RULE NO. 424(b)(1)
REGISTRATION NO. 333-60467
PROSPECTUS
UNITED RENTALS (NORTH AMERICA), INC.
OFFER TO EXCHANGE
UP TO $200,000,000 OF 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B FOR
ANY AND ALL OF THE OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008,
SERIES A
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON NOVEMBER 4, 1998, UNLESS EXTENDED.
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United Rentals (North America), Inc. (the "Company") hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange its outstanding 9 1/2% Senior Subordinated Notes
due 2008, Series A (the "Original Notes"), of which an aggregate of
$200,000,000 in principal amount is outstanding as of the date hereof, for an
equal principal amount of newly issued 9 1/2% Senior Subordinated Notes due
2008, Series B (the "Exchange Notes"). The Original Notes were issued on May
22, 1998 (the "Offering") by the Company. The form and terms of the Exchange
Notes will be the same in all material respects as the form and terms of the
Original Notes except that (i) the Exchange Notes will be registered under the
Securities Act of 1933, as amended (the "Securities Act"), and, therefore,
will not bear legends restricting the transfer thereof; and (ii) certain of
the registration rights under the Registration Rights Agreement (as defined
herein) relating to the Exchange Notes are different than those relating to
the Original Notes and, therefore, the defaults under the Registration Rights
Agreement that may require the Company to pay additional interest will be
different for the Exchange Notes and the Original Notes. The Exchange Notes
will evidence the same debt as the Original Notes and will be entitled to the
benefits of an indenture dated as of May 22, 1998, governing the Original
Notes and the Exchange Notes (the "Indenture"). The Indenture provides for the
issuance of both the Exchange Notes and the Original Notes. The Exchange Notes
and the Original Notes are sometimes referred to herein collectively as the
"Notes," and each holder of a Note is referred to as a "Holder".
Interest on the Exchange Notes will be payable semi-annually in arrears on
June 1 and December 1 of each year, commencing December 1, 1998. The Exchange
Notes will mature on June 1, 2008. The Exchange Notes will be redeemable at
the option of the Company, in whole or in part, at any time on or after June
1, 2003 at the redemption prices set forth herein, plus accrued and unpaid
interest thereon to the date of redemption. In addition, on or prior to June
1, 2001, the Company may redeem Exchange Notes at a redemption price of 109.5%
of the principal amount thereof, plus accrued and unpaid interest thereon to
the date of redemption, with the net cash proceeds of one or more Public
Equity Offerings (as defined herein), provided that after giving effect to
such redemption the aggregate principal amount of the Notes outstanding must
equal at least $130 million. See "Description of the Notes--Optional
Redemption." Upon a Change of Control (as defined herein), each Holder will
have the right to require the Company to purchase all or a portion of such
Holder's Exchange Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of purchase. See
"Description of the Notes--Change of Control."
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH HOLDERS OF ORIGINAL NOTES AND PROSPECTIVE PURCHASERS OF EXCHANGE NOTES
SHOULD CONSIDER IN CONNECTION WITH THIS EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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(cover page continued on next page)
The date of this Prospectus is September 18, 1998
The Exchange Notes will be unsecured senior subordinated obligations of the
Company and, as such, will be subordinated in right of payment to all existing
and future Senior Indebtedness (as defined herein) of the Company, including
borrowings under the Company's Credit Facility (as defined herein) and Term
Loan (as defined herein). The Exchange Notes will rank pari passu in right of
payment with all senior subordinated indebtedness of the Company, including
the Company's 8.80% Senior Subordinated Notes due 2008 (the "8.80% Notes") and
senior in right of payment to any future subordinated indebtedness of the
Company. The Exchange Notes will be unconditionally guaranteed (the
"Guarantees") on a senior subordinated basis by the Company's current and
future United States subsidiaries (each, a "Guarantor" and collectively, the
"Guarantors"). The Guarantees will be unsecured senior subordinated
obligations of the Guarantors and, as such, will be subordinated in right of
payment to all existing and future Guarantor Senior Indebtedness (as defined
herein). The Exchange Notes will also be effectively subordinated to all
obligations of any subsidiary of the Company that is not a Guarantor. At June
30, 1998, on a pro forma basis (after giving effect to all acquisitions
completed by the Company subsequent to such date (through September 14, 1998)
and the financing thereof), there was outstanding (i) $608.5 million of Senior
Indebtedness, (ii) $16.2 million of Guarantor Senior Indebtedness (other than
guarantees of the Company's Senior Indebtedness), (iii) $16.2 million of
obligations of subsidiaries that are not Guarantors (other than obligations to
the Company) and (iv) $205 million of indebtedness that is pari passu with the
Notes. The Indenture permits the Company and its subsidiaries to incur
additional debt, subject to certain limitations. See "Description of the
Notes."
There is no established trading market for the Original Notes or the
Exchange Notes and the Company does not intend to apply for listing of the
Original Notes or the Exchange Notes on any securities exchange or for
inclusion of the Notes in any automated quotation system. Although the
Original Notes are currently eligible for trading through PORTAL (as defined
herein), the Exchange Notes will not be eligible for trading through PORTAL.
If a market for the Exchange Notes develops, the Exchange Notes could trade at
a discount from their principal amount.
The Company will accept for exchange any and all Original Notes validly
tendered on or prior to 5:00 p.m., New York City time, on November 4, 1998 (if
and as extended, the "Expiration Date"). Tenders of Original Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Original Notes being tendered for exchange. The Original
Notes may be tendered only in integral multiples of $1,000. In the event the
Company terminates the Exchange Offer and does not accept for exchange any
Original Notes, the Company will promptly return all previously tendered
Original Notes to the Holders thereof.
The Original Notes were originally issued and sold on May 22, 1998 in a
transaction not registered under the Securities Act in reliance upon an
exemption from the registration requirements thereof and were offered for sale
by the initial purchasers of the Original Notes pursuant to Rule 144A and
Regulation S of the Securities Act. In general, the Original Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act. The
Exchange Notes are being offered hereby in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement.
Following the Exchange Offer, any Holders of Original Notes will continue to
be subject to the existing restrictions on transfer and, subject to limited
exceptions, the Company will not have any further obligation to such Holders
to provide for registration under the Securities Act of transfers of the
Original Notes held by them. See "Registration Rights Agreement."
Each Holder that wishes to exchange Original Notes for Exchange Notes in the
Exchange Offer will be required to make certain representations, including
that (i) it is not an affiliate of the Company, (ii) it is not a broker-dealer
that purchased such Original Notes directly from the Company, (iii) any
Exchange Notes that it acquires in the Exchange Offer will be acquired by it
in the ordinary course of its business and (iv) it has no arrangement with any
person to participate in the distribution of the Exchange Notes; provided,
however, that if the Holder is a broker-dealer that wishes to exchange
Original Notes that were acquired by it for its own account as a result of
market-making activities or other trading activities, it may represent, in
lieu of the representation set forth in clause (iv), that it has no
arrangement or understanding with the Company, or any affiliate of the
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Company, to participate in the distribution of the Exchange Notes. See "The
Exchange Offer--Required Representations."
Based on interpretations by the Staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
any Holder thereof (other than an affiliate of the Company) without compliance
with the registration and prospectus delivery provisions of the Securities Act
(subject to the representations set forth in the preceding paragraph being
made and being accurate); provided, however, that in the case of a broker-
dealer that receives Exchange Notes in exchange for Original Notes that were
acquired by it for its own account as a result of market-making activities or
other trading activities, such broker-dealer must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales by it of
any such Exchange Notes. This Prospectus, as it may be amended or supplemented
from time to time, may, if permitted by the Company, be used by a broker-
dealer in order to satisfy such prospectus delivery requirements. The Company
has agreed in the Registration Rights Agreement that, for a period of 30 days
following consummation of the Exchange Offer (subject to extension under
certain circumstances), it will make this Prospectus available to any broker-
dealer for use in connection with any such resale (subject to the right of the
Company to restrict the use of this Prospectus under certain circumstances).
Each broker-dealer that participates in the Exchange Offer will be required to
confirm that it will comply with the prospectus delivery requirements
described above. See "The Exchange Offer--Resale of Exchange Notes" and
"Registration Rights Agreement--Certain Provisions Relating to Broker-
Dealers."
Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that Original Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered, or
tendered but unaccepted, Original Notes could be adversely affected.
The Exchange Notes issued pursuant to the Exchange Offer will be issued in
the form of a single permanent Exchange Global Security (as defined herein),
which will be deposited with, or on behalf of, The Depository Trust Company
("DTC") and registered in its name or in the name of Cede & Co., its nominee.
Beneficial interests in the Exchange Global Security representing the Exchange
Notes will be shown on, and transfers thereof will be effected through,
records maintained by DTC and its participants. See "Description of the
Notes--Book-Entry, Delivery and Form."
The Company will not receive any proceeds from, and has agreed to bear the
expense of, this Exchange Offer. No underwriter is being used in connection
with this Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT TENDERS
FOR EXCHANGE FROM, HOLDERS OF THE ORIGINAL NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
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AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-4 (together with all amendments thereto, the "Registration
Statement"), under the Securities Act with respect to the Exchange Notes
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules filed therewith,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is hereby made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document referred to are not necessarily complete and, in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
deemed to be qualified in its entirety by such reference. The Registration
Statement, including all exhibits and schedules thereto, may be inspected and
copied at the public reference facilities maintained by the Commission at the
principal office of the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Midwest Regional Office of the Commission
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and at the Northeast Regional office of the Commission
located at Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Room 1204, Washington, D.C. 20549,
at prescribed rates.
The Company is subject to the informational and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files periodic reports, proxy statements,
and other information with the Commission. Such periodic reports, proxy
statements, and other information may be inspected and copied at the public
reference facilities maintained by the Commission at the principal office of
the Commission in Washington, D.C., and at the Commission's regional offices
at the addresses stated above. Copies of such material may be obtained at
prescribed rates from the Public Reference Section of the Commission at the
address stated above.
The Commission maintains an Internet web site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Prospectus are forward-looking in
nature. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or comparable terminology, or by
discussions of strategy. Prospective purchasers of Exchange Notes are
cautioned that the Company's business and operations are subject to a variety
of risks and uncertainties and, consequently, the Company's actual results may
materially differ from those projected by the forward-looking statements
contained in this Prospectus. Certain of such risks and uncertainties are
discussed under "Risk Factors," beginning on page 15 of this Prospectus, and
prospective purchasers of Exchange Notes are urged to carefully consider such
factors.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. The term "the Acquired
Companies" refers collectively to the 72 companies acquired by the Company
during the period from its formation in September 1997 through September 14,
1998. Unless otherwise indicated, all financial and operating data for the
Company contained herein with respect to the year ended December 31, 1997 is on
a pro forma basis after giving effect to the acquisition of the Acquired
Companies and the financing thereof as of January 1, 1997.
United Rentals (North America), Inc. (referred to herein as "URI") was
formerly named United Rentals, Inc. On August 5, 1998, a reorganization (the
"Reorganization") was effected pursuant to which (a) URI became a wholly owned
subsidiary of a newly formed holding company, (b) the name of URI was changed
from United Rentals, Inc. to United Rentals (North America), Inc. and (c) the
name of the new holding company became United Rentals, Inc. Unless otherwise
indicated or the context clearly requires otherwise, (i) the terms "United
Rentals" and "the Holding Company" refer to the new holding company, (ii) the
terms "URI' and the "Issuer" refer to United Rentals (North America), Inc. and
not its subsidiaries, (iii) the term "the Company" refers to URI and its
subsidiaries and (iv) the term "Common Stock" refers to the common stock of
URI, with respect to periods prior to the Reorganization, and to the common
stock of the Holding Company, with respect to periods thereafter.
THE COMPANY
The Company is a large, geographically diversified equipment rental company
with 269 rental locations in 31 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 other individuals.
The Company also sells used rental equipment, acts as a distributor for certain
new equipment, and sells related merchandise and parts. The Company commenced
equipment rental operations in October 1997 by acquiring six established
companies and acquired 66 additional companies in the first nine months of 1998
(through September 14, 1998). During the year ended December 31, 1997, the
Company on a pro forma basis rented equipment to approximately 395,000
customers (with the top ten customers representing less than 1% of total
revenues) and had pro forma revenues and EBITDA (as defined herein) of $768.9
million and $235.5 million, respectively.
The types of rental equipment offered by the Company include a broad range of
light to heavy construction and industrial equipment (such as backhoes,
forklifts, aerial lifts, skid-steer loaders, compressors, pumps and
generators), general tools and equipment (such as hand tools and garden and
landscaping equipment) and, to a lesser extent, 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 September 14, 1998, the Company's rental
equipment included approximately 153,000 units (not including special event
equipment), had an original purchase price of approximately $849 million and
had a weighted average age (based on original purchase price) of approximately
32 months.
PENDING MERGER
GENERAL
On June 15, 1998, the Company entered into an Agreement and Plan of Merger,
as amended and restated on August 31, 1998 (the "Merger Agreement"), with U.S.
Rentals, Inc., a Delaware corporation ("U.S. Rentals"). The Merger Agreement
provides, subject to the terms and conditions set forth therein, for a
subsidiary of United Rentals to be merged with and into U.S. Rentals (the
"Merger"). Following the Merger, U.S. Rentals will become a wholly owned
subsidiary of URI. At the effective time of the Merger, (i) each outstanding
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share of U.S. Rentals common stock will be converted into 0.9625 shares of
Common Stock of United Rentals (the "Exchange Ratio") and (ii) all outstanding
options to purchase shares of U.S. Rentals common stock will be assumed by
United Rentals and converted into options to purchase Common Stock of United
Rentals, subject to adjustment for the Exchange Ratio. The Merger is expected
to be accounted for as a "pooling of interests" for financial accounting
purposes. See "Certain Information Concerning Pending Merger."
U.S. Rentals is the second largest equipment rental company in the United
States and the largest in the Western United States based on 1997 rental
revenues. U.S. Rentals currently operates 131 equipment rental locations in 23
states and Mexico and generates an average of approximately 145,000 rental
contracts per month from a diverse base of customers including commercial and
residential construction, industrial and homeowner customers. U.S. Rentals
management estimates that more than 280,000 customers did business with U.S.
Rentals in 1997. U.S. Rentals owns more than 101,000 pieces of rental equipment
comprised of approximately 600 equipment categories, including aerial work
platforms, forklifts, paving and concrete equipment, compaction equipment, air
compressors, hand tools, plumbing, landscaping and gardening equipment. U.S.
Rentals management believes that U.S. Rentals' fleet, which had a weighted
average age of approximately 20 months and an original equipment cost of
approximately $725 million at June 30, 1998, is one of the most comprehensive
and well-maintained equipment rental fleets in the industry. U.S. Rentals also
sells new equipment manufactured by nationally known companies, used equipment
from its rental fleet and rental-related merchandise, parts and supplies.
COMBINED OPERATIONS OF THE COMPANY AND U.S. RENTALS
The Company and U.S. Rentals on a combined basis (the "Combined Company")
currently operates 400 rental locations (360 in the United States, 39 in Canada
and one in Mexico). During the year ended December 31, 1997, the Combined
Company rented equipment to over 675,000 customers, of which the top 10
customers represented less than 2.0% of total revenues, and had revenues and
EBITDA of $1,193.6 million and $379.9 million, respectively, on a pro forma
basis (giving effect to the Merger and the acquisitions of the Acquired
Companies). As of September 14, 1998, the Combined Company's rental equipment
included approximately 254,000 units (excluding special event equipment) and
had an original purchase price of approximately $1,574.0 million and a weighted
average age (based on original purchase price) of approximately 26 months.
THE INDUSTRY
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 23% from 1992 through 1997 (based upon 1992
revenues and 1997 pro forma revenues, giving effect to certain acquisitions
completed after the beginning of 1997, reported by the Rental Equipment
Register, an industry trade publication). The Company believes that growth in
the equipment rental industry primarily reflects increasing recognition by
customers 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.
The equipment rental industry is highly fragmented and consists 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 Register for 1997: (i)
there were
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only 10 equipment rental companies that had 1997 equipment rental revenues in
excess of $100 million (with the largest company having had 1997 equipment
rental revenues of approximately $460 million), (ii) the largest 100 equipment
rental companies combined had less than a 22% share of the market based on 1997
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 1997 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 and effectively integrate and operate
acquired companies.
GROWTH STRATEGY
The Company's growth strategy is to continue to expand through internal
growth, a disciplined acquisition program and the opening of new rental
locations, and to further diversify its equipment categories and customer
markets. The Company believes that it has competitive advantages relative to
many 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, greater flexibility to
transfer equipment among locations in response to customer demand, and greater
ability to efficiently dispose of used equipment through direct sales to
customers.
The Company is seeking to make acquisitions of varying size, including
acquisitions 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. 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. The Company will continue to seek expansion opportunities in
North America and to pursue acquisition candidates with varying types of
equipment and customer specializations. The Company believes that geographic
and customer diversification will allow the Company to participate in the
overall growth of the equipment rental industry and reduce the Company's
sensitivity to fluctuations in regional economic conditions, adverse weather
impacting a particular region or changes that affect particular market
segments.
The Company focuses substantial efforts on improving operating margins and
increasing internal growth at acquired companies. The Company seeks to improve
operating margins by efficiently integrating new and existing operations,
eliminating duplicative costs, reducing overhead, centralizing functions such
as purchasing and information technology, and applying best practices. The
Company seeks to increase internal growth by investing in additional and more
modern equipment, using advanced information technology systems to improve
asset utilization and tracking, increasing sales and marketing efforts, cross-
marketing between locations that offer different equipment categories,
expanding the customer segments and geographic areas served, and opening
complementary locations. The Company believes that the potential to increase
growth through capital investment is particularly significant at many acquired
companies because a lack of capital has constrained many small and mid-sized
equipment rental companies from adequately expanding and modernizing their
equipment.
BACKGROUND
The Company was founded by eight of the Company's officers. Each of the
founders was formerly a senior executive of United Waste Systems, Inc. ("United
Waste"), a solid waste management company that was sold in August 1997, or a
senior member of United Waste's acquisition team. United Waste executed a
growth
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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. Since the
founding of the Company, the Company has recruited additional operating,
acquisition, finance and other personnel from the equipment rental industry and
other industries, including regional managers, store managers and acquisition
professionals with extensive experience in the equipment rental industry.
URI was incorporated under the laws of the State of Delaware as "United
Rentals, Inc." in August 1997, initially capitalized in September 1997 and
commenced rental operations in October 1997. In August 1998, pursuant to the
Reorganization, URI became a wholly owned subsidiary of United Rentals and the
corporate name of URI was changed to "United Rentals (North America), Inc." The
executive offices of the Company are located at Four Greenwich Office Park,
Greenwich, Connecticut 06830, and its telephone number is (203) 622-3131.
CERTAIN INFORMATION CONCERNING THE ISSUANCE OF THE ORIGINAL NOTES
The Original Notes were originally issued and sold on May 22, 1998 in a
transaction not registered under the Securities Act in reliance upon an
exemption from the registration requirements thereof. The initial purchasers
(the "Initial Purchasers") of the Original Notes were: Merrill Lynch, Pierce,
Fenner & Smith Incorporated; Donaldson, Lufkin & Jenrette Securities
Corporation; Goldman, Sachs & Co.; and Salomon Brothers Inc. The Initial
Purchasers subsequently offered and resold the Original Notes pursuant to Rule
144A and Regulation S under the Securities Act. In connection with the issuance
of the Original Notes, the Company entered into a Registration Rights Agreement
with the Initial Purchasers (the "Registration Rights Agreement") which
provides the Holders of the Notes with certain registration and exchange
rights. The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. See "Registration Rights
Agreement."
The Original Notes are represented by two, permanent global notes which are
registered in the name of a nominee of DTC. Pursuant to procedures established
by DTC, interests in the global notes are held in book-entry form by
participants in the DTC system who have accounts with DTC ("DTC Participants").
Accordingly, ownership of beneficial interests in such Notes is limited to DTC
Participants or persons who hold such interests through DTC Participants.
The term "Book-Entry Holder" with respect to any Notes means the DTC
Participant that is listed as the holder of such Notes in the records
maintained by DTC.
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THE EXCHANGE OFFER
The Exchange Offer.......... The Company is offering to exchange up to $200
million aggregate principal amount of Exchange
Notes for a like principal amount of Original
Notes. The Exchange Notes may be exchanged only
in multiples of $1,000 principal amount. The
Company will issue the Exchange Notes on or
promptly after the Expiration Date. See "The
Exchange Offer."
Required Representations.... In connection with any tender of Original Notes
pursuant to the Exchange Offer, the Book-Entry
Holder of such Original Notes will be required to
make certain representations in the Letter of
Transmittal, including that (i) it is not an
affiliate of the Company, (ii) it is not a
broker-dealer that purchased such Original Notes
directly from the Company, (iii) any Exchange
Notes that it acquires in the Exchange Offer will
be acquired by it in the ordinary course of its
business and (iv) it has no arrangement with any
person to participate in the distribution of the
Exchange Notes; provided, however, that if the
Book-Entry Holder is a broker-dealer that wishes
to tender Original Notes that were acquired by it
for its own account as a result of market-making
activities or other trading activities, it may
represent, in lieu of the representation set
forth in clause (iv) above, that it has no
arrangement or understanding with the Company, or
any affiliate of the Company, to participate in
the distribution of the Exchange Notes. In
addition, any Book-Entry Holder that holds any
Original Notes as nominee, will be required to
confirm that the beneficial owner for which it is
holding such Notes has made the representations
provided for in the preceding sentence.
Resale of the Exchange Based on interpretations by the Staff of the
Notes...................... Commission set forth in no-action letters issued
to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer may be offered for resale, resold or
otherwise transferred by any Holder thereof
(other than an affiliate of the Company) without
compliance with the registration and prospectus
delivery provisions of the Securities Act
(subject to the representations set forth in the
preceding paragraph being made and being
accurate); provided, however, that in the case of
a broker-dealer that receives Exchange Notes in
exchange for Original Notes that were acquired by
it for its own account as a result of market-
making activities or other trading activities,
such broker-dealer must deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resales by it of any such
Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may,
if permitted by the Company, be used by a broker-
dealer in order to satisfy such prospectus
delivery requirements. The Company has agreed in
the Registration Rights Agreement that, for a
period of 30 days following consummation of the
Exchange Offer (subject to extension under
certain circumstances), it will make this
Prospectus available to any broker-dealer for use
in connection with any such
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resale (subject to the right of the Company to
restrict the use of this Prospectus under certain
circumstances). Each broker-dealer that
participates in the Exchange Offer will be
required to confirm that it will comply with the
prospectus delivery requirements described above.
See "Registration Rights Agreement" and "Plan of
Distribution."
The conclusions set forth in the preceding
paragraph are based on interpretations by the
Staff of the Commission set forth in no-action
letters issued to third parties. The Company does
not intend to seek its own no-action letter with
respect to the Exchange Offer and there can be no
assurance that the Staff of the Commission would
make a similar determination with respect to the
Exchange Offer as it has in such no-action
letters to third parties.
Accrued Interest on the
Original Notes.............
The Exchange Notes will bear interest at the rate
of 9 1/2% per annum from and including the last
interest payment date on the Original Notes (or,
if none has yet occurred, the date of issuance of
such Original Notes). Accordingly, Holders of
Original Notes that are accepted for exchange
will not receive interest that is accrued but
unpaid on the Original Notes at the time of
tender, but such interest will be payable in
respect of the Exchange Notes delivered in
exchange for such Original Notes on the first
interest payment date after the Expiration Date.
Procedures for Tendering
Original Notes.............
To tender any Original Notes pursuant to the
Exchange Offer, the Book-Entry Holder of such
Original Notes must make book-entry delivery of
such Original Notes by causing DTC to transfer
such Original Notes to the account of the
Exchange Agent (as defined herein) at DTC in
accordance with DTC's Automated Tender Offer
Program ("ATOP"). In addition, either (i) DTC
must deliver an Agent's Message (as defined
below) prior to 5:00 p.m., New York City time, on
the Expiration Date, indicating that DTC has
received from such Book-Entry Holder an express
acknowledgment that such Book-Entry Holder has
received and agrees to be bound by the terms of
the accompanying Letter of Transmittal (the
"Letter of Transmittal") or (ii) such Book-Entry
Holder must complete, sign and date the Letter of
Transmittal or a facsimile thereof, in accordance
with the instructions contained herein and
therein, and deliver such Letter of Transmittal,
or such facsimile, and any other required
documentation to the Exchange Agent at the
address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. The term
"Agent's Message" means a message transmitted by
DTC to, and received by, the Exchange Agent and
forming part of the book-entry confirmation
relating to a book-entry transfer of Original
Notes through ATOP, which states that DTC has
received an express acknowledgment from the DTC
Participant that is tendering the Original Notes
which are the subject of such book entry
confirmation, that such DTC Participant has
received and agrees to be bound by the terms of
the Letter of Transmittal. See "The Exchange
Offer--Procedures for Tendering."
7
Expiration Date............. 5:00 p.m., New York City time, on November 4,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended. See "The Exchange Offer--Expiration
Date; Extensions; Amendments."
Exchange Date............... The date of acceptance for exchange of the
Original Notes tendered for exchange will be
when, as and if the Company gives oral or written
notice thereof to the Exchange Agent.
Withdrawal Rights........... Tenders of Original Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on
the Expiration Date by (i) furnishing a written
or facsimile notice of withdrawal to the Exchange
Agent containing the information set forth under
"The Exchange Offer--Withdrawal of Tenders" or
(ii) complying with the appropriate procedures of
DTC's ATOP system.
Acceptance of Original
Notes and Delivery of
Exchange Notes............. Subject to satisfaction or waiver of all the
conditions referred to below, the Company will
accept for exchange any and all Original Notes
which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Conditions to the Exchange
Offer...................... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original
Notes being tendered for exchange. The Exchange
Offer is subject to certain customary conditions
concerning, among other things, changes to
existing law and governmental approvals, which
may be waived by the Company. See "The Exchange
Offer--Conditions."
Federal Income Tax
Consequences............... The exchange of Original Notes for Exchange Notes
pursuant to the terms set forth in this
Prospectus should not result in any material
federal income tax consequences to Holders
exchanging Original Notes for Exchange Notes. See
"The Exchange Offer--Certain Federal Income Tax
Considerations."
Use of Proceeds............. There will be no cash proceeds to the Company
from the exchange of Original Notes pursuant to
the Exchange Offer. The net proceeds to the
Company from the sale of the Original Notes was
approximately $193.1 million. The Company (i)
used $102.8 million of the net proceeds from the
sale of the Original Notes to repay outstanding
indebtedness under the Credit Facility and (ii)
used the balance of such net proceeds for
acquisitions.
Exchange Agent.............. State Street Bank and Trust Company is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer. The address
and telephone number of the Exchange Agent is set
forth under "The Exchange Offer--Exchange Agent."
State Street Bank and Trust Company also serves
as Trustee under the Indenture.
8
Effect on the Holders of
Original Notes.............
Upon consummation of the Exchange Offer, the
Holders of Original Notes will not have any
further registration rights under the
Registration Rights Agreement (subject to limited
exceptions as described under "Registration
Rights Agreement--Shelf Registration Statement").
Holders of the Original Notes who do not tender
their Original Notes in the Exchange Offer will
continue to hold such Original Notes and will be
entitled to all the rights and will be subject to
all the limitations applicable thereto under the
Indenture. All Original Notes that remain
outstanding upon consummation of the Exchange
Offer will continue to be subject to the
restrictions on transfer provided for in the
Original Notes and the Indenture. In general, the
Original Notes may not be offered or sold unless
registered under the Securities Act, except
pursuant to an exemption from, or in a
transaction not subject to, the registration
requirements of the Securities Act. To the extent
that the Original Notes are tendered and accepted
in the Exchange Offer, the trading market for
untendered Original Notes could be adversely
affected.
9
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The Exchange Offer applies to $200 million aggregate principal amount of the
Original Notes. The terms of the Exchange Notes will be the same in all
material respects as the Original Notes except that (i) the Exchange Notes will
be registered under the Securities Act, and, therefore, will not bear legends
restricting the transfer thereof and (ii) certain of the registration rights,
under the Registration Rights Agreement, relating to the Exchange Notes are
different than those relating to the Original Notes and, therefore, the
defaults under the Registration Rights Agreement that may require the Company
to pay additional interest will be different for the Exchange Notes and the
Original Notes. The Exchange Notes will evidence the same debt as the Original
Notes and both series of Notes will be entitled to the benefits of the
Indenture and treated as a single class of debt securities.
Issuer...................... United Rentals (North America), Inc.
Maturity.................... June 1, 2008.
Interest Payment Dates...... June 1 and December 1 of each year, commencing
December 1, 1998.
Optional Redemption......... The Exchange Notes will be redeemable at the
option of the Company, in whole or in part, at
any time on or after June 1, 2003, at the
redemption prices set forth herein, plus accrued
and unpaid interest thereon to the date of
redemption.
In addition, on or prior to June 1, 2001, the
Company may redeem Exchange Notes at a redemption
price of 109.5% of the principal amount thereof,
plus accrued and unpaid interest thereon to the
date of redemption, with the net cash proceeds of
one or more Public Equity Offerings (as defined
herein), provided that not less than $130 million
of principal amount of the Notes is outstanding
immediately after giving effect to such
redemption. See "Description of the Notes--
Optional Redemption."
Guarantees.................. The Exchange Notes will be unconditionally
guaranteed on a senior subordinated basis by the
Company's current and future United States
subsidiaries.
Ranking..................... The Exchange Notes will be unsecured senior
subordinated obligations of the Issuer and, as
such, will be subordinated in right of payment to
all existing and future Senior Indebtedness (as
defined herein) of the Issuer, including
borrowings under the Company's $300 million
revolving credit facility (the "Credit Facility")
and $250 million term loan due 2005 (the "Term
Loan"). The Exchange Notes will rank pari passu
in right of payment with any senior subordinated
indebtedness of the Issuer, including the
Issuer's 8.80% Notes, and senior in right of
payment to any future subordinated indebtedness
of the Issuer. The Guarantees will be unsecured
senior subordinated obligations of the Guarantors
and, as such, will be subordinated in right of
payment to all existing and future Guarantor
Senior Indebtedness (as defined herein). The
Guarantees will rank pari passu with any future
senior subordinated Indebtedness of the
Guarantors, and senior in right of payment to
10
any future subordinated indebtedness of the
Guarantors. The Company's Canadian subsidiaries
will not be Guarantors and, as a result, the
Exchange Notes will be effectively subordinated
to all obligations of such subsidiaries,
including trade payables of such subsidiaries. At
June 30, 1998, on a pro forma basis (after giving
effect to all acquisitions completed by the
Company subsequent to such date (through
September 14, 1998) and the financing thereof),
there was outstanding (i) $608.5 million of
Senior Indebtedness, (ii) $16.2 million of
Guarantor Senior Indebtedness (other than
guarantees of the Company's Senior Indebtedness),
(iii) $16.2 million of obligations of
subsidiaries that are not Guarantors (other than
obligations to the Company) and (iv) $205 million
of indebtedness that is pari passu with the
Notes. The Indenture permits the Company and its
subsidiaries to incur additional debt, subject to
certain limitations. See "Description of the
Notes--Subordination" and "--Certain Covenants--
Limitation on Indebtedness."
Change of Control........... Following the occurrence of a Change of Control
(as defined herein), each Holder of Exchange
Notes will have the right to require the Company
to purchase all or a portion of such Holder's
Exchange Notes at a purchase price equal to 101%
of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon to the date
of purchase. See "Description of the Notes--
Change of Control."
Certain Covenants........... The Indenture contains certain covenants,
including (i) limitations on additional
indebtedness, (ii) limitations on restricted
payments, (iii) limitations on liens, (iv)
limitations on dividends and other payment
restrictions affecting Restricted Subsidiaries
(as defined herein), (v) limitations on preferred
stock of Restricted Subsidiaries, (vi)
limitations on transactions with affiliates,
(vii) limitations on the disposition of proceeds
of asset sales and (viii) limitations on
designations of Unrestricted Subsidiaries (as
defined herein). In addition, the Indenture
limits the ability of the Company to consolidate,
merge or sell all or substantially all of its
assets. These covenants are subject to important
exceptions and qualifications. See "Description
of the Notes--Certain Covenants."
Registration Rights......... A broker-dealer (a "Participating Broker-Dealer")
that receives Exchange Notes in exchange for
Original Notes that were acquired by it for its
own account as a result of market-making
activities or other trading activities will be
required to deliver a prospectus meeting the
requirements of the Securities Act in connection
with any resales by it of any such Exchange
Notes. This Prospectus, as it may be amended or
supplemented from time to time, may, if permitted
by the Company, be used by a broker-dealer in
order to satisfy such prospectus delivery
requirements. The Company has agreed in the
Registration Rights Agreement that it will use
its best efforts to make this Prospectus
available to any such broker-dealer for use in
connection with any resales of such Exchange
Notes (subject to the right of the Company to
restrict the use of this
11
Prospectus under certain circumstances). The
obligation of the Company to make this Prospectus
available as aforesaid will commence on the day
that the Exchange Offer is consummated and
continue in effect for a 30-day period (the
"Broker Prospectus Period"); provided, however,
that, if for any day during such period the
Company restricts the use of such prospectus, the
Broker Prospectus Period shall be extended on a
day-for-day basis.
The Company has agreed in the Registration Rights
Agreement that, if at the end of the Broker
Prospectus Period any Participating Broker-Dealer
continues to hold any Exchange Notes that it
received in the Exchange Offer, the Company will
(within the time period specified under
"Registration Rights Agreement"), if any such
broker-dealer so requests within 60 days after
the end of the Broker Prospectus Period, file
with the Commission a shelf registration
statement (a "Broker Shelf Registration
Statement") to cover the resale of such Exchange
Notes by such broker-dealers and use its best
efforts to have such registration statement
declared effective by the Commission; provided,
however, that (i) the Company may in lieu of
filing such registration statement extend the
Broker Prospectus Period by 60 days and (ii) the
Company will not be required to file such
registration statement until such time as the
Company becomes eligible to use a Form S-3 for
such registration statement. The interest rate on
the Exchange Notes is subject to increase under
certain circumstances if the Company is not in
compliance with its obligations under the
Registration Rights Agreement relating to the
Broker Shelf Registration Statement. See
"Registration Rights Agreement."
Absence of Public Market
for Exchange Notes.........
The Exchange Notes are new securities for which
there is currently no established trading market.
Although the Initial Purchasers have informed the
Company that they currently intend to make a
market in the Exchange Notes, they are not
obligated to do so and any such market making may
be discontinued at any time without notice.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the
Exchange Notes. The Company does not intend to
apply for listing of the Exchange Notes on any
securities exchange or for quotation through the
Nasdaq National Market. Although the Original
Notes are currently eligible for trading in the
Private Offerings, Resale and Trading through
Automated Linkages ("PORTAL") market of the
National Association of Securities Dealers, Inc.,
the Exchange Notes will not be eligible for
trading through PORTAL. If a market for the
Exchange Notes develops, the Exchange Notes could
trade at a discount from their principal amount.
RISK FACTORS
See "Risk Factors" beginning on page 15 for a discussion of certain factors
applicable to an investment in the Notes.
12
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma income statement data and other financial
data with respect to the year ended December 31, 1997 and the six months ended
June 30, 1998 gives effect to (i) each acquisition of an Acquired Company
completed by the Company after the beginning of the period and the financing
thereof, as if each such transaction had occurred at the beginning of the
period, and (ii) completion of the Merger with U.S. Rentals using the "pooling
of interests" method of accounting, as if all such transactions had occurred at
the beginning of the period. The following unaudited pro forma income statement
data with respect to the years ended December 31, 1995 and 1996 gives effect to
(i) the acquisition of Rental Tools and Equipment Co. International, Inc.
(which was completed in August 1998 and accounted for as a "pooling of
interests"), as if such transaction had occurred at the beginning of the period
presented, and (ii) completion of the Merger with U.S. Rentals using the
"pooling of interests" method of accounting, as if such transaction had
occurred at the beginning of the period.
The following unaudited pro forma balance sheet data as of June 30, 1998
gives effect to (i) each acquisition of an Acquired Company completed by the
Company subsequent to such date and the financing thereof, as if each such
transaction had occurred on such date, and (ii) completion of the Merger with
U.S. Rentals using the "pooling of interests" method of accounting, as if such
transaction had occurred on such date.
The following data should be read in conjunction with (i) the information set
forth under "Use of Proceeds," "Capitalization," "Selected Historical and Pro
Forma Consolidated Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," (ii) the
Consolidated Financial Statements and the related notes thereto and Pro Forma
Consolidated Financial Statements and the related notes thereto of the Company
included elsewhere in this Prospectus and (iii) the financial statements of
certain of the Acquired Companies and of U.S. Rentals included elsewhere in
this Prospectus. The pro forma data set forth below is provided for
informational purposes only and does not purport to be indicative of the
results that would have actually been obtained had the acquisition of each of
the Acquired Companies and the Merger been completed at the beginning of the
periods presented or of the results that may be expected to occur in the
future.
13
PERIOD FROM
AUGUST 14, 1997
(INCEPTION) SIX MONTHS YEAR ENDED DECEMBER 31, SIX MONTHS
THROUGH ENDED ------------------------------ ENDED
DECEMBER 31, 1997 JUNE 30, 1998 1995 1996 1997 JUNE 30, 1998
----------------- ------------- --------- --------- ---------- -------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
----------------- ------------- --------- --------- ---------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues.......... $10,633 $127,351 $282,887 $353,196 $1,193,622 $650,019
Gross profit............ 3,811 47,239 89,246 104,578 409,638 213,785
Operating income........ 238 18,322 42,183 49,282 154,257 82,823
Interest expense........ 454 4,937 7,471 10,936 74,339 32,982
Net income.............. 34 8,220 33,297 37,725 36,279 32,962
Basic earnings per
share.................. $ 0.00 $ 0.27 $ 1.47 $ 1.66 $ 0.55 $ 0.49
Diluted earnings per
share.................. $ 0.00 $ 0.23 $ 1.47 $ 1.66 $ 0.53 $ 0.45
PERIOD FROM
AUGUST 14, 1997
(INCEPTION) SIX MONTHS SIX MONTHS
THROUGH ENDED YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998
----------------- ------------- ----------------- -------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
----------------- ------------- ----------------- -------------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
EBITDA(1)............... $1,539 $36,702 $379,857 $200,524
EBITDA margin(2)........ 14.5% 28.8% 31.8% 30.8%
Interest expense(3)..... $ 454 $ 4,937 $ 74,339 $ 32,982
Depreciation and
amortization........... $1,301 $18,380 $205,310 $117,701
Ratio of EBITDA to
interest expense....... 3.4x 7.4x 5.1x 6.1x
AS OF JUNE 30, 1998
---------------------
HISTORICAL PRO FORMA
---------- ----------
(DOLLARS IN
THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 5,486 $ 26,510
Rental equipment, net.................................... 298,956 1,081,380
Total assets............................................. 889,164 2,374,226
Total debt............................................... 389,181 1,406,859
Stockholders' equity..................................... 418,394 669,823
- --------
(1) EBITDA is defined as net income (calculated excluding non-operating income
and expense and excluding the $20.3 million Non-Recurring U.S. Rentals
Charge) plus interest expense, income taxes and depreciation and
amortization. EBITDA is presented to provide additional information
concerning the Company's ability to meet its future debt service
obligations and capital expenditure and working capital requirements.
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to
either net income as an indicator of the Company's operating performance or
cash flows as an indicator of the Company's liquidity.
(2) EBITDA margin is defined as EBITDA as a percentage of revenues.
(3) Interest expense excludes the amortization of deferred financing fees.
14
RISK FACTORS
In addition to the other information contained in this Prospectus, Holders
of Original Notes should carefully consider the following factors before
deciding to tender Original Notes in the Exchange Offer. Except as otherwise
indicated, the risk factors set forth below are generally applicable to both
the Original Notes and the Exchange Notes.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS IS DEPENDENT ON FUTURE
PERFORMANCE
The Company incurred substantial indebtedness in connection with its
acquisition of the Acquired Companies. As of June 30, 1998, the Company had
total debt of $1,028.3 million on a pro forma basis after giving effect to the
acquisitions completed by the Company subsequent to such date (through
September 14, 1998) and the financing thereof. The Company expects to obtain a
new, larger credit facility in connection with the pending Merger with U.S.
Rentals as described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." In
addition, the Company will require substantial capital to finance future
acquisition growth and expects that it will incur substantial additional
indebtedness from time to time (including borrowings under its existing Credit
Facility and the new credit facility that it expects to obtain) for a variety
of purposes, including completing additional acquisitions, establishing new
rental locations and purchasing equipment. The Indenture and the other
agreements governing the Company's existing indebtedness permit the Company
and its subsidiaries to incur additional debt, subject to certain limitations.
See "--Dependence on Additional Capital to Finance Growth," "Capitalization,"
"Selected Historical and Pro Forma Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of the Notes--
Certain Covenants--Limitation on Indebtedness."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to, the
following: (i) a substantial portion of the Company's consolidated cash flow
from operations will be dedicated to the payment of the principal of and
interest on its debt and will not be available for other purposes, (ii) the
Company's ability to obtain additional financing in the future for
acquisitions, new rental locations, capital expenditures, general corporate
purposes or other purposes may be impaired, (iii) the Company is more
leveraged than certain of its competitors, which may place the Company at a
competitive disadvantage, (iv) a high degree of leverage may make the Company
more vulnerable to a downturn in its business or in the economy generally and
(v) certain of the Company's borrowings, including all borrowings under the
Credit Facility and the Term Loan are, or in the future may be, at variable
rates which may make the Company vulnerable to increases in interest rates.
The Company's ability to make scheduled payments of principal of, or to pay
interest on or to refinance its debt (including the Notes) depends on its
future financial performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond its control. There can be no assurance that the Company will
have sufficient cash from operations or other sources to service its debt
(including the Notes).
SUBORDINATION OF THE NOTES AND GUARANTEES; UNSECURED STATUS
The Notes are general unsecured obligations of the Issuer and are
subordinated in right of payment to the prior payment in full of all existing
and future Senior Indebtedness of the Issuer, including all amounts owing
under the Credit Facility and the Term Loan. The Guarantees are general
unsecured obligations of the Guarantors and are subordinated in right of
payment to all existing and future Guarantor Senior Indebtedness. The
Company's Canadian subsidiaries are not Guarantors and, as a result, the Notes
are effectively subordinated to all obligations of such subsidiaries,
including trade payables of such subsidiaries. At June 30, 1998, on a pro
forma basis (after giving effect to all acquisitions completed by the Company
subsequent to such date (through September 14, 1998) and the financing
thereof), there was outstanding (i) $608.5 million of Senior Indebtedness,
(ii) $16.2 million of Guarantor Senior Indebtedness (other than guarantees of
the Company's Senior
15
Indebtedness), (iii) $16.2 million of obligations of subsidiaries that are not
Guarantors (other than obligations to the Company) and (iv) $205 million of
indebtedness that is pari passu with the Notes. The Indenture permits the
Company and its subsidiaries to incur additional debt, subject to certain
limitations.
The effect of such subordination provisions is that, (i) in the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding
with respect to the Issuer, the assets of the Issuer will be available to pay
obligations on the Notes only after all Senior Indebtedness has been paid in
full and (ii) in the event of any such occurrence with respect to a Guarantor,
the assets of such Guarantor will be available to pay obligations on the
Guarantee of such Guarantor only after all Guarantor Senior Indebtedness of
such Guarantor has been paid in full. In addition, no cash payments may be
made with respect to the Notes during the continuance of a payment default
with respect to Senior Indebtedness. Furthermore, under certain circumstances,
no cash payments with respect to the Notes may be made for a period of up to
179 days (during each period of 360 days) if a non-payment default exists with
respect to Senior Indebtedness. There can be no assurance that, after the
payment of all Senior Indebtedness and Guarantor Senior Indebtedness, there
will be sufficient assets remaining to pay amounts due on all or any of the
Notes.
The Indenture permits the Company to incur certain secured indebtedness. The
Credit Facility and the Term Loan are secured by a lien on substantially all
the assets of the Company and the Guarantors. If an event of default occurs
under the Credit Facility or the Term Loan, the lenders thereunder will have
the right to exercise the remedies (such as foreclosure) available to a
secured lender under applicable law and the agreement governing the Credit
Facility or Term Loan. Since the Notes are unsecured, the effect of such
security interest is to give the lenders under the Credit Facility and the
Term Loan a prior claim on the assets of the Company and the Guarantors, in
addition to the priority that they have by virtue of the subordination
provisions described above.
RISKS ASSOCIATED WITH HOLDING COMPANY STRUCTURE
The Company derives all its operating income from its subsidiaries and, as
of June 30, 1998, approximately 97% of the Company's consolidated assets were
held by its subsidiaries. Consequently, the Company's ability to meet its
financial obligations, including its obligations under the Notes, is dependent
upon the earnings of such subsidiaries and the distribution or other payment
of such earnings to the Company. The ability of the Company's subsidiaries to
make distributions or other payments to the Company is limited by applicable
law generally governing the payment of dividends and other distributions by
corporations. Furthermore, although at present there are no contractual
restrictions that limit the ability of the Company's subsidiaries to make
distributions or other payments to the Company, certain of the Company's
subsidiaries may in the future become subject to loan or other agreements that
contain such restrictions.
POSSIBLE INABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company is required under
certain circumstances to offer to repurchase the Notes for cash at a price
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest thereon to the date of purchase. There can be no assurance, however,
that the Company would have sufficient cash to make such required repurchase.
Furthermore, the agreements governing the Credit Facility and Term Loan
prohibit the Company from purchasing the Notes and future agreements that the
Company may enter into relating to Senior Indebtedness may contain a similar
prohibition. In the event that a Change of Control occurs at a time when the
Company is prohibited from purchasing the Notes, the Company could seek the
consent of its lenders to the purchase of the Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does
not obtain such consent or repay such borrowings, the Company will remain
prohibited from purchasing the Notes. In such case, the Company's failure to
purchase Notes that are tendered following a Change of Control would
constitute an event of default under the Indenture which would, in turn,
constitute a default under the Credit Facility and Term Loan and could
constitute a default under other Senior Indebtedness. In such circumstances,
the subordination provisions in the Indenture would likely restrict payments
to the Holders of the Notes.
16
RESTRICTIVE COVENANTS
The Indenture and the agreements governing the Company's existing
indebtedness contain, and future agreements governing the Company's long-term
debt may also contain, certain restrictive financial and operating covenants
which affect, and in many respects significantly limit or prohibit, among
other things, the ability of the Company to incur indebtedness, make
prepayments of certain indebtedness, make investments, create liens, make
acquisitions, sell assets and engage in mergers and consolidations. These
covenants may significantly limit the operating and financial flexibility of
the Company and may limit its ability to respond to changes in its business or
competitive activities. The failure by the Company to comply with such
covenants could result in an event of default under the applicable instrument,
which could permit acceleration of the debt under such instrument and in some
cases acceleration of debt under other instruments that contain cross-default
or cross-acceleration provisions. See "Description of the Notes--Certain
Covenants" and "Description of the Notes--Events of Default."
FRAUDULENT TRANSFER CONSIDERATIONS
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Guarantors' issuance of the Guarantees. To the extent that a
court were to find that (x) a Guarantee was incurred by a Guarantor with
actual intent to hinder, delay or defraud any present or future creditor or
(y) such Guarantor did not receive fair consideration or reasonably equivalent
value for issuing its Guarantee and such Guarantor (i) was insolvent, (ii) was
rendered insolvent by reason of the issuance of such Guarantee, (iii) was
engaged or about to engage in a business or transaction for which the
remaining assets of such Guarantor constituted unreasonably small capital to
carry on its business or (iv) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, the court
could avoid such Guarantee or subordinate such Guarantee in favor of the
Guarantor's creditors. To the extent that the Guarantee of a Guarantor were
avoided as a fraudulent conveyance or held unenforceable for any other reason,
claims of Holders of the Notes against such Guarantor would be adversely
affected, Holders of the Notes would be solely creditors of the Issuer and the
other Guarantors and the Notes would be effectively subordinated to all
obligations of such Guarantor. To the extent that the claims of the Holders of
the Notes against any Guarantor were subordinated in favor of other creditors
of such Guarantor, such other creditors would be entitled to be paid in full
before any payment could be made on the Notes. In the event that one or more
of the Guarantees is avoided or subordinated, there can be no assurance that
after providing for all prior claims there would be sufficient assets
remaining to satisfy the claims of Holders of the Notes.
Based upon financial and other information, the Company believes that the
Notes and the Guarantees are being incurred for proper purposes and in good
faith and that the Company and each Guarantor is solvent and will continue to
be solvent after issuing the Notes or its Guarantee, as the case may be, will
have sufficient capital for carrying on its business after such issuance and
will be able to pay its debts as they mature. There can be no assurance,
however, that a court passing on such standards would agree with the
foregoing. Among other things, a legal challenge of a Guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by the
Guarantor as a result of the issuance by the Company of the Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES
All Original Notes that remain outstanding upon consummation of the Exchange
Offer will continue to be subject to the restrictions on transfer provided for
in the Original Notes and the Indenture. In general, the Original Notes may
not be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act. Upon consummation of the
Exchange Offer, the Holders of Original Notes will not have any further
registration rights under the Registration Rights Agreement (subject to
limited exceptions as described under "Registration Right Agreement--Shelf
Registration Statement"). To the extent that the Original Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered Original
Notes could be adversely affected.
17
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes for Original Notes pursuant to the Exchange
Offer will be made only after timely tender of the Original Notes in the
manner described under "The Exchange Offer--Procedure for Tendering."
Therefore, Holders desiring to tender their Original Notes pursuant to the
Exchange Offer should allow sufficient time to ensure timely tender of the
Original Notes. The Company is under no duty to give notification of defects
or irregularities with respect to tenders of Original Notes for exchange.
PROSPECTUS DELIVERY REQUIREMENTS APPLICABLE TO PARTICIPATING BROKER-DEALERS
A broker-dealer that receives Exchange Notes in exchange for Original Notes
that were acquired by it for its own account as a result of market-making
activities or other trading activities will be required to deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales by it of any such Exchange Notes. In order for a broker-dealer to
participate in the Exchange Offer, it must acknowledge that it will comply
with such prospectus delivery requirements. The Company's obligation to make
this Prospectus available to broker-dealers for use by them in connection with
resales of the Exchange Notes is limited (as described under "Registration
Rights Agreement--Certain Provisions Relating to Broker-Dealers").
Accordingly, there can be no assurance that a prospectus meeting the
requirements of the Securities Act will be available for use by broker-dealers
in connection with any proposed resale of Exchange Notes.
NEED TO MAKE REPRESENTATIONS IN ORDER TO PARTICIPATE IN EXCHANGE OFFER
In connection with any tender of Original Notes pursuant to the Exchange
Offer, the Book-Entry Holder of such Original Notes will be required to make
certain representations in the Letter of Transmittal, including that (i) it is
not an affiliate of the Company, (ii) it is not a broker-dealer that purchased
such Original Notes directly from the Company, (iii) any Exchange Notes that
it acquires in the Exchange Offer will be acquired by it in the ordinary
course of its business and (iv) it has no arrangement with any person to
participate in the distribution of the Exchange Notes; provided, however, that
if the Book-Entry Holder is a broker-dealer that wishes to exchange Original
Notes that were acquired by it for its own account as a result of market-
making activities or other trading activities, it may represent, in lieu of
the representation set forth in clause (iv) above, that it has no arrangement
or understanding with the Company, or any affiliate of the Company, to
participate in the distribution of the Exchange Notes. In addition, any Book-
Entry Holder that holds any Original Notes as nominee will be required to
confirm that the beneficial owner for which it is holding such Notes has made
the representations provided for in the preceding sentence. In the event that
any of the required representations is not true with respect to a Holder that
receives Exchange Notes pursuant to the Exchange Offer, the Exchange Notes
received by such Holder may be deemed to be restricted securities and, if so,
such Exchange Notes may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are a new issue of securities for which there is
currently no trading market. The Company does not intend to apply for listing
of the Exchange Notes on any securities exchange or for quotation through the
Nasdaq National Market. Although the Initial Purchasers have informed the
Company that they currently intend to make a market in the Exchange Notes,
they are not obligated to do so and any such market making may be discontinued
at any time without notice. Accordingly, there can be no assurance as to the
development of any market for the Exchange Notes, the liquidity of any such
market that may develop, the ability of the Holders of the Exchange Notes to
sell their Exchange Notes or the price at which such Holders would be able to
sell their Exchange Notes. If a market were to exist, the Exchange Notes could
trade at prices that may be lower than the initial offering price of the
Original Notes for which they were exchanged, depending on many factors,
including prevailing interest rates and the markets for similar securities,
general economic conditions and the financial condition and performance of,
and prospects for, the Company.
18
SENSITIVITY TO GENERAL ECONOMIC AND WEATHER CONDITIONS
The Company believes that the equipment rental business is sensitive to
changes in general economic conditions and may be temporarily disrupted 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 changes in construction and
industrial activity, or increases in prevailing interest rates, or (ii)
adverse weather conditions that may temporarily decrease construction and
industrial activity in any one particular geographic area.
PENDING MERGER WITH U.S. RENTALS IS SUBJECT TO CERTAIN CONDITIONS
The Merger is subject to the satisfaction or waiver of certain conditions.
See "Certain Information Concerning Pending Merger." Consequently, although
the Company expects that the Merger will be completed, there can be no
assurance of this.
ACQUIRED COMPANIES NOT HISTORICALLY OPERATED AS A COMBINED BUSINESS
The Acquired Companies have been in existence an average of 26.5 years and
some have been in existence for more than 50 years. However, the businesses of
these companies have not historically been operated on a combined basis and
there can be no assurance that the Company will be able to integrate
successfully the businesses of the Acquired Companies (or the businesses of
any companies acquired in the future), to operate them profitably on a
combined basis, or to manage effectively the combined business. Failure by the
Company to integrate successfully or manage effectively the Acquired Companies
could have a material adverse effect on the Company's results of operations
and financial condition.
LIMITED OPERATING HISTORY
The Company was incorporated in August 1997 and commenced equipment rental
and related operations in October 1997 by acquiring six established rental
companies. The Company acquired 66 additional companies in the first nine
months of 1998 (through September 14, 1998). Due to the recent commencement of
the Company's operations, the Company has a limited operating history upon
which an evaluation of the Company and its prospects can be based.
Furthermore, the Company's historical financial statements included herein do
not fully reflect its current operations in view of the fact that (i)
acquisitions completed after the commencement of a period are reflected in the
Company's results for only a portion of the period and (ii) acquisitions
completed subsequent to the end of a period are not reflected in the Company's
results for such period.
RISKS RELATING TO GROWTH STRATEGY
The Company's growth strategy includes continued expansion through internal
growth, its ongoing acquisition program and the start-up of new locations.
However, there can be no assurance that the Company will successfully
implement its growth strategy or that this strategy will result in continued
profitability. In addition, under the terms of the Indenture, the indenture
governing the 8.80% Notes, and the agreements governing the Credit Facility
and the Term Loan, the Company may not make acquisitions unless certain
financial conditions are satisfied or the consent of the lenders is obtained.
Furthermore, there can be no assurance that the Company's growth rate will be
comparable to the past or future growth rate of the overall equipment rental
industry or any segment thereof. 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. Competition for acquisitions could have the effect of increasing
prices required to be paid for such acquisitions. There can be no assurance
that the Company will
19
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
Realization of the anticipated benefits of completed and future acquisitions
(including the pending Merger with U.S. Rentals) will depend, in part, upon
the efficient, effective and timely integration of acquired operations.
Accordingly, the Company intends to continue 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 successful in these efforts or that these efforts may not
in certain circumstances adversely affect existing operations.
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 for a start-up location to become
profitable. Although start-ups can generate long-term growth, there can be no
assurance that any start-up location will become profitable within any
specific time period, 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, United Rentals capital stock, notes and/or assumption of indebtedness.
To the extent that cash generated internally and cash available under the
Company's borrowing facilities is not sufficient to fund the Company's capital
requirements, the Company will require additional debt and/or equity
financing. 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 of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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. In connection with acquisitions, the
Company seeks to minimize the impact of these liabilities by obtaining
indemnities and warranties from the sellers which may be supported by
deferring payment of a portion of the purchase price. However, these
indemnities and 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 agreements governing the Credit Facility and Term
Loan provide that the failure of certain members of the Company's current
senior
20
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 and the Term Loan unless replacement officers satisfactory to the
lenders are appointed. See "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.
The Company's rental locations are managed by local managers who have
extensive experience in the equipment rental industry and substantial
knowledge of the local markets served. These managers are generally former
owners or employees of the businesses acquired by the Company. The loss of one
or more of these managers may have a material adverse effect on the Company in
the event that the Company is unable to find a suitable replacement in a
timely manner.
COMPETITION
The equipment rental industry is highly fragmented and competitive. The
Company's competitors include public companies or divisions of public
companies; 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. 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. See "Business--Competition."
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 period not meeting expectations, which could have a material
adverse impact on the price of the Notes.
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 the Company's 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
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-
21
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
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.
CONCENTRATED CONTROL
The executive officers and directors of the Company own in the aggregate
shares of Common Stock which represent approximately 43.6% of United Rentals'
outstanding Common Stock on a pro forma basis giving effect to the exercise of
all currently exercisable options and warrants owned by such executive
officers and directors (46.6% giving effect to the exercise of all options and
warrants, including options that are not currently exercisable). Such share
ownership may effectively give such persons the ability to elect the entire
Board of Directors of United Rentals and to control the Company's management
and affairs.
RISKS RELATED TO INTERNATIONAL OPERATIONS
The Company's operations outside the United States are subject to risks
normally associated with international operations, including currency
conversion risks and complying with foreign laws.
22
THE EXCHANGE OFFER
The following summary of certain terms of the Exchange Offer is qualified in
its entirety by reference to the full text of the documents underlying the
Exchange Offer, including the Letter of Transmittal and the Registration
Rights Agreement, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
Participation in the Exchange Offer is voluntary, and Holders should
carefully consider whether to accept. Holders are urged to consult their
financial and tax advisors in making their decision on what action to take.
PURPOSE OF THE EXCHANGE OFFER; EFFECT ON HOLDERS OF ORIGINAL NOTES
The Exchange Offer is being made in order to satisfy certain of the
Company's obligations under the Registration Rights Agreement. See
"Registration Rights Agreement."
Upon consummation of the Exchange Offer, the Holders of Original Notes will
not have any further registration rights under the Registration Rights
Agreement (subject to limited exceptions as described under "Registration
Right Agreement--Shelf Registration Statement"). Holders of the Original Notes
who do not tender their Original Notes in the Exchange Offer will continue to
hold such Original Notes and will be entitled to all the rights and will be
subject to all the limitations applicable thereto under the Indenture. All
Original Notes that remain outstanding upon consummation of the Exchange Offer
will continue to be subject to the restrictions on transfer provided for in
the Original Notes and the Indenture. In general, the Original Notes may not
be offered or sold unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act. To the extent that the Original Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
Original Notes could be adversely affected.
REQUIRED REPRESENTATIONS
In connection with any tender of Original Notes pursuant to the Exchange
Offer, the Book-Entry Holder of such Original Notes will be required to make
certain representations in the Letter of Transmittal, including that (i) it is
not an affiliate of the Company, (ii) it is not a broker-dealer that purchased
such Original Notes directly from the Company, (iii) any Exchange Notes that
it acquires in the Exchange Offer will be acquired by it in the ordinary
course of its business and (iv) it has no arrangement with any person to
participate in the distribution of the Exchange Notes; provided, however, that
if the Book-Entry Holder is a broker-dealer that wishes to tender Original
Notes that were acquired by it for its own account as a result of market-
making activities or other trading activities, it may represent, in lieu of
the representation set forth in clause (iv), that it has no arrangement or
understanding with the Company, or any affiliate of the Company, to
participate in the distribution of the Exchange Notes. In addition, a Book-
Entry Holder that holds any Original Notes as nominee, will be required to
confirm that the beneficial owner for which it is holding such Notes has made
the representations provided for in the preceding sentence.
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that (except as
provided in the following two paragraphs) the Exchange Notes issued pursuant
to the Exchange Offer may be offered for resale, resold or otherwise
transferred by any Holder thereof (other than an affiliate of the Company)
without compliance with the registration and prospectus delivery provisions of
the Securities Act (subject to the representations set forth under "--Required
Representations" being made and being accurate).
Any broker-dealer that receives Exchange Notes in exchange for Original
Notes that were acquired by it for its own account as a result of market-
making activities or other trading activities, must deliver a prospectus
meeting the requirements of the Securities Act in connection with any resales
by it of any such Exchange Notes.
23
This Prospectus, as it may be amended or supplemented from time to time, may,
if permitted by the Company, be used by a broker-dealer in order to satisfy
such prospectus delivery requirements. The Company has agreed in the
Registration Rights Agreement that, for a period of 30 days following
consummation of the Exchange Offer (subject to extension under certain
circumstances described under "Registration Rights Agreement"), it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale (subject to the right of the Company to restrict the use of this
Prospectus under certain circumstances). Each broker-dealer that participates
in the Exchange Offer will be required to confirm that it will comply with the
prospectus delivery requirements described above. A broker-dealer that
delivers a prospectus in connection with the resale of any Exchange Notes will
be subject to certain of the civil liability provisions under the Securities
Act. See "Registration Right Agreement" and "Plan of Distribution."
In the event that any of the required representations set forth under "--
Required Representations" is not true with respect to a Holder that receives
Exchange Notes pursuant to the Exchange Offer, the Exchange Notes received by
such Holder may be deemed to be restricted securities and, if so, such
Exchange Notes may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act.
The conclusions set forth in the preceding three paragraphs are based on
interpretations by the Staff of the Commission set forth in no-action letters
issued to third parties. The Company does not intend to seek its own no-action
letter with respect to the Exchange Offer and there is no assurance that the
Staff of the Commission would make a similar determination with respect to the
Exchange Offer as it has in such no-action letters to third parties.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept for
exchange all Original Notes properly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue
$1,000 principal amount of Exchange Notes in exchange for each $1,000
principal amount of outstanding Original Notes accepted in the Exchange Offer.
Holders may tender some or all of their Original Notes pursuant to the
Exchange Offer in denominations of $1,000 and integral multiples thereof. The
Exchange Offer is not conditioned upon any minimum aggregate principal amount
of Original Notes being tendered.
The terms of the Exchange Notes will be the same in all material respects as
the Original Notes except that (i) the Exchange Notes will be registered under
the Securities Act, and, therefore, will not bear legends restricting the
transfer thereof and (ii) certain of the registration rights, under the
Registration Rights Agreement, relating to the Exchange Notes are different
than those relating to the Original Notes and, therefore, the defaults under
the Registration Rights Agreement that may require the Company to pay
additional interest will be different for the Exchange Notes and the Original
Notes. See "Registration Rights Agreement--Certain Provisions Relating to
Additional Interest." The Exchange Notes will evidence the same debt as the
Original Notes and both series of Notes will be entitled to the benefits of
the Indenture and treated as a single class of debt securities.
In connection with the issuance of the Original Notes, the Company arranged
for the Original Notes to be issued and transferable in book-entry form
through the facilities of DTC, acting as depositary. The Exchange Notes will
also be issuable and transferable in book-entry form through DTC. See
"Description of the Notes--Book Entry; Delivery and Form."
The Company shall be deemed to have accepted validly tendered Original Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Original Notes for the purposes of receiving the Exchange Notes from the
Company and delivering Exchange Notes to such Holders. The Company's
obligation to accept Original Notes for exchange pursuant to the Exchange
Offer is subject to certain customary conditions as set forth under "--
Conditions."
24
If any tendered Original Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
such unaccepted Original Notes will be returned, without expense, to the
tendering Holder thereof as promptly as practicable after the Expiration Date.
Holders of Original Notes who tender pursuant to the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Original Notes pursuant to the Exchange Offer. The Company will
pay all charges and expenses, other than certain applicable taxes, in
connection with the Exchange Offer. See "--Solicitation of Tenders; Fees and
Expenses."
Holders do not have appraisal or dissenters' rights under the Delaware
General Corporation Law or under the Indenture in connection with the Exchange
Offer. The Company intends to conduct the Exchange Offer in accordance with
the applicable requirements of Regulation 14E under the Exchange Act.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF ORIGINAL NOTES AS TO WHETHER TO TENDER OR REFRAIN
FROM TENDERING ALL OR ANY PORTION OF THEIR ORIGINAL NOTES PURSUANT TO THE
EXCHANGE OFFER. MOREOVER, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF ORIGINAL NOTES MUST MAKE THEIR OWN DECISION WHETHER
TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF
ORIGINAL NOTES TO TENDER, AFTER READING THIS PROSPECTUS AND THE LETTER OF
TRANSMITTAL AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON THEIR OWN
FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer will remain open for acceptance for a period of not less
than 20 business days after the date notice of the Exchange Offer is mailed to
Holders of the Original Notes (or longer if required by applicable law). The
Expiration Date will be 5:00 p.m., New York City time, on November 4, 1998,
unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date will be the latest business day to which the
Exchange Offer is extended. In order to extend the Expiration Date, the
Company will notify the Exchange Agent of any extension by oral or written
notice and will mail to the record Holders an announcement thereof, each prior
to 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. During any such extension, all Original
Notes previously tendered and not withdrawn as herein provided will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
INTEREST ON THE EXCHANGE NOTES
Interest on the Notes is payable semi-annually on June 1 and December 1 of
each year at the rate of 9 1/2% per annum. The Exchange Notes will bear
interest from and including the last interest payment date on the Original
Notes (or, if none has yet occurred, the date of issuance of such Original
Notes). Accordingly, Holders of Original Notes that are accepted for exchange
will not receive interest that is accrued but unpaid on the Original Notes at
the time of tender, but such interest will be payable in respect of the
Exchange Notes delivered in exchange for such Original Notes on the first
interest payment date after the Expiration Date.
PROCEDURES FOR TENDERING
Only a Book-Entry Holder of Original Notes may tender such Original Notes
pursuant to the Exchange Offer. To tender any Original Notes pursuant to the
Exchange Offer, the Book-Entry Holder of such Original Notes must make book-
entry delivery of such Original Notes by causing DTC to transfer such Original
Notes to the account of the Exchange Agent at DTC in accordance with DTC's
Automated Tender Offer Program ("ATOP") prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) DTC must deliver an
Agent's Message (as defined below) prior to 5:00 p.m., New York City time, on
the Expiration Date,
25
indicating that DTC has received from such Book-Entry Holder an express
acknowledgment that such Book-Entry Holder has received and agrees to be bound
by the terms of the Letter of Transmittal or (ii) such Book-Entry Holder must
complete, sign and date the Letter of Transmittal or a facsimile thereof, in
accordance with the instructions contained herein and therein and deliver such
Letter of Transmittal, or such facsimile, and any other required documentation
to the Exchange Agent at the address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming part of the book-entry
confirmation relating to a book-entry transfer of Original Notes through ATOP,
which states that DTC has received an express acknowledgment from the DTC
Participant that is tendering the Original Notes which are the subject of such
book entry confirmation, that such DTC Participant has received and agrees to
be bound by the terms of the Letter of Transmittal.
The tender by a Holder of Original Notes and the acceptance thereof by the
Company will constitute an agreement between such Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER.
INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT
OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Original Notes and withdrawal of tendered
Original Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Original Notes not properly tendered or any
Original Notes the Company's acceptance of which would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the right to
waive any irregularities or conditions of tender as to particular Original
Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Original Notes must be cured
within such time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Original
Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Original Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Original Notes
received by the Exchange Agent that are not properly tendered or the tender of
which is otherwise rejected by the Company and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the Book-Entry Holder that tendered such Original Notes (by crediting
an account maintained at DTC designated by such Book-Entry Holder) as soon as
practicable following the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Original Notes pursuant to the Exchange Offer, the
Book-Entry Holder that tendered such Original Notes must, prior to 5:00 p.m.,
New York City time, on the Expiration Date, either (i) withdraw such tender in
accordance with the appropriate procedures of the ATOP system or (ii) deliver
to the Exchange Agent a written or facsimile transmission notice of withdrawal
at the address set forth herein. Any such notice of withdrawal must contain
the name and number of the Book-Entry Holder, the amount of Original Notes to
which such withdrawal relates, the account at DTC to be credited with the
withdrawn Original Notes
26
and the signature of the Book-Entry Holder. All questions as to the validity,
form and eligibility (including time of receipt) of such withdrawal notices
will be determined by the Company in its sole discretion, whose determination
will be final and binding on all parties. Any Original Notes so withdrawn will
be deemed not to have been validly tendered for purposes of the Exchange
Offer, and no Exchange Notes will be issued with respect thereto unless the
Original Notes so withdrawn are validly retendered. Any Original Notes which
have been tendered but which are withdrawn will be returned by the Exchange
Agent to the Book-Entry Holder that tendered such Original Notes (by crediting
an account maintained at DTC designated by such Book-Entry Holder) as soon as
practicable after withdrawal. Properly withdrawn Original Notes may be
retendered at any time prior to the Expiration Date by following the
procedures described under "--Procedures for Tendering."
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange Exchange Notes for, any
Original Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Original Notes, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange
Offer which, in the sole judgment of the Company, might impair the
ability of the Company to proceed with the Exchange Offer; or
(b) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation
of the Exchange Offer; or
(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law, statute, rule
or regulation) which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer.
If the Company determines in its reasonable judgment that any of the
conditions set forth above are not satisfied, the Company may (i) terminate
the Exchange Offer and refuse to accept any Original Notes and return all
tendered Original Notes to the tendering Holders, (ii) extend the Exchange
Offer and retain all Original Notes tendered prior to the expiration of the
Exchange Offer subject, however, to the rights of Holders to withdraw such
Original Notes (see "--Withdrawals of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Original Notes which have not been withdrawn. Moreover,
regardless of whether any of such conditions has occurred, the Company may
amend the Exchange Offer in any manner which, in its good faith judgment, is
advantageous to Holders of the Original Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right, and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time. If a waiver constitutes a
material change in the Exchange Offer, the Company will disclose such change
by means of a supplement to this Prospectus that will be distributed to each
Book-Entry Holder, and the Company will extend the Exchange Offer for a period
of five to ten business days, depending upon the significance of the waiver
and the manner of disclosure to the Book-Entry Holders, if the Exchange Offer
would otherwise expire during such period. Any determination by the Company
concerning the events described above will be final and binding upon all
parties.
In addition, the Company will not accept for exchange any Original Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Original Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus is
a part or if the Indenture is not qualified under the Trust Indenture Act of
1939, as amended. The Company is required to use every reasonable effort to
obtain the withdrawal of any such stop order at the earliest possible time.
27
The Exchange Offer is not conditioned upon any minimum principal amount of
Original Notes being tendered for exchange.
EXCHANGE AGENT
State Street Bank and Trust Company, the Trustee under the Indenture, has
been appointed as Exchange Agent for the Exchange Offer. In such capacity, the
Exchange Agent has no fiduciary duties to the Holders of the Notes and will be
acting solely on the basis of directions of the Company. All executed Letters
of Transmittal must be directed to the Exchange Agent at the applicable
address set forth below. Questions and requests for assistance and requests
for additional copies of this Prospectus or the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
By Mail: By Facsimile By Overnight or Hand
Transmission:
(registered or certified Delivery:
recommended) (for Eligible
State Street Bank and Institutions only) State Street Bank and
Trust Company Trust Company
Corporate Trust (617) 664-5290 Corporate Trust
Department Attention: Kellie Mullen Department
P.O. Box 778 Confirm by Telephone: Two International Plaza
Boston, MA 02102-0078 (617) 664-5587 Boston, MA 02110-0078
Attention: Kellie Mullen Fourth Floor
Attention: Kellie Mullen
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OR FACSIMILE NUMBER
OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, facsimile, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Company will,
however, pay the Exchange Agent reasonable and customary fees for its services
and will reimburse the Exchange Agent for its reasonable out-of-pocket
expenses in connection therewith and pay other expenses of the Exchange Offer,
including fees and expenses of the Trustee, filing fees, blue sky fees,
accounting and legal fees and printing and distribution expenses. The Company
may also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Original Notes and in handling or forwarding tenders
for exchange.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Original Notes pursuant to the Exchange Offer. If, however, Exchange Notes
or Original Notes for principal amounts not tendered or accepted for exchange
are to be delivered to, or are to be registered or issued in the name of, any
person other than the Book-Entry Holder of the Original Notes tendered, or if
a transfer tax is imposed for any reason other than the exchange of Original
Notes pursuant to the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the Book-Entry Holder or any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder.
28
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes for which they are exchanged, which is the aggregate principal
amount of the Original Notes, as reflected in the Company's accounting records
on the date of exchange. Accordingly, no gain or loss for accounting purposes
will be recognized in connection with the Exchange Offer. The cost of the
Exchange Offer will be deferred and amortized over the term of the Exchange
Notes.
OTHER
The Company may in the future seek to acquire untendered Original Notes, to
the extent permitted by applicable law, in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plans to acquire any Original Notes that are not tendered in the
Exchange Offer or to file a registration statement to permit resales of any
untendered Original Notes.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain U.S. federal income tax
consequences of the Exchange Offer. This discussion is based on the current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations, judicial authority and administrative rulings
and practice. This discussion is generally limited to the tax consequences to
Holders of the Notes that hold the Notes as capital assets (within the meaning
of Section 1221 of the Code). There can be no assurance that the Internal
Revenue Service (the "Service") will not take a contrary view, and no ruling
from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to Holders. Certain Holders, including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States, may be subject to special rules not discussed below.
For U.S. federal income tax purposes, the exchange of Original Notes for
Exchange Notes pursuant to the Exchange Offer should not be treated as a
taxable transaction for federal income tax purposes. As a result, there should
be no federal income tax consequences to Holders exchanging Original Notes for
Exchange Notes pursuant to the Exchange Offer. A Holder should have the same
adjusted basis and holding period in an Exchange Note as it had in an Original
Note immediately prior to the exchange.
THE FOREGOING DISCUSSION IS BASED ON THE PROVISIONS OF THE CODE,
REGULATIONS, TREASURY REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN
EFFECT, ALL OF WHICH ARE SUBJECT TO CHANGE. ANY SUCH CHANGES MAY BE APPLIED
RETROACTIVELY IN A MANNER THAT COULD ADVERSELY AFFECT HOLDERS EXCHANGING
NOTES. EACH HOLDER OF NOTES SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES TO IT, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS, OF EXCHANGING ORIGINAL NOTES FOR EXCHANGE NOTES
PURSUANT TO THE EXCHANGE OFFER.
29
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of the Original Notes, the Company entered
into a Registration Rights Agreement with the Initial Purchasers (the
"Registration Rights Agreement"). Set forth below is a summary of certain
provisions of the Registration Rights Agreement. Such summary does not purport
to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Registration Rights Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
EXCHANGE OFFER
The Registration Rights Agreement provides that the Company is obligated to
(unless applicable law or Commission policy does not permit) (i) on or prior
to 90 days after the date (the "Issue Date") the Original Notes were
originally issued, file a registration statement (the "Exchange Registration
Statement") with the Commission with respect to an offer to exchange the
Original Notes for Exchange Notes, (ii) use its best efforts to cause the
Exchange Registration Statement to become effective under the Securities Act
on or prior to 150 days after the Issue Date, (iii) commence the exchange
offer contemplated by the Exchange Registration Statement promptly after the
registration statement is declared effective by the Commission and keep such
exchange offer open for acceptance for a period (the "Exchange Period") of 20
business days after the date notice of the exchange offer is mailed to the
Holders (or for such longer period as may be required by law), (iv) use its
best efforts to issue, promptly after the end of the Exchange Period, Exchange
Notes in exchange for all Original Notes that have been properly tendered for
exchange during the Exchange Period and (v) use its best efforts to maintain
the effectiveness of the Exchange Registration Statement during the Exchange
Period and thereafter until such time as the Company has issued Exchange Notes
in exchange for all Original Notes that have been properly tendered for
exchange during the Exchange Period. The exchange offer contemplated by the
Registration Rights Agreement will be deemed consummated, for purposes of the
Registration Rights Agreement, if the Company makes such offer, such offer
remains open for Exchange Period, and the Company issues Exchange Notes in
respect of all Original Notes that are properly tendered during the Exchange
Period.
The Exchange Offer being made hereby is intended to satisfy the Company's
obligations under the Registration Rights Agreement described in the preceding
paragraph.
SHELF REGISTRATION STATEMENT
If (i) the Company is not permitted to file the Exchange Registration
Statement or to consummate the exchange offer contemplated by the Registration
Rights Agreement because such offer is not permitted by applicable law or
Commission policy; (ii) for any other reason, the exchange offer contemplated
by the Registration Rights Agreement is not consummated within 180 days after
the Issue Date of the Original Notes; (iii) any Holder of Notes notifies the
Company prior to the 20th day following consummation of the Exchange Offer
that (a) due to a change in law or policy such Holder is not entitled to
participate in the Exchange Offer, (b) due to a change in law or policy such
Holder may not resell the Exchange Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus and the prospectus contained in
the Exchange Registration Statement is not appropriate or available for such
resales by such Holder or (c) such Holder is a broker-dealer and owns Original
Notes acquired directly from the Company or an affiliate of the Company; or
(iv) the Holders of a majority in aggregate principal amount of the Original
Notes are not eligible to participate in the Exchange Offer and to receive
Exchange Notes that they may resell to the public without restriction under
the Securities Act and without restriction under applicable blue sky or state
securities laws, then the Company is required to file with the Commission a
shelf registration statement ("Shelf Registration Statement") to cover resales
of the Transfer Restricted Notes (as defined below) by the Holders thereof.
If the Company is required to file the Shelf Registration Statement as
described in the preceding paragraph, the Company is obligated (i) to use its
best efforts to file the Shelf Registration Statement on or prior to the 90th
day after such filing obligation arises (except that, if the obligation to
file the Shelf Registration Statement arises because the exchange offer
contemplated by the Registration Rights Agreement has not been consummated
within 180 days after the Issue Date, then the Company will use its best
efforts to file the Shelf Registration
30
Statement on or prior to the 30th day after such filing obligation arises),
(ii) following the filing of the Shelf Registration Statement, to use its best
efforts to cause the Shelf Registration Statement to be declared effective by
the Commission on or prior to the 150th day after such filing obligation
arises and (iii) after the Shelf Registration Statement is declared effective
by the Commission, to use its best efforts to keep such Shelf Registration
Statement continuously effective, supplemented and amended (including through
a post-effective amendment on Form S-3 when the Company becomes eligible to
file such Form) until the second anniversary of the effective date of the
Shelf Registration Statement or such shorter period that will terminate when
all the Transfer Restricted Notes covered by the Shelf Registration Statement
have been sold pursuant thereto.
The term "Transfer Restricted Notes" means (i) each Original Note and (ii)
each Exchange Note that is issued to a broker-dealer in exchange for Original
Notes that were acquired by such broker-dealer for its own account as a result
of market-making activities or other trading activities; provided, however,
that a Note shall cease to be a Transfer Restricted Note when (a) such Note
has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or Broker Shelf Registration
Statement (as defined herein), or (b) such Note is eligible for distribution
to the public pursuant to Rule 144(k) under the Securities Act (or any similar
provision then in force, but not Rule 144A under the Securities Act), or (c)
such Note shall have been otherwise transferred by the holder thereof and a
new Note not bearing a legend restricting further transfer shall have been
delivered by the Company and subsequent disposition of such Note shall not
require registration or qualification under the Securities Act or any similar
state law then in force, or (d) such Note ceases to be outstanding or (e) in
the case of an Exchange Note that is a Transfer Restricted Note, such Exchange
Note is sold to a purchaser who receives from the seller on or prior to the
date of such sale a copy of the prospectus contained in the Exchange
Registration Statement, as amended or supplemented
CERTAIN PROVISIONS RELATING TO BROKER-DEALERS
A broker-dealer (a "Participating Broker-Dealer") that receives Exchange
Notes in exchange for Original Notes that were acquired by it for its own
account as a result of market-making activities or other trading activities,
will be required to deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales by it of any such Exchange
Notes. This Prospectus, as it may be amended or supplemented from time to
time, may, if permitted by the Company, be used by a broker-dealer in order to
satisfy such prospectus delivery requirements. The Company has agreed in the
Registration Rights Agreement that it will use its best efforts to make this
Prospectus available to any such broker-dealer for use in connection with any
resales of such Exchange Notes (subject to the right of the Company to
restrict the use of this Prospectus under certain circumstances specified in
the Registration Rights Agreement). The obligation of the Company to make this
Prospectus available as aforesaid will commence on the day that the Exchange
Offer is consummated and continue in effect for a 30-day period (the "Broker
Prospectus Period"); provided, however, that, if for any day during such
period the Company restricts the use of such prospectus, the Broker Prospectus
Period shall be extended on a day-for-day basis.
If at the end of the Broker Prospectus Period any Participating Broker-
Dealer continues to hold any Exchange Notes that it received in the Exchange
Offer, the Company is required (within the time period specified below), if
any such broker-dealer so requests within 60 days after the end of the Broker
Prospectus Period, to file with the Commission a shelf registration statement
(a "Broker Shelf Registration Statement") to cover the resale of such Exchange
Notes by such broker-dealers and use its best efforts to have such
registration statement declared effective by the Commission; provided,
however, that (i) the Company may in lieu of filing such registration
statement extend the Broker Prospectus Period by 60 days and (ii) the Company
will not be required to file such registration statement until such time as
the Company becomes eligible to use a Form S-3 for such registration
statement.
If the Company is required to file the Broker Shelf Registration Statement
as described in the preceding paragraph, the Company is obligated to (i) file
the Broker Shelf Registration Statement within 30 days following the date on
which the Company first becomes eligible to use a Form S-3 for such
registration statement (or, if later, within 30 days of the date the request
for such registration statement is first made in accordance with the
31
Registration Rights Agreement) and (ii) use its best efforts to have the
Broker Shelf Registration Statement declared effective by the Commission on or
prior to the 90th day following the date on which the Company first becomes
eligible to use a Form S-3 for such registration statement (or, if later, the
90th day following the date the request for such registration statement is
first made in accordance with the Registration Rights Agreement). The Company
will be required to use its best efforts to keep the Broker Shelf Registration
Statement continuously effective, supplemented and amended for a 60-day
period; provided, however, that, if for any day during such period such
registration statement is not usable in connection with the resale of the
Exchange Notes covered thereby, such period shall be extended on a day-for-day
basis.
CERTAIN PROVISIONS RELATING TO ADDITIONAL INTEREST
If a Registration Default (as defined herein) exists, the interest rate on
the Specified Notes (as defined below) will increase, with respect to the
first 90-day period (or portion thereof) while a Registration Default is
continuing immediately following the occurrence of such Registration Default,
.25% per annum, such interest rate increasing by an additional .25% per annum
at the beginning of each subsequent 90-day period (or portion thereof) while a
Registration Default is continuing until all Registration Defaults have been
cured, up to a maximum rate of additional interest of 1.00% per annum.
Following the cure of all Registration Defaults the accrual of additional
interest on the Specified Notes will cease and the interest rate will revert
to the original rate. The Indenture will provide that additional interest as
aforesaid will constitute liquidated damages and will be the exclusive
monetary remedy available to Holders of the Notes in respect of any
Registration Default. The Specified Notes mean the Original Notes (and not the
Exchange Notes); provided, however, that the Specified Notes means the
Exchange Notes (and not the Original Notes) with respect to (a) any
Registration Default that arises pursuant to clause (i) or (ii) of the
definition of such term and relates solely to the Broker Shelf Registration
Statement and (b) any Registration Default that arises solely pursuant to
clause (v) or (vi) of the definition of such term.
A "Registration Default" will exist (subject to the following sentence) if
(i) the Company fails to file any of the registration statements required by
the Registration Rights Agreement on or prior to the date specified for such
filing, (ii) any of such registration statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness, (iii)
an exchange offer is required to be consummated under the Registration Rights
Agreement and is not consummated within 180 days after the Issue Date, (iv)
the Shelf Registration Statement is declared effective but thereafter, during
the period for which the Company is required to maintain the effectiveness of
such registration statement, it ceases to be effective or usable in connection
with the resale of the Notes covered by such registration statement for a
period of 60 days, whether or not consecutive, (v) the Exchange Offer
Registration Statement is declared effective but thereafter, during the Broker
Prospectus Period, it ceases to be effective (or the Company restricts the use
of the prospectus included therein) for a period of 60 days, whether or not
consecutive, or (vi) the Broker Shelf Registration Statement is declared
effective but thereafter, during the period for which the Company is required
to maintain the effectiveness of such registration statement, it ceases to be
effective or usable in connection with the resale of the Exchange Notes
covered by such registration statement for a period of 60 days, whether or not
consecutive. Notwithstanding the foregoing, (a) any Registration Default
specified in clause (i), (ii) or (iii) of the preceding sentence that relates
to the Exchange Offer Registration Statement or the Exchange Offer shall be
deemed cured at such time as the Shelf Registration Statement is declared
effective by the Commission and (b) any Registration Default specified in
clause (v) of the preceding sentence shall be deemed cured at such time as the
Broker Shelf Registration Statement is declared effective by the Commission.
32
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes. In consideration for issuing the Exchange Notes as
contemplated in this Prospectus, the Company will receive in exchange Original
Notes in like principal amount, which will be cancelled and as such will not
result in any increase in indebtedness of the Company.
RATIO OF EARNINGS TO FIXED CHARGES
PERIOD FROM
AUGUST 14, 1997 SIX MONTHS SIX MONTHS
(INCEPTION) THROUGH ENDED ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998 JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998
------------------- ------------- ------------- ----------------- ----------------
SUPPLEMENTAL SUPPLEMENTAL
HISTORICAL HISTORICAL PRO FORMA(2) PRO FORMA(3) PRO FORMA(3)
------------------- ------------- ------------- ----------------- ----------------
Ratio of earnings to
fixed charges (1)...... 1.1x 3.0x 2.5x 2.0x 2.4x
- --------
(1) For purposes of computing such ratio, (i) earnings consist of income
before provision for income taxes plus fixed charges and (ii) fixed
charges consist of interest expense, amortization of debt issuance costs
and the estimated portion of rental expense attributable to interest.
(2) The pro forma ratio of earnings to fixed charges gives effect to the
issuance of the Notes and the application of a portion of the net proceeds
therefrom to repay outstanding indebtedness, as if such transactions had
occurred at the beginning of the period.
(3) The supplemental pro forma ratio of earnings to fixed charges gives effect
to (i) each acquisition completed by the Company after the beginning of
the period and the financing thereof and (ii) completion of the Merger
with U.S. Rentals using the "pooling of interest" method of accounting, as
if all such transactions had occurred at the beginning of the period.
33
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, on an historical and pro forma basis. The following unaudited pro
forma data as of June 30, 1998 gives effect to (i) the acquisitions completed
by the Company subsequent to such date (through September 14, 1998) and the
financing of each such acquisition, (ii) the completion of the pending Merger
with U.S. Rentals using the "pooling of interests" method of accounting and
(iii) an increase in the size of the Credit Facility required in order to
repay certain indebtedness of U.S. Rentals (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Cash Requirements Relating to the Merger"), as if all such
transactions had occurred on such date.
AS OF JUNE 30, 1998
---------------------------
ACTUAL PRO FORMA
---------- ------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents........................... $ 5,486 $ 26,510
========== ============
Debt (including current portion):
Credit Facility(1)................................ $ 173,000 $ 714,178
Term Loan ........................................ -- 250,000
9 1/2% Senior Subordinated Notes.................. 200,000 200,000
8.80% Senior Subordinated Notes................... -- 205,000
Other Debt........................................ 16,181 37,681
---------- ------------
Total debt...................................... 389,181 1,406,859
Stockholders' equity................................ 418,394 669,823
---------- ------------
Total capitalization................................ $ 807,575 $2,076,682
========== ============
- --------
(1) As of September 8, 1998, the outstanding indebtedness under the Credit
Facility was $97.0 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
34
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected historical and pro forma income
statement, balance sheet and other financial data for the Company. The
historical income statement data for the Company for the period from August
14, 1997 (inception) to December 31, 1997 are derived from the audited
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus. The historical income statement data for the six months ended June
30, 1998 and the balance sheet data as of June 30, 1998 for the Company are
derived from the unaudited consolidated financial statements of the Company
included elsewhere in this Prospectus.
The following unaudited pro forma income statement data and other financial
data with respect to the year ended December 31, 1997 and the six months ended
June 30, 1998 gives effect to (i) each acquisition of an Acquired Company
completed by the Company after the beginning of the period and the financing
thereof and (ii) completion of the Merger with U.S. Rentals using the "pooling
of interests" method of accounting, as if all such transactions had occurred
at the beginning of the period. The following unaudited pro forma income
statement data with respect to the years ended December 31, 1995 and 1996
gives effect to (i) the acquisition of Rental Tools and Equipment Co.
International, Inc. (which was completed in August 1998 and accounted for as a
"pooling of interests") and (ii) completion of the Merger with U.S. Rentals
using the "pooling of interests" method of accounting, as if all such
transactions had occurred at the beginning of the period.
The following unaudited pro forma balance sheet data as of June 30, 1998
gives effect to (i) each acquisition of an Acquired Company completed by the
Company subsequent to such date and the financing thereof and (ii) completion
of the Merger with U.S. Rentals using the "pooling of interests" method of
accounting, as if all such transactions had occurred on such date.
The following data should be read in conjunction with (i) the information
set forth under "Use of Proceeds," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
(ii) the Consolidated Financial Statements and the related notes thereto and
Pro Forma Consolidated Financial Statements and the related notes thereto of
the Company included elsewhere in this Prospectus and (iii) the financial
statements of certain of the Acquired Companies and U.S. Rentals included
elsewhere in this Prospectus. The pro forma data set forth below is provided
for informational purposes only and does not purport to be indicative of the
results that would have actually been obtained had the acquisition of each of
the Acquired Companies and the Merger been completed at the beginning of the
period presented or of the results that may be expected to occur in the
future.
35
PERIOD FROM
AUGUST 14, 1997
(INCEPTION)
THROUGH SIX MONTHS YEAR ENDED DECEMBER 31, SIX MONTHS
DECEMBER 31, ENDED ------------------------------ ENDED
1997 JUNE 30, 1998 1995 1996 1997 JUNE 30, 1998
--------------- ------------- --------- --------- ---------- -------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
--------------- ------------- --------- --------- ---------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues.......... $10,633 $127,351 $282,887 $353,196 $1,193,622 $650,019
Total cost of
operations............. 6,822 80,112 193,641 248,618 783,984 436,234
------- -------- -------- -------- ---------- --------
Gross profit............ 3,811 47,239 89,246 104,578 409,638 213,785
Selling, general and
administrative expense. 3,311 25,102 40,147 45,913 197,120 109,734
Non-rental depreciation
and amortization....... 262 3,815 6,916 9,383 37,971 21,228
Termination cost of
deferred compensation
agreements............. 20,290
------- -------- -------- -------- ---------- --------
Operating income........ 238 18,322 42,183 49,282 154,257 82,823
Interest expense........ 454 4,937 7,471 10,936 74,339 32,982
Other (income) expense,
net.................... (270) (528) 947 247 (6,570) (5,652)
------- -------- -------- -------- ---------- --------
Income before income
taxes.................. 54 13,913 33,765 38,099 86,488 55,493
Income taxes............ 20 5,693 468 374 50,209 22,531
------- -------- -------- -------- ---------- --------
Net income.............. $ 34 $ 8,220 $ 33,297 $ 37,725 $ 36,279 $ 32,962
======= ======== ======== ======== ========== ========
Basic earnings per
share.................. $ 0.00 $ 0.27 $ 1.47 $ 1.66 $ 0.55 $ 0.49
======= ======== ======== ======== ========== ========
Diluted earnings per
share.................. $ 0.00 $ 0.23 $ 1.47 $ 1.66 $ 0.53 $ 0.45
======= ======== ======== ======== ========== ========
PERIOD FROM
AUGUST 14, 1997
(INCEPTION) SIX MONTHS SIX MONTHS
THROUGH ENDED YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998
----------------- ------------- ----------------- -------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
----------------- ------------- ----------------- -------------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
EBITDA(1)............... $1,539 $36,702 $379,857 $200,524
EBITDA margin(2)........ 14.5% 28.8% 31.8% 30.8%
Interest expense(3)..... $ 454 $ 4,937 $ 74,339 $ 32,982
Depreciation and
amortization........... $1,301 $18,380 $205,310 $117,701
Ratio of EBITDA to
interest expense....... 3.4x 7.4x 5.1x 6.1x
AS OF JUNE 30, 1998
---------------------
HISTORICAL PRO FORMA
---------- ----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 5,486 $ 26,510
Rental equipment, net............ 298,956 1,081,380
Total assets..................... 889,164 2,374,226
Total debt....................... 389,181 1,406,859
Stockholders' equity............. 418,394 669,823
- --------
(1) EBITDA is defined as net income (calculated excluding non-operating income
and expense and excluding the $20.3 million Non-Recurring U.S. Rentals
Charge) plus interest expense, income taxes and depreciation and
amortization. EBITDA is presented to provide additional information
concerning the Company's ability to meet its future debt service
obligations and capital expenditure and working capital requirements.
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to
either net income as an indicator of the Company's operating performance
or cash flows as an indicator of the Company's liquidity.
(2) EBITDA margin is defined as EBITDA as a percentage of revenues.
(3) Interest expense excludes the amortization of deferred financing fees.
36
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, the unaudited Pro Forma
Consolidated Financial Statements and related notes thereto and the "Selected
Historical and Pro Forma Consolidated Financial Information" of the Company
included elsewhere in this Prospectus.
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 66 additional companies in the first nine months of 1998
(through September 14, 1998).
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 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 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. Therefore, the discussion below focuses on the
historical and pro forma results of the Company rather than on pre-acquisition
historical results of the Acquired Companies.
CONSIDERATION PAID FOR THE ACQUIRED COMPANIES
The aggregate consideration paid by the Company for the Acquired Companies
was $1,015.2 million and consisted of approximately $872.7 million in cash,
5,105,380 shares of Common Stock, 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 $498.8 million. The Company
also agreed in connection with 12 of the acquisitions to pay additional
amounts to the former owners based upon specified future revenues (such
amounts being limited to (i) $10,000,000, $2,800,000, $2,000,000, $1,400,000,
$1,000,000, $800,000, $500,000, $500,000, $500,000, $350,000 and
Cdn$4,000,000, respectively, with respect to 11 of such acquisitions and (ii)
an amount based on the revenues of a single store with respect to the other
acquisition).
37
HISTORICAL RESULTS OF OPERATIONS
The Company believes that its historical results for each of the periods
discussed below do not fully reflect its current operations in view of the
fact that (i) acquisitions completed after the commencement of the period are
reflected in the Company's results for only a portion of the period and (ii)
acquisitions completed subsequent to the end of the period are not reflected
in the Company's results for such period.
SIX MONTHS ENDED JUNE 30, 1998
Revenues. Total revenues were $127.4 million for the six months ended June
30, 1998. Equipment rental revenues accounted for 67.6% of such revenues.
Gross Profits. For the six months ended June 30, 1998, the gross profit
margin was (i) 41.7% from equipment rentals, (ii) 44.3% from sales of rental
equipment and (iii) 21.7% from sales of new equipment, merchandise and other
revenues.
Selling, General and Administrative Expense. For the six months ended June
30, 1998, selling, general and administrative expense ("SG&A") was $25.1
million or 19.7% of total revenues.
Non-rental Depreciation and Amortization. For the six months ended June 30,
1998, non-rental depreciation and amortization was $3.8 million or 3.0% of
total revenues.
Interest Expense. For the six months ended June 30, 1998, interest expense
was $4.9 million.
Income Taxes. The Company's effective income tax rate for the six months
ended June 30, 1998 was 41.0%.
PERIOD FROM AUGUST 14, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
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, SG&A was $3.3 million or 31.1% of total
revenues.
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.
Income Taxes. The Company's effective income tax rate for the period from
August 14, 1997 through December 31, 1997 was 37.9%.
PRO FORMA RESULTS OF OPERATIONS
The pro forma income statement data with respect to each period discussed
below gives effect to (i) each acquisition completed by the Company after the
beginning of such period (through September 14, 1998) and the financing of
each such acquisition and (ii) completion of the Merger with U.S. Rentals
using the "pooling of interest" method of accounting, as if all such
transactions had occurred at the beginning of the period. Such pro forma
income statement data, however, does not reflect (i) potential cost savings,
synergies and efficiencies that may be achieved through the integration of the
businesses and operations of the businesses acquired, (ii) the
38
expenses that the Company may incur as it seeks to increase internal growth at
the businesses acquired including expenditures required in order to expand and
modernize rental equipment, increase sales and marketing efforts and expand
and diversify the customer segments served and (iii) the costs incurred
subsequent to the end of the period in connection with installing the
Company's integrated information technology system. In addition, the pro forma
income statement data for 1997 does not reflect the additional compensation
expense relating to the Company's senior management which would have been
incurred had such compensation accrued commencing at the beginning of the year
(rather than in September 1997). The pro forma income statement data discussed
below does not purport to be indicative of the results that would have
actually been obtained had the acquisition of each of the businesses acquired
and the financing of each such acquisition been completed at the beginning of
the period discussed or of the results that may be expected to occur in the
future.
SIX MONTHS ENDED JUNE 30, 1998
Revenues. Total revenues were $650.0 million for the six months ended June
30, 1998. Equipment rental revenues accounted for 70.7% of such revenues.
Gross Profits. For the six months ended June 30, 1998, the gross profit
margin was (i) 32.8% from equipment rentals and (ii) 33.1% from sales of
equipment and merchandise and other revenues.
Selling, General and Administrative Expense. For the six months ended June
30, 1998, SG&A was $109.7 million or 16.9% of total revenues.
Non-rental Depreciation and Amortization. For the six months ended June 30,
1998, non-rental depreciation and amortization was $21.2 million or 3.3% of
total revenues.
Interest Expense. For the six months ended June 30, 1998, interest expense
was $33.0 million.
Income Taxes. The Company's effective income tax rate for the six months
ended June 30, 1998 was 41.0%.
YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues were $1,193.6 million for the year ended
December 31, 1997. Equipment rental revenues accounted for 72.1% of such
revenues.
Gross Profit. For the year ended December 31, 1997, the gross profit margin
was (i) 36.1% from equipment rentals and (ii) 29.7% from sales of equipment
and merchandise and other revenues.
Selling, General and Administrative Expense. For the year ended December 31,
1997, SG&A was $197.1 million or 16.5% of total revenues.
Non-rental Depreciation and Amortization. For the year ended December 31,
1997, non-rental depreciation and amortization was $38.0 million or 3.2% of
total revenues.
Interest Expense. Interest expense was $74.3 million for the year ended
December 31, 1997.
Income Taxes. The pro forma effective income tax rate for the year ended
December 31, 1997 was 58.1%. Such pro forma effective tax rate was impacted by
(i) the recognition in 1997 of a $7,520,000 deferred tax liability in
connection with a recapitalization of U.S. Rentals which was effected prior to
the initial public offering of U.S. Rentals and (ii) the incurrence in
connection with such initial public offering of a $20.3 million non-recurring
charge (arising from the termination of deferred compensation agreements with
certain executives) which was not tax deductible.
39
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
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 Common Stock in the Company's initial public
offering in December 1997 and in an additional public offering in March 1998
for aggregate consideration of $307 million (after deducting the underwriting
discounts and estimated offering expenses), (iv) borrowings under the
Company's $300 million revolving credit facility (the "Credit Facility"), (v)
the sale of $200 million aggregate principal amount of Original Notes in May
1998 for aggregate consideration of $194.5 million (after deducting the
initial purchasers' discount), (vi) the proceeds of a $250 million term loan
that the Company received in July 1998, (vii) the Preferred Securities
Offering (described below under "--Certain Information Concerning Preferred
Securities") which resulted in URI receiving net proceeds of $290 million,
(viii) the sale of $205 million aggregate principal amount of 8.80% senior
subordinated notes (the "8.80% Notes") in August 1998 for aggregate
consideration of $197.5 million (after deducting the initial purchaser's
discount) and (ix) cash generated from operations and from the sale of
equipment. The Company generated cash from operations of $1.1 million and
$28.8 million during the period from August 14, 1997 (inception) through
December 31, 1997, and the first six months of 1998, respectively. For
additional information concerning certain of the financings described above,
see "--Certain Information Concerning Preferred Securities" and "--Certain
Information Concerning the Credit Facility and Other Indebtedness."
The Company's principal existing sources of cash are borrowings available
under the Credit Facility and cash generated from operations. The Company will
require additional financing in connection with the Merger as described below
under "--Cash Requirements Relating to the Merger."
CASH REQUIREMENTS RELATING TO THE MERGER
The Company has obtained commitments from a group of lenders to provide the
Company with a new $750 million revolving credit facility which would replace
the Company's existing Credit Facility. The Company expects that it will (i)
use a portion of this new facility to refinance approximately $382 million of
U.S. Rentals' outstanding indebtedness and pay approximately $60 million of
expenses in connection with the Merger (as described below) and (ii) use the
balance for general corporate purposes, including acquisitions. If for any
reason the Company were unable to obtain the expected new credit facility,
consummation of the Merger could be delayed or prevented.
The principal cash outlays that the Company expects will be required in
connection with the Merger are discussed below.
Repayment of U.S. Rentals' Credit Facility. Upon completion of the Merger,
U.S. Rentals will be required to immediately repay all outstanding
indebtedness under its revolving credit facility. As of September 4, 1998,
there was $130.0 million of indebtedness outstanding under such credit
facility.
Prepayment of U.S. Rentals' Senior Notes. The Company and U.S. Rentals are
engaged in discussions with the holders of $252 million aggregate principal
amount of U.S. Rentals' senior unsecured notes with respect to obtaining the
agreement of such holders to certain amendments to the terms of such notes
that would enable URI to assume such notes in connection with the Merger. Any
such amendment would likely provide, among other things, for an increase in
the interest rate on the notes following the Merger. There can be no assurance
that the holders of the notes will agree to such an amendment. If agreement to
such amendment is not obtained, the Company will prepay the notes pursuant to
the terms thereof concurrently with the closing of the Merger. The Company
intends to fund such repayment with the new credit facility that the Company
expects to obtain as described above.
40
Other Cash Expenditures. The Company estimates that other cash expenditures
in connection with the Merger will be in the range of $50 million to $60
million (excluding non-cash charges of approximately $10 million). These
include expenditures for (i) accelerated deferred compensation for certain
employees of U.S. Rentals, (ii) severance for certain employees of U.S.
Rentals, and (iii) professional fees and investment banking fees.
GENERAL CASH REQUIREMENTS RELATED TO OPERATIONS
The Company expects to obtain a new credit facility (as described above).
The Company estimates that borrowings under such credit facility and cash
generated from operations will be sufficient for at least two years following
completion of the Merger to fund the cash required for (i) the existing
operations of the Company and (ii) the existing operations of U.S. Rentals to
be acquired in the Merger. The Company expects that following the Merger its
principal uses of cash relating to its operations will be to fund (i)
operating activities and working capital, (ii) the purchase of rental
equipment and inventory of items offered for sale and (iii) debt service. The
Company estimates that equipment expenditures over the next 12 months will be
in the range of $350 million to $400 million for (a) the existing operations
of the Company and (b) the existing operations of U.S. Rentals to be acquired
in the Merger. The Company expects to fund the foregoing expenditures from its
existing cash sources described above. The Company cannot quantify at this
time the amount of additional equipment expenditures that will be required in
connection with new acquisitions, but expects that generally such expenditures
will be funded from the cash flow generated by such acquisitions.
Principal elements of the Company's strategy include continued expansion
through a disciplined acquisition program and the opening of new rental
locations. The Company expects to pay for future acquisitions using cash,
capital stock, notes and/or assumption of indebtedness. The Company expects
that it will require additional financing for future acquisitions and,
consequently, the Company's indebtedness may increase as the Company
implements its growth strategy. There can be no assurance 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
"Business--Start-up Locations." In addition, U.S. Rentals is in the process of
developing two start-up locations. The Company estimates that the aggregate
costs associated with such start-up locations will be in the range of $3
million to $5 million (including expenditures of approximately $700,000
incurred to date).
The Company has recently installed a new integrated information technology
system as described under "Business--Information Technology System." The cost
of installing such system was approximately $7.4 million. The Company
estimates that the cost of extending the system to the locations to be
acquired through the Merger will be approximately $3.3 million.
The Company has been informed by its software vendors that the Company's new
information technology system is year 2000 compliant. The Company has,
therefore, not developed any contingency plans relating to year 2000 issues
and has not budgeted any funds for year 2000 issues. Although the Company
believes that its system is year 2000 compliant, there can be no assurance
that unanticipated year 2000 problems will not arise
which, depending on the nature and magnitude of the problem, could have a
material adverse effect on the Company's business and financial condition.
Furthermore, year 2000 problems involving third parties may have a negative
impact on the general economy or on the ability of businesses generally to
receive essential services (such as telecommunications, banking services,
etc.). Any such occurrence could have a material adverse effect on the
Company's business and financial condition.
Based upon the terms of the Company's currently outstanding indebtedness
(including currently outstanding indebtedness of U.S. Rentals that will be
assumed in the Merger), the Company is scheduled to repay approximately $1.2
million of indebtedness during the balance of 1998 and $3.7 million during
1999. In addition, U.S. Rentals' outstanding indebtedness includes a $21
million demand note. The Company expects that demand for the repayment of such
note may be made prior to or concurrently with completion of the Merger. The
debt repayment obligations described in this paragraph are in addition to
those relating to the Merger described under "--Cash requirements relating to
the Merger."
41
CERTAIN INFORMATION CONCERNING PREFERRED SECURITIES
On August 5, 1998, a subsidiary trust (the "Trust") of the Holding Company
sold in a private offering (the "Preferred Securities Offering") $300 million
of 6 1/2% Convertible Quarterly Income Preferred Securities (the "Preferred
Securities"). The net proceeds from the Preferred Securities Offering were
approximately $290 million. The Trust used the proceeds from the Preferred
Securities Offering to purchase convertible subordinated debentures from the
Holding Company which resulted in the Holding Company receiving all of the
proceeds of the Preferred Securities Offering. The Holding Company in turn
contributed the net proceeds of the Preferred Securities Offering to URI, its
wholly owned subsidiary. URI has used approximately $281 million of such net
proceeds to repay outstanding indebtedness under the Credit Facility and has
used the balance of such net proceeds for acquisitions.
The Preferred Securities are convertible into Common Stock of the Holding
Company at a conversion price equivalent to $43.63 per share.
CERTAIN INFORMATION CONCERNING THE CREDIT FACILITY AND OTHER INDEBTEDNESS
Set forth below is certain information concerning the Company's existing
Credit Facility and certain other indebtedness of the Company.
Existing Credit Facility. The Company's existing Credit Facility is with a
group of financial institutions, for which Bank of America National Trust and
Savings Association acts as U.S. agent and Bank of America Canada acts as
Canadian agent. Set forth below is certain information concerning the terms of
the Credit Facility. As described above, the Company expects to obtain a new
credit facility that will increase the Company's borrowing capacity. The terms
of such new credit facility may be different than the terms of the existing
Credit Facility.
The Credit Facility enables URI to borrow up to $300 million on a revolving
basis and permits a Canadian subsidiary of URI (the "Canadian Subsidiary") to
directly borrow up to $40 million under the Credit Facility (provided that the
aggregate borrowings of URI 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. As of September 8, 1998, there was
$97.0 million outstanding indebtedness under the Credit Facility (not
including undrawn outstanding letters of credit in the amount of $1.4
million). As described above, the Company expects to obtain a new $750 million
revolving credit facility which would replace the existing Credit Facility.
Borrowings by URI under the Credit Facility accrue interest, at URI'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) or (b)
the Eurodollar Rate (which for borrowings by URI is equal to Bank of America's
reserve adjusted eurodollar rate) plus a margin ranging from 0.950% to 1.625%
per annum. Borrowings by the Canadian Subsidiary under the Credit Facility
accrue interest, at such subsidiary's option, at either (x) the Prime Rate
(which is equal to Bank of America Canada's prime rate), (y) the BA Rate
(which is equal to Bank of America Canada's BA Rate) plus a margin ranging
from 0.950% to 1.625% per annum or (z) the Eurodollar Rate (which for
borrowing by the Canadian Subsidiary is equal to Bank of America Canada's
reserve adjusted eurodollar rate) plus a margin ranging from 0.950% to 1.625%
per annum. If at any time an event of default (as defined in the agreement
governing the Credit Facility) exists, the interest rate applicable to each
loan will increase by 2% per annum. URI 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 (which fee may be reduced to
0.300% for periods during which the Company maintains a specified funded debt
to cash flow ratio).
The agreement governing 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 funded
debt to net worth, (c) interest coverage ratio, (d) funded debt to cash flow,
(e) the ratio of funded debt to cash flow, and (f) the ratio of senior debt to
tangible assets. The agreement governing the Credit Facility also
42
contains certain covenants that restrict URI's ability to, among other things,
(i) incur additional indebtedness, (ii) permit liens to attach to its assets,
(iii) pay dividends or make other restricted payments on its common stock and
certain other securities, (iv) make acquisitions unless certain financial
conditions are satisfied, (v) engage in transactions with affiliates or (vi)
consolidate, merge or sell all or substantially all of its assets. In
addition, the agreement governing the Credit Facility provides that failure by
any two of Messrs. Jacobs, Milne, Nolan and Miner to continue to hold
executive positions with URI for a period of 30 consecutive days constitutes
an event of default unless replacement officers satisfactory to the lenders
are appointed.
The obligations of URI under the Credit Facility are (i) secured by
substantially all of its assets, the stock of its United States subsidiaries
and a portion of the stock of a Canadian subsidiary and (ii) guaranteed by the
Holding Company and secured by the stock of URI. The obligations of the
Canadian Subsidiary under the Credit Facility are guaranteed by URI and
secured by substantially all of the assets of the Canadian Subsidiary and the
stock of the subsidiaries of the Canadian Subsidiary.
Term Loan. In July 1998, URI obtained a $250 million term loan from a group
of financial institutions. The term loan matures on June 30, 2005. Prior to
maturity, quarterly installments of principal in the amount of $625,000 are
due on the last day of each calendar quarter, commencing September 30, 1999.
The amount due at maturity is $235,625,000. The term loan accrues interest, at
the Company's option, at either (a) the Base Rate (as defined above with
respect to the Credit Facility) plus a margin ranging from 0% to 0.5% per
annum, or (b) the Eurodollar Rate (as defined above with respect to the Credit
Facility for borrowings by the Company) plus a margin ranging from 1.875% to
2.375% per annum. The term loan is secured pari passu with the Credit
Facility. The agreement governing the term loan contains restrictive covenants
substantially similar to those provided by the Credit Facility.
9 1/2% Senior Subordinated Notes. For information concerning the Notes, see
"Description of the Notes."
8.80% Senior Subordinated Notes. In August 1998, URI issued $205 million
aggregate principal amount of 8.80% Notes which are due August 15, 2008. The
8.80% Notes are unsecured. URI may, at its option, redeem the 8.80% Notes on
or after August 15, 2003 at specified redemption prices which range from
104.40% in 2003 to 100.00% in 2006 and thereafter. In addition, on or prior to
August 15, 2001, URI may, at its option, use the proceeds of a public equity
offering to redeem up to 35% of the outstanding 8.80% Notes, at a redemption
price of 108.8%. The indenture governing the 8.80% Notes contains restrictions
substantially similar to those applicable to the Notes.
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.
43
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 changes in construction and industrial
activity, or increases in interest rates, or (ii) adverse weather conditions
that may temporarily decrease construction and industrial activity in a
particular geographic area. 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 Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a primary financial
statement. The Company adopted SFAS No. 130 during the period ended March 31,
1998. The adoption of SFAS No. 130 did not have a material effect on the
consolidated financial position results of operations or cash flows of the
Company. SFAS No. 131 establishes a new method by which companies will report
operating segment information. This method is based on the manner in which
management organizes the segments within a company for making operating
decisions and assessing performance. The Company continues to evaluate the
provisions of SFAS No. 131 and, upon adoption, the Company may report
operating segments. The Company is required to adopt SFAS No. 131 by December
31, 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Post Retirement
Benefits." SFAS No. 132 revises employers' disclosures about pension and other
post retirement benefit plans but does not change the measurement or
recognition of those plans. The Company is required to adopt SFAS No. 132 by
December 31, 1998. The adoption of SFAS No. 132 is not expected to have any
effect on the Company's consolidated financial position or results of
operations or significantly change disclosures presently made by the Company
with respect to employee benefit plans.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities.
The Company will adopt SFAS No. 133 beginning January 1, 2000. The adoption of
SFAS No. 133 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
44
BUSINESS
The Company is a large, geographically diversified equipment rental company
with 269 rental locations in 31 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 other individuals.
The Company also sells used rental equipment, acts as a distributor for
certain new equipment, and sells related merchandise and parts. The Company
commenced equipment rental operations in October 1997 by acquiring six
established companies and acquired 66 additional companies in the first nine
months of 1998 (through September 14, 1998). During the year ended December
31, 1997, the Company on a pro forma basis rented equipment to approximately
395,000 customers (with the top ten customers representing less than 1% of
total revenues) and had pro forma revenues of $768.9 million.
The types of rental equipment offered by the Company include a broad range
of light to heavy construction and industrial equipment (such as backhoes,
forklifts, aerial lifts, skid-steer loaders, compressors, pumps and
generators), general tools and equipment (such as hand tools and garden and
landscaping equipment) and, to a lesser extent, 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 September 14, 1998, the
Company's rental equipment included approximately 153,000 units (not including
special event equipment), had an original purchase price of approximately $849
million and had a weighted average age (based on original purchase price) of
approximately 32 months.
BACKGROUND
The Company was founded by eight of the Company's officers, who contributed
an aggregate of $44.4 million in cash to the capital of the Company. Each of
the founders was formerly a senior executive of United Waste Systems, Inc.
("United Waste"), a solid waste management company that was sold in August
1997, or a senior member of United Waste's acquisition team. 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. Since the founding of the Company, the Company has recruited
additional operating, acquisition, finance and other personnel from the
equipment rental industry and other industries, including regional managers,
store managers and acquisition professionals with extensive experience in the
equipment rental industry. See "Management."
URI was incorporated in August 1997, initially capitalized in September 1997
and commenced equipment rental operations in October 1997. The Holding Company
was incorporated in July 1998 and became the parent company of URI on August
5, 1998, pursuant to the reorganization (the "Reorganization") described
below. Prior to the Reorganization, the name of United Rentals (North
America), Inc. was United Rentals, Inc.
On August 5, 1998, the Reorganization of URI's legal structure was effected
pursuant to Section 251(g) of the Delaware General Corporation law. In the
Reorganization, (i) URI became a wholly owned subsidiary of the Holding
Company, (ii) the name of the Holding Company became United Rentals, Inc. (and
the name of URI was changed from United Rentals, Inc. to United Rentals (North
America), Inc.), (iii) the outstanding common stock of URI was automatically
converted, on a share-for-share basis, into common stock of the Holding
Company and (iv) the common stock of the Holding Company commenced trading on
the New York Stock Exchange under the symbol "URI" instead of the common stock
of URI. The purpose of the Reorganization was to facilitate certain
financings.
The executive offices of the Company are located at Four Greenwich Office
Park, Greenwich, Connecticut 06830, and its telephone number is (203) 622-
3131.
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
45
approximately 23% from 1992 through 1997 (based upon 1992 revenues and 1997
pro forma revenues, giving effect to certain acquisitions completed after the
beginning of 1997, reported by the Rental Equipment Register, an industry
trade publication). The Company believes growth in the equipment rental
industry 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.
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 Register for 1997: (i)
there were only 10 equipment rental companies that had 1997 equipment rental
revenues in excess of $100 million (with the largest company having had 1997
equipment rental revenues of approximately $460 million), (ii) the largest 100
equipment rental companies combined had less than a 22% share of the market
based on 1997 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 1997 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 continue to expand its operations in North
America. The Company believes that it has competitive advantages relative to
many 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, greater
flexibility to transfer equipment among locations in response to customer
demand, and greater ability to efficiently dispose of used equipment through
direct sales to customers. The Company's plan for achieving this objective
includes the following key elements:
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 seeks to increase internal growth by investing in
additional and more modern equipment, using advanced information technology
systems to improve asset utilization and tracking, increasing sales and
marketing efforts, cross-marketing between locations that offer different
equipment categories, expanding and diversifying the customer segments served,
expanding the geographic areas served, and opening complementary locations.
46
Improve Operating Margins. The Company focuses 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.
Execute Disciplined Acquisition Program. The Company intends to continue to
expand through a disciplined acquisition program. The Company is seeking to
make acquisitions of varying size, including acquisitions 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. 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.
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 continue 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, adverse weather
impacting a particular region or changes that affect particular market
segments. In order to achieve this diversification, the Company will continue
to seek expansion opportunities in North America 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.
COMPLETED ACQUISITIONS
The table below provides certain information concerning the 72 acquisitions
completed by the Company through September 14, 1998:
NUMBER OF YEARS IN 1997
COMPANY LOCATIONS RENTAL SITES BUSINESS REVENUES
- ------- -------------- ------------ -------- ---------------------
1997 ACQUISITIONS: (DOLLARS IN MILLIONS)
Mercer Equipment Company North Carolina 3 9 $ 18.5
A&A Tool Rentals and
Sales, Inc. California 2 35 13.8
Coran Enterprises, Inc. California 4 33 9.5
(dba A-1 Rents) and
affiliate
J&J Rental Services,
Inc. Texas 1 19 8.7
Bronco Hi-Lift, Inc. Colorado 1 16 6.5
Rent-It Center, Inc. Utah 1 45 2.9
47
NUMBER OF YEARS IN 1997
COMPANY LOCATIONS RENTAL SITES BUSINESS REVENUES
- ------- --------------------------------------------------------- ------------ -------- -----------
(DOLLARS IN
MILLIONS)
1998 ACQUISITIONS:
Equipment Supply Alabama; Delaware; 22 21 101.1
Company, Inc. and Georgia; Indiana;
affiliates Kentucky; Maryland; Michigan;
New Jersey; North Carolina;
Ohio; Pennsylvania; Virginia
Access Rentals, Inc. and
affiliates Connecticut; Florida; 19 23 52.3
Indiana; Minnesota;
New Jersey; New
York; Pennsylvania;
South Carolina;
Tennessee; Washington;
Ontario, Canada
Rental Tools & Equipment
Co. International, Inc. Georgia; Maryland; Pennsylvania; Virginia; North Carolina 22 47 47.1
McClinch Equipment
Services, Inc. and Connecticut; Delaware; Maryland; Virginia; New Jersey;
affiliates New York; Virginia 9 44 42.8
Power Rental Co., Inc. Idaho; Oregon; Washington 18 28 40.5
BNR Equipment Limited
and affiliates New York; Ontario, Canada 8 23 24.0
ADCO Equipment, Inc. and
affiliate California 2 43 23.3
Industrial Lift, Inc. Maryland; New Jersey; Virginia 4 15 21.5
Rental Equipment, Inc.
and affiliates California 6 38 19.3
Grand Valley Equipment
and affiliate Michigan 2 24 18.3
Valley Rentals, Inc. Washington 3 37 15.6
Lift Systems, Inc. Illinois 2 12 14.5
Independent Scissor Lift
and affiliate Arizona; California 4 26 14.3
Gaedcke Equipment
Company Texas 4 38 14.0
Perco Limited Quebec, Canada 10 61 13.6
Bear Associates, Inc. Delaware; Maryland 4 13 13.2
Reitzel Rentals Ltd. Ontario, Canada 10 52 12.1
High Reach, Inc. and
affiliate Oregon; Washington 3 16 11.0
Channel Equipment
Holding, Inc. and
affiliates Texas 4(a) 20 10.8
Paul E. Carlson, Inc.
(dba Carlson Equipment) Minnesota 3 42 10.7
West Main Rentals &
Sales, Inc. California; Oregon 6 18 9.8
Select Equipment Ltd. Ontario, Canada 2 20 9.3
Mission Valley Rentals,
Inc. California 4 22 8.6
Ross Equipment
Corporation Ohio 1 51 8.6
Ray Gordon Equipment LLC Ontario 3 3 8.0
Arrow Equipment Company Illinois 3 27 7.6
Western Rental & Sales, 4 21 7.6
Inc. and affiliate Utah
Dealers Service Company New Jersey 2 27 7.2
48
NUMBER OF YEARS IN 1997
COMPANY LOCATIONS RENTAL SITES BUSINESS REVENUES
- ------- --------------------------- ------------ -------- ---------------------
(DOLLARS IN MILLIONS)
Yankee Equipment Corpo-
ration Connecticut 2(a) 22 $6.9
Mid-Mountain Machinery
Inc. Washington 1 40 6.4
Ace Rental & Sales Com-
pany, Inc. Kentucky 3 18 6.3
Pro Rentals, Inc. Washington 6 12 5.9
Anderson Oregon Rental,
Inc. and affiliates Oregon 6 13 5.7
ASC Equipment Company,
Inc. North Carolina 3 21 5.5
B&H Equipment, Inc. Texas 2 6 5.5
Equipment Rental and
Sales of Monroe, Inc. North Carolina 1 24 5.2
Sky-King Holdings
Equipment Ltd. Ontario, Canada 3 13 5.0
Equipment Capital
Corporation (dba Owens
Equipment Company) Colorado 1 10 4.6
Nevada High Reach
Equipment, Inc. and
affiliate Nevada 3 13 4.5
Windham Construction
Corp. (dba Windham
Equipment Company) New York 2 13 4.3
C.T.R. Rental Center,
Inc. Texas 3 27 4.3
Action Rentals LLC Colorado 3 6 3.9
Palmer Equipment
Company, Inc. Michigan 1 21 3.7
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
Rental Service, Inc. California 1 36 3.2
Quarry & Drill Supply, Connecticut; Massachusetts;
Inc. (dba Premier Tool) New York 3 8 3.2
Madison Equipment
Rentals and Sales, Inc. Alabama 3 11 3.2
MISCO Rents, Inc. Indiana 2 8 3.1
Power Rentals and Sales,
Inc. California 1 33 2.5
Santa Fe Supply &
Rental, Inc. Colorado 1 11 2.3
Archer Construction
Equipment, Inc.
(dba Ace Equipment) North Carolina 1 30 2.2
Dirt & Rock Rentals &
Equipment LLC Kentucky 2 15 2.1
Contractors Supply and
Equipment Kentucky 1 9 1.9
Rentals Unlimited, Inc. Rhode Island 2 30 1.7
Darien Rental Services
Company Connecticut 1 31 1.7
Phoenix Rental
Corporation and
affiliate Wisconsin 1 9 1.7
Pearson Equipment
Rentals, Limited Ontario, Canada 1 33 1.4
Rents Et. Al., Inc. California 1 10 1.4
Salisbury Rental Center,
Inc. North Carolina 1 10 1.3
Carson Tahoe Rents, Inc. California; Nevada 3 33 1.1
CC Rentals, Inc. Nevada 1 2 1.1
Anchor Rental, Inc. Connecticut 1 15 1.0
Georgian Sales and
Construction Ontario, Canada 1 30 0.7
A-1 Rents of Galveston,
Inc. Texas 1 16 0.6
M&S Sales, Inc. Rhode Island 1(b) 12 0.3
- --------
(a) One of these locations was shut down and the operations formerly conducted
at such location were consolidated with another location.
(b) This location was shut down and the operations formerly conducted at this
location were consolidated with another location.
49
The aggregate consideration paid by the Company for the Acquired Companies
was $1,015.2 million and consisted of approximately $872.7 million in cash,
5,105,380 shares of Common Stock, 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 approximately $498.8
million. The Company agreed in connection with 12 acquisitions to pay former
owners additional amounts based upon specified future revenues and/or new
store openings (such amounts being limited to (i) $10,000,000, $2,800,000,
$2,000,000, $1,400,000, $1,000,000, $800,000, $500,000, $500,000, $500,000,
$350,000, and Cdn$4,000,000, respectively, with respect to 11 of such
acquisitions, and, (ii) an amount based on a single store with respect to one
acquisition).
POTENTIAL ACQUISITIONS
The Company, as of September 14, 1998, was a party to 36 non-binding letters
of intent relating to the possible acquisition by the Company of 36 additional
companies having an aggregate of 104 rental locations. Based upon information
provided to the Company in connection with its preliminary investigation of
these companies, the Company estimates that the aggregate 1997 revenues of
these companies were approximately $231.9 million. However, in view of the
preliminary nature of this estimate, there can be no assurance that actual
revenues did not differ.
Based upon the terms contained in the letters of intent, the Company
estimates that the aggregate purchase price for the 36 companies under letter
of intent would be approximately $241.8 million plus the assumption of
approximately $79.3 million of indebtedness. A portion of the purchase price
may be paid in the form of Common Stock.
In view of the fact that the letters of intent are non-binding and that the
Company has not completed its due diligence investigations with respect to the
companies under letter of intent, the Company cannot predict whether these
letters of intent will lead to definitive agreements, whether the terms of any
such definitive agreements will be the same as the terms contemplated by the
letters of intent or whether any transaction contemplated by such letters of
intent will be consummated.
The Company is continuously involved in discussions relating to potential
acquisitions of varying size and in due diligence investigations of potential
acquisition candidates. In addition to the potential acquisitions that are
currently under letter of intent, there are additional potential acquisitions
with respect to which the Company is currently engaged in discussions or due
diligence investigations. These potential acquisitions include the acquisition
of smaller companies to complement existing or anticipated locations and
combinations with large companies that have an established presence in one or
more regions.
START-UP LOCATIONS
The Company has to date developed three start-up locations (1 in Florida, 1
in Texas and 1 in Quebec) and is in the process of developing three additional
start-up locations (1 in Maryland, 1 in Texas, and 1 in Washington). 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 one of these locations will open in the third quarter
of 1998, one in the fourth quarter of 1998 and one in the first quarter of
1999.
OPERATIONS
The Company operates (as of September 14, 1998) 269 rental locations in 31
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, to a lesser extent, 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.
50
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 (such as boom and scissor
lifts), air compressors, backhoes, ditching equipment, forklifts,
generators, pumps, and skid-steer loaders.
General Tools and Equipment: garden and landscaping equipment, hand
tools, high-pressure washers, paint sprayers, power tools, roto
tillers.
Special Event: lighting, staging and dance floors, tables and chairs,
tents and canopies.
As of September 14, 1998, the Company's rental equipment included
approximately 153,000 units (excluding special event equipment) and had an
original purchase price of approximately $849 million and a weighted average
age (based on original purchase price) of approximately 32 months. The Company
estimates that (based on original purchase price) construction and industrial
equipment represents approximately 94% of the Company's rental equipment,
general tools and equipment represents approximately 6%, and special event
equipment represents less than 1%. The Company also estimates that aerial lift
equipment represents approximately 51% of the Company's rental equipment and
accounted for approximately 33% 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 most 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.
51
CUSTOMERS AND SALES AND MARKETING
The Company on a pro forma basis rented equipment to approximately 395,000
customers in 1997. No single customer accounted for more than 0.5% of the
Company's pro forma revenues in 1997, and the Company's top 10 customers
accounted for less than 1% 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)
revenues attributable to construction industry participants accounted for
approximately 68% of the Company's pro forma revenues, (b) revenues
attributable to industrial companies accounted for approximately 26% of the
Company's pro forma revenues, and (c) revenues attributable to homeowners and
others accounted for approximately 6% of the Company's pro forma revenues.
The Company markets its products and services through a sales force which,
as of September 14, 1998, consisted of approximately 445 store-based
salespeople and 428 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 under-utilized equipment to other
locations. The new system replaces the separate systems heretofore used by the
Acquired Companies.
The Company's information technology system is currently operational at all
of the Company's locations, except for certain locations that were acquired in
the past 45 days. In general, it takes the Company three to five weeks to
install the system at newly acquired locations. However, in view of the
significant number of new locations that will be acquired in the Merger with
U.S. Rentals, the Company expects that the system will not be installed at
such locations until January 1999.
Each of the Company's locations 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 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.
52
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.,
Rental Service Corporation and, prior to the Merger, U.S. Rentals); 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.
PROPERTIES
The Company operates (as of September 14, 1998) 269 rental locations (230 in
the United States and 39 in Canada). The rental locations in the United States
are in the following 31 states: Alabama (4), Arizona (1), California (26),
Colorado (6), Connecticut (8), Delaware (5), Florida (3), Georgia (2), Idaho
(1), Illinois (5), Indiana (5), Kentucky (8), Maryland (17), Massachusetts
(1), Michigan (4), Minnesota (5), Nevada (7), New Jersey (8), New York (11),
North Carolina (14), Ohio (2), Oregon (25), Pennsylvania (7), Rhode Island
(2), South Carolina (3), Tennessee (2), Texas (15), Utah (5), Virginia (11),
Washington (16) and Wisconsin (1). The rental locations in Canada are in
Ontario (28) and Quebec (11). 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 owns 33 of its rental locations and leases the other locations.
The leases for the Company's rental locations provide for various terms,
including (i) 112 leases that provide for a remaining term of more than five
years (of which 35 provide for a renewal option), (ii) 71 leases that provide
for a remaining term of between one and five years (of which 28 provide for a
renewal option), (iii) 38 leases that provide for a remaining term of less
than one year (six of which provide for a renewal option) and (iv) 15 leases
that are on a month-to-month basis. The Company is currently negotiating
renewals for those leases that provide for a remaining term of less than one
year and do not provide for renewal options. 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 September 14, 1998, this fleet included
approximately 8,892 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).
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
53
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
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 September 14, 1998, the Company employed 4,387 persons, including 52
corporate and regional management employees, 3,462 operational employees and
873 sales people. Of these employees, 1,207 are salaried personnel and 3,180
are hourly personnel. Collective bargaining agreements relating to 22 separate
locations cover approximately 216 of the Company's employees. The Company
considers its labor relations to be good.
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 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.
54
CERTAIN INFORMATION CONCERNING PENDING MERGER
GENERAL
The Merger Agreement provides, subject to the terms and conditions set forth
therein, for a subsidiary of United Rentals to be merged with and into U.S.
Rentals. Following the Merger, U.S. Rentals will become a wholly owned
subsidiary of URI. At the effective time of the Merger, (i) each outstanding
share of U.S. Rentals common stock would be converted into 0.9625 shares of
Common Stock of United Rentals and (ii) all outstanding options to purchase
shares of U.S. Rentals common stock will be assumed by United Rentals and
converted into options to purchase Common Stock of United Rentals, subject to
adjustment for the Exchange Ratio.
U.S. Rentals is the second largest equipment rental company in the United
States and the largest in the Western United States based on 1997 rental
revenues. U.S. Rentals currently operates 131 equipment rental locations in 23
states and Mexico and generates an average of approximately 145,000 rental
contracts per month from a diverse base of customers including commercial and
residential construction, industrial and homeowner customers. U.S. Rentals
management estimates that more than 280,000 customers did business with U.S.
Rentals in 1997. U.S. Rentals owns more than 100,000 pieces of rental
equipment comprised of approximately 600 equipment categories including aerial
work platforms, forklifts, paving and concrete equipment, compaction
equipment, air compressors, hand tools, plumbing, landscaping and gardening
equipment. U.S. Rentals management believes that U.S. Rentals' fleet, which
had a weighted average age of approximately 23 months and an original
equipment cost of approximately $725 million at June 30, 1998, is one of the
most comprehensive and well-maintained equipment rental fleets in the
industry. U.S. Rentals also sells new equipment manufactured by nationally
known companies, used equipment from its rental fleet and rental-related
merchandise, parts and supplies.
CERTAIN ADDITIONAL INFORMATION CONCERNING THE MERGER
Set forth below is certain additional information concerning the terms of
the Merger. Such information does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the Merger Agreement.
SHARES TO BE ISSUED IN THE MERGER
Based upon the number of shares of U.S. Rentals common stock outstanding as
of August 28, 1998, United Rentals will issue approximately 29.6 million
shares of Common Stock to U.S. Rentals stockholders in the Merger and such
shares will constitute approximately 44.2% of the outstanding shares of United
Rentals common stock after the Merger.
CONDITIONS TO THE MERGER
The Merger is subject to the satisfaction or waiver of a number of
conditions. These include, but are not limited to, (i) the adoption of the
Merger Agreement by the stockholders of U.S. Rentals; (ii) the approval by the
stockholders of United Rentals of (a) the issuance of Common Stock of United
Rentals contemplated by the Merger Agreement and (b) an amendment to United
Rentals' certificate of incorporation to increase the authorized shares of
United Rental's common stock to 500,000,000 shares; (iii) the absence of any
law, regulation or order making the Merger illegal or prohibiting the Merger;
(iv) termination or expiration of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (v) the
receipt of letters from the companies' independent accountants regarding such
accountants' concurrence with the conclusions of management of the respective
companies as to the appropriateness of "pooling of interests" accounting for
the Merger if consummated in accordance with the Merger Agreement.
GOVERNMENTAL APPROVALS
On June 26, 1998, the Company and U.S. Rentals each filed under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended, a premerger
notification with the Department of Justice and the Federal
55
Trade Commission in respect of the Merger. On July 9, 1998, the Company and
U.S. Rentals were advised that early termination of the waiting period under
such Act had been granted.
TERMINATION
The Company and U.S. Rentals mutually can agree to terminate the Merger
Agreement at any time, whether before or after the receipt of stockholder
approval, without completing the Merger. In addition, either company can
terminate the Merger Agreement if: (i) the Merger is not completed before
December 31, 1998; (ii) a governmental authority prohibits the Merger; (iii)
the stockholders of U.S. Rentals do not adopt the Merger Agreement; (iv) the
stockholders of United Rentals do not approve the matters required as a
condition to the Merger as described above; (v) the other party materially
breaches or fails to comply with any of its representations, warranties,
covenants or agreements set forth in the Merger Agreement; (vi) after October
14, 1998 and before a special meeting of its stockholders is held relating to
the Merger, under certain circumstances, the Board of Directors of either
party withdraws or modifies its recommendations to its stockholders in
accordance with the Merger Agreement or accepts a superior offer from a third
party.
TERMINATION FEES
The Merger Agreement requires the Company or U.S. Rentals to pay the other
certain fees if the Merger Agreement is terminated under the following
circumstances: (i) $15 million if the Merger Agreement is terminated because
of a non-willful breach of the Merger Agreement; (ii) $30 million if the
Merger Agreement is terminated because of a willful breach of the Merger
Agreement; or (iii) $30 million if the Merger Agreement is terminated upon the
occurrence of certain other events specified in the Merger Agreement.
CERTAIN INFORMATION CONCERNING THE COMBINED OPERATIONS OF THE COMPANY AND U.S.
RENTALS
Set forth below is certain information concerning the operations of the
Company and U.S. Rentals on a combined basis (the "Combined Company"). All
financial and operating data set forth below with respect to the year ended
December 31, 1997 is on a pro forma basis giving effect to the Merger and all
acquisitions completed by either company subsequent to January 1, 1997
(through September 14, 1998).
LOCATIONS
The Combined Company currently operates 400 rental locations (360 in the
United States, 39 in Canada and one in Mexico). The number of locations in
each state (or province) is shown below:
United States. Alabama (10), Arizona (3), Arkansas (3), California (76),
Colorado (8), Connecticut (8), Delaware (5), Florida (20), Georgia (3),
Idaho (2), Indiana (5), Kansas (1), Kentucky (8), Louisiana (3), Illinois
(5), Maryland (17), Massachusetts (1), Michigan (5), Minnesota (5),
Missouri (2), Nebraska (1), Nevada (12), New Jersey (8), New Mexico (2),
New York (11), North Carolina (16), Ohio (2), Oklahoma (2), Oregon (27),
Pennsylvania (7), Rhode Island (2), South Carolina (8), Tennessee (2),
Texas (31), Utah (6), Virginia (15), Washington (17) and Wisconsin (1).
Canada: Ontario (28), Quebec (11)
Mexico: Nuevo Leon (1)
EQUIPMENT
As of September 14, 1998, the Combined Company's rental equipment included
approximately 254,000 units (excluding special event equipment) and had an
original purchase price of approximately $1,574.0 million and a weighted
average age (based on original purchase price) of approximately 26 months.
CUSTOMERS AND SALES AND MARKETING
The Combined Company rented equipment to over 675,000 customers in 1997. No
single customer accounted for more than 0.4% of the Combined Company's
revenues in 1997, and the Combined Company's
56
top 10 customers accounted for less than 2% of the Combined Company's revenues
in 1997. The Company estimates that in 1997 (a) revenues attributable to
construction industry participants accounted for approximately
64% of the Combined Company's revenues, (b) revenues attributable to
industrial companies accounted for approximately 27% of the Combined Company's
revenues, and (c) revenues attributable to homeowners and others accounted for
approximately 9% of the Combined Company's revenues.
The Combined Company markets its products and services through a sales force
which, as of September 14, 1998, consisted of approximately 2,035 store-based
salespeople and 763 field-based salespeople.
EMPLOYEES
At September 14, 1998, the Combined Company employed 7,566 persons,
including 71 corporate and regional management employees, 4,697 operational
employees and 2,798 sales people. Of these employees, 1,824 are salaried
personnel and 5,742 are hourly personnel. Collective bargaining agreements
relating to 23 separate locations cover approximately 227 of the Combined
Company's employees.
57
MANAGEMENT
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.
CURRENT OFFICERS AND DIRECTORS
The table below identifies, and provides certain information concerning, the
current officers and directors of URI. The officers and directors as of the
Holding Company are the same as the officers and directors of URI. Upon
completion of the pending Merger which U.S. Rentals, certain changes relating
to URI's and the Holding Company's Board of Directors and officers will be
made as described under "--Changes to Officers and Directors Upon Completion
Of Pending Merger."
NAME AGE POSITIONS(1)
---- --- ------------
Bradley S. Jacobs....... 42 Chairman, Chief Executive Officer and Director(2)
Wayland R. Hicks........ 55 President, Chief Operating Officer and Director(3)
John N. Milne........... 39 Vice Chairman, Chief Acquisition Officer,
Secretary and Director(2)
Michael J. Nolan........ 37 Chief Financial Officer(2)
Robert P. Miner......... 48 Vice President, Strategic Planning(4)
Sandra E. Welwood....... 42 Vice President, Corporate Controller(2)
Kurtis T. Barker........ 37 Regional Vice President, Operations(5)
Daniel E. Imig.......... 52 Regional Vice President, Operations(5)
Robert P. Krause........ 38 Regional Vice President, Operations(6)
Joseph J. Kondrup,
Jr. ................... 39 Vice President, Acquisitions(2)
Kai E. Nyby............. 45 Vice President, Acquisitions(2)
Richard A. Volonino..... 55 Vice President, Acquisitions(2)
Ronald M. DeFeo......... 46 Director(5)
Richard J. Heckmann..... 54 Director(5)
Gerald Tsai, Jr. ....... 69 Director(7)
- --------
(1) For information concerning the term served by directors, see "--
Classification of Board of Directors."
(2) The indicated person has held such position(s) since September 1997.
(3) Mr. Hicks has served as President and Chief Operating Officer since
November 1997 and as a director since June 1998.
(4) Mr. Miner was appointed Vice President, Strategic Planning in July 1998.
From September 1997 until July 1998, he served as Vice President, Finance.
(5) The indicated person has held such position since October 1997.
(6) Mr. Krause has served as Regional Vice President, Operations since May
1998.
(7) Mr. Tsai has served as a director since December 1997.
58
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 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.
Robert P. Krause held various management positions with Hertz Equipment
Rental Corporation prior to joining the Company in 1998, including Regional
Operations Manager of Hertz's Western Region from 1995 until 1998 and Branch
Manager from 1990 until 1995.
59
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 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 Corporation, 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.
CHANGES TO OFFICERS AND DIRECTORS UPON COMPLETION OF PENDING MERGER
Pursuant to the Merger Agreement, it is expected that the changes described
below relating to the Holding Company's Board of Directors and officers of the
Company and the Holding Company will be made upon consummation of the Merger.
The Board of Directors of the Holding Company will consist of the six
current members plus four new members. Two of the new members are expected to
be Richard D. Colburn (who will become Chairman Emeritus of the Company and
will be a member of the class of directors whose term expires in 2001) and
William F. Berry (who will be a member of the class of directors whose term
expires in 2000). The other new members have not yet been identified.
The officers of the Company (and of the Holding Company) will change as
follows: (i) Wayland R. Hicks will become Vice Chairman of the Company (and of
the Holding Company) while continuing as Chief Operating Officer of the
Company (and of the Holding Company), (ii) William F. Berry, President and
Chief Executive Officer of U.S. Rentals, will become President of the Company
(and of the Holding Company), and (iii) John S. McKinney, Chief Financial
Officer of U.S. Rentals, will become Vice President, Finance of the Company
(and of the Holding Company).
60
Set forth below is certain information concerning the persons named above
that are expected to become officers and/or directors upon completion of the
Merger.
Richard D. Colburn, 87, purchased U.S. Rentals (under its previous name of
Leasing Enterprises, Inc.) on December 31, 1975, and has been Chairman of the
Board of U.S. Rentals since that date. Mr. Colburn is a private investor.
William F. Berry, 45, has been an employee of U.S. Rentals and one of its
predecessors since 1966, became U.S. Rentals' President and Chief Executive
Officer in January 1987 and became a director in 1996. In his more than 30
years with U.S. Rentals and its predecessor, Mr. Berry has held numerous
operational and managerial positions, including Profit Center Manager,
Division Manager and Regional Vice President.
John S. McKinney, 43, has been the Vice President-Finance and Chief
Financial Officer of U.S. Rentals since 1990 and became a director of U.S.
Rentals in 1996. Mr. McKinney joined U.S. Rentals in 1988 as Controller, and
held that position until being promoted to his current positions. Prior to
joining U.S. Rentals, Mr. McKinney served as the controller of an electrical
wholesale company, held various financial positions at Iomega Corporation,
including Assistant Controller, and held various positions at the accounting
firm of Arthur Andersen & Co.
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 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
NAME STOCK WARRANTS PURCHASE 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. Hicks and Mr. Tsai) will expire at
the annual meeting of stockholders following January 1, 1998, the term of
office of the second class (currently comprised of Mr. DeFeo and Mr. Heckmann)
will expire at the
61
second annual meeting of stockholders following January 1, 1998, 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 January 1,
1998. 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.
COMMITTEES OF THE BOARD
The Board of Directors has three standing committees: the Audit Committee,
the Compensation/Stock Option Committee, and the Special Stock Option
Committee.
The responsibilities of the Audit Committee include selecting the firm of
independent accountants to be appointed to audit the Company's financial
statements and reviewing the scope and results of the audit with the
independent accountants. The members of this committee are Messrs. DeFeo,
Heckmann and Tsai.
The responsibilities of the Compensation/Stock Option Committee include
making recommendations with respect to the compensation to be paid to officers
and directors, administering any stock option plan in which officers or
directors are eligible to participate and approving the grant of options
pursuant to any such plan. The members of this committee are Messrs. DeFeo,
Heckmann and Tsai.
The responsibilities of the Special Stock Option Committee include
administering any stock option plan in which officers and directors are not
eligible to participate and approving the grant of options pursuant to any
such plan to persons who are not officers or directors. The members of this
committee are Messrs. Jacobs and Milne.
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. During 1997, Messrs. DeFeo, Heckmann and Tsai were each granted
options to purchase an aggregate of 20,000 shares of Common Stock at an
exercise price of $15.00 per share.
COMPENSATION OF CERTAIN OFFICERS
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and each of the other executive
officers of the Company during the period August 14, 1997 (inception) through
December 31, 1997.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) 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's employment with the Company commenced on November 14, 1997.
62
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 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 were granted options in 1997.
OPTION GRANTS IN 1997
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED RATE OF STOCK
SECURITIES OPTIONS EXERCISE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO PRICE TERM(1)
OPTIONS EMPLOYEES PER EXPIRATION ---------------------------
NAME GRANTED IN 1997 SHARE DATE 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 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 VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
NAME DECEMBER 31, 1997 DECEMBER 31, 1997
- ---- ------------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------- ----------------- ----------- -------------
Wayland R. Hicks........ -- 450,000 -- $3,475,000
EMPLOYMENT AGREEMENTS
AGREEMENTS CURRENTLY IN EFFECT
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 "Principal Stockholders--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
63
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.
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, after Mr. Hicks becomes a
director, 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.
AGREEMENTS TO BE ENTERED INTO UPON CLOSING OF PENDING MERGER
Pursuant to the Merger Agreement, the Company will enter into employment
agreements with each of Messrs. Berry and McKinney. Such agreements will be
entered into concurrently with the closing of the Merger. Certain information
with regard to these agreements is set forth below.
The agreements provide for Mr. Berry to serve as President and Mr. McKinney
to serve as Vice President-Finance of the Company. The agreements provide for
an annual base salary of $225,000 for Mr. Berry and $175,000 for Mr. McKinney,
subject to possible annual upward 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
agreement with Mr. Berry provides for the Company to reimburse him for certain
relocation expenses up to a maximum of $100,000.
The term of each agreement will commence upon the closing of the Merger and
continue for three years (unless terminated earlier as provided therein),
provided that the term thereunder will automatically renew so that at no time
will the balance of the term of the agreement be less than two years. Under
each of the agreements, the Company or the employee may at any time terminate
the agreement, with or without cause,
64
provided that if the Company terminates the agreement without cause (as
defined in the agreement), the employee will be entitled to receive from the
Company his then current monthly base salary and benefits over the remaining
term of the employment agreement.
The agreements provide for the grant (i) to Mr. Berry of options to purchase
200,000 shares and Mr. McKinney of options to purchase 100,000 shares of
Common Stock, in each case, at a price per share equal to the closing price
per share of Common Stock as reported on the NYSE on the closing date of the
Merger (the "Specified Price") and (ii) to Mr. Berry of options to purchase
75,000 shares and Mr. McKinney of options to purchase 37,500 shares of Common
Stock, in each case, at a price per share equal to the greater of (x) 125% of
the Specified Price and (y) $45. All of such options shall vest over a three
year term. The agreements provide that all stock options at any time granted
to the employee will automatically vest upon a change of control of the
Company (as defined in the agreement).
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.
STOCK OPTION PLANS
As of September 8, 1998, options to purchase an aggregate of 4,974,875
shares of Common Stock had been granted pursuant to the 1997 Stock Option Plan
of the Company (and the Holding Company). These options have a weighted
average exercise price of $22.97 per share.
The Board of Directors of the Holding Company will submit for stockholder
approval at a special meeting that has been called for September 29, 1998, a
new 1998 Stock Option Plan. The 1998 Stock Option Plan provides for the
granting of options to purchase not more than an aggregate of 4,000,000 shares
of Common Stock. Some or all of the options issued under the 1998 Stock Option
Plan may be "incentive stock options" within the meaning of the Code. All
officers and directors of the Holding Company and its subsidiaries are
eligible to participate in the 1998 Stock Option Plan. Each option granted
pursuant to the 1998 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 20, 2008.
The Company expects that, in addition to the 1998 Stock Option Plan, the
Holding Company will adopt a new stock option plan pursuant to which options,
for up to an aggregate of 750,000 shares of Common Stock, may be granted to
employees who are not officers or directors and to consultants and independent
contractors who perform services for the Holding Company or its subsidiaries.
CERTAIN 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 $1.1 million of equipment from
Terex.
65
PRINCIPAL STOCKHOLDERS
GENERAL
The table below and the notes thereto set forth as of August 28, 1998
certain information concerning the beneficial ownership (as defined in Rule
13d-3 under the Exchange Act) of the 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. 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 OF COMMON
NAME BENEFICIALLY OWNED(1)(2) STOCK OWNED(2)
- ---- ------------------------ -----------------
Bradley S. Jacobs................... 15,000,100(3)(4) 35.4%
Wayland R. Hicks.................... 103,591(5) *
John N. Milne....................... 2,142,857(6) 5.6%
Michael J. Nolan.................... 857,244(7) 2.3%
Robert P. Miner..................... 428,571(8) 1.1%
Ronald M. DeFeo..................... 63,000(9) *
Richard J. Heckmann................. 80,000(10) *
Gerald Tsai, Jr..................... 360,000(11) *
All executive officers and directors
as a group
(8 persons)........................ 19,035,363(12) 43.6%
- --------
*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.
(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. Does not include
1,200,000 shares issuable upon exercise of options which are not
currently exercisable.
(4) Mr. Jacobs has certain rights relating to the disposition of the shares
and Warrants owned by certain of the other officers of the Company. By
virtue of such rights, Mr. Jacobs is deemed to share beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of the shares
owned by such other officers of the Company as described under "--Certain
Agreements Relating to Securities Held by Officers." 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) Consists of 103,591 outstanding shares. Does not include unissued shares
that the Company is required to pay Mr. Hicks as part of his base salary
as described under "Management--Employment Agreements." Does not include
675,000 shares issuable upon exercise of options which are not currently
exercisable.
(6) Consists of 1,428,571 outstanding shares and 714,286 shares issuable upon
the exercise of currently exercisable Warrants. Does not include 300,000
shares issuable upon exercise of options which are not currently
exercisable.
66
(7) Consists of 571,529 outstanding shares and 285,715 shares issuable upon
the exercise of currently exercisable Warrants. Does not include 225,000
shares issuable upon exercise of options which are not currently
exercisable.
(8) Consists of 285,714 outstanding shares and 142,857 shares issuable upon
the exercise of currently exercisable Warrants. Does not include 40,000
shares issuable upon exercise of options which are not currently
exercisable.
(9) Consists of 3,000 outstanding shares and 60,000 shares issuable upon the
exercise of currently exercisable options.
(10) Consists of 20,000 outstanding shares and 60,000 shares issuable upon
exercise of currently exercisable options.
(11) Consists of 300,000 outstanding shares and 60,000 shares issuable upon
exercise of currently exercisable options.
(12) Consists of 12,712,505 outstanding shares, 6,142,858 shares issuable upon
the exercise of currently exercisable Warrants and 180,000 shares
issuable upon the exercise of currently exercisable options. Does not
include 2,440,000 shares issuable upon exercise of options which are not
currently exercisable.
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 "Management--Capital Contributions by
Officers of Directors." All shares of Common Stock and Warrants purchased 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 (i) in the case of Messrs. Milne, Nolan
and Miner, $9.125 per share of Common Stock and $0.625 per Warrant plus an
amount representing a 4% annual return on such amounts from the date on which
such securities were purchased and (ii) in the case of the other officers, the
amount originally paid by such officer for such securities plus an amount
representing a 10% annual return on such amount. See "Management--Capital
Contributions by Officers and Directors" for information concerning the
amounts paid by the 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 "Management--Employment Agreements."
67
DESCRIPTION OF THE NOTES
The Exchange Notes offered hereby will be issued, and the Original Notes
were issued, under an Indenture dated as of May 22, 1998 (the "Indenture"),
among the Company, the Guarantors and State Street Bank & Trust Company, as
trustee (the "Trustee"). References to the Notes include both the Original
Notes and the Exchange Notes. Upon the effectiveness of the Registration
Statement of which this Prospectus is a part, the Indenture will be subject to
and governed by the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act").
The following summary of the material provisions of the Indenture and the
Notes does not purport to be complete and is subject to, and qualified in its
entirety by, reference to the provisions of the Indenture and the Notes
(copies of which are filed as an exhibit to the Registration Statement of
which this Prospectus forms a part), including the definitions of certain
terms contained therein and those terms made part of the Indenture by
reference to the Trust Indenture Act. The definition of certain capitalized
terms used in the following summary are set forth below under "--Certain
Definitions." All references to the Company in the following summary refer
exclusively to the Issuer, and not to any of its subsidiaries.
ORIGINAL NOTES AND EXCHANGE NOTES WILL REPRESENT SAME DEBT
The Exchange Notes will be issued solely in exchange for an equal principal
amount of Original Notes pursuant to the Exchange Offer. The Exchange Notes
will evidence the same debt as the Original Notes and both series of Notes
will be entitled to the benefits of the Indenture and treated as a single
class of debt securities. The terms of the Exchange Notes will be the same in
all material respects as the Original Notes except that (i) the Exchange Notes
will be registered under the Securities Act, and therefore, will not bear
legends restricting the transfer thereof and (ii) certain of the registration
rights, under the Registration Rights Agreement, relating to the Exchange
Notes are different than those relating to the Original Notes and, therefore,
the defaults under the Registration Rights Agreement that may require the
Company to pay additional interest will be different for the Exchange Notes
and the Original Notes. See "Registration Rights Agreement--Certain Provisions
Relating to Additional Interest" and "--Additional Interest."
If the Exchange Offer is consummated, holders of Original Notes who do not
exchange their Original Notes for Exchange Notes will vote together with
holders of the Exchange Notes for all relevant purposes under the Indenture.
Accordingly, all references herein to specified percentages in aggregate
principal amount of the outstanding Notes shall be deemed to mean, at any time
after the Exchange Offer is consummated, such percentages in aggregate
principal amount of the Original Notes and the Exchange Notes then
outstanding.
GENERAL
The Notes are unsecured senior subordinated obligations of the Company
limited to $200 million aggregate principal amount, and are guaranteed by each
of the Guarantors on a senior subordinated basis as described below. The Notes
may be issued only in registered form without coupons, in denominations of
$1,000 and integral multiples thereof. Principal of, premium, if any, and
interest on the Notes is payable, and the Notes are transferable, at the
corporate trust office or agency of the Trustee in the City of New York
maintained for such purposes. In addition, interest may be paid at the option
of the Company by check mailed to the person entitled thereto as shown on the
security register. No service charge will be made for any transfer, exchange
or redemption of Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on June 1, 2008. Interest on the Notes accrues at the
rate of 9 1/2% per annum and is payable semi-annually in arrears on each June
1 and December 1, commencing December 1, 1998, to the holders of record of
Notes at the close of business on the May 15 and November 15, respectively,
immediately preceding such interest payment date. Interest on the Exchange
Notes will accrue from the most recent date on which interest has been paid on
the Exchange Notes or, if no interest has been paid on the Exchange Notes,
from the most recent date on which interest was paid on the Original Notes
(or, if no interest has been paid on the Original Notes, from the Issue Date
of the Original Notes). Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
68
ADDITIONAL INTEREST
As discussed under "Registration Rights Agreement," the interest rate on the
Notes is subject to increase under certain circumstances if the Company is not
in compliance with its obligations under the Registration Rights Agreement.
See "Registration Rights Agreement."
OPTIONAL REDEMPTION
Optional Redemption. The Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after June 1, 2003, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest, if any, to the redemption date, if redeemed
during the 12-month period beginning June 1 of the years indicated below:
REDEMPTION
YEAR PRICE
---- ----------
2003................................... 104.750%
2004................................... 103.167%
2005................................... 101.583%
2006 and thereafter.................... 100.000%
In addition, at any time, or from time to time, on or prior to June 1, 2001,
the Company may, at its option, use the net cash proceeds of one or more
Public Equity Offerings (as defined below) to redeem Notes, at a redemption
price equal to 109.5% of the principal amount thereof plus accrued and unpaid
interest, if any, thereon to the redemption date; provided that not less than
$130 million principal amount of Notes remains outstanding immediately after
the occurrence of such redemption. In order to effect the foregoing redemption
with the proceeds of any Public Equity Offering the Company shall send a
redemption notice to the Trustee not later than 90 days after the consummation
of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Common Stock of the Company pursuant to a
registration statement filed with the Commission in accordance with the
Securities Act.
Selection and Notice. In the event that less than all of the Notes are to be
redeemed at any time, selection of such Notes for redemption will be made by
the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes
are not then listed on a national securities exchange, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate (subject
to the rules of DTC); provided, however, that Notes shall only be redeemable
in principal amounts of $1,000 or an integral multiple of $1,000. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than
60 days before the redemption date to each holder of Notes to be redeemed at
its registered address. If any Note is to be redeemed in part only, the notice
of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon surrender for cancellation of the original Note. On and
after the redemption date, interest will cease to accrue on Notes or portions
thereof called for redemption, unless the Company defaults in the payment of
the redemption price.
SINKING FUND
The Notes are entitled to the benefit of any mandatory sinking fund.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company shall be obligated
to make an offer to purchase (a "Change of Control Offer"), on a business day
(the "Change of Control Purchase Date") not more than 60 nor less than 30 days
following the occurrence of the Change of Control, all of the then outstanding
Notes tendered at a purchase price in cash (the "Change of Control Purchase
Price") equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, thereon to the Change of Control Purchase Date. The Company
shall be required to purchase all Notes tendered into the Change of Control
Offer and not withdrawn. The Change of Control Offer is required to remain
open for at least 20 business days.
69
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, mail to each holder of
Notes notice of the Change of Control Offer, which notice shall govern the
terms of the Change of Control Offer and shall state, among other things, the
procedures that holders of Notes must follow to accept the Change of Control
Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of
Notes seeking to accept the Change of Control Offer. In addition, there can be
no assurance that the Company's debt instruments will permit such offer to be
made. The agreements governing the Company's senior indebtedness do not permit
the Company to make a Change of Control Offer and, in order to make such
offer, the Company would be required to pay off such indebtedness in full or
seek a waiver from the lenders thereunder to allow the Company to make the
Change of Control Offer. The occurrence of a Change of Control is also an
event of default under the agreement governing the Company's senior
indebtedness and would entitle the lenders thereunder to accelerate all
amounts owing under such indebtedness. Failure to make a Change of Control
Offer, even if prohibited by the Company's debt instruments, would constitute
a default under the Indenture. See "Risk Factors--Possible Inability to
Repurchase Notes upon Change of Control." The Company shall not be required to
make a Change of Control Offer upon a Change of Control if a third party makes
the Change of Control Offer in the manner, at the times and otherwise in
compliance with the requirements applicable to a Change of Control Offer made
by the Company and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
The definition of "Change of Control" excludes certain transactions by
Permitted Holders, including a direct or indirect sale, lease, exchange or
other transfer of all or substantially all of the assets of the Company to
Permitted Holders. The provisions of the Indenture may not afford Noteholders
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving the Company if such
transaction is not a transaction defined as a "Change of Control."
The use of the term "all or substantially all" in provisions of the
Indenture such as clause (b) of the definition of "Change of Control" and
under "--Consolidation, Merger, Sale of Assets, Etc." has no clearly
established meaning under New York law (which governs the Indenture) and has
been the subject of limited judicial interpretation in only a few
jurisdictions. Accordingly, there may be a degree of uncertainty in
ascertaining whether any particular transaction would involve a disposition of
"all or substantially all" of the assets of a person.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder, to the extent such laws or
regulations are applicable, in the event that a Change of Control occurs and
the Company is required to purchase Notes as described above.
SUBORDINATION
The indebtedness evidenced by the Notes is subordinated in right of payment
to the prior payment in full in cash of all Senior Indebtedness. The Notes are
senior subordinated indebtedness of the Company ranking senior to all existing
and future Subordinated Indebtedness of the Company.
The Indenture provides that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company or
its assets, or any liquidation, dissolution or other winding-up of the
Company, whether voluntary or involuntary, or any assignment for the benefit
of creditors or other marshalling of assets or liabilities of the Company, all
Senior Indebtedness (including, in the case of Designated Senior Indebtedness,
any interest accruing subsequent to the filing of a petition for bankruptcy
regardless of whether such interest is an allowed claim in the bankruptcy
proceeding) must be paid in full in cash before any payment is made on account
of the principal of, premium, if any, or interest on the Notes.
During the continuance of any default in the payment of principal, premium,
if any, or interest on any Senior Indebtedness, when the same becomes due, and
after receipt by the Trustee and the Company from representatives of holders
of such Senior Indebtedness of written notice of such default, no direct or
indirect
70
payment (other than payments from trusts previously created pursuant to the
provisions described under "--Defeasance or Covenant Defeasance of Indenture")
by or on behalf of the Company of any kind of character (excluding certain
permitted equity or subordinated securities) may be made on account of the
principal of, premium, if any, or interest on, or the purchase, redemption or
other acquisition of, the Notes unless and until such default has been cured
or waived or has ceased to exist or such Senior Indebtedness shall have been
discharged or paid in full in cash, after which the Company shall resume
making any and all required payments in respect of the Notes, including any
missed payments.
In addition, during the continuance of any other default with respect to any
Designated Senior Indebtedness that permits, or would permit with the passage
of time or the giving of notice or both, the maturity thereof to be
accelerated (a "Non-payment Default") and upon the earlier to occur of (a)
receipt by the Trustee and the Company from the representatives of holders of
such Designated Senior Indebtedness of a written notice of such Non-payment
Default or (b) if such Non-payment Default results from the acceleration of
the maturity of the Notes, the date of such acceleration, no payment (other
than payments from trusts previously created pursuant to the provisions
described under "--Defeasance or Covenant Defeasance of Indenture") of any
kind or character (excluding certain permitted equity or subordinated
securities) may be made by the Company on account of the principal of,
premium, if any, or interest on, or the purchase, redemption, or other
acquisition of, the Notes for the period specified below (the "Payment
Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of a
Non-payment Default by the Trustee and the Company from the representatives of
holders of Designated Senior Indebtedness or the date of the acceleration
referred to in clause (b) of the preceding paragraph, as the case may be, and
shall end on the earliest to occur of the following events: (i) 179 days have
elapsed since the receipt of such notice or the date of the acceleration
referred to in clause (b) of the preceding paragraph (provided the maturity of
such Designated Senior Indebtedness shall not theretofore have been
accelerated), (ii) such default is cured or waived or ceases to exist or such
Designated Senior Indebtedness is discharged or paid in full in cash, or (iii)
such Payment Blockage Period shall have been terminated by written notice to
the Company or the Trustee from the representatives of holders of Designated
Senior Indebtedness initiating such Payment Blockage Period, after which the
Company shall promptly resume making any and all required payments in respect
of the Notes, including any missed payments. Only one Payment Blockage Period
with respect to the Notes may be commenced within any 360 consecutive day
period. No Non-payment Default with respect to Designated Senior Indebtedness
that existed or was continuing on the date of the commencement of any Payment
Blockage Period will be, or can be, made the basis for the commencement of a
second Payment Blockage Period, whether or not within a period of 360
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days. In no event will a Payment Blockage Period
extend beyond 179 days from the date of the receipt by the Trustee of the
notice or the date of the acceleration initiating such Payment Blockage Period
and there must be a 180 consecutive day period in any 360 day period during
which no Payment Blockage Period is in effect.
If the Company fails to make any payment on the Notes when due on account of
the payment blockage provisions referred to above, such failure would
constitute an Event of Default under the Indenture and would enable the
holders of the Notes to accelerate the maturity thereof. See "--Events of
Default."
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and funds which would be
otherwise payable to the holders of the Notes will be paid to the holders of
Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in
full, and the Company may be unable to meet its obligations fully with respect
to the Notes.
At June 30, 1998, on a pro forma basis (after giving effect to all
acquisitions completed by the Company subsequent to such date and the
financing thereof), there was outstanding $608.5 million of Senior
Indebtedness. The Indenture limits, but not prohibit, the incurrence by the
Company of additional Indebtedness which is senior to the Notes and prohibits
the incurrence by the Company of Indebtedness which is subordinated in right
of payment to any other Indebtedness of the Company and senior in right of
payment to the Notes. The Company at September 8, 1998, had $201.6 million of
borrowing capacity available under the Credit Facility.
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"Designated Senior Indebtedness" means (i) all Indebtedness under the Credit
Facility and (ii) any other issue of Senior Indebtedness which (a) at the time
of the determination is equal to or greater than $25 million in aggregate
principal amount and (b) is specifically designated by the Company in the
instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness."
"Senior Indebtedness" means the principal of, premium, if any, and interest
on any Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the
generality of the foregoing, (x) "Senior Indebtedness" shall include the
principal of, premium, if any, and interest on all obligations of every nature
of the Company from time to time owed to the lenders under the Credit
Facility, including, without limitation, principal of and interest on, and all
fees, indemnities and expenses payable under the Credit Facility, and (y) in
the case of Designated Senior Indebtedness, "Senior Indebtedness" shall
include interest accruing thereon subsequent to the occurrence of any Event of
Default specified in clause (vii) or (viii) under "--Events of Default"
relating to the Company, whether or not the claim for such interest is allowed
under any applicable Bankruptcy Code. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include (a) Indebtedness evidenced by the Notes, (b)
Indebtedness that is expressly subordinate or junior in right of payment to
any Indebtedness of the Company, (c) Indebtedness which, when incurred and
without respect to any election under Section 1111(b) of Title 11, United
States Code, is without recourse to the Company, (d) Indebtedness which is
represented by Redeemable Capital Stock, (e) Indebtedness for goods, materials
or services purchased in the ordinary course of business or Indebtedness
consisting of trade payables or other current liabilities (other than any
current liabilities owing under the Credit Facility, or the current portion of
any long-term Indebtedness which would constitute Senior Indebtedness but for
the operation of this clause (e)), (f) Indebtedness of or amounts owed by the
Company for compensation to employees or for services rendered to the Company,
(g) any liability for federal, state, local or other taxes owed or owing by
the Company, (h) Indebtedness of the Company to a Subsidiary of the Company or
any other Affiliate of the Company or any of such Affiliate's Subsidiaries,
(i) that portion of any Indebtedness which is incurred by the Company in
violation of the Indenture and (j) amounts owing under leases.
GUARANTEES
Each Guarantor has fully and unconditionally guaranteed, on a senior
subordinated basis, jointly and severally, to each holder and the Trustee, the
full and prompt performance of the Company's obligations under the Indenture
and the Notes, including the payment of principal of and interest on the
Notes. The Guarantees are subordinated to Guarantor Senior Indebtedness on the
same basis as the Notes are subordinated to Senior Indebtedness.
The obligations of each Guarantor are limited to the maximum amount which,
after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by
or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under its Guarantee or pursuant to its contribution
obligations under the Indenture, will result in the obligations of such
Guarantor under the Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. See "Risk Factors--Fraudulent
Transfer Considerations."
Each Guarantor that makes a payment or distribution under a Guarantee shall
be entitled to a contribution from each other Guarantor in an amount pro rata,
based on the net assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor without limitation, or with other persons upon
the terms and conditions set forth in the Indenture. See "--Consolidation,
Merger, Sale of Assets, Etc." In the event all or substantially all of the
assets or the capital stock of a Guarantor is sold and the sale complies with
the provisions set forth in "--Certain Covenants--Limitation on Asset Sales,"
the Guarantor's Guarantee will be automatically discharged and released.
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"Guarantor Senior Indebtedness" of a Guarantor means the principal of,
premium, if any, and interest on any Indebtedness of such Guarantor, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes or such Guarantor's Guarantee. Without limiting the generality of the
foregoing, (x) "Guarantor Senior Indebtedness" shall include the principal of,
premium, if any, and interest on all obligations of every nature of such
Guarantor from time to time owed to the lenders under the Credit Facility,
including, without limitation, principal of and interest on, and all fees,
indemnities and expenses payable under the Credit Facility, and (y) in the
case of amounts owing under the Credit Facility and guarantees of Designated
Senior Indebtedness, "Guarantor Senior Indebtedness" shall include interest
accruing thereon subsequent to the occurrence of any Event of Default
specified in clause (vii) or (viii) under "--Events of Default" relating to
such Guarantor, whether or not the claim for such interest is allowed under
any applicable Bankruptcy Code. Notwithstanding the foregoing, "Guarantor
Senior Indebtedness" shall not include (a) Indebtedness evidenced by the Notes
or the Guarantees, (b) Indebtedness that is expressly subordinate or junior in
right of payment to any Indebtedness of such Guarantor, (c) Indebtedness
which, when incurred and without respect to any election under Section 1111(b)
of Title 11, United States Code, is without recourse to such Guarantor, (d)
Indebtedness which is represented by Redeemable Capital Stock, (e)
Indebtedness for goods, materials or services purchased in the ordinary course
of business or Indebtedness consisting of trade payables or other current
liabilities (other than any current liabilities owing under the Credit
Facility, or the current portion of any long-term Indebtedness which would
constitute Guarantor Senior Indebtedness but for the operation of this clause
(e)), (f) Indebtedness of or amounts owed by such Guarantor for compensation
to employees or for services rendered to such Guarantor, (g) any liability for
federal, state, local or other taxes owed or owing by such Guarantor,
(h) Indebtedness of such Guarantor to the Company or a Subsidiary of the
Company or any other Affiliate of the Company or any of such Affiliate's
Subsidiaries, (i) that portion of any Indebtedness which is incurred by such
Guarantor in violation of the Indenture and (j) amounts owing under leases.
CERTAIN COVENANTS
The Indenture contains the following covenants, among others:
Limitation on Indebtedness. The Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or in any manner become directly or indirectly liable,
contingently or otherwise (in each case, to "incur"), for the payment of any
Indebtedness (including any Acquired Indebtedness) other than Permitted
Indebtedness; provided, however, that (i) the Company and any Guarantor will
be permitted to incur Indebtedness (including Acquired Indebtedness), and (ii)
a Restricted Subsidiary will be permitted to incur Acquired Indebtedness, if
in each case, after giving pro forma effect to (1) the incurrence of such
Indebtedness and (if applicable) the application of the net proceeds
therefrom, including to refinance other Indebtedness, as if such Indebtedness
were incurred at the beginning of the four full fiscal quarters immediately
preceding such incurrence, taken as one period; (2) the incurrence, repayment
or retirement of any other Indebtedness by the Company and its Restricted
Subsidiaries since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired at the beginning of such four-
quarter period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such four-quarter
period); and (3) any Asset Sale or Asset Acquisition occurring since the first
day of such four-quarter period (including to the date of calculation) as if
such acquisition or disposition occurred at the beginning of such four-quarter
period, the Consolidated Fixed Charge Coverage Ratio of the Company is at
least 2:1.
Limitation on Restricted Payments. The Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any other distribution or payment
on or in respect of Capital Stock of the Company or any of its Restricted
Subsidiaries or make any payment to the direct or indirect
73
holders (in their capacities as such) of Capital Stock of the Company or
any of its Restricted Subsidiaries (other than dividends or distributions
payable solely in Capital Stock of the Company (other than Redeemable
Capital Stock) or in options, warrants or other rights to purchase Capital
Stock of the Company (other than Redeemable Capital Stock)) (other than the
declaration or payment of dividends or other distributions to the extent
declared or paid to the Company or any Restricted Subsidiary),
(b) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of the Company or any of its Restricted Subsidiaries or
any options, warrants, or other rights to purchase any such Capital Stock
(other than any such securities owned by the Company or a Restricted
Subsidiary),
(c) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any such
Subordinated Indebtedness owned by the Company or a Restricted Subsidiary),
or
(d) make any Investment (other than any Permitted Investment) in any
person
(such payments or Investments described in the preceding clauses (a), (b),
(c) and (d) are collectively referred to as "Restricted Payments"), unless,
after giving effect to the proposed Restricted Payment (the amount of any
such Restricted Payment, if other than cash, shall be the Fair Market Value
of the asset(s) proposed to be transferred by the Company or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted
Payment), (A) no Default or Event of Default shall have occurred and be
continuing, (B) immediately after giving effect to such Restricted Payment,
the Company would be able to incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) (assuming a market rate of interest with
respect to such additional Indebtedness) and (C) the aggregate amount of
all Restricted Payments declared or made from and after the Issue Date
would not exceed the sum of:
(1) 50% of the aggregate Consolidated Net Income of the Company accrued
on a cumulative basis during the period beginning on the Issue Date and
ending on the last day of the fiscal quarter of the Company immediately
preceding the date of such proposed Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income of the Company for such period
shall be a deficit, minus 100% of such deficit);
(2) the aggregate net cash proceeds received by the Company as capital
contributions to the Company after the Issue Date and which constitute
shareholders' equity of the Company in accordance with GAAP;
(3) the aggregate net cash proceeds received by the Company from the
issuance or sale of Capital Stock (excluding Redeemable Capital Stock) of
the Company to any person (other than to a Subsidiary of the Company) after
the Issue Date;
(4) the aggregate net cash proceeds received by the Company from any
person (other than a Subsidiary of the Company) upon the exercise of any
options, warrants or rights to purchase shares of Capital Stock (other than
Redeemable Capital Stock) of the Company after the Issue Date;
(5) the aggregate net cash proceeds received after the Issue Date by the
Company from any person (other than a Subsidiary of the Company) for debt
securities that have been converted or exchanged into or for Capital Stock
of the Company (other than Redeemable Capital Stock) (to the extent such
debt securities were originally sold for cash) plus the aggregate amount of
cash received by the Company (other than from a Subsidiary of the Company)
in connection with such conversion or exchange;
(6) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment after the Issue Date, an amount equal to
the lesser of the return of capital with respect to such Investment and the
initial amount of such Investment, in either case, less the cost of the
disposition of such Investment; and
74
(7) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after the
Issue Date in accordance with "--Limitation on Designations of Unrestricted
Subsidiaries" below, the Fair Market Value of the Company's interest in
such Subsidiary, provided that such amount shall not in any case exceed the
Designation Amount with respect to such Restricted Subsidiary upon its
Designation,
minus:
the Designation Amount (measured as of the date of Designation) with
respect to any Restricted Subsidiary of the Company which has been
designated as an Unrestricted Subsidiary after the Issue Date in accordance
with "--Limitations on Designations of Unrestricted Subsidiaries" below.
For purposes of the preceding clause (C)(4), the value of the aggregate net
proceeds received by the Company upon the issuance of Capital Stock upon the
exercise of options, warrants or rights will be the net cash proceeds received
upon the issuance of such options, warrants or rights plus the incremental
amount received by the Company upon the exercise thereof.
None of the foregoing provisions will prohibit, so long, in the case of
clauses (ii), (iii), (v) and (vi) below, as there is no Default or Event of
Default continuing, (i) the payment of any dividend or distribution within 60
days after the date of its declaration, if at the date of declaration such
payment would be permitted by the first paragraph of this covenant; (ii) the
redemption, repurchase or other acquisition or retirement of any shares of any
class of Capital Stock of the Company in exchange for, or out of the net cash
proceeds of, a substantially concurrent issue and sale of other shares of
Capital Stock of the Company (other than Redeemable Capital Stock) to any
person (other than to a Subsidiary of the Company); provided, however, that
such net cash proceeds are excluded from clause (C) of the first paragraph of
this covenant; (iii) any redemption, repurchase or other acquisition or
retirement of Subordinated Indebtedness by exchange for, or out of the net
cash proceeds of, a substantially concurrent issue and sale of (1) Capital
Stock (other than Redeemable Capital Stock) of the Company to any person
(other than to a Subsidiary of the Company); provided, however, that any such
net cash proceeds are excluded from clause (C) of the first paragraph of this
covenant; or (2) Indebtedness of the Company so long as such Indebtedness is
Subordinated Indebtedness which (w) has no scheduled principal payment prior
to the 91st day after the Maturity Date, (x) has an Average Life to Stated
Maturity greater than the remaining Average Life to Stated Maturity of the
Notes and (y) is subordinated to the Notes in the same manner and to the same
extent as the Subordinated Indebtedness so purchased, exchanged, redeemed,
acquired or retired; (iv) Investments constituting Restricted Payments made as
a result of the receipt of non-cash consideration from any Asset Sale or other
sale of assets or property made pursuant to and in compliance with the
Indenture; (v) payments to purchase Capital Stock of the Company from officers
of the Company, pursuant to agreements in effect as of the Issue Date, in an
amount not to exceed $15 million in the aggregate, (vi) payments (other than
those covered by clause (v)) to purchase Capital Stock of the Company from
management or employees of the Company or any of its Subsidiaries, or their
authorized representatives, upon the death, disability or termination of
employment of such employees, in aggregate amounts under this clause (vi) not
to exceed $1 million in any fiscal year of the Company, and (vii) the payment
of any dividend or distribution by a Restricted Subsidiary to the holders of
its Capital Stock on a pro rata basis. Any payments made pursuant to clauses
(i), (v) or (vi) of this paragraph shall be taken into account in calculating
the amount of Restricted Payments made from and after the Issue Date.
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, create, incur, assume or suffer to exist any Liens
of any kind against or upon any of its property or assets, or any proceeds
therefrom, unless the Notes are equally and ratably secured (except that Liens
securing Subordinated Indebtedness shall be expressly subordinate to Liens
securing the Notes to the same extent such Subordinated Indebtedness is
subordinate to the Notes), except for (a) Liens securing Senior Indebtedness;
(b) Liens securing the Notes; (c) Liens in favor of the Company on assets of
any Subsidiary of the Company; (d) Liens securing Indebtedness which is
incurred to refinance Indebtedness which has been secured by a Lien permitted
under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided, however,
75
that such Liens do not extend to or cover any property or assets of the
Company or any its Restricted Subsidiaries not securing the Indebtedness so
refinanced; and (e) Permitted Liens.
Disposition of Proceeds of Asset Sales. The Company will not, and will not
permit any of its Restricted Subsidiaries to, make any Asset Sale unless (a)
the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the shares or assets sold or otherwise disposed of and (b) at least
75% of such consideration consists of cash or Cash Equivalents or Replacement
Assets; provided, however, that the amount of any liabilities (as shown on the
most recent balance sheet of the Company or such Restricted Subsidiary) of the
Company or such Restricted Subsidiary that are assumed by the transferee of
such assets and any securities, notes or other obligations received by the
Company or such Restricted Subsidiary from such transferee that are converted
within 30 days into cash or Cash Equivalents (to the extent of the cash or
Cash Equivalents received) shall be deemed to be cash for the purposes of this
provision; provided further, that the 75% limitation referred to in clause (b)
will not apply to any Asset Sale in which the cash or Cash Equivalent portion
of the consideration received therefrom, determined in accordance with the
foregoing provision, is equal to or greater than what the after-tax proceeds
would have been had such Asset Sale complied with the aforementioned 75%
limitation. To the extent that the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay, and permanently reduce the commitments under,
the Credit Facility, or are not so applied, the Company or such Restricted
Subsidiary, as the case may be, may apply the Net Cash Proceeds from such
Asset Sale, within 360 days of such Asset Sale, to an investment in properties
and assets that replace the properties and assets that were the subject of
such Asset Sale or in properties and assets that are used or useful in the
business of the Company and its Restricted Subsidiaries conducted at such time
or in businesses reasonably related thereto or in Capital Stock of a person,
the principal portion of whose assets consist of such property or assets
("Replacement Assets"). Any Net Cash Proceeds from any Asset Sale that are
neither used to repay, and permanently reduce the commitments under, the
Credit Facility nor invested in Replacement Assets within such 360-day period
constitute "Excess Proceeds" subject to disposition as provided below.
When the aggregate amount of Excess Proceeds equals or exceeds $10 million,
the Company shall make an offer to purchase (an "Asset Sale Offer"), from all
holders of the Notes, an aggregate principal amount of Notes equal to such
Excess Proceeds, at a price in cash equal to 100% of the outstanding principal
amount
thereof plus accrued and unpaid interest, if any, to the purchase date (the
"Asset Sale Offer Price"). To the extent that the aggregate principal amount
of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use such deficiency for general corporate purposes.
The Notes shall be purchased by the Company, at the option of the holder
thereof, in whole or in part in integral multiples of $1,000, on a date that
is not earlier than 30 days and not later than 60 days from the date the
notice is given to holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act. If the
aggregate principal amount of Notes validly tendered and not withdrawn by
holders thereof exceeds the Excess Proceeds, Notes to be purchased will be
selected on a pro rata basis. Upon completion of such Asset Sale Offer, the
amount of Excess Proceeds shall be reset to zero.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder, to the extent such laws and
regulations are applicable, in the event that an Asset Sale occurs and the
Company is required to purchase Notes as described above.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any Restricted Subsidiary to issue any Preferred Stock other than
Preferred Stock issued to the Company or a Wholly-Owned Restricted Subsidiary.
The Company will not sell, transfer or otherwise dispose of Preferred Stock
issued by a Restricted Subsidiary of the Company or permit a Restricted
Subsidiary to sell, transfer or otherwise dispose of Preferred Stock issued by
a Restricted Subsidiary, other than to the Company or a Wholly-Owned
Restricted Subsidiary. Notwithstanding the foregoing, nothing in such covenant
will prohibit Preferred Stock (other than Redeemable Capital Stock) issued by
a person prior to the time (A) such person becomes a Restricted Subsidiary of
the Company, (B) such person merges with or into a Restricted Subsidiary of
the Company or (C) a Restricted
76
Subsidiary of the Company merges with or into such person; provided that such
Preferred Stock was not issued or incurred by such person in anticipation of a
transaction contemplated by subclause (A), (B), or (C) above.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into any transaction or series of related transactions (including,
without limitation, the sale, transfer, disposition, purchase, exchange or
lease of assets, property or services) with, or for the benefit of, any of its
Affiliates (other than Restricted Subsidiaries), except (a) on terms that are
no less favorable to the Company or such Subsidiary, as the case may be, than
those which could have been obtained in a comparable transaction at such time
from persons who are not Affiliates of the Company, (b) with respect to a
transaction or series of related transactions involving aggregate payments or
value equal to or greater than $2 million, the Company shall have delivered an
officer's certificate to the Trustee certifying that such transaction or
transactions comply with the preceding clause (a), and (c) with respect to a
transaction or series of related transactions involving aggregate payments or
value equal to or greater than $5 million, such transaction or transactions
shall have been approved by a majority of the Disinterested Members of the
Board of Directors of the Company.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and the
Restricted Subsidiaries, (ii) customary directors' fees, indemnification and
similar arrangements, consulting fees, employee salaries, bonuses or
employment agreements, compensation or employee benefit arrangements and
incentive arrangements with any officer, director or employee of the Company
or any Restricted Subsidiary entered into in the ordinary course of business,
(iii) any dividends made in compliance with "--Limitation on Restricted
Payments" above, (iv) loans and advances to officers, directors and employees
of the Company or any Restricted Subsidiary for travel, entertainment, moving
and other relocation expenses, in each case made in the ordinary course of
business, (v) the incurrence of intercompany Indebtedness which constitutes
Permitted Indebtedness, (vi) transactions pursuant to agreements in effect on
the Issue Date, and (vii) the purchase of equipment for its Fair Market Value
from Terex Corporation or its Affiliates in the ordinary course of business of
each of Terex Corporation and the Company.
Limitation on Dividends and other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary of the Company to (a)
pay dividends, in cash or otherwise, or make any other distributions on or in
respect of its Capital Stock or any other interest or participation in, or
measured by, its profits, (b) pay any Indebtedness owed to the Company or any
other Restricted Subsidiary of the Company, (c) make loans or advances to the
Company or any other Restricted Subsidiary of the Company, (d) transfer any of
its properties or assets to the Company or any other Restricted Subsidiary of
the Company or (e) guarantee any Indebtedness of the Company or any other
Restricted Subsidiary of the Company, except for such encumbrances or
restrictions existing under or by reason of (i) applicable law or any
applicable rule, regulation or order, (ii) customary non-assignment provisions
of any contract or any lease governing a leasehold interest of the Company or
any Restricted Subsidiary of the Company, (iii) customary restrictions on
transfers of property subject to a Lien permitted under the Indenture, (iv)
the Credit Facility as in effect on the Issue Date, (v) any agreement or other
instrument of a person acquired by the Company or any Restricted Subsidiary of
the Company in existence at the time of such acquisition (but not created in
contemplation thereof), which encumbrance or restriction is not applicable to
any person, or the properties or assets of any person, other than the person,
or the property or assets of the person, so acquired, (vi) an agreement
entered into for the sale or disposition of Capital Stock or assets of a
Restricted Subsidiary or an agreement entered into for the sale of specified
assets (in either case, so long as such encumbrance or restriction, by its
terms, terminates on the earlier of the termination of such agreement or the
consummation of such agreement and so long as such restriction applies only to
the Capital Stock or assets to be sold), (vii) any agreement in effect on the
Issue Date, (viii) the Indenture and the Guarantees, and (ix) any agreement
that amends, extends, refinances, renews or replaces any agreement described
in the foregoing clauses, provided that the terms and conditions of any such
agreement are not materially less favorable to the holders of the Notes with
respect to such dividend and payment restrictions than those under or pursuant
to the agreement amended, extended, refinanced, renewed or replaced.
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Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate after the Issue Date any Restricted Subsidiary as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(i) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(ii) the Company would be permitted to make an Investment (other than a
Permitted Investment, except a Permitted Investment covered by clause (x)
of the definition thereof) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of "--
Limitation on Restricted Payments" above in an amount (the "Designation
Amount") equal to the Fair Market Value of the Company's interest in such
Subsidiary on such date calculated in accordance with GAAP; and
(iii) the Company would be permitted under the Indenture to incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "--Limitation on Indebtedness" at the time of
such Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"--Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount.
The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, at any time (x) provide credit support for or subject any of
its property or assets (other than the Capital Stock of any Unrestricted
Subsidiary) to the satisfaction of, any Indebtedness of any Unrestricted
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness), (y) be directly or indirectly liable for any Indebtedness of
any Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the
occurrence of a default with respect to any Indebtedness of any Unrestricted
Subsidiary (including any right to take enforcement action against such
Unrestricted Subsidiary), except any non-recourse guarantee given solely to
support the pledge by the Company or any Restricted Subsidiary of the Capital
Stock of an Unrestricted Subsidiary. All Subsidiaries of Unrestricted
Subsidiaries shall automatically be deemed to be Unrestricted Subsidiaries.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(i) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
In the event the Company or a Restricted Subsidiary makes any Investment in
any person which was not previously a Subsidiary and such person thereby
becomes a Subsidiary, such person shall automatically be an Unrestricted
Subsidiary and the Company may designate such Subsidiary as a Restricted
Subsidiary only if it meets the foregoing requirements.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Limitation on the Issuance of Subordinated Indebtedness. The Company will
not, directly or indirectly, incur any Indebtedness (including Acquired
Indebtedness) that is subordinate in right of payment to any Indebtedness of
the Company and senior in right of payment to the Notes.
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Additional Subsidiary Guarantees. If the Company or any of its Restricted
Subsidiaries acquires, creates or designates another domestic Restricted
Subsidiary, then such newly acquired, created or designated Restricted
Subsidiary shall, within 30 days after the date of its acquisition, creation
or designation, whichever is later, execute and deliver to the Trustee a
supplemental indenture in form reasonably satisfactory to the Trustee pursuant
to which such Subsidiary shall unconditionally guarantee all of the Company's
obligations under the Notes and the Indenture on the terms set forth in the
Indenture. Thereafter, such Subsidiary shall be a Guarantor for all purposes
of the Indenture.
Reporting Requirements. For so long as the Notes are outstanding, whether or
not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, or
any successor provision thereto, the Company shall file with the Commission
(if permitted by Commission practice and applicable law and regulations) the
annual reports, quarterly reports and other documents which the Company would
have been required to file with the Commission pursuant to such Section 13(a)
or 15(d) or any successor provision thereto if the Company were so subject,
such documents to be filed with the Commission on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required so to file such documents if the Company were so subject. The Company
shall also in any event (a) within 15 days after each Required Filing Date
(whether or not permitted or required to be filed with the Commission) (i)
transmit (or cause to be transmitted) by mail to all holders of Notes, as
their names and addresses appear in the Note register, without cost to such
holders, and (ii) file with the Trustee, copies of the annual reports,
quarterly reports and other documents which the Company would be required to
file with the Commission if the Notes were then registered under the Exchange
Act. In addition, for so long as any Notes remain outstanding, the Company
will furnish to the holders of Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to any
beneficial holder of Notes, if not obtainable from the Commission, information
of the type that would be filed with the Commission pursuant to the foregoing
provisions upon the request of any such holder.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Company will not, in any transaction or series of transactions, merge or
consolidate with or into, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of its properties and assets as
an entirety to, any person or persons, and the Company will not permit any of
its Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in a sale, assignment, conveyance, transfer, lease or other
disposition of all or substantially all of the properties and assets of the
Company or the Company and its Restricted Subsidiaries, taken as a whole, to
any other person or persons, unless at the time and after giving effect
thereto (a) either (i) if the transaction or transactions is a merger or
consolidation, the Company or such Restricted Subsidiary, as the case may be,
shall be the surviving person of such merger or consolidation, or (ii) the
person formed by such consolidation or into which the Company, or such
Restricted Subsidiary, as the case may be, is merged or to which the
properties and assets of the Company or such Restricted Subsidiary, as the
case may be, substantially as an entirety, are transferred (any such surviving
person or transferee person being the "Surviving Entity") shall be a
corporation organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and shall expressly
assume by a supplemental indenture executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under the
Notes, the Indenture and the Registration Rights Agreement, and in each case,
the Indenture shall remain in full force and effect; (b) immediately after
giving effect to such transaction or series of transactions on a pro forma
basis (including, without limitation, any Indebtedness incurred or anticipated
to be incurred in connection with or in respect of such transaction or series
of transactions), no Default or Event of Default shall have occurred and be
continuing; and (c) except in the case of any merger of the Company with any
wholly-owned Subsidiary of the Company or any merger of Guarantors (and, in
each case, no other persons), the Company or the Surviving Entity, as the case
may be, after giving effect to such transaction or series of transactions on a
pro forma basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction or series of transactions), could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) (assuming a market rate of
interest with respect to such additional Indebtedness).
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In connection with any consolidation, merger, transfer, lease, assignment or
other disposition contemplated hereby, the Company shall deliver, or cause to
be delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, transfer, lease, assignment or other
disposition and the supplemental indenture in respect thereof comply with the
requirements under the Indenture.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties
and asset of the Company in accordance with the immediately preceding
paragraphs, the successor person formed by such consolidation or into which
the Company or a Restricted Subsidiary, as the case may be, is merged or the
successor person to which such sale, assignment, conveyance, transfer, lease
or disposition is made shall succeed to, and be substituted for, and may
exercise every right and power of the Company under the Notes, the Indenture
and/or the Registration Rights Agreement, as the case may be, with the same
effect as if such successor had been named as the Company in the Notes, the
Indenture and/or in the Registration Rights Agreement, as the case may be and,
except in the case of a lease, the Company or such Restricted Subsidiary shall
be released and discharged from its obligations thereunder.
The Indenture will provide that for all purposes of the Indenture and the
Notes (including the provision of this covenant and the covenants described in
"--Certain Covenants--Limitation on Indebtedness," "--Limitation on Restricted
Payments" and "--Certain Covenants--Limitation on Liens"), Subsidiaries of any
surviving person shall, upon such transaction or series of related
transactions, become Restricted Subsidiaries unless and until designated
Unrestricted Subsidiaries pursuant to and in accordance with "--Limitation on
Designations of Unrestricted Subsidiaries" and all Indebtedness, and all Liens
on property or assets, of the Company and the Restricted Subsidiaries in
existence immediately after such transaction or series of related transactions
will be deemed to have been incurred upon such transaction or series of
related transactions.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any, when
due and payable, on any of the Notes (at Stated Maturity, upon optional
redemption, required purchase or otherwise); or
(ii) default in the payment of an installment of interest on any of the
Notes, when due and payable, for 30 days; or
(iii) (a) default in the performance, or breach, of any covenant or
agreement of the Company under the Indenture (other than a default in the
performance or breach of a covenant or agreement which is specifically
dealt with in clauses (i), (ii) or (iv)) and such default or breach shall
continue for a period of 30 days after written notice has been given, by
certified mail, (x) to the Company by the Trustee or (y) to the Company and
the Trustee by the holders of at least 25% in aggregate principal amount of
the outstanding Notes; or
(iv) (a) there shall be a default in the performance or breach of the
provisions of "--Consolidation, Merger, Sale of Assets, Etc."; (b) the
Company shall have failed to make or consummate an Offer in accordance with
the provisions of the Indenture described under "--Certain Covenants--
Dispositions of Proceeds of Asset Sales"; or (c) the Company shall have
failed to make or consummate a Change of Control Offer in accordance with
the provisions of the Indenture described under "--Change of Control"; or
(v) default or defaults under one or more agreements, instruments,
mortgages, bonds, debentures or other evidences of Indebtedness under which
the Company or any Restricted Subsidiary of the Company then has
outstanding Indebtedness in excess of $15 million, individually or in the
aggregate, and either (a) such Indebtedness is already due and payable in
full or (b) such default or defaults have resulted in the acceleration of
the maturity of such Indebtedness; or
(vi) one or more judgments, orders or decrees of any court or regulatory
or administrative agency of competent jurisdiction for the payment of money
in excess of $15 million, either individually or in the
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aggregate, shall be entered against the Company or any Restricted
Subsidiary of the Company or any of their respective properties and shall
not be discharged and there shall have been a period of 60 days after the
date on which any period for appeal has expired and during which a stay of
enforcement of such judgment, order or decree, shall not be in effect; or
(vii) the entry of a decree or order by a court having jurisdiction in
the premises (A) for relief in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under the Federal
Bankruptcy Code or any other federal, state or foreign bankruptcy,
insolvency, reorganization or similar law or (B) adjudging the Company or
any Significant Subsidiary bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Significant Subsidiary under the Federal Bankruptcy Code
or any other similar federal, state or foreign law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Significant Subsidiary or of any
substantial part of any of their properties, or ordering the winding up or
liquidation of any of their affairs, and the continuance of any such decree
or order unstayed and in effect for a period of 60 consecutive days; or
(viii) the institution by the Company or any Significant Subsidiary of a
voluntary case or proceeding under the Federal Bankruptcy Code or any other
similar federal, state or foreign law or any other case or proceedings to
be adjudicated a bankrupt or insolvent, or the consent by the Company or
any Significant Subsidiary to the entry of a decree or order for relief in
respect of the Company or any Significant Subsidiary in any involuntary
case or proceeding under the Federal Bankruptcy Code or any other similar
federal, state or foreign law or to the institution of bankruptcy or
insolvency proceedings against the Company or any Significant Subsidiary,
or the filing by the Company or any Significant Subsidiary of a petition or
answer or consent seeking reorganization or relief under the Federal
Bankruptcy Code or any other similar federal, state or foreign law, or the
consent by it to the filing of any such petition or to the appointment of
or taking possession by a custodian, receiver, liquidator, assignee,
trustee or sequestrator (or other similar official) of any of the Company
or any Significant Subsidiary or of any substantial part of its property,
or the making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally as
they become due or the taking of corporate action by the Company or any
Significant Subsidiary in furtherance of any such action; or
(ix) any of the Guarantees ceases to be in full force and effect or any
of the Guarantees is declared to be null and void and unenforceable or any
of the Guarantees is found to be invalid or any of the Guarantors denies
its liability under its Guarantee (other than by reason of release of a
Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than those covered by clause (vii) or (viii)
above with respect to the Company) shall occur and be continuing, the Trustee,
by notice to the Company and the representative of the banks under the Credit
Facility, or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice to the Trustee, the Company and the
representative of the banks under the Credit Facility, may declare the
principal of, premium, if any, and accrued and unpaid interest, if any, on all
of the outstanding Notes due and payable immediately, upon which declaration,
all amounts payable in respect of the Notes shall be due and payable as of the
date which is five business days after the giving of such notice to the
representative of the banks under the Credit Facility. If an Event of Default
specified in clause (vii) or (viii) above with respect to the Company occurs
and is continuing, then the principal of, premium, if any, and accrued and
unpaid interest, if any, on all the outstanding Notes shall ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any holder of Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration if (a) the Company has paid or deposited with the
Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee
under the Indenture and the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, (ii) all overdue interest
on all Notes, (iii) the principal of and premium, if any,
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on any Notes which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, and (iv) to
the extent that payment of such interest is lawful, interest upon overdue
interest and overdue principal at the rate provided in the Notes which has
become due otherwise than by such declaration of acceleration; (b) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (c) all Events of Default, other than the non-
payment of principal of, premium, if any, and interest on the Notes that has
become due solely by such declaration of acceleration, have been cured or
waived.
The holders of not less than a majority in aggregate principal amount of the
outstanding Notes may on behalf of the holders of all the Notes waive any past
defaults under the Indenture, except a default in the payment of the principal
of, premium, if any, or interest on any Note, or in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the holder of each Note outstanding.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 45 days after receipt of such
notice and the Trustee, within such 45-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations do not apply,
however, to a suit instituted by a holder of a Note for the enforcement of the
payment of the principal of, premium, if any, or interest on such Note on or
after the respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs. Subject to the provisions of the Indenture relating to the duties of
the Trustee, whether or not an Event of Default shall occur and be continuing,
the Trustee under the Indenture is not under any obligation to exercise any of
its rights or powers under the Indenture at the request or direction of any of
the holders unless such holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee under the Indenture.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee shall mail to each holder of the Notes notice of the
Default or Event of Default within 30 days after obtaining
knowledge thereof. Except in the case of a Default or an Event of Default in
payment of principal of, premium, if any, or interest on any Notes, the
Trustee may withhold the notice to the holders of such Notes if a committee of
its trust officers in good faith determines that withholding the notice is in
the interest of the Noteholders.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within five days of any event which is, or
after notice or lapse of time or both would become, an Event of Default.
NO LIABILITY FOR CERTAIN PERSONS
No director, officer, employee or stockholder of the Company, nor any
director, officer or employee of any Guarantor, as such, will have any
liability for any obligations of the Company or any Guarantor under the Notes,
the Guarantees or the Indenture based on or by reason of such obligations or
their creation. Each holder by accepting a Note waives and releases all such
liability. The foregoing waiver and release are an integral part of the
consideration for the issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws.
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DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations of
the Company with respect to the outstanding Notes ("defeasance") to the extent
set forth below. Such defeasance means that the Company shall be deemed to
have paid and discharged the entire Indebtedness represented by the
outstanding Notes, except for (i) the rights of holders of outstanding Notes
to receive payment in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, (ii) the Company's
obligations to issue temporary Notes, register the transfer or exchange of any
Notes, replace mutilated, destroyed, lost or stolen Notes and maintain an
office or agency for payments in respect of the Notes, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and (iv) the defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to terminate the obligations of the Company with respect to
certain covenants that are set forth in the Indenture, some of which are
described under "--Certain Covenants" above, and any subsequent failure to
comply with such obligations shall not constitute a Default or an Event of
Default with respect to the Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Notes to redemption or maturity (except lost,
stolen or destroyed Notes which have been replaced or paid); (ii) the Company
shall have delivered to the Trustee an opinion of counsel to the effect that
the holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred (in the case of defeasance,
such opinion must refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable federal income tax laws); (iii) no Default
or Event of Default shall have occurred and be continuing on the date of such
deposit; (iv) such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest with respect to any securities of the
Company; (v) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any agreement or
instrument to which the Company is a party or by which it is bound; (vi) the
Company shall have delivered to the Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii)
the Company shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with the intent of
preferring the holders of the Notes over the other creditors of the Company
with the intent of hindering, delaying or defrauding creditors of the Company
or others; (viii) no event or condition shall exist that would prevent the
Company from making payments of the principal of, premium, if any, and
interest on the Notes on the date of such deposit or at any time ending on the
91st day after the date of such deposit; and (ix) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent under the Indenture to either
defeasance or covenant defeasance, as the case may be, have been complied
with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or repaid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation (except lost, stolen or destroyed Notes which have been replaced
or paid) have become due and payable and the Company has irrevocably deposited
or caused to be deposited with the Trustee funds in an amount sufficient to
pay and discharge the entire Indebtedness on the Notes not theretofore
delivered to the
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Trustee for cancellation, for principal of, premium, if any, and interest on
the Notes to the date of deposit together with irrevocable instructions from
the Company directing the Trustee to apply such funds to the payment thereof
at maturity or redemption, as the case may be; (ii) the Company has paid all
other sums payable under the Indenture by the Company; and (iii) the Company
has delivered to the Trustee an officers' certificate and an opinion of
counsel stating that all conditions precedent under the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
AMENDMENTS AND WAIVERS
From time to time, the Company, when authorized by a resolution of its Board
of Directors, and the Trustee may, without the consent of the holders of any
outstanding Notes, amend, waive or supplement the Indenture or the Notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, qualifying, or maintaining the qualification of,
the Indenture under the Trust Indenture Act, or making any change that does
not adversely affect the rights of any holder of Notes. Other amendments and
modifications of the Indenture or the Notes may be made by the Company and the
Trustee with the consent of the holders of not less than a majority of the
aggregate principal amount of the outstanding Notes; provided, however, that
no such modification or amendment may, without the consent of the holder of
each outstanding Note affected thereby, (i) reduce the principal amount of,
extend the fixed maturity of or alter the redemption provisions of, the Notes,
(ii) change the currency in which any Notes or any premium or the interest
thereon is payable, (iii) reduce the percentage in principal amount of
outstanding Notes that must consent to an amendment, supplement or waiver or
consent to take any action under the Indenture or the Notes, (iv) impair the
right to institute suit for the enforcement of any payment on or with respect
to the Notes, (v) waive a default in payment with respect to the Notes, (vi)
amend, change or modify the obligation of the Company to make and consummate a
Change of Control Offer in the event of a Change of Control or make and
consummate the offer with respect to any Asset Sale or modify any of the
provisions or definitions with respect thereto, (vii) reduce or change the
rate or time for payment of interest on the Notes or (viii) to modify or
change any provision of the Indenture affecting the ranking of the Notes in a
manner adverse to the holders of the Notes.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred
and is continuing, the Trustee will exercise such rights and powers vested in
it under the Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage
in other transactions; provided, however, that if it acquires any conflicting
interest (as defined in such Act) it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of New
York, without regard to the principles of conflicts of law.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person (a) assumed in
connection with an Asset Acquisition from such person or (b) existing at the
time such person becomes a Subsidiary of any other person and not incurred in
connection with, or in contemplation of, such Asset Acquisition or such person
becoming a Subsidiary.
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"Affiliate" means, with respect to any specified person, (i) any other
person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person, (ii) any other person that
owns, directly or indirectly, 10% or more of such specified person's Capital
Stock, or (iii) any officer or director of (A) any such specified person, (B)
any Subsidiary of such specified person or (C) any person described in clauses
(i) or (ii) above.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other person pursuant to which such person
shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any person which
constitute all or substantially all of the assets of such person, any division
or line of business of such person or any other properties or assets of such
person other than in the ordinary course of business.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition by the Company or any Restricted Subsidiary of the Company to any
person other than the Company or a Restricted Subsidiary of the Company, of
(a) any Capital Stock of any Restricted Subsidiary of the Company; (b) all or
substantially all of the properties and assets of any division or line of
business of the Company or any Restricted Subsidiary of the Company; or (c)
any other properties or assets of the Company or any Restricted Subsidiary of
the Company, other than (i) sales of obsolete, damaged or used equipment or
other equipment or inventory sales in the ordinary course of business, (ii)
sales of assets in one or a series of related transactions for an aggregate
consideration of less than $1 million, (iii) sales of Permitted Investments,
and (iv) sales of accounts receivable for financing purposes. For the purposes
of this definition, the term "Asset Sale" shall not include any sale,
issuance, conveyance, transfer, lease or other disposition of properties or
assets that is governed by the provisions described under "--Consolidation,
Merger, Sale of Assets, Etc."
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness and (b) the amount of each
such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means the board of directors of a company or its
equivalent, including managers of a limited liability company, general
partners of a partnership or trustees of a business trust, or any duly
authorized committee thereof.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such person's capital stock or equity participations, and any rights (other
than debt securities convertible into capital stock), warrants or options
exchangeable for or convertible into such capital stock and, including,
without limitation, with respect to partnerships, limited liability companies
or business trusts, ownership interests (whether general or limited) and any
other interest or participation that confers on a person the right to receive
a share of the profits and losses of, or distributions of assets of, such
partnerships, limited liability companies or business trusts.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real,
personal or mixed) that is required to be classified and accounted for as a
capital lease obligation under GAAP, and, for the purpose of the Indenture,
the amount of such obligation at any date shall be the capitalized amount
thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness,
maturing not more than one year after such time, issued or guaranteed by the
United States Government or any agency thereof, (b) commercial paper, maturing
not more than one year from the date of issue, or corporate demand notes, in
each case rated at least A-1 by Standard & Poor's Ratings Group or P-1 by
Moody's Investors Service, Inc., (c) any certificate of
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deposit (or time deposits represented by such certificates of deposit) or
bankers' acceptance, maturing not more than one year after such time, or
overnight Federal Funds transactions that are issued or sold by a commercial
banking institution that is a member of the Federal Reserve System and has a
combined capital and surplus and undivided profits of not less than $500
million, (d) any repurchase agreement entered into with any commercial banking
institution of the stature referred to in clause (c) which (i) is secured by a
fully perfected security interest in any obligation of the type described in
any of clauses (a) through (c) and (ii) has a market value at the time such
repurchase agreement is entered into of not less than 100% of the repurchase
obligation of such commercial banking institution thereunder, (e) investments
in short term asset management accounts managed by any bank party to the
Credit Facility which are invested in indebtedness of any state or
municipality of the United States or of the District of Columbia and which are
rated under one of the two highest ratings then obtainable from Standard &
Poor's Ratings Group or by Moody's Investors Service, Inc. or investments of
the types described in clauses (a) through (d) above, and (f) investments in
funds investing primarily in investments of the types described in clauses (a)
through (e) above.
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 50% of the total Voting Stock of the Company; provided, however,
that a "Change of Control" shall not be deemed to have occurred under this
subclause (a) unless the Permitted Holders do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of the Company; (b) the Company
consolidates with, or merges with or into, another person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all
of its assets to any person, or any person consolidates with, or merges with
or into, the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where (i)
the outstanding Voting Stock of the Company is converted into or exchanged for
Voting Stock (other than Redeemable Capital Stock) of the surviving or
transferee corporation and (ii) immediately after such transaction no "person"
or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange
Act), excluding Permitted Holders, is the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 50% of the
total Voting Stock of the surviving or transferee corporation; (c) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of the Company was approved by a vote of 66-2/3%
of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office; or (d) the Company is
liquidated or dissolved or adopts a plan of liquidation; provided, however,
that a transaction effected to create a holding company of the Company,
pursuant to which the Company becomes a wholly-owned Subsidiary of such
holding company, and as a result of which the holders of Voting Stock of such
holding company upon consummation of such transaction are substantially the
same as the holders of the Voting Stock of the Company immediately prior to
such transaction, shall not be deemed to involve a "Change of Control."
"Common Stock" means the common stock of the Company, par value $.01 per
share.
"Consolidated Cash Flow Available for Fixed Charges" means, with respect to
any person for any period, (i) the sum of, without duplication, the amounts
for such period, taken as a single accounting period, of (a) Consolidated Net
Income, (b) Consolidated Non-cash Charges, (c) Consolidated Interest Expense,
(d) Consolidated Income Tax Expense (other than income tax expense (either
positive or negative) attributable to extraordinary gains or losses), (e) one-
third of Consolidated Rental Payments and (f) if any Asset Sale or Asset
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Acquisition shall have occurred since the first day of any four quarter period
for which "Consolidated Cash Flow Available for Fixed Charges" is being
calculated (including to the date of calculation) (A) the cost of any
compensation, remuneration or other benefit paid or provided to any employee,
consultant, Affiliate or equity owner of the entity involved in any such Asset
Acquisition to the extent such costs are eliminated or reduced (or public
announcement has been made of the intent to eliminate or reduce such costs)
prior to the date of such
calculation and not replaced and (B) the amount of any reduction in general,
administrative or overhead costs of the entity involved in any such Asset
Acquisition, to the extent such amounts under clauses (A) and (B) would be
permitted to be eliminated in a pro forma income statement prepared in
accordance with Rule 11-02 of Regulation S-X, less (ii)(x) non-cash items
increasing Consolidated Net Income and (y) all cash payments during such
period relating to non-cash charges that were added back in determining
Consolidated Cash Flow Available for Fixed Charges in the most recent Four
Quarter Period.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
person, the ratio of the aggregate amount of Consolidated Cash Flow Available
for Fixed Charges of such person for the four full fiscal quarters, treated as
one period, for which financial information in respect thereof is available
immediately preceding the date of the transaction (the "Transaction Date")
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio (such four full fiscal quarter period being referred to herein as the
"Four Quarter Period") to the aggregate amount of Consolidated Fixed Charges
of such person for the Four Quarter Period. In calculating "Consolidated Fixed
Charges" for purposes of determining the denominator (but not the numerator)
of this "Consolidated Fixed Charge Coverage Ratio," (i) interest on
outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall
be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date; and (ii) if
interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Four Quarter Period. If such person or any of its Restricted
Subsidiaries directly or indirectly guarantees Indebtedness of a third person,
the above clause shall give effect to the incurrence of such guaranteed
Indebtedness as if such person or such Subsidiary had directly incurred or
otherwise assumed such guaranteed Indebtedness.
"Consolidated Fixed Charges" means, with respect to any person for any
period, the sum of, without duplication, the amounts for such period of (i)
Consolidated Interest Expense, (ii) the aggregate amount of dividends and
other distributions paid or accrued during such period in respect of
Redeemable Capital Stock of such person and its Restricted Subsidiaries on a
consolidated basis and (iii) one-third of Consolidated Rental Payments.
"Consolidated Income Tax Expense" means, with respect to any person for any
period, the provision for federal, state, local and foreign income taxes of
such person and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any person for any
period, without duplication, the sum of (i) the interest expense of such
person and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP, including, without limitation, (a)
any amortization of debt discount, (b) the net cost under Interest Rate
Protection Obligations (including any amortization of discounts), (c) the
interest portion of any deferred payment obligation, (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit,
bankers' acceptance financing or similar facilities and (e) all accrued
interest and (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any person, for any period,
the consolidated net income (or loss) of such person and its Restricted
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income, by excluding, without
duplication, (i) all
87
extraordinary gains or losses (net of fees and expenses relating to the
transaction giving rise thereto), (ii) the portion of net income of such
person and its Restricted Subsidiaries allocable to minority interests in
unconsolidated persons or to Investments in Unrestricted Subsidiaries to the
extent that cash dividends or distributions have not actually been received by
such person or one of its Restricted Subsidiaries, (iii) net income (or loss)
of any person combined with such person or one of its Restricted Subsidiaries
on a "pooling of interests" basis attributable to any period prior to the date
of combination, (iv) gains or losses in respect of any Asset Sales by such
person or one of its Restricted Subsidiaries (net of fees and expenses
relating to the transaction giving rise thereto), on an after-tax basis, (v)
the net income of any Restricted Subsidiary of such person to the extent that
the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Restricted Subsidiary or its stockholders and (vi) any gain
or loss realized as a result of the cumulative effect of a change in
accounting principles.
"Consolidated Non-cash Charges" means, with respect to any person for any
period, the aggregate depreciation, amortization (including amortization of
goodwill and other intangibles) and other non-cash expenses of such person and
its Restricted Subsidiaries reducing Consolidated Net Income of such person
and its Restricted Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP (excluding any such charges constituting an
extraordinary item or loss).
"Consolidated Rental Payments" of any person means, for any period, the
aggregate rental obligations of such person and its Restricted Subsidiaries
(not including taxes, insurance, maintenance and similar expenses that the
lessee is obligated to pay under the terms of the relevant leases), determined
on a consolidated basis in accordance with GAAP, payable in respect of such
period (net of income from subleases thereof, not including taxes, insurance,
maintenance and similar expenses that the sublessee is obligated to pay under
the terms of such sublease), whether or not such obligations are reflected as
liabilities or commitments on a consolidated balance sheet of such person and
its Restricted Subsidiaries or in the notes thereto, excluding, however, in
any event, (i) that portion of Consolidated Interest Expense of such person
representing payments by such person or any of its Restricted Subsidiaries in
respect of Capitalized Lease Obligations (net of payments to such person or
any of its Restricted Subsidiaries under subleases qualifying as capitalized
lease subleases to the extent that such payments would be deducted in
determining Consolidated Interest Expense) and (ii) the aggregate amount of
amortization of obligations of such person and its Restricted Subsidiaries in
respect of such Capitalized Lease Obligations for such period (net of payments
to such person or any of its Restricted Subsidiaries and subleases qualifying
as capitalized lease subleases to the extent that such payments could be
deducted in determining such amortization amount).
"control" when used with respect to any specified person means the power to
direct the management and policies of such person, directly or indirectly,
whether through ownership of voting securities, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Credit Facility" means the Third Amended and Restated Credit Agreement
dated as of May 12, 1998 among the Company, United Rentals of Canada, Inc.,
various financial institutions, BankBoston, N.A., Comerica Bank, Credit
Lyonnais New York Branch, Deutsche Bank AG and Fleet Bank N.A., as Co-Agents,
Bank of America Canada, as Canadian Agent, and Bank of America National Trust
and Savings Association, as U.S. Agent, including any notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended (including any amendment and
restatement thereof), modified, renewed, refunded, replaced or refinanced from
time to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder or adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement
and whether by the same or any other agents, lender or group of lenders.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
88
"Disinterested Member of the Board of Directors of the Company" means, with
respect to any transaction or series of transactions, a member of the Board of
Directors of the Company other than a member who has any material direct or
indirect financial interest in or with respect to such transaction or series
of transactions or is an Affiliate, or an officer, director or an employee of
any person (other than the Company) who has any direct or indirect financial
interest in or with respect to such transaction or series of transactions.
"Event of Default" has the meaning set forth under "--Events of Default"
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's- length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction. Fair Market Value shall be determined
by the Board of Directors of the Company in good faith.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable at the date
of the Indenture.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of nonperformance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts available to be drawn down under letters of credit of
another person.
"Indebtedness" means, with respect to any person, without duplication, (a)
all liabilities of such person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities incurred in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such person in connection with any letters of credit, banker's acceptance or
other similar credit transaction, (b) all obligations of such person evidenced
by bonds, notes, debentures or other similar instruments, (c) all indebtedness
created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such person (even if the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), but excluding
trade accounts payable arising in the ordinary course of business, (d) all
Capitalized Lease Obligations of such person, (e) all Indebtedness referred to
in the preceding clauses of other persons and all dividends of other persons,
the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon property (including, without limitation, accounts and contract
rights) owned by such person, even though such person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured), (f) all guarantees of
Indebtedness referred to in this definition by such person, (g) all Redeemable
Capital Stock of such person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued dividends, (h) all
obligations under or in respect of Interest Rate Protection Obligations of
such person, and (i) any amendment, supplement, modification, deferral,
renewal, extension, refinancing or refunding of any liability of the types
referred to in clauses (a) through (h) above; provided, however, that
Indebtedness shall not include (i) any holdback or escrow of the purchase
price of property, services, businesses or assets or (ii) any contingent
payment obligations incurred in connection with the acquisition of assets or
businesses, which are contingent on the performance of the assets or
businesses so acquired. For purposes hereof, the "maximum fixed repurchase
price" of any Redeemable Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Redeemable
Capital Stock as if such Redeemable Capital Stock were purchased on any date
on which Indebtedness shall be
89
required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the fair market value of such Redeemable Capital
Stock, such fair market value shall be approved in good faith by the board of
directors of the issuer of such Redeemable Capital Stock. In the case of
Indebtedness of other persons, the payment of which is secured by a Lien on
property owned by a person as referred to in clause (e) above, the amount of
the Indebtedness of such person attributable to such Lien at any date shall be
the lesser of the Fair Market Value at such date of any asset subject to such
Lien and the amount of the Indebtedness secured.
"Interest Rate Protection Agreement" means, with respect to any person, any
arrangement with any other person whereby, directly or indirectly, such person
is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such person calculated by
applying a fixed or a floating rate of interest on the same notional amount
and shall include without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Interest Rate Protection Obligations" means the obligations of any person
pursuant to any Interest Rate Protection Agreements.
"Investment" means, with respect to any person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any other person.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any
property of any kind. A person shall be deemed to own subject to a Lien any
property which such person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Maturity Date" means June 1, 2008.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary of the Company) net
of (i) brokerage commissions and other fees and expenses (including, without
limitation, fees and expenses of legal counsel and investment bankers,
recording fees, transfer fees and appraisers' fees) related to such Asset
Sale, (ii) provisions for all taxes payable as a result of such Asset Sale,
(iii) amounts required to be paid to any person (other than the Company or any
Restricted Subsidiary of the Company) owning a beneficial interest in the
assets subject to the Asset Sale (iv) payments made to retire Indebtedness
where payment of such Indebtedness is secured by the assets or properties the
subject of such Asset Sale, and (v) appropriate amounts to be provided by the
Company or any Restricted Subsidiary of the Company, as the case may be, as a
reserve required in accordance with GAAP against any liabilities associated
with such Asset Sale and retained by the Company or any Restricted Subsidiary
of the Company, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee.
"Permitted Holder" means Bradley S. Jacobs, John N. Milne, Michael J. Nolan
and their respective Affiliates, and trusts established for the benefit of a
Permitted Holder or members of his immediate family.
"Permitted Indebtedness" means, without duplication:
(a) Indebtedness of the Company and the Guarantors evidenced by up to
$200 million principal amount of the Notes and the Guarantees;
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(b) Indebtedness of the Company and Restricted Subsidiaries under the
Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed the greater of (i) $450 million or (ii) 100% of
Tangible Assets, less, in either case, any amounts permanently repaid in
accordance with the covenant described under "--Certain Covenants--
Disposition of Proceeds of Asset Sales";
(c) Indebtedness of the Company or any Restricted Subsidiary outstanding
on the Issue Date;
(d) Indebtedness of the Company or any Restricted Subsidiary of the
Company incurred in respect of performance bonds, bankers' acceptances and
letters of credit in the ordinary course of business, including
Indebtedness evidenced by letters of credit issued in the ordinary course
of business consistent with past practice to support the insurance or self-
insurance obligations of the Company or any of its Restricted Subsidiaries
(including to secure workers' compensation and other similar insurance
coverages), in the aggregate amount not to exceed $10 million at any time;
but excluding letters of credit issued in respect of or to secure money
borrowed;
(e) (i) Interest Rate Protection Obligations of the Company covering
Indebtedness of the Company and (ii) Interest Rate Protection Obligations
of any Restricted Subsidiary covering Permitted Indebtedness of such
Restricted Subsidiary provided that, in the case of either clause (i) or
(ii), (x) any Indebtedness to which any such Interest Rate Protection
Obligations correspond bears interest at fluctuating interest rates and is
otherwise permitted to be incurred under the "Limitation on Indebtedness"
covenant and (y) the notional principal amount of any such Interest Rate
Protection Obligations that exceeds the principal amount of the
Indebtedness to which such Interest Rate Protection Obligations relate
shall not constitute Permitted Indebtedness;
(f) Indebtedness of a Restricted Subsidiary owed to and held by the
Company or another Restricted Subsidiary, except that (i) any transfer of
such Indebtedness by the Company or a Restricted Subsidiary (other than to
the Company or another Restricted Subsidiary) and (ii) the sale, transfer
or other disposition by the Company or any Restricted Subsidiary of the
Company of Capital Stock of a Restricted Subsidiary (other than to the
Company or a Restricted Subsidiary) which is owed Indebtedness of another
Restricted Subsidiary shall, in each case, be an incurrence of Indebtedness
by such Restricted Subsidiary subject to the other provisions of the
Indenture;
(g) Indebtedness of the Company owed to and held by a Restricted
Subsidiary which is unsecured and subordinated in right of payment to the
payment and performance of the obligations of the Company under the
Indenture and the Notes, except that (i) any transfer of such Indebtedness
by the Company or a Restricted Subsidiary (other than to another Restricted
Subsidiary) and (ii) the sale, transfer or other disposition by the Company
or any Restricted Subsidiary of the Company (other than to the Company or a
Restricted Subsidiary) of Capital Stock of a Restricted Subsidiary which is
owed Indebtedness of the Company shall, in each case, be an incurrence of
Indebtedness by the Company, subject to the other provisions of the
Indenture;
(h) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence;
(i) Indebtedness of the Company or any Restricted Subsidiary under
equipment purchase or lines of credit or for Capitalized Lease Obligations
not to exceed $25 million in aggregate principal amount outstanding at any
time;
(j) Indebtedness of the Company or any Restricted Subsidiary, in addition
to that described in clauses (a) through (i) of this definition, in an
aggregate principal amount outstanding at any time not to exceed $15
million;
(k) (i) Indebtedness of the Company the proceeds of which are used solely
to refinance (whether by amendment, renewal, extension or refunding)
Indebtedness of the Company or any of its Restricted Subsidiaries and (ii)
Indebtedness of any Restricted Subsidiary of the Company the proceeds of
which are
91
used solely to refinance (whether by amendment, renewal, extension or
refunding) Indebtedness of such Restricted Subsidiary, provided, however,
that (x) the principal amount of Indebtedness incurred pursuant to this
clause (k) (or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration of the maturity thereof, the original issue price of such
Indebtedness) shall not exceed the sum of principal amount of Indebtedness
so refinanced, plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of such Indebtedness
or the amount of any premium reasonably determined by the Company as
necessary to accomplish such refinancing by means of a tender offer or
privately negotiated purchase, plus the amount of expenses in connection
therewith, and (y) in the case of Indebtedness incurred by the Company
pursuant to this clause (k) to refinance Subordinated Indebtedness, such
Indebtedness (A) has no scheduled principal payment prior to the 91st day
after the Maturity Date, (B) has an Average Life to Stated Maturity greater
than the remaining Average Life to Stated Maturity of the Notes and (C) is
subordinated to the Notes in the same manner and to the same extent that
the Subordinated Indebtedness being refinanced is subordinated to the
Notes;
(l) Indebtedness arising from agreements of the Company or any Restricted
Subsidiary providing for indemnification, adjustment or holdback of
purchase price or similar obligations, in each case, incurred or assumed in
connection with the acquisition or disposition of any business, assets or a
Subsidiary, other than guarantees of Indebtedness incurred by any person
acquiring all or any portion of such business, assets or Subsidiary for the
purpose of financing such acquisition; and
(m) Guarantees by the Company or a Restricted Subsidiary of Indebtedness
that was permitted to be incurred under the Indenture.
"Permitted Investments" means any of the following: (i) Investments in the
Company or in a Restricted Subsidiary; (ii) Investments in another person, if
as a result of such Investment (A) such other person becomes a Restricted
Subsidiary or (B) such other person is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to the Company or
a Restricted Subsidiary; (iii) Investments representing Capital Stock or
obligations issued to the Company or any of its Restricted Subsidiaries in
settlement of claims against any other person by reason of a composition or
readjustment of debt or a reorganization of any debtor of the Company or such
Restricted Subsidiary; (iv) Investments in Interest Rate Protection Agreements
on commercially reasonable terms entered into by the Company or any of its
Subsidiaries in the ordinary course of business in connection with the
operations of the business of the Company or its Restricted Subsidiaries to
hedge against fluctuations in interest rates on its outstanding Indebtedness;
(v) Investments in the Notes; (vi) Investments in Cash Equivalents; (vii)
Investments acquired by the Company or any Restricted Subsidiary in connection
with an Asset Sale permitted under "--Certain Covenants--Disposition of
Proceeds of Asset Sales" to the extent such Investments are non-cash proceeds
as permitted under such covenant; (viii) advances to employees or officers of
the Company in the ordinary course of business; (ix) any Investment to the
extent that the consideration therefor is Capital Stock (other than Redeemable
Capital Stock) of the Company and (x) other Investments not to exceed $5
million at any time outstanding.
"Permitted Liens" means the following types of Liens:
(a) any Lien existing as of the date of the Indenture;
(b) Liens securing Indebtedness under the Credit Facility in accordance
with the provisions thereof in effect on the date of the Indenture;
(c) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or any Restricted Subsidiary, if such Lien does
not attach to any property or assets of the Company or any Restricted
Subsidiary other than the property or assets subject to the Lien prior to
such incurrence;
(d) Liens in favor of the Company or a Restricted Subsidiary;
(e) Liens on and pledges of the Capital Stock of any Unrestricted
Subsidiary securing any Indebtedness of such Unrestricted Subsidiary;
92
(f) Liens for taxes, assessments or governmental charges or claims either
(i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(g) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(h) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(i) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may
have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(j) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(k) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
(l) purchase money Liens to finance property or assets of the Company or
any Restricted Subsidiary of the Company acquired in the ordinary course of
business; provided, however, that (i) the related purchase money
Indebtedness shall not be secured by any property or assets of the Company
or any Subsidiary of the Company other than the property and assets so
acquired and (ii) the Lien securing such Indebtedness shall be created
within 90 days of such acquisition;
(m) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(n) Liens securing refinancing Indebtedness permitted under clause (k) of
the definition of "Permitted Indebtedness," provided such Liens do not
exceed the Liens replaced in connection with such refinanced Indebtedness;
(o) Liens incurred in the ordinary course of business by the Company or
any Restricted Subsidiary with respect to obligations that do not exceed $5
million at any time outstanding;
(p) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off; and
(q) Liens securing Interest Rate Protection Obligations which Interest
Rate Protection Obligations relate to Indebtedness that is secured by Liens
otherwise permitted under this Indenture.
"person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock," as applied to any person, means Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over
shares of Capital Stock of any other class of such person.
93
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is or upon the happening of an
event or passage of time would be, required to be redeemed prior to the
Maturity Date or is redeemable at the option of the holder thereof at any time
prior to the Maturity Date, or is convertible into or exchangeable for debt
securities at any time prior to the Maturity Date; provided that Capital Stock
will not constitute Redeemable Capital Stock solely because the holders
thereof have the right to require the Company to repurchase or redeem such
Capital Stock upon the occurrence of a Change of Control or an Asset Sale.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Significant Subsidiary" of any person, as of any date of determination,
means a Restricted Subsidiary of such person which would be a significant
subsidiary of such person as determined in accordance with the definition in
Rule 1-02(w) of Article 1 of Regulation S-X promulgated by the Commission and
as in effect on the date of the Indenture.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and when used with respect to any other Indebtedness, means
the date specified in the instrument governing such Indebtedness as the fixed
date on which the principal of such Indebtedness, or any installment of
interest thereon, is due and payable.
"Subordinated Indebtedness" means, with respect to the Company, Indebtedness
of the Company which is expressly subordinated in right of payment to the
Notes.
"Subsidiary" means, with respect to any person, (i) a corporation a majority
of whose Voting Stock is at the time, directly or indirectly, owned by such
person, by one or more Subsidiaries of such person or by such person and one
or more Subsidiaries thereof and (ii) any other person (other than a
corporation), including, without limitation, a partnership, limited liability
company, business trust or joint venture, in which such person, one or more
Subsidiaries thereof or such person and one or more Subsidiaries thereof,
directly or indirectly, at the date of determination thereof, has at least
majority ownership interest entitled to vote in the election of directors,
managers or trustees thereof (or other person performing similar functions).
For purposes of this definition, any directors' qualifying shares or
investments by foreign nationals mandated by applicable law shall be
disregarded in determining the ownership of a Subsidiary.
"Tangible Assets" means all assets of the Company and its Subsidiaries,
excluding all Intangible Assets. For purposes of the foregoing, "Intangible
Assets" means goodwill, patents, trade names, trade marks, copyrights,
franchises, organization expenses and any other assets properly classified as
intangible assets in accordance with GAAP.
"Unrestricted Subsidiary" means each Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--
Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of any person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary of the
Company of which 100% of the outstanding Capital Stock is owned by the Company
or another Wholly-Owned Restricted Subsidiary of the Company. For purposes of
this definition, any directors' qualifying shares or investments by foreign
nationals mandated by applicable law shall be disregarded in determining the
ownership of a Subsidiary.
94
BOOK-ENTRY; DELIVERY AND FORM
The Original Notes are represented by two permanent, global notes (the
"Original Global Securities"), in definitive, fully registered book-entry
form, and the Exchange Notes will be represented by a single, permanent global
note (the "Exchange Global Security"), in definitive, fully registered book-
entry form. The Original Global Securities are, and the Exchange Global
Security will be, registered in the name of a nominee of DTC. Pursuant to
procedures established by DTC, interests in the Original Global Securities and
the Exchange Global Security (collectively, the "Global Securities") will be
shown on, and the transfer of such interest will be effected only through,
records maintained by DTC or its nominee (with respect to interest of
Participants) and the records of Participants (with respect to interests of
persons other than Participants).
So long as DTC or its nominee is the registered owner or holder of the
Global Securities, DTC or such nominee will be considered the sole owner or
holder of the Notes represented by the Global Securities for all purposes
under the Indenture and under the Notes represented thereby. No beneficial
owner of an interest in the Global Securities will be able to transfer such
interest except in accordance with the applicable procedures of DTC in
addition to those provided for under the Indenture. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Security to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants (as defined herein), the ability of a person
having beneficial interests in a Global Security to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests.
Payments of the principal of, premium, if any, and interest on the Notes
represented by the Global Securities will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any paying agent under the Indenture will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Global Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium, if any, and interest on the Notes represented by
the Global Securities, will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the Global
Securities as shown in the records of DTC or its nominee. The Company also
expects that payments by Participants to owners of beneficial interests in the
Global Securities held through such Participants will be governed by standing
instructions and customary practice as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payment will be the responsibility of such Participants.
DTC has advised the Company that DTC will take any action permitted to be
taken by a Holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more Participants to whose
account the interests in the Global Securities are credited and only in
respect of the aggregate principal amount as to which such Participant or
Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
95
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Securities among Participants
of DTC, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its direct
or indirect Participants of their respective obligations under the rules and
procedures governing their operations.
Interests in the Global Securities will be exchanged for certificated
securities if (i) DTC notifies the Company that it is unwilling or unable to
continue as depositary for the Global Securities, or DTC ceases to be a
"Clearing Agency" registered under the Exchange Act, and a successor
depositary is not appointed by the Company within 90 days, or (ii) an Event of
Default has occurred and is continuing with respect to the Notes. Upon the
occurrence of any of the events described in the preceding sentence, the
Company will cause the appropriate certificated securities to be delivered.
96
PLAN OF DISTRIBUTION
Any broker-dealer (a "Participating Broker-Dealer") that, pursuant to the
Exchange Offer, receives Exchange Notes in exchange for Original Notes that
were acquired by it for its own account as a result of market-making
activities or other trading activities, will be required to deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales by it of any such Exchange Notes. Each Participating Broker-Dealer
will be required to acknowledge in the Letter of Transmittal that it will
comply with such prospectus delivery requirement in connection with any resale
of Exchange Notes. The Letter of Transmittal states that by making such
acknowledgment a Participating Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
Based on interpretations by the Staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that this
Prospectus, as it may be amended or supplemented from time to time, may, if
permitted by the Company, be used by Participating Broker-Dealers in order to
satisfy the prospectus delivery requirements applicable to Participating
Broker-Dealers in connection with the resale of Exchange Notes as described
above. The Company has agreed in the Registration Rights Agreement that it
will use its best efforts to make this Prospectus available to each
Participating Broker-Dealer for use in connection with any resales of such
Exchange Notes (subject to the right of the Company to restrict the use of
this Prospectus under certain circumstances specified in the Registration
Rights Agreement). The obligation of the Company to make this Prospectus
available as aforesaid will commence on the day that the Exchange Offer is
consummated and continue in effect for a 30-day period (the "Broker Prospectus
Period"); provided, however, that, if for any day during such period the
Company restricts the use of such prospectus, the Broker Prospectus Period
shall be extended on a day-for-day basis. See "Description of Registration
Rights Agreement."
Any sale of Exchange Notes by Participating Broker-Dealers will be for their
own account, and the Company will not receive any proceeds of such sales.
Participating Broker-Dealers may from time to time sell Exchange Notes that
were received by them in the Exchange Offer in one or more transactions in the
over-the-counter market, in privately negotiated transactions, through the
writing of options on the Exchange Notes or otherwise, and such sales may be
made at the market price prevailing at the time of sale, a price related to
such prevailing market price or a negotiated price. Such sales of Exchange
Notes may be made directly to purchasers or, alternatively, may be offered
from time to time through agents, brokers, dealers or underwriters, who may
receive compensation in the form of concessions or commissions from the
Participating Broker-Dealers or purchasers of the Exchange Notes (which
compensation may be in excess of customary commissions). Any agents, brokers
or dealers that participate in the distribution of the Exchange Notes may be
deemed to be underwriters and any commissions received by them and any profit
on the resale of such Exchange Notes sold by them might be deemed to be
underwriting discounts and commissions under the Securities Act.
During the Broker Prospectus Period, the Company will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any Participating Broker-Dealer that requests such documents
(subject to the right of the Company to restrict the use of this Prospectus
under certain circumstances specified in the Registration Rights Agreement).
Any such requests should be directed to United Rentals (North America), Inc.,
Attention: Corporate Secretary, Four Greenwich Office Park, Greenwich,
Connecticut 06830, telephone: (203) 622-3131.
The Company has agreed in the Registration Rights Agreement to indemnify
each Participating Broker-Dealer that resells Exchange Notes pursuant to this
Prospectus, and their officers, directors and controlling persons, against
certain liabilities in connection with the offer and sale of the Exchange
Notes, including liabilities under the Securities Act, or to contribute to
payments that such Participating Broker-Dealers may be required to make in
respect thereof.
97
LEGAL MATTERS
Certain legal matters in connection with the issue and sale of the Exchange
Notes will be passed upon for the Company by Weil, Gotshal & Manges LLP, New
York, New York, and Ehrenreich Eilenberg Krause & Zivian LLP, New York, New
York.
EXPERTS
The consolidated financial statements of United Rentals, Inc. at December
31, 1997 and for the period from August 14, 1997 (Inception) to December 31,
1997, the financial statements of J&J Rental Services, Inc., at December 31,
1996 and October 22, 1997 and for each of the two years in the period ended
December 31, 1996, the six months ended June 30, 1997 and for the period from
July 1, 1997 to October 22, 1997, the financial statements of Bronco Hi-Lift,
Inc. at December 31, 1996 and October 24, 1997 and for each of the two years
in the period ended December 31, 1996 and for the period from January 1, 1997
to October 24, 1997, the financial statements of Mission Valley Rentals, Inc.
at June 30, 1996 and 1997 and for the years then ended, the combined financial
statements of Valley Rentals, Inc. at December 31, 1997 and for the year then
ended, the financial statements of Pro Rentals, Inc. at December 31, 1997 and
for the year then ended, the combined financial statements of Able Equipment
Rental, Inc. at December 31, 1997 and for the year then ended, the combined
financial statements of Channel Equipment Holding, Inc. at December 31, 1997
and for the year then ended, the financial statements of ASC Equipment Company
at December 31, 1997 and for the year then ended, the financial statements of
Power Rental Co., Inc. at July 31, 1997 and for the year then ended and the
combined financial statements of Adco Equipment, Inc. at December 31, 1997 and
for the year then ended, appearing in this Registration Statement and
Prospectus, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their reports thereon appearing elsewhere herein, and are
included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of A&A Tool Rentals & Sales, Inc. and
subsidiary as of October 19, 1997 and October 31, 1996, and for the period
from November 1, 1996 to October 19, 1997 and for the years ended October 31,
1996 and 1995, have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein.
The financial statements of MERCER Equipment Company appearing in this
Prospectus have been audited by Webster Duke & Co., independent auditors, as
set forth in their reports thereon included elsewhere herein.
The combined financial statements of Coran Enterprises, Inc. (dba A-1 Rents)
and Monterey Bay Equipment Rental, Inc., appearing in this Prospectus, have
been audited by Grant Thornton LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein.
The combined financial statements of BNR Group of Companies as of March 31,
1996 and 1997 and for the years ended March 31, 1996 and 1997 and the
consolidated financial statements of Perco Group Ltd. as of December 31, 1997
and for the year ended December 31, 1997, have been included herein in
reliance upon the reports of KPMG, independent chartered accountants,
appearing elsewhere herein.
The audited financial statements of Access Rentals, Inc. and Subsidiary and
Affiliate included in this Prospectus have been included herein in reliance on
the report of Battaglia, Andrews & Moag, P.C., independent certified public
accountants, 210 East Main Street, Batavia, New York 14020, for the periods
indicated.
The financial statements of West Main Rentals & Sales, Incorporated as of
December 31, 1997, and the year then ended have been included herein in
reliance upon the report of Moss Adams LLP, independent certified public
accountants, appearing elsewhere herein.
98
The financial statements of U.S. Rentals, Inc. at December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 included
herein have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The combined financial statements of Equipment Supply Co., Inc. and
Affiliates included herein have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of McClinch Inc. and subsidiaries as
of January 31, 1998, and the year then ended and the financial statements of
McClinch Equipment Services, Inc. as of December 31, 1997 and the year then
ended included herein have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report thereon included herein.
The financial statements of Lift Systems, Inc. as of December 31, 1997 and
the year then ended have been included in reliance upon the report of
Altschuler, Melvoin and Glasser LLP, independent accountants, appearing
elsewhere herein.
The financial statements of Reitzel Rentals Ltd. as of February 28, 1998 and
for the year ended February 28, 1998, included herein have been audited by
PricewaterhouseCoopers LLP, independent chartered accountants, as set forth in
their report thereon included herein.
The combined financial statements of Grand Valley Equipment Co., Inc. and
Kubota of Grand Rapids, Inc. as of December 31, 1997, and the year then ended
have been included herein in reliance upon the report of Beene Garter LLP,
independent auditors, appearing elsewhere herein.
The financial statements of Paul E. Carlson, Inc. (d/b/a Carlson Equipment
Company) as of February 28, 1998, and for the year then ended, included
herein, have been audited by McGladrey & Pullen, LLP, independent accountants,
as stated in their report appearing herein.
The financial statements of Industrial Lift, Inc. as of December 31, 1997
and 1996 and the years then ended included herein in reliance upon the report
of Schalleur & Surgent, LLC, independent auditors, appearing elsewhere herein.
The financial statements of Rental Tools & Equipment Co. International, Inc.
as of June 30, 1997 and 1998, and for each of the three years in the period
ended June 30, 1998, included in this Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
99
INDEX TO FINANCIAL STATEMENTS
PAGE
----
I. Pro Forma Consolidated Financial Statements of United Rentals, Inc.
Introduction....................................................... F-7
Pro Forma Consolidated Balance Sheet--June 30, 1998 (unaudited).... F-8
Pro Forma Consolidated Statement of Operations for the Six Months
Ended June 30, 1998 (unaudited)................................... F-9
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1997 (unaudited)..................................... F-10
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1996 (unaudited)..................................... F-11
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1995 (unaudited)..................................... F-12
Notes to Pro Forma Consolidated Financial Statements............... F-13
II. Consolidated Financial Statements of United Rentals, Inc.
Report of Independent Auditors..................................... F-15
Consolidated Balance Sheet--December 31, 1997...................... F-16
Consolidated Statement of Operations for the period from August 14,
1997 (Inception) to December 31, 1997............................. F-17
Consolidated Statement of Stockholders' Equity for the period from
August 14, 1997 (Inception) to December 31, 1997.................. F-18
Consolidated Statement of Cash Flows for the period from August 14,
1997 (Inception) to December 31, 1997............................. F-19
Notes to Consolidated Financial Statements......................... F-20
III. Unaudited Consolidated Financial Statements of United Rentals, Inc.
Consolidated Balance Sheet--June 30, 1998 (unaudited) and December
31, 1997.......................................................... F-28
Consolidated Statement of Operations for the Six and Three Months
Ended June 30, 1998 (unaudited)................................... F-29
Consolidated Statement of Stockholders' Equity for the Six Months
Ended June 30, 1998 (unaudited)................................... F-30
Consolidated Statement of Cash Flows for the Six Months Ended June
30, 1998 (unaudited).............................................. F-31
Notes to Unaudited Consolidated Financial Statements............... F-32
IV. Financial Statements of U.S. Rentals, Inc.
Report of Independent Accountants.................................. F-40
Balance Sheets--December 31, 1996 and 1997......................... F-41
Statements of Operations for the Years Ended December 31, 1995,
1996 and 1997..................................................... F-42
Statements of Stockholders' Equity for the Years Ended December 31,
1994, 1995, 1996
and 1997.......................................................... F-43
Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997..................................................... F-44
Notes to Financial Statements...................................... F-45
V. Unaudited Financial Statements of U.S. Rentals, Inc.
Balance Sheets--June 30, 1998 (unaudited) and December 31, 1997.... F-55
Statements of Operations for the Six and Three Months Ended June
30, 1998 and 1997 (unaudited)..................................... F-56
Statements of Cash Flows for the Six and Three Months Ended June
30, 1998 and 1997 (unaudited)..................................... F-57
Statement of Changes in Stockholders' Equity for the Six Months
Ended June 30, 1998 (unaudited)................................... F-58
Notes to Financial Statements...................................... F-59
F-1
PAGE
-----
Combined Financial Statements of Equipment Supply Co., Inc. and
VI. Affiliates
Report of Independent Certified Public Accountants............... F-61
Combined Balance Sheets--December 31, 1997 and 1996 and June 30,
1998 (unaudited)................................................ F-62
Combined Statements of Income for the Years Ended December 31,
1997, 1996 and 1995 and for the Six Months Ended June 30, 1998
and 1997 (unaudited)............................................ F-63
Combined Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and for the Six Months Ended
June 30, 1998 (unaudited)....................................... F-64
Combined Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995 and for the Six Months Ended June 30,
1998 and 1997 (unaudited)....................................... F-65
Notes to Combined Financial Statements........................... F-66
VII. Consolidated and Combined Financial Statements of Access Rentals,
Inc. and subsidiary and affiliate
Report of Independent Accountants................................ F-78
Consolidated and Combined Balance Sheets--March 31, 1996 and 1997
and December 31, 1997 (unaudited)............................... F-79
Consolidated and Combined Statements of Income for the Years
Ended September 30, 1994 and 1995, for the Six Months Ended
March 31, 1996, for the Year Ended March 31, 1997 and for the
Nine Months Ended December 31, 1996 and 1997 (unaudited)........ F-80
Consolidated and Combined Statement of Stockholders' Equity for
the Years Ended September 30, 1994 and 1995, for the Six Months
Ended March 31, 1996, for the Year Ended March 31, 1997 and for
the Nine Months Ended December 31, 1997 (unaudited)............. F-81
Consolidated and Combined Statements of Cash Flows for the Years
Ended September 30, 1994 and 1995, for the Six Months Ended
March 31, 1996, for the Year Ended March 31, 1997 and for the
Nine Months Ended December 31, 1996 and 1997 (unaudited)........ F-82
Notes to Financial Statements.................................... F-83
Financial Statements of Rental Tools & Equipment Co. Internation-
VIII. al, Inc.
Report of Independent Accountants................................ F-93
Balance Sheets--June 30, 1997 and 1998........................... F-94
Statements of Operations For the Years Ended June 30, 1996, 1997
and 1998........................................................ F-95
Statements of Changes in Stockholders' Equity For the Years Ended
June 30, 1996, 1997 and 1998.................................... F-96
Statements of Cash Flows For the Years Ended June 30, 1996, 1997
and 1998........................................................ F-97
Notes to Financial Statements.................................... F-98
IX. Financial Statements of Power Rental Co., Inc.
Report of Independent Auditors................................... F-104
Balance Sheets--July 31, 1997 and May 31, 1998 (unaudited)....... F-105
Statements of Operations for the Year Ended July 31, 1997 and for
the Ten Months Ended May 31, 1997 and 1998 (unaudited).......... F-106
Statements of Stockholders' Equity for the Year Ended July 31,
1997 and for the Ten Months Ended May 31, 1998 (unaudited)...... F-107
Statements of Cash Flows for the Year Ended July 31, 1997 and for
the Ten Months Ended May 31, 1997 and 1998 (unaudited).......... F-108
Notes to Financial Statements.................................... F-109
X. Combined Financial Statements of BNR Group of Companies
Report of Independent Auditors................................... F-115
Combined Balance Sheets--March 31, 1996 and 1997 and December 31,
1997 (unaudited)................................................ F-116
Combined Statements of Earnings for the Years Ended March 31,
1996 and 1997 and for the Nine Months Ended December 31, 1996
and 1997 (unaudited)............................................ F-117
Combined Statements of Stockholders' Equity for the Years Ended
March 31, 1996 and 1997 and for the Nine Months Ended December
31, 1997 (unaudited)............................................ F-118
F-2
PAGE
-----
Combined Statements of Cash Flows for the Years Ended March 31,
1996 and 1997 and for the Nine Months Ended December 31, 1996
and 1997 (unaudited)........................................... F-119
Notes to Combined Financial Statements.......................... F-120
XI. Combined Financial Statements of Adco Equipment, Inc.
Report of Independent Auditors.................................. F-129
Combined Balance Sheets--December 31, 1997 and June 30, 1998
(unaudited).................................................... F-130
Combined Statements of Operations For the Year Ended December
31, 1997 and For the Six Months Ended June 30, 1997 and 1998
(unaudited).................................................... F-131
Combined Statements of Stockholders' Equity For the Year Ended
December 31, 1997 and For the Six Months Ended June 30, 1998
(unaudited).................................................... F-132
Combined Statements of Cash Flows For the Year Ended December
31, 1997 and For the Six Months Ended June 30, 1997 and 1998
(unaudited).................................................... F-133
Notes to Combined Financial Statements.......................... F-134
Consolidated Financial Statements of McClinch Inc. and Subsidi-
XII. aries
Report of Independent Accountants............................... F-138
Consolidated Balance Sheets--January 31, 1998 and July 31, 1998
(unaudited).................................................... F-139
Consolidated Statements of Income and Retained Earnings For the
Year Ended January 31, 1998 and For the Six Months Ended July
31, 1997 and 1998 (unaudited).................................. F-140
Consolidated Statements of Cash Flows For the Year Ended January
31, 1998 and For the Six Months Ended July 31, 1997 and 1998
(unaudited).................................................... F-141
Notes to Consolidated Financial Statements...................... F-142
XIII. Financial Statements of Industrial Lift, Inc.
Report of Independent Auditors.................................. F-149
Balance Sheets--December 31, 1996 and 1997 and as of May 12,
1998 (unaudited)............................................... F-150
Statements of Income and Retained Earnings for the Years Ended
December 31, 1996 and 1997 and for the Period Ended May 12,
1997 and 1998 (unaudited)...................................... F-151
Statements of Cash Flows for the Years Ended December 31, 1996
and 1997 and for the Period Ended May 12, 1997 and 1998
(unaudited).................................................... F-152
Notes to Financial Statements................................... F-153
XIV. Combined Financial Statements of Able Equipment Rental, Inc.
Report of Independent Auditors.................................. F-158
Combined Balance Sheets--December 31, 1997 and February 28, 1998
(unaudited).................................................... F-159
Combined Statements of Income for the Year Ended December 31,
1997 and for the Two Months Ended February 28, 1997 and 1998
(unaudited).................................................... F-160
Combined Statements of Stockholders' Equity and Partners'
Capital for the Year Ended December 31, 1997 and for the Two
Months Ended February 28, 1998 (unaudited)..................... F-161
Combined Statements of Cash Flows for the Year Ended December
31, 1997 and for the Two Months Ended February 28, 1997 and
1998 (unaudited)............................................... F-162
Notes to Combined Financial Statements.......................... F-163
XV. Combined Financial Statements of Grand Valley Equipment Co.,
Inc. and Kubota of Grand Rapids, Inc.
Independent Auditors' Report on Combined Financial Statements .. F-168
Combined Balance Sheets--December 31, 1997 and May 31, 1998
(unaudited).................................................... F-169
Combined Statements of Income and Retained Earnings for the year
ended December 31, 1997 and for the five months ended May 31,
1997 and 1998 (unaudited)...................................... F-170
Combined Statements of Cash Flows for the year ended December
31, 1997 and for the five months ended May 31, 1997 and 1998
(unaudited).................................................... F-171
Notes to Financial Statements................................... F-172
XVI. Financial Statements of McClinch Equipment Services, Inc.
Report of Independent Accountants............................... F-176
Balance Sheets--December 31, 1997 and June 30, 1998
(unaudited).................................................... F-177
F-3
PAGE
-----
Statements of Income and Retained Earnings for the year ended
December 31, 1997 and for the six months ended June 30, 1997
and 1998 (unaudited).......................................... F-178
Statements of Cash Flows for the year ended December 31, 1997
and for the six months ended June 30, 1997 and 1998
(unaudited)................................................... F-179
Notes to Financial Statements.................................. F-180
XVII. Combined Financial Statements of Valley Rentals, Inc.
Report of Independent Auditors................................. F-185
Combined Balance Sheets--December 31, 1997 and March 31, 1998
(unaudited)................................................... F-186
Combined Statements of Income for the Year Ended December 31,
1997 and for the Three Months Ended March 31, 1997 and 1998
(unaudited)................................................... F-187
Combined Statements of Stockholders' Equity and Partners'
Capital for the Year Ended December 31, 1997 and for the Three
Months Ended March 31, 1998 (unaudited)....................... F-188
Combined Statements of Cash Flows for the Year Ended December
31, 1997 and for the Three Months Ended March 31, 1997 and
1998 (unaudited).............................................. F-189
Notes to Combined Financial Statements......................... F-190
XVIII. Financial Statements of Lift Systems, Inc.
Independent Accountants' Report................................ F-194
Balance Sheets--December 31, 1997 and June 30, 1998
(unaudited)................................................... F-195
Statement of Income for the year ended December 31, 1997 and
for the six-month periods ended June 30, 1998 and 1997
(unaudited)................................................... F-196
Statement of Changes in Stockholder's Equity for the year ended
December 31, 1997 and for the six-month period ended June 30,
1998 (unaudited).............................................. F-197
Statement of Cash Flows for the year ended December 31, 1997
and for the six-month periods ended June 30, 1997 and 1998
(unaudited)................................................... F-198
Notes to Financial Statements.................................. F-200
XIX. Consolidated Financial Statements of Perco Group Ltd.
Report of Independent Auditors................................. F-205
Consolidated Balance Sheet--December 31, 1997 and May 19, 1998
(unaudited)................................................... F-206
Consolidated Statement of Earnings for the year ended December
31, 1997 and for the 139 days ended May 19, 1997 and 1998
(unaudited)................................................... F-207
Consolidated Statement of Retained Earnings for the year ended
December 31, 1997 and for the 139 days ended May 19, 1998
(unaudited)................................................... F-208
Consolidated Statement of Changes in Financial Position for the
year ended December 31, 1997 and for the 139 days ended May
19, 1997 and 1998 (unaudited)................................. F-209
Notes to Consolidated Financial Statements..................... F-210
XX. Financial Statements of Reitzel Rentals Ltd.
Auditors' Report............................................... F-218
Balance Sheets--February 28, 1998 and May 31, 1998
(unaudited)................................................... F-219
Statements of Operations for the year ended February 28, 1998
and for the three months ended May 31, 1997 and 1998
(unaudited)................................................... F-220
Statements of Shareholders' Equity for the year ended February
28, 1998 and for the three months ended May 31, 1998
(unaudited)................................................... F-221
Statements of Cash Flows for the year ended February 28, 1998
and for the three months ended May 31, 1997 and 1998
(unaudited)................................................... F-222
Notes to Financial Statements.................................. F-223
Combined Financial Statements of Channel Equipment Holding,
XXI. Inc.
Report of Independent Auditors................................. F-229
Combined Balance Sheet--December 31, 1997...................... F-230
Combined Statement of Operations for the Year Ended December
31, 1997...................................................... F-231
F-4
PAGE
-----
Combined Statement of Stockholders' Equity (Deficit) for the
Year Ended December 31, 1997................................... F-232
Combined Statements of Cash Flows for the Year Ended December
31, 1997....................................................... F-233
Notes to Combined Financial Statements.......................... F-234
Financial Statements of Paul E. Carlson, Inc. dba Carlson
XXII. Equipment Company
Independent Auditor's Report.................................... F-238
Balance Sheets--February 28, 1998 and May 31, 1998 (unaudited).. F-239
Statements of Operations for the year ended February 28, 1998
and for the three months ended May 31,1997 and 1998
(unaudited).................................................... F-241
Statements of Stockholders' Equity for the year ended February
28, 1998 and for the three months ended May 31, 1998
(unaudited).................................................... F-242
Statements of Cash Flows for the year ended February 28, 1998
and for the three months ended May 31, 1997 and 1998
(unaudited).................................................... F-243
Notes to Financial Statements................................... F-244
Financial Statements of West Main Rentals and Sales,
XXIII. Incorporated
Independent Auditor's Report.................................... F-252
Balance Sheet--December 31, 1997 and March 31, 1998
(unaudited).................................................... F-253
Statement of Income for the Year Ended December 31, 1997 and for
the Three Months Ended March 31, 1998 and 1997 (unaudited)..... F-254
Statement of Stockholders' Equity for the Year Ended December
31, 1996, 1997 and for the Three Months Ended March 31, 1998
(unaudited).................................................... F-255
Statement of Cash Flows for the Year Ended December 31, 1997 and
for the Three Months Ended March 31, 1998 and 1997
(unaudited).................................................... F-256
Notes to Financial Statements................................... F-257
XXIV. Financial Statements of Mission Valley Rentals, Inc.
Report of Independent Auditors.................................. F-263
Balance Sheets--June 30, 1996 and 1997 and December 31, 1997
(unaudited).................................................... F-264
Statements of Operations for the Years Ended June 30, 1996 and
1997 and for the Six Months Ended December 31, 1996 and 1997
(unaudited).................................................... F-265
Statements of Stockholders' Equity for the Years Ended July 1,
1995, June 30, 1996 and 1997 and for the Six Months Ended
December 31, 1997 (unaudited).................................. F-266
Statements of Cash Flows for the Years Ended June 30, 1996 and
1997 and the Six Months Ended December 31, 1996 and 1997
(unaudited).................................................... F-267
Notes to Financial Statements................................... F-268
XXV. Financial Statements of Pro Rentals, Inc.
Report of Independent Auditors.................................. F-274
Balance Sheet--December 31, 1997................................ F-275
Statement of Income for the Year Ended December 31, 1997........ F-276
Statement of Stockholders' Equity for the Year Ended December
31, 1997....................................................... F-277
Statement of Cash Flows for the Year Ended December 31, 1997.... F-278
Notes to Financial Statements................................... F-279
XXVI. Financial Statements of ASC Equipment Company
Report of Independent Auditors.................................. F-282
Balance Sheet--December 31, 1997................................ F-283
Statement of Income for the Year Ended December 31, 1997........ F-284
Statement of Stockholders' Equity for the Year Ended December
31, 1997....................................................... F-285
Statement of Cash Flows for the Year Ended December 31, 1997.... F-286
Notes to Financial Statements................................... F-287
XXVII. Financial Statements of MERCER Equipment Company
Independent Auditor's Report.................................... F-290
Balance Sheets--December 31, 1996 and October 24, 1997.......... F-291
F-5
PAGE
-----
Statements of Income and Retained Earnings for the Years Ended
December 31, 1995 and 1996 and for the period from January 1,
1997 to October 24, 1997..................................... F-292
Statements of Cash Flows for the Years Ended December 31, 1995
and 1996 and for the period from January 1, 1997 to October
24, 1997..................................................... F-293
Notes to Financial Statements................................. F-294
Consolidated Financial Statements of A&A Tool Rentals & Sales,
XXVIII. Inc. and subsidiary
Report of Independent Auditors................................ F-299
Consolidated Balance Sheets--October 31, 1996 and October 19,
1997 and July 31, 1997 (unaudited)........................... F-300
Consolidated Statements of Operations for the Years Ended
October 31, 1995 and 1996 and for the period from November 1,
1996 to October 19, 1997 and for the Nine Months Ended July
31, 1996 and 1997 (unaudited)................................ F-301
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 1994, 1995 and 1996 and for the period from
November 1, 1996 to October 19, 1997 ........................ F-302
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1995 and 1996 and for the period from November 1,
1996 to October 19, 1997 and for the Nine Months Ended July
31, 1996 and 1997 (unaudited)................................ F-303
Notes to Consolidated Financial Statements.................... F-304
XXIX. Financial Statements of J&J Rental Services, Inc.
Report of Independent Auditors................................ F-311
Balance Sheets--December 31, 1996 and October 22, 1997 ....... F-312
Statements of Income for the Years Ended December 31, 1995 and
1996, for the Six Months Ended June 30, 1997 and for the
period from July 1, 1997 to October 22, 1997................. F-313
Statements of Stockholders' Equity and Partners' Capital for
the Years Ended December 31, 1995 and 1996 and for the Six
Months Ended June 30, 1997 and for the period from July 1,
1997 to October 22, 1997..................................... F-314
Statements of Cash Flows for the Years Ended December 31, 1995
and 1996, for the Six Months Ended June 30, 1997 and for the
period from July 1, 1997 to October 22, 1997................. F-315
Notes to Financial Statements................................. F-316
XXX. Combined Financial Statements of Coran Enterprises, Inc. dba
A-1 Rents and
Monterey Bay Equipment Rental, Inc.
Report of Independent Certified Public Accountants............ F-323
Combined Statements of Earnings for the Years Ended December
31, 1995 and 1996 and for the period from January 1, 1997 to
October 24, 1997 ............................................ F-324
Combined Statements of Stockholders' Equity for the Years
Ended December 31, 1995 and 1996 and for the period from
January 1, 1997 to October 24, 1997 ......................... F-325
Combined Statements of Cash Flows for the Years Ended December
31, 1995 and 1996 and for the period from January 1, 1997 to
October 24, 1997 ............................................ F-326
Notes to Combined Financial Statements........................ F-327
XXXI. Financial Statements of Bronco Hi-Lift, Inc.
Report of Independent Auditors................................ F-329
Balance Sheets--December 31, 1996 and October 24, 1997 ....... F-330
Statements of Income for the Years Ended December 31, 1995 and
1996 and for the period from January 1, 1997 to October 24,
1997......................................................... F-331
Statements of Stockholders' Equity for the Years Ended
December 31, 1995 and 1996 and for the period from January 1,
1997 to October 24, 1997..................................... F-332
Statements of Cash Flows for the Years Ended December 31, 1995
and 1996 and for the period from January 1, 1997 to October
24, 1997..................................................... F-333
Notes to Financial Statements................................. F-334
F-6
UNITED RENTALS
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma unaudited consolidated balance sheet of the Company
gives effect to (i) the acquisitions completed by the Company subsequent to
June 30, 1998 (through September 14, 1998) and the financing thereof, and (ii)
completion of the Merger with U.S. Rentals using the "pooling of interests"
method of accounting (as described in the notes to the Pro Forma Consolidated
Financial Statements), as if all such transactions had occurred on June 30,
1998.
The following pro forma unaudited consolidated statements of operations with
respect to the six months ended June 30, 1998 and the year ended December 31,
1997, give effect to (i) each acquisition completed by the Company after the
beginning of the period and the financing thereof and (ii) completion of the
Merger with U.S. Rentals using the "pooling of interests" method of accounting
(as described in the notes to the Pro Forma Consolidated Financial
Statements), as if all such transactions had occurred at the beginning of the
period.
The following pro forma unaudited consolidated statements of operations with
respect to the year ended December 31, 1996 and the year ended December 31,
1995 gives effect to completion of the Merger with U.S. Rentals and the
acquisition of Rental Tools and Equipment Co. International, Inc., in each
case using the "pooling of interests" method of accounting (as described in
the notes to the Pro Forma Consolidated Financial Statements). The Company was
not in existence during these periods and, accordingly, no historical data of
the Company is presented for these periods.
The pro forma consolidated financial statements are based upon certain
assumptions and estimates which are subject to change. These statements 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.
The pro forma consolidated financial statements should be read in
conjunction with (i) the Company's historical Consolidated Financial
Statements and related Notes included elsewhere in this Registration
Statement, (ii) U.S. Rentals' Consolidated Financial Statements and related
Notes included elsewhere in this Registration Statement, (iii) Rental Tools
and Equipment Co. International, Inc. Financial Statements and related Notes
included elsewhere in this Registration Statement, (iv) McClinch, Inc. and
Subsidiaries Consolidated Financial Statements and related Notes included
elsewhere in this Registration Statement, and (v) McClinch Equipment Services,
Inc. Financial Statements and related Notes included elsewhere in this
Registration Statement.
F-7
UNITED RENTALS
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
EQUIPMENT MCCLINCH INC.
SUPPLY AND MCCLINCH
UNITED CO., INC. AND EQUIPMENT OTHER U.S.
RENTALS AFFILIATES SERVICES, INC. ACQUISITIONS RENTALS ADJUSTMENTS PRO FORMA
-------- ------------- -------------- ------------ -------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS:
Cash and cash
equivalents............ $ 5,486 $ 1,784 $ 1,136 $ 11,895 $ 22,510 $ (16,301)(a) $ 26,510
Accounts receivable,
net.................... 67,203 16,528 7,536 27,210 74,124 192,601
Inventory............... 33,255 4,508 1,735 12,703 19,040 71,241
Rental equipment, net... 298,956 111,618 38,172 100,154 521,696 10,784 (b) 1,081,380
Property and equipment,
net.................... 32,349 5,267 5,850 26,813 93,130 (2,448)(c) 160,961
Intangible assets, net.. 429,028 3,639 26,398 331,868 (d) 790,933
Prepaid expenses and
other assets........... 22,887 7,022 1,158 7,366 12,167 50,600
-------- -------- ------- -------- -------- --------- ----------
$889,164 $150,366 $55,587 $186,141 $769,065 $ 323,903 $2,374,226
======== ======== ======= ======== ======== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Liabilities:
Accounts payable,
accrued expenses and
other liabilities...... $ 79,213 $ 16,587 $ 6,873 $ 23,559 $ 78,264 $ 60,000 (e) $ 264,496
Debt.................... 389,181 94,819 32,052 96,139 378,600 (185,113)(f) 1,406,859
601,181 (g)
Deferred income taxes... 2,376 940 29,732 33,048
-------- -------- ------- -------- -------- --------- ----------
Total liabilities...... 470,770 112,346 38,925 119,698 486,596 476,068 1,704,403
Commitments and
contingencies
Stockholders' equity:
United Rentals preferred
stock--$.01 par value,
5,000,000 shares
authorized, no shares
outstanding............
Common stock:
United Rentals--$.01 par
value, 75,000,000
shares authorized,
historical 34,192,085
shares (66,951,284 pro
forma shares) issued
and outstanding........ 342 1 26 2,676 308 (2,715)(h) 669
31 (i)
Additional paid-in
capital................ 409,817 364 (608) (1,199) 244,830 1,075 (h) 666,932
12,653 (i)
Retained earnings....... 8,235 37,655 17,244 64,966 37,331 (163,209)(e), (h) 2,222
-------- -------- ------- -------- -------- --------- ----------
Total stockholders'
equity................ 418,394 38,020 16,662 66,443 282,469 (152,165) 669,823
-------- -------- ------- -------- -------- --------- ----------
$889,164 $150,366 $55,587 $186,141 $769,065 $ 323,903 $2,374,226
======== ======== ======= ======== ======== ========= ==========
See notes to pro forma unaudited Consolidated Financial Statements.
F-8
UNITED RENTALS
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
EQUIPMENT
SUPPLY MCCLINCH INC.
ACCESS POWER CO., INC. AND MCCLINCH
UNITED RENTALS, RENTAL AND EQUIPMENT OTHER U.S.
RENTALS INC. CO., INC. AFFILIATES SERVICE, INC. ACQUISITIONS RENTALS ADJUSTMENTS PRO FORMA
------- -------- --------- ---------- ------------- ------------ -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues
Equipment rentals.... $86,105 $2,313 $ 6,295 $34,382 $16,515 $106,696 $207,447 $459,753
Sales of equipment,
merchandise and
other revenue....... 41,246 841 1,555 8,958 5,601 68,152 63,913 190,266
------- ------ ------- ------- ------- -------- -------- -------- --------
Total revenues........ 127,351 3,154 7,850 43,340 22,116 174,848 271,360 650,019
Cost of revenues
Cost of equipment
rentals, excluding
depreciation........ 35,608 1,131 3,416 12,529 6,770 42,073 110,910 212,437
Depreciation of
rental equipment.... 14,562 402 2,987 10,368 3,316 27,926 45,979 $ (9,070)(a) 96,473
Cost of sales and
other operating
costs............... 29,939 741 638 7,267 3,795 46,115 38,829 127,324
------- ------ ------- ------- ------- -------- -------- -------- --------
Total cost of reve-
nues................. 80,112 2,274 7,041 30,164 13,881 116,114 195,718 (9,070) 436,234
------- ------ ------- ------- ------- -------- -------- -------- --------
Gross profit.......... 47,239 880 809 13,176 8,235 58,734 75,642 9,070 213,785
Selling, general and
administrative
expenses............. 25,102 774 3,200 9,672 3,535 46,463 31,550 (10,381)(c) 109,734
(181)(d)
Non-rental
depreciation and
amortization......... 3,815 23 304 359 382 2,570 7,675 6,100 (e) 21,228
------- ------ ------- ------- ------- -------- -------- -------- --------
Operating income
(loss)............... 18,322 83 (2,695) 3,145 4,318 9,701 36,417 13,532 82,823
Interest expense...... 4,937 147 631 4,220 763 7,693 8,887 (11,203)(f) 32,982
16,907 (g)
Other (income) ex-
pense, net........... (528) (52) (95) (198) (51) (4,728) (5,652)
------- ------ ------- ------- ------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes................ 13,913 (12) (3,231) (877) 3,606 6,736 27,530 7,828 55,493
Provision for income
taxes................ 5,693 (2,638) 896 841 11,067 6,672 (h) 22,531
------- ------ ------- ------- ------- -------- -------- -------- --------
Net income (loss)..... $ 8,220 $ (12) $(3,231) $ 1,761 $ 2,710 $ 5,895 $ 16,463 $ 1,156 $ 32,962
======= ====== ======= ======= ======= ======== ======== ======== ========
Basic earnings per
share................ $ 0.27 $ 0.49
======= ========
Diluted earnings per
share................ $ 0.23 $ 0.45
======= ========
Basic weighted average
equivalent shares
outstanding.......... 29,970 66,951
======= ========
Diluted weighted
average equivalent
shares outstanding... 35,092 73,190
======= ========
See notes to pro forma unaudited Consolidated Financial Statements.
F-9
UNITED RENTALS
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997
UNITED
RENTALS
PERIOD FROM
AUGUST 14, MCCLINCH
1997 EQUIPMENT INC. AND
(INCEPTION) MISSION SUPPLY MCCLINCH
THROUGH ACCESS BNR GROUP VALLEY POWER CO., INC. EQUIPMENT
DECEMBER RENTALS, OF RENTALS, RENTAL AND SERVICES, OTHER U.S.
31, 1997 INC. COMPANIES INC. CO., INC. AFFILIATES INC. ACQUISITIONS RENTALS ADJUSTMENTS
----------- -------- --------- -------- --------- ---------- --------- ------------ -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues
Equipment rent-
als............ $ 7,019 $42,316 $ 9,403 $7,853 $35,382 $78,142 $30,615 $308,813 $340,507
Sales of
equipment,
merchandise and
other
revenues....... 3,614 9,943 14,612 765 5,154 16,416 9,418 189,464 84,186
------- ------- ------- ------ ------- ------- ------- -------- -------- --------
Total revenues... 10,633 52,259 24,015 8,618 40,536 94,558 40,033 498,277 424,693
Cost of revenues
Cost of
equipment
rentals,
excluding
depreciation... 3,203 12,415 4,662 3,437 12,678 23,510 11,590 125,429 185,277
Depreciation of
rental
equipment...... 1,039 8,480 1,589 1,746 9,706 20,397 5,888 65,115 69,231 $(15,852)(a)
Cost of sales
and other
operating
costs.......... 2,580 8,862 10,361 518 3,648 11,362 6,485 138,215 52,485 (72)(b)
------- ------- ------- ------ ------- ------- ------- -------- -------- --------
Total cost of
revenues........ 6,822 29,757 16,612 5,701 26,032 55,269 23,963 328,759 306,993 (15,924)
------- ------- ------- ------ ------- ------- ------- -------- -------- --------
Gross profit..... 3,811 22,502 7,403 2,917 14,504 39,289 16,070 169,518 117,700 15,924
Selling, general
and
administrative
expenses........ 3,311 10,440 5,402 3,062 12,147 17,875 8,605 117,195 42,597 (23,337)(c)
(177)(d)
Non-rental
depreciation and
amortization.... 262 1,355 104 32 1,226 878 714 6,683 11,222 15,495 (e)
Termination cost
of deferred
compensation
agreements...... 20,290
------- ------- ------- ------ ------- ------- ------- -------- -------- --------
Operating
income.......... 238 10,707 1,897 (177) 1,131 20,536 6,751 45,640 43,571 23,943
Interest
expense......... 454 3,700 501 434 2,344 11,186 2,195 19,008 7,370 (38,817)(f)
65,964 (g)
Other (income)
expense, net (270) (809) (61) (370) (2,859) (715) (1,959) 473
------- ------- ------- ------ ------- ------- ------- -------- -------- --------
Income before
provision for
income taxes and
extraordinary
item............ 54 7,816 1,396 (550) (843) 12,209 5,271 28,591 35,748 (3,204)
Provision for
income taxes.... 20 2,745 459 (73) 1,242 1,189 3,215 29,407 12,005 (h)
------- ------- ------- ------ ------- ------- ------- -------- -------- --------
Income before
extraordinary
item............ $ 34 $ 5,071 $ 937 $ (477) $ (843) $10,967 $ 4,082 $ 25,376 $ 6,341 $(15,209)
======= ======= ======= ====== ======= ======= ======= ======== ======== ========
Basic earnings
per share before
extraordinary
item............ $ 0.00
=======
Diluted earnings
per share before
extraordinary
item............ $ 0.00
=======
Basic weighted
average
equivalent
shares
outstanding..... 16,319
=======
Diluted weighted
average
equivalent
shares
outstanding..... 18,172
=======
PRO FORMA
-----------
Revenues
Equipment rent-
als............ $ 860,050
Sales of
equipment,
merchandise and
other
revenues....... 333,572
-----------
Total revenues... 1,193,622
Cost of revenues
Cost of
equipment
rentals,
excluding
depreciation... 382,201
Depreciation of
rental
equipment...... 167,339
Cost of sales
and other
operating
costs.......... 234,444
-----------
Total cost of
revenues........ 783,984
-----------
Gross profit..... 409,638
Selling, general
and
administrative
expenses........ 197,120
Non-rental
depreciation and
amortization.... 37,971
Termination cost
of deferred
compensation
agreements...... 20,290
-----------
Operating
income.......... 154,257
Interest
expense......... 74,339
Other (income)
expense, net (6,570)
-----------
Income before
provision for
income taxes and
extraordinary
item............ 86,488
Provision for
income taxes.... 50,209
-----------
Income before
extraordinary
item............ $ 36,279
===========
Basic earnings
per share before
extraordinary
item............ $ 0.55
===========
Diluted earnings
per share before
extraordinary
item............ $ 0.53
===========
Basic weighted
average
equivalent
shares
outstanding..... 65,595
===========
Diluted weighted
average
equivalent
shares
outstanding..... 67,862
===========
See notes to pro forma unaudited Consolidated Financial Statements.
F-10
UNITED RENTALS
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
U.S. OTHER
RENTALS ACQUISITION ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues
Equipment rentals..... $257,486 $46,640 $304,126
Sales of equipment,
merchandise and other
revenue.............. 48,351 719 49,070
-------- ------- ---- --------
Total revenues.......... 305,837 47,359 353,196
Cost of revenues
Cost of equipment
rentals, excluding
depreciation......... 136,584 19,209 155,793
Depreciation of rental
equipment............ 56,105 9,188 65,293
Cost of sales and
other operating
costs................ 27,532 27,532
-------- ------- ---- --------
Total cost of revenues.. 220,221 28,397 248,618
-------- ------- ---- --------
Gross profit............ 85,616 18,962 104,578
Selling, general and
administrative
expenses............... 35,934 9,979 45,913
Non-rental depreciation
and amortization....... 7,528 1,855 9,383
-------- ------- ---- --------
Operating income........ 42,154 7,128 49,282
Interest expense........ 8,373 2,563 10,936
Other (income) expense,
net.................... 323 (76) 247
-------- ------- ---- --------
Income before provision
for income taxes....... 33,458 4,641 38,099
Provision for income
taxes.................. 374 374
-------- ------- ---- --------
Net income.............. $ 33,084 $ 4,641 $ 37,725
======== ======= ==== ========
Basic and diluted earn-
ings per share......... $ 1.66
========
Basic and diluted
weighted average
equivalent shares
outstanding............ 22,715
========
See notes to pro forma unaudited Consolidated Financial Statements
F-11
UNITED RENTALS
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
U.S. OTHER
RENTALS ACQUISITION ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues
Equipment rentals...... $214,849 $40,040 $254,889
Sales of equipment,
merchandise and other
revenue............... 27,998 27,998
-------- ------- -------- --------
Total revenues.......... 242,847 40,040 282,887
Cost of revenues
Cost of equipment
rentals, excluding
depreciation.......... 107,876 17,707 125,583
Depreciation of rental
equipment............. 43,885 8,062 51,947
Cost of sales and other
operating costs....... 16,111 16,111
-------- ------- -------- --------
Total cost of revenues.. 167,872 25,769 193,641
-------- ------- -------- --------
Gross profit............ 74,975 14,271 89,246
Selling, general and
administrative
expenses............... 31,440 8,707 40,147
Non-rental depreciation
and amortization....... 5,513 1,403 6,916
-------- ------- -------- --------
Operating income........ 38,022 4,161 42,183
Interest expense........ 5,310 2,161 7,471
Other (income) expense,
net.................... 1,620 (673) 947
-------- ------- -------- --------
Income before provision
for income taxes....... 31,092 2,673 33,765
Provision for income
taxes.................. 468 468
-------- ------- -------- --------
Net income.............. $ 30,624 $ 2,673 $ 33,297
======== ======= ======== ========
Basic and diluted earn-
ings per share......... $ 1.47
========
Basic and diluted
weighted average
equivalent shares
outstanding............ 22,715
========
See notes to pro forma unaudited consolidated financial statements.
F-12
UNITED RENTALS
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company is 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 other individuals. The Company also sells
rental equipment, acts as a distributor for certain new equipment, and sells
related merchandise and parts.
The financial data for United Rentals, Inc., U.S. Rentals, Inc. and Rental
Tools and Equipment Co. International Inc. is derived from the respective
historical financial statements of each company. The financial data for each
of the acquisitions is derived from the respective historical financial
statements of such companies. The results of operations for each acquisition
acquired during a period presented includes the results of operations from the
beginning of such period through the date of acquisition.
2. ACQUISITIONS
Since its formation, the Company has completed a total of 72 acquisitions.
These include the acquisition of the six Initial Acquired Companies in October
1997 and the acquisition of 66 additional companies in the elapsed portion of
1998.
Based upon management's preliminary estimates, it is estimated that the
carrying value of the assets and liabilities of the 21 companies acquired by
the Company subsequent to June 30, 1998 approximates fair value, with the
exception of rental equipment and other property and equipment, which required
adjustments to reflect fair market value. The following table presents the
allocation of purchase price of each of the 21 companies acquired by the
Company subsequent to June 30, 1998:
EQUIPMENT OTHER
SUPPLY MCCLINCH ACQUISITIONS TOTAL
--------- -------- ------------ --------
Purchase price....................... $133,692 $97,175 $230,462 $461,329
Net assets acquired.................. 38,020 16,662 66,443 121,125
Fair value adjustments:
Rental equipment................... 2,561 2,117 6,106 10,784
Property and equipment............. 233 (13) (2,668) (2,448)
-------- ------- -------- --------
Intangible assets recorded........... $ 92,878 $78,409 $160,581 $331,868
======== ======= ======== ========
3. PRO FORMA ADJUSTMENTS
Balance sheet adjustments:
a. Records the portion of the acquisition consideration and debt repayment
paid from available cash on hand.
b. Adjusts the carrying value of rental equipment to fair market value.
c. Adjusts the carrying value of property and equipment to fair market
value.
d. Records the excess of the acquisition consideration over the estimated
fair value of net assets acquired.
e. Records a charge to stockholders' equity and an increase in accrued
liabilities for the estimated U.S. Rentals Merger costs of $60 million.
f. Records the repayment of certain indebtedness of the acquisitions.
g. Records the portion of the acquisition consideration and debt repayment
funded by borrowing under United Rentals' credit facility, senior
subordinated notes and term loan.
h. Records the elimination of the stockholders' equity of the acquisitions.
F-13
i. Records the portion of the acquisition consideration paid in the form of
common stock.
Statement of operations adjustments:
a. Adjusts the depreciation of rental equipment and other property and
equipment based upon adjusted carrying values utilizing the following
lives (subject to a salvage value ranging from 0 to 10%):
Rental equipment.............................................. 2-10 years
Other property and equipment.................................. 2-15 years
b. Adjusts the method of accounting for inventory at one of the
acquisitions from the LIFO method to the FIFO method.
c. Adjusts the compensation to former owners and executives of the
acquisitions to current levels of compensation.
d. Adjusts the lease expense for real estate utilized by the acquisitions
to current lease agreements.
e. Records the amortization of the excess of cost over net assets acquired
attributable to the acquisitions using an estimated life of 40 years.
f. Eliminates interest expense related to the outstanding indebtedness of
the acquisitions which was repaid by United Rentals.
g. Records interest expense relating to the portion of the acquisitions
funded through borrowing under United Rentals' credit facility using a
rate per annum of 7%, senior subordinated notes using a rate per annum
of 9 1/2% and term loan using a rate per annum of 7.6%.
h. Records a provision for income taxes at an estimated rate of 41%.
4. EARNINGS PER SHARE
Pro forma earnings per share is calculated by dividing the net income by the
weighted average shares outstanding during the period. the weighted average
outstanding shares during the period is calculated as follows:
YEARS ENDED DECEMBER 31,
----------------------------------
SIX MONTHS
ENDED
JUNE 30,
1998 1997 1996 1995
---------- ---------- ---------- ----------
Basic:
United Rentals Shares
Outstanding at June 30, 1998.. 34,192,085 34,192,085
Shares issued for acquisitions
subsequent to June 30, 1998... 3,152,409 3,152,409 2,744,368 2,744,368
U.S. Rentals weighted average
shares........................ 30,760,301 29,351,715 20,784,975 20,748,975
Reduction of U.S. Rentals
shares for exchange ratio..... (1,153,511) (1,100,689) (778,087) (778,087)
---------- ---------- ---------- ----------
66,951,284 65,595,520 22,751,256 22,751,256
========== ========== ========== ==========
Diluted:
United Rentals Shares
outstanding at June 30, 1998 34,192,085 34,192,085
Shares issued for acquisitions
subsequent to June 30, 1998... 3,152,409 3,152,409 2,744,368 2,744,368
U.S. Rentals weighted average
equivalent shares............. 31,920,944 29,843,752 20,748,975 20,748,975
Reduction of U.S. Rentals
shares for exchange ratio..... (1,197,035) (1,119,141) (778,087) (778,087)
Common Stock equivalents (based
on the initial public offering
price of $13.50 per share for
1997)......................... 5,122,060 1,792,942
---------- ---------- ---------- ----------
73,190,463 67,862,047 22,751,256 22,751,256
========== ========== ========== ==========
F-14
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Rentals, Inc.
We have audited the accompanying consolidated balance sheet of United
Rentals, Inc. 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. These financial statements are the
responsibility of the management of United Rentals, Inc. Our responsibility is
to express an opinion on these financial statements 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. at December 31, 1997, and the results of its
operations and its cash flows from August 14, 1997 (Inception) to December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 30, 1998, except for
Note 11, as to which the date
is September 14, 1998
F-15
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.
F-16
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.
F-17
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.
F-18
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.
F-19
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. (see Note 11) 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.
F-20
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-21
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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. 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.
F-22
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
===========
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
F-23
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
=======
F-24
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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, is currently exercisable 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). At December
31, 1997, 60,000 options to purchase Common Stock at $15.00 per share were
exercisable.
F-25
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-26
UNITED RENTALS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and through September 14, 1998, the Company
completed the acquisition of 66 equipment rental companies (the
"Acquisitions") and the aggregate consideration paid by the Company for the
Acquisitions was $957.5 million and consisted of approximately $819.1 million
in cash, 4,786,668 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 and proceeds from the public offering noted below.
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 1997 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.
On May 19, 1998, the Company completed an offering of $200,000,000 of 9 1/2%
Senior Subordinated Notes due 2008. Net proceeds of the offering were
approximately $193.0 million.
On June 15, 1998, the Company entered into an Agreement and Plan of Merger
with U.S. Rentals, Inc. The Agreement calls for an exchange ratio of 0.9625
shares of the Company's Common Stock for each share of U.S. Rentals Common
Stock. The pending Merger is subject to the satisfaction or waiver of a number
of conditions, including, but not limited to, the adoption of the Merger
Agreement by the stockholders of U.S. Rentals, Inc. and the Company's
stockholders. The Company expects the Merger to be completed in the fall of
1998.
In August 1998, the Company completed a reorganization pursuant to which
existing United Rentals, Inc. became a wholly owned subsidiary of United
Rentals Holdings, Inc. (Holdings), a newly formed holding company. The name of
existing United Rentals, Inc. changed to United Rentals (North America), Inc.
and the name of United Rentals Holdings, Inc. became United Rentals, Inc. The
accompanying financial statements of United Rentals, Inc. became the financial
statements of United Rentals (North America), Inc. On August 5, United Rentals
Trust I, a subsidiary of Holdings, completed a $300 million offering of
Convertible Quarterly Income Preferred Securities. Net proceeds of the
offering of $290 million were contributed by Holdings to United Rentals (North
America), Inc.
On August 12, 1998, United Rentals (North America), Inc. completed an
offering of $205,000,000 of 8.80% Senior Subordinated Notes due 2008. Net
proceeds of the offering were approximately $197.5 million.
F-27
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30 DECEMBER 31
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents.......................... $ 5,486,092 $ 68,607,528
Accounts receivable, net of allowance for doubtful
accounts of $7,778,000 in 1998 and $1,161,000 in
1997.............................................. 67,202,625 7,494,636
Inventory.......................................... 33,255,606 3,827,446
Prepaid expenses and other assets.................. 22,887,178 2,966,822
Rental equipment, net.............................. 298,956,195 33,407,561
Property and equipment, net........................ 32,349,116 2,272,683
Intangible assets, net of accumulated amortization
of $3,198,000 in 1998 and $241,000 in 1997........ 429,027,657 50,533,736
------------ ------------
$889,164,469 $169,110,412
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable................................. $ 55,855,965 $ 5,697,830
Debt............................................. 389,181,344 1,074,474
Deferred income taxes............................ 2,375,648 198,249
Accrued expenses and other liabilities........... 23,357,346 4,409,828
------------ ------------
Total liabilities.............................. 470,770,303 11,380,381
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding.... -- --
Common stock--$.01 par value, 75,000,000 shares
authorized in 1998 and 1997, 34,192,085 in 1998
and 23,899,119 in 1997 shares issued and
outstanding..................................... 341,921 238,991
Additional paid-in capital....................... 409,817,333 157,457,418
Retained earnings................................ 8,253,698 33,622
Cumulative translation adjustments............... (18,786) --
------------ ------------
Total stockholders' equity..................... 418,394,166 157,730,031
------------ ------------
$889,164,469 $169,110,412
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
Revenues:
Equipment rentals................................ $ 86,104,719 $59,324,869
Sales of rental equipment........................ 10,464,642 7,481,451
Sales of new equipment, merchandise and other
revenues........................................ 30,781,919 21,354,794
------------ -----------
Total revenues..................................... 127,351,280 88,161,114
Cost of revenues:
Cost of equipment rentals, excluding
depreciation.................................... 35,608,405 24,386,901
Depreciation of rental equipment................. 14,565,250 9,981,418
Cost of rental equipment sales................... 5,828,280 4,188,849
Cost of new equipment and merchandise sales and
other operating costs........................... 24,110,542 16,518,651
------------ -----------
Total cost of revenues............................. 80,112,477 55,075,819
------------ -----------
Gross profit....................................... 47,238,803 33,085,295
Selling, general and administrative expenses....... 25,101,187 17,294,256
Non-rental depreciation and amortization........... 3,815,236 2,728,812
------------ -----------
Operating income................................... 18,322,380 13,062,227
Interest expense................................... 4,936,708 3,763,990
Other (income) expense............................. (527,547) (146,844)
------------ -----------
Income before provision for income taxes........... 13,913,219 9,445,081
Provision for income taxes......................... 5,693,143 3,863,356
------------ -----------
Net income....................................... $ 8,220,076 $ 5,581,725
============ ===========
Basic earnings per share........................... $ 0.27 $ 0.17
============ ===========
Diluted earnings per share......................... $ 0.23 $ 0.14
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK
--------------------
NUMBER ADDITIONAL CUMULATIVE
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.................. 10,415,752 104,158 252,158,687
Translation
adjustments............ $(18,786)
Conversion of
convertible note....... 14,814 148 199,852
Cancellation of common
stock.................. (137,600) (1,376) 1,376
Net income.............. 8,220,076
---------- -------- ------------ ---------- --------
Balance, June 30, 1998.. 34,192,085 $341,921 $409,817,333 $8,253,698 $(18,786)
========== ======== ============ ========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
Cash Flows From Operating Activities:
Net income...................................................... $ 8,220,076
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 18,380,486
Gain on sale of rental equipment................................ (4,636,362)
Deferred taxes.................................................. 3,623,614
Changes in operating assets and liabilities:
Accounts receivable............................................ (7,175,089)
Inventory...................................................... (1,842,775)
Prepaid expenses and other assets.............................. (6,694,037)
Accounts payable............................................... 21,489,836
Accrued expenses and other liabilities......................... (2,543,195)
------------
Net cash provided by operating activities..................... 28,822,554
Cash Flows From Investing Activities:
Purchases of rental equipment................................... (62,722,443)
Purchases of property and equipment............................. (11,519,846)
Proceeds from sales of rental equipment......................... 10,464,642
In-process acquisition costs.................................... (3,495,002)
Payment of contingent purchase price............................ (2,255,433)
Purchases of other companies.................................... (369,534,206)
------------
Net cash used in investing activities......................... (439,062,288)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net of issuance costs... 206,456,306
Proceeds from debt.............................................. 623,776,408
Repayments of debt.............................................. (474,999,342)
Payment of debt financing costs................................. (8,115,074)
------------
Net cash provided by financing activities..................... 347,118,298
------------
Net decrease in cash and cash equivalents........................ (63,121,436)
Cash and cash equivalents at beginning of period................. 68,607,528
------------
Cash and cash equivalents at end of period.................... $ 5,486,092
============
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest........................................................ $ 2,290,550
------------
Income taxes.................................................... $ 2,946,000
------------
Supplemental disclosure of non cash investing and financing
activities:
During the six month period ended June 30, 1998 a convertible
note in the principal amount of $200,000 was converted into
14,814 shares of common stock.
The Company acquired the net assets and assumed certain
liabilities of other companies as follows:
Assets, net of cash acquired.................................... 681,724,845
Liabilities assumed............................................. (264,655,908)
Less:
Amounts paid in common stock and warrants....................... (47,534,731)
------------
Net cash paid................................................. $369,534,206
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. BASIS OF PRESENTATION
United Rentals, Inc. is principally a holding company ("Holdings") and
conducts its operations principally through its wholly owned subsidiary United
Rentals (North America), Inc. ("URI") and subsidiaries of URI. URI was
incorporated in August 1997, initially capitalized in September 1997 and
commenced equipment rental operations in October 1997. Holdings was
incorporated in July 1998 and became the parent of URI on August 5, 1998,
pursuant to the reorganization of the legal structure of URI described in Note
7. Prior to such reorganization, the name of URI was United Rentals, Inc.
References herein to the "Company" refer to Holdings and its subsidiaries,
with respect to periods following the reorganization, and to URI and its
subsidiaries, with respect to periods prior to the reorganization. Separate
consolidated financial statements of URI and its subsidiaries have not been
presented as they are the same as those of the Company as of June 30, 1998 and
for period then ended.
The Consolidated Financial Statements of 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 periods 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 six and three month periods ended June
30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. The Consolidated Financial Statements
included herein should be read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto included elsewhere herein for
the period from August 14, 1997 (inception) to December 31, 1997.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a primary financial
statement. The Company adopted SFAS No. 130 during the period ended March 31,
1998. The adoption of SFAS No. 130 did not have a material effect on the
consolidated financial position, results of operations or cash flows of the
Company. SFAS No. 131 establishes a new method by which companies will report
operating segment information. This method is based on the manner in which
management organizes the segments within a company for making operating
decisions and assessing performance. The Company continues to evaluate the
provisions of SFAS No. 131 and, upon adoption, the Company may report
operating segments. The Company is required to adopt SFAS No. 131 by December
31, 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Post Retirement
Benefits." SFAS No. 132 revises employers' disclosures about pension and other
post retirement benefit plans but does not change the measurement or
recognition of those plans. The Company is required to adopt SFAS No. 132 by
December 31, 1998. The adoption of SFAS No. 132 is not expected to have a
material effect on the Company's consolidated financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities.
The Company will adopt SFAS No. 133 beginning January 1, 2000. The adoption of
SFAS No. 133 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
F-32
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 discounts and offering expenses). The Company used $132.7 million
of the net proceeds from the Offering to repay all of the then outstanding
indebtedness under the Company's credit facility and used the balance of such
net proceeds for acquisitions.
The purchase agreement relating to the acquisition of one company acquired
provides that the stock consideration paid by the Company in connection with
such acquisition is subject to adjustment based upon the trading prices of the
common stock during the 60-day period which commenced December 18, 1997. In
accordance with such provisions, the Company canceled 137,600 shares of common
stock issued by the Company in connection with such acquisition.
3. 9 1/2% SENIOR SUBORDINATED NOTES
In May 1998, the Company issued $200 million aggregate principal amount of 9
1/2% Senior Subordinated Notes which are due June 1, 2008. The Company used
$102.8 million of the net proceeds from the sale of such notes to repay all of
the then outstanding indebtedness under the Company's credit facility and used
the balance of such net proceeds from this offering for acquisitions, capital
expenditures and general corporate purposes.
4. ACQUISITIONS
During the six months ended June 30, 1998, the Company completed the
acquisition of 45 equipment rental companies having an aggregate of 160 rental
locations in 24 states and Canada.
The aggregate consideration paid by the Company for the acquisitions
completed during the six months ended June 30, 1998 was $429.7 million and
consisted of approximately $382.2 million in cash, 1,779,351 shares of Common
Stock and warrants to purchase an aggregate of 30,000 shares of Common Stock.
In addition, the Company repaid or assumed outstanding indebtedness of the
companies acquired during the six months ended June 30, 1998 in the aggregate
amount of $216.4 million. The Company also agreed in connection with eight of
the acquisitions completed during the six months ended June 30, 1998, to pay
additional amounts to the former owners based upon specified future revenues
(such amounts being limited to (i) $10.0 million, $2.0 million, $0.8 million,
$0.5 million, $0.5 million, $0.4 million and Cdn. $4.0 million, respectively,
with respect to seven of such acquisitions and (ii) an amount based on the
revenues 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 six months ended June
30, 1998 as though each acquisition described above was made on January 1,
1998.
SIX MONTHS ENDED
JUNE 30, 1998
----------------
Revenues.................................................... $160,026,542
Net income.................................................. 9,493,852
Basic earnings per share.................................... 0.32
Diluted earnings per share.................................. 0.27
F-33
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
Numerator:
Net income....................................... $ 8,220,076 $ 5,581,725
=========== ===========
Denominator:
Denominator for basic earnings per share
weighted-average shares......................... 29,970,357 33,702,126
Effect of dilutive securities:
Employee stock options......................... 903,311 1,705,898
Warrants....................................... 4,218,749 4,554,411
----------- -----------
Dilutive potential common shares
Denominator for diluted earnings per share--
adjusted weighted-average shares.............. 35,092,417 39,962,435
=========== ===========
Basic earnings per share........................... $ 0.27 $ 0.17
=========== ===========
Diluted earnings per share......................... $ 0.23 $ 0.14
=========== ===========
6. AGREEMENT AND PLAN OF MERGER
On June 15, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Rentals, Inc., a Delaware corporation
("U.S. Rentals"). The Merger Agreement provides, subject to the terms and
conditions set forth therein, for a subsidiary of the Company to be merged
with and into U.S. Rentals (the "Merger"). Following the Merger, U.S. Rentals
will become a wholly owned subsidiary of URI. At the effective time of the
Merger, (i) each outstanding share of U.S. Rentals common stock will be
converted into 0.9625 shares of Common Stock of the Company (the "Exchange
Ratio") and (ii) all outstanding options to purchase shares of U.S. Rentals
common stock will be assumed by the Company and converted into options to
purchase Common Stock of United Rentals, Inc. subject to adjustment for the
Exchange Ratio. The Merger is expected to be accounted for as a "pooling of
interests" for financial accounting purposes. The Merger, which is subject to
shareholder approvals and other customary conditions, is expected to close
before the end of September 1998.
7. SUBSEQUENT EVENTS
Completed Acquisitions
Subsequent to June 30, 1998, the Company completed the acquisition of 19
equipment rental companies consisting of 66 rental sites. The aggregate
consideration paid by the Company for these acquisitions was $344.1 million
and consisted of approximately $331.4 million in cash, and 390,549 shares of
Common Stock. The Company also agreed in connection with two of the
acquisitions to pay additional amounts to the former owners based upon
specified future revenues not to exceed $0.5 million in each case. The Company
funded a portion of the cash consideration for these acquisitions with cash on
hand (including cash proceeds from debt and equity offerings) and the balance
with borrowings under the Company's revolving credit facility.
F-34
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Potential Acquisitions
The Company has entered into definitive agreements with respect to the
acquisition (the "Pending Acquisitions") of the following companies (the
"Pending Acquisition Companies"): Rental Tools and Equipment Co. International
Inc.; and McClinch, Inc., McClinch Equipment Services, Inc. and Grey Fox
Equipment, Inc. The Pending Acquisition Companies have an aggregate of 32
rental locations in nine states. Completion of the Pending Acquisitions is
subject to various conditions, and no assurance can be given that the Pending
Acquisitions will be consummated or that the Pending Acquisitions will be
consummated on the terms contemplated by the definitive agreements.
The Company expects that the aggregate consideration for the Pending
Acquisition Companies will consist of (i) up to 2,090,240 shares of Common
Stock (subject to adjustment), (ii) cash of $103.2 million (subject to
adjustment) and (iii) warrants to purchase an aggregate of $0.6 million worth
of Common Stock at an exercise price per share based on the price of the
Common Stock at the time the acquisition is completed. In addition, the
Company will assume approximately $77.8 million of indebtedness. The
consideration for the Pending Acquisition Companies includes reimbursement to
the shareholders of the Pending Acquisition Companies for certain expenditures
to acquire equipment and businesses and payment for certain real estate used
in the business.
Term Loan
In July 1998, URI obtained a $250 million term loan from a group of
financial institutions (the "Term Loan"). The Term Loan matures on June 30,
2005. URI used the net proceeds from the loan for acquisitions.
Holding Company Reorganization
URI was formerly named United Rentals, Inc. On August 5, 1998 a
reorganization was effected pursuant to which (i) URI became a wholly owned
subsidiary of Holdings, a newly formed holding company, (ii) the name of URI
was changed from United Rentals, Inc. to United Rentals (North America), Inc.,
(iii) the name of Holdings became United Rentals, Inc., (iv) the outstanding
common stock of URI was automatically converted, on a share-for-share basis,
into Common Stock of Holdings and (v) the Common Stock of Holdings commenced
trading on the New York Stock Exchange under the symbol "URI" instead of the
common stock of URI. The purpose of the reorganization was to facilitate
certain financings. The business operations of the Company will not change as
a result of the new legal structure.
The stockholders of Holdings have the same rights, privileges and interests
with respect to Holdings as they had with respect to URI immediately prior to
the reorganization. Holdings has the same board of directors as URI and the
certificate of incorporation and by-laws of Holdings is the same in all
material respects as the certificate of incorporation and by-laws of URI in
effect immediately prior to the reorganization.
Issuance of 6 1/2% Convertible Quarterly Income Preferred Securities
On August 5, 1998, a subsidiary trust (the "Trust") of Holdings issued and
sold in a private offering (the "Preferred Securities Offering") $300 million
of 6 1/2% Convertible Quarterly Income Preferred Securities (the "Preferred
Securities"). In addition, the Trust may sell up to an additional $50 million
of Preferred Securities pursuant to an over-allotment option granted to the
initial purchasers of the Preferred Securities. The Preferred Securities have
not been registered under the Securities Act of 1933 (the "Act") and,
accordingly, may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements
under the Act.
The net proceeds from the Preferred Securities Offering were approximately
$290.0 million. The Trust used the proceeds from the Preferred Securities
Offering to purchase convertible subordinated debentures from
F-35
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Holdings which resulted in Holdings receiving all of the net proceeds of the
Preferred Securities Offering. Holdings in turn contributed the net proceeds
of the Preferred Securities Offering to URI. URI used approximately $281
million of such net proceeds to repay the then outstanding indebtedness under
the Company's credit facility and used the balance of such net proceeds for
acquisitions.
8.80% Senior Subordinated Notes
In August 1998, URI issued $205 million aggregate principal amount of 8.80%
Senior Subordinated Notes which are due August 15, 2008. URI used $90.3
million of the net proceeds from the sale of such notes to repay outstanding
indebtedness under the Company's credit facility and expects to use the
balance of such net proceeds to repay borrowings under the credit facility and
expects to use the remaining net proceeds for future acquisitions, capital
expenditures and general corporate purposes.
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
Certain indebtedness of URI is guaranteed by URI's United States
subsidiaries (the "guarantor subsidiaries") but is not guaranteed by URI's
foreign subsidiaries (the "non guarantor subsidiaries"). The guarantor
subsidiaries are all wholly-owned and the guarantees are made on a joint and
several basis and are full and unconditional (subject to subordination
provisions and subject to a standard limitation which provides that the
maximum amount guaranteed by each guarantor will not exceed the maximum amount
that can be guaranteed without making the guarantee void under fraudulent
conveyance laws). Separate consolidated financial statements of the guarantor
subsidiaries have not been presented because management has determined that
such information would not be material to investors. However, condensed
consolidating financial information as of June 30, 1998 and for the three and
six months ended June 30, 1998, are presented. The condensed consolidating
financial information as of and for the period ended December 31, 1997 and
prior have been omitted since the non-guarantors subsidiaries came into
existence during 1998. The condensed consolidating financial information of
URI and its subsidiaries are as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
---------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------- ------------
ASSETS
Cash and cash
equivalents............ $ 3,848,441 $ 1,637,651 $ 5,486,092
Accounts receivable,
net.................... 54,759,191 12,443,434 67,202,625
Intercompany
receivable(payable).... $117,111,518 (87,178,362) (29,933,156)
Inventory............... 27,650,390 5,605,216 33,255,606
Prepaid expenses and
other assets........... 17,093,847 4,408,920 1,384,411 22,887,178
Rental equipment, net... 267,387,088 31,569,107 298,956,195
Property and equipment,
net.................... 11,690,414 16,369,013 4,289,689 32,349,116
Investment in
subsidiaries........... 636,524,774 $(636,524,774)
Intangible assets, net.. 378,041,251 50,986,406 429,027,657
------------ ------------ ----------- ------------- ------------
$782,420,553 $665,285,932 $77,982,758 $(636,524,774) $889,164,469
============ ============ =========== ============= ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable....... $ 4,389,229 $ 45,965,934 $ 5,500,802 $ 55,855,965
Debt................... 373,274,464 9,572,933 6,333,947 389,181,344
Deferred income taxes.. 2,375,648 2,375,648
Accrued expenses and
other liabilities..... 12,202,795 9,420,580 1,733,971 23,357,346
------------ ------------ ----------- ------------- ------------
Total liabilities.... 392,242,136 64,959,447 13,568,720 470,770,303
Commitments and
contingencies
Stockholders' equity:
Preferred stock........
Common stock........... 334,022 3,142 4,757 341,921
Additional paid-in
capital............... 409,843,690 573,113,322 62,265,384 $(635,405,063) 409,817,333
Retained earnings...... (19,999,295) 27,210,021 2,162,683 (1,119,711) 8,253,698
Cumulative translation
adjustments........... (18,786) (18,786)
------------ ------------ ----------- ------------- ------------
Total stockholders'
equity ............. 390,178,417 600,326,485 64,414,038 (636,524,774) 418,394,166
------------ ------------ ----------- ------------- ------------
$782,420,553 $665,285,932 $77,982,758 $(636,524,774) $889,164,469
============ ============ =========== ============= ============
F-36
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
Revenues:
Equipment rentals...... $78,386,351 $7,718,368 $86,104,719
Sales of rental
equipment............. 8,844,185 1,620,457 10,464,642
Sales of new
equipment,
merchandise and other
revenues.............. 25,559,849 5,222,070 30,781,919
----------- ----------- ---------- ------------ -----------
Total revenues....... 112,790,385 14,560,895 127,351,280
Cost of revenues:
Cost of equipment
rentals, excluding
depreciation.......... 32,369,249 3,239,156 35,608,405
Depreciation of rental
equipment............. 13,315,071 1,250,179 14,565,250
Cost of rental
equipment sales....... 4,789,636 1,038,644 5,828,280
Cost of new equipment
and merchandise sales
and other operating
costs................. 19,544,732 4,565,810 24,110,542
----------- ----------- ---------- ------------ -----------
Total cost of
revenues............ 70,018,688 10,093,789 80,112,477
----------- ----------- ---------- ------------ -----------
Gross profit............ 42,771,697 4,467,106 47,238,803
Selling, general and
administrative
expenses............... $7,627,110 15,495,410 1,978,667 25,101,187
Non-rental depreciation
and amortization....... 316,889 3,247,290 251,057 3,815,236
----------- ----------- ---------- ------------ -----------
Operating income (loss). (7,943,999) 24,028,997 2,237,382 18,322,380
Interest expense........ 4,585,300 255,559 95,849 4,936,708
Other (income) expense.. (49,728) (456,554) (21,265) (527,547)
----------- ----------- ---------- ------------ -----------
Income (loss) before
provision for income
tax.................... (12,479,571) 24,229,992 2,162,798 13,913,219
Provision (benefit) for
income taxes........... (5,106,509) 9,914,658 884,994 5,693,143
----------- ----------- ---------- ------------ -----------
Income (loss) before
equity in net earnings
of subsidiaries........ (7,373,062) 14,315,334 1,277,804 8,220,076
Equity in net earnings
of subsidiaries........ 15,593,138 $(15,593,138)
----------- ----------- ---------- ------------ -----------
Net income.............. $ 8,220,076 $14,315,334 $1,277,804 $(15,593,138) $ 8,220,076
=========== =========== ========== ============ ===========
F-37
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
Revenues:
Equipment rentals...... $53,872,857 $ 5,452,012 $59,324,869
Sales of rental
equipment............. 6,374,757 1,106,694 7,481,451
Sales of new
equipment,
merchandise and other
revenues.............. 17,661,928 3,692,866 21,354,794
----------- ----------- ----------- ------------ -----------
Total revenues....... 77,909,542 10,251,572 88,161,114
Cost of revenues:
Cost of equipment
rentals, excluding
depreciation.......... 22,523,524 1,863,377 24,386,901
Depreciation of rental
equipment............. 9,310,380 671,038 9,981,418
Cost of rental
equipment sales....... 3,558,649 630,200 4,188,849
Cost of new equipment
and merchandise sales
and other operating
costs................. 13,280,705 3,237,946 16,518,651
----------- ----------- ----------- ------------ -----------
Total cost of
revenues............ 48,673,258 6,402,561 55,075,819
----------- ----------- ----------- ------------ -----------
Gross profit............ 29,236,284 3,849,011 33,085,295
Selling, general and
administrative
expenses............... $5,552,970 10,448,532 1,292,754 17,294,256
Non-rental depreciation
and amortization....... 289,341 2,265,353 174,118 2,728,812
----------- ----------- ----------- ------------ -----------
Operating income (loss). (5,842,311) 16,522,399 2,382,139 13,062,227
Interest expense........ 3,489,001 224,673 50,316 3,763,990
Other (income) expense.. 90,602 (217,192) (20,254) (146,844)
----------- ----------- ----------- ------------ -----------
Income (loss) before
provision for income
tax.................... (9,421,914) 16,514,918 2,352,077 9,445,081
Provision (benefit) for
income taxes........... (3,853,880) 6,755,157 962,079 3,863,356
----------- ----------- ----------- ------------ -----------
Income (loss) before
equity in net earnings
of subsidiaries........ (5,568,034) 9,759,761 1,389,998 5,581,725
Equity in net earnings
of subsidiaries........ 11,149,759 $(11,149,759)
----------- ----------- ----------- ------------ -----------
Net income.............. $ 5,581,725 $ 9,759,761 $ 1,389,998 $(11,149,759) $ 5,581,725
=========== =========== =========== ============ ===========
F-38
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------ ------------- ------------ -------------
Net cash provided by
(used in) operating
activities............. $ (29,768,647) $ 57,504,920 $1,086,281 $ 28,822,554
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of rental
equipment............. (61,797,639) (924,804) (62,722,443)
Purchase of property
and equipment......... (11,519,846) (11,519,846)
Proceeds from sales of
rental equipment...... 8,844,185 1,620,457 10,464,642
In-process acquisition
costs................. (3,495,002) (3,495,002)
Payment of contingent
purchase price........ (2,111,150) (144,283) (2,255,433)
Purchase of other
companies............. (369,534,206) (369,534,206)
------------- ------------ ---------- ---------- -------------
Net cash provided by
(used in) investing
activities.......... (384,549,054) (55,064,604) 551,370 (439,062,288)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of common stock, net
of issuance costs..... 206,456,306 206,456,306
Proceeds of debt....... 623,776,408 623,776,408
Repayments from debt... (474,999,342) (474,999,342)
Payment of debt
financing costs....... (8,115,074) (8,115,074)
------------- ------------ ---------- ---------- -------------
Net cash provided by
financing
activities.......... 347,118,298 347,118,298
------------- ------------ ---------- ---------- -------------
Net increase
(decrease) in cash
and cash equivalents.. (67,199,403) 2,440,316 1,637,651 (63,121,436)
Cash and cash
equivalents at
beginning of period .. $ 67,199,403 1,408,125 68,607,528
------------- ------------ ---------- ---------- -------------
Cash and cash
equivalents at end
of period........... $ 3,848,441 $1,637,651 $ 5,486,092
============= ============ ========== ========== =============
Supplemental disclosure
of cash flow
information:
Cash paid during the
period:
Interest............. $ 1,984,438 $ 239,524 $ 66,588 $ 2,290,550
============= ============ ========== ========== =============
Income taxes......... $ 2,946,000 $ 2,946,000
============= ============ ========== ========== =============
Supplemental disclosure
of non-cash investing
and financing
activities:
During the six month
period ended June 30,
1998, a convertible
note in the principal
amount of $200,000 was
converted into 14,814
shares of common stock
The Company acquired the
net assets and assumed
certain liabilities of
other companies as
follows:
Assets, net of cash
acquired.............. 681,724,845 681,724,845
Liabilities assumed.... (264,655,908) (264,655,908)
Less:
Amounts paid in common
stock and warrants.... (47,534,731) (47,534,731)
------------- ------------ ---------- ---------- -------------
Net cash paid.......... $ 369,534,206 $ 369,534,206
============= ============ ========== ========== =============
F-39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of U.S. Rentals, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of U.S. Rentals, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of management of U.S. Rentals, Inc.; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Sacramento, California
January 28, 1998
F-40
U.S. RENTALS, INC.
BALANCE SHEETS
DECEMBER 31,
-----------------
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT SHARE
DATA)
ASSETS
Cash and cash equivalents.................................... $ 2,906 $ 3,104
Accounts receivable, net..................................... 35,653 60,906
Notes receivable from affiliate.............................. 25,365 --
Notes receivable, other...................................... 563 501
Inventories.................................................. 5,841 17,379
Rental equipment, net........................................ 205,982 390,598
Property and equipment, net.................................. 42,345 78,014
Goodwill, net................................................ 1,035 23,114
Prepaid expenses and other assets............................ 4,758 12,195
-------- --------
Total assets................................................. $324,448 $585,811
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities....................... $ 57,008 $ 75,048
Notes payable to related parties............................. 23,943 17,000
Notes payable, other......................................... 162,767 203,300
Deferred taxes............................................... -- 25,077
-------- --------
Total liabilities............................................ 243,718 320,425
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $.01 par value;
100,000,000 shares authorized,
30,748,975 shares issued and outstanding................. -- 307
Common stock at stated value;
2,500 shares authorized,
900 shares issued and outstanding........................ 699 --
Paid-in capital............................................ 13,186 244,211
Retained earnaings......................................... 66,845 20,868
-------- --------
Total stockholders' equity................................... 80,730 265,386
-------- --------
Total liabilities and stockholders' equity................... $324,448 $585,811
======== ========
Please see accompanying notes to financial statements.
F-41
U.S. RENTALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
REVENUES:
Rental revenue............................ $ 214,849 $ 257,486 $ 340,507
Rental equipment sales.................... 10,832 24,629 38,839
Merchandise and new equipment sales....... 17,166 23,722 45,347
---------- ---------- ----------
Total revenues.......................... 242,847 305,837 424,693
---------- ---------- ----------
COST OF REVENUES:
Rental equipment expense.................. 51,370 65,102 87,209
Rental equipment depreciation............. 43,885 56,105 69,231
Cost of rental equipment sales............ 4,693 10,109 19,065
Cost of merchandise and new equipment
sales.................................... 11,418 17,423 33,420
Direct operating expense.................. 56,506 71,482 98,068
---------- ---------- ----------
Total cost of revenues.................. 167,872 220,221 306,993
---------- ---------- ----------
Gross profit............................ 74,975 85,616 117,700
Selling, general and administrative
expense.................................. 31,440 35,934 42,597
Non-rental depreciation and
amortization............................. 5,513 7,528 11,222
Termination cost of deferred compensation
agreements............................... -- -- 20,290
---------- ---------- ----------
Operating income........................ 38,022 42,154 43,591
Interest expense.......................... (4,575) (8,373) (6,680)
Related party interest (expense) income,
net...................................... (735) 342 (690)
Other expense, net........................ (1,620) (665) (473)
---------- ---------- ----------
Income before income taxes and
extraordinary item..................... 31,092 33,458 35,748
Income tax expense...................... 468 374 29,407
---------- ---------- ----------
Net income before extraordinary item.... 30,624 33,084 6,341
Extraordinary item, net of tax benefit of
$995..................................... -- -- 1,511
---------- ---------- ----------
Net income................................ $ 30,624 $ 33,084 $ 4,830
========== ========== ==========
Basic net income before extraordinary
item per share........................... $ 1.48 $ 1.59 $ .22
========== ========== ==========
Diluted net income before extraordinary
item per share........................... $ 1.48 $ 1.59 $ .21
========== ========== ==========
Basic net income per share................ $ 1.48 $ 1.59 $ .17
========== ========== ==========
Diluted net income per share.............. $ 1.48 $ 1.59 $ .16
========== ========== ==========
Basic weighted average shares
outstanding.............................. 20,748,975 20,748,975 29,351,715
========== ========== ==========
Diluted weighted average shares
outstanding.............................. 20,748,975 20,748,975 29,843,752
========== ========== ==========
UNAUDITED PRO FORMA DATA (NOTE 7):
Historical income before income taxes and
extraordinary item....................... $ 31,092 $ 33,458 $ 35,748
Pro forma income tax expense.............. 12,780 13,456 14,371
---------- ---------- ----------
Pro forma net income before
extraordinary item..................... $ 18,312 $ 20,002 $ 21,377
========== ========== ==========
Pro forma basic net income before
extraordinary item per share............. $ .88 $ .96 $ .73
========== ========== ==========
Pro forma diluted net income before
extraordinary item per share............. $ .88 $ .96 $ .72
========== ========== ==========
Please see accompanying notes to financial statements.
F-42
U.S. RENTALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES STATED/PAR VALUE CAPITAL EARNINGS EQUITY
---------- ---------------- -------- -------- -------------
(IN THOUSANDS)
Balance at December 31,
1994................... 900 $ 699 $ 13,186 $ 44,066 $ 57,951
Net income............ -- -- -- 30,624 30,624
Dividends............. -- -- -- (5,498) (5,498)
---------- ----- -------- -------- --------
Balance at December 31,
1995................... 900 699 13,186 69,192 83,077
Net income............ -- -- -- 33,084 33,084
Dividends............. -- -- -- (35,431) (35,431)
---------- ----- -------- -------- --------
Balance at December 31,
1996................... 900 699 13,186 66,845 80,730
Net income............ -- -- -- 4,830 4,830
Recapitalization...... (900) (699) 699 -- --
Distribution of non-op-
erating assets, net.... -- -- (4,219) -- (4,219)
Dividends paid prior to
initial public
offering............... -- -- -- (1,905) (1,905)
Contribution of earnings
to paid-in capital..... -- -- 48,902 (48,902) --
Recapitalization due to
initial public
offering............... 20,748,975 207 (207) -- --
Initial public offering
proceeds, net of
issuance cost of
$1,550................. 10,000,000 100 185,850 -- 185,950
---------- ----- -------- -------- --------
Balance at December 31,
1997................... 30,748,975 $ 307 $244,211 $ 20,868 $265,386
========== ===== ======== ======== ========
Please see accompanying notes to financial statements.
F-43
U.S. RENTALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income..................................... $ 30,624 $ 33,084 $ 4,830
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation and amortization................ 49,398 63,633 80,453
Gain on sale of equipment.................... (6,342) (14,955) (20,692)
Principal adjustment on notes receivable..... (220) (572) (146)
Provision for doubtful accounts.............. 3,441 4,075 7,773
Deferred income taxes........................ -- -- 25,077
Interest income not collected................ -- -- (294)
Interest expense not paid.................... -- -- 495
Loss on early extinguishment of debt......... -- -- 2,506
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable.......................... (10,526) (9,799) (26,505)
Inventories.................................. (1,413) (1,665) (4,989)
Prepaid expenses and other assets............ (1,515) (1,466) (8,247)
Accounts payable and other liabilities....... 11,588 597 19,518
-------- --------- ---------
Net cash provided by operating activities...... 75,035 72,932 79,779
-------- --------- ---------
INVESTING ACTIVITIES:
Acquisitions of rental operations.............. -- (15,033) (64,076)
Purchases of rental equipment.................. (88,861) (106,501) (246,631)
Proceeds from sale of rental equipment......... 10,832 24,629 38,839
Purchases of property and equipment, net....... (10,764) (23,068) (45,971)
(Funding) collection of notes receivable, net.. (1,061) 2,537 122
-------- --------- ---------
Net cash used in investing activities.......... (89,854) (117,436) (317,717)
-------- --------- ---------
FINANCING ACTIVITIES:
(Payments on) proceeds from line of credit,
net........................................... (28,200) 39,553 130,733
Proceeds from (payments on) senior notes....... 50,000 40,000 (92,506)
Payments on other obligations, net............. (718) (191) (138)
Proceeds from related party note payable....... -- -- 17,000
Proceeds from issuance of common stock, net of
issuance costs................................ -- -- 185,950
Cash retained by the Predecessor in connection
with Recapitalization......................... -- -- (998)
Dividends paid................................. (5,498) (35,431) (1,905)
-------- --------- ---------
Net cash provided by financing activities...... 15,584 43,931 238,136
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 765 (573) 198
Cash and cash equivalents at beginning of
year.......................................... 2,714 3,479 2,906
-------- --------- ---------
Cash and cash equivalents at end of year....... $ 3,479 $ 2,906 $ 3,104
======== ========= =========
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Net assets retained by the Predecessor in
connection
with Recapitalization......................... $ 3,221
=========
Please see accompanying notes to financial statements.
F-44
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
U.S. Rentals, Inc. (the "Company") is a Delaware corporation primarily
involved in the short-term rental of general purpose construction equipment,
and to a lesser extent, selling complementary parts, merchandise, new and used
equipment to commercial and residential construction, industrial and homeowner
customers. At December 31, 1997, the Company operated 123 equipment rental
yards located in 21 states across the United States.
Initial public offering
The Company's initial public offering ("IPO") was declared effective on
February 20, 1997. Prior to the IPO, the equipment rental business was
operated by Ayr, Inc. (formerly known as USR Holdings, Inc.), a California
corporation (the "Predecessor"). The Company did not have any operations prior
to the IPO. Prior to closing of the IPO, the Predecessor transferred
substantially all of its operating assets and associated liabilities to the
Company for 20,748,975 shares of common stock of the Company, representing all
of the outstanding capital stock prior to the IPO. The Predecessor retained
only non-operating assets and liabilities, including approximately $25.7
million of notes receivable from an affiliate and $24.4 million of notes
payable to related parties. These transactions are referred to as the
"Recapitalization" in these financial statements. In conjunction with the
Recapitalization, the Predecessor entered into an agreement to terminate
deferred compensation agreements with certain executives. The Predecessor
borrowed approximately $20.3 million under its bank line of credit to fund the
cost of termination. The Company assumed the liability for the indebtedness
under the bank line of credit as part of the Recapitalization. The non-
recurring cost of the termination was expensed in 1997. Unless otherwise
indicated, the Company also refers to the Predecessor prior to the IPO.
Related party transactions
As disclosed in these financial statements, the Company has participated in
certain transactions with related parties during the current and previous
years. In the opinion of management, all transactions with related parties
have been conducted on terms which are fair and equitable; however, the
transactions are not necessarily on the same terms as those which would have
been made between wholly unrelated parties.
Financial statement presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Rental revenue
Rental revenue is recognized upon the earliest occurrence of either the
return of the equipment or the end of one month's rental term.
Rental equipment
Rental equipment is recorded at cost. Depreciation for rental equipment
acquired prior to January 1, 1996, is computed using the straight-line method
over an estimated five-year useful life with no salvage value. Rental
equipment acquired subsequent to January 1, 1996, is depreciated using the
straight-line method over an estimated seven-year useful life, after giving
effect to an estimated salvage value of 10%. Included in purchases of rental
equipment are the costs of minor equipment which are fully depreciated in the
month of acquisition. Accumulated depreciation on rental equipment was
$161,765,000 and $190,213,000 at December 31, 1996 and 1997, respectively.
F-45
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Ordinary maintenance and repair costs are charged to operations as incurred.
When rental equipment is disposed of, the related cost and accumulated
depreciation are removed from the respective accounts. Proceeds from the
disposal and the related net book value of the equipment are recognized in the
period of disposal and reported as revenue from rental equipment sales and
cost of rental equipment sales in the statement of operations.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
The estimated useful lives for property and equipment range from 10 to 39
years for buildings; 1 to 8 years for vehicles, delivery and yard equipment;
and 5 to 10 years for fixtures and leasehold improvements.
Ordinary maintenance and repairs costs are charged to operations as
incurred. When property and equipment are disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
Inventories
The Company's inventories primarily consist of items such as hand tools and
accessories held for resale. Inventories are stated at the lower of cost,
determined by the first-in, first-out method, or market.
Self-insurance
The Company is self-insured for general liability, workers' compensation,
and group medical claims up to specified per claim and aggregate amounts.
Self-insurance costs are accrued based upon the aggregate liability for
reported claims incurred and an estimated liability for claims incurred but
not reported. These liabilities are not discounted.
Earnings per share
Historical earnings per share is presented based on the weighted average
number of outstanding common shares, after giving effect to the
Recapitalization retroactively for all periods. Pro forma earnings per share
is based on the weighted average number of outstanding common shares, after
giving effect to the Recapitalization and the pro forma income tax expense as
if the Company were a C corporation for all periods presented. Diluted
weighted average shares outstanding were calculated using the treasury stock
method and exceed basic weighted average shares outstanding by 492,037 due to
3,907,887 dilutive options outstanding at December 31, 1997. Basic and diluted
earnings per share attributable to the extraordinary item totaled $.05 for the
year ended December 31, 1997.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Fair value of financial instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, trade accounts receivable, and accounts payable and other
liabilities approximated fair value due to the immediate to short-term
maturity of these financial instruments. The fair value of notes receivable
and 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.
F-46
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction and industrial customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers and the Company's geographic dispersion. The Company performs credit
evaluations of its customers' financial condition and generally does not
require collateral on accounts receivable. The Company maintains an allowance
for doubtful accounts on its receivables based upon expected collectability.
The allowance for doubtful accounts was $6,991,000 and $9,495,000 at December
31, 1996 and 1997, respectively.
Advertising costs
The Company advertises primarily through trade journals and the media.
Advertising costs are expensed as incurred and totaled $3,094,000, $4,200,000,
and $6,453,000 for each of the three years in the period ended December 31,
1997.
Goodwill
Amortization of goodwill is provided on a straight-line basis over forty
years. Goodwill is presented net of accumulated amortization of $207,000 and
$371,000 at December 31, 1996 and 1997.
Long-lived assets
Long-lived assets are recorded at the lower of amortized cost or fair value.
As part of an ongoing review of the valuation of long-lived assets, management
assesses the carrying value of such assets if facts and circumstances suggest
they may be impaired. If this review indicates that the carrying value of
these assets may not be recoverable, as determined by a nondiscounted cash
flow analysis over the remaining useful life, the carrying value would be
reduced to its estimated fair value. There have been no material impairments
recognized in these financial statements.
Income taxes
Subsequent to the IPO and Recapitalization, the Company is assessed
corporate income taxes for federal and state purposes. Income taxes are
recorded under the liability approach; a current or deferred liability or
asset is recognized for the current or deferred income tax consequences of all
events that have been recorded in the financial statements.
Prior to the IPO, the Predecessor had elected S corporation status under the
U.S. Internal Revenue Code. Pursuant to this election (and similar elections
in California and certain other states), the Predecessor's income, deductions,
and credits are reported on the income tax return of the Predecessor's
stockholder for federal purposes and, accordingly, no provision for federal
income taxes has been made.
California assesses a corporate level income tax on S corporations, and
certain states in which the Predecessor does business do not recognize S
corporation status. Therefore, the Predecessor remains subject to, and has
made provision for, taxes in those states.
Because of the Recapitalization, historical results of operations, including
income taxes, are not, in all cases, indicative of future results. The
unaudited pro forma income tax provision is computed using the liability
approach as if the Company had been a C corporation for all periods presented.
Pro forma income tax expense is lower than actual income tax expense in 1997
due to the recognition of a $7,520,000 deferred tax liability upon the
Recapitalization and the pro forma benefit from the inclusion in pro forma
taxable income of the net loss from January 1, 1997, to the closing date of
the IPO attributable to the nonrecurring cost to terminate deferred
compensation agreements.
F-47
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock Options
The Company accounts for its stock option plan in accordance with the
intrinsic value method, under which no compensation expense is recognized in
the financial statements except where the fair market value of the stock
exceeds the exercise price of the options granted on the date of grant. The
Company has presented the pro forma disclosures of the compensation expense
under the fair value method of Statement of Financial Accounting Standards
Number 123 ("SFAS 123") in Note 9.
Adoption of new accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 128, Earnings per Share ("SFAS 128"),
which changed the basis upon which earnings (or loss) per share is calculated.
As required by this statement, the Company adopted the provisions of SFAS 128
for the year ended December 31, 1997, and retroactively for each of the
preceding years presented in the financial statements.
Reclassifications
Certain prior year balances have been reclassified to conform to the 1997
presentation.
2. ACQUISITIONS
During 1997, the Company acquired the assets of 9 businesses operating 33
rental locations throughout the United States. The acquisitions were financed
through borrowings under the Company's line of credit and have been recorded
using the purchase method of accounting. The results of operations for each
location acquired have been included in the Company's results of operations
from their respective acquisition dates. A summary of the purchase price and
assets acquired is as follows (in thousands):
Rental equipment.................................................... $ 26,877
Inventories......................................................... 6,549
Accounts receivable................................................. 6,521
Other assets........................................................ 2,704
Goodwill............................................................ 21,425
--------
$ 64,076
========
The following unaudited pro forma data (in thousands) summarizes the results
of operations of the periods indicated as if the acquisitions had been
completed on January 1, 1996. The pro forma data gives effect to the actual
operating results prior to acquisition and adjustments to goodwill. The pro
forma results do not purport to be indicative of the results that would have
actually been achieved if the acquisitions had occurred on January 1, 1996, or
that may be achieved in the future.
1996 1997
-------- --------
(UNAUDITED)
Total revenues............................................. $363,848 $459,649
Net income................................................. $ 22,288 $ 23,073
3. NOTES RECEIVABLE FROM AFFILIATE
Prior to the Recapitalization, the Predecessor had notes receivable from an
affiliate. As discussed in Note l, these notes were retained by the
Predecessor. The Company earned interest income from the affiliate of
$3,343,000, $3,420,000, and $555,000 for each of the three years in the period
ended December 31, 1997, respectively. The notes provide for positive or
negative annual adjustments of principal based on the change in the Consumer
Price Index, limited to certain percentages of the affiliated entity's
cumulative net income from
F-48
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1984. The accompanying financial statements include principal
adjustments in notes receivable and other income in the amounts of $220,000,
$572,000, and $146,000 for each of the three years in the period ended December
31, 1997, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (in thousands):
DECEMBER 31,
------------------
1996 1997
-------- --------
Land..................................................... $ 14,099 $ 21,543
Buildings................................................ 12,806 21,600
Vehicles and delivery equipment.......................... 28,000 45,234
Yard equipment........................................... 3,000 3,674
Furniture and fixtures................................... 4,626 7,227
Leaseholds............................................... 8,942 15,666
-------- --------
71,473 114,944
Less accumulated depreciation............................ (29,128) (36,930)
-------- --------
$ 42,345 $ 78,014
======== ========
5. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of the following (in
thousands):
DECEMBER 31,
---------------
1996 1997
------- -------
Trade payables and other accruals........................... $34,264 $50,716
Profit sharing accrual...................................... 8,742 12,667
Self-insurance reserve...................................... 14,002 11,665
------- -------
$57,008 $75,048
======= =======
F-49
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES PAYABLE
Notes payable consist of the following (in thousands):
DECEMBER 31,
-----------------
1996 1997
-------- --------
Notes payable to related parties:
Subordinated note payable to The Colburn School of
Performing Arts, interest payable quarterly at prime rate
plus 5%................................................... $ 20,000 $ --
Demand notes payable to related parties, interest at
various rates tied to the Predecessor's average bank
borrowing rate............................................ 3,943 --
Demand note to majority stockholder, interest payable
monthly at a rate tied to the Company's revolving line of
credit (5.90% at December 31, 1997)....................... -- 17,000
-------- --------
23,943 17,000
-------- --------
Notes payable, other:
Senior notes payable to various parties, interest payable
semiannually ranging from 6.82% to 7.76%.................. 90,000 --
Revolving line of credit, interest payable monthly at
reference rate plus .125% (8.25% at December 31, 1996).... 26,300 --
Revolving line of credit, interest payable monthly at money
market rate (ranging from 6.03% to 6.34% at December 31,
1997)..................................................... 43,000 203,000
Notes payable to a bank, interest and principal payable
monthly at rates ranging from 5.74% to 9.51%.............. 2,967 --
Notes payable related to the purchase of certain
businesses, imputed interest averaging 7%, due through
1999...................................................... 500 300
-------- --------
162,767 203,300
-------- --------
$186,710 $220,300
======== ========
The Company's agreement with the banks provides for an unsecured line of
credit of $300,000,000 maturing no later than 2002. The revolving line of
credit is unsecured and includes restrictions as to limitations upon certain
ratios of liabilities to net worth and upon the minimum net worth of the
Company. The Company is in compliance with covenants in all agreements. The
Company pays a commitment fee ranging from .175% to .25% on the unused portion
of the outstanding line of credit balance less outstanding letters of credit
calculated quarterly based on the average daily balance. The senior and bank
note agreements existing at December 31, 1996, were paid down with the
proceeds from the IPO.
Cash paid for interest was $7,545,000, $11,185,000, and $9,608,000 for each
of the three years in the period ended December 31, 1997, respectively.
Maturities of notes payable are as follows at December 31, 1997 (in
thousands):
1998................................ $220,000
1999................................ 300
--------
$220,300
========
7. INCOME TAXES
As discussed in Note 1, the Company was taxed as an S corporation prior to
the Recapitalization. As such, the income tax provision was comprised of
current state income tax expense of $468,000 and $374,000 for 1995 and 1996,
respectively. Deferred taxes for such periods were immaterial. Cash payments
for state income taxes made by the Company were $597,000 and $353,000 for 1995
and 1996, respectively. Cash payments for federal and state income taxes made
by the Company were $11,407,000 in 1997.
F-50
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following provision for income taxes for 1997 includes all state taxes
recognized by the Predecessor as an S corporation prior to the
Recapitalization and federal and state taxes recognized by the Company
subsequent to the Recapitalization (in thousands).
1997
-------
Federal:
Current........................................................... $ 3,765
Deferred.......................................................... 14,281
Deferred tax recorded upon Recapitalization....................... 6,141
-------
24,187
-------
State:
Current........................................................... 565
Deferred.......................................................... 3,276
Deferred tax recorded upon Recapitalization....................... 1,379
-------
5,220
-------
$29,407
=======
The 1997 provision for income taxes differs from the amount as determined by
applying the U.S. statutory federal tax rate of 35% to income before income
taxes as a result of the following:
Federal income taxes................................................... 35.0%
State income taxes, net of federal benefit............................. 4.8%
Cumulative deferred taxes recorded upon Recapitalization............... 21.0%
Loss prior to Recapitalization excluded from taxable income............ 21.1%
Other.................................................................. 0.4%
----
82.3%
====
The unaudited pro forma provision for income taxes differs from the amount
of income tax determined by applying the U.S. statutory federal income tax
rate of 35% to income before income taxes as a result of the following:
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ----
Federal income taxes....................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................. 5.3% 4.9% 4.8%
Other...................................................... 0.8% 0.3% 0.4%
---- ---- ----
41.1% 40.2% 40.2%
==== ==== ====
Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year
in which the differences are expected to reverse. Deferred income tax expenses
or credits are based on the changes in the deferred income tax assets or
liabilities from period to period.
F-51
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) are as follows (in thousands):
DECEMBER 31,
1997
------------
Self-insurance reserves......................................... $ 4,944
Compensation related accruals................................... 1,674
Allowances for doubtful accounts................................ 2,079
State income taxes.............................................. 1,636
Others, net..................................................... 924
--------
11,257
Depreciation.................................................... (36,334)
--------
$(25,077)
========
8. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases certain facilities under operating leases which contain
renewal options and provide for periodic cost of living adjustments. Rental
expense was $3,365,000, $3,681,000, and $5,374,000 for each of the three years
in the period ended December 31, 1997, respectively.
Future minimum rental commitments as of December 31, 1997, under
noncancelable operating leases are (in thousands):
1998................................................................. $ 6,445
1999................................................................. 5,353
2000................................................................. 4,439
2001................................................................. 3,678
2002................................................................. 2,545
Thereafter........................................................... 8,237
-------
$30,697
=======
Legal matters
The Company is party to legal proceedings and potential claims arising in
the ordinary course of its business. In the opinion of management, the Company
has adequate legal defense, reserves, or insurance coverage with respect to
these matters so that the ultimate resolution will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows. The Company has accrued $12,011,000 and $9,563,000 at December 31, 1996
and 1997, respectively, to cover the uninsured portion of possible costs
arising from these pending claims and other potential unasserted claims.
Environmental matters
The Company and its operations are subject to various laws and related
regulations governing environmental matters. Under such laws, an owner or
lessee of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances located on or in, or emanating from,
such property, as well as investigation of property damage. The Company incurs
ongoing expenses associated with the removal of underground storage tanks and
the performance of appropriate remediation at certain of its locations. The
Company believes that such removal and remediation will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
F-52
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION PLAN
Effective February 20, 1997, the Board of Directors of the Company adopted
the 1997 Performance Award Plan under which stock options and other awards can
be granted to key employees and directors at prices and terms established by
the Board of Directors at the date of grant. The exercise price of all options
issued during 1997 equaled the fair value of the stock on the grant date which
ranged from $17.88 to $26.88. Accordingly, no compensation expense has been
recognized. Options outstanding at December 31, 1997, vest ratably over
periods ranging from five to ten years and expire in 2007.
The following table summarizes the activity under the stock option plan:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Shares under option:
Outstanding at December 31, 1996.................. -- $ --
Granted: ($17.88-$20.00)......................... 3,867,387 $19.99
($23.44-$26.88).................................. 206,500 $25.78
---------
Outstanding at December 31, 1997.................... 4,073,887 $20.29
=========
There were no vested options outstanding and 526,113 shares were available
for future grants under the stock option plan at December 31, 1997.
For purposes of the pro forma disclosures required by SAFS 123, the
estimated fair value of options is amortized to expense over the options'
vesting period. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model. The Black-Scholes model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly sensitive assumptions, including
the expected stock price volatility, which are subject to change from time to
time. For this reason, the resulting pro forma compensation costs are not
necessarily indicative of costs to be expected in future years.
Pro forma unaudited net income, pro forma basic unaudited net income per
share, and pro forma diluted unaudited net income per share in 1997, after
giving effect to the Recapitalization would be $18,065,000, $.62, and $.60,
respectively, if the Company had accounted for its stock options using the
fair value based method of accounting established by SFAS 123. The following
weighted average assumptions were used in the option pricing model to
determine the fair value of the options: dividend yield of 0%, expected
volatility of 32%, risk-free interest rate ranging from 5.84% to 6.61%, and
expected lives ranging from 3 to 5.25 years.
10. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) retirement plan (the
Plan) which is subject to the provisions of ERISA. Under the Plan, which was
implemented in 1994, the Company matches a minimum of 50% of the participants'
contributions up to a specified amount as determined by the Board of
Directors. Company contributions to the Plan were $246,000, $122,000, and
$136,000 for each of the three years in the period ended December 31, 1997,
respectively.
F-53
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected financial data
The following table of quarterly financial information has been prepared
from unaudited financial statements of the Company, and reflects adjustments
which are, in the opinion of management, necessary for a fair presentation of
the interim periods presented. The Company has determined that the one-time
charge to establish the cumulative deferred tax liability as of the date of
the Company's IPO associated with becoming subject to C corporation taxes
should have been $7.5 million instead of $9.3 million as previously reported
in Form 10-Q for the third quarter of 1997. The loss before extraordinary item
and net loss presented below reflect this change.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- --------
Year ended December 31, 1997
Total revenues............................. $80,981 $96,434 $114,026 $133,252
Gross profit............................... 18,108 27,277 34,915 37,400
Income (loss) before extraordinary item.... (22,750) 8,015 10,857 10,219
Extraordinary item......................... 1,511 -- -- --
Net income (loss).......................... (24,261) 8,015 10,857 10,219
Year ended December 31, 1996
Total revenues............................. $58,643 $71,172 $ 86,647 $ 89,375
Gross profit............................... 14,262 18,292 25,244 27,818
Net income................................. 4,205 6,835 11,596 10,448
Price range of common stock
The Company's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol USR. The following table provides the high and low closing
sales prices of the common stock as reported by the NYSE for each quarter of
1997.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High......................................... $20.13 $27.50 $29.31 $27.38
Low.......................................... $17.00 $15.38 $24.25 $23.13
F-54
U.S. RENTALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
------
Cash and cash equivalents............................. $ 22,510 $ 3,104
Accounts receivable, net.............................. 74,124 60,906
Inventories........................................... 19,040 17,379
Rental equipment, net................................. 521,696 390,598
Property and equipment, net........................... 93,130 78,014
Goodwill, net......................................... 26,398 23,114
Prepaid expenses and other assets..................... 12,167 12,696
-------- --------
Total assets...................................... $769,065 $585,811
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable and other liabilities................ $ 78,264 $ 75,048
Note payable to related party......................... 21,500 17,000
Notes payable, other.................................. 357,100 203,300
Deferred taxes........................................ 29,732 25,077
-------- --------
Total liabilities................................. 486,596 320,425
-------- --------
Stockholders' equity:
Common stock, $.01 par value--authorized 100,000,000
shares; issued and
outstanding 30,774,975 shares as of June 30, 1998
and 30,748,975 as of
December 31, 1997.................................. 308 307
Paid-in capital..................................... 244,830 244,211
Retained earnings................................... 37,331 20,868
-------- --------
Total stockholders' equity........................ 282,469 265,386
-------- --------
Total liabilities and stockholders' equity........ $769,065 $585,811
======== ========
F-55
U.S. RENTALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
Rental revenue............... $ 114,806 $ 77,109 $ 207,447 $ 142,439
Rental equipment sales....... 18,489 9,274 31,555 16,475
Merchandise and new equipment
sales....................... 17,547 10,051 32,358 18,501
---------- ---------- ---------- ----------
Total revenues............. 150,842 96,434 271,360 177,415
---------- ---------- ---------- ----------
Cost of revenues:
Rental equipment expense..... 24,016 18,678 46,016 36,176
Rental equipment
depreciation................ 24,534 15,708 45,979 30,021
Cost of rental equipment
sales....................... 9,610 4,631 15,898 8,016
Cost of merchandise and new
equipment sales............. 12,080 7,442 22,931 13,936
Direct operating expense..... 31,517 22,698 64,894 43,881
---------- ---------- ---------- ----------
Total cost of revenues..... 101,757 69,157 195,718 132,030
---------- ---------- ---------- ----------
Gross profit............... 49,085 27,277 75,642 45,385
Selling, general and
administrative expense........ 20,124 10,427 31,550 17,977
Non-rental depreciation........ 3,766 2,724 7,491 4,654
Amortization of goodwill....... 109 41 184 44
Termination cost of deferred
compensation agreements....... -- -- -- 20,290
---------- ---------- ---------- ----------
Operating income........... 25,086 14,085 36,417 2,420
Other expense, net............. -- -- -- (473)
Related party interest expense,
net........................... (310) (223) (594) (171)
Interest expense, net.......... (4,891) (504) (8,293) (2,057)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and
extraordinary item........ 19,885 13,358 27,530 (281)
Income tax expense............. 7,994 5,343 11,067 14,455
---------- ---------- ---------- ----------
Income (loss) before
extraordinary item........ 11,891 8,015 16,463 (14,736)
Extraordinary item, net of tax
benefit of $995............... -- -- -- 1,511
---------- ---------- ---------- ----------
Net income (loss).......... $ 11,891 $ 8,015 $ 16,463 $ (16,247)
========== ========== ========== ==========
Basic net income (loss) before
extraordinary item per share.. $ 0.39 $ 0.26 $ 0.54 $ (0.53)
---------- ---------- ---------- ----------
Diluted net income (loss)
before extraordinary item per
share......................... $ 0.37 $ 0.26 $ 0.52 $ (0.52)
---------- ---------- ---------- ----------
Basic and diluted extraordinary
item per share................ $ -- $ -- $ -- $ (0.05)
---------- ---------- ---------- ----------
Basic net income (loss) per
share......................... $ 0.39 $ 0.26 $ 0.54 $ (0.58)
---------- ---------- ---------- ----------
Diluted net income (loss) per
share......................... $ 0.37 $ 0.26 $ 0.52 $ (0.57)
---------- ---------- ---------- ----------
Basic weighted average shares
outstanding................... 30,768,502 30,748,975 30,760,301 27,946,777
========== ========== ========== ==========
Diluted weighted average shares
outstanding................... 32,245,254 30,975,435 31,920,944 28,537,859
========== ========== ========== ==========
F-56
U.S. RENTALS, INC.
STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- ---------
Operating activities:
Net income (loss)................. $ 11,891 $ 8,015 $ 16,463 $ (16,247)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization... 28,409 18,082 53,654 34,547
Gain on sale of equipment....... (9,249) (5,104) (16,281) (9,006)
Principal adjustment on notes
receivable..................... -- -- -- (146)
Provision for doubtful
accounts....................... 3,015 1,764 5,142 3,236
Deferred taxes.................. 4,963 1,742 4,655 9,380
Interest income not collected... -- -- -- (294)
Interest expense not paid....... -- -- -- 495
Loss on early extinguishment of
debt........................... -- -- -- 2,506
Changes in operating assets and
liabilities accounts
receivable....................... (15,561) (9,117) (17,970) (14,812)
Inventories..................... (1,782) (1,546) (1,197) (1,399)
Prepaid expenses and other
assets......................... 3,027 1,068 3,102 552
Accounts payable and other
liabilities.................... 1,446 9,286 1,142 9,127
--------- -------- --------- ---------
Net cash provided by operating
activities......................... 26,159 24,190 48,710 17,939
--------- -------- --------- ---------
Investing activities:
Acquisition of rental operations.. (1,274) (20,919) (9,344) (22,676)
Purchases of rental equipment..... (114,387) (64,258) (189,813) (92,511)
Proceeds from sale of rental
equipment........................ 18,489 9,274 31,555 16,475
Purchases of property and
equipment, net................... (11,590) (11,127) (20,622) (17,173)
Funding of notes receivable, net.. -- 32 -- 253
--------- -------- --------- ---------
Net cash used in investing activi-
ties............................. (108,762) (86,998) (188,224) (115,632)
--------- -------- --------- ---------
Financing activities:
Proceeds from (payments on) line
of credit, net................... (154,000) 45,000 (98,000) (13,267)
Proceeds from (payments) on senior
notes............................ 252,000 -- 252,000 (92,506)
Payments on other obligations..... (100) (100) (200) (200)
Proceeds from related party note.. 500 18,000 4,500 18,000
Proceeds from issuance of common
stock, net of issuance costs..... 369 -- 620 185,950
Cash retained by the predecessor
in connection with
Recapitalization................. -- -- -- (998)
Dividends paid.................... -- -- -- (1,905)
--------- -------- --------- ---------
Net cash provided by financing
activities......................... 98,769 62,900 158,920 95,074
--------- -------- --------- ---------
Net increase (decrease) in cash..... 16,166 92 19,406 (2,619)
Cash at beginning of period......... 6,344 195 3,104 2,906
--------- -------- --------- ---------
Cash at end of period............... $ 22,510 $ 287 $ 22,510 $ 287
========= ======== ========= =========
Supplemental non-cash flow
information:
Distribution of net assets to
stockholder in connection with
the IPO.......................... $ 3,221
=========
F-57
U.S. RENTALS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS EQUITY
---------- ------ ---------- -------- -------------
Balance at December 31,
1997...................... 30,748,975 $307 $244,211 $20,868 $265,386
Net income................. -- -- -- 16,463 16,463
Stock options exercised.... 26,000 1 520 -- 521
Income tax benefit from
stock options exercised... -- -- 99 -- 99
---------- ---- -------- ------- --------
Balance at June 30, 1998... 30,774,975 $308 $244,830 $37,331 $282,469
========== ==== ======== ======= ========
F-58
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
(TABLES IN THOUSANDS)
(UNAUDITED)
1. INTRODUCTION
The Registrant's initial public offering ("IPO") was declared effective on
February 20, 1997. Prior to the IPO, the equipment rental business was
operated by Ayr, Inc., a California corporation (the "Predecessor") that was
treated as an S corporation under the Internal Revenue Code. The Registrant
did not have any operations prior to its IPO. Prior to the closing of the IPO,
the Predecessor transferred substantially all of its operating assets and
associated liabilities to the Registrant in exchange for 20,748,975 shares of
Common Stock of the Registrant, representing all of the Registrant's
outstanding capital stock prior to the IPO. The Predecessor retained only non-
operating assets and liabilities, including approximately $25.7 million of
notes receivable from related parties and approximately $24.4 million of notes
payable to related parties. These transactions are referred to as the
"Recapitalization" in this report.
Unless otherwise indicated, the "Company" means the Predecessor prior to the
IPO and the Registrant on or after the IPO.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Results of operations for the interim periods
are not necessarily indicative of the results that may be expected for a full
year.
3. BANK DEBT AND LONG-TERM OBLIGATIONS
Bank debt and long-term obligations consist of the following:
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
Notes payable:
Senior notes payable to various parties, interest
payable semi-annually ranging from 6.71% to 6.93%, due
2006 to 2010.......................................... $252,000 $ --
Revolving line of credit, interest payable monthly at
money market rates (6.08% to 6.14% at June 30, 1998
and 6.03% to 6.34% at December 31, 1997).............. 105,000 203,000
Notes payable related to the purchase of certain
businesses, imputed interest
averaging 7%, due through 1999........................ 100 300
-------- --------
357,100 203,300
Note payable to related party:
Demand note payable to majority stockholder of
Predecessor interest at a
variable rate, payable monthly, 5.9% at June 30, 1998
and December 31,
1997.................................................. 21,500 17,000
-------- --------
$378,600 $220,300
======== ========
On February 26, 1997, the Company repaid the bank notes, the old revolving
line of credit and senior notes utilizing proceeds from its IPO. The early
extinguishment of debt generated an extraordinary loss of $1.5 million (net of
income tax benefit of $995,000).
F-59
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On February 26, 1997, the Company entered into a $300.0 million unsecured
line of credit with a bank maturing no later than February 25, 2002. The
Company believes it is in compliance with all covenants in the credit
agreement.
On April 28, 1998, the Company completed a $252.0 million private placement
of senior unsecured notes. The Company believes it is in compliance with all
covenants in the senior note agreement.
4. INCOME TAXES
Income tax expense consists of the following:
SIX MONTHS
ENDED JUNE 30,
---------------
1998 1997
------- -------
One-time charge for cumulative deferred taxes as of the date of
the IPO as if the Company had always been subject to taxes as
a C corporation............................................... $ -- $ 7,520
Income tax provision for the period subsequent to the IPO...... 11,067 6,935
------- -------
$11,067 $14,455
======= =======
F-60
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Equipment Supply Co., Inc. and Affiliates
Burlington, New Jersey
We have audited the accompanying combined balance sheets of Equipment Supply
Co., Inc. and Affiliates (see Note 1) as of December 31, 1997 and 1996, and
the related combined statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Equipment Supply
Co., Inc. and Affiliates as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Philadelphia, Pennsylvania
June 19, 1998,
except for Notes 9 and 15 which
are as of July 10, 1998
F-61
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31,
------------------------- JUNE 30,
1997 1996 1998
------------ ------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents............... $ 1,038,086 $ 4,015,527 $ 1,784,124
Marketable securities................... -- 1,103,354 --
Accounts receivable, net of allowance
for
possible losses of $2,241,339,
$1,202,790
and $2,241,339......................... 16,087,730 14,592,845 16,528,382
Inventories............................. 3,234,402 3,249,010 4,507,505
Prepaid expenses and other assets....... 2,365,177 389,234 1,837,531
Due from stockholder.................... 4,310,190 1,637,628 5,184,698
Rental equipment, net................... 122,154,888 127,343,198 111,617,692
Property and equipment, net............. 6,548,778 5,401,275 5,267,210
Goodwill and other intangible assets,
net.................................... 3,887,945 4,436,997 3,639,033
------------ ------------ ------------
Total assets........................ $159,627,196 $162,169,068 $150,366,175
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt.................................. $ 94,870,512 $107,460,779 $ 87,577,703
Capital lease obligations............. 8,841,236 11,923,889 7,241,127
Accounts payable...................... 4,909,578 4,116,967 3,648,493
Income taxes payable.................. 1,209,251 1,393,548 1,442,884
Deferred income taxes................. 3,884,669 3,996,763 939,847
Deferred leasing costs................ 4,379,594 -- 5,626,989
Deferred rental income................ 2,404,500 2,016,607 2,653,308
Other liabilities..................... 1,599,427 2,335,963 3,215,431
------------ ------------ ------------
Total liabilities................... 122,098,767 133,244,516 112,345,782
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized 2,500 shares;
Issued and outstanding 581 shares.... 1,500 1,500 1,500
Additional paid-in capital............ 363,808 326,294 363,808
Retained earnings..................... 37,163,121 28,596,758 37,655,085
------------ ------------ ------------
Total stockholders' equity.......... 37,528,429 28,924,552 38,020,393
------------ ------------ ------------
Total liabilities and stockholders'
equity............................. $159,627,196 $162,169,068 $150,366,175
============ ============ ============
See accompanying notes to combined financial statements.
F-62
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1997 1996 1995 1998 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
REVENUES
Equipment rentals..... $78,141,502 $65,226,201 $40,905,725 $34,381,555 $38,110,803
Sales of rental
equipment............ 8,102,210 11,935,375 7,968,205 3,280,299 3,150,044
Sales of new
equipment,
merchandise and other
revenues............. 8,314,451 10,129,016 5,246,285 5,678,060 4,111,176
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES...... 94,558,163 87,290,592 54,120,215 43,339,914 45,372,023
----------- ----------- ----------- ----------- -----------
COST OF REVENUES
Cost of equipment
rentals, excluding
depreciation......... 23,509,529 19,225,581 14,222,651 12,528,730 7,675,660
Depreciation of rental
equipment............ 20,397,030 15,383,114 7,844,434 10,368,052 10,774,115
Cost of rental
equipment sold....... 5,049,876 9,834,128 3,291,409 2,131,867 1,975,139
Cost of new equipment
and merchandise...... 6,312,172 6,263,969 2,250,037 5,135,293 3,721,652
----------- ----------- ----------- ----------- -----------
TOTAL COST OF
REVENUES........... 55,268,607 50,706,792 27,608,531 30,163,942 24,146,566
----------- ----------- ----------- ----------- -----------
GROSS PROFIT............ 39,289,556 36,583,800 26,511,684 13,175,972 21,225,457
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
General and
administrative
expenses............. 17,874,879 15,195,802 10,852,925 9,672,514 9,455,819
Nonrental depreciation
and amortization..... 878,342 627,534 237,427 358,520 421,916
----------- ----------- ----------- ----------- -----------
TOTAL OPERATING
EXPENSES........... 18,753,221 15,823,336 11,090,352 10,031,034 9,877,735
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS.. 20,536,335 20,760,464 15,421,332 3,144,938 11,347,722
INTEREST EXPENSE........ (11,185,934) (7,508,226) (3,691,638) (4,220,244) (6,434,136)
OTHER INCOME (EXPENSE).. 2,858,438 854,658 (28,356) 198,381 793,290
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES.................. 12,208,839 14,106,896 11,701,338 (876,925) 5,706,876
PROVISION FOR INCOME TAX
EXPENSE (BENEFIT)...... 1,242,142 2,073,617 1,517,539 (2,637,684) 575,365
----------- ----------- ----------- ----------- -----------
NET INCOME.............. $10,966,697 $12,033,279 $10,183,799 $ 1,760,759 $ 5,131,511
=========== =========== =========== =========== ===========
See accompanying notes to combined financial statements.
F-63
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ----------- -----------
BALANCE, January 1, 1995.... 581 $1,500 $ -- $14,408,232 $14,409,732
Net income.................. -- -- -- 10,183,799 10,183,799
Stockholders' distribu-
tions...................... -- -- -- (3,861,677) (3,861,677)
Capital contributions....... -- -- 170,406 -- 170,406
--- ------ -------- ----------- -----------
BALANCE, December 31, 1995.. 581 1,500 170,406 20,730,354 20,902,260
Net income.................. -- -- -- 12,033,279 12,033,279
Stockholders' distribu-
tions...................... -- -- -- (4,166,875) (4,166,875)
Capital contributions....... -- -- 155,888 -- 155,888
--- ------ -------- ----------- -----------
BALANCE, December 31, 1996.. 581 1,500 326,294 28,596,758 28,924,552
Net income.................. -- -- -- 10,966,697 10,966,697
Stockholders' distribu-
tions...................... -- -- -- (2,937,557) (2,937,557)
Capital contributions....... -- -- 37,514 -- 37,514
Adjustment related to
affiliate with
different fiscal year...... -- -- -- 537,223 537,223
--- ------ -------- ----------- -----------
BALANCE, December 31, 1997.. 581 1,500 363,808 37,163,121 37,528,429
Net income (unaudited)...... -- -- -- 1,760,759 1,760,759
Stockholders' distributions
(unaudited)................ -- -- -- (1,268,795) (1,268,795)
--- ------ -------- ----------- -----------
BALANCE, June 30, 1998 (un-
audited)................... 581 $1,500 $363,808 $37,655,085 $38,020,393
=== ====== ======== =========== ===========
See accompanying notes to combined financial statements.
F-64
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------------
1997 1996 1995 1998 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income............. $ 10,966,697 $ 12,033,279 $ 10,183,799 $ 1,760,759 $ 5,131,511
Adjustments to
reconcile net income
to net cash flows
provided by operating
activities
Depreciation and
amortization........ 21,275,372 16,010,648 8,081,861 10,775,137 11,196,031
Provision for bad
debts............... 1,038,549 374,056 828,734 -- --
Loss (Gain) on sale
of equipment........ (3,052,334) (2,101,247) (4,555,863) (1,148,432) (1,174,905)
Gain on sale of
marketable
securities.......... (390,410) (126,747) (37,345) -- (413,631)
Deferred income
taxes............... (112,094) 743,691 961,861 (2,944,822) (127,771)
Adjustment related to
affiliate with
different fiscal
year................ 537,223 -- -- -- 537,223
Changes in operating
assets and
liabilities:
(Increase) decrease
in accounts
receivable.......... (2,533,434) (4,603,457) (4,789,132) (440,653) (1,275,848)
(Increase) decrease
in inventories...... 14,608 (945,385) (824,220) (1,273,103) (384,360)
(Increase) decrease
in prepaid expenses
and other assets.... (1,975,943) 122,694 587,072 527,646 (233,087)
Increase (decrease)
in accounts
payable............. 792,611 1,436,552 1,560,529 (1,261,085) 3,933,297
Increase (decrease)
in income taxes
payable............. (184,297) 1,076,242 689,302 233,633 (474,120)
Increase in deferred
leasing costs....... 4,379,594 -- -- 1,247,395 --
Increase (decrease)
in deferred rental
income.............. 387,893 627,699 499,251 248,808 175,016
Increase (decrease)
in other
liabilities......... (736,536) 914,657 1,015,997 1,616,004 (527,352)
------------ ------------ ------------ ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES... 30,407,499 25,562,682 14,201,846 9,341,287 16,362,004
------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchases of
equipment............. (21,445,901) (73,822,654) (32,957,168) (664,200) (12,537,761)
Acquisitions of
affiliated
companies............. -- (11,807,987) (7,829,319) -- --
Proceeds from sale of
equipment............. 8,102,210 11,935,375 7,741,552 3,280,299 3,150,044
Sales (purchases) of
marketable
securities............ 1,493,764 (414,665) 397,153 -- (347,750)
------------ ------------ ------------ ----------- -----------
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES............. (11,849,927) (74,109,931) (32,647,782) 2,616,099 (9,735,467)
------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from debt..... $ 12,869,925 $ 79,950,621 $ 28,777,004 $ 2,634,890 $11,729,779
Repayment of capital
lease obligations..... (3,341,413) (4,419,085) (2,177,919) (1,774,650) (2,004,361)
Repayment of debt...... (25,460,192) (18,525,872) (4,207,118) (9,927,699) (14,536,422)
Payment of loan
acquisition fees...... (28,728) (299,978) (88,493) (586) (26,183)
(Increase) decrease in
due to/from
stockholders.......... (2,672,562) (1,673,052) 35,425 (874,508) (2,555,699)
Capital
contributions......... 37,514 155,887 170,406 -- --
Stockholders'
distributions......... (2,937,557) (4,166,875) (3,861,677) (1,268,795) (1,809,911)
------------ ------------ ------------ ----------- -----------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES............. (21,535,013) 51,021,646 18,647,627 (11,211,348) (9,202,797)
------------ ------------ ------------ ----------- -----------
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS............ (2,977,441) 2,474,397 201,691 746,038 (2,576,260)
CASH AND CASH
EQUIVALENTS, beginning
of year................ $ 4,015,527 $ 1,541,130 $ 1,339,439 $ 1,038,086 $ 4,015,527
------------ ------------ ------------ ----------- -----------
CASH AND CASH
EQUIVALENTS, end of
year................... $ 1,038,086 $ 4,015,527 $ 1,541,130 $ 1,784,124 $ 1,439,267
============ ============ ============ =========== ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCIAL ACTIVITIES
Acquisition of
equipment in exchange
for capital lease
obligations........... $ 260,760 $ 7,121,669 $ 6,997,926 $ 174,541 $ 228,467
Goodwill related to
acquisitions.......... $ -- $ -- $ 1,897,761 $ -- $ --
Assets acquired from
purchase of
companies............. $ -- $ 13,165,000 $ 9,524,479 $ -- $ --
Liabilities assumed
from purchase of
companies............. $ -- $ 3,357,013 $ 3,151,101 $ -- $ --
============ ============ ============ =========== ===========
OTHER SUPPLEMENTAL
DISCLOSURES
Taxes paid............. $ 2,226,828 $ 315,814 $ 276,960 $ 73,505 $ 1,280,867
Interest paid.......... $ 11,116,164 $ 7,250,310 $ 3,568,958 $ 4,401,870 $ 6,572,411
============ ============ ============ =========== ===========
See accompanying notes to combined financial statements.
F-65
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of Equipment Supply
Co., Inc. ("Equipment Supply") and its affiliated companies: High Reach Co.,
Inc. ("High Reach") and Rylan, Inc. ("Rylan") (collectively the "Company")
which have common ownership and activities. For financial reporting purposes,
Equipment Supply has been treated as the parent company and the purchaser of
both High Reach and Rylan during 1995. The 1995 acquisitions of the stock of
these companies were made by the stockholders of Equipment Supply.
The Company rents, sells and services aerial platform equipment throughout
the mid-Atlantic region of the United States. 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 sheets are presented on an unclassified
basis.
All significant intercompany balances and transactions have been eliminated
in combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The combined balance sheet as of June 30, 1998 and the combined statements
of income, stockholders' equity and cash flows for the three months ended June
30, 1998 and 1997 are unaudited and have been prepared on the same basis as
the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consists
solely of normal recurring adjustments. The results of operations for the
interim periods are not necessarily indicative of results for the full year.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Debt and Equity Securities" requires investments in debt and equity securities
to be classified into one of three categories based on the Company's intent.
The Company has classified its investments in marketable securities as
available for sale which requires the Company to record these investments at
fair market value and record the unrealized gain or loss on the original
investment as a separate component of stockholders' equity. Such unrealized
gains or losses were not material in any period presented.
INVENTORIES
Inventories consisting of equipment and parts are stated at the lower of
average weighted cost or market.
DEPRECIATION AND AMORTIZATION
All equipment and property is stated at cost. Depreciation of rental
equipment is computed, using an estimated 5% residual value, by the straight-
line method at rates adequate to allocate the cost of rental equipment over
their estimated useful lives, ranging from five to ten years.
F-66
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Depreciation of property and equipment and amortization of leasehold
improvements are computed by the straight-line method at rates adequate to
allocate the cost of applicable assets over their estimated useful lives.
Ordinary maintenance and repair costs are charged to operations as incurred.
DEFERRED FINANCING COSTS
Deferred financing costs, which are incurred by the Company in connection
with debt, are charged to operations over the life of the underlying
indebtedness and are included in goodwill and other intangible assets. The net
book value of deferred financing costs at December 31, 1997 and 1996 and June
30, 1998 is $369,421, $340,693 and $321,445, respectively.
INCOME TAXES
The Company adopted in 1995 the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
No. 109 requires a company to recognize deferred income tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. Under this
method, deferred income tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
For all periods presented, Equipment Supply has elected, with the consent of
its stockholders, to be taxed as an S Corporation for federal and certain
state reporting purposes. In lieu of federal and certain state corporation
income taxes, the stockholders are taxed on their proportionate share of the
Company's taxable income. Provision has been made for state income taxes for
those states not recognizing S Corporation status.
During 1998, Rylan elected, with the consent of its stockholders, to be
taxed as an S Corporation for federal and state income tax reporting purposes.
Consequently, all applicable federal and state deferred income taxes have been
reversed during the six months ended June 30, 1998. As a result, the effect on
the 1998 combined statement of income was to increase net income by
approximately $2.9 million.
During 1997, High Reach elected, with the consent of its stockholders, to be
taxed as an S Corporation for federal and state income tax reporting purposes.
Provision has been made for state income taxes for those states not
recognizing S Corporation status. A provision for federal and state income
taxes has been recorded for all periods through September 30, 1997. As of
October 1, 1997, all applicable federal and state deferred income taxes
approximating $81,000 have been reversed in accordance with SFAS 109 and have
been recorded in the statement of income.
ACQUISITIONS
High Reach
On April 1, 1995, the stockholders of Equipment Supply purchased all of the
capital stock of High Reach for an aggregate purchase price of approximately
$3.1 million, of which approximately $2.5 million was paid in cash with the
balance in the form of a note maturing no later than March 31, 1997, bearing
interest at 7% per annum.
F-67
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
The High Reach acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on their estimated fair values. In accordance with SFAS 109,
the Company recorded an additional increase to goodwill of approximately
$737,000 and a corresponding increase to a deferred income tax liability,
representing the difference between the financial and tax bases of certain
assets acquired. The goodwill is being amortized over fifteen years on a
straight-line basis.
The results of operations of High Reach have been included in the Company's
combined financials since the effective date of the acquisition. The
stockholders borrowed approximately $2.5 million from the Company and such
amounts have been recorded as part of the purchase price. Additionally, other
amounts paid by the stockholders in connection with the acquisition have been
treated as additional capital contributions and as part of the purchase price.
During 1995 and 1996, High Reach was combined using its fiscal year end of
September 30. In 1997, the Company reported the results of operations for High
Reach on a calendar year basis. Net income for High Reach's three month period
ended December 31, 1996 has been reflected as an adjustment to stockholders'
equity. No unusual trends or transactions were noted in this three month
period.
Rylan
On April 27, 1995, the stockholders of Equipment Supply purchased all of the
capital stock of Rylan for an aggregate cash purchase price of $4.8 million.
The Rylan acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on their estimated fair values. In accordance with SFAS 109,
the Company recorded an additional increase to goodwill of approximately $1.2
million and a corresponding increase to a deferred income tax liability,
representing the difference between the financial and tax bases of certain
assets acquired.
The results of operations of Rylan have been included in the Company's
combined financial statement since the effective date of the acquisition.
Total goodwill arising from the acquisition, in the amount of approximately
$1.9 million, is being amortized over fifteen years on a straight-line basis.
The stockholders financed the Rylan acquisition in the amount of $4.8
million by obtaining a term loan from a financial institution. Such debt has
been recorded on the Company's financial statements, as the Company has been
making the required principal and interest payments on behalf of the
stockholders and have guaranteed this debt (see Note 9).
Freestate
Effective May 1, 1996, Rylan acquired substantially all of the assets and
assumed certain liabilities of Freestate Industries, Inc. for approximately
$11.8 million in cash. Such amount included payments specified for covenants
not to compete for three key employees. The acquisition was accounted for
using the purchase method of accounting. Accordingly, the purchase price was
allocated to the net assets acquired based on their estimated fair values.
Total goodwill and other intangible assets, amounting to approximately
$2,000,000, are being amortized over a period ranging from five to fifteen
years on a straight-line basis. The results of operations of Freestate have
been included in the Company's combined financial statements since the
effective date of the acquisition.
F-68
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
The Company borrowed approximately $10.8 million to finance a portion of the
purchase price (see Note 9).
REVENUE RECOGNITION
The Company rents equipment to its customers under agreements not exceeding
one month, consequently the rental agreements are classified as operating
leases.
Revenues from rental leases are recognized over the term of the respective
agreements. Revenues from product sales are recognized when the product is
shipped. Revenue from equipment repairs is recognized at the time of service.
Revenues from maintenance contracts are recognized over the term of the
respective contracts as service is provided.
Amounts billed in advance are recorded as prebilled rentals which is
classified as deferred rental income on the combined balance sheet.
DEFERRED LEASING COSTS
The Company receives volume rebates for leasing and purchasing certain
equipment. The rebates related to operating leases are recognized as a
reduction in lease expense over the terms of the respective leases, generally
five years. Rebates related to purchased equipment are treated as a reduction
in the cost of equipment. The Company amortizes the costs of its leases on a
straight-line basis over the respective lease terms.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable based on undiscounted estimated future operating cash
flows. As of December 31, 1997, the Company has determined that no impairment
has occurred.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards which are effective for financial statements for periods
beginning after December 15, 1997.
F-69
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosure about Segments of a Business Enterprise and
Related Information," which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The Company believes that its operations compose a single segment and there
are no components of comprehensive income.
3. FINANCIAL INVESTMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of periodic temporary
investments of excess cash and trade receivables. The Company places its
temporary excess cash investments in high quality short-term money market
instruments and the carrying value approximates market value. A significant
portion of the Company's rental sales and equipment sales are to customers in
the construction industry and, as such, the Company is directly affected by
the well-being of that industry. However, the credit risk associated with
trade receivables is minimal due to the Company's large customer base,
geographical dispersion and ongoing control procedures which monitor the
credit worthiness of its customers.
4. DUE FROM STOCKHOLDERS
From time to time, the Company makes advances to its stockholders.
Generally, there are no formal repayment terms and the amounts are
noninterest-bearing.
5. RENTAL EQUIPMENT
Rental equipment consists of the following:
DECEMBER 31,
------------------------- JUNE 30,
1997 1996 1998
------------ ------------ ------------
Rental equipment.................... $168,047,372 $156,891,144 $163,566,080
Less accumulated depreciation....... 45,892,484 29,547,946 51,948,388
------------ ------------ ------------
$122,154,888 $127,343,198 $111,617,692
============ ============ ============
F-70
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Depreciation expense amounted to $18,948,184, $14,385,916, $7,332,808,
$9,686,871 and $10,130,648 for the years ended December 31, 1997, 1996 and
1995 and the six months ended June 30, 1998 and 1997, respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
---------------------- JUNE 30,
1997 1996 1998 LIVES
----------- ---------- ----------- -----------
Shop equipment.................. $ 834,355 $ 760,669 $ 525,492 5-7 years
Transportation equipment........ 9,134,757 6,887,232 8,008,297 5 years
Furniture and fixtures.......... 1,288,479 962,474 1,071,448 5-7 year
Building and lease hold improve-
ments.......................... 635,895 590,132 701,146 15-39 years
----------- ---------- -----------
Total......................... 11,893,486 9,200,507 10,306,383
Less accumulated depreciation
and amortization............... 5,344,708 3,799,232 5,039,173
----------- ---------- -----------
$ 6,548,778 $5,401,275 $ 5,267,210
=========== ========== ===========
Depreciation and amortization amounted to $1,749,408, $1,180,285, $625,324,
$838,767 and $774,830 for the years ended December 31, 1997, 1996 and 1995 and
the six months ended June 30, 1998 and 1997, respectively.
7. CAPITAL LEASE OBLIGATIONS
Capitalized leased assets include machinery and transportation equipment.
Interest on the respective capital lease obligations range from 7.3% to 11.4%
at December 31, 1997 and 1996 and June 30, 1998.
Capital lease obligations, all of which are collateralized by the leased
equipment, consist of the following:
DECEMBER 31,
---------------------- JUNE 30,
1997 1996 1998
---------- ----------- ----------
Various equipment capital lease obligations,
lease terms of 60 months with monthly lease
payments of $512 to $52,463 ending April
1999 to June 2001.......................... $6,451,715 $8,807,391 $5,290,680
Various vehicle capital lease obligations,
lease terms of 60 months with monthly lease
payments of $590 to $10,751 ending August
1998 to April 2002......................... 2,204,559 2,826,490 1,825,700
Various vehicle capital lease obligations
lease terms of 48 months with monthly lease
payments of $578 to $4,049 ending January
1999 to June 2000.......................... 184,962 290,008 124,747
---------- ----------- ----------
$8,841,236 $11,923,889 $7,241,127
========== =========== ==========
F-71
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
The future minimum lease payments under capital leases, together with the
present value of the net minimum lease payments as of December 31, 1997 is as
follows:
YEAR
ENDING
DECEMBER
31, AMOUNT
-------- -----------
1998........................................................ $ 3,628,913
1999........................................................ 3,416,347
2000........................................................ 2,478,665
2001........................................................ 845,860
2002........................................................ 9,965
-----------
Total minimum lease payments................................. 10,379,750
Less amount representing interest............................ 1,538,514
-----------
Capital lease obligations.................................... $ 8,841,236
===========
The net book value of equipment under capital leases at December 31, 1997
and 1996 and June 30, 1998 amounted to $11,165,421, $13,800,349 and
$9,990,153, respectively.
8. NOTES PAYABLE, BANK
At December 31, 1997 and June 30, 1998, the Company had a line of credit
with a bank for $2,500,000. Borrowings under the lines bear interest at a rate
of 1/2% above the bank's prime rate (9%, at December 31, 1997 and June 30,
1998) and are secured by certain Company assets. At December 31, 1997 and June
30, 1998, $-0- and $1,993,000, respectively, was outstanding under this line.
F-72
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
9. DEBT
Debt consists of the following:
DECEMBER 31,
------------------------ JUNE 30,
1997 1996 1998
----------- ------------ -----------
Notes payable to banks and finance compa-
nies with fixed interest rates ranging
from prime plus .5% to prime plus 2% (9%
and 10.5% at December 31, 1997) due in
monthly installments ranging from $546 to
$211,242 ending in September 1999 to De-
cember 2001 including interest. Collater-
alized either by a specific security in-
terest in equipment, a general lien on
equipment or by all assets owned or here-
after acquired by the Company............ $51,164,326 $ 64,098,599 $46,140,944
Term note payable to a finance company
with interest of 9.93% due in monthly in-
stallments of $221,314, including inter-
est, through April 2002. Collateralized
by a specific security interest in equip-
ment and guaranteed by the President of
the Company. (During 1998, the balance of
the loan was converted to and is included
in the note payable to a finance company
noted below.)............................ 9,310,102 -- --
Note payable, bank, in connection with
Rylan acquisition, due in monthly in-
stallments of $99,519, including interest
at 9.25%: collateralized by certain as-
sets of Rylan and guaranteed by the
stockholders and the Company; final pay-
ment due July 2000....................... 391,362 2,041,928 --
Note payable, sellers in connection with
the High Reach acquisition, due in
monthly installments of $10,213 plus in-
terest at 7% with final payment of
$377,844 made during March 1997.......... -- 408,523 --
Note payable, bank (see Note 8).......... -- -- 1,993,000
Note payable to a finance company with an
interest rate of LIBOR plus 3.25% (9.41%
at December 31, 1997) due in varying
monthly installments. Collateralized by a
specific security interest in equipment
and guaranteed by the President of the
Company.................................. 34,004,722 40,911,729 39,443,759
----------- ------------ -----------
$94,870,512 $107,460,779 $87,577,703
=========== ============ ===========
F-73
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
At December 31, 1997, the aggregate maturities of debt are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
------------ ------------
1998.......................................................... $ 26,007,808
1999.......................................................... 25,586,393
2000.......................................................... 23,492,367
2001.......................................................... 18,116,590
2002.......................................................... 1,208,650
Thereafter.................................................... 458,704
------------
$ 94,870,512
============
Certain agreements require the Company to maintain specified minimum net
worth and working capital and certain financial ratios. At December 31, 1997,
the Company was in violation of certain covenants, including obtaining a
specified level of minimum tangible net worth and a debt service coverage
ratio.
From the proceeds of the sale, more fully described in Note 15, the Company
repaid substantially all of its debt.
10. INCOME TAXES
Deferred income taxes reflect the net tax effect of differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Deferred income taxes relate primarily to depreciation and amortization,
differences in the accounting treatment of capital leases and bases of certain
assets of acquired businesses.
The components of income tax expense are summarized as follows:
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1997 1996 1995 1998 1997
---------- ---------- ---------- ----------- --------
CURRENT INCOME TAXES
Federal............... $ 482,568 $ 928,915 $ 277,900 $ -- $232,612
State................. 871,648 401,011 277,778 307,138 470,532
---------- ---------- ---------- ----------- --------
TOTAL CURRENT INCOME
TAX EXPENSE........ 1,354,216 1,329,926 555,678 307,138 703,144
---------- ---------- ---------- ----------- --------
DEFERRED INCOME TAXES
(BENEFIT)
Federal............... 393,018 133,507 452,061 -- 311,611
State................. (424,092) 610,184 509,800 (20,000) (439,382)
Reversal of deferred
income taxes relating
to sub S elections... (81,000) -- -- (2,924,822) --
---------- ---------- ---------- ----------- --------
TOTAL DEFERRED
INCOME TAX EXPENSE
(BENEFIT).......... (112,074) 743,691 961,861 (2,944,822) (127,771)
---------- ---------- ---------- ----------- --------
TOTAL INCOME TAX
EXPENSE (BENEFIT).. $1,242,142 $2,073,617 $1,517,539 $(2,637,684) $575,373
========== ========== ========== =========== ========
F-74
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Differences which give rise to a significant portion of deferred income
taxes are as follows:
DECEMBER 31, JUNE 30,
----------------------- -----------
1997 1996 1998
----------- ----------- -----------
DEFERRED INCOME TAX (ASSETS)
LIABILITIES
Depreciation and amortization....... $ 2,256,399 $ 2,393,302 $ 1,072,381
Reserves and allowances............. (269,491) (294,300) (132,534)
Difference in basis of certain
acquired assets.................... 1,897,761 1,897,761 --
----------- ----------- -----------
$ 3,884,669 $ 3,996,763 $ 939,847
=========== =========== ===========
The differences between the income tax provision and the tax that would have
resulted from applying federal statutory rates on income before taxes is
primarily due to Equipment Supply being taxed as an S Corporation and High
Reach being taxed as an S Corporation for the three months ended December 31,
1997.
The effect of Rylan's conversion to an S Corporation in 1998 was for the
Company to recognize a deferred income tax benefit of approximately $2.9
million.
11. RETIREMENT PLANS
The Company participates in several defined contribution plans covering
substantially all nonunion employees. The Plans allow matching contributions
based on a percentage of the employees' contributions. The Company
contributions for the years ended December 31, 1997, 1996 and 1995 and the six
months ended June 30, 1998 and 1997 amounted to $139,572, $96,931, $30,821,
$91,351 and $70,393, respectively.
Additionally, the Company participates in a multi-employer plan that
provides defined contributions to the Company's union employees. For
collectively bargained, multi-employer pension plans, contributions are made
in accordance with negotiated labor contracts and generally are based on the
number of hours worked. With the passage of the Multi-Employer Pension Plan
Amendments Act of 1980 (the "Act"), the Company may, under certain
circumstances, become subject to liabilities in excess of contributions made
under collective bargaining agreements. Generally, these liabilities are
contingent upon the termination, withdrawal or partial withdrawal from the
plans. Company contributions for the years ended December 31, 1997, 1996 and
1995 and the six months ended June 30, 1998 and 1997 amounted to $96,737,
$75,930, $62,372, $57,991 and $43,609, respectively.
On January 1, 1998, the Company terminated its defined contribution plans
for Equipment Supply, High Reach and Rylan and established a combined defined
contribution plan covering substantially all nonunion employees. The plan
allows employees to make voluntary contributions processed through payroll
deductions.
12. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company leases various facilities under lease agreements, including
those with related parties. Some of these leases require the Company to pay
property taxes and other related costs.
F-75
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Future minimum lease payments, by year, and in the aggregate for
noncancelable operating leases, including those with related parties, with
initial or remaining terms of one year or more are as follows at December 31,
1997:
FACILITIES LEASES
YEAR ENDED (SUBSTANTIALLY WITH EQUIPMENT TOTAL OPERATING
DECEMBER 31, RELATED PARTIES) LEASES LEASES
------------ ------------------- ----------- ---------------
1998....................... $ 2,120,949 $11,035,372 $13,156,321
1999....................... 1,938,559 10,001,175 11,939,734
2000....................... 1,921,804 7,768,161 9,689,965
2001....................... 1,917,196 6,567,617 8,484,813
2002....................... 1,912,170 4,870,393 6,782,563
Thereafter................. 876,000 -- 876,000
----------- ----------- -----------
$10,686,678 $40,242,718 $50,929,396
----------- ----------- -----------
Rent expense under noncancelable operating leases for the years ended
December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998 and
1997 amounted to $10,210,657, $6,674,413, $1,179,277, $7,886,107 and
$2,405,348, respectively.
The following related party transactions including rent expense is
summarized as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -----------------
1997 1996 1995 1998 1997
-------- -------- ------- -------- --------
Rent expense................... $963,600 $756,000 $18,168 $748,200 $515,500
Other expense.................. 79,190 109,173 58,689 80,100 59,300
The Company has guaranteed a personal loan of the stockholders, which is
included as a liability in the financial statements. The loan proceeds were
used to purchase Rylan (see Note 9).
From time to time, the Company is a defendant in various lawsuits incident
to the ordinary course of business. It is not possible to determine with any
precision the probable outcome or the amount of liability, if any, under these
lawsuits; however, in the opinion of the Company and its counsel, the
disposition of these lawsuits will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
13. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for accounts receivable,
accounts payable and other liabilities approximate fair value due to the
immediate to short-term maturity of these financial instruments. The fair
value of debt approximates cost as interest rates approximate market.
14. SUPPLIER CONCENTRATION
During 1997, two suppliers accounted for approximately 73% of total
purchases and leased equipment costs. During 1996, three suppliers (of which
two were the same in 1997) accounted for approximately 84% of total purchases
and lease costs. During 1995, three suppliers (of which two were the same in
1996 and 1997) accounted for approximately 68% of total purchases and lease
costs.
F-76
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
During 1997, volume activities with one vendor generated approximately $2
million in marketing rebates. Such amount has been recorded as other income.
15. SUBSEQUENT EVENT
Sale of Business Operations
Subsequent to December 31, 1997, the Company sold its principal business
operations, a substantial portion of its net assets and certain stock for
approximately $225 million.
Additionally, the Company anticipates paying approximately $1.5 million in
bonuses to certain of its employees.
F-77
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Access Rentals, Inc.
We have audited the accompanying consolidated balance sheet of Access
Rentals, Inc., and subsidiary as of March 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended September 30, 1994 and 1995, and the six months ended March 31,
1996. We have also audited the combined balance sheet of Access Rentals, Inc.,
and subsidiary and affiliate as of March 31, 1997, and the related combined
statements of income, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the financial position of
Access Rentals, Inc., and subsidiary and affiliate as of March 31, 1996 and
1997, and results of their operations and cash flows for the years ended
September 30, 1994 and 1995, the six months ended March 31, 1996 and the year
ended March 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Battaglia, Andrews & Moag, P.C.
Batavia, New York
January 22, 1998
F-78
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
CONSOLIDATED AND COMBINED BALANCE SHEETS
MARCH 31, MARCH 31, DECEMBER
1996 1997 31, 1997
----------- ----------- -----------
(UNAUDITED)
ASSETS
------
Cash.................................... $ 284,228 $ 399,196 $ 362,817
Accounts receivable, net................ 3,319,859 5,173,046 9,482,265
Unbilled receivables.................... -- -- 1,075,209
Inventory............................... 2,013,125 1,835,687 2,511,326
Rental equipment, net................... 30,865,058 49,551,170 63,636,491
Property and equipment, net............. 2,625,564 4,599,576 5,386,167
Due from related party.................. 1,121,814 1,860,102 2,071,971
Prepaid expenses and other assets....... 1,221,482 1,896,518 1,286,100
Deferred tax asset...................... 458,908 937,585 576,730
Intangibles............................. -- 1,375,005 2,212,368
----------- ----------- -----------
Total assets........................ $41,910,038 $67,627,885 $88,601,444
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable, accrued expenses and
other liabilities.................... $ 3,128,407 $ 3,601,707 $ 7,160,756
Deferred tax liability................ 4,675,199 6,350,541 7,821,732
Debt.................................. 19,109,094 39,782,237 51,505,595
----------- ----------- -----------
Total liabilities................... 26,912,700 49,734,485 66,488,083
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value; 10,000
shares authorized, 300, 300 and
10,000 shares issued and outstanding
for each respective year............. 300 300 10,000
Additional paid-in capital............ 4,500 4,500 4,500
Note receivable from stockholder...... (420,040) (515,606) (1,105,994)
Retained earnings..................... 15,426,922 18,411,049 23,278,389
Equity adjustment for foreign currency
translation.......................... (14,344) (6,843) (73,534)
----------- ----------- -----------
Total stockholders' equity.......... 14,997,338 17,893,400 22,113,361
----------- ----------- -----------
Total liabilities and stockholders'
equity............................. $41,910,038 $67,627,885 $88,601,444
=========== =========== ===========
See accompanying notes.
F-79
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
YEAR ENDED SIX MONTHS NINE MONTHS ENDED
SEPTEMBER 30, ENDED YEAR ENDED DECEMBER 31,
------------------------ MARCH 31, MARCH 31, ------------------------
1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Equipment rentals...... $15,804,754 $18,382,243 $10,405,814 $30,615,602 $21,391,478 $33,092,299
Sales of equipment and
parts................. 4,731,889 9,426,936 3,629,373 8,963,128 9,279,272 10,258,882
----------- ----------- ----------- ----------- ----------- -----------
Total revenues......... 20,536,643 27,809,179 14,035,187 39,578,730 30,670,750 43,351,181
Cost of revenues:
Cost of rentals
excluding
depreciation.......... 4,867,059 6,129,103 3,870,961 9,937,663 7,341,151 9,819,143
Depreciation, equipment
rentals............... 2,825,381 3,405,797 2,139,726 6,509,012 4,701,737 6,672,741
Cost of equipment and
parts................. 3,468,073 7,115,826 2,703,494 6,494,156 5,200,774 7,568,450
----------- ----------- ----------- ----------- ----------- -----------
Total cost of
revenues.............. 11,160,513 16,650,726 8,714,181 22,940,831 17,243,662 24,060,334
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............ 9,376,130 11,158,453 5,321,006 16,637,899 13,427,088 19,290,847
Selling, general and
administrative
expenses............... 4,414,362 5,394,286 2,329,997 8,747,215 6,261,115 7,953,627
Non-rental
depreciation........... 489,084 532,659 283,206 946,382 658,899 1,067,156
----------- ----------- ----------- ----------- ----------- -----------
Operating income....... 4,472,684 5,231,508 2,707,803 6,944,302 6,507,074 10,270,064
Interest expense........ 673,532 1,147,616 682,394 2,604,066 1,821,607 2,918,100
Other (income), net..... (220,289) (250,421) (295,443) (605,215) (363,828) (567,759)
----------- ----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes and
cumulative effect of
change in accounting
principle............. 4,019,441 4,334,313 2,320,852 4,945,451 5,049,295 7,919,723
Provision for income
taxes.................. 1,661,994 1,819,455 1,122,851 1,786,724 2,016,066 2,974,033
----------- ----------- ----------- ----------- ----------- -----------
Income before
cumulative effect of
change in accounting
principle............. 2,357,447 2,514,858 1,198,001 3,158,727 3,033,229 4,945,690
Cumulative effect of
change in method of
accounting for taxes... 46,325 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 2,403,772 $ 2,514,858 $ 1,198,001 $ 3,158,727 $ 3,033,229 $ 4,945,690
=========== =========== =========== =========== =========== ===========
See accompanying notes.
F-80
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
CONSOLIDATED AND COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE FOREIGN
-------------- PAID-IN FROM TREASURY RETAINED CURRENCY
SHARES AMOUNT CAPITAL STOCKHOLDER STOCK EARNINGS TRANSLATION
------ ------- ---------- ----------- --------- ----------- -----------
Balance at October 1,
1993................... 6 $ 4,800 $ -- $ (128,069) $(200,000) $ 9,775,310 $ --
Prior period
adjustment............ (265,019)
------ ------- ------ ----------- --------- ----------- --------
Balance, October 1, as
restated............... 6 4,800 -- (128,069) (200,000) 9,510,291 --
Retroactive retirement
of treasury stock..... 200,000 (200,000)
Retroactive effect of
stock split........... 294 (4,500) 4,500
Advances on note
receivable from
stockholder, net...... (199,179)
Net income............. 2,403,772
------ ------- ------ ----------- --------- ----------- --------
Balance at September 30,
1994................... 300 300 4,500 (327,248) -- 11,714,063 --
Advances on note
receivable from
stockholder, net...... (44,180)
Net income............. 2,514,858 (5,557)
------ ------- ------ ----------- --------- ----------- --------
Balance at September 30,
1995................... 300 300 4,500 (371,428) -- 14,228,921 (5,557)
Advances on note
receivable from
stockholder, net...... (48,612)
Net income............. 1,198,001 (8,787)
------ ------- ------ ----------- --------- ----------- --------
Balance at March 31,
1996................... 300 300 4,500 (420,040) -- 15,426,922 (14,344)
Advances on note
receivable from
stockholder, net...... (105,566)
Affiliate owner
contributions......... 10,000
Affiliate owner
distributions......... (174,600)
Net income............. 3,158,727 7,501
------ ------- ------ ----------- --------- ----------- --------
Balance at March 31,
1997................... 300 300 4,500 (515,606) -- 18,411,049 (6,843)
Issuance of common
stock (unaudited)..... 9,700 9,700 (9,700)
Advances on note
receivable from
stockholder, net
(unaudited)........... (590,388)
Affiliate owner
distributions
(unaudited)........... (68,650)
Net income
(unaudited)........... 4,945,690 (66,691)
------ ------- ------ ----------- --------- ----------- --------
Balance at December 31,
1997 (unaudited)....... 10,000 $10,000 $4,500 $(1,105,994) $ -- $23,278,389 $(73,534)
====== ======= ====== =========== ========= =========== ========
See accompanying notes.
F-81
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, SIX MONTHS YEAR ENDED DECEMBER 31,
------------------------ ENDED MARCH MARCH 31, --------------------------
1994 1995 31, 1996 1997 1996 1997
----------- ----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 2,403,772 $ 2,514,858 $ 1,198,001 $ 3,158,727 $ 3,033,229 $ 4,945,690
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization.......... 3,314,465 3,938,456 2,422,932 7,583,689 5,446,164 7,898,802
Deferred income
taxes................. 672,080 676,782 667,412 1,151,456 1,048,873 1,835,040
Gain on sales of
equipment............. (778,327) (1,274,170) (533,974) (1,543,192) (1,064,927) (1,767,358)
Cumulative effect of
change in method of
accounting for income
taxes................. (46,325) -- -- -- -- --
Change in assets and
liabilities:
Increase (decrease)
in:
Accounts receivable,
net................. (1,163,341) (43,024) 670,789 (1,853,187) (3,004,185) (4,309,219)
Unbilled
receivables......... -- -- -- -- -- (1,075,209)
Inventory............ (91,367) (357,333) (741,329) 177,438 (393,457) (675,639)
Prepaid expenses and
other assets........ (740,966) (92,290) 179,547 (584,753) 111,402 560,606
Increase (decrease)
in:
Accounts payable,
accrued expenses and
other liabilities... 213,105 949,842 402,186 473,300 129,992 3,559,049
----------- ----------- ----------- ------------ ------------ ------------
Total adjustments... 1,379,324 3,798,263 3,067,563 5,404,751 2,273,862 6,026,072
Net cash provided by
operating
activities......... 3,783,096 6,313,121 4,265,564 8,563,478 5,307,091 10,971,762
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from the sale
of property and
equipment............. 2,715,240 4,498,860 3,511,441 5,223,214 3,662,918 6,076,640
Purchase of property
and equipment......... (2,497,803) (4,978,090) (3,789,714) (3,146,679) (333,516) (5,572,825)
Advances on loan
receivable--
stockholder........... (304,436) (248,462) (99,555) (389,594) (293,310) (697,153)
Repayments on loan
receivable--
stockholder........... 105,257 204,282 50,943 284,028 158,829 106,765
Advances on loan
receivable--related
party................. (13,000) -- (531,466) (759,690) (358,798) (246,543)
Repayments on loan
receivable--related
party................. 10,174 7,128 3,673 21,402 15,401 34,674
Advances on note
receivable............ -- (48,322) -- (77,851) -- --
Repayments on note
receivable............ (126,668) 3,283 2,554 6,255 4,632 31,128
Acquisition of
subsidiary............ -- (866,700) -- -- -- --
Payments for
intangibles........... -- -- -- (1,521,984) (1,521,984) (977,583)
----------- ----------- ----------- ------------ ------------ ------------
Net cash provided by
(used by) investing
activities.......... (111,236) (1,428,021) (852,124) (360,899) 1,334,172 (1,244,897)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Affiliate owner
distributions......... -- -- -- (174,600) -- (68,650)
Affiliate owner
contributions......... -- -- -- 10,000 10,000 --
Borrowings on debt
obligations........... 161,297 736,330 2,083,097 23,048,203 16,018,625 22,959,059
Principal payments on
debt obligations...... (3,932,202) (5,601,158) (5,234,451) (30,978,715) (22,599,866) (32,586,962)
----------- ----------- ----------- ------------ ------------ ------------
Net cash used by
financing
activities.......... (3,770,905) (4,864,828) (3,151,354) (8,095,112) (6,571,241) (9,696,553)
Equity translation...... -- (5,557) (8,787) 7,501 7,569 (66,691)
----------- ----------- ----------- ------------ ------------ ------------
Net increase (decrease)
in cash................ (99,045) 14,715 253,299 114,968 77,591 (36,379)
CASH--BEGINNING OF
PERIOD................. 115,259 16,214 30,929 284,228 284,228 399,196
----------- ----------- ----------- ------------ ------------ ------------
CASH--END OF PERIOD..... $ 16,214 $ 30,929 $ 284,228 $ 399,196 $ 361,819 $ 362,817
=========== =========== =========== ============ ============ ============
See accompanying notes.
F-82
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995, AND AS OF AND FOR THE SIX
MONTHS ENDED
MARCH 31, 1996 AND AS OF AND FOR THE YEAR ENDED MARCH 31, 1997
(THE INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The accompanying financial statements include the financial statements of
Access Rentals, Inc. (the "Parent"), Access Lift Equipment, Inc. (the
"Subsidiary") which was acquired in February 1995 and Reinhart Leasing LLC
(the "Affiliate"). The Affiliate, which has common ownership to the Parent,
was formed on June 26, 1996.
The accompanying financial statements include the financial statements of
the Parent for the years ended September 30, 1994 and 1995, as of and for the
six months ended March 31, 1996, as of and for the year ended March 31, 1997
and as of December 31, 1997 and for the nine months ended December 31, 1996
and 1997 and the financial statements of the Subsidiary for the seven months
ended September 30, 1995, as of and for the three months ended December 31,
1995 (included in the financial statements for the six months ended March 31,
1996), as of and for the year ended December 31, 1996 (included in the
financial statements for the year ended March 31, 1997) and the nine months
ended December 31, 1996 and 1997. The consolidated financial statements have
been combined with the financial statements of the Affiliate for the six
months ended December 31, 1996 (included in the financial statements for the
nine months ended December 31, 1996) as of and for the nine months ended March
31, 1997 and as of and for the nine months ended December 31, 1997. All
material intercompany transactions and balances have been eliminated in
consolidation and combination.
BUSINESS
Access Rentals, Inc. and Subsidiary (the Company) rents, sells and repairs
aerial personnel lift equipment primarily to companies in the manufacturing
and construction industries. Sales and rentals primarily occur in areas where
the Company maintains offices, such as the states of New York, Minnesota,
Tennessee, Indiana, New Jersey, Pennsylvania, Connecticut, South Carolina,
Florida, Washington and in and around Toronto, Canada. 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 balance sheet is presented on an unclassified basis.
Reinhart Leasing, LLC rents and sells aerial personnel lift equipment solely
to Access Rentals, Inc.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet at December 31, 1997, and the statements of
income, stockholders' equity and cash flows for the nine month periods ended
December 31, 1996 and 1997 are unaudited and have been prepared on the same
basis as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consists
solely of normal recurring adjustments. The results of operations for such
interim periods are not necessarily indicative of results for the full year.
F-83
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ACCOUNTS RECEIVABLE
It is the Company's policy to present accounts receivable net of an
allowance for uncollectible accounts. At March 31, 1996 and 1997 and December
31, 1997, the balance of the allowance for uncollectible accounts amounted to
$103,028, $228,885 and $380,000, respectively.
INVENTORY
Inventory consists of equipment and vehicles purchased for resale and
equipment parts purchased for repairs and resale. Equipment is valued at the
lower of cost or market, based on specific identification, and parts are
valued using the average cost method.
Inventory amounted to:
MARCH 31,
----------------------- DECEMBER
1996 1997 31, 1997
----------- ----------- -----------
(UNAUDITED)
Equipment for resale.................. $ 1,371,741 $ 368,723 $ 842,295
Parts................................. 641,384 1,466,964 1,669,031
----------- ----------- -----------
Total............................... $ 2,013,125 $ 1,835,687 $ 2,511,326
=========== =========== ===========
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated six-year useful life
with a 10% salvage value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is being depreciated using the
straight-line and declining balance methods over the estimated useful lives of
the respective assets.
The cost of normal maintenance and repairs is charged to expense as
incurred, whereas expenditures which materially extend property lives are
capitalized. When depreciable property is retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the accounts
and any gain or loss is reflected in income.
RENTAL REVENUE
Rental revenue is recorded as earned under the operating method.
ADVERTISING COSTS
The Company advertises primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expenses amounted to approximately $7,706, $11,349, $6,717,
$10,395, $6,454 and $26,982, for the years ended September 30, 1994 and 1995,
six months ended March 31, 1996, year ended March 31, 1997, and nine months
ended December 31, 1996 and 1997, respectively.
F-84
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OTHER ASSETS/AMORTIZATION
During the year ended March 31, 1997 and the nine months ended December 31,
1997, the Company acquired assets of two companies. The acquisitions resulted
in goodwill and covenants not-to-compete amounting to approximately $1,777,500
and $700,000, respectively, which are being amortized using the straight-line
method over 15 years and 5 years, respectively. Total amortization expense
amounted to $128,295, $85,528 and $158,905 for the year ended March 31, 1997
and the nine months ended December 31, 1996 and 1997, respectively.
INCOME TAXES
The provision for income tax is based on earnings reported for financial
statement purposes, adjusted for transactions that do not enter into the
computation of income taxes payable. The Parent, Subsidiary and Affiliate file
separate tax returns. The Parent files tax returns in the United States and
the Subsidiary files tax returns in Canada. The Affiliate is a limited
liability company taxed as a partnership; therefore the members are taxed
individually on the income of the Affiliate and a provision for taxes has not
been made in the financial statements.
CONCENTRATION OF CREDIT RISK
Credit is granted to substantially all of the Parent's customers throughout
the United States and the Subsidiary's customers throughout Canada. Management
feels that adequate reserves for potential credit losses are maintained.
FOREIGN CURRENCY TRANSLATION
The Company conducts business through a subsidiary located in Canada. The
Company regards the local currency of the subsidiary to be its functional
currency; consequently, translation gains and losses of the foreign subsidiary
are accumulated and reported as a separate component of stockholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations on the
transactions denominated in a currency other than the local functional
currency are included in the results of operations.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. This affects the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
NOTE 2--RENTAL EQUIPMENT
RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following:
MARCH 31,
----------------------- DECEMBER
1996 1997 31, 1997
----------- ----------- -----------
(UNAUDITED)
Rental equipment........................... $43,896,291 $66,007,890 $84,098,558
Less accumulated depreciation.............. 13,031,233 16,456,720 20,462,067
----------- ----------- -----------
Rental equipment, net...................... $30,865,058 $49,551,170 $63,636,491
=========== =========== ===========
F-85
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation consisted of the
following:
MARCH 31,
--------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
Land......................................... $ 182,969 $ 182,969 $ 182,969
Buildings and improvements................... 949,741 1,346,619 1,779,975
Office and shop equipment.................... 833,209 1,341,605 1,387,020
Transportation equipment..................... 2,573,492 4,425,156 5,393,695
Less accumulated depreciation................ 1,913,847 2,696,773 3,357,492
---------- ---------- ----------
Property and equipment, net.................. $2,625,564 $4,599,576 $5,386,167
========== ========== ==========
NOTE 3--NET INVESTMENT IN SALES-TYPE LEASES
The Company leases some of its rental equipment to customers under sales-
type leases. The following summarizes the net investment in sales-type leases
which are included in prepaid and other assets on the balance sheet:
MARCH 31,
------------------- DECEMBER 31,
1996 1997 1997
--------- --------- ------------
(UNAUDITED)
Total minimum lease payments to be received.... $ 418,679 $ 573,127 $ 716,961
Less unearned interest income.................. 26,950 38,773 39,627
--------- --------- ---------
Net investment in sales-type leases............ $ 391,729 $ 534,354 $ 677,334
========= ========= =========
F-86
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--DEBT
Debt consists of the following:
MARCH 31,
----------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
(UNAUDITED)
Lines-of-credit.......................... $ 2,130,195 $ 3,788,341 $ 3,828,370
Present value of capital lease
obligations............................. 3,436,191 8,465,249 16,104,886
Various installment obligations
collateralized by rental and
transportation equipment. These notes
bear interest ranging from 6%-9.8%, with
repayment periods ranging from two to
five years.............................. 12,030,127 18,913,002 23,965,117
Term loan payable to a bank, monthly
payments of $50,500 including interest
at 7.84%, maturing July, 2006.
Collateralized by rental equipment...... 270,413 2,217,572 1,887,211
Term loan payable to a bank, requiring
monthly principle payments of $79,511,
plus interest at the prime rate plus
1.75%, or the sum of the LIBOR on the
request day plus 1.75% (7.3125% at
March 31, 1997), maturing July 2002. The
loan is collateralized by rental
equipment of the Affiliate.............. -- 5,088,735 4,325,469
Term loan payable to a bank, quarterly
principal payments of $46,021, plus
interest at 6%, maturing July 1999.
Collateralized by rental equipment of
the Parent.............................. 598,268 414,186 276,124
Subsidiary revolving term loan payable to
a bank, monthly principal payments
totaling Canadian $39,455, plus interest
at Canadian prime rate plus 0.5%, (5.25%
at March 31, 1997), maturing June 2000.
Collateralized by equipment of
Subsidiary and guaranteed by the
Parent.................................. 608,502 878,339 1,116,680
Mortgage payable to third-party lender,
monthly payments of $1,750 including
interest at 9%, maturing January 1998.
Collateralized by real property at 45
Center Street, Batavia, New York........ 35,398 16,813 1,738
----------- ----------- -----------
Total debt........................... $19,109,094 $39,782,237 $51,505,595
=========== =========== ===========
BANK LINES-OF-CREDIT
The Parent has revolving bank lines-of-credit amounting to $5,000,000
(increased to $6,000,000 on September 1, 1997), which are payable on demand,
with interest due monthly at rates varying from 7.50% to 8.00% as of March 31,
1997. The agreements are collateralized by equipment and receivables of the
Parent. The outstanding balance on these lines-of-credit agreements amounted
to $3,788,341 at March 31, 1997.
The Parent also has revolving term lines-of-credit available from various
lending institutions which aggregate $63,700,000 as of March 31, 1997. The
Company pays interest on the outstanding balances of these agreements at rates
which ranged from 6.65% to 9.8% at March 31, 1997.
The Subsidiary has a $500,000 (Canadian denomination) revolving line-of-
credit available for operating cash requirements and a $2,400,000 (Canadian
denomination) term line-of-credit available to finance up to 75% of the cost
of equipment acquisitions. The operating line-of-credit is payable on demand,
with interest due
F-87
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
monthly at the Canadian prime rate of interest plus 0.25%, (5.00% at March 31,
1997). There was not an outstanding balance on the operating line-of-credit
agreement as of March 31, 1997. Advances on the equipment line-of-credit are
payable over 36 or 48 months, with interest due monthly at Canadian prime plus
0.50%, (5.25% at March 31, 1997). The outstanding balance on the equipment
line-of-credit agreement was $878,339 (United States denomination) as of March
31, 1997. The line-of-credit agreements are collateralized by accounts
receivable and personal property of the Subsidiary and are guaranteed by the
Parent.
Current maturities of long-term debt for each of the five years subsequent
to March 31, 1997 are as follows:
CAPITAL
DEBT LEASE
OBLIGATIONS OBLIGATIONS TOTAL DEBT
----------- ----------- -----------
1998.................................. $12,274,967 $2,283,984 $14,558,951
1999.................................. 7,097,078 2,168,855 9,265,933
2000.................................. 5,099,954 1,869,131 6,969,085
2001.................................. 3,002,236 1,379,399 4,381,635
2002.................................. 1,811,547 896,077 2,707,624
Thereafter............................ 2,031,206 1,492,772 3,523,978
----------- ---------- -----------
Total payments........................ 31,316,988 10,090,218 41,407,206
Less interest amount.................. -- 1,624,969 1,624,969
----------- ---------- -----------
Total debt.......................... $31,316,988 $8,465,249 $39,782,237
=========== ========== ===========
CAPITAL LEASE OBLIGATIONS
The Company and Affiliate lease rental equipment under various agreements
classified as capital leases based on the provisions of Statement of Financial
Accounting Standards No. 13. The economic substance of the leases is that the
Company is financing the acquisition of the equipment through the leases and,
accordingly, they are recorded in the Company's assets and liabilities. These
assets are stated on the balance sheet at their capitalized cost, less
accumulated depreciation, of $4,115,887, $9,091,782 and $16,275,311 as of
March 31, 1996 and 1997 and December 31, 1997, respectively.
NOTE 5--OPERATING LEASES
The Company leases building, shop and office space, and rental equipment
under various long-term and short-term operating lease agreements. Rent
expense under the agreements for the years ended September 30, 1994 and 1995,
six months ended March 31, 1996, year ended March 31, 1997, and nine months
ended December 31, 1996 and 1997 amounted to $328,892, $334,504, $174,189,
$825,229, $758,883 and $1,086,219, respectively.
The total future minimum rental payments required for noncancellable
operating leases as of March 31, 1997 are as follows:
1998........................................................... $ 513,782
1999........................................................... 342,859
2000........................................................... 363,925
2001........................................................... 267,697
2002........................................................... 410,846
Thereafter..................................................... 80,785
----------
Total...................................................... $1,979,894
==========
F-88
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--PROVISIONS FOR INCOME TAXES
The Company has provided for income tax based on consolidated net income.
Income tax expense is allocated to the Parent and Subsidiary based on the tax
liability and expense relating to the respective taxing authorities.
The provision for income taxes, calculated according to SFAS No. 109,
"Accounting for Income Taxes", amounted to:
YEAR ENDED SIX MONTHS NINE MONTHS ENDED
SEPTEMBER 30, ENDED YEAR ENDED DECEMBER 31,
--------------------- MARCH 31, MARCH 31, -----------------------
1994 1995 1996 1997 1996 1997
---------- ---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Current:
Federal income tax.... $ 651,914 $ 844,075 $ 336,022 $ 495,887 $ 699,193 $ 835,885
State income tax...... 338,000 296,054 114,774 93,415 268,000 301,000
Canadian business tax... -- 2,544 4,643 45,966 -- 2,108
---------- ---------- ----------- ----------- ---------- -----------
Total current....... 989,914 1,142,673 455,439 635,268 967,193 1,138,993
Deferred:
Federal income tax.... 577,859 455,576 336,121 866,666 849,733 1,320,725
State income tax...... 94,221 89,206 268,291 194,174 64,000 378,575
Canadian business tax... -- 132,000 63,000 90,616 135,140 135,740
---------- ---------- ----------- ----------- ---------- -----------
Total deferred...... 672,080 676,782 667,412 1,151,456 1,048,873 1,835,040
---------- ---------- ----------- ----------- ---------- -----------
Total provision for
income taxes....... $1,661,994 $1,819,455 $ 1,122,851 $ 1,786,724 $2,016,066 $ 2,974,033
========== ========== =========== =========== ========== ===========
Deferred taxes are recorded based on differences between the financial
statement and tax basis of assets and liabilities. Temporary differences which
give rise to a significant portion of deferred tax assets and liabilities were
the result of book and tax depreciation and revenue recognition timing
differences, allowance for uncollectible accounts, net operating loss
carryforwards of the Subsidiary and certain tax credits.
The Subsidiary has remaining Canadian net operating loss (NOL) carryforwards
of approximately $415,000 as of March 31, 1997 and December 31, 1997. The NOL
carryforwards begin to expire in 1998 and will be completely expired in 2001.
Application of statutory tax rates to combined pretax income will not be
representative of the provision for income taxes. As previously disclosed, the
income of the Affiliate is taxed individually at the member level.
NOTE 7--RELATED PARTY TRANSACTIONS
Officer Loan--The chief executive officer and a stockholder maintains a
floating loan with the Company. This loan is charged when personal
expenditures are paid by the Company on behalf of the officer. A loan
agreement exists between the parties, in which the Company charges interest of
8.5% on the average outstanding balance. The terms provide for the officer to
make regular, periodic payments to reduce the outstanding balance. The balance
outstanding at March 31, 1996 and 1997 and December 31, 1997 amounted to
$420,040, $515,606 and $1,105,994, respectively. The amounts at March 31, 1997
and December 31, 1997 have been reduced in combination by the Affiliate's
capital account.
F-89
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Loan Receivable--The Company has a loan receivable which represents cash
advances made to companies owned by an employee and the stockholders. The
Company charges interest on these loans at an annual rate of 8%. The balance
outstanding at March 31, 1996 and 1997 and December 31, 1997 amounted to
$1,121,814, $1,860,102 and $2,071,971, respectively.
Operating Lease Agreement--The Company leases shop, warehouse space and
aircraft from companies owned by an employee and the stockholders. The Company
also leases rental equipment from the Affiliate, the effect of which has been
eliminated in the combination of the financial statements. The leases are on a
month to month basis and require monthly payments of $41,000 for the shop and
warehouse space and $250,000 ($325,000 as of September 1, 1997) for rental
equipment. The terms of the equipment lease with the Affiliate were modified
during the nine months ended December 1997.
Sale/Leaseback of Property--On March 31, 1996, the Company sold four
buildings to a company owned by the stockholders for $1,725,000. Management
estimated that the market value of the property approximated the net book
value. The property is provided for in the operating lease, as disclosed
above.
NOTE 8--CASH FLOW DISCLOSURE INFORMATION
For the years ended September 30, 1994 and 1995, six months ended March 31,
1996, year ended March 31, 1997, and nine months ended December 31, 1996 and
1997, total interest paid amounted to $660,902, $1,132,222, $676,546,
$2,005,464, $1,447,752 and $2,120,907, respectively.
For the years ended September 30, 1994 and 1995, six months ended March 31,
1996, year ended March 31, 1997, and nine months ended December 31, 1996 and
1997, total taxes paid amounted to $887,760, $1,516,861, $584,371, $1,045,652,
$791,179 and $298,321, respectively.
During the years ended September 30, 1994 and 1995, six months ended March
31, 1996, year ended March 31, 1997, and nine months ended December 31, 1996
and 1997, the Company and Affiliate purchased $7,368,661, $7,127,810,
$7,968,504, $28,603,655, $27,336,255 and $21,237,266, respectively, of
equipment which was financed.
NOTE 9--RETIREMENT PLANS
The Parent maintains a defined contribution retirement plan for non-union
employees. The plan qualifies as a deferred compensation plan under Section
401(k) of the Internal Revenue Code. Company contributions are based on a 100%
match of the employees' elective deferral up to 4%.
The Parent also contributes to defined benefit pension plans for employees
covered under six union contracts, Locals #15C, #103, #138, #542C, #825 and
#832 of the International Union of Operating Engineers. A full description of
the membership, benefits and employer and employee obligations to contribute
to these plans are described in the Summary Plan Description and Annual
Reports of the plans.
The actuarial information needed to determine the liabilities and provide
the current disclosure information necessary under FASB No. 87 was
unavailable. Consequently, the financial statements for the years ended
September 30, 1994 and 1995, six months ended March 31, 1996, year ended March
31, 1997 and nine months ended December 1996 and 1997, do not reflect the
financial position, results of operations and expanded disclosures in
accordance with FASB No. 87.
The Subsidiary maintains a non-contributory pension plan, whereby the
Subsidiary contributes 4% of employee compensation to the plan. In addition,
the Subsidiary will contribute a 100% match of the employees' elective
deferral up to a maximum of 2%.
F-90
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The cost of the plans for the years ended September 30, 1994 and 1995, six
months ended March 31, 1996, the year ended March 31, 1997, and the nine
months ended December 31, 1996 and 1997, amounted to approximately $151,669,
$192,541, $110,857, $329,712, $149,568 and $162,150, respectively.
NOTE 10--COMMITMENTS AND CONTINGENCIES
Access Rentals, Inc. (Parent) guarantees debt obligations of the Subsidiary,
Access Lift Equipment, Inc., the Affiliate, Reinhart Leasing, LLC, and another
related company owned by the stockholders.
At December 31, 1997, the Company had outstanding purchase orders for
equipment in the amount of $4,240,564.
NOTE 11--CHANGE IN METHOD OF ACCOUNTING AND PRIOR YEAR ADJUSTMENT
The accompanying consolidated financial statements for the fiscal year ended
September 30, 1994 have been retroactively restated as a result of
management's change in method of accounting for rental income. In years prior
to the change, the Company recorded revenue for the entire rental period of a
contract upon billing. The change in accounting policy removes the portion of
rental billings pertaining to periods subsequent to the reporting period. The
effect of the restatement resulted in a $265,019 decrease to retained earnings
at September 30, 1993.
A restatement of the September 30, 1994 consolidated statement of income is
summarized as follows:
AS
PREVIOUSLY
REPORTED AS RESTATED
----------- -----------
Rental income.......................................... $14,730,347 $15,804,754
Income before taxes and cumulative effect of change in
accounting principle.................................. 4,127,869 4,019,441
Provision for income taxes............................. 1,715,048 1,661,994
Income before cumulative effect of change in accounting
principle............................................. 2,412,821 2,357,447
Cumulative effect of change in method of accounting for
income taxes.......................................... 46,325 46,325
Net income............................................. $ 2,459,146 $ 2,403,772
NOTE 12--ACQUISITION OF SUBSIDIARY
Effective February 26, 1995, the Company acquired 100% of the outstanding
common stock of Access Lift Equipment, Inc., formerly Upright of Canada, Inc.,
for approximately $920,000.
The acquisition, accounted for in accordance with Accounting Principles
Board (APB) Opinion No. 16--Business Combinations, using the purchase method
of accounting, has resulted in the inclusion of the operating results of the
Subsidiary, from the date of acquisition, in the financial statements of the
Company.
NOTE 13--STOCKHOLDERS' EQUITY
On December 30, 1997, Access Rentals, Inc. (Parent) retired 6 shares of
treasury stock then issued its remaining 194 common shares with no par value.
Also, on December 30, 1997, Access Rentals, Inc. (Parent) amended its
certificate of incorporation to increase the number of authorized shares from
200 common with no par value to 100 Class A Voting common shares with a par
value of $1 and 9,900 Class B Non-voting common shares with a par value of $1,
effecting a stock split of 50 shares of new stock for each share of stock.
F-91
ACCESS RENTALS, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The retirement of treasury stock and the stock split were given retroactive
effect in the accompanying financial statements.
At December 31, 1997 the following common stock shares were authorized,
issued and outstanding:
Class A Voting, $1 par value....................................... 100
Class B Non-voting, $1 par value................................... 9,900
------
Total shares................................................... 10,000
======
NOTE 14--SUBSEQUENT EVENTS
On September 1, 1997, the Company and Affiliate acquired certain assets of a
company engaged in primarily the same business as Access Rentals, Inc., with
operations in Florida. The purchase price, including the covenant not-to-
compete, amounted to approximately $4,988,850, for which the same amount of
debt was incurred.
During January 1998, the Company sold all real estate owned by the Company
to a related party company. The sales price was determined based upon
appraisals and approximated $605,000.
On January 21, 1998, the Company, Affiliate and stockholders entered into a
stock purchase agreement with United Rentals, Inc. (URI). Under the terms of
the stock purchase agreement, URI purchased all of the issued and outstanding
capital stock of the Company and substantially all of the assets of the
Affiliate. Also, as part of the transaction all of the stock of Access Lift
Equipment, Inc. (Subsidiary) was sold by Access Rentals, Inc., to United
Rentals of Canada, Inc., a wholly-owned subsidiary of URI.
NOTE 15--RECLASSIFICATIONS
Certain reclassifications have been made to previously issued financial
statements in order to conform them to current classifications.
F-92
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Rental Tools & Equipment Co.
International, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Rental Tools &
Equipment Co. International, Inc. at June 30, 1997 and 1998, and the results
of its operations and its cash flows for each of the three years in the period
ended June 30, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Falls Church, Virginia
August 12, 1998
F-93
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
BALANCE SHEETS
JUNE 30, JUNE 30,
1997 1998
----------- -----------
ASSETS
CURRENT ASSETS
Cash............................................... $ 332,380 $ 572,929
Accounts receivable, net........................... 6,054,243 8,239,177
Prepaid expenses and other......................... 597,483 667,111
----------- -----------
Total current assets............................. 6,984,106 9,479,217
----------- -----------
RENTAL EQUIPMENT, at cost............................ 97,349,866 104,851,657
Less accumulated depreciation...................... (61,574,737) (64,361,003)
----------- -----------
Rental equipment, net.............................. 35,775,129 40,490,654
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net................... 15,069,797 20,405,786
----------- -----------
OTHER NON-CURRENT ASSETS............................. 605,482 1,337,026
----------- -----------
TOTAL ASSETS......................................... $58,434,514 $71,712,683
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................... $ 3,228,502 $ 8,206,466
Notes and mortgages payable........................ 12,771,181 506,206
Short-term borrowings.............................. 565,162
Unearned revenue................................... 586,930 634,584
----------- -----------
Total current liabilities........................ 17,151,775 9,347,256
----------- -----------
LONG-TERM LIABILITIES
Notes and mortgages payable........................ 24,560,157 42,494,588
Other non-current liabilities...................... 445,902 387,226
----------- -----------
Total long-term liabilities...................... 25,006,059 42,881,814
----------- -----------
Total liabilities................................ 42,157,834 52,229,070
----------- -----------
STOCKHOLDERS' EQUITY
Common stock; no par value; 1,500 shares
authorized; 1,139 shares issued at June 30, 1997,
1,167 shares issued at June 30, 1998, 951 shares
outstanding at June 30, 1997, 979 shares
outstanding at June 30, 1998...................... 821,287 1,306,490
Common stock; no par value; non-voting; 30,000
shares authorized; no shares issued or outstanding
at June 30, 1997 and June 30, 1998................
Less treasury stock; at cost; 188 shares at June
30, 1997 and 1998................................. (1,201,063) (1,201,063)
Retained earnings.................................. 16,656,456 19,378,186
----------- -----------
Total stockholders' equity....................... 16,276,680 19,483,613
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $58,434,514 $71,712,683
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-94
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
Revenues:
Equipment rentals........................ $42,689,093 $46,395,441 $49,040,192
Other, net............................... 399,681 632,270 1,876,539
----------- ----------- -----------
Total revenues......................... 43,088,774 47,027,711 50,916,731
Cost of revenues:
Cost of equipment rentals................ 18,891,454 19,761,457 19,993,727
Rental equipment depreciation............ 8,785,129 10,240,691 13,028,771
----------- ----------- -----------
Total cost of revenues................. 27,676,583 30,002,148 33,022,498
Gross Profit............................... 15,412,191 17,025,563 17,894,233
Selling, general & administrative expense.. 9,187,120 10,759,245 11,969,787
Depreciation and amortization.............. 1,618,250 1,961,995 2,132,221
----------- ----------- -----------
Operating income........................... 4,606,821 4,304,323 3,792,225
Gain on sale of division................... 3,643,921
Interest expense, net...................... 2,416,111 2,573,450 3,284,181
----------- ----------- -----------
Net income................................. $ 2,190,710 $ 1,730,873 $ 4,151,965
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
F-95
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON TOTAL
STOCK, NO TREASURY RETAINED STOCKHOLDERS'
PAR VALUE STOCK EARNINGS EQUITY
---------- ----------- ----------- -------------
Balance, June 30, 1995...... $ 804,287 $(1,096,039) $14,874,508 $14,582,756
Net Income................ 2,190,710 2,190,710
Issuance of Common Stock.. 17,000 17,000
Distributions to Stock-
holders.................. (1,131,269) (1,131,269)
Treasury Stock Purchase... (105,024) (105,024)
---------- ----------- ----------- -----------
Balance, June 30, 1996 821,287 (1,201,063) 15,933,949 15,554,173
Net Income................ 1,730,873 1,730,873
Distributions to
Stockholders............. (1,008,366) (1,008,366)
---------- ----------- ----------- -----------
Balance, June 30, 1997...... 821,287 (1,201,063) 16,656,456 16,276,680
Net Income................ 4,151,965 4,151,965
Issuance of Common Stock.. 485,203 485,203
Distributions to Stock-
holders.................. (1,430,235) (1,430,235)
---------- ----------- ----------- -----------
Balance, June 30, 1998...... $1,306,490 $(1,201,063) $19,378,186 $19,483,613
========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
F-96
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income.......................... $ 2,190,710 $ 1,730,873 $ 4,151,965
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization....... 10,403,379 12,202,686 15,160,993
Provision for doubtful accounts..... 692,725 1,086,412 846,859
Gain on sale of division............ -- -- (3,643,921)
Stock compensation awarded.......... -- -- 250,000
Gain on sale of equipment........... (64,050) (369,931) (1,458,521)
(Increase) in accounts receivable... (1,668,051) (839,959) (3,031,793)
Decrease (increase) in prepaid
expenses and other................. 93,180 26,706 (69,628)
(Increase) decrease in other non-
current assets..................... (24,846) 180,427 (831,732)
Increase (decrease) in accounts
payable............................ 1,912,949 (1,732,003) 1,610,613
Increase (decrease) in unearned
revenue............................ 769,409 (351,736) 47,654
(Decrease) increase in other non-
current liabilities................ (827,962) 111,849 176,527
------------ ------------ ------------
Net cash provided by operating
activities........................ 13,477,443 12,045,324 13,209,016
Cash flows from investing activities:
Purchases of rental equipment....... (12,859,754) (16,709,101) (17,089,562)
Purchases of property, plant and
equipment.......................... (4,132,214) (3,554,693) (7,205,057)
Proceeds from disposition of rental
equipment and property, plant and
equipment.......................... 494,518 1,135,663 8,871,293
------------ ------------ ------------
Net cash used in investing
activities........................ (16,497,450) (19,128,131) (15,423,326)
Cash flows from financing activities:
Repayment of notes and mortgages
payable............................ (7,857,161) (9,582,887) (14,918,262)
Decrease in short-term borrowings,
net (180,404) (3,525) (565,162)
Proceeds from issuance of notes and
mortgages payable.................. 12,836,742 17,354,604 19,368,518
Issuance of common stock............ 17,000 -- --
Purchase of treasury stock.......... (105,024) -- --
Distributions to stockholders....... (1,131,269) (1,008,366) (1,430,235)
------------ ------------ ------------
Net cash provided by financing
activities........................ 3,579,884 6,759,826 2,454,859
Increase (decrease) in cash.......... 559,877 (322,981) 240,549
Cash at beginning of year............ 95,484 655,361 332,380
------------ ------------ ------------
Cash at end of year.................. $ 655,361 $ 332,380 $ 572,929
============ ============ ============
Non-cash investing and financing ac-
tivities:...........................
Assets aquired through issuance of
notes payable...................... -- -- $ 1,219,200
Refinancing of notes and mortgages
payable............................ -- -- $ 35,977,502
Deferred compensation payments
through issuance of common stock... -- -- $ 235,203
Rental equipment acquired through
accounts payable................... -- -- $ 3,367,351
The accompanying notes are an integral part of these financial statements
F-97
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996, 1997 AND 1998
NOTE 1--THE COMPANY
Rental Tools & Equipment Co. International, Inc. (the Company) engages in
the rental of industrial, construction and specialized tools and equipment.
The Company operates its business in the form of divisions at the following
locations:
Silver Spring, MD Baltimore, MD
Bladensburg, MD Philadelphia, PA
Norfolk, VA York, PA
Hampton, VA Greensboro, NC
Merrifield, VA Charlotte, NC
Richmond, VA Durham, NC
Upper Marlboro, MD La Porte, TX (sold in June 1998)
Atlanta, GA Prince Frederick, MD
Hopewell, VA Gaithersburg, MD
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are described
below.
Method of accounting
The accompanying financial statements are prepared on the accrual basis of
accounting.
Revenue recognition
Short-term rentals (less than 30 days) are recorded as revenue in the period
in which equipment is returned by the customer. Long-term rentals are billed
and recorded as revenue on a monthly basis.
Concentration of credit risk
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base and their geographic dispersion. The Company generally does not require
collateral on accounts receivable. At June 30, 1997 and 1998, the Company had
an allowance for doubtful accounts of approximately $233,000 and $353,000,
respectively.
Rental equipment, property, plant and equipment and related depreciation and
amortization
Rental equipment is not included in current assets in accordance with
current industry accounting practices. Included in rental equipment are assets
under construction of $1,131,329 and $602,971 at June 30, 1997 and 1998,
respectively.
Property, plant and equipment are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs which do not
significantly prolong the useful lives of the assets are charged to expense as
incurred.
Rental equipment and automotive equipment are depreciated using accelerated
depreciation methods over six years. Office and maintenance equipment,
leasehold improvements and buildings are depreciated on the straight-line
method over periods ranging from five to twenty-five years.
F-98
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
Cost of equipment rentals
Cost of equipment rentals represents direct and indirect costs related to
equipment rentals, including; salaries and wages of division personnel,
maintenance costs, delivery costs and the costs of rental supplies.
Income taxes
The Company is an S Corporation for income tax purposes and payment of
income taxes is generally the responsibility of the stockholders of the
Company.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in fiscal year 1996 and 1997 financial statements have been
reclassified to conform with the 1998 financial statements.
Gain on sale of division
On June 3, 1998, the Company sold all of its assets in LaPorte, Texas,
including property, plant, rental equipment and receivables, for net proceeds
of $7,625,000 resulting in a gain of approximately $3,644,000. Sales at this
division were $3,399,000, $2,626,000 and $2,574,000 for the years ended June
30, 1996, 1997 and 1998, respectively.
NOTE 3--PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
JUNE 30,
--------------------------
1997 1998
------------ ------------
Buildings....................................... $ 9,640,451 $ 14,114,658
Automotive equipment............................ 6,788,288 7,297,351
Office and maintenance equipment................ 4,072,484 4,305,358
Leasehold improvements.......................... 2,126,065 2,190,399
------------ ------------
Total......................................... 22,627,288 27,907,766
Less: Accumulated depreciation and
amortization................................... (10,040,972) (11,040,769)
------------ ------------
Plant and equipment, net........................ 12,586,316 16,866,997
Land............................................ 2,483,481 3,528,789
------------ ------------
Property, plant and equipment, net............ $ 15,069,797 $ 20,405,786
============ ============
F-99
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--ACCOUNTS PAYABLE
Accounts payable consists of the following:
JUNE 30,
---------------------
1997 1998
---------- ----------
Accounts payable, trade and accrued expenses.......... $2,591,633 $2,938,741
Accounts payable, equipment purchases................. 3,367,351
Bonuses payable....................................... 460,172 703,762
Accrued profit sharing contributions.................. 36,939 645,038
Accrued vacation...................................... 397,320
Miscellaneous taxes payable........................... 139,758 154,254
---------- ----------
Total............................................... $3,228,502 $8,206,466
========== ==========
NOTE 5 -- DEBT OBLIGATIONS
Debt Obligations consist of the following:
DESCRIPTION JUNE 30, 1997 JUNE 30, 1998
----------- ------------- -------------
NOTES PAYABLE, EFFECTIVE RATE
First Union
(Due 2003, Various rates)(1)..................... $35,463,740
First National Bank of Maryland
(Various rates).................................. $2,607,351
Caterpillar Financial
(Due 1999--7.25%)................................ 142,891
Digital Financial Services
(Due 2000--9.1%)................................. 73,554 48,335
First Union National
(Various rates).................................. 17,795,787
Signet Bank of Maryland
(Various rates).................................. 14,521,803
Wayne Stenabaugh
(Due 1998--6%)................................... 30,161
----------- -----------
Subtotal Notes Payable......................... 35,171,547 35,512,075
----------- -----------
MORTGAGES PAYABLE, EFFECTIVE RATE
Central Carolina Bank
(Due 1998--9.08%)................................ 339,087
Central Carolina Bank
(Due 2003--8.5%)................................. 295,068
First National Bank of Maryland
(Due 2003--7.58%)................................ 3,800,000
First Union
(Due 2001--8.19%)................................ 1,820,704 1,689,984
First Union
(Due 2002--7.64%)................................ 484,467
First Union
(Due 2003--7.41%)(2)............................. 1,219,200
----------- -----------
Subtotal Mortgages Payable..................... 2,159,791 7,488,719
----------- -----------
Total Debt Obligations....................... $37,331,338 $43,000,794
=========== ===========
F-100
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
- --------
(1) On October 22, 1997, the Company entered into a $60 million revolving bank
line of credit. The line of credit is subject to a defined borrowing base
composed of rental equipment and accounts receivable. The proceeds were
initially used to finance existing indebtedness. The remaining available
balance will be used to meet working capital requirements. The bank line
of credit bears interest at variable rates and payment of all amounts
outstanding is due five years from the date of closing. Among other
restrictions, the Company must comply with certain financial and non-
financial covenants. At June 30, 1998, the Company is in compliance with
all of the associated financial covenants. The lenders have a continuing
security interest in any and all rights to "collateral", (e.g. all
accounts receivable, equipment, intangibles, instruments, inventory,
etc.). As of year end, the Company had $24,536,260 available to use under
the credit agreement.
(2) On March 25, 1998, the Company entered into a $5 million line of credit
for real estate transactions. The line renews in twelve month intervals.
Upon execution of a transaction, the amount borrowed under the line is
converted to a term loan which is amortized over 15 years with a balloon
payment for all amounts outstanding due at the end of five years. Amounts
borrowed are secured by liens on the property acquired. At June 30, 1998
the balance outstanding amounted to $1,219,200.
Change of control or ownership is an event of default under the $60 million
credit agreement, $5 million real estate agreement and certain other
mortgages, unless approved in advance by the lenders.
The aggregate maturities of all long-term debt obligations over the next
five years are as follows: 1999--$506,206; 2000--$512,403; 2001--$494,190;
2002--$499,195; 2003, and thereafter--$40,988,800.
For the fiscal years 1996, 1997 and 1998, cash paid for interest under notes
and mortgages payable was $2,432,380, $2,600,823 and $3,222,888, respectively.
NOTE 6--RELATED PARTY TRANSACTIONS
Several of the Company's operating facilities are controlled and owned by
the Chairman of the Board (the majority stockholder) or his affiliated
entities. Pursuant to lease agreements which were amended in 1986, the Company
has annual rental expenses of approximately $357,000 on these facilities. The
lease payments are subject to annual adjustment based on the Consumer Price
Index. In addition, the Company must pay real estate taxes and insurance
related to the facilities. The leases are on a month by month basis.
At June 30, 1997, the Chairman of the Board had loans to the Company
totaling $565,162. All outstanding amounts were repaid by the Company during
fiscal year 1998.
The Company makes advances to and receives advances from certain officers.
Advances are unsecured and reported on a net basis in other current assets.
Officers owed the Company $6,686 as of June 30, 1997 and 1998, respectively.
The Rental Tools & Equipment Co. International, Inc. Profit Sharing & 401(k)
Savings Plan (the Plan) owns land in two locations: Charlotte and Durham,
North Carolina. At each of these locations the Company has built a rental
facility and operates its business. The Company makes ground rent lease
payments to the plan on a monthly basis under long term lease agreements. The
Charlotte lease ends in March 2007 and the Durham lease
F-101
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ends in December 1998. These payments are adjusted annually to reflect the
appraised fair rental values of the land. The Company made ground lease
payments to the Plan as follows:
YEAR ENDED JUNE 30,
--------------------------
1996 1997 1998
-------- -------- --------
Charlotte, NC................................... $ 57,739 $ 56,755 $ 56,755
Durham, NC...................................... 6,616 6,749 6,749
LaPorte, TX..................................... 49,078 48,242 44,222
-------- -------- --------
$113,433 $111,746 $107,726
======== ======== ========
In June 1998, the Plan sold the land at Laporte, Texas to the Company to
facilitate the Company's sale of the LaPorte division. Concurrently, the
company ceased making payments for the LaPorte ground lease to the Plan.
NOTE 7--MANAGEMENT INCENTIVES AND RETIREMENT PLAN
In October 1991, the Company instituted a 401(k) Savings Plan as an added
feature to the existing Profit Sharing Plan. Under the 401(k) Savings feature,
the Company is required to match 50% of the employee's contribution, with a
cap at 6% of compensation. Company matching contributions were $171,526,
$215,343 and $228,291 for the years ended June 30, 1996, 1997 and 1998,
respectively. Additionally, the Board of Directors, at their discretion,
approved contributions made to or accrued on behalf of the Profit Sharing
feature in amounts of $372,455, $88,410 and $713,658 for the years ended June
30, 1996, 1997 and 1998, respectively. During fiscal years 1996, 1997, and
1998, the Company applied existing accumulated forfeitures already in the Plan
of $12,003, $51,471, and $68,620 respectively, to reduce its accrued
obligation to the Plan, at June 30, 1996, 1997, and 1998 to $360,452, $36,939
and $645,038, respectively.
Divisional managers are entitled to receive annual bonuses based upon the
financial performance and profitability of their respective division. A
portion of these bonuses are required to be deferred and paid upon a change in
employment status. The Company has recorded a liability of $355,902 and
242,226 at June 30, 1997 and 1998, respectively, in connection with this
deferred compensation arrangement.
NOTE 8--INCOME TAXES
The Company has elected to be treated as an S Corporation as permitted under
the Internal Revenue Code. Accordingly, in lieu of corporate income taxes, the
stockholders are taxed on their proportionate share of the Company's taxable
income. Therefore, the Company had no Federal income tax liability at June 30,
1997 and 1998 and no federal income tax expense for each of the three years in
the period ended June 30, 1998.
The Board of Directors has adopted a policy that authorizes distributions to
stockholders necessary for the stockholders to pay the associated income
taxes. Distributions in fiscal years 1996, 1997 and 1998 totaled $1,131,269,
$1,008,366 and $1,430,235, respectively.
NOTE 9--COMMITMENTS AND CONTINGENCIES
At June 30, 1998, the Company was a defendant in several lawsuits relating
to injuries sustained by third parties. The Company has accrued approximately
$141,000 to cover any unfavorable settlements or findings.
The Company has entered into an agreement to acquire property and establish
a new rental location in Maryland. This new facility is expected to be open
for business in September 1998. The acquisition of property, plant and rental
equipment will be financed with the Company's existing credit facility.
At June 30, 1998, the Company has outstanding purchase commitments for
capital expenditures of approximately $2,000,000, primarily for rental
equipment.
F-102
RENTAL TOOLS & EQUIPMENT CO. INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--SUBSEQUENT EVENTS
In July 1998, the Company acquired for cash all of the outstanding stock in
an existing rental company with four locations in Maryland for $6,800,000. The
acquisition will be accounted for as a purchase. The excess of the purchase
price over the estimated fair value of the acquired net assets, which
approximates $3,800,000 will be recorded as goodwill. The acquisition was
financed through the Company's existing credit facility.
The Company purchased property in Raleigh, North Carolina in July 1998 for
approximately $889,000. The purchase was funded through the Company's existing
real estate credit facility. The Company expects the division to begin
operations in August 1998.
In July 1998, the stockholders and the Company finalized an agreement to
merge with United Rentals, Inc. in which the company will be merged with and
into United Rentals, Inc. and will become a wholly owned subsidiary.
F-103
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Power Rental Co., Inc.
We have audited the balance sheet of Power Rental Co., Inc. as of July 31,
1997 and the related statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Power Rental Co., Inc. at
July 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
June 24, 1998
F-104
POWER RENTAL CO., INC.
BALANCE SHEETS
JULY 31, MAY 31,
1997 1998
----------- -----------
(UNAUDITED)
ASSETS
Cash................................................... $ 53,462 $ --
Accounts receivable, net of allowance for doubtful
accounts of
$200,000 and $170,000 at 1997 and 1998, respectively.. 4,193,529 4,136,551
Due from related parties............................... 612,717 1,173,050
Inventory.............................................. 51,476 63,576
Rental equipment, net.................................. 35,575,067 38,139,754
Property and equipment, net............................ 7,301,836 8,269,235
Prepaid expenses and other assets...................... 1,413,651 1,762,667
Intangible assets, net................................. 378,269 335,289
----------- -----------
Total assets....................................... $49,580,007 $53,880,122
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabili-
ties................................................ $ 4,831,620 $ 4,674,375
Debt................................................. 30,841,647 38,067,418
Deferred rent........................................ 72,200 84,800
Deferred income taxes................................ 2,921,231 1,983,119
----------- -----------
Total liabilities.................................. 38,666,698 44,809,712
Commitments and contingencies
Stockholders' equity:
Common stock--Class A voting, $1.00 par value, 10,000
shares authorized, 10 issued and outstanding........ 10 10
Common stock--Class B non-voting, $1.00 par value,
90,000 shares authorized, 20,000 issued and
outstanding......................................... 20,000 20,000
Additional paid in capital........................... 522,550 522,550
Retained earnings.................................... 10,370,749 8,527,850
----------- -----------
Total stockholders' equity......................... 10,913,309 9,070,410
----------- -----------
Total liabilities and stockholders' equity......... $49,580,007 $53,880,122
=========== ===========
See accompanying notes.
F-105
POWER RENTAL CO., INC.
STATEMENTS OF OPERATIONS
TEN MONTHS ENDED
YEAR ENDED MAY 31,
JULY 31, ------------------------
1997 1997 1998
----------- ----------- -----------
(UNAUDITED)
Revenues:
Equipment rentals..................... $34,943,308 $28,469,107 $27,578,967
Sales of rental equipment............. 4,484,056 3,428,774 4,020,158
Sales of parts and supplies........... 1,462,391 1,226,682 1,140,346
----------- ----------- -----------
Total revenues...................... 40,889,755 33,124,563 32,739,471
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation........ 11,392,273 8,867,084 10,726,582
Depreciation, equipment rentals....... 9,753,507 8,150,000 8,967,724
Cost of sales of rental equipment..... 2,915,751 2,402,610 1,898,704
Cost of sales of parts and supplies... 1,316,267 1,032,410 902,963
----------- ----------- -----------
Total cost of revenues.............. 25,377,798 20,452,104 22,495,973
----------- ----------- -----------
Gross profit............................ 15,511,957 12,672,459 10,243,498
Selling, general and administrative
expenses............................... 11,865,623 9,781,625 10,320,661
Non-rental depreciation................. 1,214,796 913,500 1,242,846
----------- ----------- -----------
Operating income (loss)................. 2,431,538 1,977,334 (1,320,009)
Interest expense........................ 2,171,959 1,593,657 2,389,562
Interest income......................... (176,612) (97,471) (137,826)
Other (income), net..................... (398,159) (334,337) (182,304)
----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes....................... 834,350 815,485 (3,389,441)
Provision (benefit) for income taxes.... 317,053 282,070 (1,546,542)
----------- ----------- -----------
Net income (loss)....................... $ 517,297 $ 533,415 $(1,842,899)
=========== =========== ===========
See accompanying notes.
F-106
POWER RENTAL CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A CLASS B ADDITIONAL
------------- -------------- PAID IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ ------- ---------- -----------
Balance at August 1,
1996..................... 10 $10 20,000 $20,000 $522,550 $ 9,853,452
Net income.............. 517,297
--- --- ------ ------- -------- -----------
Balance at July 31, 1997.. 10 10 20,000 20,000 522,550 10,370,749
Net loss (unaudited).... (1,842,899)
--- --- ------ ------- -------- -----------
Balance at May 31, 1998
(unaudited).............. 10 $10 20,000 $20,000 $522,550 $ 8,527,850
=== === ====== ======= ======== ===========
See accompanying notes.
F-107
POWER RENTAL CO., INC.
STATEMENTS OF CASH FLOWS
TEN MONTHS ENDED
YEAR ENDED MAY 31,
JULY 31, --------------------------
1997 1997 1998
------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................... $ 517,297 $ 533,414 $ (1,842,899)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization..... 11,018,848 9,097,833 10,253,550
Gain on equipment sales........... (1,294,474) (815,756) (1,603,959)
Gain on property and equipment
sales............................ (29,468) (47,940) (27,709)
Deferred income taxes............. 87,846 86,530 (938,112)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable..................... (135,231) 392,008 56,978
Decrease (increase) in
inventory...................... 8,973 (21,226) (12,100)
Increase in prepaid expenses and
other assets................... (648,001) (486,370) (349,016)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities 622,048 381,560 (157,244)
Increase in deferred rent....... 40,800 29,000 12,600
------------ ------------ ------------
Total adjustments............. 9,671,341 8,615,639 7,234,988
------------ ------------ ------------
Cash provided by operating
activities......................... 10,188,638 9,149,053 5,392,089
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment........ (1,769,523) (3,339,078) (684,337)
Purchase of property and equipment.. (2,757,539) (2,237,093) (903,864)
Intangibles associated with purchase
of certain assets.................. (110,000) (110,000)
Proceeds from sale of rental
equipment.......................... 3,882,235 2,956,554 3,243,356
Proceeds from sale of property and
equipment.......................... 139,723 65,562 204,980
------------ ------------ ------------
Cash provided by (used in) investing
activities......................... (615,104) (2,664,055) 1,860,135
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt.......... (9,810,236) (7,567,820) (10,800,353)
Principal payments on credit
facility........................... (26,748,605) (19,096,555) (17,990,000)
Borrowings on debt.................. 207,000 207,000 220,000
Borrowings under credit facility.... 26,726,605 20,089,955 21,825,000
Repayments from related parties..... 681,553 352,200 824,504
Advances to related parties......... (599,788) (491,933) (1,384,837)
------------ ------------ ------------
Cash used in financing activities... (9,543,471) (6,507,153) (7,305,686)
------------ ------------ ------------
Increase (decrease) in cash......... 30,063 (22,155) (53,462)
Cash balance at beginning of
period............................. 23,399 23,399 53,462
------------ ------------ ------------
Cash balance at end of period....... $ 53,462 $ 1,244 $ --
============ ============ ============
See accompanying notes.
F-108
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Power Rental Co., Inc. (the "Company") rents, sells and repairs construction
equipment for use by contractor, industrial and homeowner markets. The rentals
are on a daily, weekly or monthly basis. The Company has eighteen locations
and their principal market area is the Pacific Northwest of the United States.
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 balance sheets are presented on an
unclassified basis.
These financial statements are prepared on a historical cost basis and do
not include any adjustments that may result from the acquisition of the
Company by United Rentals, Inc. ("United") as more fully described in Note 10.
Interim Financial Statements
The accompanying balance sheet at May 31, 1998 and the statements of
operations, stockholders' equity and cash flows for the ten-month periods
ended May 31, 1997 and 1998 are unaudited and have been prepared on the same
basis as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consist
solely of normal recurring adjustments. The results of operations for such
interim period are not necessarily indicative of results for the full year.
Inventory
Inventories consist primarily of general replacement parts and are stated at
the lower of cost, determined under the first-in, first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the statement of
operations.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over estimated useful lives
ranging from three to seven years. Leasehold improvements are amortized using
the straight-line method over the estimated lives of the improvements or the
remaining life of the lease, whichever is shorter.
F-109
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Intangible Assets
Intangible assets are recorded at cost and consist of goodwill of $372,480
and covenants not to compete of $207,000. Accumulated amortization at July 31,
1997 and May 31, 1998 is $201,211 and $244,191, respectively. Goodwill is
being amortized by the straight-line method over its estimated useful life of
forty years. The covenants not to compete reflect agreements made regarding
confidentiality and restricting competitive activity and are being amortized
by the straight-line method over the period of the agreements, which is 5
years. Amortization expense was $50,545, $34,333 and $42,980 for the year
ended July 31, 1997 and for the ten months ended May 31, 1997 and 1998,
respectively.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Companies advertise primarily through sponsorships, trade journals,
trade associations and phone directories. All advertising costs are expensed
as incurred. Advertising expense amounted to approximately $714,680, $609,100
and $653,300 in the year ended July 31, 1997 and for the ten months ended May
31, 1997 and 1998, respectively.
Income Taxes
The Company uses the "liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
differences are expected to reverse.
Accounting 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.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Company's customer base
and its credit policy.
F-110
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following:
JULY 31, MAY 31,
1997 1998
----------- -----------
(UNAUDITED)
Rental equipment.................................. $61,168,264 $69,016,929
Less accumulated depreciation..................... 25,593,197 30,877,175
----------- -----------
Rental equipment, net............................. $35,575,067 $38,139,754
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JULY 31, MAY 31,
1997 1998
----------- -----------
(UNAUDITED)
Transportation equipment........................... $ 5,143,693 $ 5,984,589
Office and shop equipment.......................... 2,236,792 2,683,017
Leasehold improvements............................. 3,573,110 4,419,965
----------- -----------
10,953,595 13,087,571
Less accumulated depreciation and amortization..... 3,651,759 4,818,336
----------- -----------
Property and equipment, net........................ $ 7,301,836 $ 8,269,235
=========== ===========
5. DEBT
Debt consists of the following:
JULY 31, MAY 31,
1997 1998
--------- -----------
(UNAUDITED)
Caterpillar Credit-Note with a monthly payment of $1,668
including interest of 5.6%............................. $ 24,020 $ 9,758
Ingersoll Rand--Various non-interest bearing notes with
combined monthly payments of $100,064 and $2,850 in
1997 and 1998, respectively............................ 289,690 26,308
Allegro Escrow--Two notes with combined monthly payments
of $4,297 including interest of 9.0%................... 175,653 144,831
Associates Commercial--Various notes with combined
monthly payments of $24,451 including interest from
7.6% to 8.9%........................................... 905,505 4,149,252
Case Credit--Various notes with combined monthly
payments of $211,021 including interest from 4.9% to
8.9%................................................... 3,823,564 3,079,867
J.D. Fulwiler--Note with monthly payment of $3,134
including interest of 8.0%............................. 27,285 --
Concord Commercial--Various notes with combined monthly
payments of $143,858 including interest from 8.1% to
8.9%................................................... 4,019,259 3,365,279
John Deere Credit--Various notes with combined monthly
payments of $133,615 including interest from 6.9% to
9.7%................................................... 2,399,434 1,571,762
Ford Motor Credit--Various notes with combined monthly
payments of $121,192 including interest from 8.2% to
9.2%................................................... 1,918,226 1,756,489
F-111
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
JULY 31, MAY 31,
1997 1998
----------- -----------
(UNAUDITED)
AT&T Credit--Note with monthly payment of $2,599
including interest of 10.6%........................... $ 101,393 $ 77,829
Navistar Financial--Various notes with combined monthly
payments of $53,762 including interest from 7.3% to
9.0%.................................................. 1,271,686 922,509
Seafirst Bank--Various notes with combined monthly
payments of $523,962 including interest from 7.3% to
8.5%.................................................. 12,075,932 13,420,418
Seafirst Bank--Line of credit up to $19,000,000,
expiring in February 1999 with interest payable
monthly at 8.5%....................................... 3,810,000 7,645,000
JCB Finance--Note with monthly payment of $8,529
including interest of 8.51%........................... -- 236,637
Pacific Atlantic--Note with monthly payment of $2,610
including interest of 10.9%........................... -- 74,107
PACCAR Financial--Note with monthly payment of $3,663
including
interest of 7.8%...................................... -- 150,654
Deutsche Financial--Note with monthly payment of
$28,932 including
interest of 8.13%..................................... -- 1,436,718
----------- -----------
$30,841,647 $38,067,418
=========== ===========
Substantially all rental equipment collateralize the above notes.
All debt was paid off in June 1998 in connection with the acquisition
discussed in Note 10.
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED TEN MONTHS ENDED MAY
JULY 31, 31,
1997 1997 1998
---------- -------- -----------
(UNAUDITED)
Current:
Federal................................. $229,197 $195,530 $ (608,430)
State................................... 10 10
-------- -------- -----------
229,207 195,540 (608,430)
Deferred:
Federal................................. 34,832 34,612 (876,200)
State................................... 53,014 51,918 (61,912)
-------- -------- -----------
87,846 86,530 (938,112)
-------- -------- -----------
$317,053 $282,070 $(1,546,542)
======== ======== ===========
F-112
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
Significant components of the Company's deferred tax liability at July 31,
1997 and May 31, 1998 are as follows:
JULY 31, MAY 31,
1997 1998
---------- -----------
(UNAUDITED)
Net operating loss carryforward................... $ (469,000) $(1,085,000)
Cumulative tax depreciation in excess of book..... 3,390,231 3,068,119
---------- -----------
Deferred tax liability, net....................... $2,921,231 $ 1,983,119
========== ===========
At July 31, 1997, the Company has net operating loss carryforwards of
$1,142,326 for income tax purposes that expire in 2012.
7. RELATED PARTY TRANSACTIONS
During the year ended July 31, 1997 and the ten months ended May 31, 1997
and 1998, the Company paid $628,533, $565,295 and $530,687 for advertising
expenses to a partnership controlled by the Company's president and principal
stockholder.
The accompanying financial statements at July 30, 1997 and May 31, 1998,
reflect amounts receivable of $509,473 and $659,174, respectively, from the
president of the Company. These advances are made within the framework of a
special drawing and loan account which bears interest at 8%.
In addition, the Company is owed amounts from relatives of and related
entities controlled by the president of the Company totaling $103,244 and
$454,406 at July 31, 1997 and May 31, 1998, respectively. These advances are
non-interest bearing.
The Company conducts its operations primarily from various separate
facilities under noncancellable lease agreements. Three of these facilities
are owned either by the Company's president and principal stockholder or
related entities controlled by the president of the Company. Another facility
is leased to a limited partnership in which the general partner is the
Company's president and principal stockholder. These leases expire at various
dates through the year 2001. All of these agreements require the payment by
the Company of property taxes, maintenance and insurance. Total rent expense
paid to related parties and charged to current operations totaled $630,000,
$516,450 and $704,850 for the year ended July 31, 1997 and ten months ended
May 31, 1997 and 1998, respectively.
In connection with the acquisition discussed in Note 10, the lease terms
with related parties have been renegotiated.
The remaining lease agreements are with unrelated third parties. These
leases expire at various dates through the year 2006. Most of these agreements
contain certain renewal options and provide for first right of refusal toward
purchase. These agreements generally require the Company to pay all utilities,
insurance, taxes and maintenance. Total rent expense charged to operations on
unrelated third party leases for the year ended July 31, 1997 and ten months
ended May 31, 1997 and 1998 were $786,928, $609,674 and $644,800,
respectively.
F-113
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
Some leases include scheduled base rent increases over the term of the
leases. The total amount of the base rent payments is being charged to expense
on a straight-line method over the terms of the leases. The Company recorded a
liability for deferred rent to reflect the excess of rent expense over cash
payments which is included in the accompanying balance sheets.
The future minimum lease commitments under all unrelated third party
operating leases that have noncancellable lease terms in excess of one year
are as follows:
Fiscal 1998.............. $ 868,660
1999.................. 667,360
2000.................. 586,600
2001.................. 449,440
2002.................. 317,940
Thereafter............ 399,030
----------
$3,289,030
==========
At July 31, 1997 and May 31, 1998 the Company was contingently liable as a
guarantor on bank loans in the amount of $1,662,098 and $1,516,740,
respectively, owed to the bank by its president and principal stockholder.
These bank loans are also secured by substantial personal and real property
assets of such stockholder.
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended July 31, 1997 and the ten months ended May 31, 1997 and
1998, total interest paid was $2,019,792, $1,588,185 and $2,394,938,
respectively.
For the year ended July 31, 1997 and the ten months ended May 31, 1997 and
1998, total taxes paid was $899,655, $899,655 and $0, respectively.
For the year ended July 31, 1997 and the ten months ended May 31, 1997 and
1998, the Company purchased $17,555,968, $12,719,662 and $13,971,123,
respectively, of equipment which was financed.
9. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) pension plan which covers
substantially all employees. The Company makes discretionary contributions.
Company contributions to the plan were $300,000, $300,000 and $0 for the year
ended July 31, 1997 and for the ten months ended May 31, 1997 and 1998,
respectively.
10. SUBSEQUENT EVENT
On June 8, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Company.
F-114
REPORT OF INDEPENDENT AUDITORS
Board of Directors BNR Group of Companies
We have audited the combined balance sheets of BNR Group of Companies as at
March 31, 1996 and 1997 and the combined statements of earnings, stockholders'
equity and cash flows for the years then ended. These combined financial
statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these combined financial statements present fairly, in all
material respects, the combined financial position of BNR Group of Companies
as at March 31, 1996 and 1997 and the results of their operations and their
cash flows for the years then ended in accordance with generally accepted
accounting principles in Canada.
Generally accepted accounting principles in Canada vary in certain
significant respects from generally accepted accounting principles in the
United States. Application of generally accepted accounting principles in the
United States would have affected results of operations for the years ended
March 31, 1996 and 1997 and stockholders' equity as at March 31, 1996 and
March 31, 1997 to the extent summarized in note 14 to the combined financial
statements.
/s/ KPMG
Chartered Accountants
Waterloo, Canada
February 3, 1998
F-115
BNR GROUP OF COMPANIES
COMBINED BALANCE SHEETS
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
--------- ----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash.................................... $ 45,817 $ 62,471 $ 36,157
Trade accounts receivable (note 2)...... 3,807,908 4,692,084 7,281,959
Inventories............................. 1,744,367 1,897,021 2,276,311
Income taxes recoverable................ -- 81,808 --
Prepaid expenses........................ 116,844 128,343 85,937
----------- ----------- -----------
5,714,936 6,861,727 9,680,364
Rental equipment (note 3)................. 8,668,609 10,593,547 13,211,100
Fixed assets (note 4)..................... 731,864 716,381 1,054,482
----------- ----------- -----------
$15,115,409 $18,171,655 $23,945,946
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 5).............. $ 120,373 $ 469,860 $ 1,469,042
Short-term borrowings (note 5).......... 1,428,176 1,407,830 1,752,252
Accounts payable........................ 1,950,163 1,957,643 2,081,720
Accrued liabilities..................... 946,688 686,351 433,945
Income taxes payable.................... 67,618 -- 475,417
Current portion of long-term debt (note
6)..................................... 1,618,749 2,390,758 3,233,715
----------- ----------- -----------
6,131,767 6,912,442 9,446,091
Long-term debt (note 6)................... 2,250,744 3,467,720 4,369,061
Redeemable shares (note 7)................ 4,534,975 4,424,975 4,424,975
Deferred income taxes..................... 681,518 975,570 1,385,392
Stockholders' equity:
Share capital (note 8).................. 83,319 83,319 83,319
Retained earnings....................... 1,433,086 2,307,629 4,237,108
----------- ----------- -----------
1,516,405 2,390,948 4,320,427
----------- ----------- -----------
$15,115,409 $18,171,655 $23,945,946
=========== =========== ===========
See accompanying notes to combined financial statements.
F-116
BNR GROUP OF COMPANIES
COMBINED STATEMENTS OF EARNINGS
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
---------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Revenues:
Rental revenue............. $ 9,286,562 $10,873,631 $ 9,333,864 $11,481,757
Sales of equipment, parts
and supplies.............. 12,276,498 15,829,146 12,292,494 15,836,495
Other...................... 847,000 788,306 682,980 757,443
----------- ----------- ----------- -----------
22,410,060 27,491,083 22,309,338 28,075,695
Cost of revenues:
Cost of equipment rentals,
excluding equipment rental
depreciation.............. 4,352,621 5,277,966 4,103,508 5,282,162
Depreciation on rental
equipment................. 1,609,690 1,936,254 1,451,671 1,715,542
Cost of sales, equipment,
parts and supplies........ 8,883,214 11,818,715 9,303,777 11,832,825
----------- ----------- ----------- -----------
14,845,525 19,032,935 14,858,956 18,830,529
----------- ----------- ----------- -----------
Gross profit................. 7,564,535 8,458,148 7,450,382 9,245,166
Selling, general and adminis-
tration..................... 5,728,380 6,386,710 4,528,911 5,623,444
Non-rental depreciation...... 71,748 78,354 56,903 123,246
----------- ----------- ----------- -----------
Operating earnings........... 1,764,407 1,993,084 2,864,568 3,498,476
Interest expense............. 565,106 691,559 514,503 517,347
----------- ----------- ----------- -----------
Earnings before income tax-
es.......................... 1,199,301 1,301,525 2,350,065 2,981,129
Income taxes (note 9):
Current.................... 245,436 132,930 480,220 637,328
Deferred................... 118,677 294,052 288,251 409,822
----------- ----------- ----------- -----------
364,113 426,982 768,471 1,047,150
----------- ----------- ----------- -----------
Net earnings................. $ 835,188 $ 874,543 $ 1,581,594 $ 1,933,979
=========== =========== =========== ===========
See accompanying notes to combined financial statements.
F-117
BNR GROUP OF COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
SHARE RETAINED
CAPITAL EARNINGS TOTAL
------- ---------- ----------
Balances, at March 31, 1995..................... $83,319 $ 597,898 $ 681,217
Net earnings.................................... -- 835,188 835,188
------- ---------- ----------
Balances, at March 31, 1996..................... 83,319 1,433,086 1,516,405
Net earnings.................................... -- 874,543 874,543
------- ---------- ----------
Balances, at March 31, 1997..................... 83,319 2,307,629 2,390,948
Net earnings (unaudited)........................ -- 1,933,979 1,933,979
Dividends (unaudited)........................... -- (4,500) (4,500)
------- ---------- ----------
Balances, at December 31, 1997 (unaudited)...... $83,319 $4,237,108 $4,320,427
======= ========== ==========
See accompanying notes to combined financial statements.
F-118
BNR GROUP OF COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
---------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net earnings............... $ 835,188 $ 874,543 $ 1,581,594 $ 1,933,979
Items not involving cash:
Depreciation and amorti-
zation.................. 1,681,438 2,014,608 1,508,574 1,838,788
Gain on disposal of
rental equipment........ (639,271) (839,394) (725,213) (764,999)
Gain on disposal of fixed
assets.................. (44,016) -- -- --
Deferred income taxes.... 118,677 294,052 288,251 409,822
Change in operating assets:
Accounts receivable...... (894,464) (884,176) (2,814,394) (2,589,875)
Inventories.............. (613,126) (152,654) (186,602) (379,290)
Prepaid expenses......... (63,687) (11,499) 3,516 42,406
Accounts payable......... 408,768 7,480 (209,735) 124,077
Accrued liabilities...... 387,747 (260,337) (600,645) (252,406)
Income taxes............. 9,712 (149,426) 338,842 557,225
----------- ----------- ----------- -----------
1,186,966 893,197 (815,812) 919,727
Cash flows from investing
activities:
Purchase of rental equip-
ment.................... (5,523,247) (7,355,356) (6,419,981) (7,976,473)
Proceeds on disposal of
rental equipment........ 2,900,664 4,333,558 3,489,908 4,408,377
Purchase of fixed as-
sets.................... (91,794) (62,871) (50,489) (461,347)
Proceeds on disposal of
fixed assets............ 52,648 -- -- --
----------- ----------- ----------- -----------
(2,661,729) (3,084,669) (2,980,562) (4,029,443)
Cash flows from financing
activities:
Net advance (repayment)
of bank indebtedness.... 23,618 349,487 1,256,010 344,422
Net borrowings
(repayment) on short-
term borrowings......... 188,093 (20,346) 338,414 999,182
Borrowings on long-term
debt.................... 2,172,871 2,894,173 3,066,515 2,998,826
Payments on long-term
debt.................... (673,795) (905,188) (783,925) (1,254,528)
Repayment of shareholder
loans................... (41,180) -- -- --
Issuance of share capi-
tal..................... 69,520 -- -- --
Dividends................ -- -- -- (4,500)
Redemption of Class B
special shares.......... (229,725) (110,000) (110,000) --
----------- ----------- ----------- -----------
1,509,402 2,208,126 3,767,014 3,083,402
----------- ----------- ----------- -----------
Increase (decrease) in
cash...................... 34,639 16,654 (29,360) (26,314)
Cash, beginning of period.. 11,178 45,817 45,817 62,471
----------- ----------- ----------- -----------
Cash, end of period........ $ 45,817 $ 62,471 $ 16,457 $ 36,157
=========== =========== =========== ===========
Supplemental Schedule of
Cash Flow Information:
Cash paid during the pe-
riod for interest....... $ 565,106 $ 691,559 $ 514,503 $ 517,347
Cash paid during the
period for income
taxes................... 231,521 332,816 183,030 143,383
=========== =========== =========== ===========
See accompanying notes to combined financial statements.
F-119
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
MARCH 31, 1996 AND 1997
(The information as at December 31, 1997 and for the nine months ended
December 31, 1996 and 1997 is unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
The accompanying combined financial statements are presented in accordance
with accounting principles generally accepted in Canada (Canadian GAAP).
The combined financial statements include the accounts of BNR Equipment
Limited (BNR Kitchener), 754643 Ontario Limited (BNR Ottawa), 650310 Ontario
Limited (BNR Barrie), 766903 Ontario Inc. (BNR Owen Sound) and BNR Equipment,
Inc. (BNR Amherst).
As more fully described in note 15, on January 22, 1998, all of the
aforementioned companies were acquired by United Rentals, Inc. in a single
common transaction and, accordingly, these financial statements have been
prepared on a combined basis.
Each of the companies rents and sells industrial supplies and power
equipment. All significant intercompany accounts and transactions have been
eliminated on combination.
These financial statements are prepared on the basis of their predecessor
historical costs and do not include any adjustments that may result on the
acquisition of the BNR Group of Companies by United Rentals, Inc. as more
fully described in note 15.
(b) Interim financial statements:
The accompanying combined balance sheets and statements of stockholders'
equity at December 31, 1997 and the combined statements of earnings,
stockholders' equity and cash flows for the nine month periods ended December
31, 1996 and 1997 are unaudited and have been prepared on a basis that is
consistent with the audited combined financial statements included herein. In
the opinion of management, such unaudited combined financial statements
include all adjustments necessary to present fairly the information set forth
therein, which consist solely of normal recurring adjustments. The results of
operations for such interim periods are not necessarily indicative of results
for the full year.
(c) Revenue recognition:
Revenue related to the sale of industrial supplies and power equipment is
recognized at the point of sale. Revenue related to the rental of industrial
power equipment is recognized ratably over the contract term. The companies
generally rent equipment under short-term agreements of one month or less.
(d) Inventories:
Inventories consisting primarily of power tools, industrial supplies and
power equipment are valued at the lower of cost (first-in, first-out basis)
and net realizable value.
(e) Foreign currency translation:
Monetary assets and liabilities of the companies, which are denominated in
foreign currencies, are translated into Canadian dollars at exchange rates
prevailing at the balance sheet date. Exchange gains and losses resulting from
the translation of these amounts are reflected in the combined statement of
earnings in the period in which they occur.
F-120
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
(f) Rental equipment, fixed assets and depreciation:
Rental equipment and fixed assets are stated at acquisition cost.
Depreciation is provided using the following methods and annual rates:
ASSET BASIS RATE
----- ----- ----
Rental equipment...................................... Declining balance 15%
Buildings............................................. Declining balance 5%
Office and shop equipment............................. Declining balance 20%
Signs................................................. Declining balance 20%
Vehicles.............................................. Declining balance 20%
Parking lot........................................... Declining balance 8%
Leasehold improvements................................ Straight-line 20%
(g) Deferred income taxes:
The companies account for income taxes on the deferred tax allocation
method. Under this method, timing differences between reported and taxable
income result in provisions for taxes not currently payable. Such timing
differences arise principally as a result of claiming depreciation and other
amounts for tax purposes at amounts differing from those charged to income.
(h) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable are net of allowances for doubtful accounts of
$nil at March 31, 1996, $68,966 at March 31, 1997 and $215,591 at December 31,
1997.
3. RENTAL EQUIPMENT:
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
(UNAUDITED)
Rental equipment........................ $18,335,170 $22,133,208 $26,466,262
Less accumulated depreciation........... 9,666,561 11,539,661 13,255,162
----------- ----------- -----------
$ 8,668,609 $10,593,547 $13,211,100
=========== =========== ===========
F-121
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
4. FIXED ASSETS:
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
Land..................................... $ 201,600 $ 201,600 $ 201,600
Buildings................................ 617,977 617,977 623,066
Office and shop equipment................ 319,208 337,252 363,774
Signs.................................... 17,426 19,163 23,884
Vehicles................................. 53,020 53,020 388,361
Parking lot.............................. -- 7,560 26,448
Leasehold improvements................... 145,646 181,176 251,962
---------- ---------- ----------
1,354,877 1,417,748 1,879,095
Less accumulated depreciation and amorti-
zation.................................. 623,013 701,367 824,613
---------- ---------- ----------
$ 731,864 $ 716,381 $1,054,482
========== ========== ==========
5. BANK INDEBTEDNESS AND SHORT-TERM BORROWINGS:
Bank indebtedness and short-term borrowings bear interest rates between
prime plus .50% to prime plus .75% and are secured by a general assignment of
book debts, security agreement over all inventories, first collateral
mortgages and demand debenture over land and buildings, a fixed charge and a
chattel mortgage over certain equipment and an assignment of fire insurance
over buildings and equipment.
6. LONG-TERM DEBT:
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
Bank loans, various term loans with
combined monthly payments of $123,078
(as at December 31, 1997) including
interest ranging from prime plus 1% to
prime plus 1.75% due from 1998 through
2001. Collateralized by certain
equipment and fixed assets............ $1,662,704 $2,406,572 $2,021,641
Lien notes, various notes with combined
monthly payments of $300,956 (as at
December 31, 1997) including interest
ranging from prime plus 1.25% to prime
plus 2%, due from 1998 through 2001.
Collateralized by specific equipment
...................................... 2,136,540 3,288,692 5,062,094
Other notes, various notes with
combined monthly payments of $26,106
(as at December 31, 1997) including
interest ranging from 2.9% to 10%, due
from 1998 through 2000. Collateralized
by specific equipment and vehicles.... 70,249 163,214 519,041
---------- ---------- ----------
3,869,493 5,858,478 7,602,776
Current portion of long-term debt...... 1,618,749 2,390,758 3,233,715
---------- ---------- ----------
$2,250,744 $3,467,720 $4,369,061
========== ========== ==========
F-122
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
6. LONG-TERM DEBT (CONTINUED):
Annual principal payments over each of the next four years are as follows:
MARCH 31, DECEMBER 31,
1997 1997
----------- ------------
(UNAUDITED)
1998............ $ 2,390,758 $ 3,233,715
1999............ 1,878,097 2,696,223
2000............ 1,280,955 1,448,045
2001............ 308,668 224,793
----------- -----------
$ 5,858,478 $ 7,602,776
=========== ===========
7. REDEEMABLE SHARES:
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
----------------- ----------------- ----------------- -------
(UNAUDITED)
# $ # $ # $
------- --------- ------- --------- ------- ---------
BNR EQUIPMENT LIMITED (BNR
KITCHENER)
Authorized:
Unlimited number of
Class A special
shares, non-voting,
redeemable
Unlimited number of
Class B special
shares, non-voting,
redeemable
Issued:
Class B special
shares.............. 875,975 875,975 765,975 765,975 765,975 765,975
754643 ONTARIO LIMITED (BNR
OTTAWA)
Authorized:
Unlimited number of
special shares, non-
voting, redeemable
Issued:
Special shares....... 159,000 159,000 159,000 159,000 159,000 159,000
650310 ONTARIO LIMITED (BNR
BARRIE)
Authorized:
Unlimited number of
Class C special
shares, non-voting,
redeemable
Unlimited number of
Class D special
shares, non-voting,
redeemable
Issued:
Class C special
shares.............. 1,000 2,315,000 1,000 2,315,000 1,000 2,315,000
Class D special
shares.............. 185,000 185,000 185,000 185,000 185,000 185,000
766903 ONTARIO INC. (BNR OWEN
SOUND)
Authorized:
Unlimited number of
Class C special
shares, non-voting,
redeemable
Issued:
Class C special
shares.............. 1,000 1,000,000 1,000 1,000,000 1,000 1,000,000
--------- --------- ---------
4,534,975 4,424,975 4,424,975
========= ========= =========
F-123
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
7. REDEEMABLE SHARES (CONTINUED)
(a) Certain of the BNR Group of Companies have issued special shares, Class
B special shares and Class D special shares which are redeemable at the
holders option at $1 per share. Under Canadian generally accepted accounting
principles, these shares are presented as liabilities in the combined
financial statements at their redemption amounts.
(b) Certain of the BNR Group of Companies have issued Class C special shares
which are redeemable at the holders option at a fixed amount which is in
excess of their stated capital amounts. Under Canadian generally accepted
accounting principles, these Class C special shares are presented as
liabilities in the combined financial statements at their redemption amounts.
The excess of their redemption amounts over their paid-up capital amounts of
$3,314,990 has been charged to retained earnings.
(c) The special shares, Class B special shares, Class C special shares and
Class D special shares have no fixed redemption date and are redeemable at the
option of the holder. Dividends on these shares are discretionary. In the
event of liquidation, dissolution, or wind up of the companies, holders of
these shares are entitled to receive, in priority to all other classes, an
amount equal to the redemption amount plus any declared and unpaid dividends.
(d) Between May 8, 1995 and January 18, 1996, BNR Equipment Limited (BNR
Kitchener) redeemed 229,725 Class B special shares for $229,725.
Between April 18, 1996 and July 15, 1996, BNR Equipment Limited (BNR
Kitchener) redeemed 110,000 Class B special shares for $110,000.
F-124
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
8. SHARE CAPITAL:
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------ -------
(UNAUDITED)
# $ # $ # $
----- ------ ----- ------ ----- ------
BNR EQUIPMENT LIMITED (BNR
KITCHENER)
Authorized:
Unlimited number of common
shares
Issued:
Common shares................. 6,000 13,693 6,000 13,693 6,000 13,693
754643 ONTARIO LIMITED (BNR OT-
TAWA)
Authorized:
Unlimited number of common
shares
Issued:
Common shares................. 100 100 100 100 100 100
650310 ONTARIO LIMITED (BNR
BARRIE)
Authorized:
Unlimited number of Class A
common shares................
Unlimited number of Class B
convertible common shares....
Issued:
Class B convertible common
shares....................... 600 1 600 1 600 1
766903 ONTARIO INC. (BNR OWEN
SOUND)
Authorized:
Unlimited number of Class A
common shares................
Unlimited number of Class B
convertible common shares....
Issued:
Class B convertible common
shares....................... 1,000 5 1,000 5 1,000 5
BNR EQUIPMENT INC. (BNR AMHERST)
Authorized:
Unlimited number of common
shares
Issued:
Common shares................. 100 69,520 100 69,520 100 69,520
------ ------ ------
83,319 83,319 83,319
====== ====== ======
The Class B convertible common shares are convertible into an equivalent
number of Class A common shares for no additional consideration.
F-125
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
9. INCOME TAXES:
The effective income tax rate differs from the statutory rate that would be
obtained by applying the combined basic federal, state and provincial tax rate
to earnings before income taxes. These differences result from the following
items:
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
--------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Combined basic federal, state
and provincial tax rate..... 44.6% 44.6% 44.6% 44.6%
Increase (decrease) in income
tax rate resulting from:
Tax reductions to certain
private companies........... (12.0) (9.9) (11.3) (10.0)
Other permanent differences.. (2.2) (1.9) (.6) .5
----- ---- ----- -----
Effective income tax rate.... 30.4% 32.8% 32.7% 35.1%
===== ==== ===== =====
10. COMMITMENTS:
The companies are committed to payments under operating leases for
equipment, vehicles and buildings. Annual payments over each of the next five
years are as follows:
MARCH 31, DECEMBER 31,
1997 1997
---------- ------------
(UNAUDITED)
1998............ $ 789,000 $ 620,000
1999............ 446,000 522,000
2000............ 275,000 361,000
2001............ 122,000 238,000
2002............ 54,000 148,000
---------- ----------
$1,686,000 $1,889,000
========== ==========
11. FINANCIAL INSTRUMENTS:
The carrying value of the companies' trade accounts receivable, bank
indebtedness, accounts payable, accrued liabilities, short-term borrowings and
redeemable shares approximate their fair values due to their demand nature or
relatively short periods to maturity.
The fair value of the companies' long-term debt have been determined to be
equal to their carrying values, as the current financing arrangements
represent the borrowing rate presently available to the companies for loans
with similar terms and maturities.
F-126
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
12. RELATED PARTY TRANSACTIONS:
(a) The companies rent certain premises from officers and stockholders of
the companies.
The following are the amounts that have been expensed in each of the
periods:
March 31, 1997.................. $202,081
December 31, 1997 (unaudited)... 164,498
(b) Included in note 10 are operating lease commitments with a company
controlled by certain stockholders:
The following are the amounts that have been expensed in each of the
periods:
March 31, 1997................... $57,523
December 31, 1997 (unaudited).... 57,391
13. NATURE OF OPERATIONS AND SEGMENT INFORMATION:
The companies only significant activity is the rental and sale of industrial
supplies and power equipment. Geographically segmented information is as
follows:
CANADA UNITED STATES TOTAL
MARCH 31, MARCH 31, MARCH 31,
----------------------- --------------------- -----------------------
YEAR ENDED 1996 1997 1996 1997 1996 1997
------------------------ ----------- ----------- --------- ---------- ----------- -----------
Revenues................ $21,812,899 $24,746,282 $ 597,161 $2,744,801 $22,410,060 $27,491,083
Operating earnings
(loss)................. 1,922,641 1,996,754 (158,234) (3,670) 1,764,407 1,993,084
Identifiable net
assets................. 1,307,530 1,821,554 208,875 569,394 1,516,405 2,390,948
CANADA UNITED STATES TOTAL
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------- ------------
NINE MONTHS ENDED 1997 1997 1997
------------------------------------- ------------ ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues............................. $24,447,526 $3,628,169 $28,075,695
Operating earnings................... 3,137,274 361,202 3,498,476
Identifiable net assets.............. 3,251,422 1,069,005 4,320,427
14. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
The companies follow Canadian generally accepted accounting principles which
are different in some respects from those applicable in the United States.
(a) Since redemption of the shares described in note 7 is outside the
control of the companies, the shares are classified as liabilities under
Canadian GAAP. For U.S. GAAP purposes, such redeemable shares can be
classified outside stockholders' equity and below liabilities. This
classification difference has no impact on net income or stockholders' equity
for U.S. GAAP purposes.
(b) The income tax provision is based on the deferral method and adjustments
are generally not made for changes in income tax rates. Under U.S. GAAP,
deferred tax liabilities are measured using the enacted tax rate expected to
apply to taxable income in the periods in which the deferred tax liability is
expected to be settled.
F-127
BNR GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN CANADIAN DOLLARS)
14. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED):
The deferred income tax liability under U.S. GAAP as compared to Canadian
GAAP consists of the following temporary differences:
YEAR YEAR NINE MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
Rental Equipment and Fixed Assets--
Tax depreciation in excess of book
depreciation--
For U.S. GAAP........................... $1,257,257 $1,518,790 $1,833,228
For Canadian GAAP....................... 681,518 975,570 1,385,392
(c) The following table presents a reconciliation of net earnings from
Canadian GAAP to U.S. GAAP:
YEAR YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
--------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Net earnings under Canadian
GAAP......................... $835,188 $874,543 $1,581,594 $1,933,979
Income tax adjustment under
the asset and liability
method....................... (66,853) 32,519 56,922 95,384
-------- -------- ---------- ----------
Net earnings under U.S. GAAP.. $768,335 $907,062 $1,638,516 $2,029,363
======== ======== ========== ==========
(d) The following table presents stockholders' equity under U.S. GAAP:
YEAR YEAR NINE MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
Stockholders' equity under Canadian
GAAP.................................. $1,516,405 $2,390,948 $4,320,427
Income tax adjustment under the asset
and liability method.................. (575,739) (543,220) (447,836)
Stockholders' equity under U.S. GAAP... 940,666 1,847,728 3,872,591
15. SUBSEQUENT EVENT:
On January 22, 1998, all of the outstanding capital stock was acquired by
United Rentals, Inc. All of the shares described in note 7 and all of the
shares described in note 8, except for the shares of the U.S. company BNR
Equipment, Inc. (BNR Amherst) were cancelled and these Canadian companies of
the BNR Group of Companies amalgamated with United Rentals of Canada, Inc. on
January 30, 1998. Subsequent to December 31, 1997 and prior to the acquisition
by United Rentals, Inc., land and buildings with a carrying value of
approximately $500,000 were acquired by certain of the BNR Group of Companies'
stockholders for cash of $665,000 which was used by the companies to repay the
companies' debt. At the same time, the companies entered into operating lease
agreements with the stockholders with respect to these land and buildings.
F-128
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Adco Equipment, Inc.
We have audited the combined balance sheet of Adco Equipment, Inc. (see Note
1) (the "Companies") as of December 31, 1997 and the related combined
statements of operations, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Adco
Equipment, Inc. at December 31, 1997, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
July 17, 1998
F-129
ADCO EQUIPMENT, INC.
COMBINED BALANCE SHEETS
DECEMBER
31, JUNE 30,
ASSETS 1997 1998
------ ----------- -----------
(UNAUDITED)
Cash................................................... $ 1,634,205 $ 2,890,453
Accounts receivable, net of allowance for doubtful
accounts of $322,000 at 1997 and 1998................. 2,350,314 3,679,084
Inventory.............................................. 1,263,667 1,372,957
Rental equipment, net.................................. 8,227,480 8,597,740
Property and equipment, net............................ 891,894 821,862
Prepaid expenses and other assets...................... 60,172 61,127
----------- -----------
Total assets....................................... $14,427,732 $17,423,223
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable, accrued expenses and other
liabilities......................................... $ 849,960 $ 725,516
Debt................................................. 2,526,175 3,124,603
Stockholder loan..................................... 200,000 200,000
----------- -----------
Total liabilities.................................. 3,576,135 4,050,119
Commitments and contingencies
Stockholders' equity:
Common stock, Adco Equipment, Inc., no par value,
7,500 shares authorized, 100 issued and outstanding;
Adco Equipment Supply, Inc., no par value, 7,500
shares authorized, 1,000 issued and outstanding..... 20,000 20,000
Retained earnings.................................... 10,831,597 13,353,104
----------- -----------
Total stockholders' equity......................... 10,851,597 13,373,104
----------- -----------
Total liabilities and stockholders' equity......... $14,427,732 $17,423,223
=========== ===========
See accompanying notes.
F-130
ADCO EQUIPMENT, INC.
COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE
YEAR ENDED 30,
DECEMBER ------------------------
31, 1997 1997 1998
----------- ----------- -----------
(UNAUDITED)
Revenues:
Equipment rentals..................... $16,313,470 $ 8,461,446 $ 9,298,812
Sales of parts, supplies and new
equipment............................ 6,968,972 3,619,348 4,012,727
----------- ----------- -----------
Total revenues.......................... 23,282,442 12,080,794 13,311,539
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation........ 6,191,738 2,689,474 2,906,348
Depreciation, equipment rentals....... 2,465,331 1,232,666 1,393,939
Cost of parts, supplies and new
equipment sales...................... 5,932,862 3,111,352 3,467,749
----------- ----------- -----------
Total cost of revenues.................. 14,589,931 7,033,492 7,768,036
----------- ----------- -----------
Gross profit............................ 8,692,511 5,047,302 5,543,503
Selling, general and administrative
expenses............................... 6,374,453 3,063,353 2,991,891
Non-rental depreciation................. 249,572 124,786 143,020
----------- ----------- -----------
Operating income........................ 2,068,486 1,859,163 2,408,592
Interest expense........................ 267,639 143,470 141,892
Other (income), net..................... (226,501) (116,398) (254,807)
----------- ----------- -----------
Net income.......................... $ 2,027,348 $ 1,832,091 $ 2,521,507
=========== =========== ===========
See accompanying notes.
F-131
ADCO EQUIPMENT, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
-------------- RETAINED
SHARES AMOUNT EARNINGS
------ ------- -----------
Balance at January 1, 1997.......................... 1,100 $20,000 $ 8,804,249
Net income.......................................... 2,027,348
----- ------- -----------
Balance at December 31, 1997........................ 1,100 20,000 10,831,597
Net income (unaudited).............................. 2,521,507
----- ------- -----------
Balance at June 30, 1998 (unaudited)................ 1,100 $20,000 $13,353,104
===== ======= ===========
See accompanying notes.
F-132
ADCO EQUIPMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE
YEAR ENDED 30,
DECEMBER 31, ------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................ $ 2,027,348 $ 1,832,091 $ 2,521,507
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 2,714,903 1,357,452 1,536,959
Changes in assets and liabilities:
Accounts receivable, net.......... 22,910 (906,199) (1,328,770)
Inventory......................... 500,839 229,882 (109,290)
Prepaid expenses and other
assets........................... (5,733) (25,819) (955)
Accounts payable, accrued expenses
and other liabilities............ (272,050) (578,559) (124,444)
----------- ----------- -----------
Total adjustments............... 2,960,869 76,757 (26,500)
----------- ----------- -----------
Cash provided by operating
activities..................... 4,988,217 1,908,848 2,495,007
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment.......... (3,451,755) (1,797,573) (1,764,199)
Purchase of property and equipment.... (400,350) (61,723) (72,988)
----------- ----------- -----------
Cash used in investing activities..... (3,852,105) (1,859,296) (1,837,187)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt............ (1,712,003) (773,727) (1,250,521)
Borrowings on debt.................... 867,886 649,784 1,848,949
----------- ----------- -----------
Cash (used in) provided by financing
activities........................... (844,117) (123,943) 598,428
----------- ----------- -----------
Increase (decrease) in cash........... 291,995 (74,391) 1,256,248
Cash balance at beginning of period... 1,342,210 1,342,210 1,634,205
----------- ----------- -----------
Cash balance at end of period......... $ 1,634,205 $ 1,267,819 $ 2,890,453
=========== =========== ===========
See accompanying notes.
F-133
ADCO EQUIPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements of Adco Equipment, Inc. include the
accounts of Adco Equipment, Inc. ("Equipment") and Adco Equipment Supply, Inc.
("Supply") (collectively the "Companies"). The Companies are affiliated
through common ownership. All significant intercompany accounts and
transactions have been eliminated in combination.
These combined financial statements are prepared on a historical cost basis
and do not include any adjustments that may result from the acquisition of the
Companies by United Rentals, Inc. ("United") as more fully described in Note
9.
Business Activity
The Companies rent, sell and repair construction equipment for use by
construction, industrial, entertainment and municipal markets. The rentals are
on a daily, weekly or monthly basis. The Companies have two locations and
their principal market area is Southern California. The nature of the
Companies' business is such that short-term obligations are typically met by
cash flow generated from long-term assets. Consequently, consistent with
industry practice, the combined balance sheet is presented on an unclassified
basis.
Interim Financial Statements
The accompanying combined balance sheet at June 30, 1998 and the combined
statements of operations, stockholders' equity and cash flows for the six-
month periods ended June 30, 1997 and 1998 are unaudited and have been
prepared on the same basis as the audited combined financial statements
included herein. In the opinion of management, such unaudited combined
financial statements include all adjustments necessary to present fairly the
information set forth therein, which consist solely of normal recurring
adjustments. The combined results of operations for such interim period are
not necessarily indicative of results for the full year.
Inventory
Inventories consist primarily of general replacement parts and equipment
held for resale and are stated at the lower of cost, determined under the
first-in, first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the combined
statement of operations.
F-134
ADCO EQUIPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over an estimated five-year
useful life.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to approximately $50,800, $28,200 and $38,600 in
the year ended December 31, 1997 and for the six months ended June 30, 1997
and 1998, respectively .
Income Taxes
The Companies have elected, by unanimous consent of its shareholders, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
federal purposes. Under those provisions, the Companies do not pay federal
income taxes; instead, the shareholders are liable for individual income taxes
on the Companies' profits.
Accounting 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.
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies' customer base
and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
DECEMBER JUNE 30,
31, 1997 1998
----------- -----------
(UNAUDITED)
Rental equipment................................. $28,619,154 $30,383,353
Less accumulated depreciation.................... 20,391,674 21,785,613
----------- -----------
Rental equipment, net............................ $ 8,227,480 $ 8,597,740
=========== ===========
F-135
ADCO EQUIPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
Transportation equipment......................... $2,201,586 $2,274,574
Furniture, fixtures and equipment................ 48,820 48,820
---------- ----------
2,250,406 2,323,394
Less accumulated depreciation.................... 1,358,512 1,501,532
---------- ----------
Property and equipment, net...................... $ 891,894 $ 821,862
========== ==========
5. DEBT AND STOCKHOLDER LOAN
Debt and stockholder loan consists of the following:
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
Bank of America--Various notes with combined
monthly payments of $150,000 and $207,000 in
1997 and 1998, respectively, including
interest of 8%.............................. $2,526,175 $3,124,603
Stockholder Loan--No set principal payments,
nor due date. The loan accrues interest at a
rate of 10.25% per year..................... 200,000 200,000
---------- ----------
$2,726,175 $3,324,603
========== ==========
Substantially all rental equipment collateralize the above Bank of America
notes which are secured by UCC Filings.
All debt was paid off in July 1998 in connection with the acquisition
discussed in Note 9.
6. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997 and the six months ended June 30,
1997 and 1998, the Companies paid $294,000, $147,000 and $147,000 for
equipment rental expenses to the principal stockholder.
The Companies conduct their operations primarily from two separate
facilities which are owned by the Companies principal stockholder. These
leases expire at June 30, 1998. The Companies are required to pay the property
taxes, maintenance and insurance for these facilities. Total rent expense paid
to related parties and charged to current operations totaled $330,000,
$165,000 and $165,000 for the year ended December 31, 1997 and six months
ended June 30, 1997 and 1998, respectively.
In connection with the acquisition discussed in Note 9, the lease terms with
related parties have been renegotiated.
F-136
ADCO EQUIPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 and the six months ended June 30, 1997
and 1998, total interest paid was approximately $267,600, $121,900 and
$106,900, respectively.
8. EMPLOYEE PROFIT SHARING PLAN
Equipment maintains a profit-sharing plan which covers substantially all
employees. Equipment's contributions are discretionary and amounted to
$160,000, $0 and $0 for the year ended December 31, 1997 and for the six
months ended June 30, 1997 and 1998, respectively.
9. SUBSEQUENT EVENT
On July 2, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Companies.
F-137
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of McClinch, Inc.:
We have audited the accompanying consolidated balance sheet of McClinch Inc.
and Subsidiaries as of January 31, 1998, and the related consolidated
statements of income and retained earnings and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of McClinch,
Inc. and Subsidiaries as of January 31, 1998, and the consolidated results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Stamford, Connecticut March 25, 1998
F-138
MCCLINCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SIX MONTHS
YEAR ENDED ENDED
JANUARY 31, JULY 31,
1998 1998
----------- -----------
(UNAUDITED)
ASSETS:
Cash and cash equivalents............................ $ 754,000 $ 697,000
Accounts receivable, less allowance for doubtful
accounts of $106,000 and $128,000................... 4,168,000 4,697,000
Due from related parties (Note 6).................... 293,000 755,000
Inventories.......................................... 1,181,000 1,276,000
Net investment in sales-type leases (Note 3)......... 32,000 12,000
Property and rental equipment, net (Note 4).......... 17,249,000 21,163,000
Other assets......................................... 217,000 230,000
----------- -----------
Total assets....................................... $23,894,000 $28,830,000
=========== ===========
LIABILITIES:
Notes payable (Note 5)............................... $10,388,000 $14,083,000
Accounts payable and accrued expenses................ 1,759,000 1,334,000
Income taxes payable................................. 1,000 79,000
Deferred income taxes................................ 2,476,000 2,836,000
----------- -----------
Total liabilities.................................. 14,624,000 18,332,000
----------- -----------
Commitments (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, issued and
outstanding, 1,000 shares........................... 26,000 26,000
Retained earnings.................................... 9,862,000 11,090,000
Treasury stock, at cost; 103 shares (Note 6)......... (618,000) (618,000)
----------- -----------
Total stockholders' equity......................... 9,270,000 10,498,000
----------- -----------
Total liabilities and stockholders' equity......... $23,894,000 $28,830,000
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-139
MCCLINCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
SIX MONTHS ENDED
YEAR ENDED JULY 31,
JANUARY 31, -----------------------
1998 1998 1997
----------- ----------- ----------
(UNAUDITED)
Revenues:
Equipment rentals and service (Note
6).................................... $18,474,000 $10,571,000 $8,306,000
Sales.................................. 4,659,000 3,188,000 2,640,000
----------- ----------- ----------
23,133,000 13,759,000 10,946,000
Cost of equipment rentals and service.... 11,672,000 7,154,000 5,358,000
Cost of sales............................ 2,843,000 1,944,000 1,694,000
----------- ----------- ----------
Gross profit......................... 8,618,000 4,661,000 3,894,000
Selling expenses......................... 1,484,000 788,000 629,000
General and administrative expenses...... 3,136,000 1,324,000 1,111,000
----------- ----------- ----------
3,998,000 2,549,000 2,154,000
Other income (expenses):
Interest income........................ 134,000 21,000 61,000
Interest expense....................... (1,028,000) (483,000) (495,000)
Rental of property, net (Note 9)....... 71,000 15,000 38,000
Other income........................... 44,000 1,000 1,000
----------- ----------- ----------
Income before provision for income
taxes............................... 3,219,000 2,103,000 1,759,000
Provision for income taxes (Note 7)...... 1,082,000 875,000 759,000
----------- ----------- ----------
Net income........................... 2,137,000 1,228,000 1,000,000
Retained earnings, beginning of period... 7,793,000 9,862,000 7,793,000
Dividends paid........................... (68,000) -- --
----------- ----------- ----------
Retained earnings, end of period..... $ 9,862,000 $11,090,000 $8,793,000
=========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-140
MCCLINCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEAR ENDED JULY 31,
JANUARY 31, ------------------------
1998 1998 1997
----------- ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income $ 2,137,000 $ 1,228,000 $ 1,000,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 3,387,000 1,977,000 1,623,000
Gain on sale of property and rental
equipment........................... (1,313,000) (925,000) (663,000)
Deferred income taxes................ 328,000 360,000 308,000
----------- ----------- -----------
4,539,000 2,640,000 2,268,000
Changes in assets and liabilities:
Accounts receivable................ (643,000) (529,000) (144,000)
Due to related parties for operat-
ing expenses...................... 519,000 (310,000) (174,000)
Current income taxes receivable.... 58,000 -- 58,000
Inventories........................ (201,000) (95,000) (62,000)
Other assets....................... (165,000) (13,000) (22,000)
Accounts payable and accrued ex-
penses............................ 201,000 (425,000) (123,000)
Income taxes payable............... 1,000 78,000 40,000
----------- ----------- -----------
Net cash provided by operating
activities...................... 4,309,000 1,346,000 1,841,000
----------- ----------- -----------
Cash flows from investing activities:
Advances to related parties.......... (318,000) (152,000) (147,000)
Acquisition of property and rental
equipment........................... (7,227,000) (6,581,000) (5,737,000)
Proceeds from sale of property and
rental equipment.................... 2,292,000 1,615,000 1,370,000
Net investment in sales-type leases.. 88,000 20,000 76,000
----------- ----------- -----------
Net cash used in investing activ-
ities........................... (5,165,000) (5,098,000) (4,438,000)
----------- ----------- -----------
Cash flows from financing activities:
Repayments of notes payable.......... (8,040,000) (3,764,000) (4,383,000)
Borrowings of notes payable.......... 7,145,000 7,459,000 6,600,000
Repayment of note payable to related
party............................... (41,000) -- (41,000)
Dividends paid....................... (68,000) -- --
----------- ----------- -----------
Net cash (used in) provided by
financing activities............ (1,004,000) 3,695,000 2,176,000
----------- ----------- -----------
Net decrease in cash and cash
equivalents..................... (1,860,000) (57,000) (421,000)
Cash and cash equivalents, beginning of
period................................ 2,614,000 754,000 2,614,000
----------- ----------- -----------
Cash and cash equivalents, end of
period.......................... $ 754,000 $ 697,000 $ 2,193,000
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest........................... $ 1,029,000 $ 462,000 $ 478,000
Income taxes, net of refunds....... 695,000 422,000 353,000
The accompanying notes are an integral part of the consolidated financial
statements.
F-141
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 1998 AND 1997 IS
UNAUDITED)
1. BUSINESS AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
McClinch, Inc. and its wholly-owned subsidiaries McClinch Leasing Corporation,
McClinch Equipment Corporation, McClinch Crane Services, Inc. and McClinch
Aviation Corporation, (the "Company").
The Company is an exclusive dealer for JLG Industries, Inc. and Genie
Industries in the State of Connecticut, metropolitan New York, Long Island,
Westchester County and other counties in New York State. The Company is also
an exclusive dealer for Lull Corporation in various counties in the States of
Connecticut and New York. In addition, the Company has distribution agreements
with other manufacturers in Connecticut and New York. The Company's revenues
are derived principally from the rental of aerialift and material handling
equipment and the sale of new and used equipment to a diversified customer
base including contractors and other users.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated balance sheet is presented on an unclassified basis since
it more properly reflects the Company's operations as a rental equipment
company.
Basis of Consolidation:
All intercompany transactions and balances have been eliminated.
Interim Financial Statements:
The accompanying balance sheet at July 31, 1998, and the statements of
income and retained earnings and cash flows for the six month periods ended
July 31, 1998 and 1997 are unaudited and have been prepared on the same basis
as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consists
solely of normal recurring adjustments. The results of operations for such
interim periods are not necessarily indicative of results for the full year.
Revenue Recognition:
Operating Leases--Rental revenue is recognized over the lease term
(generally less than one year) as earned.
Sales-Type Leases--Sales are recorded at amounts equal to the present value
of the minimum lease payments at the inception of the lease. The unearned
interest income represents the difference between the minimum lease payments
and the present value of such payments. Such interest income is recognized
over the life of the lease using the interest method.
Cash and Cash Equivalents:
Cash and cash equivalents consist primarily of cash in banks and temporary
cash investments, which consist principally of U.S. Treasury Notes, with
original maturities of less than 90 days. Temporary cash investments of
$144,000 as of January 31, 1998, are recorded at cost plus accrued interest
which approximates market value. The Company maintains all of its cash
balances in one institution. These balances are insured by the Federal Deposit
Insurance Corporation up to $100,000.
F-142
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 1998 AND 1997 IS
UNAUDITED)
Inventories:
Inventories, consisting principally of aerialift equipment and related spare
parts, are recorded at the lower of first-in, first-out cost or market.
Property and Rental Equipment:
Property and rental equipment, consisting principally of the Company's
rental fleet of aerialift and material handling equipment, is stated at cost
and is depreciated using the straight-line method over the following estimated
useful lives: buildings and building improvements, 30 years; rental equipment,
furniture and fixtures and computer equipment, 7 years; and vehicles, 5 years.
Upon retirement or sale, the cost and related accumulated depreciation are
removed from the accounts and the resulting gains or losses are included in
income.
Income Taxes:
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in a company's
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the temporary differences
are expected to reverse.
Estimates:
The preparation of financial statements in confirmity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications:
Certain amounts have been reclassified between balance sheet accounts in the
current year to more properly reflect the nature of the item.
3. SALES-TYPE LEASES
The net investment in sales-type leases consists of the following:
JANUARY 31, JULY 31,
1998 1998
----------- --------
Minimum lease payments receivable...................... $34,000 $13,000
Lease, Unearned interest income...................... (2,000) (1,000)
------- -------
Net investment in sales-type leases.................... $32,000 $12,000
======= =======
Minimum lease payments as of January 31, 1998 are receivable as follows:
FISCAL YEAR
-----------
1999.......................................................... $29,000
2000.......................................................... 5,000
F-143
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 1998 AND 1997 IS
UNAUDITED)
4. PROPERTY AND RENTAL EQUIPMENT
Property and rental equipment consists of the following:
JANUARY 31, JULY 31,
1998 1998
------------ ------------
Rental equipment................................. $ 30,965,000 $ 34,412,000
Land............................................. 530,000 530,000
Buildings and improvements....................... 377,000 405,000
Vehicles......................................... 2,381,000 2,597,000
Furniture, fixtures and computer equipment....... 528,000 630,000
------------ ------------
34,781,000 38,574,000
Less, Accumulated depreciation................. (17,532,000) (17,411,000)
------------ ------------
Total........................................ $ 17,249,000 $ 21,163,000
============ ============
5. NOTES PAYABLE
Notes payable consists of the following:
JANUARY 31, JULY 31,
1998 1998
----------- -----------
Note payable to a bank syndicate bearing interest at
LIBOR plus 1 3/4%.................................. $ 9,695,000 $13,449,000
Note payable to Citicorp Dealer Finance bearing
interest at 8.5%, payable in monthly installments
of $7,839 through September 2004, including
interest........................................... 477,000 450,000
First mortgage to Edith Godwin on real property
located in Bridgeport, Connecticut, bearing
interest at 9.0%, payable in monthly installments
of $3,066 through January 2002, including
interest........................................... 123,000 110,000
Notes payable to Orix Credit Alliance bearing
interest at 8.5%, payable in monthly installments
of $3,657 through May 2000, including interest..... 93,000 74,000
----------- -----------
$10,388,000 $14,083,000
=========== ===========
The Company has available a revolving line of credit with a bank syndicate
totaling the lesser of $22,000,000, or an amount based on eligible accounts
receivable, parts inventory, new equipment inventory, vehicles and rental
equipment. The line of credit includes cross-guarantees of amounts outstanding
with affiliates which amounted to approximately $17,935,000 and $23,691,000 at
January 31, 1998 and July 31, 1998, respectively. The unused portion of the
line of credit was $12,305,000 and $8,551,000 at January 31, 1998 and July 31,
1998, respectively. The Company pays a commitment fee of 1/4% per annum on the
unused portion of the line of credit.
The outstanding balance bears interest at a fluctuating 30-day LIBOR rate
plus 1 3/4% (7.38% and 7.41% at January 31, 1998 and July 31, 1998,
respectively). The Company has the option to borrow additional funds and/or
convert all or a portion of the outstanding balance to a fluctuating interest
rate equal to the lender's prime rate plus 1/2% or a fixed LIBOR rate plus 1
3/4%, for 90, 180 or 360 days.
F-144
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 1998 AND 1997 IS
UNAUDITED)
The line of credit terminates on November 30, 1999 and extends automatically
every six months unless either party gives written notice to the other. Upon
termination or default, amounts outstanding under this line of credit convert
to a note which is payable in at least 48 monthly installments.
Although no fixed payments are required under the revolving credit
agreement, the Company expects aggregate maturities under this agreement and
other notes payable at January 31, 1998 to approximate the following:
FISCAL YEAR
---------------------------------------------------------------
1999........................................................... $2,544,000
2000........................................................... 2,554,000
2001........................................................... 2,536,000
2002........................................................... 2,530,000
2003........................................................... 78,000
Thereafter..................................................... 146,000
The lenders require, among other terms, that the Company and its affiliate
(see Note 6) on a combined basis meet certain financial ratios and obtain
approval prior to the issuing of advances or loans to stockholders or officers
which exceed certain amounts, as defined.
Substantially all of the assets of the Company have been pledged as
collateral under the debt agreement.
6. RELATED PARTY TRANSACTIONS
Due from related parties consists of the following:
JANUARY 31, JULY 31,
1998 1998
----------- --------
Due (to) from affiliated companies..................... $(72,000) $227,000
Loans receivable from officer/stockholder.............. 365,000 528,000
-------- --------
$293,000 $755,000
======== ========
The Company rents equipment from affiliates with common ownership under
informal equipment sharing agreements for ultimate rental to customers in New
York and Connecticut. In addition, the Company rents equipment to affiliates
for ultimate rental to the affiliates' customers. The net expenses incurred
(included in cost of equipment rentals and service) by the Company under these
arrangements were $744,000 for the year ended January 31, 1998 and $598,000
and $104,000 for the six months ended July 31, 1998 and 1997, respectively. In
addition, the Company provides services to affiliates in connection with their
operations. The primary expenses incurred and paid by the Company, which are
allocated or billed to the affiliates include salaries ($2,059,000, for the
year ended January 31, 1998 and $250,000 and $416,000 for the six months ended
July 31, 1998 and 1997, respectively, deducted from general and administrative
expenses and $154,000 for the year ended January 31, 1998 and $-0- and
$104,000 for the six months ended July 31, 1998 and 1997, respectively,
deducted from selling expenses), spare parts inventory, trucking services and
insurance expenses ($699,000 for the year ended January 31, 1998 and $453,000
and $408,000 for the six months ended July 31, 1998 and 1997, respectively,
included in cost of equipment rentals and service).
During fiscal year 1998, the Company purchased $243,000 ($63,000 and
$146,000 during the six months ended July 31, 1998 and 1997, respectively) of
used machinery and equipment from an affiliate for ultimate
F-145
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE THREE MONTHS ENDED JULY 31, 1998 AND 1997
IS UNAUDITED)
sale to unrelated third parties. Additionally, the Company sold used machinery
and equipment with a selling price of $980,000 ($611,000 and $776,000 during
the six months ended July 31, 1998 and 1997, respectively) to an affiliate for
ultimate sale to unrelated third parties.
These transactions are settled in the normal course of business.
Loans to officer/stockholder are due on demand and bear interest at the
applicable federal rate (5.66%) as published by the Internal Revenue Service.
Pursuant to a stockholders agreement between the Company and certain of its
stockholders, a stockholder desiring to sell its shares of common stock must
first offer them to the Company. The repurchase price is based on a formula of
one and one-half times the Company's consolidated book value at the end of the
fiscal year preceding the date on which the sale is made.
Refer to Note 9 for commitments with related parties.
7. INCOME TAXES
The components of the provision for income taxes are as follows:
SIX MONTHS ENDED
YEAR ENDED JULY 31,
JANUARY 31, -----------------
1998 1998 1997
----------- -------- --------
Current:
State and local.............................. $ 232,000 $156,000 $135,000
Federal...................................... 522,000 359,000 316,000
---------- -------- --------
754,000 515,000 451,000
Deferred:
State and local.............................. 57,000 108,000 92,000
Federal...................................... 271,000 252,000 216,000
---------- -------- --------
328,000 360,000 308,000
---------- -------- --------
$1,082,000 $875,000 $759,000
========== ======== ========
The components of deferred tax assets and liabilities are as follows:
JANUARY 31, JULY 31,
1998 1998
----------- -----------
Deferred tax assets:
Accounts receivable.............................. $ 37,000 $ 46,000
Deferred tax liabilities:
Property and rental equipment and other.......... (2,513,000) (2,882,000)
----------- -----------
$ 2,476,000 $ 2,836,000
=========== ===========
No valuation allowance has been recognized for deferred tax assets.
F-146
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 1998 AND 1997 IS
UNAUDITED)
The income tax provision differs from the provision computed at the
statutory rate as follows:
SIX MONTHS
ENDED
YEAR ENDED JULY 31
JANUARY 31, -------------
1998 1998 1997
----------- ----- -----
Federal statutory tax rate........................ 34 34 34
Tax effect of state taxes......................... 9 9 9
Reduction for changes in enacted state tax rates.. (3) -- --
Cash surrender value of the insurance............. (2) -- --
Certain adjustments for prior estimates........... (4) (1) --
--- ----- -----
Provision as reported........................... 34% 42% 43%
=== ===== =====
8. PROFIT-SHARING PLAN
The Company participates in a profit sharing plan with its affiliates which
provides for a discretionary contribution to a trust fund based on the
Company's net income for the year, to be allocated to all eligible employees
based on their proportional compensation. Nonunion employees are eligible for
participation in the plan after the completion of one year of service,
provided they have also reached age 21. After becoming eligible, employees
vest at an annual rate of 20%. Discretionary contributions under the plan were
$150,000 for the year ended January 31, 1998. There were no discretionary
contributions for the six months ended July 31, 1998 and 1997, respectively.
The plan also provides for a salary deferral plan pursuant to Section 401(k)
of the Internal Revenue Code, as amended. The plan requires the Company to
contribute 25% of employee's contributions not to exceed 6% of their annual
compensation up to $160,000. Participants vest in the Company's contribution
at the rate of 20% annually after becoming eligible. Matching contributions
under the plan by the Company were $27,000 for the year ended January 31, 1998
and $21,000 and $11,000 for the six months ended July 31, 1998 and 1997,
respectively.
9. COMMITMENTS
The Company has a formal employment agreement with an officer of the Company
which extends through February 1999. The agreement provides for a minimum
annual salary and a bonus based upon the Company's performance.
The Company owns land and buildings which it rents to a third party in the
form of an operating lease. Future minimum rental income from this
noncancelable operating lease as of January 31, 1998 amounted to approximately
$58,000 which is expected to be received as follows: 1999, $30,000; 2000,
$28,000.
F-147
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 1998 AND 1997 IS
UNAUDITED)
The Company leases a building from an affiliated company under the terms of
a lease expiring on July 31, 1999. The Company guarantees the debt of the
affiliated company which was $1,681,000 and $1,635,000 at January 31, 1998 and
July 31, 1998, respectively. Additionally, the Company has commitments under
an operating lease, expiring in 2002, with Fleet Capital Corporation for an
aircraft. The lease provides the Company with certain end of term rights and
early purchase options. The following is a schedule of all future minimum
lease payments:
FISCAL YEAR
-----------
1999............................................................ $441,000
2000............................................................ 279,000
2001............................................................ 116,000
2002............................................................ 89,000
--------
$925,000
========
Total rent expense was $329,000, $165,000 and $165,000 for the year ended
January 31, 1998 and the six months ended July 31, 1998 and 1997,
respectively.
10. SUBSEQUENT EVENT (UNAUDITED)
On September 1, 1998, United Rentals, Inc. acquired all of the outstanding
shares of common stock of the Company.
F-148
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Industrial Lift, Inc.
Vincentown, New Jersey
We have audited the accompanying balance sheets of Industrial Lift, Inc. (a
New Jersey State Corporation) as of December 31, 1996 and 1997, and the
related statements of income, retained earnings and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Industrial Lift, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Schalleur & Surgent, LLC
Devon, Pennsylvania
February 26, 1998, except for
Note J which is as of
September 15, 1998
F-149
INDUSTRIAL LIFT, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
-------------------------- MAY 12,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
Current assets:
Cash............................... $ 186,093 $ 533,499 $ 297,689
Accounts receivable--trade......... 1,853,061 2,485,668 1,823,681
Investment in sales--type leases
(Note D).......................... 390,009 274,181 336,827
Inventory (Note C)................. 1,468,070 2,501,870 2,854,061
Prepaid expenses................... 45,361 39,289 35,712
------------ ------------ ------------
Total current assets........... 3,942,594 5,834,507 5,337,980
------------ ------------ ------------
Property, plant and equipment: (Note
A)
Rental equipment................... 17,660,046 18,533,702 18,118,513
Land............................... 40,393 40,393 40,393
Building........................... 650,000 650,000 650,000
Machinery and equipment............ 739,126 748,735 666,316
------------ ------------ ------------
19,089,565 19,972,830 19,475,222
Less: accumulated depreciation..... (11,049,573) (11,879,828) (11,828,604)
------------ ------------ ------------
Net property, plant and equip-
ment............................ 8,039,992 8,093,002 7,646,618
------------ ------------ ------------
Other assets:
Security deposits.................. 4,443 8,412 8,412
Investment in sales--type leases
(Note D).......................... 1,823,833 1,282,955 1,529,343
Notes receivable--officers (Note
G)................................ 455,068 438,319 573,319
------------ ------------ ------------
Total other assets............. 2,283,344 1,729,686 2,111,074
------------ ------------ ------------
Total assets................... $ 14,265,930 $ 15,657,195 $ 15,095,672
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
(Note E).......................... $ 3,620,426 $ 5,398,778 $ 3,459,388
Accounts payable................... 590,032 352,571 155,957
Accrued expenses (Note G).......... 136,181 182,362 77,581
Deposits and credits............... 74,500 335,441 196,490
------------ ------------ ------------
Total current liabilities........ 4,421,139 6,269,152 3,889,416
Long-term liabilities:
Long-term debt, net of current por-
tion (Note E)..................... 8,405,283 7,271,718 9,518,587
------------ ------------ ------------
Total liabilities................ 12,826,422 13,540,870 13,408,003
------------ ------------ ------------
Stockholders' equity:
Capital stock, no par value, 1,000
shares authorized, 200 shares
issued and outstanding............ 220,000 220,000 220,000
Retained earnings.................. 1,219,508 1,896,325 1,467,669
------------ ------------ ------------
Total stockholders' equity....... 1,439,508 2,116,325 1,687,669
------------ ------------ ------------
Total liabilities & equity....... $ 14,265,930 $ 15,657,195 $ 15,095,672
============ ============ ============
See accountant's audit report and notes to the financial statements.
F-150
INDUSTRIAL LIFT, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED FOR THE PERIOD ENDED
DECEMBER 31, MAY 12, 1998
----------------------- ----------------------
1996 1997 1997 1998
----------- ----------- ---------- ----------
(UNAUDITED)
Income
Sales, rentals, services, and
interest on leases.......... $15,873,782 $21,502,996 $8,221,446 $7,754,774
Cost of sales
Beginning inventory.......... 1,341,337 1,468,070 1,468,070 2,501,870
Purchases.................... 5,527,726 11,027,711 2,932,170 3,842,272
Direct labor................. 826,677 710,655 470,211 545,665
Cost of used equipment
sales....................... 471,293 900,367 374,284 329,470
Other costs.................. 4,016,301 4,005,126 2,601,818 1,543,505
----------- ----------- ---------- ----------
Total goods available for
sale...................... 12,183,334 18,111,929 7,846,553 8,762,782
Less: ending inventory..... 1,468,070 2,501,870 1,724,926 2,854,061
----------- ----------- ---------- ----------
Total cost of sales........ 10,715,264 15,610,059 6,121,627 5,908,721
----------- ----------- ---------- ----------
Gross profit................... 5,158,518 5,892,937 2,099,819 1,846,053
Operating expenses............. 5,146,620 5,264,130 1,903,993 2,314,803
----------- ----------- ---------- ----------
Net income from operations..... 11,898 628,807 195,826 (468,750)
----------- ----------- ---------- ----------
Other income
Gain on disposal of non-
rental assets............... 24,228 14,861 8,807 24,482
Miscellaneous income......... 707 1,219 (2,814) 1,809
Interest income.............. 18,909 31,930 304 13,803
----------- ----------- ---------- ----------
Total other income......... 43,844 48,010 6,297 40,094
----------- ----------- ---------- ----------
Net income .................... 55,742 676,817 202,123 (428,656)
Retained earnings--beginning... 1,163,766 1,219,508 1,219,508 1,896,325
----------- ----------- ---------- ----------
Retained earnings--ending...... $ 1,219,508 $ 1,896,325 $1,421,631 $1,467,669
=========== =========== ========== ==========
See accountant's audit report and notes to the financial statements.
F-151
INDUSTRIAL LIFT, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE PERIOD ENDED
DECEMBER 31, MAY 12,
---------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
Cash flows from operating
activities:
Net income................... $ 55,742 $ 676,817 $ 202,123 $ (428,656)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................. 1,717,389 1,639,844 616,669 655,600
Gain on sale of assets....... (436,420) (477,760) (198,633) (171,595)
(Increase)/decrease in:
Accounts receivable--trade... 136,810 (632,607) (414,358) 661,987
Inventory.................... (126,733) (1,033,800) (256,856) (352,191)
Prepaid expenses............. 4,682 6,072 3,577
Security deposits............ -- (3,969) (4,014) --
Increase/(decrease) in:
Accounts payable............. (94,283) (237,461) (329,106) (196,614)
Accrued expenses............. 22,068 46,181 19,864 (104,781)
Deposits and credits......... 74,500 260,941 (60,376) (138,952)
---------- ---------- --------- ----------
Net cash provided/(used) oper-
ating activities.............. 1,353,755 244,258 (424,687) (71,625)
---------- ---------- --------- ----------
Cash flows from investing ac-
tivities:
Capital expenditures--
property, plant and
equipment................... (2,066,163) (2,153,839) (897,450) (346,778)
Proceeds on sale of
equipment................... 1,076,908 1,465,872 247,485 367,519
Investment in sales--type
leases...................... (966,008) (185,545) (91,209) (458,764)
Proceeds received on lease
payments.................... 352,191 315,124 103,956 101,359
---------- ---------- --------- ----------
Net cash provided/(used) by in-
vesting activities............ (1,603,072) (558,388) (637,218) (336,664)
---------- ---------- --------- ----------
Cash flows from financing
activities:
Net borrowing/(repayments) on
note payable................ 258,175 644,787 975,812 307,479
(Advances)/repayments on note
receivable--officers........ (2,156) 16,749 (100,000) (135,000)
---------- ---------- --------- ----------
Net cash provided/(used) by fi-
nancing activities............ 256,019 661,536 875,812 172,479
---------- ---------- --------- ----------
Net inc/(decrease) in cash and
cash equivalents.............. 6,702 347,406 (186,093) (235,810)
Cash--Beginning of the year.... 179,391 186,093 186,093 533,499
---------- ---------- --------- ----------
Cash--End of the year.......... $ 186,093 $ 533,499 $ 0 $ 297,689
========== ========== ========= ==========
Supplementary disclosure of
cash flow information:
Interest paid................ $1,097,114 $1,179,133 $ 334,261 $ 493,040
========== ========== ========= ==========
See accountant's audit report and notes to the financial statements
F-152
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Industrial Lift, Inc. (the Company) is engaged in selling, rental and
leasing of commercial lift equipment. The Company's headquarters are located
in Vincentown, New Jersey and also has plant locations in Odenton, Maryland,
Newport News, Virginia, and Ashland, Virginia.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of May 12, 1998 and the statements of
income and retained earnings and cash flows for the period ended May 12, 1997
and 1998 are unaudited and have been prepared on the same basis as the audited
financial statements included herein. In the opinion of management, such
unaudited financial statements include all adjustments necessary to present
fairly the information set forth therein, which consist solely of normal
recurring adjustments. The results of operations for such interim period are
not necessarily indicative of results for the full year.
METHOD OF ACCOUNTING
The Company maintains its books and records, and files its tax returns on
the accrual basis of accounting. The financial statements have been prepared
on that basis, in which revenue and gains are recognized when earned and
expenses and losses are recognized when incurred.
Preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
INCOME TAXES
The Company, with the consent of its shareholders, elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code, which provides
that, in lieu of corporation income taxes, the stockholders are taxed on the
Company's taxable income. Therefore, no provision or liability for income
taxes is reflected in these financial statements.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Improvements and
betterments that materially extend the life of the asset are capitalized.
Expenditures for maintenance and repairs that do not add materially to
productive capacity or extend the life of an asset are expensed as incurred.
The Company computes depreciation for financial reporting purposes using the
straight line method over the estimated useful lives of the related assets.
Both the straight-line and accelerated methods are utilized for tax purposes.
When non-rental assets are retired, sold or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts, and any
gain or loss thereon is reflected in the current year as other income.
F-153
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
NOTE B--CONCENTRATION OF CREDIT RISK
The Company has concentrated its credit risk for cash by maintaining
deposits in banks located within the same geographic region. The maximum loss
that would have resulted from that risk totaled $196,567 and $301,682 at
December 31, 1996 and 1997, respectively, and $197,688 as of May 12, 1998 for
the excess of the deposit liabilities reported by the banks over the amounts
that would have been covered by federal insurance.
The Company provides sales on credit to substantially all of their
customers, the majority of which are construction companies. As of December
31, 1996 and 1997, outstanding credit to customers is $1,853,061 and
$2,485,668, respectively, and $1,823,681 as of May 12, 1998.
NOTE C--INVENTORIES
Inventories, which are stated at the lower of cost (first in/first out) or
market, consist of the following:
DECEMBER 31,
--------------------- MAY 12,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
New equipment............................ $ 850,650 $1,892,561 $2,296,124
Used equipment........................... 6,590 22,632 16,841
Parts, accessories and labor............. 610,830 586,677 541,096
---------- ---------- ----------
Total.................................. $1,468,070 $2,501,870 $2,854,061
========== ========== ==========
NOTE D--INVESTMENT IN LEASES
The Company leasing operations consist of leasing commercial lift equipment
under short term and long term rental agreements. Certain of these long term
leases fall under the classification as sales-type leases, whereby the lease
gives rise to a dealers profit at the inception of the lease. The Company's
net investment in sales-type leases consist of:
DECEMBER 31,
---------------------- MAY 12,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
Minimum lease payment receivable...... $1,576,242 $1,034,885 $1,183,128
Estimated residual value of leased
property............................. 637,600 522,251 673,052
---------- ---------- ----------
2,213,842 1,557,136 1,856,180
Less current portion.................. (390,009) (274,181) (326,837)
---------- ---------- ----------
$1,823,833 $1,282,955 $1,529,343
========== ========== ==========
Future annual minimum lease payments receivable on these leases are:
1998.............................................................. $274,181
1999.............................................................. 235,026
2000.............................................................. 193,609
2001.............................................................. 152,611
2002.............................................................. 87,532
F-154
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
The Company retains title to the leased equipment. The lessees pay taxes,
licenses and insurance costs on the equipment.
SHORT-TERM RENTALS
The value of future minimum rental payments under operating lease agreements
is not determinable. The Company does not maintain the accounting to summarize
this information due to the short term nature of the leases and the high
volume of which leases are entered.
NOTE E--NOTES PAYABLE
The Company has entered into various security agreements whereby they
finance the equipment they purchased for leasing, rental and resale. The
maturity dates vary according to the purchase date of the equipment and range
between three to eight years. Equipment financing agreements consist of the
following:
DECEMBER 31,
----------------------- MAY 12,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
1. Security agreement with Gehl Compa-
ny, payable in monthly installments
of interest only payments, interest
rate averaging between 8.0% to
10.0%, secured by inventory and ac-
counts receivable.................. $ 451,355 $ 968,098 $ 989,196
2. Security agreement with Associates
Commercial Corporation, payable in
monthly installments, floating in-
terest rate averaging between 7.5%
to 9.5%, secured by inventory, ac-
counts receivable and rights to
equipment financed................. 10,622,836 10,006,648 9,600,997
3. Security agreement with CitiCorp,
payable in monthly installments,
interest averaging between 8.0% to
10.0%, secured by new and used in-
ventory and rights to equipment fi-
nanced............................. 153,428 -- --
4. Mortgage payable to Associates Com-
mercial Corporation payable in
monthly installments of $9,544, in-
terest at 10%, secured by property
and plant. Effective April 1, 1998
the payment will be $8,870 as a re-
sult of a change in the interest
rate to 8.4%....................... 798,089 761,728 748,475
5. Security agreement with Grove North
America is payable within 360 days
of original invoice date. Interest
is calculated by Grove North
America when the invoice is issued
based on 360 day repayment terms.
Interest is calculated at 8.25%,
securedby inventory................ -- 934,022 1,639,307
----------- ----------- -----------
12,025,708 12,670,496 12,977,975
Less: Current Portion............... 3,620,426 5,398,776
3,459,388
----------- ----------- -----------
$ 8,405,282 $ 7,271,720 $ 9,518,587
=========== =========== ===========
F-155
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
Long-Term Maturities at December 31, 1997 are as follows:
1999.................................. $ 2,311,740
2000.................................. 2,282,507
2001.................................. 1,832,837
2002.................................. 308,428
Thereafter............................ 536,208
-----------
$ 7,271,720
===========
NOTE F--PROFIT SHARING CONTRIBUTION PAYABLE
The Company has a profit sharing plan that provides coverage for all
eligible employees who have been employed by the Company for at least six
months at the end of the year. Each participant receives a proportionate share
of the contribution based on his or her compensation to total compensation.
The amount of the employer contributions is determined by the board of
directors during the course of the year. Profit sharing contributions for the
years ended December 31, 1996 and 1997 was $30,000 and $35,000, respectively,
and $13,416 and $15,133 for the period ended May 12, 1997 and 1998,
respectively.
NOTE G--RELATED PARTY TRANSACTIONS
Included in other assets as of December 31, 1996 and 1997 and May 12, 1998
is $455,068, $438,319 and $573,319 in loans to shareholders including $34,694,
$17,946 and $18,710 of accrued interest respectively. The notes have no
repayment terms and are accruing interest at 4%. Repayment of $34,694 was made
on the loans in 1997.
NOTE H--OPERATING LEASES
The Company, as lessee, leases certain equipment and plant facilities under
operating lease agreements.
The Company entered into a three year lease agreement in April, 1997 for its
facilities located in Odenton, Maryland. This lease calls for monthly rental
payments of $4,213 and $4,424 over the next two consecutive years of the
lease.
The Company also rents its facilities located in Newport News, Virginia. The
two year lease agreement was entered into in August, 1996. Monthly payments
for the next year lease is $3,800 per month.
The Company has a lease agreement for their Ashland, Virginia facility which
began in June, 1997. The monthly lease payments for the 1998-1999 lease year
are $1,200 per month.
Certain commercial lift equipment rented to customers under the company's
leasing operations are leased under the following operating lease agreements:
. Eighty-four month lease beginning in December, 1997--First two payments
at $3,235 per month--Eighty-two payments at $9,185 per month
. Seventy-two month lease beginning in December, 1997--First two payments
at $18,858 per month--Seventy payments at $28,578 per month
. Seventy-two month lease beginning in November, 1997--First two payments
at $5,703 per month--Seventy payments at $18,598 per month
F-156
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
The company has a lease agreement for their telephone and computer system
which began in December, 1997. The agreement is for sixty months at $4,667 per
month.
Rent expense associated with the above leases was approximately $438,548 for
the year ending December 31, 1997.
Future rental payments under these operating leases at December 31, 1997 is
as follows:
1998................................... $1,094,000
1999................................... 1,002,460
2000................................... 857,531
2001................................... 805,448
2002................................... 795,580
Thereafter............................. 751,182
----------
$5,306,201
==========
NOTE I--LITIGATION
In 1996 the Company settled a claim with the State of New Jersey and was
assessed $1,700 in sales tax, which it paid.
During 1995 the Company had been in a personal injury claim based upon
theories of negligence, product liability, and willful and wanton disregard.
This claim was settled in 1996 at no cost to the Company.
NOTE J--SUBSEQUENT EVENT
On May 12 , 1998, United Rentals, Inc. purchased all of Industrial Lift,
Inc.'s issued and outstanding common stock.
F-157
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Able Equipment Rental, Inc.
We have audited the combined balance sheet of Able Equipment Rental, Inc.
(See Note 1) (the "Companies") as of December 31, 1997 and the related
combined statements of income, stockholders' equity and partners' capital and
cash flows for the year then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Able
Equipment Rental, Inc. at December 31, 1997 and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 15, 1998
F-158
ABLE EQUIPMENT RENTAL, INC.
COMBINED BALANCE SHEETS
DECEMBER FEBRUARY
31, 1997 28, 1998
----------- -----------
(UNAUDITED)
ASSETS
Cash.................................................. $ 489,330 $ 273,090
Accounts receivable, net of allowance for doubtful
accounts of $166,000 and $181,000 in 1997 and 1998,
respectively......................................... 2,725,794 2,670,554
Unbilled receivables.................................. 359,000 395,000
Inventory............................................. 583,013 413,617
Rental equipment, net................................. 9,413,628 9,518,678
Property and equipment, net........................... 696,070 1,008,900
Prepaid expenses and other assets..................... 145,742 116,589
----------- -----------
Total assets...................................... $14,412,577 $14,396,428
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS'
CAPITAL
Liabilities:
Accounts payable, accrued expenses and other
liabilities........................................ $ 989,038 $ 784,412
Debt................................................ 8,120,710 8,395,970
Stockholder loan.................................... 364,600 364,600
Deferred rent....................................... 18,247 18,247
Deferred tax liability.............................. 86,348 113,735
----------- -----------
Total liabilities................................. 9,578,943 9,676,964
Commitments and contingencies
Stockholders' equity and partners' capital:
Stockholders' equity:
Common stock........................................ 17,000 17,000
Additional paid-in capital.......................... 102,978 102,978
Retained earnings................................... 4,278,962 4,151,355
----------- -----------
4,398,940 4,271,333
Partners' capital.................................... 434,694 448,131
----------- -----------
Total stockholders' equity and partners' capital.. 4,833,634 4,719,464
----------- -----------
Total liabilities and stockholders' equity and
partners' capital.................................... $14,412,577 $14,396,428
=========== ===========
See accompanying notes.
F-159
ABLE EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF INCOME
TWO MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED
DECEMBER FEBRUARY 28, FEBRUARY
31, 1997 1997 28, 1998
----------- ------------ ----------
(UNAUDITED)
Revenues:
Equipment rentals........................ $17,081,826 $1,631,226 $2,633,136
Sales of rental equipment................ 365,670 -- --
Sales of parts, supplies and new
equipment............................... 1,847,708 503,961 757,212
----------- ---------- ----------
Total revenues............................. 19,295,204 2,135,187 3,390,348
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation........... 6,944,226 1,005,933 1,306,857
Depreciation, equipment rentals.......... 1,667,366 201,010 302,678
Cost of rental equipment sales........... 293,238 -- --
Cost of parts, supplies and new equipment
sales................................... 1,518,807 239,576 272,657
----------- ---------- ----------
Total cost of revenues..................... 10,423,637 1,446,519 1,882,192
----------- ---------- ----------
Gross profit............................... 8,871,567 688,668 1,508,156
Selling, general and administrative
expenses.................................. 6,438,632 627,098 1,241,182
Non-rental depreciation.................... 172,489 14,440 27,130
----------- ---------- ----------
Operating income........................... 2,260,446 47,130 239,844
Interest expense........................... 591,701 42,099 113,995
----------- ---------- ----------
Income before provision for income taxes... 1,668,745 5,031 125,849
Provision for income taxes................. 61,235 19,436 36,269
----------- ---------- ----------
Net income (loss).......................... $ 1,607,510 $ (14,405) $ 89,580
=========== ========== ==========
See accompanying notes.
F-160
ABLE EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
COMMON STOCK ADDITIONAL
-------------- PAID-IN RETAINED PARTNERS'
SHARES AMOUNT CAPITAL EARNINGS CAPITAL
------ ------- ---------- ---------- ---------
Balance at January 1, 1997.... 1,700 $17,000 $102,978 $3,290,014 $ 483,975
Capital contributions....... -- 6,000
Stockholders and capital
distributions.............. (322,246) (351,597)
Net income.................. 1,311,194 296,316
----- ------- -------- ---------- ---------
Balance at December 31, 1997.. 1,700 $17,000 $102,978 $4,278,962 $ 434,694
Stockholders distributions
(unaudited)................ (203,750) --
Net income (unaudited)...... 76,143 13,437
----- ------- -------- ---------- ---------
Balance at February 28, 1998
(unaudited).................. 1,700 $17,000 $102,978 $4,151,355 $ 448,131
===== ======= ======== ========== =========
See accompanying notes.
F-161
ABLE EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF CASH FLOWS
TWO MONTHS ENDED
YEAR ENDED FEBRUARY 28,
DECEMBER 31, --------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................... $ 1,607,510 $ (14,405) $ 89,580
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation............................ 1,839,855 215,450 329,808
Gain on sale of property and equipment.. (72,432) (6,556) (559)
Deferred tax liability.................. 26,340 19,436 27,387
Changes in assets and liabilities:
(Increase) Decrease in accounts
receivable........................... (956,085) 57,264 55,240
Increase in unbilled receivables...... (142,000) (23,000) (36,000)
Increase (Decrease) in inventory...... (346,085) 102,170 169,396
Decrease (Increase) in prepaid
expenses and other assets............ 5,467 (62,149) 29,153
Increase (Decrease) in accounts
payable, accrued expenses and other
liabilities.......................... 724,666 (29,375) (204,627)
Increase in deferred rent............. 18,247 -- --
----------- --------- ---------
Cash provided by operating
activities......................... 2,705,483 258,835 459,378
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment.............. (5,395,221) (399,294) (407,728)
Proceeds from sale of rental equipment.... 365,670 22,249 613
Purchases of property and equipment....... (468,927) (54,417) (340,014)
----------- --------- ---------
Cash used in investing activities... (5,498,478) (431,462) (747,129)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions..................... 6,000 -- --
Stockholders and capital distributions.... (673,843) -- (203,750)
Principal payments on debt................ (2,495,519) (343,900) (311,207)
Borrowings under credit facility.......... 6,116,144 346,667 586,468
----------- --------- ---------
Cash provided by financing
activities......................... 2,952,782 2,767 71,511
----------- --------- ---------
Increase (Decrease) in cash............... 159,787 (169,860) (216,240)
Cash balance at beginning of period....... 329,543 329,543 489,330
----------- --------- ---------
Cash balance at end of period....... $ 489,330 $ 159,683 $ 273,090
=========== ========= =========
See accompanying notes.
F-162
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE TWO MONTHS ENDED FEBRUARY
28, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements of Able Equipment Rental, Inc. include the
accounts of the following entities: Rental Equipment, Inc.; Butler & Son,
Inc.; Butler & Derbyshire, Inc.; Butler & O'Connor; Butler & Butler; Butler,
Rollins & Butler; Butler, Schlerf & Butler; Butler, Westbrook & Butler;
Butler, Binder & Butler; Butler, Cook & Butler; Butler, Henkle & Butler;
Butler, McKenney & Butler; Butler, Breitenstein & Butler; Butler, Escalante &
Butler; and Butler, Paeper & Butler (collectively the "Companies"). The
Companies are affiliated through common ownership. All significant
intercompany accounts and transactions have been eliminated in combination.
These combined financial statements are prepared on a historical cost basis
and do not include any adjustments that may result from the acquisition of the
Companies by United Rentals, Inc. ("United") as more fully described in Note
10.
Business Activity
The Companies rent, sell and repair construction equipment for use by
contractor, industrial and homeowners markets. The rentals are on a daily,
weekly or monthly basis. The Companies have six locations and their principal
market area is Southern California. The nature of the Companies' business is
such that short-term obligations are typically met by cash flow generated from
long-term assets. Consequently, consistent with industry practice, the balance
sheet is presented on an unclassified basis.
On March 29, 1997 Rental Equipment, Inc. acquired for $1,500,000 a
substantial amount of rental equipment and fixed assets from Sam's-U-Rent,
Inc. and assumed all operations. The Company utilized the funds available
under its line of credit to finance the purchase. The acquisition has been
accounted for as a purchase and, accordingly, at such date the Company
recorded the assets acquired at their estimated fair values.
Interim Financial Statements
The accompanying combined balance sheet at February 28, 1998 and the
combined statements of income, stockholders' equity and partners' capital and
cash flows for the two-month periods ended February 28, 1997 and 1998 are
unaudited and have been prepared on the same basis as the audited combined
financial statements included herein. In the opinion of management, such
unaudited combined financial statements include all adjustments necessary to
present fairly the information set forth therein, which consist solely of
normal recurring adjustments. The results of operations for such interim
period are not necessarily indicative of results for the full year.
Inventory
Inventory consists primarily of general replacement parts, fuel and
equipment held for resale and are stated at the lower of cost, determined
under the first-in, first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated seven-year useful
life with no salvage value.
F-163
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
rental equipment and cost of sales of rental equipment, respectively, in the
combined statement of income.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over an estimated useful
life of seven years. Leasehold improvements are amortized using the straight-
line method over the estimated lives of the leasehold improvement or the
remaining life of the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to approximately $144,000, $17,000 and $24,000 in
the year ended December 31, 1997 and in the two months ended February 28, 1997
and 1998, respectively.
Income Taxes
Rental Equipment, Inc. and Butler & Son, Inc. have elected, by unanimous
consent of their shareholders, to be taxed under the provisions of Subchapter
S of the Internal Revenue Code for both federal and state purposes. Under
those provisions, the Companies do not pay federal or state income taxes;
instead, the shareholders are liable for individual income taxes on their
profits.
Butler & Derbyshire, Inc., a C Corporation for federal tax purposes, applied
an asset and liability approach to accounting for income taxes. Deferred
income tax assets and liabilities arise from differences between the tax basis
of an asset or liability and its reported amount in the combined financial
statements. Deferred tax balances are determined by using tax rates to be in
effect when the taxes will actually be paid or refunds received.
All the other entities included in these combined financial statements are
partnerships. No provision has been made in the accompanying financial
statements for any federal, state, or local income taxes since they are the
liability of the individual partners.
Accounting 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.
F-164
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies' customer base
and their credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
DECEMBER 31, FEBRUARY 28,
1997 1998
------------ ------------
(UNAUDITED)
Rental equipment................................... $16,709,153 $17,116,881
Less accumulated depreciation...................... 7,295,525 7,598,203
----------- -----------
Rental equipment, net.............................. $ 9,413,628 $ 9,518,678
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, FEBRUARY 28,
1997 1998
------------ ------------
(UNAUDITED)
Transportation equipment........................... $ 901,400 $1,228,870
Furniture and fixtures............................. 321,638 330,289
Leasehold improvements............................. 259,854 259,854
---------- ----------
1,482,892 1,819,013
Less accumulated depreciation...................... 786,822 810,113
---------- ----------
Total............................................ $ 696,070 $1,008,900
========== ==========
5. DEBT AND STOCKHOLDER LOAN
Debt and stockholder loan consists of the following:
DECEMBER 31, FEBRUARY 28,
1997 1998
------------ ------------
(UNAUDITED)
Sanwa Bank--Various lines of credit with combined
monthly payments of $122,452 and $163,958, in
1997 and 1998 respectively including interest
from 8.1% to 9.5%............................... $8,120,710 $8,395,970
Stockholder Loan--No set principal payments. Loan
is due on December 13, 1999. The loan accrues
interest at a rate of 10% per year. ............ 364,600 364,600
---------- ----------
$8,485,310 $8,760,570
========== ==========
Substantially all rental equipment collateralized the above bank notes. All
debt was paid off in connection with the acquisition discussed in Note 10.
F-165
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following:
TWO MONTHS
ENDED
YEAR ENDED FEBRUARY 28,
DECEMBER 31, ---------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
Current:
Federal....................................... $20,009 $ -- $ 7,023
State......................................... 14,886 -- 1,859
------- ------- -------
34,895 -- 8,882
Deferred:
Federal....................................... -- --
State......................................... 26,340 19,436 27,387
------- ------- -------
26,340 19,436 27,387
------- ------- -------
$61,235 $19,436 $36,269
======= ======= =======
Significant components of the Companies deferred tax liability are as
follows:
DECEMBER 31, FEBRUARY 28,
1997 1998
------------ ------------
(UNAUDITED)
Difference in basis of accounting.................. $34,375 $ 54,566
Cumulative tax depreciation in excess of book...... 51,973 59,169
------- --------
Deferred tax liability............................. $86,348 $113,735
======= ========
7. OPERATING LEASES
The Companies lease six store locations on long-term leases. The Companies
are responsible for all operating expenses of the facilities including
property taxes, assessments, insurance, repairs and maintenance. These leases
have various terms and extend through May 2007 and include scheduled base rent
increases over the term of the leases. The total amount of the base rent
payments is being charged to expense on the straight-line method over the
terms of the leases. The Companies recorded a liability for deferred rent to
reflect the excess of rent expense over cash payments which is included in the
accompanying combined balance sheet.
Total rent expense for the year ended December 31, 1997 and for the two
months ended February 28, 1997 and 1998 was approximately $846,000, $66,000
and $182,000, respectively.
At December 31, 1997, minimum lease commitments under all operating leases,
with initial or remaining lease terms of more than one year, are as follows:
1998............................................. $ 918,000
1999............................................. 851,000
2000............................................. 810,000
2001............................................. 810,000
2002............................................. 810,000
Thereafter....................................... 3,230,000
----------
Total.......................................... $7,429,000
==========
F-166
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMON STOCK
The common stock of the Companies at December 31, 1997 and February 28, 1998
(unaudited) is summarized as follows:
SHARES
----------------------
ISSUED AND
PAR VALUE AUTHORIZED OUTSTANDING AMOUNT
--------- ---------- ----------- -------
Rental Equipment, Inc. ............ $10 7,500 500 $ 5,000
Butler & Son, Inc. ................ no par 5,000 200 2,000
Butler & Derbyshire, Inc........... no par 5,000 1,000 10,000
----- -------
1,700 $17,000
===== =======
9. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 and for the two months ended February
28, 1997 and 1998, total interest paid was $554,701, $48,666 and $114,822,
respectively.
For the year ended December 31, 1997 and for the two months ended February
28, 1997 and 1998, total income taxes paid was $9,000, $0 and $0, respectively
10. SUBSEQUENT EVENT
On March 23, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of Rental Equipment
Inc., Butler & Son, Inc. and Butler & Derbyshire, Inc. as well as the net
assets of the partnerships included herein.
F-167
INDEPENDENT AUDITORS' REPORT ON COMBINED FINANCIAL STATEMENTS
Board of Directors Grand Valley Equipment Co., Inc. and Kubota of Grand
Rapids, Inc.
We have audited the accompanying combined balance sheet of Grand Valley
Equipment Co., Inc. and Kubota of Grand Rapids, Inc. as of December 31, 1997
and the related combined statements of income and retained earnings and cash
flows for the year then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements 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 combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Grand Valley
Equipment Co., Inc. and Kubota of Grand Rapids, Inc. as of December 31, 1997
and the results of operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Beene Garter LLP
July 23, 1998
Grand Rapids, Michigan
F-168
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, MAY 31,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
Current Assets
Cash................................................ $ 440,146 $1,304,088
Accounts receivable................................. 911,325 1,402,058
Refundable income taxes............................. 63,287 --
Inventories......................................... 1,296,093 2,231,832
---------- ----------
TOTAL CURRENT ASSETS.................................. 2,710,851 4,937,978
Rental Equipment, net................................. 4,724,733 3,438,583
Property, Plant and Equipment, net.................... 238,388 237,995
---------- ----------
$7,673,972 $8,614,556
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft...................................... $ 311,917 $ --
Notes payable....................................... 2,070,106 1,526,658
Accounts payable.................................... 289,310 275,169
Accrued expenses
Federal income tax................................ -- 637,560
Other............................................. 215,915 142,869
Customer deposits................................... 154,472 6,769
Deferred income taxes............................... 150,000 150,000
---------- ----------
TOTAL CURRENT LIABILITIES............................. 3,191,720 2,739,025
Stockholders' Equity
Common stock, no par value; authorized 50,000
shares; issued and outstanding 6,000............... 6,000 6,000
Common stock, $1 par value; authorized 50,000
shares; issued and outstanding 21,750.............. 21,750 21,750
Retained earnings................................... 4,454,502 5,847,781
---------- ----------
4,482,252 5,875,531
---------- ----------
$7,673,972 $8,614,556
========== ==========
See accompanying notes
F-169
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
FIVE MONTHS FIVE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, MAY 31, MAY 31,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues
Equipment rentals....................... $3,082,730 $1,255,473 $1,123,104
Sales of new, used and rental equipment,
parts and other........................ 15,188,885 6,921,749 6,007,118
---------- ---------- ----------
18,271,615 8,177,222 7,130,222
Cost of Sales
Rental equipment depreciation........... 1,697,339 748,000 635,000
Cost of sales........................... 11,509,080 4,393,854 4,783,983
---------- ---------- ----------
13,206,419 5,141,854 5,418,983
---------- ---------- ----------
GROSS PROFIT.............................. 5,065,196 3,035,368 1,711,239
Selling, General and Administrative
Expenses................................. 3,420,352 902,584 1,139,258
Non-rental Depreciation and Amortization.. 102,359 35,350 38,250
---------- ---------- ----------
Operating Income.......................... 1,542,485 2,097,434 533,731
---------- ---------- ----------
Other Income (Expense)
Interest income......................... 45,631 33,621 5,503
Gain on sale of non-rental equipment.... 38,471 -- --
Other income............................ 75,857 22,028 34,293
Interest expense........................ (111,927) (32,804) (51,729)
---------- ---------- ----------
48,032 22,845 (11,933)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................ 1,590,517 2,120,279 521,798
Provision for Income Taxes................ 544,138 727,000 187,000
---------- ---------- ----------
NET INCOME................................ 1,046,379 1,393,279 334,798
Beginning Retained Earnings............... 3,408,123 4,454,502 3,408,123
---------- ---------- ----------
ENDING RETAINED EARNINGS.................. $4,454,502 $5,847,781 $3,742,921
========== ========== ==========
See accompanying notes
F-170
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FIVE MONTHS FIVE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, MAY 31, MAY 31,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash Flows from Operating Activities
Net income............................. $ 1,046,379 $1,393,279 $ 334,798
Adjustments to reconcile net income to
net cash provided by operating
activities............................
Depreciation and amortization........ 1,799,698 783,350 673,250
Gain sale of non-rental equipment.... (38,741) -- --
Gain on sale of rental equipment..... (604,752) (912,841) (209,378)
Deferred income taxes................ 185,000 -- --
Changes in assets and liabilities
Accounts receivable................ (187,919) (427,446) (540,038)
Inventories........................ 313,739 (935,739) (315,768)
Accounts payable, accrued expenses
and other liabilities............. (575,471) 402,670 22,895
----------- ---------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES.............................. 1,937,933 303,273 (34,241)
Cash Flows from Investing Activities
Purchase of rental equipment........... (9,056,754) (902,990) (1,948,032)
Purchase of non-rental equipment....... (73,591) (34,958) (56,649)
Proceeds from sale of rental
equipment............................. 7,205,622 2,353,982 2,239,869
Proceeds from sale of non-rental
equipment............................. 81,873 -- --
----------- ---------- -----------
NET CASH (USED) PROVIDED BY INVESTING
ACTIVITIES.............................. (1,842,850) 1,416,034 235,188
Cash Flows from Financing Activities
Bank overdraft......................... (156,626) (311,917) (468,543)
Change in notes payable................ 285,939 (543,448) 142,528
----------- ---------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES.............................. 129,313 (855,365) (326,015)
----------- ---------- -----------
INCREASE (DECREASE) IN CASH.............. 224,396 863,942 (125,068)
Cash Balance at Beginning of Period...... 215,750 440,146 215,750
----------- ---------- -----------
CASH BALANCE AT END OF PERIOD............ $ 440,146 $1,304,088 $ 90,682
=========== ========== ===========
Supplemental Cash Flow Information
Cash paid for interest................. $ 111,927 $ 32,804 $ 51,729
Cash paid for income taxes............. $ 415,280 $ 26,153 $ 103,820
See accompanying notes
F-171
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE THREE MONTHS
ENDED MAY 31, 1998 AND 1997 IS UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Basis of Presentation
The combined financial statements include the accounts of Grand Valley
Equipment Co., Inc. and Kubota of Grand Rapids, Inc. (collectively the
"Company"). Grand Valley Equipment Co., Inc. ("GVE") and Kubota of Grand
Rapids, Inc. ("KGR") are combined due to common ownership and operations which
are complimentary. The financial statements of GVE as of October 31, 1997
(GVE's fiscal year end) are combined with the financial statements of KGR as
of December 31, 1997. The financial statements of GVE as of March 31, 1998 and
1997 are combined with the financial statements of KGR as of May 31, 1998 and
1997.
The Company rents and sells heavy and light machinery and equipment
primarily in the Western Michigan area. All significant intercompany accounts
and transactions have been eliminated on combination.
Interim Financial Statements
The accompanying combined balance sheets at May 31, 1998, and the combined
statements of income, and retained earnings and cash flows for the five month
periods ended May 31, 1998 and 1997 are unaudited and have been prepared on
the same basis as the audited combined financial statements included herein.
In the opinion of management, such unaudited combined financial statements
include all adjustments necessary to present fairly the information set forth
therein, which consist solely of normal recurring adjustments. The results of
operations for such interim periods are not necessarily indicative of results
for the full year.
Inventories
Inventories, which consist of heavy and light machinery and equipment, are
valued at the lower of cost or net realizable value.
Revenue Recognition
Revenue related to the sale of heavy and light machinery and equipment is
recognized at the point of sale. Revenue related to the rental of heavy and
light machinery is recognized at the time of return for rentals of one month
or less, and ratably over the contract term for rentals in excess of one
month.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using an accelerated method over an estimated five-year useful life
with no salvage value.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is provided on accelerated methods over the estimated useful lives
of the respective assets.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations. Ordinary maintenance and repair costs
are charged to operations as incurred.
F-172
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company uses the "liability method" of accounting for income taxes.
Accordingly, deferred tax assets and liabilities would be determined based on
the difference between the financial statement and tax basis of assets and
liabilities, primarily due to differences in the carrying value of rental
equipment, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2--CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with quality financial institutions and,
consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Company's customer base
and its credit policy.
NOTE 3--RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
DECEMBER 31, MAY 31,
1997 1998
------------ -----------
(UNAUDITED)
Rental equipment.................................. $ 7,694,776 $ 7,156,627
Less: Accumulated depreciation.................... (2,970,043) (3,718,044)
----------- -----------
Rental Equipment, net............................. $ 4,724,733 $ 3,438,583
=========== ===========
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, MAY 31,
1997 1998
------------ -----------
(UNAUDITED)
Land................................................ $ 5,000 $ 5,000
Buildings........................................... 60,957 60,957
Machinery and equipment............................. 270,759 270,759
Office furniture and equipment...................... 17,066 10,434
Vehicles............................................ 368,476 410,065
--------- ---------
722,258 757,215
Less: Accumulated depreciation...................... (483,870) (519,220)
--------- ---------
$ 238,388 $ 237,995
========= =========
F-173
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--NOTES PAYABLE
Notes payable consist of the following:
DECEMBER 31, MAY 31,
1997 1998
------------ -----------
(UNAUDITED)
$2,500,000 line-of-credit, providing for interest
at prime rate (8.5% at December 31, 1997), due in
March, 1999, secured by the assets of the
Company.......................................... $1,605,000 $ 480,000
Amounts due under manufacturer floor plan
arrangement represent amounts on which principle
and interest are not yet due..................... 465,106 1,046,658
---------- ----------
$2,070,106 $1,526,658
========== ==========
NOTE 6--LEASES
The Company leases operating facilities under operating leases from entities
under similar ownership. Rent expense under these leases totaled $184,000 for
the year ended December 31, 1997 and $30,000 and $77,000 for five months ended
May 31, 1998 and 1997, respectively. Under the lease agreements, aggregate
rent is payable in monthly installments of $6,000. The agreements provide for
an increase in annual rent based on the Consumer Price Index of the previous
five years. Future minimum rent commitments are $72,000 each for years ended
December 31, 1998 to December 31, 2004, to be adjusted based on the increase
in the Consumer Price Index. There is no formal lease agreement for the GVE
lease, they are leasing on a month to month basis.
NOTE 7--INCOME TAXES
The provision for income taxes consists of the following:
MAY 31,
DECEMBER 31, -----------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Currently payable....................... $359,138 $187,000 $727,000
Deferred................................ 185,000 -- --
-------- -------- --------
Federal income tax...................... $544,138 $187,000 $727,000
======== ======== ========
The effective rate for income tax expense differs from the statutory rate of
34% when applied to income from continuing operations before income taxes due
to certain nondeductible expenses of the Company.
NOTE 8--RETIREMENT PLAN
The Company has adopted a profit-sharing plan and a 401(k) plan that covers
substantially all employees and provides for discretionary employer and
voluntary employee contributions.
KGR has established a defined contribution 401(k) retirement plan which
covers substantially all full-time employees. The employees may contribute up
to $9,500 annually. Company contributions are discretionary. Company
contributions to the plan were $20,102, $6,114 and $6,057 for the year ended
December 31, 1997 and for the five month periods ended May 31, 1998 and 1997,
respectively.
GVE has established a Profit-Sharing Plan under section 401 and 501 of the
Internal Revenue Code. Substantially all full-time employees are eligible for
the plan. Yearly employer contributions are discretionary.
F-174
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employees may also elect to contribute to the plan. Company contributions to
the plan were $151,152 for the year ended December 31, 1997. Company
contributions to the plan were $63,000 and $62,500 for the five month periods
ended May 31, 1998 and 1997, respectively.
NOTE 9--CONTINGENCIES
The Company may occasionally be subject to certain liability claims resulting
from the normal course of business.
NOTE 10--SUBSEQUENT EVENT
On June 9, 1998, the Company entered into a stock purchase agreement with
United Rentals, Inc. ("United"). Under the terms of the stock purchase
agreement, United purchased all of the issued and outstanding capital stock of
both GVE and KGR.
F-175
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders ofMcClinch Equipment Services, Inc:
We have audited the accompanying balance sheet of McClinch Equipment
Services, Inc. as of December 31, 1997, and the related statements of income
and retained earnings and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial statements referred to above present fairly,
in all material respects, the financial position of McClinch Equipment
Services, Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Stamford, Connecticut
March 6, 1998.
F-176
MCCLINCH EQUIPMENT SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS:
Cash and cash equivalents............................. $ 314,000 $ 439,000
Accounts receivable, less allowance for doubtful ac-
counts of $75,000.................................... 3,611,000 2,839,000
State income taxes receivable......................... 1,000 6,000
Inventories........................................... 354,000 459,000
Net investment in sales-type leases (Note 2).......... 49,000 130,000
Fixed assets, net (Note 3)............................ 18,631,000 22,859,000
Other assets.......................................... 29,000 25,000
Due from related parties.............................. 151,000 --
----------- -----------
Total assets........................................ $23,140,000 $26,757,000
=========== ===========
LIABILITIES:
Notes payable (Note 4)................................ $16,200,000 $18,021,000
Accounts payable and accrued expenses................. 1,237,000 1,193,000
Due to related parties................................ -- 822,000
Deferred state income taxes (Note 6).................. 500,000 556,000
----------- -----------
Total liabilities................................... 17,937,000 20,592,000
----------- -----------
Commitments (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, 6,000 shares;
issued and outstanding, 100 shares.................... -- --
Additional paid-in capital............................. 10,000 10,000
Retained earnings...................................... 5,193,000 6,155,000
----------- -----------
Total stockholders' equity........................... 5,203,000 6,165,000
----------- -----------
Total liabilities and stockholders' equity........... $23,140,000 $26,757,000
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-177
MCCLINCH EQUIPMENT SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------
1997 1998 1997
------------ ---------- ----------
(UNAUDITED)
Revenues:
Equipment rentals and service........... $12,141,000 $6,626,000 $5,036,000
Sales................................... 4,759,000 2,415,000 2,426,000
----------- ---------- ----------
16,900,000 9,041,000 7,462,000
----------- ---------- ----------
Cost of equipment rentals and service
(Note 5)................................. 6,520,000 3,911,000 2,994,000
Cost of sales............................. 3,642,000 1,852,000 1,859,000
----------- ---------- ----------
Gross profit.......................... 6,738,000 3,278,000 2,609,000
Selling expenses (Note 5)................. 1,540,000 690,000 663,000
General and administrative expenses (Note
5)....................................... 2,445,000 966,000 627,000
----------- ---------- ----------
2,753,000 1,622,000 1,319,000
Other income (expense):
Other income............................ 410,000 39,000 207,000
Interest income......................... 56,000 12,000 23,000
Interest expense........................ (1,167,000) (651,000) (509,000)
----------- ---------- ----------
Income before provision for state in-
come taxes........................... 2,052,000 1,022,000 1,040,000
Provision for state income taxes:
Current................................. 7,000 4,000 2,000
Deferred................................ 100,000 56,000 68,000
----------- ---------- ----------
Net income............................ 1,945,000 962,000 970,000
Retained earnings, beginning of period.... 3,248,000 5,193,000 3,248,000
----------- ---------- ----------
Retained earnings, end of period...... $ 5,193,000 $6,155,000 $4,218,000
=========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F-178
MCCLINCH EQUIPMENT SERVICES, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1997 1998 1997
------------ ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income............................ $ 1,945,000 $ 962,000 $ 970,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 3,215,000 1,987,000 1,476,000
Gain on sale of equipment........... (180,000) (115,000) (76,000)
Deferred state income taxes......... 100,000 56,000 68,000
----------- ----------- -----------
5,080,000 2,890,000 2,438,000
Changes in assets and liabilities:
Accounts receivable................. (1,460,000) 772,000 30,000
State income taxes receivable....... 1,000 (5,000) (4,000)
Inventories......................... (2,000) (105,000) 60,000
Other assets........................ (9,000) 4,000 --
Accounts payable and accrued ex-
penses............................. 449,000 (44,000) 91,000
Due to related parties.............. (243,000) 973,000 124,000
----------- ----------- -----------
Net cash provided by operating
activities....................... 3,816,000 4,485,000 2,739,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and rental
equipment............................ (8,814,000) (6,425,000) (5,550,000)
Net investment in sales-type leases... 26,000 (81,000) 33,000
Proceeds from the sale of equipment... 495,000 325,000 200,000
----------- ----------- -----------
Net cash used in investing activi-
ties............................. (8,293,000) (6,181,000) (5,317,000)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit....... 8,750,000 5,800,000 5,500,000
Repayments under line of credit....... (4,050,000) (3,979,000) (2,000,000)
----------- ----------- -----------
Net cash provided by financing ac-
tivities......................... 4,700,000 1,821,000 3,500,000
----------- ----------- -----------
Net increase in cash and cash
equivalents...................... 223,000 125,000 922,000
Cash and cash equivalents, beginning of
period................................. 91,000 314,000 91,000
----------- ----------- -----------
Cash and cash equivalents, end of
period........................... $ 314,000 $ 439,000 $ 1,013,000
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest............................. $ 1,131,000 $ 648,000 $ 491,000
State income taxes................... 6,000 9,000 6,000
The accompanying notes are an integral part of the financial statements.
F-179
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's Business:
McClinch Equipment Services, Inc. (the "Company") is an exclusive dealer for
JLG Industries in New Jersey, Delaware, Maryland, Washington D.C., and
Northern Virginia. The Company also has distribution agreements with other
manufacturers in New Jersey, Delaware, Maryland, Pennsylvania, Washington,
D.C. and Virginia. Revenues are derived principally from the rental of
aerialift equipment and material handling equipment and the sale of new and
used aerialift equipment to a diversified customer base including contractors
and other users.
Basis of Presentation:
The balance sheet is presented on an unclassified basis since it more
properly reflects the Company's operations as an equipment rental company.
Interim Financial Statements:
The accompanying balance sheet at June 30, 1998, and the statements of
income and retained earnings and cash flows for the six month periods June 30,
1998 and 1997 are unaudited and have been prepared on the same basis as the
audited financial statements included herein. In the opinion of management,
such unaudited financial statements include all adjustments necessary to
present fairly the information set forth therein, which consists solely of
normal recurring adjustments. The results of operations for such interim
periods are not necessarily indicative of results for the full year.
Revenue Recognition:
a. Operating Leases. Rental revenue is recognized over the lease term
(generally less than one year) as earned.
b. Sales-Type Leases: Sales are recorded at amounts equal to the present
value of the minimum lease payments at the inception of the lease. The
unearned interest income represents the difference between the minimum lease
payments and the present value of such payments. Such interest income is
recognized over the life of the lease using the interest method.
Cash and Cash Equivalents:
Cash and cash equivalents consist primarily of cash in banks and temporary
cash investments with original maturities of less than 90 days. These balances
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Inventories:
Inventories, consisting principally of aerialift equipment and related spare
parts, are recorded at the lower of first-in, first-out cost or market.
Fixed Assets:
Fixed assets, consisting principally of the Company's fleet of aerialift
equipment, primarily held for rental under operating leases, is stated at cost
and is depreciated using the straight-line method over the following estimated
useful lives: rental equipment, shop equipment, furniture and fixtures and
computer equipment, 7 years; vehicles, 5 years; and leasehold improvements,
over the remaining term of the lease.
F-180
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
Upon retirement or sale, the cost and related accumulated depreciation are
removed from the accounts and the resulting gains or losses are included in
income.
Income Taxes:
The Company has elected to be taxed as a Small Business Corporation under
the Internal Revenue Code. Under this regulation the Company's income is
reported for federal income tax purposes by the stockholders on their
individual tax returns. Accordingly, the financial statements reflect no
provision or liability for federal income taxes.
The small business corporation election can be made in some of the states in
which the Company does business and accordingly, the financial statements only
reflect state income tax provisions for the states in which the election can
not be made.
The Company recognizes deferred tax assets and liabilities for the expected
future state tax consequences of events that have been recognized in the
Company's financial statements or state tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse. A valuation allowance is
established when it is more likely than not that deferred tax assets will not
be realized.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications:
Certain amounts have been reclassified between balance sheet accounts in the
current year to more properly reflect the nature of the item.
2. SALES-TYPE LEASES
The net investment in sales-type leases consists of the following:
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
Minimum lease payments receivable..................... $53,000 $145,000
Less, Unearned interest income...................... (4,000) (15,000)
------- --------
Net investment in sales-type leases................... $49,000 $130,000
======= ========
All future minimum lease payments are receivable during 1998 and 1999.
F-181
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
3. FIXED ASSETS
Fixed assets consist of the following:
DECEMBER
31, JUNE 30,
1997 1998
----------- -----------
Land and building.................................. $ -- $ 242,000
Rental equipment................................... 24,854,000 30,325,000
Vehicles........................................... 1,043,000 1,246,000
Shop equipment..................................... 35,000 79,000
Office equipment................................... 28,000 31,000
Leasehold improvements............................. -- 32,000
----------- -----------
25,960,000 31,955,000
Less, Accumulated depreciation................... (7,329,000) (9,096,000)
----------- -----------
$18,631,000 $22,859,000
=========== ===========
4. NOTES PAYABLE
The Company has available a revolving line of credit with a bank syndicate
totaling the lesser of $28,000,000 or an amount based on eligible accounts
receivable, parts inventory, new equipment inventory, vehicles and rental
equipment. The unused portion of the line of credit was $11,800,000 and
$9,979,000 at December 31, 1997 and June 30, 1998, respectively.
At December 31, 1997, the outstanding balance bears interest at fluctuating
30-day LIBOR rate plus 2 1/4% (8.2% at December 31, 1997). Effective in
January 1998, the outstanding balance bears interest at the fluctuating 30-day
LIBOR rate plus 1 3/4% (7.4% at June 30, 1998) and the Company pays a
commitment fee of 1/4% per annum on the unused portion of the line of credit.
The Company has the option to borrow additional funds and/or convert all or a
portion of the outstanding balance to a fluctuating interest rate equal to the
lender's prime rate plus 1/2% or a fixed LIBOR rate plus 1 3/4% for 90, 180 or
360 days.
The line of credit terminates on November 30, 1999 and extends automatically
every six months unless either party gives written notice to the other. Upon
termination or default, amounts outstanding under this line of credit convert
to a note which is payable in 48 monthly installments.
Although there are no fixed payments on the principal, the Company expects
the aggregate maturities of debt outstanding at December 31, 1997 to
approximate the following:
1998........................................................... $4,050,000
1999........................................................... 4,050,000
2000........................................................... 4,050,000
2001........................................................... 4,050,000
Substantially all of the assets of the Company have been pledged as
collateral under the debt agreement. In addition, an affiliate of the Company
has guaranteed this debt.
The lenders require, among other terms, that the Company and its affiliate
on a combined basis meet certain financial ratios and obtain approval prior to
issuing of advances or loans to stockholders or officers which exceed certain
amounts, as defined.
F-182
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
5. RELATED PARTY TRANSACTIONS
An affiliate (through common ownership) provides services to the Company in
connection with its operations. The primary expenses, which are incurred and
paid by the affiliate and allocated to the Company, include salaries
($1,750,000 for the year ended December 31, 1997 and $500,000 and $330,000 for
the six months ended June 30, 1998 and 1997, respectively, included in general
and administrative expenses) and spare parts inventory, trucking services and
insurance expenses ($850,000, for the year ended December 31, 1997, and
$430,000 and $361,000 for the six months ended June 30, 1998 and June 30,
1997, respectively, included in cost of equipment rentals and service).
The Company rents equipment to the affiliate under an informal equipment
sharing agreement for ultimate rental to the affiliate's customers in New York
and Connecticut. In addition, the Company rents equipment from the affiliate
for ultimate rental to customers in its operating areas. The net revenue
earned (included in equipment rentals and service revenues) by the Company
under these arrangements for the year ended December 31, 1997 was $178,000 and
$239,000 and $230,000 for the six months ended June 30, 1998 and 1997,
respectively.
The Company purchased used rental equipment from an affiliate for ultimate
sale to unrelated third parties amounting to $964,000 for the year ended
December 31, 1997 and $574,000 and $739,000 for the six months ended June 30,
1998 and 1997, respectively. Additionally, the Company sold used rental
equipment to the affiliate for ultimate sale to unrelated third parties. The
selling price of such equipment amounted to $239,000 for the year ended
December 31, 1997 and $78,000 and $138,000 for the six months ended June 30,
1998 and 1997, respectively.
These transactions are settled in the normal course of business.
6. INCOME TAXES
Deferred state income taxes are recorded to reflect primarily the tax
consequences on future years of temporary differences between the tax bases of
assets and liabilities, principally fixed assets and accounts receivable, and
their financial reporting amounts at each year-end and for tax operating loss
carryforwards.
The components of deferred state tax assets and liabilities are as follows:
DECEMBER 31, JUNE 30,
1997 1998
------------ ---------
Deferred tax assets:
Net operating loss carryforward................... $ 22,000 $ 22,000
Accounts receivable............................... 5,000 5,000
Deferred tax liabilities:
Fixed assets...................................... (377,000) (433,000)
Other............................................. (150,000) (150,000)
--------- ---------
$(500,000) $(556,000)
========= =========
No valuation allowance has been recognized for deferred tax assets. The
Company has various state net operating loss carryforwards at December 31,
1997 of approximately $357,000 which expire from 2002 through 2012.
F-183
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
7. PROFIT-SHARING PLAN
The Company participates in a profit sharing plan with its affiliates which
provides for a discretionary contribution to a trust fund based on the
Company's net income for the year, to be allocated to all eligible employees
based on their proportional compensation. Nonunion employees are eligible for
participation in the plan after the completion of one year of service,
provided they have also reached age 21. After becoming eligible, employees
vest at an annual rate of 20%. Discretionary contributions under the plan by
the Company were $75,000 for the year ended December 31, 1997. There were no
discretionary contributions under the plan by the Company for the six months
ended June 30, 1998 and 1997.
The plan also provides for a salary deferral plan pursuant to Section 401(k)
of the Internal Revenue Code, as amended. The plan requires the Company to
contribute an amount equal to 25% of employees' contributions not to exceed 6%
of their annual compensation up to $160,000. Participants vest in the
Company's contribution at the rate of 20% annually after becoming eligible.
Matching contributions under the plan by the Company were $12,000 for the year
ended December 31, 1997 and $9,000 for the six months ended June 30, 1998 and
1997.
8. COMMITMENTS
The Company leases buildings in Delaware, Virginia, Maryland and New Jersey
from unrelated parties in the form of operating leases which expire in 1998
and 1999. Total future minimum lease payments of $190,000 are as follows:
1998, $163,000; and 1999, $27,000. In addition, the Company leases buildings
in New Jersey and Virginia on a month-to-month basis. Total rent expense of
$243,000 was incurred for the year ended December 31, 1997 and $135,000 and
$110,000 for the six months ended June 30, 1998 and 1997, respectively.
9. SUBSEQUENT EVENT (UNAUDITED)
On September 1, 1998, United Rentals, Inc. acquired all of the outstanding
shares of common stock of the Company.
F-184
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Valley Rentals, Inc.
We have audited the combined balance sheet of Valley Rentals, Inc. (see Note
1) (the "Companies") as of December 31, 1997 and the related combined
statements of income, stockholders' equity and partners' capital and cash
flows for the year then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Valley
Rentals, Inc. at December 31, 1997, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 20, 1998, except for Note 10,
as to which the date is April 22,
1998
F-185
VALLEY RENTALS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
Cash................................................. $ 663,540 $ 86,842
Accounts receivable, net of allowance for doubtful
accounts of $117,275................................ 2,116,829 1,955,545
Inventory............................................ 169,514 171,114
Rental equipment, net................................ 9,696,900 9,846,963
Property and equipment, net.......................... 1,791,348 1,763,087
Prepaid expenses and other assets.................... 94,146 50,945
----------- -----------
Total assets..................................... $14,532,277 $13,874,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Liabilities:
Accounts payable, accrued expenses and other
liabilities....................................... $ 1,684,216 $ 1,436,169
Stockholder loan................................... 137,385 103,675
Debt............................................... 1,109,707 1,432,271
----------- -----------
Total liabilities................................ 2,931,308 2,972,115
Commitments and contingencies
Stockholders' equity and partners' capital:
Stockholders' equity:
Common stock, Valley Rentals, Inc., no par value,
10,000 shares authorized,
3,633 shares issued and outstanding............... 58,650 58,650
Additional paid-in capital......................... 1,854,431 1,854,431
Retained earnings.................................. 9,691,223 8,992,635
Partners' capital (deficit)--Valley Equipment
Leasing, LLC ...................................... (3,335) (3,335)
----------- -----------
Total stockholders' equity and partners'
capital......................................... 11,600,969 10,902,381
----------- -----------
Total liabilities and stockholders' equity and
partners' capital............................... $14,532,277 $13,874,496
=========== ===========
See accompanying notes.
F-186
VALLEY RENTALS, INC.
COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
Revenues:
Equipment rentals....................... $12,998,863 $2,984,396 $2,835,547
Sales of rental equipment............... 663,776 201,797 351,103
Sales of parts, supplies and new
equipment.............................. 1,965,431 203,804 226,372
----------- ---------- ----------
Total revenues........................ 15,628,070 3,389,997 3,413,022
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation.......... 3,809,895 834,400 1,051,236
Depreciation, equipment rentals......... 3,475,710 758,568 783,393
Cost of rental equipment sales.......... 336,664 186,153 170,128
Cost of parts, supplies and new
equipment sales........................ 1,001,695 138,994 159,831
----------- ---------- ----------
Total cost of revenues................ 8,623,964 1,918,115 2,164,588
----------- ---------- ----------
Gross profit.......................... 7,004,106 1,471,882 1,248,434
Selling, general and administrative
expenses................................. 4,725,084 1,159,283 1,226,219
Non-rental depreciation................... 304,895 69,072 91,525
----------- ---------- ----------
Operating income (loss)............... 1,974,127 243,527 (69,310)
Interest expense.......................... 159,488 23,739 12,321
Interest (income)......................... (61,651) (15,784) (19,445)
Other (income), net....................... (37,427) 7,053 9,785
----------- ---------- ----------
Net income (loss)..................... $ 1,913,717 $ 228,519 $ (71,971)
=========== ========== ==========
See accompanying notes.
F-187
VALLEY RENTALS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
COMMON STOCK ADDITIONAL PARTNERS'
-------------- PAID-IN RETAINED CAPITAL
SHARES AMOUNT CAPITAL EARNINGS (DEFICIT)
------ ------- ---------- ----------- ---------
Balance at January 1, 1997.... 3,633 $58,650 $1,854,431 $ 8,819,142 $(10,877)
Net income.................. 1,906,175 7,542
Stockholder distributions... (1,034,094)
----- ------- ---------- ----------- --------
Balance at December 31, 1997.. 3,633 58,650 1,854,431 9,691,223 (3,335)
Net loss (Unaudited)........ (71,971)
Stockholder distributions
(Unaudited)................ (626,617)
----- ------- ---------- ----------- --------
Balance at March 31, 1998 (Un-
audited)..................... 3,633 $58,650 $1,854,431 $ 8,992,635 $ (3,335)
===== ======= ========== =========== ========
See accompanying notes.
F-188
VALLEY RENTALS, INC.
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1997 1997 1998
------------ ---------- -----------
(UNAUDITED)
Cash flows from operating activities
Net income (loss)...................... $ 1,913,717 $ 228,519 $ (71,971)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 3,780,605 827,640 874,918
Gain on rental equipment sales....... (327,112) (15,644) (180,975)
Changes in assets and liabilities:
(Increase) decrease in accounts re-
ceivable........................... (245,964) (72,829) 161,284
Decrease (increase) in inventory.... 1,557 (2,500) (1,600)
(Increase) decrease in prepaid ex-
penses and other assets............ (27,197) 34,521 43,201
Decrease in accounts payable,
accrued expenses and other
liabilities........................ (26,197) (358,397) (248,047)
----------- ---------- -----------
Cash provided by operating activities.. 5,069,409 641,310 576,810
Cash flows from investing activities
Purchase of rental equipment........... (3,479,228) (287,751) (1,006,687)
Proceeds from sale of rental
equipment............................. 663,776 201,797 351,103
Purchases of property and equipment.... (364,461) (127,632) (63,264)
----------- ---------- -----------
Cash used in investing activities...... (3,179,913) (213,586) (718,848)
Cash flows from financing activities
Stockholder distribution............... (1,034,094) (1,471,458) (626,617)
Principal payments on debt............. (2,706,431) (178,032) (253,043)
Borrowings under credit facilities..... 2,193,000 1,000,000 445,000
----------- ---------- -----------
Cash used in financing activities...... (1,547,525) (649,490) (434,660)
----------- ---------- -----------
Increase (decrease) in cash............ 341,971 (221,766) (576,698)
Cash balance at beginning of period.... 321,569 321,569 663,540
----------- ---------- -----------
Cash balance at end of period.......... $ 663,540 $ 99,803 $ 86,842
=========== ========== ===========
See accompanying notes.
F-189
VALLEY RENTALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(THE INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements of Valley Rentals, Inc. include the
accounts of Valley Rentals, Inc. ("Valley") and Valley Equipment Leasing, LLC
("Valley Equipment") (collectively the "Companies"). The Companies are
affiliated through common ownership. All significant intercompany accounts and
transactions have been eliminated in combination.
These combined financial statements are prepared on a historical cost basis
and do not include any adjustments that may result from the acquisition of the
Companies by United Rentals, Inc. ("United") as more fully described in Note
10.
BUSINESS ACTIVITIES
The Companies rent, sell and repair construction equipment for use by
contractor, industrial and homeowners markets. The rentals are on a daily,
weekly or monthly basis. The Companies have three locations (Longview,
Vancouver and Turnwater) and the principal market area is Washington State.
The nature of the Companies' business is such that short-term obligations are
typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the balance sheet is presented on an
unclassified basis.
INTERIM FINANCIAL STATEMENTS
The accompanying combined balance sheet at March 31, 1998 and the combined
statements of income, stockholders' equity and partners' capital and cash
flows for the three-month periods ended March 31, 1997 and 1998 are unaudited
and have been prepared on the same basis as the audited combined financial
statements included herein. In the opinion of management, such unaudited
combined financial statements include all adjustments necessary to present
fairly the information set forth therein, which consist solely of normal
recurring adjustments. The results of operations for such interim period are
not necessarily indicative of results for the full year.
INVENTORY
Inventories consists primarily of equipment, general replacement parts and
fuel for the equipment and are stated at the lower of cost, determined under
the first-in, first-out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Rental equipment costing less than
$1,500 is immediately expensed at the date of purchase. Depreciation for
rental equipment is computed using the straight-line method over an estimated
five to seven-year useful life with no salvage value. Ordinary maintenance and
repair costs are charged to operations as incurred. Proceeds from the disposal
and the related net book value of the equipment are recognized in the period
of disposal and reported as revenue from sales of rental equipment and cost of
sales of rental equipment, respectively, in the combined statement of income.
F-190
VALLEY RENTALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The Company capitalizes all
property and equipment purchases greater than $1,500. Depreciation of property
and equipment is computed on the straight-line method over estimated useful
lives of 5 to 10 years with no salvage value. Leasehold improvements are
amortized using the straight-line method over the estimated lives of the
improvements or the remaining life of the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
RENTAL REVENUE
Rental revenue is recorded as earned under the operating method.
ADVERTISING COSTS
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to $250,984, $49,386 and $51,026 in the year
ended December 31, 1997 and for the three months ended March 31, 1997 and
1998, respectively.
INCOME TAXES
Valley has elected, by unanimous consent of its shareholders, to be taxed
under the provisions of Subchapter S of the Internal Revenue Code for federal
purposes. Under those provisions, Valley does not pay federal income taxes;
instead, the shareholders are liable for individual income taxes on Valley's
profits. Valley Equipment, an LLC, is not a taxable entity and, therefore,
incurs no income tax liability. Any profits and losses of Valley Equipment
flow through to the individual members.
ACCOUNTING 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.
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies' customer base
and their credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
Rental equipment................................... $22,504,852 $22,858,436
Less accumulated depreciation...................... 12,807,952 13,011,473
----------- -----------
Rental equipment, net.............................. $ 9,696,900 $ 9,846,963
=========== ===========
F-191
VALLEY RENTALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
Land................................................ $ 463,000 $ 463,000
Building and building improvements.................. 431,313 431,313
Transportation equipment............................ 1,360,766 1,424,030
Furniture, fixtures and equipment................... 487,153 487,153
Leasehold improvements.............................. 557,781 557,781
---------- ----------
3,300,013 3,363,277
Less accumulated depreciation....................... 1,508,665 1,600,190
---------- ----------
Total............................................... $1,791,348 $1,763,087
========== ==========
5. DEBT
Debt consists of the following:
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
Columbia State Bank--Various notes with combined
monthly payments of $21,148 including interest of
9%................................................ $ 779,050 $ 739,337
Columbia State Bank--Revolving line of credit loan
of $1,500,000 expiring on June 1, 1998 and bearing
interest at 0.5% over prime....................... 0 445,000
John Deere Credit--Various notes with combined
monthly payments of $31,093 including interest
from 5.5% to 5.9%................................. 262,918 206,202
Ingersoll Rand--Various non-interest bearing notes
with combined monthly payments of $14,253......... 67,739 41,732
---------- ----------
$1,109,707 $1,432,271
========== ==========
Substantially all assets collateralize the above notes.
All debt was paid off in connection with the acquisition discussed in Note
10.
6. OPERATING LEASES
The Companies lease two store locations on long term leases. The Companies
are responsible for all operating expenses of the facilities including
property taxes, assessments, insurance, repairs and maintenance. These leases
have various terms and extend through December 2001.
Total rent expense for the year ended December 31, 1997 and for the three
months ended March 31, 1997 and 1998 was approximately $136,100, $33,900 and
$33,900, respectively.
F-192
VALLEY RENTALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, minimum lease commitments under all operating leases,
with initial or remaining lease terms of more than one year, are as follows:
1998................................................................ $225,452
1999................................................................ 218,252
2000................................................................ 204,300
2001................................................................ 58,710
2002................................................................ 0
--------
Total............................................................... $706,714
========
7. RELATED PARTY TRANSACTIONS
The Companies lease two of its three operating facilities from the president
and a majority stockholder of the Companies on a five year lease basis
expiring October 31, 2000 and December 31, 2001. The Companies are responsible
for all operating expenses of the facilities including property taxes,
assessment, insurance, repairs and maintenance. Total rent expense for the
year ended December 31, 1997 and for the three months ended March 31, 1997 and
1998 was approximately $124,800, $31,200 and $31,200, respectively.
In connection with the acquisition discussed in Note 10, the lease terms
have been renegotiated.
The Companies paid $50,000, $0 and $0 during the year ended December 31,
1997, and the three months ended March 31, 1997 and 1998, respectively, to the
members of the board of directors, who are also shareholders.
The Companies also have a note payable to its majority stockholder totaling
$137,385 and $103,675 at December 31, 1997 and March 31, 1998, respectively,
bearing interest at 8.75%. No repayment schedule has been established.
In January and April 1998, the Companies made payments of $627,542 on behalf
of its Stockholders to the Internal Revenue Service.
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 and for the three months ended March
31, 1997 and 1998 total interest paid was $159,517, $25,499 and $14,050,
respectively.
During 1997 the Companies purchased $508,830 of equipment which was financed
and $72,993 of equipment which was traded in like-kind exchanges. During the
three months ended March 31, 1997 and 1998 the Companies purchased $187,737
and $96,897 of equipment, respectively, which was financed.
9. PENSION AND PROFIT-SHARING PLANS
The Companies have a defined contribution 401(k) pension plan which covers
substantially all employees. The Companies match 10% up to the first six
percent of the employees contribution. Companies contributions to the plan
were $9,773, $2,762 and $3,577 for the year ended December 31, 1997 and for
the three months ended March 31, 1997 and 1998, respectively.
In addition, Valley maintains a profit-sharing plan which covers
substantially all employees. Valley's contributions are discretionary and
amounted to $140,000, $30,000 and $34,500 for the year ended December 31, 1997
and for the three months ended March 31, 1997 and 1998, respectively.
10. SUBSEQUENT EVENT
On April 22, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Companies.
F-193
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Lift Systems, Inc.
We have audited the balance sheet of Lift Systems, Inc. as of December 31,
1997 and the related statements of income, changes in stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Lift Systems, Inc. as of
December 31, 1997 and the results of its operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Altschuler, Melvoin and Glasser
LLP
Chicago, Illinois
March 12, 1998, except for Note 8 as to which the date is July 27, 1998
F-194
LIFT SYSTEMS, INC.
BALANCE SHEETS
DECEMBER JUNE 30,
31, 1997 1998
----------- -----------
ASSETS (UNAUDITED)
Rental Equipment:
Cost................................................. $20,050,950 $21,424,239
Less accumulated depreciation........................ 8,931,693 9,661,284
----------- -----------
11,119,257 11,762,955
----------- -----------
Cash and Cash Equivalents.............................. 176,993 255,606
Accounts Receivable, Net of Allowances of $135,000
(1997) and $115,000 (1998)............................ 3,359,585 2,995,040
Equipment Held for Resale.............................. 233,152 310,236
Other Assets........................................... 619,874 649,339
----------- -----------
4,389,604 4,210,221
----------- -----------
Other Depreciable Equipment, At Cost:
Vehicles............................................. 1,624,753 1,600,872
Mobile radio equipment............................... 19,134 19,134
Shop tools and equipment............................. 158,615 167,260
Maintenance equipment................................ 160,783 160,783
Office furniture and equipment....................... 162,785 164,589
Computer systems..................................... 390,873 402,674
----------- -----------
2,516,943 2,515,312
Less accumulated depreciation........................ 1,293,400 1,424,304
----------- -----------
1,223,543 1,091,008
----------- -----------
Land, Building and Improvements:
Cost................................................. 1,532,442 1,545,120
Less accumulated depreciation........................ 111,194 132,786
----------- -----------
1,421,248 1,412,334
----------- -----------
$18,153,652 $18,476,518
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term Debt Secured by Rental Equipment............. $ 9,267,350 $ 8,988,045
Bank Line of Credit Note Payable.......................
Trade Accounts Payable................................. 198,935 761,084
Other Accrued Liabilities.............................. 543,229 368,200
Deferred State Income Taxes............................ 93,475 86,948
Other Long-term Debt................................... 1,366,636 1,340,528
----------- -----------
11,469,625 11,544,805
----------- -----------
Stockholders' Equity:
Common stock:
$1.00 par value; 100,000 shares authorized; 800
shares issued and outstanding..................... 800 800
Additional paid-in capital........................... 79,200 79,200
Retained earnings.................................... 6,604,027 6,851,713
----------- -----------
6,684,027 6,931,713
----------- -----------
$18,153,652 $18,476,518
=========== ===========
The accompanying notes are an integral part of this statement.
F-195
LIFT SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED SIX-MONTH PERIODS
DECEMBER 31, ENDED JUNE 30,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Operating Revenue:
Equipment sales........................ $2,812,545 $1,931,706 $ 1,322,954
Rentals................................ 10,020,489 4,887,706 4,485,354
Transport.............................. 1,030,373 548,971 468,159
Service and parts sales................ 651,546 426,477 367,754
Other.................................. 23,998 42,674 4,568
---------- ---------- -----------
14,538,951 7,837,534 6,648,789
Less cost of equipment sold............ 1,734,679 1,109,815 662,150
---------- ---------- -----------
Gross Operating Profit................... 12,804,272 6,727,719 5,986,639
---------- ---------- -----------
Operating Expenses:
Direct cost of rental revenue (except
depreciation)......................... 1,817,749 795,148 865,690
External costs of transport revenue.... 29,767 13,458 605
Costs of service revenue and parts
sales................................. 427,230 228,673 238,811
Personnel costs, not charged to direct
costs above........................... 3,093,421 1,915,085 1,403,832
General and administrative expenses.... 940,036 626,553 460,341
Insurance based on revenue............. 113,627 67,292 65,324
Occupancy expenses..................... 123,877 63,384 53,172
Provision for bad debts................ 73,076 34,888 30,398
---------- ---------- -----------
6,618,783 3,744,481 3,118,173
---------- ---------- -----------
Income from Operations................... 6,185,489 2,983,238 2,868,466
Other Income (Expense):
Interest expense....................... (857,800) (439,540) (406,076)
Interest income........................ 28,897 14,619 11,963
Discretionary compensation............. (435,900) (113,247) (132,000)
Profit-sharing contribution............ (212,622) (1,098) (68,274)
Gain (Loss) on sale of property and
equipment............................. 9,335 14,300 13,498
Other.................................. 6,926 22,924 3,070
---------- ---------- -----------
Income before Depreciation, Amortization
and Income Taxes........................ 4,724,325 2,481,196 2,290,647
Depreciation and Amortization............ (3,824,466) (2,128,510) (1,806,349)
Provision for Deferred State Income Tax-
es...................................... (15,000) (5,000) (8,000)
---------- ---------- -----------
Net Income............................... $ 884,859 $ 347,686 $ 476,298
========== ========== ===========
The accompanying notes are an integral part of this statement.
F-196
LIFT SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- ---------- ----------
Balance, January 1, 1997............. $800 $79,200 $5,823,929 $5,903,929
Net Income for 1997.................. 884,859 884,859
Redemption of Common Stock........... (4,761) (4,761)
Dividends............................ (100,000) (100,000)
---- ------- ---------- ----------
Balance, December 31, 1997........... 800 79,200 6,604,027 6,684,027
Net Income for the Six-month Period
Ended June 30, 1998 (unaudited)..... 347,686 347,686
Dividends............................ (100,000) (100,000)
---- ------- ---------- ----------
Balance, June 30, 1998 (unaudited)... $800 $79,200 $6,851,713 $6,931,713
==== ======= ========== ==========
The accompanying notes are an integral part of this statement.
F-197
LIFT SYSTEMS, INC.
STATEMENT OF CASH FLOWS
SIX-MONTH PERIODS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash Flows from Operating Activities:
Collections from customers............. $12,312,047 $ 7,148,389 $5,868,998
Interest income collected.............. 28,897 13,248 11,963
Commissions collected.................. 23,997 42,674 4,568
Other income collected................. 6,926 22,924 3,070
Cash paid to suppliers................. (5,357,199) (2,660,434) (1,374,588)
Cash paid to employees................. (3,534,083) (1,914,664) (1,618,151)
Interest paid.......................... (857,800) (444,849) (406,279)
State income taxes paid................ (6,000) (11,527) (6,000)
----------- ----------- ----------
Net cash provided by operating
activities............................ 2,616,785 2,195,761 2,483,581
----------- ----------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of rental
equipment............................. 1,453,297 1,132,766 871,244
Proceeds from sale of nonrental
property.............................. 45,391 29,336 43,891
Purchases of rental equipment.......... (5,274,037) (2,784,636) (3,114,099)
Purchases of other depreciable
property.............................. (309,438) (76,523) (207,675)
Payments for land and building
improvements.......................... 0 (12,678) 0
----------- ----------- ----------
Net cash used in investing activities.. (4,084,787) (1,711,735) (2,406,639)
----------- ----------- ----------
Cash Flows from Financing Activities:
Proceeds from bank loans for rental
equipment............................. 4,149,000 1,406,000 1,221,000
Proceeds from line of credit........... 1,699,000 883,000 300,000
Payments on rental equipment loans..... (2,989,158) (1,685,305) (1,549,169)
Payments on line of credit............. (2,199,000) (883,000) (800,000)
Payments on other long-term debt....... (20,183) (18,984) (2,433)
Payments on real estate mortgage loan.. (13,987) (7,124) (6,563)
Payments on noncompete agreement....... (14,000) 0 0
Payments on stock purchase............. (4,761) 0 0
Payments of dividends.................. (100,000) (100,000) (100,000)
----------- ----------- ----------
Net cash provided by (used in)
financing activities.................. 506,911 (405,413) (937,165)
----------- ----------- ----------
Net (Decrease) Increase in Cash and Cash
Equivalents............................. (961,091) 78,613 (860,223)
Cash and Cash Equivalents, Beginning of
Period.................................. 1,138,084 176,993 1,138,084
----------- ----------- ----------
Cash and Cash Equivalents, End of
Period.................................. $ 176,993 $ 255,606 $ 277,861
=========== =========== ==========
The accompanying notes are an integral part of this statement.
F-198
LIFT SYSTEMS, INC.
STATEMENT OF CASH FLOWS
SIX-MONTH PERIODS
ENDED JUNE 30,
YEAR-ENDED
DECEMBER 31,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Reconciliation of Net Income to Net
Cash Provided by Operating
Activities:
Net income.......................... $ 884,859 $ 347,686 $ 476,298
----------- ---------- ----------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization... 3,824,466 2,128,510 1,806,349
Provision for bad debts......... 73,076 34,888 30,398
Provision for profit-sharing
contribution................... 212,622 1,098 68,274
Loss (Gain) on sale of other
depreciable property........... (9,335) (14,300) (13,498)
Purchases of equipment for
resale ........................ (233,152) (310,236)
Proceeds from sales of rental
equipment...................... (1,453,297) (1,132,766) (871,244)
Original cost of rental
equipment sold................. 2,037,886 1,606,185 1,255,161
Accumulated depreciation of
rental equipment sold.......... (1,366,834) (1,128,111) (914,433)
Decrease (Increase) in accounts
receivable..................... (1,139,008) 328,991 (131,662)
Decrease (Increase) in other
assets......................... (57,006) (46,777) 108,243
Increase (Decrease) in accounts
payable........................ (6,875) 562,149 636,772
Increase (Decrease) in deferred
state income taxes............. 9,000 (6,527) 2,000
Decrease in other accrued
liabilities.................... (159,617) (175,029) 30,923
----------- ---------- ----------
Total adjustments............. 1,731,926 1,848,075 2,007,283
----------- ---------- ----------
Net Cash Provided by Operating
Activities........................... $ 2,616,785 $2,195,761 $2,483,581
=========== ========== ==========
Supplemental Schedule of Noncash
Financing Activities:
During 1997, the Company did like-
kind exchanges of rental equipment
- one with a customer and nine
with a manufacturer/supplier. The
gross acquired cost and
accumulated depreciation of the
equipment given up in these
exchanges were $121,965 and
$38,326, respectively, yielding a
capitalized cost of $83,639 for
the items of equipment acquired.
During 1997, the Company entered
into financing leases totaling
$214,255 (see Note 5).
The accompanying notes are an integral part of this statement.
F-199
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED)
Lift Systems, Inc. sells, services, rents and transports aerial lift
equipment. Its primary customers are specialty construction contractors and
industrial maintenance departments in Northeast Illinois, Southeast Wisconsin
and Northwest Indiana. In management's opinion, the Company has no current
risk of significant vulnerability due to dependence on individual suppliers or
concentrations of revenue streams or receivables in a single or a limited
number of customers.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
These financial statements are prepared on a historical cost basis and do
not include any adjustments that may result from the acquisition of the
Company by United Rentals, Inc. ("United") as more fully described in Note 8.
Interim Financial Statements
The accompanying balance sheet at June 30, 1998 and the statements of
income, stockholders' equity and cash flows for the six month periods ended
June 30, 1998 and 1997 are unaudited and have been prepared on the same basis
as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consist
solely of normal recurring adjustments. The results of operations for such
interim periods are not necessarily indicative of results for the full year.
Rental Revenue
Rental revenue is recognized on a daily basis under operating leases
covering rental equipment. Such leases typically range from one day to several
months.
Depreciation and Amortization
Amounts capitalized to components of the headquarters facility, other than
land, are being depreciated on a straight-line basis with lives ranging from 5
to 39 years for both financial and tax reporting purposes. For financial
reporting purposes, all other depreciation is provided on a straight-line
basis over seven years for shop tools and equipment and office furniture and
equipment, and over five years for rental equipment and most other depreciable
assets. Total depreciation expense reflected in these financial statements for
1997 and for the six month periods ended June 30, 1998 and 1997 is $3,789,843,
$2,111,198 and $1,789,037 respectively. For tax purposes, equipment
depreciation is computed over the same lives but using the maximum rates
allowed by the Internal Revenue Code.
The cost of the noncompete agreement (see Note 3) is being amortized monthly
on a straight-line basis over five years, the term of the agreement. The
amount of such amortization reflected in these financial statements for 1997
and for the six month periods ended June 30, 1998 and 1997 is $34,000, $17,000
and $17,000 respectively.
F-200
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED)
Total mortgage acquisition costs of $15,594 (see Note 5) are being amortized
over 25 years on a straight line basis.
Income Taxes
Lift Systems, Inc. has elected to be taxed as a Subchapter S corporation
whereby corporate taxable income is allocated to the stockholders and reported
on their individual income tax returns. Accordingly, no provision for federal
income taxes is required in the accompanying financial statements. However,
the Company is subject to Illinois, Wisconsin and Indiana state income taxes.
For income tax purposes, the Company reports income on a modified cash basis
and uses accelerated methods of depreciation as described above. Accordingly,
deferred state income taxes have been provided on the temporary differences in
reporting income for financial statement and tax reporting purposes.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted funds in checking accounts
and an interest bearing money market account.
NOTE 2--LAND AND BUILDING
On September 13, 1994, the Company purchased eight acres of land and a
masonry building of 22,500 square feet to serve as the Company's headquarters
and primary operating facility for the foreseeable future. The primary
financing for this property was provided by a purchase money mortgage secured
by a promissory note as more fully described in Note 5 below. The closing
purchase price of this property was $1.2 million. Operations recommenced from
the new location on Monday, January 30, 1995. At June 30, 1998 the capitalized
costs consisted of the following:
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
---------- ------------ ----------
Land................................... $ 407,512 -- $ 407,512
Building............................... $ 804,524 $ 69,452 $ 735,072
Land Improvements...................... $ 333,084 $ 63,334 $ 269,750
---------- -------- ----------
$1,545,120 $132,786 $1,412,334
========== ======== ==========
NOTE 3--NONCOMPETE AGREEMENT
Included in Other Assets is the cost of a noncompete agreement, net of
accumulated amortization, which amortization method is described above. The
gross cost of this agreement was $170,000 consisting of an immediate payment
of $100,000 and annual installments of $14,000 to be paid on or about July 1
of each year for five years with the first installment due on July 1, 1994,
provided that the former shareholder is in compliance with the terms of the
agreement. The noncompete agreement arose concurrently with, as an integral
part of, and in partial consideration for, a Stock Redemption Agreement as
more fully described in Note 6 below. The liability related to the noncompete
agreement was $14,000 at December 31,1997 and at June 30, 1998. This liability
is included in Other Long-Term Debt.
F-201
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED)
NOTE 4--SHORT-TERM LINES OF CREDIT
The Company has in place an overall credit facility as further described in
Note 5 below, under which the Company has available a $500,000 revolving line
of credit for working capital purposes. Amounts borrowed under this credit
agreement bear interest at a floating rate of .25% over the bank's prime rate.
There were no amounts outstanding under this line of credit at December 31,
1997 or at June 30, 1998.
Under the same bank credit facility, the Company may borrow up to $400,000
under a revolving equipment loan agreement. The purpose of this facility is to
provide short-term rental equipment financing until the total borrowed under
this facility reaches at least $350,000 or amounts have been outstanding under
this facility for six months. At such times, the total outstanding under this
revolving equipment loan will be converted to a five or seven year term note
bearing a fixed interest rate as further described below. Amounts outstanding
under this revolving agreement bear interest computed daily at a floating rate
of .25% over the bank's prime rate. There were no amounts outstanding under
this line of credit at December 31, 1997 or at June 30, 1998.
These credit facilities were renewed on April 30, 1998 for 90 days at the
same terms.
NOTE 5--LONG TERM DEBT AND LINES OF CREDIT
As of December 31, 1997, Lift Systems, Inc. had established an overall
credit facility of $12,000,000. This consists of a $500,000 revolving loan
commitment as described under Note 4 above and an $12,000,000 equipment loan
commitment. The $12,000,000 commitment amount is the maximum amount of
principal that may be outstanding under the short-term revolving equipment
loan arrangement and any long-term equipment loans owed to the bank. Long-term
equipment loans, other than "Large Equipment Term Loans", are repayable in
sixty equal monthly installments of principal and interest fixed at a rate of
2.5% or 2.25% over the five year Treasury rate at the time the loan is
established. Large Equipment Term Loans are defined as term loans up to the
aggregate maximum principal amount of $750,000, the proceeds of which are used
to finance or refinance the purchase price of booms and scissors-lifts that
are 50 feet and over in height and have a net cost exceeding $60,000. Such
Large Equipment Term Loans will be repayable over five years based on a seven
year amortization in equal monthly installments of principal and interest
fixed at a rate of 2.5% over the five year Treasury rate at the time the loan
is established.
The proceeds of all amounts borrowed under the equipment loan commitment
must be used to finance or refinance the purchase price of new rental
equipment inventory at not more than 80% of the net cost of such equipment.
Any term loan may be voluntarily prepaid in whole or in part, at any time,
provided that any voluntary prepayment in full prior to maturity must be
accompanied by a voluntary prepayment penalty of 3% if paid within one year of
original funding, 2.5% if between one and two years, 2% between two and three
years and 1% between three and four years. Mandatory prepayments, with no
penalty, must be made when any item of equipment listed as specific collateral
on a term loan is sold.
Among other covenants, the Company must maintain its principal accounts at
the lending bank, furnish the bank with audited annual financial statements
and unaudited quarterly financial statements and at all times maintain; a
tangible net worth of at least $4,500,000; a ratio of Unsubordinated
Liabilities to Tangible Net Worth of not more than 3 to 1; and a Debt Service
Coverage Ratio of at least 1.25 to 1.0.
In addition to the equipment term loans being specifically collateralized by
various items of rental equipment any amounts borrowed under the overall
credit facility are secured by a blanket security interest in
F-202
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED)
substantially all the assets of the Company and the personal guarantee of the
majority stockholder of Lift Systems, Inc.
On September 13, 1994, the Company purchased property as more fully
described in Note 2 above. The funds to close this purchase were obtained
through a purchase money mortgage secured by a promissory note with a variable
rate. Installment payments of principal and interest are payable on the first
day of each calendar month beginning November 1, 1994, and all principal and
interest must be paid on or before 25 years from the date of the Note,
September 13, 1994. The variable interest rate is determined as 2% over the
prime rate as published in the Wall Street Journal. The first business day of
each calendar quarter constitutes an interest rate change date. The initial
interest rate from September 13 through October 2, 1994, was 9.25% per annum.
On December 31, 1997 and June 30, 1998, the interest rate in effect was 10.5%
per annum. Under Section 7(a) of the Small Business Act, the U.S. Small
Business Administration has guaranteed 62.5% of this loan to the lender. This
loan is also secured by the personal guarantee of each of the three
officer/employee/stockholders of Lift Systems, Inc. The remaining principal
balance of $1,162,394 and $1,155,270 at December 31, 1997 and June 30, 1998
respectively is also included under Other Long-term Debt.
During 1997, Lift Systems, Inc. entered into a Term Lease Master Agreement
with IBM Credit Corporation to provide financing for many of the out-of-pocket
costs incurred in acquiring and converting to the Company's new central
computer system. The first funding under this arrangement was a principal
amount of $186,040 on June 26, 1997 to be repaid at a monthly total amount of
$3,720 over 60 months (through June 2002) which includes interest at an
effective annual rate of 7.67%. The second funding occurred on October 21,
1997 for a principal amount of $28,215 to be repaid at a monthly total amount
of $601 over 59 months (through September 2002) which includes interest at an
effective annual rate of 9.97%. Inasmuch as these leases provide for $1
purchase options on the hardware items, these transactions have been recorded
as financing leases in these financial statements with the assets acquired
capitalized under Computer Systems and the net principal balance owing
included under Other Long-Term Debt on the balance sheet.
Principal amounts of all long-term debt outstanding at June 30, 1998, are
due as follows for the twelve month periods ending June 30:
1999............................. $ 2,812,660
2000............................. 2,532,723
2001............................. 2,153,742
2002............................. 1,313,872
2003............................. 455,894
2004 through 2008................ 161,236
2009 through 2013................ 271,942
2014 through 2018................ 458,657
2019 through 2020................ 167,847
-----------
$10,328,573
===========
NOTE 6--COMMITMENTS
Lease Commitments
Rental expenses on all facilities leased by Lift Systems, Inc. during 1997
and through June 30, 1998 were immaterial. On February 13, 1998 Lift Systems,
Inc. entered into a lease for a branch facility in Rockford, Illinois
F-203
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED)
commencing April 1, 1998 for a fixed term of three years. Annual basic rents
are $48,000 for the first year payable $4,000 on the first day of each month,
$51,600 for the second year payable $4,300 on the first day of each month, and
$55,200 for the third year payable $4,600 on the first day of each month.
There is one option to extend the lease for two years at the same rental
amount as the third year stated above. The Company is responsible for all real
estate taxes, utility expenses, and all routine maintenance and operating
costs during the lease term and any extensions thereof. The lessor is
responsible for certain structural and mechanical systems repair and
maintenance costs. The Company has the option to purchase the leased property
during the first three years of the lease for $430,000 with a binding contract
for purchase and sale to be completed six months prior to the expiration of
the initial lease term. The Company has an additional option to purchase the
property on these same conditions during the option period at a purchase price
$445,000.
Redemption Agreement
On July 1, 1993, Lift Systems, Inc. acquired and retired all 200 shares of
stock owned by a then 20% stockholder. Concurrently with and as conditions of
the Stock Redemption Agreement, the selling stockholder entered into a
Noncompete Agreement with Lift Systems, Inc. and the Company executed a
Contingent Promissory Note for the purchase price of the stock. The potential
maximum consideration for the stock is $330,000 (all of which has been paid or
accrued as of December 31, 1997), payable in accordance with the terms and
provisions and subject to the conditions, restrictions and contingencies
provided for in the Contingent Promissory Note. The Contingent Promissory Note
provides, in general, for an annual anniversary payment to be made on or after
July 1, of each year until the total payments equal $330,000 or until July 1,
2001, at which time any amount not computed to be payable up to the Maximum
Aggregate Amount of $330,000 would be extinguished as an obligation of Lift
Systems, Inc. The amount to be paid each year is defined as the lesser of 50%
of modified net income or the Annual Amount (as defined).
For each of the years ended December 31, 1993 through 1997, the Annual
Amount was due under this agreement on or after July 1 of the following year.
At December 31, 1997, the $4,761 present value of the final payment has been
recorded in Other Accrued Liabilities and as a cost of the stock redemption.
NOTE 7--PROFIT SHARING PLAN
The Company established a qualified profit-sharing plan effective January 1,
1993, primarily to provide retirement benefits for substantially all full time
employees with a minimum of one year of service. Contributions to the plan are
made in discretionary amounts as determined by the Company's Board of
Directors, limited to the maximum amount deductible for federal income tax
purposes.
NOTE 8--SUBSEQUENT EVENTS
The Company is defendant in certain litigation matters arising in the normal
course of business. In the opinion of management, the ultimate resolution of
such matters will not have a material effect on the financial position or
results of operations of the Company.
The stockholders of Lift Systems, Inc. sold all of the outstanding stock in
the Company to United Rentals, Inc. on July 27, 1998.
F-204
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Perco Group Ltd.
We have audited the consolidated balance sheet of Perco Group Ltd. as at
December 31, 1997 and the consolidated statements of earnings, retained
earnings and changes in financial position for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Perco Group Ltd. as at
December 31, 1997 and the results of its operations and the changes in its
financial position for the year then ended in accordance with generally
accepted accounting principles in Canada.
Generally accepted accounting principles in Canada vary in certain
significant respects from generally accepted accounting principles in the
United States. Application of generally accepted accounting principles in the
United States would have affected results of operations for the year ended
December 31, 1997 and stockholders' equity as at December 31, 1997 to the
extent summarized in note 12 to the consolidated financial statements.
KPMG
Montreal, Canada
February 2, 1998, except as to note 14 which
is as of May 22, 1998
F-205
PERCO GROUP LTD.
CONSOLIDATED BALANCE SHEET
(EXPRESSED IN CANADIAN DOLLARS)
DECEMBER 31, MAY 19,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash................................................ $ 373,650 $ 530,617
Accounts receivable (note 2)........................ 4,373,577 3,256,006
Income taxes receivable............................. 183,914 693,930
Inventories......................................... 1,588,724 1,792,572
Prepaid expenses.................................... 75,770 34,217
----------- -----------
6,595,635 6,307,342
Fixed assets (note 3)................................. 12,915,691 14,791,687
Deferred financing costs, at cost less accumulated am-
ortization........................................... 85,807 74,307
----------- -----------
$19,597,133 $21,173,336
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 4).......................... $ 771,465 $ 2,013,896
Accounts payable.................................... 993,820 861,171
Accrued liabilities................................. 582,365 602,670
Current portion of long-term debt (note 5).......... 2,295,000 2,453,000
Current portion of obligation under capital leases
(note 6)........................................... 229,678 197,678
----------- -----------
4,872,328 6,128,415
Long-term debt (note 5)............................... 6,742,512 7,430,691
Obligation under capital leases (note 6).............. 171,042 150,579
Deferred income taxes................................. 1,753,145 1,823,983
Non-controlling interest.............................. 1,004,523 916,084
Redeemable shares (note 7)............................ 1,062,500 1,062,500
Shareholders' equity:
Capital stock (note 8).............................. 312,500 862,500
Retained earnings................................... 3,678,583 2,798,584
----------- -----------
3,991,083 3,661,084
Commitments (note 9)..................................
Subsequent event (note 14)............................
----------- -----------
$19,597,133 $21,173,336
=========== ===========
See accompanying notes to consolidated financial statements.
F-206
PERCO GROUP LTD.
CONSOLIDATED STATEMENT OF EARNINGS
(EXPRESSED IN CANADIAN DOLLARS)
PERIOD FROM PERIOD FROM
JANUARY 1, JANUARY 1,
YEAR ENDED 1998 1997
DECEMBER 31, THROUGH MAY THROUGH MAY
1997 19, 1998 19, 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Rental income........................... $14,509,900 $3,806,126 $4,190,553
Sales................................... 4,334,959 1,950,448 1,584,392
Gain on disposal of fixed assets........ 647,352 231,616 324,940
----------- ---------- ----------
19,492,211 5,988,190 6,099,885
Direct rental expenses, excluding
equipment rental depreciation............ 5,659,124 1,664,660 1,931,926
Depreciation on rental equipment.......... 1,776,368 747,819 660,160
Cost of goods sold........................ 3,344,842 1,484,590 1,263,506
----------- ---------- ----------
10,780,334 3,897,069 3,855,592
----------- ---------- ----------
Earnings before undernoted items.......... 8,711,877 2,091,121 2,244,293
Operating expenses:
Selling and administrative expenses..... 5,516,606 2,305,247 2,097,712
Non-rental depreciation................. 411,626 134,082 152,915
Interest on long-term debt and
obligation under capital leases........ 837,963 348,449 279,915
Other financial expenses................ 37,907 13,683 43,915
----------- ---------- ----------
6,804,102 2,801,461 2,574,457
----------- ---------- ----------
Earnings (loss) before income taxes and
non-controlling interest................. 1,907,775 (710,340) (330,164)
Income taxes:
Current (notes 10 and 11)............... 767,053 (362,740) (126,927)
Deferred................................ 103,371 70,838 5,000
----------- ---------- ----------
870,424 (291,902) (121,927)
----------- ---------- ----------
Earnings (loss) before non-controlling
interest................................. 1,037,351 (418,438) (208,237)
Non-controlling interest.................. 131,507 (88,439) (52,524)
----------- ---------- ----------
Net earnings (loss)....................... $ 905,844 $ (329,999) $ (155,713)
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-207
PERCO GROUP LTD.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(EXPRESSED IN CANADIAN DOLLARS)
PERIOD FROM
JANUARY 1,
YEAR ENDED 1998
DECEMBER 31, THROUGH MAY
1997 19, 1998
------------ -----------
(UNAUDITED)
Retained earnings, beginning of period................ $2,772,739 $3,678,583
Net earnings (loss)................................... 905,844 (329,999)
Transfer to paid-up capital of the outstanding Class B
shares (note 8)...................................... -- (550,000)
---------- ----------
Retained earnings, end of period...................... $3,678,583 $2,798,584
========== ==========
See accompanying notes to consolidated financial statements.
F-208
PERCO GROUP LTD.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(EXPRESSED IN CANADIAN DOLLARS)
PERIOD FROM PERIOD FROM
JANUARY 1, JANUARY 1,
YEAR ENDED 1998 1997
DECEMBER THROUGH MAY THROUGH MAY
31, 1997 19, 1998 19, 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash provided by (used in):
Operations:
Net earnings (loss)................... $ 905,844 $ (329,999) $ (155,713)
Items not involving cash:
Gain on disposal of fixed assets..... (647,352) (231,616) (324,940)
Depreciation of fixed assets......... 2,187,994 881,901 813,074
Amortization of deferred charges..... 27,600 11,500 9,200
Deferred income taxes................ 103,371 70,838 5,000
Non-controlling interest............. 131,507 (88,439) (52,524)
Net change in non-cash operating
working capital:
Accounts receivable.................. (296,315) 1,117,571 702,850
Income taxes receivable.............. (183,914) (510,016) (288,650)
Inventories.......................... (168,676) (203,848) (308,566)
Prepaid expenses..................... (27,975) 41,553 (97,906)
Accounts payable..................... 14,272 (132,649) 309,283
Accrued liabilities.................. 56,010 20,305 82,393
Income taxes payable................. (165,307) -- (165,307)
----------- ----------- -----------
1,937,059 647,101 528,194
Financing:
Increase in long-term debt............ 2,199,387 1,593,853 1,539,000
Decrease in long-term debt............ (2,008,686) (747,674) (498,098)
Decrease in obligation under capital
leases............................... (163,372) (52,463) (56,896)
----------- ----------- -----------
27,329 793,716 984,006
Investing:
Acquisition of fixed assets........... (3,561,771) (2,982,984) (2,297,799)
Proceeds of disposal of fixed assets.. 895,007 456,703 420,142
----------- ----------- -----------
(2,666,764) (2,526,281) (1,877,657)
----------- ----------- -----------
Decrease in cash........................ (702,376) (1,085,464) (365,457)
Cash (bank indebtedness net of cash),
beginning of period.................... 304,561 (397,815) 304,561
----------- ----------- -----------
Bank indebtedness net of cash, end of
period................................. $ (397,815) $(1,483,279) $ (60,896)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-209
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
YEAR ENDED DECEMBER 31, 1997
(THE INFORMATION AT MAY 19, 1998 AND FOR THE PERIOD FROM JANUARY 1, THROUGH
MAY 19, 1998 AND 1997 IS UNAUDITED.)
The Company, incorporated under Part 1A of the Quebec Companies Act, is
involved primarily in the rental of industrial and building equipment in
Canada.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
The accompanying consolidated financial statements are presented in
accordance with accounting principles generally accepted in Canada (Canadian
GAAP).
As described in note 14, the Company was acquired by United Rentals of
Canada (Quebec), Inc. These financial statements are prepared on the basis of
their predecessor historical costs and do not include any adjustments that may
result from the acquisition of the Company by United Rentals of Canada
(Quebec), Inc.
(b) Basis of consolidation:
The consolidated financial statements include the accounts of Perco Group
Ltd. and its subsidiary, 2633-4680 Quebec Inc.
(c) Interim financial statements:
The accompanying balance sheet at May 19, 1998 and the statements of
earnings, retained earnings and changes in financial position for the period
from January 1, through May 19, 1998 and 1997 are unaudited and have been
prepared on a basis that is consistent with the audited consolidated financial
statements included herein. In the opinion of management, such unaudited
financial statements include all adjustments necessary to present fairly the
information set forth therein, which consist solely of normal recurring
adjustments. The results of operation for such interim periods are not
necessarily indication of results for a full year.
(d) Inventories:
Goods and equipment for resale and supplies are valued at the lower of cost
and net realizable value. Spare parts and supplies are valued at the lower of
cost and replacement cost less an allowance for obsolescence. Cost is
determined using the first in, first out method.
(e) Fixed assets:
Fixed assets are stated at cost. Depreciation and amortization are provided
using the following methods and annual rates:
ASSET METHOD RATE/PERIOD
----- ----------------- -------------
Buildings.................................. Declining balance 4%
Rental equipment........................... Straight-line 6 2/3% to 100%
Cars and trucks............................ Declining balance 30%
Furniture and fixtures..................... Declining balance 20%
Leasehold improvements..................... Straight-line 5 years
Computer hardware and software............. Declining balance 30%
Cars and trucks under capital leases....... Declining balance 30%
F-210
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Deferred financing costs:
The costs of obtaining bank and other debt financing are deferred and
amortized on a straight-line basis over the effective life of the debt to
which they relate.
(g) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACCOUNTS RECEIVABLE:
Accounts receivable are net of allowance for doubtful accounts of $380,837
at December 31, 1997 and $443,318 at May 19, 1998.
3. FIXED ASSETS:
DECEMBER 31, MAY 19,
1997 1998
------------ -----------
Land................................................ $ 901,503 $ 901,503
Buildings........................................... 2,439,276 2,446,545
Rental equipment.................................... 23,225,446 25,282,753
Cars and trucks..................................... 1,376,234 2,109,987
Furniture and fixtures.............................. 466,277 476,007
Leasehold improvements.............................. 752,424 809,584
Computer hardware and software...................... 382,148 402,221
Cars and trucks under capital leases................ 1,134,888 460,015
----------- -----------
30,678,196 32,888,615
Less accumulated depreciation and amortization...... 17,762,505 18,096,928
----------- -----------
$12,915,691 $14,791,687
=========== ===========
4. BANK INDEBTEDNESS GUARANTEES:
The bank indebtedness and the long-term debt of the Company described in
note 5 are secured by hypothecs on inventories and accounts receivable, a
movable hypothec of $10,700,000 on all corporeal and incorporeal movable
property, including a hypothec of $10,700,000 on the all-risks insurance
coverage relating to the assets pledged as security to the bank.
F-211
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
5. LONG-TERM DEBT:
DECEMBER 31, MAY 19,
1997 1998
------------ ----------
Revolving term loan maturing in 2000, bearing interest
at the bank's Canadian base rate plus 1.5%, payable
in 24 monthly instalments of principal of $84,524,
with a final payment covering the principal balance.. $2,178,437 $2,393,086
Term loan maturing in 2000, bearing interest at the
bank's Canadian base rate plus 1%, payable in 35
equal monthly instalments of $20,286, (principal
only) with a final payment of $507,159............... 1,217,174 1,136,032
Loan from the Federal Business Development Bank
maturing in 1999, bearing interest at the bank's base
rate plus 2.5% and additional interest equal to 0.25%
of the Company's total annual revenue, payable in
monthly instalments of $16,700 (principal only)...... 388,200 321,400
Term loan maturing in 2001, bearing interest at the
bank's Canadian base rate plus 1%, payable in 47
equal monthly instalments of $18,335, (principal
only) with a final payment of $458,325............... 1,320,070 1,246,730
Term loan maturing in 2002, bearing interest at the
bank's Canadian base rate plus 1%, payable in 59
monthly instalments of $25,000 (principal only), with
a final payment of $625,000 covering the principal
balance.............................................. 2,100,000 2,000,000
Credit facility for acquisition of fixed assets
convertible in December 1998 into a term loan
maturing in 2003, bearing interest at the bank's
Canadian base rate plus 1%, payable in equal monthly
instalments (principal only), with a final payment to
be determined covering the principal balance......... -- 729,000
First mortgage loan in the amount of $1,000,000 and
second mortgage in the amount of $450,000 secured by
land and buildings with a net book value of
$1,222,596 as at December 31, 1997, 8.75%, payable in
monthly instalments of $15,137 (principal and
interest combined), renegotiable in December 1999,
maturing in April 2004............................... 871,903 835,826
First mortgage loan in the amount of $1,200,000
secured by land and a building with a net book value
of $1,113,832 as at December 31, 1997, 7.3%, payable
in monthly instalments of $10,770 (principal and
interest combined), renegotiable in December 1999,
maturing in December 2005............................ 784,480 753,905
Term loan maturing in 2003, bearing interest at the
bank's Canadian base rate plus 1% in 60 monthly
instalments of $2,893 (principal only), with a final
payment of $69,420 covering the principal balance.... -- 237,214
Conditional sale contracts maturing in 2001 and 2002,
bearing interest at various rates from 7% to 8.70%,
payable in monthly instalments of $4,274, including
interest. These debts are secured by trucks and
equipment............................................ 177,248 230,498
---------- ----------
9,037,512 9,883,691
Less current portion of long-term debt................ 2,295,000 2,453,000
---------- ----------
$6,742,512 $7,430,691
========== ==========
The term loans and the Federal Business Development Bank loan are secured by
various assets, as described in note 4. Under the term loan agreements, the
Company is committed to maintain certain financial ratios.
F-212
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
5. LONG-TERM DEBT (CONTINUED):
Repayments of the long-term debt for each of the next five years are as
follows:
DECEMBER 31, MAY 19,
1997 1998
------------ ---------
1998.................................................. $2,295,000 $ --
1999.................................................. 2,210,000 2,453,000
2000.................................................. 1,573,000 2,530,000
2001.................................................. 1,240,000 1,608,000
2002.................................................. 1,165,000 1,338,000
2003.................................................. -- 1,431,000
6. OBLIGATION UNDER CAPITAL LEASES:
Total future minimum payments under capital leases are as follows as at:
DECEMBER 31, MAY 19,
1997 1998
------------ --------
1998.................................................. $263,371 $ --
1999.................................................. 100,242 228,410
2000.................................................. 62,846 98,401
2001.................................................. 26,066 51,171
2002.................................................. -- 5,641
-------- --------
Total minimum lease payments.......................... 452,525 383,623
Less amount representing interest at rates varying
from 9% to 12.2%..................................... 51,805 35,366
-------- --------
Balance of obligation................................. 400,720 348,257
Less current portion.................................. 229,678 197,678
-------- --------
Obligation under capital leases....................... $171,042 $150,579
======== ========
7. REDEEMABLE SHARES:
An unlimited number of authorized:
Class C shares, voting, without par value, mandatorily redeemable by the
Company at death of holder
Class D shares, non-voting, without par value, conveying one monthly
preferred, non-cumulative 1% dividend on the redemption value, redeemable
at the option of the holder and issuer at the paid-up capital and in the
case of Class A shares being converted into Class D shares equal to the
difference between the paid-up capital and the fair market value at the
time of exchange
Class E shares, non-voting, without par value, conveying one monthly
preferred, non-cumulative 1% dividend on the redemption value, redeemable
at the option of the holder and issuer at the fair market value of the
consideration received at issuance
Class F shares, non-voting, without par value, conveying one yearly,
preferred, non-cumulative dividend of $1 per share, redeemable at the
option of the holder and issuer at the paid-up capital
Class G shares, non-voting, without par value, conveying one yearly,
preferred, non-cumulative dividend of $1 per share, redeemable at the
option of the issuer at the paid-up capital
F-213
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
7. REDEEMABLE SHARES (CONTINUED):
Issued and fully paid:
DECEMBER 31, MAY 19,
1997 1998
------------ ----------
62,500 Class D shares, redeemable at $62,500......... $ 62,500 $ 62,500
100,000 Class G shares, redeemable at $1,000,000..... 1,000,000 1,000,000
---------- ----------
$1,062,500 $1,062,500
========== ==========
8. CAPITAL STOCK:
An unlimited number of authorized:
Class A shares, voting, participating, without par value, convertible
into Class D shares only with the joint approval of the Board and positive
vote of Class A and D holders
Class B shares, voting, participating, without par value
Issued and fully paid:
DECEMBER 31, MAY 19,
1997 1998
------------ --------
312,500 Class A shares (250,000 shares on May 19,
1998)............................................... $312,500 $250,000
62,500 Class B shares ............................... -- 612,500
-------- --------
$312,500 $862,500
======== ========
During the period ended May 19, 1998, 62,500 Class A shares were converted
into 62,500 Class B shares and the paid-up capital of these shares was
increased by $550,000.
9. COMMITMENTS:
The Company is committed under lease contracts for premises expiring at
various dates from January 1, 1998 to January 31, 2001. The minimum lease
payments for each of the next four years are as follows:
DECEMBER 31, MAY 19,
1997 1998
------------ --------
1998................................................... $163,000 $ --
1999................................................... 153,000 176,000
2000................................................... 61,000 139,000
2001................................................... 4,000 58,000
-------- --------
$381,000 $373,000
======== ========
F-214
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
10. INCOME TAXES:
The effective income tax rate differs from the statutory rate that would be
obtained by applying the combined basic federal and provincial tax rate to
earnings before income taxes. These differences result from the following
items:
DECEMBER 31, MAY 19, MAY 19,
1997 1998 1997
------------ ------- -------
Combined basic federal and provincial tax rate.... 38.7% 38.7% 38.7%
Increase (decrease) in income tax rate resulting
from:
Permanent differences as a result of purchase
accounting and non-deductible expenses......... (4.8) 2.4 3.4
Previous years' reassessment.................... 11.7 -- --
Manufacturing and processing profits deduction.. -- -- (5.2)
---- ---- ----
Effective income tax rate......................... 45.6% 41.1% 36.9%
==== ==== ====
11. INCOME TAXES REASSESSMENT:
The Company has been reassessed for the tax credits (manufacturing and
processing profits deduction) it claimed in 1996 and in respect of the years
1994 to 1996 inclusive. The reassessment amounts to $224,000 and is included
in the December 31, 1997 current income taxes.
12. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
The company follows Canadian generally accepted accounting principles
(Canadian GAAP) which are different in some respects from those applicable in
the United States (U.S. GAAP).
(a) The following table presents a reconciliation of stockholder's equity
from Canadian GAAP to U.S. GAAP:
PERIOD
FROM
JANUARY 1,
1998
YEAR ENDED THROUGH
DECEMBER 31, MAY 19,
1997 1998
------------ ----------
Stockholders' equity:
Per Canadian GAAP................................. $3,991,083 $3,661,084
Decrease in fixed assets net (i).................. (820,253) (721,123)
Decrease in deferred income taxes (ii)............ 784,933 743,298
---------- ----------
Per U.S. GAAP....................................... $3,955,763 $3,683,259
========== ==========
(i) Under Canadian GAAP, as a result of negative goodwill from a business
combination accounted for as a purchase, the Company reduced the value of
fixed assets. Under U.S. GAAP, assets acquired in a purchase business
combination are recorded at their gross fair values, with separate deferred
tax assets and liabilities recognized for the tax effect of the differences
between such fair values and the tax bases.
(ii) The income tax provision in Canada is based on the deferral method
and adjustments are generally not made for changes in income tax rates.
Under U.S. GAAP, deferred tax liabilities are measured using the enacted
tax rate expected to apply to taxable income in the periods in which the
deferred tax asset on liability is expected to be settled. A U.S. GAAP
difference arises for the Company due to timing differences resulting from
the application of the purchase accounting adjustments described above.
F-215
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
12. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED):
(b) The following table presents a reconciliation of net earnings from
Canadian GAAP to U.S. GAAP:
PERIOD FROM PERIOD FROM
JANUARY 1, 1998 JANUARY 1, 1997
YEAR ENDED THROUGH THROUGH
DECEMBER 31, MAY 19, MAY 19,
1997 1998 1997
------------ --------------- ---------------
Net (loss) earnings under
Canadian GAAP................. $ 905,844 $(329,999) $(155,713)
Income tax adjustment under the
asset and liability method.... (154,252) (41,635) (36,540)
Lower depreciation on fixed
assets........................ 258,546 99,130 99,389
---------- --------- ---------
Net earnings (loss) under U.S.
GAAP.......................... $1,010,138 $(272,504) $ (92,864)
========== ========= =========
(c) Statement of change in financial position:
Under U.S. GAAP, a statement of cash flow is required while a statement of
changes in financial position is required under Canadian GAAP. There are no
differences in the amounts presented in the accompanying statement of changes
in financial position from a cash flow statement prepared under U.S. GAAP,
except for the presentation of bank indebtedness. Under Canadian GAAP, cash in
the statement of changes in financial position is shown net of bank
indebtedness. Under U.S. GAAP, the net change in bank indebtedness, with
original maturities of 90 days or less, is presented as a financing activity.
PERIOD FROM PERIOD FROM
JANUARY 1, 1998 JANUARY 1, 1997
YEAR ENDED THROUGH THROUGH
DECEMBER 31, MAY 19, MAY 19,
1997 1998 1997
------------ --------------- ---------------
Financing activity under
Canadian GAAP................ $ 27,329 $ 793,716 $ 984,006
Bank indebtedness increase.... 724,833 1,242,431 353,368
-------- ---------- ----------
Financing activity under U.S.
GAAP......................... $752,162 $2,036,147 $1,337,374
======== ========== ==========
The reclassification results
in:
Cash at end of year under
U.S. GAAP.................. $373,650 $ 530,617 $ 339,104
======== ========== ==========
13. FINANCIAL INSTRUMENTS:
(a) Fair value:
The carrying value of the Company's accounts receivable, bank indebtedness,
accounts payable and accrued liabilities approximates their fair values due to
their demand nature or relatively short periods to maturity.
The fair value of the Company's long-term debt and obligation under capital
leases has been determined to be equal to their carrying values, as the
current financing arrangements represent the borrowing rate presently
available to the Company for loans with similar terms and maturities.
(b) Credit risk:
Financial instruments that potentially subject the Company to significant
concentration risk consist principally of trade accounts receivable. Credit
risk with respect to trade accounts receivable is generally diversified due to
the large number of entities comprising the Company's customer base. The
Company performs ongoing credit evaluations of its customers' financial
condition. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions regarding the provision for doubtful accounts. However, actual
results could differ from those estimates.
F-216
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
14. SUBSEQUENT EVENT:
On May 21, 1998, all of the outstanding Class G shares were redeemed for a
cash consideration of $1,000,000.
On May 19, 1998 the Company entered into a stock purchase agreement with
United Rentals, Inc. Under the terms of the stock purchase agreement, the
transaction closed on May 22, 1998 and all of the remaining outstanding
capital stock described in notes 7 and 8 and all the shares held in 2633-4680
Quebec Inc. by the non-controlling interest were acquired by United Rentals of
Canada (Quebec), Inc. after Perco Group Ltd. amalgamated with its subsidiary,
2633-4680 Quebec Inc., and all outstanding shares were converted into shares
of the amalgamated company.
F-217
AUDITORS' REPORT
To the Directors of
Reitzel Rentals Ltd.
We have audited the balance sheet of Reitzel Rentals Ltd. as at February 28,
1998 and the statements of operations, shareholders' equity and cash flow for
the year then ended. These audited financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at February 28, 1998 and
the results of its operations and cash flows for the year then ended in
accordance with generally accepted accounting principles in the United States.
July 27, 1998
PricewaterhouseCoopers Chartered Accountants
F-218
REITZEL RENTALS LTD.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
FEBRUARY
28, MAY 31,
1998 1998
----------- -----------
(UNAUDITED)
ASSETS
Cash................................................... $ 46,301 $ --
Accounts receivable--trade, net of allowance for doubt-
ful accounts
of $84,980 ($93,292 as of May 31, 1998)............... 2,033,118 2,204,300
Inventory.............................................. 1,175,302 1,833,371
Rental equipment, net (Note 3)......................... 11,003,382 11,906,195
Property and equipment, net (Note 4)................... 2,264,061 1,552,663
Other assets........................................... 1,088,343 1,322,032
----------- -----------
$17,610,507 $18,818,561
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank operating line (Note 5)........................... $ -- $ 891,005
Accounts payable--trade................................ 860,221 1,969,854
Accrued management and staff bonuses................... 2,014,079 503,070
Other liabilities...................................... 348,468 1,415,692
Long-term debt (Note 6)................................ 5,423,076 5,008,469
Due to shareholders and related party (Note 7)......... 707,278 280,058
Deferred income taxes (Note 9)......................... 2,778,000 2,931,000
----------- -----------
12,130,122 12,999,148
Mandatorily redeemable shares (Note 8)................. 947,990 947,990
Commitments (Note 10)
Share capital (Note 8)................................. 56,050 56,050
Retained earnings...................................... 4,475,345 4,815,373
----------- -----------
4,531,395 4,871,423
----------- -----------
$17,610,507 $18,818,561
=========== ===========
See accompanying notes to financial statements.
F-219
REITZEL RENTALS LTD.
STATEMENTS OF OPERATIONS
(IN CANADIAN DOLLARS)
YEAR ENDED THREE MONTHS THREE MONTHS
FEBRUARY ENDED ENDED
28, MAY 31, MAY 31,
1998 1997 1998
---------- ------------ ------------
(UNAUDITED)
Revenues:
Equipment rentals....................... $9,695,641 $1,832,811 $2,278,718
Sales of rental equipment............... 1,544,982 517,409 303,742
Sales of new equipment, merchandise and
other revenues......................... 5,977,848 1,712,996 1,469,432
---------- ---------- ----------
Total revenues........................ 17,218,471 4,063,216 4,051,892
Cost of revenues:
Cost of equipment rentals, excluding de-
preciation............................. 3,639,956 688,077 855,481
Depreciation of rental equipment........ 857,104 214,276 214,276
Cost of rental equipment sales.......... 668,717 223,951 131,469
Cost of new equipment and merchandise
sales and other operating costs........ 4,232,725 1,212,918 1,040,458
---------- ---------- ----------
Total cost of revenues................ 9,398,502 2,339,222 2,241,684
---------- ---------- ----------
Gross profit............................. 7,819,969 1,723,994 1,810,208
Selling, general and administrative ex-
penses.................................. 3,154,852 1,031,807 732,798
Non-rental depreciation and amortiza-
tion.................................... 376,240 76,585 76,400
---------- ---------- ----------
Operating income......................... 4,288,877 615,802 1,001,010
Interest expense......................... 515,705 115,218 197,154
Management and staff bonuses............. 2,014,445 -- --
(Gain) loss on sale of property and
equipment............................... (363,928) (362,784) 31,847
---------- ---------- ----------
Income before provision for income tax-
es...................................... 2,123,015 863,368 772,009
Provision for income taxes............... 918,470 385,000 344,000
---------- ---------- ----------
Net income............................... $1,204,545 $ 478,368 $ 428,009
========== ========== ==========
See accompanying notes to financial statements.
F-220
REITZEL RENTALS LTD.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN CANADIAN DOLLARS)
COMMON RETAINED
SHARES EARNINGS TOTAL
------- ---------- ----------
Balance, March 1, 1997.......................... $56,050 $3,270,800 $3,326,850
Net income...................................... -- 1,204,545 1,204,545
------- ---------- ----------
Balance, February 28, 1998...................... 56,050 4,475,345 4,531,395
Cash dividends.................................. -- (87,981) (87,981)
Net income (unaudited).......................... -- 428,009 428,009
------- ---------- ----------
Balance, May 31, 1998 (unaudited)............... $56,050 $4,815,373 $4,871,423
======= ========== ==========
See accompanying notes to financial statements.
F-221
REITZEL RENTALS LTD.
STATEMENTS OF CASH FLOWS
(IN CANADIAN DOLLARS)
YEAR ENDED THREE MONTHS THREE MONTHS
FEBRUARY ENDED ENDED
28, MAY 31, MAY 31,
1998 1997 1998
----------- ------------ ------------
(UNAUDITED)
Cash flows from operating activities:
Net income............................. $ 1,204,545 $ 478,368 $ 428,009
Items not requiring cash
Amortization.......................... 1,233,344 290,661 290,676
Gain on sale of rental equipment...... (876,265) (293,458) (172,273)
(Gain) loss on disposal of property
and equipment........................ (363,928) (362,784) 31,847
Deferred income taxes................. 842,000 211,000 153,000
Changes in non-cash operating items
Accounts receivable--trade............ (175,759) 114,617 (171,182)
Inventory............................. (122,884) (668,672) (658,069)
Accounts payable--trade and other lia-
bilities............................. 554,478 (130,275) 1,095,828
----------- --------- -----------
2,295,531 (360,543) 997,836
Cash flows from investing activities
Purchase of property and equipment..... (161,975) (20,188) (90,017)
Proceeds of disposal of property and
equipment............................. 309,604 299,604 189,793
Proceeds on sale of rental equipment... 1,544,982 517,409 303,742
Purchase of rental equipment........... (1,863,221) (689,756) (502,709)
(Increase) decrease in other assets.... 20,956 40,634 (160,314)
----------- --------- -----------
(149,654) 147,703 (259,505)
Cash flows from financing activities
Increase in bank operating line........ -- 877,892 891,005
Repayment of long-term debt............ (2,222,275) (593,973) (1,160,436)
Increase (decrease) in shareholder
loans................................. 122,699 (71,079) (427,220)
Cash dividend.......................... -- -- (87,981)
----------- --------- -----------
(2,099,576) 212,840 (784,632)
----------- --------- -----------
Net cash increase (decrease) during the
period................................. 46,301 -- (46,301)
Cash beginning of period................ -- -- 46,301
----------- --------- -----------
Cash end of period...................... $ 46,301 $ -- $ --
=========== ========= ===========
See accompanying notes to financial statements.
F-222
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
1.ORGANIZATION AND BASIS OF PRESENTATION
Reitzel Rentals Ltd. (the "Company") was incorporated in January 1987 under
the laws of Ontario, Canada. The Company rents a broad array of equipment to a
diverse customer base that includes construction industry participants,
industrial companies, homeowners and others in Ontario. 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.
Comparative financial statements have not been presented as these financial
statements have been prepared solely for inclusion in the offering memorandum
issued by United Rentals Holdings, Inc. and management of United Rental
Holdings, Inc. have advised that comparative information is not required.
The financial statements have been prepared in accordance with United States
Generally Accepted Accounting Principles. All amounts are in Canadian dollars.
2.SIGNIFICANT ACCOUNTING POLICIES
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. Maintenance and repair costs are charged to operations as
incurred.
Revenue recognition
Revenue related to the sale of equipment is recognized at the time of sale
which coincides with delivery. Revenue related to rental equipment is
recognized over the contract term on a straight-line basis.
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.
Maintenance and repair costs are charged to operations as incurred.
Fair value of financial instruments
The carrying amounts reported in the balance sheet for accounts receivable,
accounts payable, and other liabilities approximate fair value due to the
immediate to short-term maturity of these financial instruments. The fair
value of long-term debt and amounts due to shareholders and related party are
determined using current interest rates for similar instruments as of period
ended.
F-223
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
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.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited
because a large number of customers make up the Company's customer base. The
Company controls credit risk through credit approvals, credit lines, and
monitoring procedures.
Twelve customers represent ten percent of revenues in the year ended
February 28, 1998 (nine customers as of May 31, 1998 and one as of May 31,
1997) and twelve customers represented ten percent of accounts receivable--
trade as of February 28, 1998 (twelve customers as of May 31, 1998 and eleven
as of May 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." The Company is required to
adopt the provisions of these Statements in fiscal year 1999. The Company is
currently evaluating the reporting formats recommended under both these
Statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employer Disclosure about Pensions and other Post Retirement Benefits" and
SFAS No. 133, "Accounting for Derivatives and Other Hedging Activities." The
Company is currently evaluating the effects of these Statements.
Interim financial statements
The accompanying balance sheet and statement of shareholders' equity at May
31, 1998 and the statement of operations, shareholders' equity and cash flows
for the three months ended May 31, 1997 and 1998 are unaudited and have been
prepared on a basis that is consistent with the audited financial statements
included herein. In the opinion of management, such unaudited financial
statements include all adjustments necessary to present fairly the information
set forth therein, which consist solely of normal recurring adjustments. The
results of operations for such interim periods are not necessarily indicative
of results for the full year.
F-224
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
3.RENTAL EQUIPMENT
MAY 31,
FEBRUARY 28, 1998 1998
----------------- -----------
(UNAUDITED)
Rental equipment.............................. $13,186,212 $13,769,978
Amortization.................................. (2,182,830) (1,863,783)
----------- -----------
Net......................................... $11,003,382 $11,906,195
=========== ===========
4.PROPERTY AND EQUIPMENT
FEBRUARY 28, 1998
----------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---------- ------------ ----------
Land..................................... $ 370,717 $ -- $ 370,717
Buildings................................ 2,268,773 1,328,578 940,195
Vehicles................................. 1,277,240 933,579 343,661
Furniture and equipment.................. 1,055,267 784,614 270,653
Radio equipment.......................... 156,124 136,902 19,222
Pavement................................. 122,914 47,687 75,227
Leasehold improvements................... 476,480 240,887 235,593
Electric signs........................... 36,647 27,854 8,793
---------- ---------- ----------
$5,764,162 $3,500,101 $2,264,061
========== ========== ==========
MAY 31, 1998
----------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---------- ------------ ----------
(UNAUDITED)
Land..................................... $ 90,892 $ -- $ 90,892
Buildings................................ 1,632,137 1,048,338 583,799
Vehicles................................. 1,208,838 905,959 302,879
Furniture and equipment.................. 988,582 734,813 253,769
Radio equipment.......................... 156,124 138,103 18,021
Pavement................................. 115,414 46,153 69,261
Leasehold improvements................... 477,910 251,813 226,097
Electric signs........................... 31,558 23,613 7,945
---------- ---------- ----------
$4,701,455 $3,148,792 $1,552,663
========== ========== ==========
5.AVAILABLE LINE OF CREDIT
The Company has available a $1,500,000 line of credit that bears interest of
prime rate plus 3/4% per annum which was 5.65% as of February 28, 1998 and is
secured, together with Bank Loans (Note 6) by a general assignment of accounts
receivable--trade, a general security agreement and a fixed charge debenture
of $4,000,000 over all property and equipment subordinated to the First
Mortgages in the amount of $299,000. No amount was outstanding under the line
of credit at February 28, 1998 and no standby fees apply.
F-225
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
6.LONG-TERM DEBT
FEBRUARY MAY 31,
28, 1998 1998
---------- -----------
(UNAUDITED)
Equipment Loans, secured by the equipment financed,
repayable in monthly instalments of principal and
interest at floating and fixed annual rates ranging
from 4.0% to 10.35%, maturing in 1998 to 2002...... $2,296,720 $2,149,606
Bank Loans, secured by a fixed charge over the
Company's land and buildings, including a general
assignment of accounts receivable and acknowledged
assignment of fire insurance coverage, repayable in
monthly instalments of principal and interest at
floating and fixed annual rates ranging from 7.45%
demand in certain circumstances.................... 1,850,245 2,105,152
First Mortgages, secured by certain of the Company's
real estate, repayable in monthly instalments of
principal and interest at annual rates ranging from
8.25% to 11.875%, maturing 1998 to 1999............ 835,300 378,103
Note Payable, repayable in monthly instalments of
principal and interest of $8,155 per month at an-
nual interest rate of 7.2%, maturing July 2002..... 375,185 375,608
Promissory Note, repayable in monthly principal pay-
ments of $4,375 plus interest, calculated monthly
at prime plus 1%, maturing in May 1999............. 65,626 --
---------- ----------
$5,423,076 $5,008,469
========== ==========
Cash interest paid on long-term debt during the period amounted to $447,326
($159,950 in the three months ended May 31, 1998 and $115,218 in the three
months ended May 31, 1997).
Approximate principal payments as of February 28, 1998 due with the next
five years are as follows:
1999.............................................................. $1,806,860
2000.............................................................. 1,599,398
2001.............................................................. 1,090,079
2002.............................................................. 293,154
2003.............................................................. 110,325
7.DUE TO SHAREHOLDERS AND RELATED PARTY
FEBRUARY 28, MAY 31,
1998 1998
------------ -----------
(UNAUDITED)
Notes payable to shareholders, no specified repay-
ment terms, with interest calculated monthly at
the Company's average annual cost of borrowing and
paid annually within six months of the year-
end............................................... $699,278 $280,058
Note payable to affiliated company, interest-free
with no specified repayment terms................. 8,000 --
-------- --------
$707,278 $280,058
======== ========
In the period ended May 31, 1998, obligations to certain shareholders were
satisfied by the transfer of the other assets and certain equipment at fair
market value as determined by independent approval.
F-226
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
8.SHARE CAPITAL
The Company is authorized to issue 251 non-voting, Class A shares and no
Class A shares were outstanding (none outstanding as of May 31, 1998). The
Class A shares rank in priority over Class B and common shares. Dividends are
cumulative on the Class A shares and are payable at a rate that will provide
the holder, assuming the holder is in the highest Ontario personal income tax
bracket, with the same after-tax rate of return on the Class A share dividend
as if the holder had received interest from a Canadian Chartered Bank at the
average of that Bank's prime lending rate each month for the twelve months in
the Company's fiscal year minus 20% of that average rate. The dividends paid
on Class A shares in any year may not exceed net earnings of the Company or
ten percent of the retained earnings of the Company as of the preceding fiscal
year-end.
The Class A shares are redeemable and retractable at the price of $470 per
Class A share (the "Redemption Price") subject to certain restrictions. The
number of Class A shares to be redeemed is limited (the "Redemption Limit") in
any one year to one-eighteen of $117,970 or the lesser of one-third of the
After-Tax Net Profits of the Company for the fiscal year previous to the
redemption notice and the After-Tax Net Profits of the Company for the fiscal
year previous to the redemption notice less dividends paid on Class A shares
in that previous fiscal year or an amount that will not contravene any banking
covenants the Company entered into at that particular time. Where the
redemption request exceeds the Redemption Limit, the Company will only redeem
Class A shares such that the total of Class A shares redeemed and the
dividends paid on Class A shares in the year of request falls below the
Redemption Limit. Notwithstanding the foregoing, all Class A shares must be
redeemed before December 31, 2007. Class A shareholders are entitled to the
same redemption amount as Class B shareholders in any one year without regard
to the Redemption Limit. Class A shares are redeemable only at the end of the
fiscal year.
The Company is authorized to issue 2,017 non-voting Class B shares of which
2,017 were outstanding at February 28, 1998 (2,017 outstanding as of May 31,
1998). The Class B shares are subordinate to Class A shares but rank in
priority to common shares. Class B shares are entitled to non-cumulative
dividends at a rate of 10% of the Redemption Amount, being $470 per Class B
share. The Aggregate Redemption Amount of Class A shares is $947,990. The
number of Class B shares redeemable in any one year is limited to an amount
that will not contravene any banking covenants the Company entered into at
that particular time. Class B shares are redeemable only at the end of the
fiscal year.
The Class B shares have been disclosed as a liability of the Company at
their redemption amount of $947,990 as Mandatorily Redeemable Shares with a
corresponding charge at their date of issue.
The Company is authorized to issue 37,000 common shares at no par value of
which 3,250 were outstanding at February 28, 1998 (3,250 were outstanding as
of May 31, 1998).
9.INCOME TAXES
FEBRUARY 28, MAY 31, MAY 31,
1998 1997 1998
------------ ------- -------
(UNAUDITED)
Combined federal and provincial income tax
rate......................................... 44.6% 44.6% 44.6%
Reduction by the small business deduction..... (2.0) -- --
Other differences............................. 0.6 -- --
---- ---- ----
Effective income tax rate..................... 43.3% 44.6% 44.6%
==== ==== ====
The Company is taxable in one jurisdiction.
F-227
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
The provision for income taxes consists of current tax expense of $76,470
($191,000 as of May 31, 1998 and $174,000 as of May 31, 1997) and deferred tax
expense of $842,000 ($153,000 as of May 31, 1998 and $211,000 as of May 31,
1997).
The deferred tax credit balance of $2,778,000 ($2,931,000 as of May 31, 1998
and $2,147,000 as of May 31, 1997) represents amounts deducted for tax
depreciation in excess of accounting depreciation of $6,229,000 ($6,572,000 as
of May 31, 1998 and $4,814,000 as of May 31, 1997). There are no other
differences in accounting and tax basis.
10.LEASE COMMITMENTS
Minimum rental commitments under operating leases are as follows:
1999................................................................ $442,000
2000................................................................ 420,000
2001................................................................ 374,000
2002................................................................ 300,000
2003................................................................ 264,000
Operating lease expense for the year ended February 28, 1998 was $356,000
($110,000 as of May 31, 1998 and $89,000 as of May 31, 1997).
11.SUPPLEMENTAL CASH DISCLOSURES
FEBRUARY 28, MAY 31,
1998 1998
------------ -----------
(UNAUDITED)
Supplemental schedule of non-cash activities:
Accounts payable--trade and other liabilities...... $ -- $(430,000)
Proceeds on disposal of property and equipment..... 330,000 521,000
Purchase of rental equipment....................... (2,427,400) (745,829)
Increase in other assets........................... (330,000) (91,000)
Proceeds of long-term debt......................... 2,427,400 745,829
12.SUBSEQUENT EVENT
As of May 31, 1998, all the outstanding shares of the Company were purchased
by United Rentals Inc.
F-228
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Channel Equipment Holding, Inc.
We have audited the accompanying combined balance sheet of Channel Equipment
Holding Inc. (see Note 1) (the "Companies") as of December 31, 1997 and the
related combined statements of operations, stockholders' equity (deficit) and
cash flows for the year then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Channel
Equipment Holding Inc. at December 31, 1997, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 21, 1998
F-229
CHANNEL EQUIPMENT HOLDING, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash ............................................................. $ 63,589
Accounts receivable, net of allowance for doubtful accounts of
$244,787......................................................... 1,274,432
Inventory......................................................... 617,793
Rental equipment, net............................................. 8,233,933
Property and equipment, net....................................... 546,798
Prepaid expenses and other assets................................. 27,567
-----------
Total assets.................................................. $10,764,112
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable, accrued expenses and other liabilities........ $ 997,055
Due to stockholders............................................. 745,650
Debt............................................................ 9,241,162
Deferred gain................................................... 121,980
-----------
Total liabilities............................................. 11,105,847
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, Channel Equipment, $1.00 par value, 1,000,000
shares authorized, 1,000 issued and outstanding; River City,
$1.00 par value, 100,000 shares authorized, 1,000 issued and
outstanding; and Contractors, $1.00 par value, 1,000,000 shares
authorized, 1,250 issued and outstanding....................... 3,250
Additional paid-in capital...................................... 238,836
Retained earnings (deficit)..................................... (538,821)
-----------
(296,735)
Treasury stock.................................................. (45,000)
-----------
Total stockholders' equity (deficit).......................... (341,735)
-----------
Total liabilities and stockholders' equity (deficit).......... $10,764,112
===========
See accompanying notes.
F-230
CHANNEL EQUIPMENT HOLDING, INC.
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenue:
Equipment rentals............................................... $ 4,680,867
Rental equipment sales.......................................... 2,265,294
Sales of parts, supplies and new equipment...................... 3,836,954
-----------
Total revenues................................................ 10,783,115
Cost of revenues:
Cost of equipment rentals, excluding equipment rental
depreciation................................................... 1,459,268
Depreciation, equipment rentals................................. 2,092,035
Cost of rental equipment sales.................................. 2,016,654
Cost of parts, supplies and new equipment sales................. 3,138,237
-----------
Total cost of revenues........................................ 8,706,194
-----------
Gross profits................................................. 2,076,921
Selling, general and administrative expenses...................... 2,085,283
Non-rental depreciation........................................... 40,067
-----------
Operating loss.................................................... (48,429)
Interest expense.................................................. 714,705
-----------
Loss before provisions for income taxes........................... (763,134)
Provision for income taxes........................................ 3,040
-----------
Net loss.......................................................... $ (766,174)
===========
See accompanying notes.
F-231
CHANNEL EQUIPMENT HOLDING, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL RETAINED
-------------- PAID IN EARNINGS TREASURY
SHARES AMOUNTS CAPITAL (DEFICIT) STOCK
------ ------- ---------- --------- --------
Balance at January 1, 1997....... 3,250 $3,250 $238,836 $ 227,353 $(45,000)
Net loss....................... (766,174)
----- ------ -------- --------- --------
Balance at December 31, 1997..... 3,250 $3,250 $238,836 $(538,821) $(45,000)
===== ====== ======== ========= ========
See accompanying notes.
F-232
CHANNEL EQUIPMENT HOLDING, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................... $ (766,174)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation................................................... 2,132,102
Gain on rental equipment sales................................. (248,640)
Changes in assets and liabilities:
Increase in accounts receivable............................... (254,454)
Increase in inventory......................................... (176,462)
Decrease in prepaid expenses and other assets................. 39,219
Increase in accounts payable, accrued expenses and other lia-
bilities..................................................... 420,460
Increase in deferred gain..................................... 121,980
-----------
Cash provided by operating activities............................ 1,268,031
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment..................................... (846,817)
Proceeds from sale of rental equipment........................... 1,936,072
Purchases of property and equipment.............................. (40,712)
-----------
Cash provided by investing activities............................ 1,048,543
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt....................................... (4,525,576)
Proceeds from stockholders loans................................. 411,600
Borrowings under credit facilities............................... 1,803,455
-----------
Cash used in financing activities................................ (2,310,521)
-----------
Increase in cash................................................. 6,053
Cash balance at beginning of year................................ 57,536
-----------
Cash balance at end of year...................................... $ 63,589
===========
See accompanying notes.
F-233
CHANNEL EQUIPMENT HOLDING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements of Channel Equipment Holding, Inc. include
the accounts of Channel Equipment Holding, Inc. ("Channel"), River City
Machinery Co., Inc. ("River City") and Contractors Sales & Rentals, Inc.
("Contractors") (collectively the "Companies"). The Companies are affiliated
through common ownership. All significant intercompany accounts and
transactions have been eliminated in combination.
These combined financial statements are prepared on a historical cost basis
and do not include any adjustments that may result from the acquisition of the
Companies by United Rentals, Inc. ("United") as more fully described in Note
9.
Business Activity
The Companies rent, sell and repair construction equipment for use by
contractor, industrial and homeowners markets. The rentals are on a daily,
weekly or monthly basis. The Companies are located in three different cities
(Houston, Austin and Georgetown) and their principal market area is the state
of Texas. The nature of the Companies business is such that short-term
obligations are typically met by cash flow generated from long-term assets.
Consequently, consistent with industry practice, the balance sheet is
presented on an unclassified basis.
Inventory
Inventories consist primarily of general replacement parts, hydraulic tubing
and equipment held for resale and are stated at the lower of cost, determined
under the first-in, first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the combined
statement of operations.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over an estimated five-year
useful life. Leasehold improvements are amortized using the straight-line
method over the estimated lives of the improvements or the remaining life of
the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
F-234
CHANNEL EQUIPMENT HOLDING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Advertising Costs
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to approximately $56,300 in the year ended
December 31, 1997.
Income Taxes
Both Channel and River City have elected, by unanimous consent of its
stockholders, to be taxed under the provisions of Subchapter S of the Internal
Revenue Code, for federal purposes. Under those provisions both Channel and
River City do not have to pay federal income taxes; instead, the stockholders
are liable for individual income taxes on both Channel and River City's
profits. Therefore, no provision for federal income taxes is included in the
accompanying combined financial statements for Channel or River City.
Contractors, a C Corporation for federal tax purposes uses the "liability
method" of accounting for income taxes. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which differences are expected to reverse.
ACCOUNTING 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.
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies customer base
and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following at December 31, 1997:
Rental equipment................................................ $12,095,388
Less accumulated depreciation.................................. (3,861,455)
-----------
Rental equipment, net.......................................... $ 8,233,933
===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
Land............................................................... $218,428
Building........................................................... 213,736
Transportation equipment........................................... 134,443
Leasehold improvements............................................. 9,250
Furniture and fixtures............................................. 28,953
--------
604,810
Less accumulated depreciation...................................... (58,012)
--------
Total.............................................................. $546,798
========
F-235
CHANNEL EQUIPMENT HOLDING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of the following at December 31, 1997:
AEL Leasing Co., Inc.--Various notes dated from February 1997 to
June 1997 with annual interest rates ranging from 8% to 10.2%
due in monthly installments ranging from $933 to $4,616........ $ 213,149
The Associates--Two notes dated October 1997 with an annual
interest rate due in full in June 1998......................... 768,589
CIT Group--Various notes dated from April 1995 to August 1997
with annual interest rates ranging from 7.5% to 10.0% due in
monthly installments ranging from $533 to $6,007............... 1,626,743
CAT Financial--Various notes dated from April 1995 to July 1997
with annual interest rates ranging from 5.1% to 8.1% due in
monthly installments ranging from $912 to $6,180............... 619,776
Deutsche Financial--Various notes dated from April 1996 to April
1997 with annual interest rates ranging from 9.6% to 9.9% due
in monthly installments ranging from $930 to $2,893............ 564,160
NICE International Corporation--Various notes dated November
1997 with annual interest rates ranging from 9.4% to 10.9% due
in monthly installments ranging from $634 to $5,199............ 665,255
Chicago Pneumatic--Various notes dated from March 1997 to July
1997 with annual interest rates ranging from 7.5% to 9.5% due
in monthly installments ranging from $427 to $1,827............ 39,095
debis Financial Services, Inc.--Non-interest bearing line-of-
credit......................................................... 89,481
Newcourt Financial USA, Inc.--Various notes dated from June 1997
to September 1997 with an annual interest rate of 9.3% due in
monthly installments ranging from $1,751 to $20,107............ 549,994
First Prosperity--Various notes dated from April 1995 to
September 1997 with annual interest rates ranging from 7.8% to
10.0% due in monthly installments ranging from $415 to $1,178.. 144,631
Financial Federal--Various notes dated from January 1996 to
November 1997 with an annual interest rate of 11% due in
monthly installments ranging from $430 to $21,465.............. 2,984,398
Norwest Bank--Various notes dated November 1996 with an annual
interest rate of 9% due in monthly installments ranging from
$277 to $380................................................... 20,998
Case Credit--Various notes dated from August 1995 to November
1996 with annual interest rates ranging from 7.9% to 9.0% due
in monthly installments ranging from $481 to $6,935............ 207,007
KDC Financial--Various notes dated from March 1995 to May 1997
with annual interest rates ranging from 7.5% to 10.0% due in
monthly installments ranging from $722 to $4,576............... 571,885
JCB Financial--Various notes dated from June 1995 to October
1997 with annual interest rates ranging from 7.0% to 9.5% due
in monthly installments ranging from $782 to $1,554............ 134,272
PACCAR--Note dated June 1997 with an annual interest rate of
8.0% due in monthly installments of $1,540..................... 41,729
----------
$9,241,162
==========
Substantially all rental equipment and fixed assets collateralize the above
notes.
All debt at December 31, 1997 was paid off in connection with the acquisition
discussed in Note 9.
F-236
CHANNEL EQUIPMENT HOLDING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTIONS
River City leases its Georgetown operating facility and Channel leases its
operating facilities from its stockholders on a month to month basis. Both
Channel and River City are responsible for all operating expenses of the
facilities including property taxes, assessments, insurance, repairs and
maintenance. Total rent expense for 1997 was approximately $160,100.
In connection with the acquisition discussed in Note 9, the lease terms have
been renegotiated.
The Companies also had a non-interest bearing note payable from its
stockholders totaling $745,650 at December 31, 1997. No repayment schedule has
been established.
7. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 total interest and income taxes paid
were $705,700 and $3,040, respectively.
During 1997 the Companies purchased $4,240,540 of equipment which was
financed.
8. EMPLOYEE BENEFIT PLAN
The Companies have a defined contribution 401(k) pension plan which covers
substantially all employees. The Companies match 100% up to the first six
percent of the employees contribution. The Companies contributions to the plan
were $8,850 for the year ended December 31, 1997.
9. SUBSEQUENT EVENT
On January 23, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Channel and
River City. On January 23, 1998, under the terms of the asset purchase
agreement, United purchased certain assets of Contractors.
F-237
LNDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Paul E. Carlson, Inc.
(d/b/a Carlson Equipment Company)
Roseville, Minnesota
We have audited the accompanying balance sheet of Paul E. Carlson, Inc.
(d/b/a Carlson Equipment Company) as of February 28, 1998, and the related
statements of operations, stockholders' equity, and cash flow for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Paul E. Carlson, Inc.
(d/b/a Carlson Equipment Company) as of February 28, 1998, and the results of
its operations and its cash flow for the year then ended in conformity with
generally accepted accounting principles.
McGladrey & Pullen, LLP
St. Paul, Minnesota April 21, 1998
F-238
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
BALANCE SHEETS
FEBRUARY 28, 1998 AND MAY 31, 1998
FEBRUARY MAY 31,
28, 1998 1998
---------- -----------
(UNAUDITED)
ASSETS (NOTES 3 AND 4)
Current Assets
Cash.................................................. $ 168,100 $ 345,293
Receivables:
Trade accounts, less allowance for doubtful accounts
of $125,000 and $163,000 at February 28 and May 31,
1998, respectively.................................. 848,365 1,209,761
Due from stockholder.................................. 43,000 43,000
Refundable income taxes............................... -- 17,139
Inventories (Note 2).................................. 1,615,701 2,546,139
Prepaid expenses...................................... 34,330 30,214
Deferred income taxes (Note 6)........................ 146,000 146,000
---------- ----------
Total current assets.............................. 2,855,496 4,337,546
---------- ----------
Rental Equipment, at cost (Note 5)...................... 7,137,174 7,305,466
Less accumulated depreciation......................... 2,922,730 2,966,205
---------- ----------
4,214,444 4,339,261
---------- ----------
Property and Equipment, at cost (Note 5)
Computer equipment.................................... 153,373 153,373
Transportation equipment.............................. 378,472 378,472
Furniture and equipment............................... 217,838 221,079
Leasehold improvements................................ 115,484 115,484
---------- ----------
865,167 868,408
Less accumulated depreciation......................... 426,798 458,298
---------- ----------
438,369 410,110
---------- ----------
$7,508,309 $9,086,917
========== ==========
See Notes to Financial Statements.
F-239
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
BALANCE SHEETS
FEBRUARY 28, 1998 AND MAY 31, 1998
FEBRUARY 28, MAY 31,
1998 1998
------------ -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank line of credit (Notes 3 and 10)................ $ -- $4,500,000
Current maturities of long-term debt................ 273,914 466,733
Accounts payable.................................... 257,289 799,045
Accrued expenses:
Compensation, vacation, and related taxes......... 160,940 102,064
Profit sharing (Note 7)........................... 150,000 --
Real estate taxes................................. 45,660 51,477
Interest.......................................... 32,067 33,542
Other............................................. 30,894 18,598
Income taxes payable................................ 155,861 --
---------- ----------
Total current liabilities....................... 1,106,625 5,971,459
---------- ----------
Deferred Income Taxes (Note 6)........................ 380,000 380,000
---------- ----------
Long-Term Debt, less current maturities (Notes 3, 4, 5
and 10)
Bank line of credit................................. 3,700,000 --
Finance companies and capital lease obligations..... 338,925 721,508
Subordinated note to former stockholder............. 735,448 728,577
---------- ----------
4,774,373 1,450,085
---------- ----------
Commitments (Notes 5, 7 and 8)
Stockholders' Equity (Notes 8 and 10)
Common stock, par value $1 per share; authorized
100,000 shares; issued and outstanding 2,550
shares............................................. 2,550 2,550
Retained earnings................................... 1,244,761 1,282,823
---------- ----------
1,247,311 1,285,373
---------- ----------
$7,508,309 $9,086,917
========== ==========
See Notes to Financial Statements.
F-240
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
STATEMENTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998 AND THE THREE
MONTHS ENDED MAY 31, 1998
YEAR ENDED THREE MONTHS ENDED MAY 31,
FEBRUARY 28, -----------------------------
1998 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Sales and rental income............. $10,695,366 $ 2,862,744 $ 2,694,561
Cost of sales....................... 6,085,129 1,858,251 1,755,730
----------- ------------- -------------
Gross profit.................... 4,610,237 1,004,493 938,831
Operating expenses.................. 3,550,240 795,748 745,412
----------- ------------- -------------
Operating income................ 1,059,997 208,745 193,419
----------- ------------- -------------
Nonoperating:
Interest expense.................. (528,266) (127,678) (128,357)
Gain on sale of other equipment... 19,270 -- --
----------- ------------- -------------
(508,996) (127,678) (128,357)
----------- ------------- -------------
Income before income taxes...... 551,001 81,067 65,062
Federal and state income taxes (Note
6)................................. 244,000 36,000 27,000
----------- ------------- -------------
Net income $ 307,001 $ 45,067 $ 38,062
=========== ============= =============
See Notes to Financial Statements.
F-241
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED FEBRUARY 28, 1998 AND THE THREE
MONTHS ENDED MAY 31, 1998
COMMON STOCK
------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ----------
Balance, February 28, 1997.................. 2,550 $2,550 $ 937,760 $ 940,310
Net income................................ -- 307,001 307,001
----- ------ ---------- ----------
Balance, February 28, 1998.................. 2,550 2,550 1,244,761 1,247,311
Net income (unaudited).................... -- -- 38,062 38,062
----- ------ ---------- ----------
Balance, May 31, 1998 (unaudited)........... 2,550 $2,550 $1,282,823 $1,285,373
===== ====== ========== ==========
See Notes to Financial Statements.
F-242
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
STATEMENTS OF CASH FLOW
YEAR ENDED FEBRUARY 28, 1998 AND THE THREE MONTHS ENDED MAY 31, 1997 AND 1998
YEAR ENDED THREE MONTHS ENDED MAY 31,
FEBRUARY 28, -----------------------------
1998 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Cash Flows From Operating Activi-
ties
Net Income....................... $ 307,001 $ 45,067 $ 38,062
Adjustments to reconcile net in-
come to net cash provided by op-
erating activities:
Depreciation................... 1,482,371 347,739 384,274
Gross margin contribution from
rental equipment sales........ (592,674) (148,435) (265,158)
Gain on sale of other equip-
ment.......................... (19,270) -- --
Net increase in deferred income
taxes......................... 82,000 -- --
Changes in current assets and
liabilities:
Trade accounts receivable.... (26,690) (579,310) (361,396)
Refundable income taxes...... -- -- (17,139)
Inventories.................. (133,318) (426,346) (930,438)
Prepaid expenses............. (8,579) (21,010) 4,116
Accounts payable............. 182,051 659,513 541,756
Accrued expenses............. 194,834 13,627 (213,880)
Income taxes payable......... 89,926 (29,935) (155,861)
---------- ------------ -------------
Net cash provided by (used
in) operating
activities................. 1,557,652 (139,090) (975,664)
---------- ------------ -------------
Cash Flows From Investing Activi-
ties
Proceeds from sales of rental
equipment....................... 1,578,609 361,480 638,694
Purchases of rental equipment.... (2,473,274) (764,723) (851,127)
Purchases of property and equip-
ment............................ (144,253) (27,956) (3,241)
Proceeds from sales of other
equipment....................... 21,778 1,278 --
Increase in receivable from
stockholder..................... (43,000) (12,000) --
---------- ------------ -------------
Net cash used in investing
activities................ (1,060,140) (441,921) (215,674)
---------- ------------ -------------
Cash Flows From Financing Activi-
ties
Proceeds from long-term borrow-
ing............................. -- -- 659,707
Payments of long-term debt....... (1,576,236) (256,946) (91,176)
Net increase in bank line of
credit debt..................... 1,100,000 750,000 800,000
---------- ------------ -------------
Net cash provided by (used
in) financing activities.. (476,236) 493,054 1,368,531
---------- ------------ -------------
Net increase (decrease) in
cash...................... 21,276 (87,957) 177,193
Cash
Beginning........................ 146,824 146,824 168,100
---------- ------------ -------------
Ending........................... $ 168,100 $ 58,867 $ 345,293
========== ============ =============
See Notes to Financial Statements (Additional Cash Flow Information -- Note 9).
F-243
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS
ENDED MAY 31, 1997 AND 1998, IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Carlson Equipment Co. is engaged in the short-term
rental and sales of construction equipment to contractor, industrial, and
municipal clients in the St. Paul/Minneapolis metropolitan area, primarily on
credit terms established on an individual customer basis.
Revenue recognition: The Company recognizes revenue upon delivery of the
rental equipment to customers. The Company recognizes revenue from the rental
agreements as earned and related expenses as incurred.
Cash: The Company maintains cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Fair value of financial instruments: The financial instruments include the
following financial instruments and the methods and assumptions used in
estimating their fair value: for cash and cash equivalents, the carrying
amount is fair value; for trade accounts receivable and accounts payable, the
carrying amounts approximate their fair values due to the short term nature of
these instruments, and for the notes payable and long-term debt, fair value
has been estimated based on discounted cash flows using interest rates being
offered for similar borrowings. No separate comparison of fair values versus
carrying values is presented for the aforementioned financial instruments
since their fair values are not significantly different than their balance
sheet carrying amounts. In addition, the aggregate fair values of the
financial instruments would not represent the underlying value of the Company.
Inventories: Inventories consisting of parts, supplies, and new machinery
and equipment are stated at the lower of cost or market. The cost of
serialized machinery and equipment is determined on a specific-identification
basis. All other inventory is valued using an average-cost method which
approximates the first-in, first-out method.
Accounting for long-lived assets: Management has and will continue, on a
periodic basis, to closely evaluate its equipment to determine potential
impairment by comparing its carrying value with the estimated future net
undiscounted cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future
net cash flows be less than the carrying value, the Company would recognize an
impairment loss at that date. An impairment loss would be measured by
comparing the amount by which the carrying value exceeds the fair value
(estimated discounted future cash flows or appraisal of assets) of the long-
lived assets. To date, management has determined that no impairment of long-
lived assets exists.
Property and equipment depreciation methods: Depreciation is provided using
the straight-line method over the following estimated useful lives:
YEARS
-----
Computer equipment............................... 5
Transportation equipment......................... 5
Furniture and equipment.......................... 5-10
Leasehold improvements........................... 5-31
F-244
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS
ENDED MAY 31, 1997 AND 1998, IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Rental equipment and related depreciation methods: Rental units are created
by the transfer of new equipment, valued at acquisition cost, from inventories
to rental equipment. Rental equipment depreciation begins at the point of
transfer. Depreciation is provided using the straight-line method over five
years, the estimated useful life of the equipment. Sales of rental equipment
are accounted for by including the proceeds in sales and by transferring the
net book value of the equipment sold to cost of sales.
Reclassification of rental equipment depreciation expense: In prior years
and in previous February 28, 1998, financial statements, the Company included
rental equipment depreciation expense in operating expenses. Rental equipment
depreciation expense of $1,359,467 has been reclassified to cost of goods sold
for the year ended February 28, 1998.
The proceeds and related net book value of rental equipment sold during the
year ended February 28, 1998, and for the three months ended May 31, 1997 and
1998, were as follows:
THREE MONTHS
YEAR ENDED ENDED MAY 31,
FEBRUARY 28, -----------------------
1998 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Proceeds of rental equipment sales.. $1,578,609 $361,480 $ 638,694
Net book value...................... 985,935 213,045 373,536
---------- -------- ---------
Gross margin from rental equipment
sales.............................. $ 592,674 $148,435 $ 265,158
========== ======== =========
Income taxes: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary
differences and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax basis. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
New accounting pronouncements: In June 1997, SFAS No. 130, Reporting
Comprehensive income, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, were issued. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components. SFAS No. 131 redefines how operating segments are determined and
requires disclosures of certain financial and descriptive information about
the Company's operating segments. SFAS Nos. 130 and 131 are effective for
fiscal years beginning after December 15, 1997. The Company believes that
adoption of SFAS Nos. 130 and 131 will not have any significant effect on its
financial statements.
F-245
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS
ENDED MAY 31, 1997 AND 1998, IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Interim financial information (unaudited): The financial statements and
notes related thereto as of May 31, 1998, and for the three months ended May
31, 1997 and 1998, are unaudited but, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial position and results of operations.
The operating results for the interim periods are not indicative of the
operating results to be expected for a full year or for other interim periods.
NOTE 2. INVENTORIES
The composition of inventories at February 28, 1998, and May 31, 1998 is as
follows:
FEBRUARY 28, MAY 31,
1998 1998
------------ -----------
(UNAUDITED)
Equipment........................................ $ 937,879 $1,651,237
Supplies......................................... 516,552 729,432
Parts............................................ 161,270 165,470
---------- ----------
$1,615,701 $2,546,139
========== ==========
NOTE 3. REVOLVING LINE OF CREDIT AGREEMENT
The Company had a revolving credit agreement with a bank which provided a
$4,500,000 line of credit. The availability of credit was determined by a
borrowing base formula consisting of eligible receivables, inventories, and
rental equipment. Advances under the line of credit accrued interest at 0.25
percent above the prime interest rate (8.5 percent as of February 28, 1998).
The line was due on March 31, 1999, and was secured by substantially all of
the Company's assets and the personal guarantees of the Company's
stockholders. Since the Company did not intend to reduce the $3,700,000
outstanding balance under this line of credit prior to February 28, 1999, nor
did it anticipate a reduction in the borrowing base during this same period,
the revolving credit agreement was reflected as long-term debt as of February
28, 1998. At May 31, 1998, the outstanding balance has been reflected as a
current liability since it was due within the subsequent 12 months. On July 9,
1998, the revolving credit agreement was paid in full and terminated (see Note
10).
The agreement contained certain restrictive financial covenants relative to
maintaining a minimum amount of net worth and maintaining a certain debt to
net worth ratio.
F-246
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS
ENDED MAY 31, 1997 AND 1998, IS UNAUDITED)
NOTE 4. LONG-TERM DEBT
Capital lease obligations and long-term debt with finance companies and a
former stockholder at February 28, 1998 and May 31, 1998, consisted of the
following:
FEBRUARY 28, MAY 31,
1998 1998
------------ -----------
(UNAUDITED)
Capitalized lease obligations, due in monthly
installments varying from $521 to $9,704, including
interest at 9.2% to 12.3%, through May 2001, secured
by related equipment, personally guaranteed by the
Company's stockholders (Note 5)..................... $416,739 $ 377,576
Notes payable, due in monthly installments varying
from $5,259 to $10,016, plus interest at 8.75% to
10.75%, through March 2003, secured by related
equipment........................................... 170,265 784,179
-------- ---------
587,004 1,161,755
Less current maturities.............................. 248,079 440,247
-------- ---------
$338,925 $ 721,508
======== =========
Note payable to former stockholder, due in monthly
installments of $8,400 to March 2000, when monthly
payments become $13,662 to February 2005, when the
remaining principal balance is due, plus interest at
1.0% over prime, secured by accounts receivable,
inventories, equipment, and stock, personally
guaranteed by the Company's stockholders,
subordinated to bank line of credit (1)............. $761,283 $ 755,063
Less current maturities.............................. 25,835 26,486
-------- ---------
$735,448 $ 728,577
======== =========
- --------
(1) On July 9, 1998, the remaining debt balance was paid in full (see Note
10).
The approximate aggregate annual future maturities of all long-term debt as
of February 28, 1998, including the line of credit and capital leases, were as
follows:
Years ending February:
1999............................ $ 274,000
2000............................ 3,907,000
2001............................ 229,000
2002............................ 137,000
2003............................ 119,000
Thereafter...................... 382,000
----------
$5,048,000
==========
F-247
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS
ENDED MAY 31, 1997 AND 1998, IS UNAUDITED)
NOTE 5. LEASE COMMITMENTS
Capitalized leases: The Company leases certain rental and other equipment
under capitalized leases as follows:
FEBRUARY 28,
1998
------------
Rental and other equipment.................................. $641,448
Less accumulated amortization............................... 221,066
--------
$420,382
========
The following is a schedule by year of the future minimum lease payments
under capital leases together with the present value of the net minimum lease
payments as of February 28, 1998:
Years ending February:
1999...................................................... $171,094
2000...................................................... 139,677
2001...................................................... 140,473
2002...................................................... 29,113
--------
Total minimum payments...................................... 480,357
Less amount representing interest........................... 63,618
--------
Present value of net minimum payments, included in long-term
debt....................................................... $416,739
========
Operating leases: The Company leases its operating facilities under
arrangements which are classified as operating leases. The New Hope facility is
leased pursuant to an agreement which expires November 1999 and requires
monthly lease payments of $6,096. The Roseville facility, which is leased on a
month-to-month basis from the Company's former majority stockholder, requires
monthly lease payments of $9,624 (see Note 10 relative to a new lease on the
Roseville facility). The Bloomington facility is leased under an agreement
which expires December 1999 and requires monthly lease payments of $4,463.
Future aggregate minimum payments as of February 28, 1998 under operating
leases are as follows:
Years ending February:
1999...................................................... $133,000
2000...................................................... 102,000
Total rent expense for fiscal year 1998 was approximately $233,000. During
fiscal year 1998, approximately $115,000 of total rent expense was paid to the
Company's former majority stockholder, whose shares were redeemed in 1995.
F-248
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS
ENDED MAY 31, 1997 AND 1998, IS UNAUDITED)
NOTE 6. INCOME TAX MATTERS
Net deferred tax liabilities consist of the following components as of
February 28, 1998:
Deferred tax assets:
Inventory reserve.......................................... $ 51,000
Receivable allowance....................................... 51,000
Accrued compensation....................................... 44,000
AMT credit carryforward.................................... 18,000
----------
164,000
Deferred tax liabilities:
Property and equipment..................................... (398,000)
----------
Net deferred tax liabilities................................. $ (234,000)
==========
Alternative minimum tax credits may be carried forward indefinitely to reduce
future tax liabilities.
The deferred tax amounts mentioned above have been classified on the
accompanying balance sheet as of February 28, 1998, as follows:
Current assets............................................... $ 146,000
Noncurrent liabilities....................................... (380,000)
----------
$ (234,000)
==========
The provision for income taxes for the year ended February 28, 1998, is
comprised of the following:
Currently payable............................................ $ 162,000
Deferred..................................................... 82,000
----------
Federal and state income taxes............................... $ 244,000
==========
The Company's income tax expense for the year ended February 28, 1998,
differed from the statutory federal rate as follows:
Statutory rate applied to income before income taxes......... $ 187,000
State income tax expense net of federal tax effect........... 34,000
Nondeductible expense........................................ 11,000
Other........................................................ 12,000
----------
$ 244,000
==========
F-249
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS
ENDED MAY 31, 1997 AND 1998, IS UNAUDITED)
NOTE 7. PROFIT SHARING AND 401(K) PLAN
The Company had a profit sharing and 401(k) plan for all employees who met
the eligibility requirements set forth in the plan. The plan incorporated the
provisions of Internal Revenue Code Section 401(k) under which the employees
could contribute up to 20 percent of their salary to the plan. The Company
matched up to 50 percent of the participant's voluntary contribution up to 5
percent of the participant's salary. In addition, the plan allowed for
additional discretionary contributions. The Company communicated its intention
and historically distributed 20 percent of pretax, preprofit sharing income as
an annual discretionary profit sharing contribution (see Note 10 relative to
the subsequent termination of the profit sharing and 401(k) plan).
Company contributions for the year ended February 28, 1998, and for the
three months ended May 31, 1997 and 1998, were as follows:
THREE MONTHS
YEAR ENDED ENDED MAY 31,
FEBRUARY 28, -----------------------
1998 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Discretionary...................... $150,000 $ 22,000 $ --
Matching........................... 37,400 8,096 8,237
-------- -------- --------
$187,400 $ 30,096 $ 8,237
======== ======== ========
NOTE 8. STOCK REDEMPTION AGREEMENT
In the event of the death or disability of a stockholder prior to July 9,
1998, the Company was obligated to purchase the outstanding stock of the
affected stockholder, should the other stockholder not exercise the right of
first purchase. The purchase price of the stock was based on the value of the
Company, as defined per the shareholder agreement. The purchase price was to be
paid in 120 equal monthly installments (see Note 10 relative to the subsequent
termination of the stock redemption agreement).
NOTE 9. ADDITIONAL CASH FLOW INFORMATION
THREE MONTHS
YEAR ENDED ENDED MAY 31,
FEBRUARY 28, -----------------------
1998 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Supplemental disclosures of cash
flow information:
Cash payments for interest....... $519,265 $124,725 $126,882
Cash payments for income taxes... 72,074 72,000 200,000
======== ======== ========
Supplemental schedule of noncash
investing and financing
activities:
Capital lease obligations
incurred for use of equipment... $ 81,124 $ -- $ --
======== ======== ========
F-250
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS
ENDED MAY 31, 1997 AND 1998, IS UNAUDITED)
NOTE 10. EVENTS SUBSEQUENT TO MAY 31, 1998
On July 9, 1998, the Company's stockholders entered into an agreement,
effective July 1, 1998, whereby United Rentals Inc. purchased all of the
Company's outstanding common stock.
In conjunction with the aforementioned agreement, the note payable to former
stockholder and the outstan~ding balance on the revolving line of cre~dit were
paid in full on July 9, 1998. In addition, the revolving credit agreement was
terminated at that time. The stock redemption agreement (Note 8) a~nd the
profit sharing and 401(k) p~lan (Note 7) were also terminated effective June
30,1998.
On July 9, 1998, the Company entered into a ten-year lease for its Roseville
facility with a former stockholder. The lease requires monthly lease payments
of $9,624 and has a five-year option to renew.
F-251
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
West Main Rentals and Sales, Incorporated
We have audited the accompanying balance sheet of West Main Rentals and
Sales, Incorporated (an S corporation) as of December 31, 1997, and the
related statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of West Main Rentals and
Sales, Incorporated as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
Moss Adams LLP
Eugene, Oregon
April 22, 1998
F-252
WEST MAIN RENTALS AND SALES, INCORPORATED
BALANCE SHEET
ASSETS
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
CURRENT ASSETS
Cash................................................. $ 134,924 $ 155,238
Accounts receivable.................................. 1,014,677 936,423
Inventory for resale................................. 634,249 630,729
Rental fleet expected to be sold..................... 402,000 402,000
Prepaid expenses..................................... 57,920 15,271
Current portion of notes receivable.................. 2,432 6,753
---------- ----------
Total current assets............................... 2,246,202 2,146,414
---------- ----------
NOTES RECEIVABLE, less current portion................. 55,954 69,160
---------- ----------
PROPERTY AND EQUIPMENT
Rental fleet......................................... 6,121,168 6,246,646
Leasehold improvements............................... 513,278 528,353
Equipment............................................ 1,246,218 1,344,013
Equipment held under capital leases.................. 1,067,217 1,067,217
---------- ----------
8,947,881 9,186,229
Less accumulated depreciation and amortization....... 3,554,875 3,739,962
---------- ----------
5,393,006 5,446,267
---------- ----------
$7,695,162 $7,661,841
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................................... $ 137,446 $ 414,808
Accrued liabilities.................................... 198,517 198,162
Notes payable.......................................... 478,616 428,198
Current portion:
Long-term debt....................................... 1,145,640 1,210,636
Obligations under capital leases..................... 206,000 214,000
---------- ----------
Total current liabilities.......................... 2,166,219 2,465,804
---------- ----------
LONG-TERM DEBT, less current portion..................... 3,184,201 3,539,421
---------- ----------
OBLIGATIONS UNDER CAPITAL LEASES, less current portion... 648,146 619,353
---------- ----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000 shares authorized,
100 shares issued and outstanding..................... 130,841 130,841
Retained earnings...................................... 1,565,755 906,422
---------- ----------
1,696,596 1,037,263
---------- ----------
$7,695,162 $7,661,841
========== ==========
See accompanying notes.
F-253
WEST MAIN RENTALS AND SALES, INCORPORATED
STATEMENT OF INCOME
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
1997 1998 1997
------------ ---------- ----------
(UNAUDITED)
REVENUES
Rental.................................. $7,167,252 $1,067,808 $1,208,955
Retail sales............................ 1,286,872 366,341 303,444
Other sales............................. 1,061,874 202,658 180,800
Gain on sale of rental equipment........ 238,793 47,209 82,399
---------- ---------- ----------
9,754,791 1,684,016 1,775,598
---------- ---------- ----------
COST OF OPERATIONS
Rental.................................. 5,064,324 1,267,400 848,479
Retail cost of sales.................... 916,670 279,002 212,656
Other cost of sales..................... 252,472 45,276 46,242
---------- ---------- ----------
6,233,466 1,591,678 1,107,377
---------- ---------- ----------
GROSS PROFIT.............................. 3,521,325 92,338 668,221
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 2,515,654 564,480 589,522
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS............. 1,005,671 (472,142) 78,699
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income......................... 6,094 1,576 1,952
Gain on sale of equipment............... 9,067 -- 1,117
Interest expense........................ (540,064) (141,267) (114,070)
---------- ---------- ----------
(524,903) (139,691) (111,001)
---------- ---------- ----------
NET INCOME (LOSS)......................... $ 480,768 $ (611,833) $ (32,302)
========== ========== ==========
See accompanying notes.
F-254
WEST MAIN RENTALS AND SALES, INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON RETAINED
STOCK EARNINGS TOTAL
-------- ---------- ----------
BALANCE, December 31, 1996..................... $130,841 $1,404,987 $1,535,828
Net income..................................... -- 480,768 480,768
Dividends...................................... -- (320,000) (320,000)
-------- ---------- ----------
BALANCE, December 31, 1997..................... 130,841 1,565,755 1,696,596
Net loss (unaudited)........................... -- (611,833) (611,833)
Dividends (unaudited).......................... -- (47,500) (47,500)
-------- ---------- ----------
BALANCE, March 31, 1998 (unaudited)............ $130,841 $ 906,422 $1,037,263
======== ========== ==========
See accompanying notes.
F-255
WEST MAIN RENTALS AND SALES, INCORPORATED
STATEMENT OF CASH FLOWS
YEAR ENDED THREE MONTHS ENDED
DECEMBER MARCH 31,
31, -------------------
1997 1998 1997
----------- --------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 480,768 $(611,833) $(32,302)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization............ 1,129,015 307,895 244,383
Net gain from sale of property........... (247,860) (47,209) (83,516)
Changes in:
Accounts receivable.................... (329,061) 78,254 5,396
Inventory for resale................... 32,228 3,520 (144,037)
Prepaid expenses....................... (17,756) 42,649 (12,866)
Accounts payable....................... (286,115) 277,362 (160,215)
Accrued liabilities.................... 27,723 (355) 7,708
----------- --------- --------
Net cash from operating activities......... 788,942 50,283 (175,449)
----------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment......... (2,261,854) (492,384) (608,559)
Proceeds from sale of equipment............ 625,362 178,437 620,775
Net principal repayments (advances) on
notes receivable.......................... 480 (17,527) 325
----------- --------- --------
Net cash from investing activities......... (1,636,012) (331,474) 12,541
----------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on notes
payable................................... 478,616 (50,418) 190,000
Proceeds from long-term borrowings and
capital lease obligations................. 1,818,217 670,403 142,412
Principal payments on long-term debt and
capital lease obligations................. (1,078,345) (270,980) (96,132)
Dividends paid............................. (320,000) (47,500) --
----------- --------- --------
Net cash from financing activities......... 898,488 301,505 236,280
----------- --------- --------
NET INCREASE IN CASH......................... 51,418 20,314 73,372
CASH, beginning of period.................... 83,506 134,924 83,506
----------- --------- --------
CASH, end of period.......................... $ 134,924 $ 155,238 $156,878
=========== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest... $ 532,245 $ 135,866 $110,846
=========== ========= ========
See accompanying notes.
F-256
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF OPERATIONS--The Company primarily rents heavy equipment to
contractors. The Company provides wholesale and retail rental services and
sales from four Oregon locations and two in California. The second California
location was opened in May 1997. The Company extends credit to all customer
types once a credit contract has been completed by the customer. This credit
contract includes trade references, which are consulted, and personal
guarantees, when deemed necessary. All charges are due in full 30 days from
the transaction date. Past due items are assessed a carrying charge. Cash
transactions require a deposit for a portion of the rental charge. A minimum
of one day's rent is required.
RESTATEMENT OF FINANCIAL INFORMATION--The Company has restated its 1997
financial statements primarily to capitalize certain equipment leases entered
into during 1996 and 1997. In the opinion of management, all material
adjustments necessary to correct the financial statements have been recorded.
The impact of these adjustments did not have a material effect on beginning
retained earnings.
INTERIM FINANCIAL STATEMENTS--The accompanying financial statements as of
March 31, 1998, and for the three months ended March 31, 1997 and 1998 are
unaudited and have been prepared on the same basis as the audited financial
statements included herein. In the opinion of management, such unaudited
financial statements include all adjustments necessary to present fairly the
information set forth therein, which consists solely of normal recurring
adjustments. The results of operations for such interim periods are not
necessarily indicative of results for the full year.
REVENUE RECOGNITION--Revenues from the daily and monthly rental of equipment
are accounted for as operating leases. Credit risk associated with accounts
receivable is periodically reviewed by management and an allowance for
doubtful accounts, if required, is established. The allowance was $20,000 at
December 31, 1997 and March 31, 1998 (unaudited).
INVENTORY FOR RESALE--The inventory for resale consists of equipment parts
and supplies and is stated at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) method.
RENTAL FLEET EXPECTED TO BE SOLD--An estimate of rental fleet equipment
expected to be sold in the next year is presented as a current asset.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost.
Depreciation and amortization is computed using the straight-line method over
the following estimated useful lives:
Rental fleet............................................... 5 to 10 years
Leasehold improvements..................................... 5 to 31 years
Equipment.................................................. 3 to 10 years
Equipment held under capital leases........................ 3 to 5 years
ADVERTISING AND PROMOTION--All costs associated with advertising and
promotion are expensed as incurred. Advertising and promotion expense totaled
$141,200 in 1997, and was $59,100 (unaudited) and $32,400 (unaudited) for the
three month periods ended March 31, 1998 and 1997, respectively.
INCOME TAXES--The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code, whereby income of the Company is
taxable directly to the individual stockholders. Accordingly, no provision for
income taxes is included in these financial statements.
F-257
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial
instruments, consisting of cash, receivables, accounts payable, and debt
instruments, is based on interest rates available to the Company and
discounted cash flow analysis. The fair value of these financial instruments
approximates carrying value.
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 will differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS--In 1997, the Company implemented
Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of
Information about Capital Structure," that continues the existing requirements
to disclose pertinent rights and privileges of all securities other than
common stock, but expands the number of companies subject to portions of its
requirements. The Company's current capital structure does not require any
additional disclosures as a result of this pronouncement.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130 "Reporting Comprehensive Income" which the Company is required to
adopt for years beginning after December 15, 1997. This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of financial statements.
This statement will require that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
Other issued but not yet required FASB statements are not currently
applicable to the Company's operations.
NOTE 2--NOTES RECEIVABLE
The Company has two unsecured notes receivable from stockholders. These
notes require interest only payments with the balance due in 2000. The
interest rate is fixed at 8%, requiring monthly payments of $361.
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
Stockholder notes receivable........................... $54,255 $54,255
Other notes receivable................................. 4,131 21,658
------- -------
58,386 75,913
Less current portion................................... 2,432 6,753
------- -------
Long-term portion...................................... $55,954 $69,160
======= =======
NOTE 3--NOTES PAYABLE
The Company has a revolving credit line available totaling $600,000 at prime
plus 1% (9.5% at December 31, 1997 and March 31, 1998). Outstanding borrowings
under the line of credit are subject to the same collateral and restrictive
covenant provisions as the term notes described in Note 4, and totaled
$430,000 at December 31, 1997 and $390,000 (unaudited) at March 31, 1998.
The Company also has a short term note payable to a finance company. The
outstanding balance on this note was $48,616 at December 31, 1997 and $38,198
(unaudited) at March 31, 1998.
F-258
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
Note payable to bank, payable in monthly (excepting
January and February) installments of $33,334 plus
interest at prime plus 1.25% (9.75% at December 31,
1997 and March 31, 1998), due December 1999......... $ 666,640 $ 633,306
Note payable to bank, payable in monthly installments
of $20,934 including interest at 9.36%, due March
2001................................................ 704,108 657,444
Note payable to bank, payable in monthly (excepting
January and February) installments of $7,000 plus
interest at prime plus 1.25% (9.75% at December 31,
1997 and March 31, 1998), due December 1999......... 126,000 105,000
Unsecured notes payable to stockholders, payable in
monthly interest only installments at 12%, due
October 2000. Subordinated to the bank debt......... 591,162 591,162
Note payable to bank, payable in monthly installments
of $5,334 plus interest at 10.7%, due November
1999................................................ 122,642 106,640
Unsecured notes payable to stockholders, all with
interest at 10% payable annually, due October 2000.
Subordinated to the bank debt....................... 114,545 114,545
Note payable to bank, payable in monthly installments
of $16,667 beginning November 1997 plus interest at
prime plus 1.25% (9.75% at December 31, 1997 and
March 31, 1998), due October 2002................... 966,667 916,667
Note payable to bank, payable in monthly payments of
$10,348 plus interest at 8.87%, due April 2002...... 427,566 396,523
Note payable to bank, payable in monthly interest
only payments through March 1998, then in monthly
installments of $11,231 including interest at prime
plus 2.00% (10.50% at March 31, 1998), due March
2006................................................ -- 600,000
Other notes payable, due in varying installments
including interest at various rates, collateral
provided by equipment and vehicles.................. 610,511 628,770
---------- ----------
4,329,841 4,750,057
Less current portion................................. 1,145,640 1,210,636
---------- ----------
$3,184,201 $3,539,421
========== ==========
Substantially all cash, accounts receivable, inventories, property and
equipment, and general intangibles are pledged as collateral for the Company's
short and long-term borrowing arrangements. The stockholders have also
personally guaranteed outstanding bank borrowings. In addition, the Company's
bank loan agreements contain provisions which, among other things, require
maintenance of certain financial ratios, restrict dividend payments and
property and equipment purchases, and provide for prepayment penalties.
Annual payments of long-term debt for the years subsequent to December 31,
1997 are due as follows:
DECEMBER 31,
------------
1998............................................................ $1,145,640
1999............................................................ 1,097,900
2000............................................................ 1,326,200
2001............................................................ 552,500
2002............................................................ 202,600
2003 and thereafter............................................. 5,001
----------
$4,329,841
==========
F-259
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT (CONTINUED)
Interest expense to stockholders on notes payable and long-term debt totaled
approximately $81,920 during 1997 and $20,600 (unaudited) and $20,500
(unaudited) for the three month periods ended March 31, 1998 and 1997,
respectively.
NOTE 5--OBLIGATIONS UNDER CAPITAL LEASES
The Company leases equipment under long-term leases and has the option to
purchase the equipment at the termination of the lease. Included in property
and equipment are the following assets held under capital leases:
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
Equipment held under capital leases.................... $1,067,217 $1,067,217
Less accumulated amortization.......................... 222,011 282,320
---------- ----------
$ 845,206 $ 784,897
========== ==========
Future minimum lease payments for assets under capital leases at December
31, 1997 are as follows:
DECEMBER 31,
------------
1998........................................................... $ 283,500
1999........................................................... 256,900
2000........................................................... 205,000
2001........................................................... 197,600
2002........................................................... 103,016
----------
Total minimum lease payments..................................... 1,046,016
Less amount representing interest................................ 191,870
----------
Present value of net minimum lease payments...................... 854,146
Less current maturities.......................................... 206,000
----------
$ 648,146
==========
NOTE 6--COMMITMENTS
RELATED PARTY LEASES--The Company leases facilities under five separate
agreements from a partnership owned by the Company stockholders. These
agreements expire between 1999 and 2011. The lease agreements provide for
payment of a minimum amount plus taxes, insurance and other costs. The monthly
rental payments can be adjusted annually. Total rents paid for the year ended
December 31, 1997 were $220,350, and were $87,600 (unaudited) and $48,450
(unaudited) for the three month periods ended March 31, 1998 and 1997,
respectively.
GRANTS PASS, OREGON LEASE--The Company leased facilities in Grants Pass,
Oregon under an agreement which expired in 1997. Rental expense on this lease
was $34,930 in 1997, and was $8,700 (unaudited) for the three month period
ended March 31, 1997.
EUREKA, CALIFORNIA LEASE--During 1997, the Company began leasing facilities
in Eureka, California under a month-to-month agreement. Monthly rent is
$3,850. A long-term agreement at the current location is expected in 1998.
F-260
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--COMMITMENTS (CONTINUED)
Aggregate future minimum lease commitments for real property, substantially
all of which are with related parties, are as follows:
DECEMBER 31,
------------
1998............................................................ $ 350,400
1999............................................................ 283,100
2000............................................................ 174,000
2001............................................................ 54,000
2002............................................................ 54,000
Thereafter........................................................ 459,000
----------
$1,374,500
==========
EQUIPMENT LEASES--The Company leases equipment under several operating lease
arrangements. Monthly payments on these leases total approximately $130,300,
with maturities extending to 2002. Rental expense totaled $982,500 for the
year ended December 31, 1997, and was $177,000 (unaudited) and $95,200
(unaudited) for the three months ended March 31, 1998 and 1997, respectively.
A significant portion of the leased equipment is returnable to the vendor with
thirty days notice without penalty from the lessor. Additionally, the
shareholders have guaranteed these lease commitments.
Aggregate future minimum lease commitments for equipment are as follows:
DECEMBER 31,
------------
1998............................................................ $1,303,000
1999............................................................ 1,274,100
2000............................................................ 1,256,400
2001............................................................ 942,600
2002............................................................ 293,600
----------
$5,069,700
==========
STOCK REPURCHASE AGREEMENT--The Company and the stockholders have entered
into an agreement whereby the Company will purchase the shares of a deceased
stockholder at a value to be determined as set forth in the agreement.
NOTE 7--RETIREMENT PLAN
A defined contribution plan covers all employees who meet age and service
requirements. The defined contribution plan is a 401(k) profit-sharing plan.
The plan allows employee contributions. The Company, at its discretion, may
also contribute to the plan. In 1997, the Company contributed $40,000; $24,400
was allocated to the profit-share portion of the plan and $15,600 was
allocated to match employee contributions at 50%. There were no Company
contributions for the three month periods ended March 31, 1998 and 1997.
NOTE 8--SUBSEQUENT EVENTS
DIVIDENDS--On January 2, 1998 the Board of Directors declared a dividend of
$475 per share of outstanding common stock, payable to shareholders of record
as of January 2, 1998.
Also, on April 10, 1998 an additional dividend was declared of $750 per
share, to shareholders of record on that date.
F-261
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--SUBSEQUENT EVENTS (CONTINUED)
NEW DEBT--On March 4, 1998 the Company obtained additional financing from
its bank. This debt is in addition to existing bank liabilities. The new
agreement provides for an aggregate commitment of $1,000,000 and expires in
2006. This note has been guaranteed by the stockholders.
SALE OF COMPANY STOCK--On March 20, 1998 a Letter of Intent was received
from United Rentals, Inc. to acquire all outstanding stock of the Company.
Under the terms of the agreement, all indebtedness of the Company, including
long-term debt and notes payable, but excluding leases, is to be paid in full
at closing. The agreement also provided for real estate leases described in
Note 6 to be extended for an additional ten years. This transaction was closed
on April 22, 1998.
Acquisition of the Company stock by United Rentals, Inc. resulted in the
termination of the Company's election to be taxed under Subchapter S of the
Internal Revenue Code.
F-262
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Mission Valley Rentals, Inc.
We have audited the balance sheets of Mission Valley Rentals, Inc. as of
June 30, 1996 and 1997 and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mission Valley Rentals,
Inc. at June 30, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 23, 1998
F-263
MISSION VALLEY RENTALS, INC.
BALANCE SHEETS
JUNE 30
--------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
ASSETS
------
Cash........................................ $ 144,491 $ 527,922 $ 505,541
Accounts receivable, net.................... 470,736 662,006 721,252
Inventory................................... 37,539 58,949 88,965
Rental equipment, net....................... 3,004,111 5,158,789 5,667,659
Property and equipment, net................. 124,597 155,001 138,343
Prepaid expenses and other assets........... 34,850 180,875 165,599
Intangible assets, net...................... 776,003 765,841
---------- ---------- ----------
Total assets............................ $3,816,324 $7,519,545 $8,053,200
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable, accrued expenses and
other liabilities........................ $ 246,536 $ 404,689 $ 805,462
Income taxes payable...................... 53,303 (54,283)
Debt...................................... 1,512,074 5,102,143 5,536,280
Deferred income taxes..................... 188,774 319,869 235,744
---------- ---------- ----------
Total liabilities....................... 2,000,687 5,826,701 6,523,203
Commitments and contingencies
Stockholders' equity:
Common stock, no par value and $1.00
stated value, 10,000 shares authorized,
1,000 issued and outstanding at June 30,
1996 and 1997, and December 31, 1997..... 1,000 1,000 1,000
Retained earnings......................... 1,814,637 1,691,844 1,528,997
---------- ---------- ----------
Total stockholders' equity.............. 1,815,637 1,692,844 1,529,997
---------- ---------- ----------
Total liabilities and stockholders'
equity................................. $3,816,324 $7,519,545 $8,053,200
========== ========== ==========
See accompanying notes.
F-264
MISSION VALLEY RENTALS, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
Revenues:
Equipment rentals............ $4,851,942 $6,798,752 $3,365,276 $4,419,275
Sales of rental equipment.... 96,987 413,481 346,540 74,642
Sales of parts and supplies.. 399,156 558,034 264,193 329,496
---------- ---------- ---------- ----------
Total revenues............. 5,348,085 7,770,267 3,976,009 4,823,413
Cost of revenues:
Cost of equipment rentals,
excluding depreciation...... 1,893,655 2,876,589 1,392,173 1,952,185
Depreciation of rental
equipment................... 738,229 1,599,457 586,675 733,558
Cost of rental equipment
sales....................... 61,810 413,481 346,540 55,168
Cost of sales of parts and
supplies.................... 214,802 377,047 153,444 171,949
---------- ---------- ---------- ----------
Total cost of revenues..... 2,908,496 5,266,574 2,478,832 2,912,860
---------- ---------- ---------- ----------
Gross profit................... 2,439,589 2,503,693 1,497,177 1,910,553
Selling, general and
administrative expenses....... 1,640,442 2,222,524 1,086,303 1,926,386
Non-rental depreciation........ 25,355 30,154 15,117 16,658
---------- ---------- ---------- ----------
Operating income (loss)........ 773,792 251,015 395,757 (32,491)
Interest expense............... 139,925 390,047 171,923 215,848
Other (income), net............ (58,767) (62,016) (31,956) (31,209)
---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes.... 692,634 (77,016) 255,790 (217,130)
Provision (benefit) for income
taxes......................... 299,259 45,777 64,295 (54,283)
---------- ---------- ---------- ----------
Net income (loss).............. $ 393,375 $ (122,793) $ 191,495 $ (162,847)
========== ========== ========== ==========
See accompanying notes.
F-265
MISSION VALLEY RENTALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
-------------- RETAINED
SHARES AMOUNTS EARNINGS
------ ------- ----------
Balance at July 1, 1995.............................. 1,000 $1,000 $1,421,262
Net income......................................... 393,375
----- ------ ----------
Balance at June 30, 1996............................. 1,000 1,000 1,814,637
Net loss........................................... (122,793)
----- ------ ----------
Balance at June 30, 1997............................. 1,000 1,000 1,691,844
Net loss (unaudited)............................... (162,847)
----- ------ ----------
Balance at December 31, 1997 (unaudited)............. 1,000 $1,000 $1,528,997
===== ====== ==========
See accompanying notes.
F-266
MISSION VALLEY RENTALS, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31
----------------------- --------------------
1996 1997 1996 1997
---------- ----------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss).............. $ 393,375 $ (122,793) $ 191,495 $(162,847)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization................ 763,584 1,646,105 611,009 760,378
Gain on equipment sales...... (35,177) (19,474)
Deferred taxes............... 81,859 131,318 87,014 (84,125)
Changes in assets and
liabilities:
Increase in accounts
receivable.................. (81,581) (191,270) (206,289) (59,246)
Increase in inventory........ (10,437) (21,410) (48,417) (30,016)
(Decrease) increase in
prepaid expenses and other
assets...................... 50,884 (146,248) (104,458) 15,276
Increase in accounts payable,
accrued expenses and other
liabilities................. 119,054 158,153 65,881 400,773
(Decrease) increase in income
taxes payable............... 53,303 (53,303) 10,992 (54,283)
---------- ----------- --------- ---------
Total adjustments.............. 941,489 1,523,345 415,732 929,283
---------- ----------- --------- ---------
Cash provided by operating
activities.................. 1,334,864 1,400,552 607,227 766,436
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of rental equipment... (388,116)
Proceeds from sale of rental
equipment..................... 96,987 413,481 346,540 74,642
---------- ----------- --------- ---------
Cash provided by (used in)
investing activities........ (291,129) 413,481 346,540 74,642
CASH FLOWS FROM FINANCING
ACTIVITIES
Principal payments on debt..... (957,424) (4,567,552) (741,982) (863,459)
Principal payments on capital
lease obligations............. (32,258)
Borrowings under credit
facility...................... 3,169,208
---------- ----------- --------- ---------
Cash used in financing
activities.................. (957,424) (1,430,602) (741,982) (863,459)
---------- ----------- --------- ---------
Increase (decrease) in cash.... 86,311 383,431 211,785 (22,381)
Cash balance at beginning of
year........................ 58,180 144,491 144,491 527,922
---------- ----------- --------- ---------
Cash balance at end of year.. $ 144,491 $ 527,922 $ 356,276 $ 505,541
========== =========== ========= =========
See accompanying notes.
F-267
MISSION VALLEY RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
(THE INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE SIX
MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Mission Valley Rentals, Inc. (the "Company") rents, sells and repairs
construction equipment for use by contractor, industrial and homeowner
markets. The rentals are on a daily, weekly or monthly basis. The Company has
four locations in Northern California and its principal market area is the
entire Bay Area and the San Joaquin Valley. 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 balance sheets are presented on an unclassified basis.
On September 1, 1996, the Company acquired for $2,320,000 a substantial
amount of rental equipment and fixed assets from Rental World, Inc. and
assumed all operations. The Company utilized the funds available under its
line of credit to finance the purchase. The acquisition has been accounted for
as a purchase and, accordingly, at such date the Company recorded the assets
acquired at their estimated fair values.
The acquired assets have been recorded at their estimated fair value at the
date of the acquisition of $1,527,503 with the excess purchase price of
$792,497 being recorded as goodwill.
Interim Financial Statements
The accompanying balance sheet at December 31, 1997 and the statements of
income, stockholders' equity and cash flows for the six-month periods ended
December 31, 1996 and 1997 are unaudited and have been prepared on the same
basis as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consist
solely of normal recurring adjustments. The results of operations for such
interim period are not necessarily indicative of results for the full year.
Inventory
Inventory consists primarily of general replacement parts and fuel for the
equipment and are stated at the lower of cost, determined under the first-in,
first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with a 10% salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the statements of
operations.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over estimated useful lives
of 5 to 10 years.
F-268
MISSION VALLEY RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Intangible assets
Intangible assets are recorded at cost and consist of goodwill, which is
being amortized by the straight line method over its estimated useful life of
forty years. Accumulated amortization at June 30, 1997 and December 31, 1997
is $16,494 and $26,656, respectively.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Company advertises primarily through phone directories and the
distribution of promotional items. All advertising costs are expensed as
incurred. Advertising expenses amounted to approximately $63,800 and $104,500
in the years ended June 30, 1996 and 1997, respectively, and $52,000 and
$42,000 for the six months ended December 31, 1996 and 1997, respectively.
Income Taxes
The Company uses the "liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Accounting 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.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Company's customer base
and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following:
JUNE 30
--------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
Rental equipment....................... $6,384,287 $9,793,816 $10,454,616
Less accumulated depreciation.......... 3,380,176 4,635,027 4,786,957
---------- ---------- -----------
Rental equipment, net.................. $3,004,111 $5,158,789 $ 5,667,659
========== ========== ===========
F-269
MISSION VALLEY RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JUNE 30
----------------- DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(UNAUDITED)
Furniture and fixtures..................... $237,744 $273,686 $273,686
Leasehold improvements..................... 268,939 293,557 293,557
-------- -------- --------
506,683 567,243 567,243
Less accumulated depreciation.............. 382,086 412,242 428,900
-------- -------- --------
Total.................................... $124,597 $155,001 $138,343
======== ======== ========
5. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations consist of the following:
JUNE 30
--------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
Ingersoll-Rand--Various notes with combined
monthly payments of $3,514 including
interest from 7.9% to 10%................. $ 53,296 $ 100,980 $ 167,744
Clark Equipment Credit Co.--Various notes
with combined monthly payments of $5,217
including interest from 7.9% to 9.9%...... 35,443 194,304 156,550
Fremont Bank--Various notes with combined
monthly payments of $52,073 including
interest from 8.75% to 9.35%.............. 784,633 2,874,127 3,017,141
Ford Motor Credit--Various notes with
combined monthly payments of $1,908
including interest from 8.75% to 9.25%.... 64,948 333,237 374,384
Ford New Holland--Various notes with
combined monthly payments of $3,849
including interest 10.5%.................. 123,539 79,366 55,493
Orix Credit--Various notes with combined
monthly payments of $3,864 including
interest from 6.3% to 9.3%................ 10,264 71,764 51,293
Case Credit--Various notes with combined
monthly payments of $20,216 including
interest from 7.7% to 7.9%................ 209,397 567,827 486,188
Caterpillar Financial Services--Various
notes with combined monthly payments of
$3,615 including interest of 6.6%......... -- 150,936 133,994
Country Ford--Various leases with combined
monthly payments of $6,685 including
interest of 8.0%.......................... -- 351,683 325,197
John Deere--Three notes with combined
monthly payments of $3,038 including
interest of 4.9%.......................... 14,073 53,471 45,788
Associates--Various notes with combined
monthly payments of $5,314 including
interest from 7.5% to 8.98%............... 147,925 182,165 366,594
GMAC--One note with a monthly payment of
$886 including interest of 9.99%.......... -- 20,627 16,254
AEL Lease--Two notes with a combined
monthly payment of $2,736 including
interest of 8.25%......................... 3,244 40,705 82,129
M.E.L. Enterprises--One note with a monthly
payment of $2,595 including interest of
9.0%...................................... 65,312 38,984 24,909
AT&T Finance Corp.--Three notes with a
combined monthly payment of $4,028
including interest of 7.35%............... -- -- 194,253
Other...................................... -- 41,967 38,369
---------- ---------- ----------
$1,512,074 $5,102,143 $5,536,280
========== ========== ==========
F-270
MISSION VALLEY RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Substantially all rental equipment collateralize the above notes.
Subsequent to June 30, 1997, the Company paid $2,766,372 on certain amounts
outstanding under the debt and capital lease agreements. The remaining balance
of $2,335,771 is scheduled for payment in fiscal year 1998.
6. CAPITAL LEASES
The Company leases certain rental equipment under leases accounted for as
capital leases. The following is an analysis of the leased property.
JUNE 30 DECEMBER 31,
1997 1997
-------- ------------
(UNAUDITED)
Rental equipment.................................... $383,874 $383,874
Less accumulated amortization....................... 39,688 59,688
-------- --------
Net............................................... $344,186 $324,186
======== ========
Total depreciation expense on assets under capital leases was $39,688 and
$20,000 in the year ended June 30, 1997 and for the six months ended December
31, 1997, respectively.
The following is a schedule by years of future lease payments under capital
leases together with the present value of the net minimum lease payments as of
June 30, 1997:
Year ended June 30, 1998........................................ $ 80,223
1999.......................................................... 80,233
2000.......................................................... 80,223
2001.......................................................... 80,223
2002.......................................................... 80,223
Thereafter.................................................... 33,426
--------
Net minimum lease payment....................................... 434,541
Less amount representing interest............................... 82,858
--------
Present value of net minimum lease payments..................... $351,683
========
7. OPERATING LEASES
The Company leases four store locations on long term leases. The Company is
responsible for all operating expenses of the facilities including property
taxes, assessments, insurance, repairs and maintenance.
Rent expense under these leases totaled $216,725 and $334,725 for the years
ended June 30, 1996 and 1997 and $166,363 and $169,963 for the six months
ended December 31, 1996 and 1997, respectively. Under the lease agreements,
aggregate rent is payable in monthly installments of approximately $28,560.
Under certain lease agreements, the rent shall be increased annually to
reflect the then current fair market rent for the premises, provided that each
annual increase shall not exceed a specific percentage, as defined in the
agreements, of the previous year's rental rate. Future minimum rent
commitments are $342,725 each for years ended June 30, 1998 to June 30, 2004
and $217,563 and $21,000 for fiscal 2005 and 2006 respectively, provided there
is no increase in fair market rent for the premises.
F-271
MISSION VALLEY RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
JUNE 30 DECEMBER 31
----------------- ------------------
1996 1997 1996 1997
-------- -------- -------- --------
(UNAUDITED)
Current:
Federal................................ $184,790 $(85,541) $(22,719) $ 29,842
State.................................. 32,610 -- --
-------- -------- -------- --------
217,400 (85,541) (22,719) 29,842
Deferred:
Federal................................ 69,580 111,620 74,407 (71,507)
State.................................. 12,279 19,698 12,607 (12,618)
-------- -------- -------- --------
81,859 131,318 87,014 (84,125)
-------- -------- -------- --------
Total.................................. $299,259 $ 45,777 $ 64,295 $(54,283)
======== ======== ======== ========
Significant components of the Company's deferred tax liability at June 30,
1996 and 1997 and December 31, 1997 (unaudited) are as follows:
JUNE 30
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(UNAUDITED)
Difference in basis of accounting............. $(33,025) $(41,185) $ --
Cumulative tax depreciation in excess of
book......................................... 188,774 319,869 235,744
-------- -------- --------
Deferred tax liability, net................... $155,749 $278,684 $235,744
======== ======== ========
Deferred tax assets at June 30, 1996 and 1997, are included in prepaid
expenses and other assets on the accompanying balance sheet.
9. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended June 30, 1996 and 1997 and the six months ended December
31, 1996 and 1997, total interest paid was $139,925 and $367,561 and $171,923
and $238,334, respectively.
For the years ended June 30, 1996 and 1997 and the six months ended December
31, 1996 and 1997, total taxes paid were $120,000 and $127,611 and $84,358 and
$ -- , respectively.
For the years ended June 30, 1996 and 1997 and for the six months ended
December 31, 1996 and 1997, the Company purchased $857,779, $3,844,300,
$3,156,404 and $1,297,596, respectively, of equipment which was financed.
For the year ended June 30, 1997 and the six months ended December 31, 1996,
the Company entered into capital lease agreements for rental equipment
totaling $383,874.
10. EMPLOYEE BENEFIT PLAN
On January 1, 1996, the Company established a defined contribution 401(k)
retirement plan which covers substantially all full time employees. The
employees may contribute up to 15% of their weekly gross pay. The
F-272
MISSION VALLEY RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company matches 20% of the employees contribution. Effective September 1997,
the Company's match increased to 70%. Company contributions to the plan were
$7,674, $15,211, $7,807 and $33,159 for the years ended June 30, 1996 and 1997
and for the six month periods ended December 31, 1996 and 1997, respectively.
11. SUBSEQUENT EVENT
On January 13, 1998, the Company entered into a stock purchase agreement
with United Rentals, Inc. ("United"). Under the terms of the stock purchase
agreement, United purchased all of the issued and outstanding capital stock of
the Company.
F-273
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Pro Rentals, Inc.
We have audited the accompanying balance sheet of Pro Rentals, Inc. as of
December 31, 1997 and the related statements of income, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Pro Rentals, Inc. at
December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 22, 1998
F-274
PRO RENTALS, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash................................................................ $ 2,700
Accounts receivable, net of allowance for doubtful accounts of
$38,000............................................................ 582,034
Inventory........................................................... 499,826
Rental equipment, net............................................... 4,308,589
Property and equipment, net......................................... 210,889
Prepaid expenses and other assets................................... 5,315
Due from stockholder................................................ 60,643
----------
Total assets.................................................... $5,669,996
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.................................................. 334,829
Accrued expenses and other liabilities............................ 182,281
Debt.............................................................. 3,456,278
----------
Total liabilities............................................... 3,973,388
Commitments and contingencies
Stockholders' equity:
Common stock, $4.00 par value, 50,000 shares authorized,
1,000 shares issued and outstanding.............................. 4,000
Retained earnings................................................. 1,692,608
----------
Total stockholders' equity...................................... 1,696,608
----------
Total liabilities and stockholders' equity...................... $5,669,996
==========
See accompanying notes.
F-275
PRO RENTALS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
Revenues:
Equipment rentals................................................. $3,980,013
Sales of rental equipment......................................... 581,820
Sales of parts, supplies and new equipment........................ 1,309,778
----------
Total revenues.................................................. 5,871,611
Cost of revenues:
Cost of equipment rentals, excluding equipment rental
depreciation..................................................... 889,536
Depreciation, equipment rentals................................... 578,897
Cost of rental equipment sales.................................... 403,475
Cost of parts, supplies and new equipment sales................... 1,147,579
----------
Total cost of revenues.......................................... 3,019,487
----------
Gross profit.................................................... 2,852,124
Selling, general and administrative expenses........................ 2,137,103
Non-rental depreciation............................................. 58,327
----------
Operating income.................................................... 656,694
Interest expense.................................................... 440,998
----------
Net income...................................................... $ 215,696
==========
See accompanying notes.
F-276
PRO RENTALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------- RETAINED
SHARES AMOUNT EARNINGS
------ ------ ----------
Balance at January 1, 1997............................. 1,000 $4,000 $1,476,912
Net income........................................... 215,696
----- ------ ----------
Balance at December 31, 1997........................... 1,000 $4,000 $1,692,608
===== ====== ==========
See accompanying notes.
F-277
PRO RENTALS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Cash flows from operating activities
Net income....................................................... $ 215,696
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 637,224
Gain on rental equipment sales................................. (178,345)
Changes in assets and liabilities:
Increase in accounts receivable.............................. (189,727)
Decrease in inventory........................................ 676,854
Decrease in prepaid expenses and other assets................ 157,506
Decrease in accounts payable................................. (4,745)
Increase in accrued expenses and other liabilities........... 69,357
-----------
Cash provided by operating activities............................ 1,383,820
Cash flows from investing activities
Proceeds from sale of rental equipment........................... 581,820
Purchase of property and equipment............................... (2,399)
-----------
Cash provided by investing activities............................ 579,421
Cash flows from financing activities
Principal payments on debt....................................... (2,553,206)
Borrowings under credit facility................................. 589,965
-----------
Cash used in financing activities................................ (1,963,241)
-----------
Increase in cash................................................. --
Cash at beginning of year........................................ 2,700
-----------
Cash at end of year.............................................. $ 2,700
===========
See accompanying notes.
F-278
PRO RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company rents, sells and repairs construction equipment for use by
contractor, industrial and homeowners markets. The rentals are on a daily,
weekly or monthly basis. The Company has six locations (East Bremerton, West
Bremerton, Port Angeles, Gig Harbor, Port Orchard and Lakewood) and the
principal market area is Northern Washington. 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 balance sheet is presented on an unclassified basis.
These financial statements are prepared on a historical cost basis and do
not include any adjustments that may result from the acquisition of the
Company by United Rentals, Inc. ("United") as more fully described in Note 9.
INVENTORY
Inventories consists primarily of equipment, general replacement parts and
fuel for the equipment and are stated at the lower of cost, determined under
the first-in, first-out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Rental equipment costing less than
$1,000 is immediately expensed at the date of purchase. Depreciation for
rental equipment is computed using the straight-line method over an estimated
seven-year useful life with a 35% salvage value. Ordinary maintenance and
repair costs are charged to operations as incurred. Proceeds from the disposal
and the related net book value of the equipment are recognized in the period
of disposal and reported as revenue from the sales of rental equipment and
cost of sales of rental equipment, respectively, in the statement of income.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The company capitalizes all
property and equipment purchases greater than $1,000. Depreciation of property
and equipment is computed on the straight-line method over estimated useful
lives of 5 to 10 years with no salvage value. Leasehold improvements are
amortized using the straight-line method over the estimated lives of the
improvements or the remaining life of the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
RENTAL REVENUE
Rental revenue is recorded as earned under the operating method.
ADVERTISING COSTS
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to $61,405 in the year ended December 31, 1997.
INCOME TAXES
Pro Rentals has elected, by unanimous consent of its shareholders, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
federal purposes. Under those provisions, the Company does not pay federal
income taxes; instead, the shareholders are liable for individual income taxes
on the Company's profits.
F-279
PRO RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ACCOUNTING 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.
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies' customer base
and their credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following at December 31, 1997:
Rental equipment................................................. $6,326,420
Less accumulated depreciation.................................... 2,017,831
----------
Rental equipment, net............................................ $4,308,589
==========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
Furniture and fixtures............................................. $ 30,363
Office equipment................................................... 237,868
Vehicles........................................................... 336,457
Leasehold improvements............................................. 11,218
--------
615,906
Less accumulated depreciation ..................................... 405,017
--------
Total.............................................................. $210,889
========
5. DEBT
Debt consists of the following at December 31, 1997:
Deutsche Financial Services--Various notes with combined monthly
payments of $37,489 including interest from 7.9% to 10.25%..... $1,116,338
John Deere--Various notes with combined monthly payments of
$10,699 including interest from 6.9% to 10.24%................. 558,677
American Equipment Leasing (AEL)--Various notes with combined
monthly payments of $34,763 including interest from 8% to
12.25%......................................................... 648,835
Financial Federal Credit, Inc.--Various notes with combined
monthly payments of $7,291 including interest of 10.25%........ 183,757
Associates Commercial Corporation--Various notes with combined
monthly payments of $6,436 including interest from 8.3% to
10.25%......................................................... 166,780
AEL--$150,000 revolving line of credit due October 14, 1998 with
monthly interest payments at prime plus 2.17%.................. 150,000
Kitsap Bank--$150,000 revolving line of credit due July 7, 1998
with monthly interest payments at prime plus 2%. This line is
personally guaranteed by the Company's shareholders............ 75,000
Other........................................................... 556,891
----------
Total....................................................... $3,456,278
==========
F-280
PRO RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Substantially all rental equipment and inventory collateralized the above
notes. All debt at December 31, 1997 was paid off in connection with the
acquisition discussed in Note 9.
6. OPERATING LEASES
The Company leases six store locations. Three of the locations are on long
term leases, while the other three are on a month-to-month basis. The Company
is responsible for all operating expenses of the facilities including property
taxes, assessments, insurance, repairs and maintenance. These leases have
various terms and extend through December 2007 and include scheduled base rent
increases over the term of the leases. The total amount of the base rent
payments is being charged to expense on the straight-line method over the
terms of the leases.
Total rent expense for 1997 was approximately $294,893.
At December 31, 1997, minimum lease commitments under all operating leases,
with initial or remaining lease terms of more than one year are as follows:
1998.............................................................. $ 318,360
1999.............................................................. 299,037
2000.............................................................. 273,144
2001.............................................................. 223,364
Thereafter........................................................ 1,432,800
----------
Total............................................................. $2,546,705
==========
7. RELATED PARTIES
Three of the Company's locations are leased from the Company's shareholders.
Total rent paid to the shareholders under these leases amounted to $177,412 in
1997. At December 31, 1997 Pro Rentals has a non-interest bearing amount due
from one of the Company's shareholders of $60,643.
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 total interest paid was $440,998.
During 1997 the Companies purchased $607,902 of rental equipment and
$524,333 of inventory which was financed.
9. SUBSEQUENT EVENT
On January 22, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Company.
F-281
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
ASC Equipment Company, Inc.
We have audited the accompanying balance sheet of ASC Equipment Company,
Inc. as of December 31, 1997 and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial statements referred to above present fairly,
in all material respects, the financial position of ASC Equipment Company,
Inc. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 22, 1998
F-282
ASC EQUIPMENT COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash............................................................... $ 13,365
Accounts receivable, net of allowance for doubtful accounts of
$51,217........................................................... 623,370
Inventory.......................................................... 619,187
Rental equipment, net.............................................. 2,721,279
Property and equipment, net........................................ 313,827
Prepaid expenses and other assets.................................. 33,883
----------
Total assets................................................... $4,324,911
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities......... $ 490,454
Debt............................................................. 2,436,503
Deferred compensation............................................ 52,615
Deferred income taxes............................................ 206,109
----------
Total liabilities.............................................. 3,185,681
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value, 100,000 shares authorized, 3,210
shares issued and outstanding................................... 3,210
Preferred stock, $1.00 par value, 1,000 shares authorized, 55
shares issued and outstanding................................... 55
Additional paid-in capital....................................... 19,595
Retained earnings................................................ 1,188,370
----------
1,211,230
Treasury stock................................................... (72,000)
----------
Total stockholders' equity..................................... 1,139,230
----------
Total liabilities and stockholders' equity..................... $4,324,911
==========
See accompanying notes.
F-283
ASC EQUIPMENT COMPANY, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
Revenues:
Equipment rentals................................................ $3,209,936
Rental equipment sales........................................... 291,618
Sales of parts, supplies and new equipment....................... 1,963,901
----------
Total revenues................................................. 5,465,455
Cost of revenues:
Cost of equipment rentals, excluding equipment rental
depreciation.................................................... 1,248,757
Depreciation, equipment rentals.................................. 949,526
Cost of rental equipment sales................................... 136,712
Cost of parts, supplies and new equipment sales.................. 1,480,339
----------
Total cost of revenues......................................... 3,815,334
----------
Gross profit................................................... 1,650,121
Selling, general and administrative expenses....................... 1,328,977
Non-rental depreciation............................................ 105,503
----------
Operating income................................................... 215,641
Interest expense................................................... 214,983
Other (income)..................................................... (116,188)
----------
Income before provision for income taxes........................... 116,846
Provision for income taxes......................................... 87,861
----------
Net income......................................................... $ 28,985
==========
See accompanying notes.
F-284
ASC EQUIPMENT COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED
COMMON STOCK STOCK ADDITIONAL
------------- ------------- PAID IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK
------ ------ ------ ------ ---------- ---------- -------- ---
Balance at January 1,
1997................... 3,210 $3,210 55 $55 $19,595 $1,159,385 $(72,000)
Net income............ 28,985
----- ------ --- --- ------- ---------- --------
Balance at December 31,
1997................... 3,210 $3,210 55 $55 $19,595 $1,188,370 $(72,000)
===== ====== === === ======= ========== ========
See accompanying notes.
F-285
ASC EQUIPMENT COMPANY, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 28,985
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 1,055,029
Gain on rental equipment sales................................. (26,631)
Deferred taxes................................................. 75,333
Changes in assets and liabilities:
Increase in accounts receivable.............................. (123,786)
Increase in inventory........................................ (57,506)
Decrease in prepaid expenses and other assets................ 47,521
Increase in accounts payable accrued expenses and other
liabilities................................................. 141,880
Increase in deferred compensation............................ 3,895
-----------
Cash provided by operating activities............................ 1,144,720
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment..................................... (1,597,801)
Proceeds from sale of rental equipment........................... 262,130
Purchases of property and equipment.............................. (190,245)
-----------
Cash used in investing activities................................ (1,525,916)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt....................................... (2,933,065)
Borrowings under credit facilities............................... 3,325,064
-----------
Cash provided by financing activities............................ 391,999
-----------
Increase in cash................................................. 10,803
Cash balance at beginning of year................................ 2,562
-----------
Cash balance at end of year...................................... $ 13,365
===========
See accompanying notes.
F-286
ASC EQUIPMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
ASC Equipment Company, Inc. (the "Company") rents, sells and repairs
construction equipment for use by contractor, industrial and homeowners
markets. The rentals are on a daily, weekly or monthly basis. The Company has
three locations (Fayetteville, Goldsboro and Jacksonville) and their principal
market area is eastern North Carolina. 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 balance
sheet is presented on an unclassified basis.
These financial statements are prepared on a historical cost basis and do
not include any adjustments that may result from the acquisition of the
Company by United Rentals, Inc. ("United") as more fully described in Note 10.
INVENTORY
Inventories consists primarily of general replacement parts and equipment
held for resale and are stated at the lower of cost, determined under the
first-in, first-out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the statement of
income.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over an estimated five-year
useful life. Leasehold improvements are amortized using the straight-line
method over the estimated lives of the improvements or the remaining life of
the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
RENTAL REVENUE
Rental revenue is recorded as earned under the operating method.
ADVERTISING COSTS
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to approximately $34,900 in the year ended
December 31, 1997.
F-287
ASC EQUIPMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Company uses the "liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
differences are expected to reverse.
ACCOUNTING 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.
2. CONCENTRATIONS OF CREDIT RISK
The company maintains cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Company's customer base
and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following at December 31, 1997:
Rental equipment............................................... $ 5,640,041
Less accumulated depreciation.................................. (2,918,762)
-----------
Rental equipment, net.......................................... $ 2,721,279
===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
Transportation equipment.......................................... $ 571,054
Furniture and fixtures............................................ 36,317
Leasehold improvements............................................ 32,622
---------
639,993
Less accumulated depreciation..................................... (326,166)
---------
Total............................................................. $ 313,827
=========
5. DEBT
Debt consists of the following at December 31, 1997:
First Citizens Bank; three notes; payable in monthly
installments of $37,770 including interest at prime 8.5% at
December 31, 1997, collateralized by equipment and real
estate........................................................ $ 936,404
First Citizens Bank; line of credit of $1,550,000; payable in
monthly installments of interest only at prime, collateralized
by equipment and inventory.................................... 1,446,292
Financial Federal; payable in monthly installments of $2,230
including interest at 6.75%; collateralized by equipment...... 53,807
----------
$2,436,503
==========
All debt at December 31, 1997 was paid off in connection with the
acquisition discussed in Note 10.
F-288
ASC EQUIPMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31, 1997:
Current:
Federal............................................................ $10,270
State.............................................................. 2,258
-------
12,528
Deferred:
Federal............................................................ 61,773
State.............................................................. 13,560
-------
75,333
-------
$87,861
=======
Significant components of the Company's deferred tax liability at December
31, 1997 are as follows:
Difference in basis of accounting................................. $(20,487)
Cumulative tax depreciation in excess of book..................... 226,596
--------
Deferred tax liability, net..................................... $206,109
========
7. RELATED PARTY TRANSACTIONS
The Company leases its three operating facilities from the president and a
stockholder of the Company on a month to month basis. The Company is
responsible for all operating expenses of the facilities including property
taxes, assessments, insurance, repairs and maintenance. Total rent expense for
1997 was approximately $99,100.
In connection with the acquisition discussed in Note 10, the lease terms
have been renegotiated.
The Company also had a non-interest bearing note receivable from its
stockholders totaling $14,971 at December 31, 1997 and is included in prepaid
expenses and other assets on the accompanying balance sheet. No repayment
schedule has been established.
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 total interest and income taxes paid
were $200,457 and $29,000, respectively.
During 1997, the Company purchased $72,500 of equipment which was financed.
9. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) pension plan which covers
substantially all employees. The Company matches 100% up to the first five
percent of the employees contribution. Company contributions to the plan were
$33,980 for the year ended December 31, 1997.
10. SUBSEQUENT EVENT
On January 27, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Company.
F-289
INDEPENDENT AUDITOR'S REPORT
MERCER Equipment Company:
We have audited the accompanying balance sheets of MERCER Equipment Company
as of December 31, 1996 and October 24, 1997 and the related statements of
income and retained earnings and of cash flows for each of the two years in
the period ended December 31, 1996, and for the period from January 1, 1997 to
October 24, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MERCER Equipment Company
as of December 31, 1996, and October 24, 1997 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996 and for the period from January 1, 1997 to October 24, 1997
in conformity with generally accepted accounting principles.
/s/ Webster, Duke & Co. PA
Charlotte, North Carolina
January 21, 1998
F-290
MERCER EQUIPMENT COMPANY
BALANCE SHEETS
DECEMBER 31, OCTOBER 24,
------------ -----------
1996 1997
------------ -----------
ASSETS
CURRENT ASSETS:
Cash................................................ $ 276,639 $ 85,384
Accounts receivable (less allowance for doubtful
accounts: 1996-$182,425, 1997-$254,073)............ 1,819,581 2,398,926
Inventory (Notes 2, 5 and 8)........................ 2,417,425 2,299,512
Miscellaneous receivables........................... 16,604 29,508
Prepaid expenses.................................... - 17,965
----------- -----------
Total current assets.............................. 4,530,249 4,831,295
----------- -----------
RENTAL EQUIPMENT (Notes 2, 5, 8, 9, 10 and 15):
Rental equipment.................................... 14,030,584 15,392,093
Less accumulated depreciation....................... 3,717,218 4,322,744
----------- -----------
Rental equipment, net............................. 10,313,366 11,069,349
----------- -----------
OTHER PROPERTY (Notes 2, 8 and 11):
Other property...................................... 1,003,079 1,091,365
Less accumulated depreciation....................... 395,658 498,962
----------- -----------
Other property, net............................... 607,421 592,403
----------- -----------
OTHER ASSETS (Note 13):
Deposits and other assets........................... 68,639 42,889
Notes receivable-officers........................... 69,980 67,453
----------- -----------
Total other assets................................ 138,619 110,342
----------- -----------
TOTAL............................................. $15,589,655 $16,603,389
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 4)............................. -- --
Note payable-Bank (Note 4).......................... $ 494,245 $ 5,017,953
Short-term equipment notes (Note 5)................. 189,528 3,619,830
Notes payable-individuals (Notes 6 and 13).......... 609,000 142,000
Current portion of long-term debt................... 2,253,562 56,411
Current portion of capital leases................... 167,445 86,597
Accounts payable.................................... 2,161,340 3,174,282
Accrued expenses.................................... 140,361 254,444
----------- -----------
Total current liabilities......................... 6,015,481 12,351,517
----------- -----------
LONG-TERM DEBT (Non-current Portion):
Revolving credit note (Note 7)...................... 2,430,000 --
Notes payable to bank (Note 8)...................... 1,513,000 --
Notes payable on rental equipment (Note 9).......... 2,195,238 --
Capital leases on rental equipment (Note 10)........ 119,183 176,047
Notes payable on other property..................... 138,543 82,208
----------- -----------
Total long-term debt.............................. 6,395,964 258,255
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock (Notes 2 and 12)....................... 500,001 500,001
Retained earnings (Note 8).......................... 2,678,209 3,493,616
----------- -----------
Total stockholders' equity........................ 3,178,210 3,993,617
----------- -----------
TOTAL............................................. $15,589,655 $16,603,389
=========== ===========
See notes to financial statements.
F-291
MERCER EQUIPMENT COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 TO
------------------------ OCTOBER 24,
1995 1996 1997
----------- ----------- -----------
REVENUE:
Sales of new equipment................. $ 2,479,358 $ 3,415,523 $3,709,356
Sales of supplies and parts............ 1,558,273 2,067,403 1,831,345
----------- ----------- ----------
Total goods sold..................... 4,037,631 5,482,926 5,540,701
Sales of rental equipment.............. 872,621 1,102,621 1,876,001
Rental revenues........................ 4,950,614 7,380,137 6,891,972
Service department revenues............ 357,039 488,216 764,738
----------- ----------- ----------
Total revenues....................... 10,217,905 14,453,900 15,073,412
----------- ----------- ----------
DIRECT COSTS OF REVENUE:
Cost of goods sold..................... 3,171,168 4,469,790 4,677,328
Cost of rental equipment sold, net..... 530,102 702,254 1,218,507
Rental department expenses (including
depreciation of $1,035,352, $1,492,131
and $1,428,312)....................... 2,226,420 3,589,936 3,728,374
Service department expenses............ 460,382 648,882 706,958
----------- ----------- ----------
Total direct costs of revenue........ 6,388,072 9,410,862 10,331,167
----------- ----------- ----------
GROSS MARGIN............................. 3,829,833 5,043,038 4,742,245
----------- ----------- ----------
OPERATING EXPENSES:
Sales expenses......................... 752,722 1,386,812 1,345,705
Administrative and general expenses.... 1,930,124 2,247,556 2,014,205
----------- ----------- ----------
Total operating expenses............. 2,682,846 3,634,368 3,359,910
----------- ----------- ----------
MARGIN FROM OPERATIONS................... 1,146,987 1,408,670 1,382,335
----------- ----------- ----------
OTHER INCOME (EXPENSE):
Miscellaneous income................... 78,258 110,340 147,362
Interest expense....................... (486,976) (813,339) (686,512)
----------- ----------- ----------
Total other income (expense)......... (408,718) (702,999) (539,150)
----------- ----------- ----------
NET INCOME............................... 738,269 705,671 843,185
BEGINNING RETAINED EARNINGS.............. 1,450,936 2,045,871 2,678,209
----------- ----------- ----------
Total................................ 2,189,205 2,751,542 3,521,394
LESS DIVIDENDS PAID...................... 143,334 73,333 27,778
----------- ----------- ----------
ENDING RETAINED EARNINGS................. $ 2,045,871 $ 2,678,209 $3,493,616
=========== =========== ==========
See notes to financial statements.
F-292
MERCER EQUIPMENT COMPANY
STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 TO
------------------------ OCTOBER 24,
1995 1996 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 738,269 $ 705,671 $ 843,185
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 1,117,783 1,610,918 1,542,966
Cost of rental equipment sold, net... 530,102 702,254 1,218,507
Cost of other property sold, net..... 14,800
Changes in assets and liabilities:
Accounts receivable, net........... (418,132) (398,900) (579,345)
Inventory.......................... (900,532) (325,339) 117,913
Miscellaneous receivables.......... (5,437) (4,065) (12,904)
Prepaid expenses................... (17,965)
Other assets....................... (16,000) (24,239) 14,400
Accounts payable................... 651,668 558,903 944,210
Accrued expenses................... 29,098 24,329 114,083
----------- ----------- ----------
Net cash provided by operating
activities...................... 1,726,819 2,864,332 4,185,050
----------- ----------- ----------
CASH FLOWS (TO) INVESTING ACTIVITIES:
Purchase of rental equipment........... (2,466,039) (2,001,083) (1,601,703)
Purchase of other property............. (131,695) (171,319) (81,117)
Increase in other asset................ (1,650)
----------- ----------- ----------
Net cash (to) investing
activities...................... (2,599,384) (2,172,402) (1,682,820)
----------- ----------- ----------
CASH FLOWS FROM (TO) FINANCING
ACTIVITIES:
Repayments of notes receivable--
officers.............................. 2,264 3,019 2,527
Repayments by stockholders............. 220,602
Loans to stockholders.................. (247,729)
Repayments under line of credit........ (125,000) (8,792)
Borrowings under line of credit........ --
Repayments of short-term equipment
notes................................. (130,301) (618,854) (597,500)
Repayments of notes payable--
individuals........................... (52,500) (491,000)
Repayments of long term debt........... (1,051,070) (1,950,688) (1,794,942)
Repayments of capital leases........... (22,009) (150,279)
Net borrowings under note payable--
bank.................................. 465,200 29,045 --
Borrowings under revolving credit
note.................................. 1,000,000 1,700,000 200,000
Proceeds from bank loans............... 1,120,588
Proceeds from notes payable
individuals........................... 305,000 23,000 24,000
Dividends paid......................... (143,334 ) (73,333) (27,778)
----------- ----------- ----------
Net cash from (to) financing
activities...................... 1,173,609 (869,988) (2,693,485)
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH.......... 301,044 (178,058) (191,255)
BEGINNING CASH BALANCE................... 153,653 454,697 276,639
----------- ----------- ----------
ENDING CASH BALANCE...................... $ 454,697 $ 276,639 $ 85,384
=========== =========== ==========
See notes to financial statements
F-293
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND OCTOBER 24, 1997
1. ORGANIZATION AND BUSINESS
Organization--MERCER Equipment Company (MERCER) is a North Carolina
corporation. For income tax purposes, it has elected treatment under
Subchapter S of the Internal Revenue Code of 1986.
Business--MERCER sells, rents, and repairs construction equipment, primarily
to contractors, industry, utilities, and municipalities. MERCER operates two
branches in the Charlotte, North Carolina area and one branch in Greensboro,
North Carolina.
2. ACCOUNTING PRINCIPLES
Basis of Accounting--MERCER prepares its financial statements on the accrual
basis of accounting.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Inventory--Inventory consists of new equipment and merchandise for resale
and of parts for resale or repair of equipment.
MERCER records inventory using the last-in, first-out (LIFO) cost
assumptions. MERCER maintains separate LIFO pools for new equipment,
merchandise, and parts; and uses government indices to determine the cost of
LIFO layers.
At December 31, 1996 and October 24, 1997, the difference between LIFO and
first-in, first-out cost was $310,346 and $347,936 respectively.
Rental Equipment--MERCER records rental equipment at cost and depreciates
that cost using the straight-line method over 60 months (50 months for rental
equipment purchased after December 31, 1995). MERCER estimates the salvage
value on rental equipment to be 28% (50% for rental equipment purchased after
December 31, 1995). (See Note 15).
Other Property--MERCER records other property at cost and depreciates that
cost using the straight-line method over lives of 5 or 7 years.
Notes Receivable--Officers--At December 31, 1996, and October 24, 1997 the
notes receivable from officers are due in monthly payments of $600, including
principal and interest, for 15 years. At December 31, 1995, the notes
receivable from officers were due in quarterly installments of $1,264,
including principal and interest, for 14 years.
Common Stock--MERCER has two classes of common stock: Class A common stock
which has voting rights and Class B common stock which has no voting rights.
The preferences, limitations, and relative rights of classes are the same
except the nonvoting stock has no voting rights other than in those cases in
which nonvoting stock is expressly granted voting rights under North Carolina
law.
F-294
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and October 24, 1997, the number of shares authorized
and outstanding of each class of stock was as follows:
AUTHORIZED OUTSTANDING
---------- -----------
Class A, voting....................................... 25,000 16,667
Class B, nonvoting.................................... 175,000 150,000
Rental Revenue--MERCER generally rents equipment under short-term agreements
of one month or less and accounts for these agreements as operating leases.
Lease Expense--MERCER leases its facilities and certain delivery vehicles
under leases classified as operating leases. MERCER leases certain rental
equipment and new equipment inventory under leases classified as capital
leases.
Income Taxes--MERCER has elected taxation under Subchapter S of the Internal
Revenue Code of 1986 and its stockholders report the taxable income or loss of
the company on their individual income tax returns. For income tax purposes,
MERCER generally uses accelerated depreciation methods (without salvage value)
and deducts bad debts as they are written off.
Statement of Cash Flows--MERCER considers all instruments with a maturity of
three months or less to be cash equivalents. MERCER paid interest expense and
purchase various assets through incurrence of notes payable as follows:
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 1997 TO
31 OCTOBER 24,
1995 1996 1997
---------- ---------- -----------
Interest paid................................ $ 464,090 $ 807,169 $ 683,596
Debt incurred to purchase:
Inventory.................................. 357,306 88,509
Rental equipment........................... 2,300,291 2,530,234 1,801,029
Fixed assets............................... 142,174 163,756 7,169
3. PURCHASE OF BUSINESS
On September 29, 1995, MERCER acquired the branch retail operations of
Builders Equipment & Tool Co., Inc. (BETCO) in a transaction accounted for as
a purchase. The accompanying financial statements include the results of the
Greensboro operation from that date. MERCER purchased substantially all of the
resale and rental inventory and the fixed assets at the branch. The purchase
price was $600,000. There were no intangible assets purchased nor are there
any contingent payments or commitments.
4. NOTE PAYABLE--BANK
At December 31, 1996, MERCER had a note payable to a bank that is due May
31, 1997. The note provides for monthly payment of interest at the bank's
prime rate plus 1/2%. The original amount of the note was $500,000.
In connection with the purchase of MERCER's common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
5. SHORT-TERM EQUIPMENT NOTES
MERCER has purchased rental equipment and inventory with short-term (less
than 12 months) notes payable with a nominal interest charge. At December 31,
1996, rental equipment and inventory with a cost of $434,972 and $135,522,
respectively, is pledged as collateral.
F-295
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the purchase of MERCERs common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
6. NOTES PAYABLE--INDIVIDUALS
Notes payable--individuals provide for quarterly interest payments at the
Wall Street prime rate plus one percent and allows MERCER to delay payment of
principal for up to one year and a day after request. At December 31, 1996 and
October 24, 1997, $178,000 and $ -- , respectively, of this amount was due
stockholders.
7. REVOLVING CREDIT NOTES
MERCER has a $3,000,000 revolving credit note with a bank. At December 31,
1996 MERCER had termed the revolver's outstanding balance and will repay the
principal over 36 months beginning in June 1997. The repayment provides for
monthly payment of $45,000 principal plus interest at the bank's prime rate
plus 1/4%. At December 31, 1995 and during 1996, only interest payments were
due on the note (see Note 9 for collateral).
In connection with the purchase of MERCERs common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
8. NOTES PAYABLE TO BANK
MERCER's note payable to bank consisted of the following:
DECEMBER 31,
1996
------------
Bank note--8.25%, principal of $49,750 plus interest paid
monthly through November 1998; balance of $635,750 due December
1998........................................................... $1,780,000
Bank note--interest at prime plus 1/2%, principal of $10,000
plus interest paid monthly through August 1998; $250,000 due
September 30, 1998............................................. 450,000
----------
Total........................................................... 2,230,000
Less current portion............................................ 717,000
----------
Noncurrent portion.............................................. $1,513,000
==========
All accounts receivable and inventory and rental equipment, unless otherwise
encumbered, are given as security for the notes payable to bank.
The loan agreement with the bank provides for maintenance of certain
absolute and ratio amounts relating to working capital, net worth, cash flow
coverage, and debt/equity and limits amounts that can be paid in dividends. At
December 31, 1996, MERCER had obtained a waiver on the cash flow coverage
ratio.
In connection with the purchase of MERCERs common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
9. NOTES PAYABLE ON RENTAL EQUIPMENT
MERCER finances purchases of rental equipment and inventory through various
arrangements with vendors, their related finance entities, and other lenders.
These notes provide for monthly payments of either a fixed principal plus
interest or a level payment of principal and interest.
These note have terms of 36 to 60 months and generally provide for
accelerated repayment if the underlying equipment is sold. At December 31,
1995 and 1996, the weighted interest rates were 10.1%, and 8.6%, respectively.
F-296
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, $480,801 of floor plan notes, which have not yet begun
to require payments of principal or interest, are included in notes payable on
rental equipment. The financial statements assume their conversion upon
expiration of the floor plan period.
At December 31, 1996, rental equipment and inventory of $4,637,033 and
$88,509, respectively, were collateral for all of the above notes.
In connection with the purchase of MERCER's common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
10. CAPITAL LEASES
MERCER leases certain rental equipment under leases accounted for as capital
leases. The following is an analysis of the leased property:
DECEMBER 31, OCTOBER 24,
------------ -----------
1996 1997
------------ -----------
Rental equipment.................................... $408,081 $386,153
Less accumulated amortization....................... 78,561 138,706
-------- --------
Net............................................... $329,520 $247,447
======== ========
The following is a schedule by years of future lease payments under capital
leases together with the present value of the net minimum lease payments as of
October 24, 1997:
Year ended December 31, 1997....................................... $106,795
1998............................................................. 98,730
1999............................................................. 74,158
2000............................................................. 23,177
--------
Net minimum lease payments......................................... 302,860
Less amount representing interest.................................. 40,216
--------
Present value of net minimum lease payments........................ 262,644
Less current portion............................................... 86,597
--------
Long-term portion.................................................. $176,047
========
11. NOTES PAYABLE ON OTHER PROPERTY
The notes payable on other property provide for monthly payment of principal
and interest at rates from 9.0% to 10.8%. At December 31, 1996 and October 24,
1997, related assets with a cost of $287,430 and $232,599 are collateral for
the notes.
The annual amounts of principal due for the next five years is as follows:
1997--$56,411; 1998--$50,318; 1999--$25,082; and 2000--$6,808.
12. COMMITMENTS AND CONTINGENCIES
As of December 31, 1996 and October 24, 1997, MERCER's cash balance had
$100,000 of FDIC insurance and is at one bank.
F-297
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of October 24, 1997, MERCER leased all of its facilities from a limited
liability company (LLC) whose members own 72% of MERCER's outstanding stock.
The leases provided for initial terms of five to seven years; two of the
leases provide for annual cost of living increases and have renewal options of
five years. MERCER is also responsible for the property taxes, insurance, and
repairs (see Note 13). In connection with the sale of MERCER's common stock
(see Note 16), the leases were rewritten to provide for an initial term of ten
years with two five-year options. The leases provide for minimum rentals of
$28,000 per month, after five years, minimum rents will be adjusted for
changes in the Consumer Price Index. MERCER has also guaranteed debt of
approximately $2,000,000 that the LLC has borrowed against the buildings.
MERCER had a stock repurchase agreement with two stockholders, each owning
30,000 shares of the outstanding Class B common stock. Among other provisions,
the stock repurchase agreement allows MERCER first refusal on a sale of such
shares at no less than the book value per share of the stock. At December 31,
1996 the minimum purchase price under this plan was $1,121,950. MERCER had a
salary continuation agreement with the same two stockholders. MERCER has
agreed to pay these stockholders' beneficiaries an amount equal to twice the
prior year's wages. This amount is payable over 24 months, and at December 31,
1996, the potential obligation under the salary continuation plan was
$672,672. In connection with the Purchase of MERCER's common stock both of
these agreements were canceled. (See Note 16)
13. RELATED PARTIES
At December 31, 1996 and October 24, 1997, other assets includes rental
deposits of $42,889 and $42,889, respectively, with the LLC described in Note
12. For the years ended December 31, 1995 and 1996 and for the period from
January 1, 1997 to October 24, 1997, MERCER paid building rentals to the LLC
of $149,500, $278,000 and $273,000, respectively.
For the years ended December 31, 1995 and 1996 and for period from January
1, 1997 to October 24, 1997, MERCER paid interest of $17,808, $15,672 and
$14,576, respectively to stockholders on the notes payable--individuals.
14. PROFIT-SHARING PLAN
MERCER has adopted a profit-sharing plan that covers substantially all
employees and provides for discretionary employer and voluntary employee
contributions. For the years ended December 31, 1995, and 1996, and for the
period from January 1, 1997 to October 24, 1997, no profit-sharing
contribution was made. For the years ended December 31, 1995, and 1996, and
for the period from January 1, 1997 to October 24, 1997, MERCER made matching
payments of $21,969, $14,777, and $24,287, respectively under Section 401(k)
of the Internal Revenue Code of 1986.
15. CHANGE IN ACCOUNTING ESTIMATE
In 1996 MERCER changed the depreciable life and estimated salvage value of
its rental equipment purchased after December 31, 1995 from 60 months to 50
months and from 28% to 50%. The effect of these changes in estimated life and
salvage value was to decrease depreciation on rental equipment by $58,859.
16. SUBSEQUENT EVENT
On October 24, 1997, United Rentals, Inc. purchased all of MERCER's issued
and outstanding common stock.
F-298
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
A&A Tool Rentals & Sales, Inc.:
We have audited the accompanying consolidated balance sheets of A&A Tool
Rentals & Sales, Inc. and subsidiary as of October 31, 1996 and October 19,
1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended October 31, 1995 and 1996, and the
period from November 1, 1996 to October 19, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of A&A Tool
Rentals & Sales, Inc. and subsidiary as of October 31, 1996 and October 19,
1997 and the results of their operations and their cash flows for the years
ended October 31, 1995 and 1996, and the period from November 1, 1996 to
October 19, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Sacramento, California
November 20, 1997
F-299
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
ASSETS
Cash....................................... $ 308,331 $ 108,327 $ 187,082
Trade accounts receivable, less allowance
for doubtful accounts of $80,000 at Octo-
ber 31, 1996 and at October 19, 1997, and
$94,608 at July 31, 1997 (notes 2 and 3).. 1,416,142 1,415,775 1,324,684
Merchandise inventory...................... 847,035 862,200 906,969
Rental equipment, primarily machinery, at
cost, net of accumulated depreciation and
amortization of $5,909,751 at October 31,
1996, $6,822,441 at October 19, 1997, and
$6,727,264 at July 31, 1997
(notes 2 and 3)........................... 3,190,093 2,780,854 3,133,863
Operating property and equipment, net of
accumulated depreciation and amortization
of $912,230 at October 31, 1996, $955,007
at October 19, 1997, and $975,498 at July
31, 1997 (notes 2 and 3).................. 384,759 281,593 306,415
Due from related party (note 5)............ 228,737 332,613 316,364
Prepaid expenses and other assets.......... 234,976 303,553 152,251
---------- ---------- ----------
Total assets........................... $6,610,073 $6,084,915 $6,327,628
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt (note 2)................... $ 90,400 $ 449,670 $ 484,700
Accounts payable........................... 766,465 1,040,494 703,583
Accrued liabilities........................ 244,938 203,709 221,763
Income tax payable......................... 6,019 12,262 2,992
Long-term debt and capital lease obliga-
tions (note 3)............................ 4,351,394 3,463,807 3,868,069
---------- ---------- ----------
Total liabilities...................... 5,459,216 5,169,942 5,281,107
---------- ---------- ----------
Commitments (notes 6 and 9)................
Stockholders' equity:
Common stock, Class A--voting par value
$.10. Authorized 2,000,000 shares;
issued and outstanding 720,000 shares... 72,000 72,000 72,000
Common stock, Class B--nonvoting. Autho-
rized 5,000,000 shares; issued and out-
standing 277,172 shares at October 31,
1996, 272,491 shares at October 19,
1997, and 275,242 shares at July 31,
1997.................................... 395,201 378,714 393,058
Retained earnings........................ 683,656 464,259 581,463
---------- ---------- ----------
Total stockholders' equity............. 1,150,857 914,973 1,046,521
---------- ---------- ----------
Total liabilities and stockholders'
equity................................ $6,610,073 $6,084,915 $6,327,628
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-300
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
NOVEMBER 1, NINE MONTHS
YEAR ENDED OCTOBER 31, 1996 TO ENDED JULY 31,
----------------------- OCTOBER 19, ----------------------
1995 1996 1997 1996 1997
----------- ---------- ----------- ---------- ----------
(UNAUDITED)
Revenues:
Equipment rentals..... $ 4,800,767 $5,918,148 $6,022,196 $4,165,881 $4,501,537
New equipment sales... 4,283,294 4,463,117 4,355,965 3,310,409 3,228,472
Sales of parts,
supplies and
rental equipment..... 848,193 1,027,943 778,141 824,910 657,572
Other................. 237,205 296,926 290,140 198,144 215,542
----------- ---------- ---------- ---------- ----------
Total revenues.......... 10,169,459 11,706,134 11,446,442 8,499,344 8,603,123
----------- ---------- ---------- ---------- ----------
Costs of Revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation and
amortization......... 2,049,172 2,542,965 2,583,884 1,976,183 2,097,280
Depreciation and amor-
tization, equipment
rentals.............. 1,040,233 1,382,048 1,465,586 902,347 1,193,986
Cost of new equipment
sales................ 4,054,467 4,304,301 4,148,874 3,234,457 3,016,957
Cost of sales of
parts, supplies, and
equipment............ 598,545 622,956 595,424 330,714 296,725
Other................. 38,358 32,582 31,339 24,337 33,115
----------- ---------- ---------- ---------- ----------
Total costs of
revenues............... 7,780,775 8,884,852 8,825,107 6,468,038 6,638,063
----------- ---------- ---------- ---------- ----------
Gross Profit............ 2,388,684 2,821,282 2,621,335 2,031,306 1,965,060
Selling, general and
administration....... 2,063,730 2,215,936 2,178,383 1,614,263 1,696,104
Non-rental
depreciation and
amortization......... 107,390 120,757 124,648 88,896 95,171
----------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 217,564 484,589 318,304 328,147 173,785
Other income
(expense)............ 50,090 116,539 80,080 61,119 105,777
----------- ---------- ---------- ---------- ----------
Income before interest
and taxes.............. 267,654 601,128 398,384 389,266 279,562
----------- ---------- ---------- ---------- ----------
Interest income....... 56,053 54,993 39,967 51,898 34,590
Interest expense...... (324,957) (401,204) (642,478) (264,613) (410,345)
----------- ---------- ---------- ---------- ----------
Net interest
expense............ (268,904) (346,211) (602,511) (212,715) (375,755)
----------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... (1,250) 254,917 (204,127) 176,551 (96,193)
Income tax expense
(note 4)............. (1,600) (7,619) (15,270) (1,600) (6,000)
----------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations.. (2,850) 247,298 (219,397) 174,951 (102,193)
Loss from operation of
discontinued
subsidiary (note 1).. (55,929) -- -- -- --
Loss from disposal of
discontinued
subsidiary (note 1).. -- (44,269) -- (16,318) --
----------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (58,779) $ 203,029 $ (219,397) $ 158,633 $ (102,193)
=========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-301
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON COMMON
STOCK STOCK
CLASS A CLASS B
--------------- ----------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------- ------- ------- -------- -------- ----------
Balances at October 31,
1994................... 720,000 $72,000 363,433 $487,609 $539,406 $1,099,015
Purchase Class B common
stock from ESOP........ -- -- (27,847) (29,796) -- (29,796)
Net loss................ -- -- -- -- (58,779) (58,779)
------- ------- ------- -------- -------- ----------
Balances at October 31,
1995................... 720,000 72,000 335,586 457,813 480,627 1,010,440
Purchase Class B common
stock from ESOP........ -- -- (58,414) (62,612) -- (62,612)
Net income.............. -- -- -- -- 203,029 203,029
------- ------- ------- -------- -------- ----------
Balances at October 31,
1996................... 720,000 72,000 277,172 395,201 683,656 1,150,857
Purchase Class B common
stock from ESOP........ -- -- (4,681) (16,487) -- (16,487)
Net loss................ -- -- -- -- (219,397) (219,397)
------- ------- ------- -------- -------- ----------
Balances at October 19,
1997................... 720,000 $72,000 272,491 $378,714 $464,259 $ 914,973
======= ======= ======= ======== ======== ==========
See accompanying notes to consolidated financial statements.
F-302
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
YEAR ENDED OCTOBER 31, NOVEMBER 1, 1996 NINE MONTHS ENDED JULY 31,
----------------------- TO OCTOBER 19, ----------------------------
1995 1996 1997 1996 1997
---------- ----------- ---------------- ----------- ----------
(UNAUDITED)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ (58,779) $ 203,029 $ (219,397) $ 158,633 $ (102,193)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization.......... 1,147,623 1,502,805 1,590,234 991,243 1,289,157
Provision for bad
debts................. 71,600 96,216 73,894 52,515 59,985
Provision for write-
down of inventory..... 31,709 -- 35,403 -- 35,403
Gain on sale of equip-
ment.................. (213,049) (364,504) (220,017) (196,325) (167,944)
Changes in operating
assets:
(Increase) decrease
in trade accounts
receivable........... (282,115) (151,882) (73,527) (190,069) 31,473
(Increase) decrease
in related party
receivables.......... (54,741) 748 (103,876) (30,385) (87,627)
(Increase) decrease
in merchandise
inventory............ 38,955 (96,479) (50,568) (348,187) (95,337)
(Increase) decrease
in prepaid expenses
and other assets..... (29,102) 10,934 (174,821) (42,445) (50,309)
Increase (decrease)
in accounts payable,
trade................ 18,196 61,005 274,029 114,982 (62,882)
Increase (decrease)
in accrued liabili-
ties................. 52,801 9,680 (41,229) (39,228) (23,175)
Decrease in deferred
revenue.............. (4,440) -- -- -- --
Increase (decrease)
in income tax pay-
able................. -- 6,019 6,243 -- (3,027)
---------- ----------- ---------- ----------- ----------
Net cash provided by
operating
activities.......... 718,658 1,277,571 1,096,368 470,734 823,524
---------- ----------- ---------- ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from the sale
of rental equipment
and operating property
and equipment......... 277,390 469,489 348,374 245,232 213,013
Purchases of rental
equipment and
operating property
and equipment......... (1,620,011) (2,689,358) (1,206,186) (2,042,083) (1,199,652)
Proceeds from sale of
marketable securi-
ties.................. 4,954 2,514 -- 2,514 --
---------- ----------- ---------- ----------- ----------
Net cash used in
investing
activities.......... (1,337,667) (2,217,355) (857,812) (1,794,337) (986,639)
---------- ----------- ---------- ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings on long-term
debt.................. 788,967 3,062,482 855,435 3,224,342 828,345
Payments on long-term
debt.................. (574,595) (1,121,435) (1,743,022) (572,655) (1,311,670)
Net borrowings (pay-
ments) on short-term
debt.................. 513,771 (901,881) 359,270 (1,553,999) 394,300
Premiums paid for offi-
cers' life insurance.. (60,042) (64,743) (93,756) (50,799) (66,966)
Drawings on cash
surrender value of
officers' life
insurance............. -- -- 200,000 -- 200,000
Purchase of Class B
common stock.......... (29,796) (62,612) (16,487) (59,590) (2,143)
---------- ----------- ---------- ----------- ----------
Net cash provided by
(used in) financing
activities.......... 638,305 911,811 (438,560) 987,299 41,866
---------- ----------- ---------- ----------- ----------
Net increase (de-
crease) in cash..... 19,296 (27,973) (200,004) (336,304) (121,249)
Cash at beginning of
period................. 317,008 336,304 308,331 336,304 308,331
---------- ----------- ---------- ----------- ----------
Cash at end of period... $ 363,304 $ 308,331 $ 108,327 $ -- $ 187,082
========== =========== ========== =========== ==========
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION:
Cash paid during the
period for:
Interest............... $ 324,957 $ 401,204 $ 516,307 $ 264,613 $ 410,345
========== =========== ========== =========== ==========
Income taxes........... $ 1,600 $ 1,600 $ 4,606 $ 1,600 $ 10,627
========== =========== ========== =========== ==========
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Sale of property and
equipment for
promissory note....... $ 10,000 $ -- $ -- $ -- $ --
========== =========== ========== =========== ==========
Conversion of short-
term debt to long-term
debt.................. $ -- $ 686,963 $ -- $ -- $ --
========== =========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
F-303
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1996 AND PERIOD FROM NOVEMBER 1, 1996 TO OCTOBER 19, 1997
(THE INFORMATION AS OF JULY 31, 1997 AND FOR THE NINE MONTHS ENDED JULY 31,
1997 AND 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary Operations Management Systems,
Inc. (OMS). The Company rents and sells construction and industrial supplies
and power equipment in Northern California. OMS marketed and sold computer
hardware and software to construction related businesses. All significant
intercompany accounts and transactions were eliminated in consolidation. 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 consolidated balance
sheets are presented on an unclassified basis.
As of October 31, 1995, the Company decided to discontinue the operations of
its subsidiary, OMS. Certain assets of OMS were sold as of October 31, 1995.
The Company disposed of the remaining assets and liabilities of OMS, which
included cash, accounts receivable, inventory, property and equipment,
accounts payable and accrued liabilities, during fiscal year 1996. The Company
recognized a loss on disposal of the remaining assets. The loss from the
disposal of OMS assets was $44,269 for the year ended October 31, 1996 and
$16,318 for the nine months ended July 31, 1996. The loss from operations of
OMS was $55,929 for the year ending October 31, 1995.
(b) Interim Financial Statements
The accompanying consolidated balance sheet at July 31, 1997 and the
consolidated statements of operations and cash flows for the nine month
periods ended July 31, 1996 and 1997 are unaudited and have been prepared on
the same basis as the audited consolidated financial statements included
herein. In the opinion of management, such unaudited consolidated financial
statements include all adjustments necessary to present fairly the information
set forth therein, which consist solely of normal recurring adjustments. The
results of operations for such interim periods are not necessarily indicative
of results for the full year.
(c) Merchandise Inventory
Merchandise inventory is stated at the lower of cost or market. Cost is
determined using the weighted-average method.
(d) Revenue Recognition
Revenue related to the sale of construction and industrial supplies and
power equipment is recognized at the point of sale. Revenue related to the
rental of construction and industrial power equipment is recognized at the
time of return for rentals of twenty-eight days or less, and ratably over the
contract term for rentals in excess of twenty-eight days.
(e) Property and Equipment
Property and equipment are stated at cost and consist of rental equipment
and operating property and equipment. Property and equipment under capital
leases are stated at the present value of minimum lease payments.
Depreciation on property and equipment is calculated using an accelerated
method.
F-304
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation for property and equipment is taken over the asset's useful
life of 5 years, except for leasehold improvements which are amortized over 10
to 20 years.
(f) Other Assets
Other assets consist primarily of the cash surrender value of officers' life
insurance net of loans against the cash surrender value of the policies and
unbilled rental revenue. The loans outstanding were $410,000 at October 31,
1996, and $610,000 at October 19, 1997 and July 31, 1997. The Company is named
beneficiary under the life insurance policy. Unbilled rental revenue
represents the revenue recognized on contracts over twenty-eight days, but not
billed. At October 19, 1997 unbilled rental revenue was $180,178.
(g) Income Taxes
The Company accounts for income taxes using the asset and liability method
under which deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under the asset
and liability method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on November 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(j) Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform to the 1997 consolidated financial statement
presentation.
(2) SHORT-TERM DEBT
As of October 31, 1996, the Company had borrowed $90,400, on a credit
facility that allows the Company to borrow up to $500,000 at the bank's prime
rate (8.25% at October 31, 1996) plus 2%. Borrowings under this facility are
collateralized by trade accounts receivable.
F-305
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1997, the Company had borrowed on a credit facility that allows the
Company to borrow up to $500,000 at the bank's prime rate (8.5% at October 19,
1997 and July 31, 1997) plus 2%. At October 19, 1997 and July 31, 1997, the
amounts outstanding were $449,670 and $484,700, respectively.
(3) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
CURRENT PAYOR AND TERMS
Union Safe Deposit Bank--Various notes
with combined monthly payments of
$54,592 including interest at prime
plus 2%, due from 1996 through 1999.
Collateralized by equipment and
accounts receivable................... $1,382,482 $ 851,741 $ 989,334
American Equipment Leasing--Various
leases with combined monthly payments
of $24,149 including interest ranging
from 11.5% to 12%, due from 1997
through 1998. Collateralized by
equipment............................. 510,567 377,619 381,122
Atlas Copco, Inc.--Various notes with a
combined monthly payment of $22,212
including interest ranging from 8.5%
to 12.36%, due from 1996 through 1998.
Collateralized by equipment........... 352,446 257,875 323,727
Clark Equipment Credit Co.--Various
notes with a combined monthly payment
of $3,546 including interest ranging
from 8.7% to 12.39%, due from 1996
through 1999. Collateralized by
equipment............................. 105,889 39,083 45,433
Ingersoll-Rand--One note with a monthly
payment of $3,254 including interest
at 9.75%, due in 1999. Collateralized
by equipment.......................... 91,121 52,069 61,832
Prospect Leasing--Two leases with a
combined monthly payment of $1,798
including interest at 10%, due in
1998. Collateralized by equipment..... 36,364 18,712 24,106
Miller Electric Finance--Two notes with
a combined monthly payment of $3,964
including interest ranging from 10.25%
to 11.3%, due in 1999. Collateralized
by equipment.......................... 72,746 89,813 101,704
The Associates--Various notes and
leases with a combined monthly payment
of $35,365 including interest ranging
from 9% to 13.5%, due from 1996
through 2000. Collateralized by
equipment............................. 924,064 1,002,327 1,175,627
JI Case Credit Corporation--Three notes
with combined monthly payments of
$14,428 including interest ranging
from 6.9% to 8.2%, due from 1997
through 2000. Collateralized by
equipment............................. 515,184 349,235 346,540
John Deere--One note with a monthly
payment of $885 including interest at
8.75%, due in 1998. Collateralized by
equipment............................. 14,159 3,540 6,195
F-306
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
CURRENT PAYOR AND TERMS--(CONTINUED)
Caterpillar Financial Services--Various
notes with a combined monthly payment
of $12,279 including interest ranging
from 9.4% to 11.3%, due from 1998
through 2001. Collateralized by
equipment.............................. 546,420 458,438 493,833
Colonial Pacific Leasing--One note with
a monthly payment of $1,323 including
interest at 10%, due in 1997.
Collateralized by equipment............ 5,293 -- --
Newcourt Financial--Two notes with a
combined monthly payment of $4,207
including interest ranging from 10% to
11%, due in 1998 and 2001.
Collateralized by equipment............ 196,194 148,508 158,329
Other................................... 80,773 62,181 105,030
---------- ---------- ----------
Total long-term debt.................... 4,833,702 3,711,141 4,212,812
Less amounts representing interest...... 482,308 247,334 344,743
---------- ---------- ----------
Long-term debt, net of interest......... $4,351,394 $3,463,807 $3,868,069
========== ========== ==========
Subsequent to October 19, 1997, all amounts outstanding under the long-term
debt agreements and capital lease agreements were paid except for $18,546
which is scheduled for payment in fiscal year 1998.
(4) INCOME TAXES
Income tax expense consists of the following:
PERIOD FROM
YEAR ENDED NOVEMBER 1, NINE MONTHS
OCTOBER 31, 1996 TO ENDED JULY 31,
------------- OCTOBER 19, ---------------
1995 1996 1997 1996 1997
------ ------ ----------- ------- -------
(UNAUDITED)
Current............................ $1,600 $7,619 $15,270 $ 1,600 $ 6,000
Deferred........................... -- -- -- -- --
------ ------ ------- ------- -------
$1,600 $7,619 $15,270 $ 1,600 $ 6,000
====== ====== ======= ======= =======
F-307
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and deferred tax liabilities are comprised of the
following:
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
Current deferred tax assets:
Allowance for bad debts............... $ 34,600 $ 34,600 $ 41,000
Inventory reserve..................... -- 6,600 --
Noncurrent deferred tax assets:
Depreciation and amortization
expense.............................. 12,000 14,000 11,300
Net operating loss.................... 188,300 236,800 198,800
Alternative minimum taxes............. 25,500 39,000 29,900
--------- --------- ---------
Total deferred tax assets............. 260,400 331,000 281,000
Less: Valuation allowance............. (260,400) (331,000) (281,000)
--------- --------- ---------
Total deferred tax assets............. -- -- --
Total deferred tax liabilities........ -- -- --
--------- --------- ---------
Net deferred tax asset/liability.... $ -- $ -- $ --
========= ========= =========
The effective rate for income tax expense differs from the statutory tax
rate of 34% when applied to income (loss) from continuing operations before
income taxes as a result of the following:
OCTOBER
31,
----------- OCTOBER 19, JULY 31,
1995 1996 1997 1997
---- ---- ----------- -----------
(UNAUDITED)
Expected U.S. Federal income tax....... (34%) 34% (34%) (34%)
State franchise tax, net............... 128% 1% -- 2%
Net operating loss carryforward........ -- (34%) -- --
Effect of valuation allowance.......... 34% -- 34% 34%
Alternative minimum tax................ -- 2% 7% 4%
--- --- --- ---
Total.............................. 128% 3% 7% 6%
=== === === ===
The net change in the total valuation allowance for the year ended October
31, 1995 and 1996 and the period from November 1, 1996 to October 19, 1997 was
an increase of $8,000, a decrease of $100,600 and an increase of $70,600,
respectively.
(5) RELATED PARTY TRANSACTIONS
Building
The Company leased its Stockton, California premises from officers and
stockholders of the Company. The Company executed a new five year lease on
June 1, 1993 with monthly rent of $21,500. On October 20, 1997, this lease was
amended for an additional five years with monthly rent of $17,000. In
addition, the Company as lessee is to pay all taxes and insurance relating to
the property. At October 19, 1997, the remaining commitment under this lease,
as amended, is $1,020,000 plus property taxes and insurance.
F-308
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Due From Related Party
Due from related party comprise the following:
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
President and shareholder................ $228,737 $317,613 $316,364
Vice president and shareholder........... -- 15,000 --
-------- -------- --------
$228,737 $332,613 $316,364
======== ======== ========
The amounts due from related parties were paid subsequent to October 19,
1997.
(6) OPERATING LEASES
The Company leases vehicles from various unrelated companies through 1999.
The vehicle leases, as well as the lease for the Company's business premises,
are classified as operating leases. At October 19, 1997, future minimum lease
payments under the operating leases including amounts amended as discussed in
note (5) are:
YEAR ENDING OCTOBER 31
----------------------
1998............................................................ $ 442,636
1999............................................................ 305,036
2000............................................................ 204,000
2001............................................................ 204,000
2002............................................................ 204,000
----------
$1,359,672
==========
Operating lease expense aggregated $520,210, $533,619 and $501,473 in 1995,
1996 and for the period from November 1, 1996 to October 19, 1997,
respectively, and $167,032 and $359,378 for the nine months ended July 31,
1996 and 1997, respectively.
(7) EMPLOYEE STOCK OWNERSHIP PLAN
Effective October 31, 1972, the Company established an Employee Stock
Ownership Plan (ESOP) for the benefit of its eligible employees. The ESOP is
designed to invest primarily in the stock of the Company. Contributions to the
ESOP are determined annually by the Board of Directors, however, in no case
may the contribution exceed the lesser of (a) fifteen percent (15%) of the
compensation of eligible employees, or (b) $30,000 for each participant. No
contributions were made in the years ended October 31, 1995 and 1996 or the
period from November 1, 1996 to October 19, 1997.
The ESOP measures compensation for Plan purposes as the Company's
contribution to the Plan. No compensation cost was recognized by the Plan for
the years ended October 31, 1995 and 1996, or the period from November 1, 1996
to October 19, 1997.
The ESOP held 277,172, 272,491 and 275,242 allocated shares at October 31,
1996, October 19, 1997, and July 31, 1997, respectively. No committed-to-be-
released or suspense shares were held by the ESOP at October 31, 1996, October
19, 1997, or at July 31, 1997.
Following termination of employment, participants receive a distribution of
their vested ESOP account balance in the form of cash or Company shares in
accordance with the provisions of the ESOP. If shares are distributed to the
participant, the participant has the right to sell the shares back to the
Company, for a limited period of time, at the fair market value of the shares.
F-309
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) PROFIT SHARING PLAN
In August 1995, the Company established a Profit Sharing/401(k) Savings Plan
(Plan) under Section 401 and 501 of the Internal Revenue Code. Substantially
all employees are eligible for the Plan. Yearly employer contributions to the
Plan are discretionary. Employees may also elect to contribute to the Plan.
For the years ended October 31, 1995 and 1996, and the period from November 1,
1996 to October 19, 1997, the Company contributed, $8,245, $27,422, and
$27,064, respectively to the Plan and $19,780 and $19,779 for the nine months
ended July 31, 1996 and 1997.
(9) COMMITMENTS
Litigation, contingent liabilities, and claims, all arising in the ordinary
course of business, are not expected to involve any amounts that could be
material to the Company's financial position or results of operations.
(10) SUBSEQUENT EVENT
On October 17, 1997, the Company entered into a stock purchase agreement
with United Rentals, Inc. (United). The transaction closed on October 20, 1997
and under the terms of the stock purchase agreement, United purchased all of
the issued and outstanding common stock of the Company.
F-310
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
J & J Rental Services, Inc.
We have audited the balance sheets of the predecessor companies to J & J
Rental Services, Inc. (see Note 1) as of December 31, 1996 and for J&J Rental
Services, Inc. as of October 22, 1997 and the related statements of income,
stockholders' equity and partners' capital and cash flows for each of the two
years in the period ended December 31, 1996, the six months ended June 30,
1997 and for the period from July 1, 1997 to October 22, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the predecessor companies
to J & J Rental Services, Inc. at December 31, 1996, and for J&J Rental
Services, Inc. as of October 22, 1997 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1996, the six months ended June 30, 1997 and for the period from July 1, 1997
to October 22, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 23, 1998
F-311
J & J RENTAL SERVICES, INC.
BALANCE SHEETS
(NOTE 1)
PREDECESSORS COMPANY
------------ -----------
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
ASSETS
Cash................................................. $ 666,153 $ 1,431,287
Accounts receivable, net of allowance for doubtful
accounts of $428,270, and $226,273 at 1996 and 1997,
respectively........................................ 1,502,119 1,470,608
Trade notes receivable, net of allowance for doubtful
accounts of $93,337 at 1996......................... 37,081
Rental equipment, net................................ 6,669,365 7,961,850
Property and equipment, net.......................... 467,460 319,219
Investments in marketable equity securities.......... 81,175
Due from Predecessor Stockholder..................... 120,000
Due from Related Party............................... 354,388
Prepaid expenses and other assets.................... 126,221 4,006
Intangible assets, net............................... 3,270,614
---------- -----------
Total assets................................... $9,669,574 $14,811,972
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS'
CAPITAL
Liabilities:
Accounts payable................................... $ 628,252 $ 936,725
Accrued expenses................................... 336,884 360,990
Income tax payable................................. 24,814
Deferred tax liability............................. 430,000
Debt............................................... 5,766,651 14,078,932
Due to Predecessor Stockholder..................... 336,498
---------- -----------
Total liabilities.............................. 7,523,099 15,376,647
Commitments and contingencies
Stockholders' equity and partners' capital:
Stockholder's equity--J & J Equipment, Inc.
Common stock, $1.00 par value, 50,000 shares
authorized, issued and outstanding.............. 50,000
Unrealized gain on marketable equity securities.. 1,165
Retained earnings................................ 981,955
----------
1,033,120
Partners' capital--Tri-Star Rentals, Ltd........... 1,113,355
----------
Stockholders' equity--J & J Rental Services, Inc.
Common stock, no par value, 1,000,000 shares au-
thorized, 77,500 shares issued and outstanding.. 1,000
Accumulated deficit.............................. (565,675)
-----------
Total stockholders' equity (deficit) and partners'
capital............................................. 2,146,475 (564,675)
---------- -----------
Total liabilities and stockholders' equity and
partners' capital............................... $9,669,574 $14,811,972
========== ===========
See accompanying notes.
F-312
J & J RENTAL SERVICES, INC.
STATEMENTS OF INCOME
(NOTE 1)
PREDECESSORS COMPANY
------------------------------------------ ---------------
THE PERIOD FROM
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JULY 1, TO
------------------------ JUNE 30, OCTOBER 22,
1995 1996 1997 1997
----------- ----------- ---------------- ---------------
Revenues:
Equipment rentals................................................. $7,573,784 $7,769,716 $3,823,790 $2,544,233
Sales of equipment and parts...................................... 1,810,400 1,243,297 573,450 129,963
----------- ----------- ---------- ----------
Total revenues.................................................. 9,384,184 9,013,013 4,397,240 2,674,196
Cost of revenues:
Cost of revenues, excluding depreciation.......................... 3,906,336 3,544,040 1,629,299 1,363,085
Depreciation, equipment rentals................................... 2,048,619 2,389,929 1,171,685 359,672
Cost of revenues of equipment and parts........................... 898,190 452,522 326,847 46,653
----------- ----------- ---------- ----------
Total cost of revenues.......................................... 6,853,145 6,386,491 3,127,831 1,769,410
----------- ----------- ---------- ----------
Gross profit........................................................ 2,531,039 2,626,522 1,269,409 904,786
Selling, general and administrative expenses........................ 1,840,973 1,521,562 713,488 786,907
Non-rental depreciation............................................. 125,004 123,971 78,643 7,629
----------- ----------- ---------- ----------
Operating income................................................ 565,062 980,989 477,278 110,250
Interest expense.................................................... 411,731 478,341 180,769 378,231
Other (income), net................................................. (45,103) (27,523) (11,418) (26,306)
----------- ----------- ---------- ----------
Income (loss) before provision for income taxes................. 198,434 530,171 307,927 (241,675)
Provision for income taxes.......................................... 35,678 49,685 98,000 --
----------- ----------- ---------- ----------
Net income (loss)............................................... $ 162,756 $ 480,486 $ 209,927 $ (241,675)
- --------------------------------------------------
=========== =========== ========== ==========
See accompanying notes.
F-313
J & J RENTAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(NOTE 1)
UNREALIZED
(LOSS) GAIN ON
COMMON STOCK MARKETABLE RETAINED PARTNERS'
SHARES AMOUNT SECURITIES EARNINGS CAPITAL
------ ------- -------------- ---------- ----------
Predecessors:
Balance at January 1,
1995.................. 50,000 $50,000 $(6,500) $ 796,096 $ 927,272
Net income............. 75,762 86,994
Distributions paid to
partners.............. (169,741)
Unrealized gain on
marketable
securities............ 9,250
------ ------- ------- ---------- ----------
Balance at December 31,
1995.................. 50,000 50,000 2,750 871,858 844,525
Net income............. 110,097 370,389
Distributions paid to
partners.............. (101,559)
Unrealized loss on
marketable
securities............ (1,585)
------ ------- ------- ---------- ----------
Balance at December 31,
1996.................. 50,000 50,000 1,165 981,955 1,113,355
Net income (loss) from
January 1, 1997 to
June 30, 1997......... 311,262 (101,335)
Distributions paid to
partners.............. (50,500)
------ ------- ------- ---------- ----------
Balance at June 30,
1997.................. 50,000 $50,000 $ 1,165 $1,293,217 $ 961,520
====== ======= ======= ========== ==========
Company:
Issuance of common
stock................. 77,500 $ 1,000
Net loss from July 1,
1997 to October 22,
1997.................. $ (241,675)
Basis adjustment....... (324,000)
------ ------- ------- ---------- ----------
Balance at October 22,
1997.................. 77,500 $ 1,000 $ (565,675)
====== ======= ======= ========== ==========
See accompanying notes.
F-314
J & J RENTAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(NOTE 1)
PREDECESSORS COMPANY
------------------------------------- -----------
THE PERIOD
SIX MONTHS FROM JULY 1
YEAR ENDED DECEMBER 31, ENDED TO
------------------------ JUNE 30, OCTOBER 22,
1995 1996 1997 1997
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................................... $ 162,756 $ 480,486 $ 209,927 $ (241,675)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 2,173,623 2,513,900 1,250,328 396,823
Bad debt expense (recovery)............................................. 128,092 (57,621) 7,214 226,273
Gain on sale of rental equipment........................................ (396,704) (369,379) (210,390) (43,878)
Gain on sale of property and equipment.................................. (2,809) (6,591) -- --
Deferred taxes.......................................................... 23,000 12,000 -- --
Changes in assets and liabilities:
Increase in accounts receivable........................................ (64,895) (10,430) (512,942) (1,696,881)
(Increase) decrease in trade notes receivable.......................... (170,337) 39,859 37,081 --
Increase in prepaid expenses and other assets.......................... (31,561) (84,918) (26,028) (4,006)
Increase (decrease) in accounts payable................................ 46,476 (41,052) 372,230 936,725
Increase in accrued expenses........................................... 53,632 1,919 123,765 360,990
Increase in income tax payable......................................... 7,613 17,201 73,186 --
Increase in Related Party receivable................................... (354,388)
----------- ----------- ----------- -----------
Cash provided by (used in) operating activities....................... 1,928,886 2,495,374 1,324,371 (420,017)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment................................... (270,369) (195,823) (614,414) (548,346)
Proceeds from sale of rental equipment.................................. 930,860 755,122 1,227,501 232,148
Proceeds from sale of property and equipment............................ 24,634 74,585 -- --
Purchase of other company, net of cash acquired......................... (7,238,924)
Unrealized gain/(loss) on marketable securities......................... 9,250 (1,585) -- --
Purchase of marketable securities....................................... (9,250) (28,425) -- --
Payments on loans to Predecessor Stockholder............................ (21,573) (73,724) (79,254) --
Proceeds received on Predecessor Stockholder loans...................... 94,857 -- 6,884 --
Loan to Predecessor Stockholder......................................... (120,000) -- -- --
----------- ----------- ----------- -----------
Cash provided by (used in) investing activities....................... 638,409 530,150 540,717 (7,555,122)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under credit facilities....................................... 871,496 351,958 -- 10,000,000
Principal payments on debt.............................................. (3,117,926) (3,171,213) (1,920,472) (593,574)
Distributions paid...................................................... (169,741) (101,559) (50,500) --
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities....................... (2,416,171) (2,920,814) (1,970,972) 9,406,426
----------- ----------- ----------- -----------
Increase (decrease) in cash ............................................. 151,124 104,710 (105,884) 1,431,287
Cash at beginning of year................................................ 410,319 561,443 666,153 --
----------- ----------- ----------- -----------
Cash at end of year................................................... $ 561,443 $ 666,153 $ 560,269 $ 1,431,287
- --------------------------------------------------
=========== =========== =========== ===========
See accompanying notes.
F-315
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND OCTOBER 22, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
J & J Rental Services, Inc. (the "Company") was formed in May 1997, and
pursuant to the terms of an Asset Purchase Agreement (the "Agreement"), on
June 30, 1997 acquired all of the rental equipment and property and equipment
from J & J Equipment, Inc. ("J & J"), and Tri-Star Rentals, Ltd. ("Tri-Star")
(collectively, the "Predecessors") and assumed all operations of the
Predecessors (the "Acquisition"). The purchase price of $10,700,000 consisted
of cash of $7,200,000 and a promissory note payable for $3,500,000. The sole
stockholder and partner of J & J and Tri-Star, respectively, (the "Predecessor
Stockholder") has, on a fully-diluted basis, a 9% ownership interest in the
outstanding common stock of the Company, and has continued in a management
role as chief operating officer.
The accompanying financial statements as of December 31, 1996 and for the
years ended December 31, 1995 and 1996, and for the six month period ended
June 30, 1997 present the accounts and results of operations of the
Predecessors on a combined, historical cost basis. Although the financial
statements of the Predecessors have been combined, the balance sheets and
statements of income and cash flows do not represent those of a single legal
entity. All significant intercompany accounts and transactions have been
eliminated in combination.
The financial statements as of October 22, 1997 and for the period from July
1 to October 22, 1997 present the accounts and results of operations of the
Company since the Acquisition.
The Acquisition has been accounted for as a purchase effective July 1, 1997
and, accordingly, at such date the Company recorded the assets acquired at
their estimated fair values, adjusted for the impact of the Predecessor
Stockholder's continuing residual interest as described below. The assets
acquired have been reduced by $324,000 representing the Predecessor
Stockholder's continuing residual interest in the Company with a corresponding
charge against the Company's retained earnings.
The adjusted purchase price and the preliminary allocation of the adjusted
purchase price to the historical assets of the Company as of July 1, 1997 are
as follows:
Purchase price.................................................. $10,739,000
Adjustment necessary to value Predecessor Stockholder's
continuing residual interest at Predecessor's basis............ 324,000
-----------
Adjusted purchase price......................................... $10,415,000
===========
Allocation of adjusted purchase price:
Net assets acquired, at fair values........................... $ 7,115,000
Covenant not to compete....................................... 50,000
Goodwill...................................................... 3,250,000
-----------
Total adjusted purchase price allocation.................... $10,415,000
===========
Business Activity
The Company rents and sells light weight and heavy off-road construction
equipment for use by construction and maintenance companies, and has ancillary
sales of parts and supplies. The rentals are on a daily, weekly or monthly
basis. The Company has two locations in Houston, Texas and its principal
market area is the
F-316
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
state of Texas. 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 balance sheets are
presented on an unclassified basis.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over estimated useful lives of three
to five years through June 30, 1997 and two to ten years subsequent to June
30, 1997 with no salvage value. Rental equipment costing less than $500 is
immediately expensed at the date of purchase. Equipment rental revenue is
recorded as earned under the operating method. Equipment rental revenue in the
statements of operations includes revenues earned on equipment rentals, and
related fuel sales and rental equipment delivery fees. Proceeds from the
disposal and the related net book value of the equipment are recognized in the
period of disposal and reported as revenue from rental equipment sales in the
statements of operations. Ordinary maintenance and repair costs are charged to
operations as incurred.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over estimated useful lives
of 5 to 10 years.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations. Ordinary maintenance and repair costs
are charged to operations as incurred.
Advertising Costs
The Company advertises primarily through trade journals, phone directories
and the distribution of promotional items. All advertising costs are expensed
as incurred. Advertising expenses amounted to approximately $40,095 and
$52,483 in the years ended December 31, 1995 and 1996, respectively, $1,297 in
the six months ended June 30, 1997, and $9,433 from July 1 to October 22,
1997.
Income Taxes
J & J applied an asset and liability approach to accounting for income
taxes. Deferred income tax assets and liabilities arise from differences
between the tax basis of an asset or liability and its reported amount in the
financial statements. Deferred tax balances are determined by using tax rates
expected to be in effect when the taxes will actually be paid or refunds
received. Under federal and state income tax law, Tri-Star, a partnership, is
not a taxable entity and, therefore, incurs no income tax liability. Any
profits and losses of Tri-Star flow through to the individual partners.
Investments
The Company's investments consist of marketable equity securities and are
classified as available for sale. Any unrealized gains or losses are excluded
from income and are presented as a component of stockholders' equity.
Intangible assets
Intangible assets are recorded at cost and consist of goodwill of $3,250,134
and covenant not to compete of $50,000. Goodwill is being amortized by the
straight-line method over its estimated useful life of forty years. The
covenant not to compete reflects an agreement made regarding confidentiality
and restricting competitive activity and is being amortized by the straight-
line method over the period of the agreement, which is 5 years. Amortization
expense was $29,520 for the period from July 1 to October 22, 1997.
F-317
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounting 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.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with a quality financial institution
and, accordingly, management believes this mitigates the amount of credit
risk. Concentrations of credit risk with respect to customer receivables are
limited due to the large number of customers comprising the Company's customer
base and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
Rental equipment.................................... $12,520,482 $8,313,840
Less accumulated depreciation....................... 5,851,117 351,990
----------- ----------
Rental equipment, net............................... $ 6,669,365 $7,961,850
=========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
Transportation equipment............................ $763,402 $166,003
Furniture, fixtures and office equipment............ 92,082 59,760
Shop equipment...................................... 39,356
Leasehold improvements.............................. 38,386
Construction in progress............................ 101,085
-------- --------
933,226 326,848
Less accumulated depreciation....................... 465,766 7,629
-------- --------
Total............................................... $467,460 $319,219
======== ========
F-318
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of the following:
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
CIT Group--Various notes dated from September 21,
1995 through August 5, 1997, with annual interest
rates ranging from 8% to 9.4% due in monthly
payments ranging from $867 to $43,987. ............. $1,246,231 $637,956
The Associates--Note dated April 1, 1996, with annual
interest of 8.8% due in monthly payments of
$3,609. ............................................ 110,450
Case Power & Equipment--Various notes dated from
January 1, 1992 through December 30, 1996, with
annual interest rates ranging from 5.5% to 7.9% due
in monthly payments ranging from $408 to $7,747. ... 795,344
Sterling Bank--Various notes dated from January 26,
1994 through December 20, 1996, with annual interest
rates ranging from 8% to 11% due in monthly payments
ranging from $582 to $2,084. ....................... 306,708
KDC Financial--Various notes dated from June 14, 1993
through December 31, 1996, with annual interest
rates ranging from 4.5% to 9.5% due in monthly
payments ranging from $840 to $4,691. .............. 1,443,971
John Deere Financial--Notes dated December 31, 1995
and September 10, 1996, with annual interest rates
of 7.9% and 6.9% due in monthly payments of $807 and
$1,083. ............................................ 69,247
Frost National Bank--Various notes dated from January
25, 1995 through August 15, 1995, with annual
interest rates ranging from 8.75% to 9.5% due in
monthly principal payments ranging from $582 to
$8,492. ............................................ 101,771
Citicorp--Note dated June 15, 1993, with an annual
interest rate of 5.9% due in monthly payments of
$921. .............................................. 5,433
First Prosperity Bank--Various notes dated from
September 8, 1994 through December 13, 1996, with
annual interest ranging from 7.25% through 9.9% due
in monthly payments ranging from $354 to $1,039. ... 55,139
CAT Financial--Notes dated June 2, 1995 and December
31, 1994, with annual interest rates of 9.69% and
9.5% due in monthly payments of $4,227 and
$3,036. ............................................ 152,293
CAT Financial--Notes dated October 11, 1996 and
November 25, 1996, non-interest bearing, with
monthly payments of $1,205 and $3,522. ............. 161,102
Chase/Clark Credit--Various notes dated from March
17, 1994 through September 28, 1994, with annual
interest rates ranging from 9.75% to 12.765% due in
monthly installments ranging from $194 to $1,430. .. 30,232
First Prosperity--Various notes dated from August 16,
1993 through December 13, 1996, with annual interest
rates ranging from 6.4% to 11% due in monthly
installments ranging from $423 to $4,205............ 171,518
Associates Commercial Credit Corp.--Various notes
dated from May 16, 1994 through July 8, 1996, with
annual interest rates ranging from 7.75% to 11.25%
due in monthly installments ranging from $912 to
$6,656.............................................. 246,570
F-319
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
Ingersoll-Rand Company--Various notes dated from June
30, 1992 through September 8, 1996 with annual
interest rates ranging from 7% to 9.5% due in
monthly installments ranging from $301 to $7,794.... 316,003
Wacker Corporation--Various notes dated from January
7, 1994 through May 25, 1996, with annual interest
rates ranging from 6.25% to 10.25% due in monthly
installments ranging from $854 to $2,889............ 99,666
AEL Leasing Co., Inc.--Various notes dated from April
21, 1994 through May 20, 1996, with annual interest
rates ranging from 8.72% to 12.93% due in monthly
installments ranging from $371 to $4,883............ 261,043
AEL Leasing Co., Inc.--Various non-interest bearing
notes dated from April 21, 1994 through February 26,
1996, due in 12 principal installments ranging from
$8,022 to $18,249................................... 36,498
Shandee--Note dated August 31, 1995, with an annual
interest rate of 11.25% due in monthly installments
of $2,803........................................... 21,510
Sterling Bank--Note dated January 2, 1996, with an
annual interest rate of 9.5% due in 24 principal
installments of $4,118.............................. 53,538
Miller Financing--Various notes dated from February
15, 1996 through June 1, 1996, with annual interest
rates ranging from 9.25 % to 10.25% due in monthly
installments ranging from $375 to $2,922............ 82,384
Toyota Motor Credit Corp.--Notes dated July 12 and
August 28, 1997, with annual interest rates of 5.4%
and 6.9%, respectively, due in monthly installments
of $543 and $ 561, respectively..................... 47,460
AEL Leasing Co., Inc.--Note dated October 10, 1997
with annual interest of 9.33% due in monthly
payments of $3,345.................................. 157,807
Case Credit--Various notes dated June 30, 1997 with
an annual interest rate of 7.9% due in monthly
installments ranging from $1,685 to $2,254.......... 290,260
Case Credit--Term note dated June 30, 1997, with
interest due monthly at prime plus .75% (9.25% at
September 30, 1997). Principal is due June 30, 2002.
This note is secured by all of the Company's rental
assets and property, plant and equipment, and is
personally guaranteed by the majority owners of the
Company............................................. 7,445,449
J & J and Tri-Star--Promissory note dated June 30,
1997 with an annual interest rate of 7.5%. Principal
payments of $175,000 are due quarterly beginning
October 1, 2000..................................... 3,500,000
Equus II Incorporated--Senior subordinated note dated
June 30, 1997, with interest to be paid monthly on
the unpaid principal balance at a variable rate not
to exceed 10% (10% at September 30, 1997). Principal
is to be paid in four annual installments of
$500,000 beginning June 30, 2001.................... 2,000,000
---------- -----------
$5,766,651 $14,078,932
========== ===========
Substantially all rental equipment collateralize the above notes.
F-320
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
All debt at October 22, 1997, except for $200,000 of the J & J and Tri-Star
note, were paid off by October 31, 1997 as a result of the acquisition
discussed in Note 10.
6. INCOME TAXES
The provision for income taxes relates to the operating results of J & J
before July 1, 1997 and consists of the following:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
--------------- 30,
1995 1996 1997
------- ------- ----------
Current:
Federal............................................ $ 7,216 $32,054 $86,500
State.............................................. 5,462 5,631 11,500
------- ------- -------
12,678 37,685 98,000
Deferred:
Federal............................................ 20,300 10,600 --
State.............................................. 2,700 1,400 --
------- ------- -------
23,000 12,000 --
------- ------- -------
Total............................................ $35,678 $49,685 $98,000
======= ======= =======
Tri-Star is a pass-through entity and, therefore incurs no tax liability.
Significant components of J & J's deferred tax liability at December 31, 1996
is as follows:
DECEMBER 31,
1996
------------
Difference in basis of accounting......................... $221,000
Cumulative tax depreciation in excess of book............. 209,000
--------
Deferred tax liability $430,000
========
Effective July 1, 1997, the Company and its shareholders have elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
federal tax purposes. Under those provisions the Company does not pay federal
income taxes; instead, the shareholders are liable for individual income taxes
on the Company's profit. Therefore, no provision for federal income taxes is
included in the Company's financial statements for the period from July 1 to
October 22, 1997.
7. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1995 and 1996; the six months ended June
30, 1997; and the period from July 1 to October 22, 1997, total interest paid
was $411,731 and $478,341; $180,769; and $259,705, respectively.
For the years ended December 31, 1995 and 1996; the six months ended June
30, 1997; and the period from July 1 to October 22, 1997, total income taxes
paid was $ -- and $ --; $24,814; and $ --, respectively.
During the years ended December 31, 1995 and 1996, and the six months ended
June 30, 1997, and for the period from July 1 to October 22, 1997 the Company
purchased $3,738,807, and $3,160,914; $1,172,917; and $1,172,506,
respectively, of equipment which was financed.
F-321
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Predecessor sponsored a defined contribution 401(k) retirement plan,
which was implemented during 1995 and covers substantially all full time
employees. The Predecessor matched a portion of the participants'
contributions. Predecessor contributions to the plan were $9,272, $6,395, $--,
and $ -- for the years ended December 31, 1995, and 1996, for the six month
period ended June 30, 1997 and for the period from July 1 to October 22, 1997,
respectively.
9. RELATED PARTY TRANSACTIONS
On November 27, 1995, Tri-Star loaned $120,000 to the Predecessor
Stockholder. This non-interest bearing note is unsecured, and is due on
demand. The outstanding balance on this note receivable at December 31, 1996
was $120,000.
On November 30, 1995, Tri-Star issued a $100,000 note payable to the
Predecessor Stockholder, which bears interest at 11.4% per annum, requires
monthly principal and interest payments of $6,097, and is unsecured. The
outstanding balance on this note at December 31, 1996 was $79,254.
J & J has a note payable outstanding to the Predecessor Stockholder, which
required interest to be paid quarterly at 6.5% per annum, and is due on
January 1, 1998. The outstanding balance on this note payable at December 31,
1996 was $257,244.
During the period from July 1 to October 22, 1997 the Company made payments
of $354,388 on behalf of another Company owned by the Company's Stockholder.
The Company leases its operating facilities from the Predecessor
Stockholder, and paid monthly rent of $8,600 through June 30, 1997. These
leases are month-to-month and can be canceled by either party.
10. SUBSEQUENT EVENT
On October 23, 1997, the Company entered into a stock purchase agreement
with United Rentals, Inc. ("United"). Under the terms of the stock purchase
agreement, United purchased all of the issued and outstanding capital stock of
the Company.
F-322
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Coran Enterprises, Inc.
and
Monterey Bay Equipment Rental, Inc.
We have audited the accompanying combined statements of earnings,
stockholders' equity, and cash flows of Coran Enterprises, Inc., dba A-1
Rents, and Monterey Bay Equipment Rental, Inc. for the years ended
December 31, 1995 and 1996. We have also audited the combined statements of
earnings, stockholders' equity, and cash flows for the period from January 1,
1997 through October 24, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of operations and combined cash
flows of Coran Enterprises, Inc. dba A-1 Rents, and Monterey Bay Equipment
Rental, Inc. for the years ended December 31, 1995 and 1996, and also for the
period from January 1, 1997 through October 24, 1997, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
San Jose, California
January 21, 1998
F-323
CORAN ENTERPRISES, INC.
DBA A-1 RENTS AND
MONTEREY BAY EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF EARNINGS
PERIOD FROM
JANUARY 1,
1997
YEAR ENDED DECEMBER 31, THROUGH
----------------------- OCTOBER 24,
1995 1996 1997
----------- ----------- -----------
Revenues:
Equipment rentals........................ $ 6,962,130 $ 7,679,713 $6,743,497
Sales of parts, supplies and rental
equipment............................... 565,586 738,330 974,713
----------- ----------- ----------
Total revenues......................... 7,527,716 8,418,043 7,718,210
Costs:
Cost of equipment rentals................ 3,835,982 4,254,243 3,764,346
Rental equipment depreciation............ 611,577 1,304,847 1,328,193
Cost of sales of supplies................ 200,746 257,500 204,248
Other.................................... 49,523 115,758 53,590
----------- ----------- ----------
Total costs............................ 4,697,828 5,932,348 5,350,377
----------- ----------- ----------
Gross margin........................... 2,829,888 2,485,695 2,367,833
Selling, general and administrative........ 1,786,650 2,062,246 1,768,439
Non-rental depreciation.................... 28,435 17,202 15,370
----------- ----------- ----------
Operating Income....................... 1,014,803 406,247 584,024
Interest expense........................... 21,120 96,464 170,183
----------- ----------- ----------
Earnings before income taxes........... 993,683 309,783 413,841
Provision for income taxes................. 12,275 8,221 276,383
----------- ----------- ----------
Net earnings............................. $ 981,408 $ 301,562 $ 137,458
=========== =========== ==========
The accompanying notes are an integral part of these statements.
F-324
CORAN ENTERPRISES, INC.
DBA A-1 RENTS AND
MONTEREY BAY EQUIPMENT RENTAL, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
SHARES ISSUED
-------------
CEI MBERI
------ ------ ADDITIONAL
$1 PAR NO PAR COMMON PAID-IN RETAINED
VALUE VALUE STOCK CAPITAL EARNINGS TOTAL
------ ------ -------- ---------- ---------- ----------
Balance at January 1,
1995................... 75,000 10,000 $275,000 $37,920 $1,691,541 $2,004,461
Net earnings.......... -- -- -- -- 981,408 981,408
------ ------ -------- ------- ---------- ----------
Balance at December 31,
1995................... 75,000 10,000 275,000 37,920 2,672,949 2,985,869
Net earnings.......... -- -- -- -- 301,562 301,562
Dividends paid to
stockholders......... -- -- -- -- (750,000) (750,000)
------ ------ -------- ------- ---------- ----------
Balance at December 31,
1996................... 75,000 10,000 275,000 37,920 2,224,511 2,537,431
Net earnings January
1, 1997 through
October 24, 1997..... -- -- -- -- 137,458 137,458
Dividends paid to
stockholders......... -- -- -- -- (781,852) (781,852)
Stock redemption...... -- (2,500) (50,000) -- (200,000) (250,000)
------ ------ -------- ------- ---------- ----------
Balance at October 24,
1997................... 75,000 7,500 $225,000 $37,920 $1,380,117 $1,643,037
====== ====== ======== ======= ========== ==========
The accompanying notes are an integral part of this statement.
F-325
CORAN ENTERPRISES, INC.
DBA A-1 RENTS AND MONTEREY BAY EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF CASH FLOWS
PERIOD
JANUARY 1,
YEAR ENDED 1997
DECEMBER 31, THROUGH
---------------------- OCTOBER 24,
1995 1996 1997
--------- ----------- -----------
Cash flows from operating activities:
Net earnings............................ $ 981,408 $ 301,562 $ 137,458
Adjustments to reconcile net earnings to
net cash provided by operating activi-
ties:
Depreciation and amortization......... 640,012 1,322,049 1,343,563
Gain on sale of equipment............. (85,747) (163,753) (446,621)
Change in assets and liabilities:
Accounts receivable................. (210,091) 60,246 (61,976)
Other assets........................ 5,220 (3,108) 59,276
Accounts payable and accrued liabil-
ities.............................. 36,638 32,355 625,287
--------- ----------- -----------
Net cash provided by operating ac-
tivities......................... 1,367,440 1,549,351 1,656,987
Cash flows from investing activities:
Purchases of rental equipment........... (633,519) (4,017,946) (315,346)
Proceeds from sale of equipment......... 110,273 205,639 492,977
--------- ----------- -----------
Net cash provided by (used in) in-
vesting activities............... (523,246) (3,812,307) 177,631
Cash flows from financing activities:
Change in bank overdraft................ (15,760) -- --
Borrowings on equipment loans........... 244,235 1,096,820 --
Payments on equipment loans............. (46,853) (158,893) (42,649)
Payment of dividends.................... -- (750,000) (781,853)
Stock redemption........................ -- -- (250,000)
Borrowings on notes payable--stockhold-
ers.................................... -- 1,249,988 --
Payments on notes payable--stockhold-
ers.................................... (95,888) -- (538,156)
--------- ----------- -----------
Net cash provided by (used in) fi-
nancing activities............... 85,734 1,437,915 (1,612,658)
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............. 929,928 (825,041) 221,960
Cash and cash equivalents--beginning of
period................................... 35,259 965,187 140,146
--------- ----------- -----------
Cash and cash equivalents--end of period.. $ 965,187 $ 140,146 $ 362,106
========= =========== ===========
Supplementary disclosures of cash flow in-
formation:
Cash paid during the period for:
Interest.............................. $ 21,120 $ 95,958 $ 151,792
========= =========== ===========
Income taxes.......................... $ 1,600 $ 23,047 $ 800
========= =========== ===========
The accompanying notes are an integral part of these statements.
F-326
CORAN ENTERPRISES, INC.
DBA A-1 RENTS ANDMONTEREY BAY EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 24, 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. Nature of Business and Basis of Presentation
The combined financial statements include the accounts of Coran Enterprises,
Inc. and Monterey Bay Equipment Rental, Inc. (collectively the "Company").
Coran Enterprises, Inc. ("CEI") and Monterey Bay Equipment Rental, Inc.
("MBERI") are combined due to common ownership and operations which are
complimentary. All significant intercompany balances and transactions have
been eliminated in combination.
The Company leases equipment for home and contractors' use under short-term
rental agreements principally in the Northern California area.
2. Property and Equipment
The Company provides for depreciation in amounts sufficient to relate the
costs of depreciable assets to operations over their estimated service lives
using the double-declining balance method. Leasehold improvements are
amortized on a straight-line basis over the lives of the improvements or the
term of the lease, whichever is shorter. Maintenance and repairs costs are
expensed as incurred. Supplies and replacement parts are expensed when
purchased.
3. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
4. Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B--RELATED PARTY TRANSACTIONS
The Company leases facilities from its stockholders on a month-to-month
basis. Total rent expense on the facilities was $662,880 and $667,638 for the
years ended December 31, 1995 and 1996. Total rent expense for the period from
January 1, 1997 through October 24, 1997 was $545,702.
The Company incurred interest expense of $17,755 and $27,627, respectively,
for the years ended December 31, 1995 and 1996, related to notes payable to
stockholders. For the period from January 1, 1997 through October 24, 1997 the
interest expense related to the stockholder notes was $80,693.
NOTE C--INCOME TAXES
The stockholders of the Company have elected "S" Corporation status for
income tax purposes. Therefore, income or loss for federal and California
state income tax purposes is reported on the shareholders' individual income
tax returns. Although the "S" Corporation tax treatment is recognized by the
State of California, the net corporate income is subject to a 1.5% corporate
surtax. (See Note E)
F-327
CORAN ENTERPRISES, INC.
DBA A-1 RENTS AND
MONTEREY BAY EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 24, 1997
NOTE D -- EQUIPMENT LOANS
Equipment loans consist of notes payable, collateralized by equipment, due
in monthly installments ranging from $1,095 to $5,375 with interest rates from
5.75% to 8.75%. These loans were paid in full as of October 31, 1997. Interest
expense on the equipment loans aggregated $3,365 and $68,837, respectively,
for the years ended December 31, 1995 and 1996. Interest expense on the
equipment loans was $89,455 for the period January 1, 1997 through October 24,
1997.
NOTE E--CHANGE IN OWNERSHIP
Effective October 24, 1997, the stockholders of CEI and MBERI sold 100% of
the outstanding shares of each company to United Rentals, Inc. The Company
provided $270,000 for state income taxes resulting from the stock sale.
F-328
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Bronco Hi-Lift, Inc.
We have audited the balance sheets of Bronco Hi-Lift, Inc. as of December
31, 1996 and October 24, 1997 and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1995 and
1996, and the period from January 1, 1997 to October 24, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bronco Hi-Lift, Inc. at
December 31, 1996 and October 24, 1997, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1996, and the period
from January 1, 1997 to October 24, 1997 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 19, 1998
F-329
BRONCO HI-LIFT, INC.
BALANCE SHEETS
DECEMBER 31, OCTOBER
1996 24, 1997
------------ ----------
ASSETS
Cash................................................... $ 305,506 $ 180,745
Accounts receivable, net............................... 826,849 998,467
Unbilled receivables................................... 40,722 283,865
Inventory.............................................. 67,825 273,119
Rental equipment, net.................................. 1,972,910 2,725,464
Property and equipment, net............................ 234,914 423,918
Due from related party................................. -- --
Prepaid expenses and other assets...................... 13,530 44,273
---------- ----------
Total assets....................................... $3,462,256 $4,929,851
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other
liabilities......................................... $ 90,584 $ 277,651
Debt................................................. 3,051,711 3,473,516
---------- ----------
Total liabilities.................................. 3,142,295 3,751,167
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value and $1.00 stated value,
100,000 shares authorized, 10,000 issued and
outstanding at December 31, 1996, and October 24,
1997................................................ 10,000 10,000
Additional paid-in capital........................... 598,000 598,000
Notes receivable from stockholders................... (300,000) --
Retained earnings.................................... 11,961 570,684
---------- ----------
Total stockholders' equity......................... 319,961 1,178,684
---------- ----------
Total liabilities and stockholders' equity......... $3,462,256 $4,929,851
========== ==========
See accompanying notes.
F-330
BRONCO HI-LIFT, INC.
STATEMENTS OF INCOME
PERIOD
FROM
JANUARY 1,
YEAR ENDED DECEMBER 31 1997 TO
------------------------ OCTOBER
1995 1996 24, 1997
----------- ----------- ----------
Revenues:
Equipment rentals...................... $ 3,427,596 $ 4,313,855 $4,330,000
New equipment sales.................... 266,308 611,033 533,370
Sales of parts, supplies and rental
equipment............................. 155,331 410,957 375,451
Other.................................. 147,214 194,469 182,355
----------- ----------- ----------
Total revenues....................... 3,996,449 5,530,314 5,421,176
Cost of revenues:
Cost of equipment rentals, excluding
depreciation.......................... 335,028 699,455 374,845
Depreciation, equipment rentals........ 637,766 736,525 660,598
Cost of new equipment sales............ 206,268 479,920 412,592
Cost of sales of parts, supplies and
equipment............................. 107,989 293,987 148,464
Other.................................. 32,418 119,315 112,107
----------- ----------- ----------
Total cost of revenues............... 1,319,469 2,329,202 1,708,606
----------- ----------- ----------
Gross profit............................. 2,676,980 3,201,112 3,712,570
Selling, general and administrative
expenses................................ 2,540,699 2,359,326 2,353,924
Non-rental depreciation.................. 84,463 99,669 85,707
----------- ----------- ----------
Operating income..................... 51,818 742,117 1,272,939
Interest expense......................... 171,305 334,035 229,154
Other (income), net...................... (26,575) (46,175) (29,938)
----------- ----------- ----------
Net income (loss).................... $ (92,912) $ 454,257 $1,073,723
=========== =========== ==========
See accompanying notes.
F-331
BRONCO HI-LIFT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK NOTES RECEIVABLE RETAINED
----------------- PAID-IN FROM EARNINGS
SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT)
------- -------- --------- ---------------- -----------
Balance at January 1,
1995................... 20,000 $ 20,000 $ 345,020 $ -- $ 693,596
Purchase and
retirement of common
stock................ (12,000) (12,000) (345,020) (1,042,980)
Issuance of common
stock................ 2,000 2,000 598,000 (500,000)
Net loss.............. (92,912)
------- -------- --------- --------- -----------
Balance at December 31,
1995................... 10,000 10,000 598,000 (500,000) (442,296)
Payment on notes
receivable from
stockholders......... 200,000
Net income............ 454,257
------- -------- --------- --------- -----------
Balance at December 31,
1996................... 10,000 10,000 598,000 (300,000) 11,961
Payments on notes
receivable from
stockholders......... 300,000
Net income............ 1,073,723
Dividends paid........ (515,000)
------- -------- --------- --------- -----------
Balance at October 24,
1997................... 10,000 $ 10,000 $ 598,000 $ -- $ 570,684
======= ======== ========= ========= ===========
See accompanying notes.
F-332
BRONCO HI-LIFT, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31 1997 TO
------------------------ OCTOBER 24,
1995 1996 1997
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................... $ (92,912) $ 454,257 $ 1,073,723
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 722,229 836,194 746,305
Gain on equipment sales............. (317,871) (302,777) (355,159)
Interest expense not requiring
cash............................... 17,500
Changes in assets and liabilities:
Increase in accounts receivable... (132,976) (235,655) (171,618)
Decrease (increase) in unbilled
receivables...................... 5,646 27,632 (243,143)
(Increase) decrease in inventory.. (102,542) 89,645 (205,294)
Decrease (increase) in prepaid
expenses and other assets........ 30,774 20,171 (30,743)
(Decrease) increase in accounts
payable, accrued expenses and
other liabilities................ (60,113) (14,377) 187,067
---------- ------------ -----------
Total adjustments............... 145,147 438,333 (72,585)
---------- ------------ -----------
Cash provided by operating
activities..................... 52,235 892,590 1,001,138
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment.......... (92,727) (1,368,253) (1,631,309)
Proceeds from sale of rental
equipment............................ 350,739 745,687 573,316
Purchases of property and equipment,
net.................................. (101,985) (90,932) (304,711)
---------- ------------ -----------
Cash provided by (used in)
investing activities........... 156,027 (713,498) (1,362,704)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid................... (485,000)
Issuance of stock..................... 100,000
Re-payments on notes due from
stockholders......................... 200,000 300,000
Principal payments on debt............ (742,891) (802,358) (278,195)
Principal payments on capital lease
obligations.......................... (32,711)
Advances to related party............. (412,113)
Borrowings under credit facility...... 900,000 500,000 700,000
---------- ------------ -----------
Cash provided by (used) in
financing activities........... (187,715) (102,358) 236,805
---------- ------------ -----------
Increase (decrease) in cash........... 20,547 76,734 (124,761)
Cash balance at beginning
period......................... 208,225 228,772 305,506
---------- ------------ -----------
Cash balance at end of period... $ 228,772 $ 305,506 $ 180,745
========== ============ ===========
See accompanying notes.
F-333
BRONCO HI-LIFT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND OCTOBER 24, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Bronco Hi-Lift, Inc. (the "Company") rents, sells and repairs aerial lift
equipment for use by construction companies and maintenance and media crews.
The rentals are on a daily, weekly or monthly basis. The Company is located in
Denver, Colorado and its principal market area is the state of Colorado. 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 balance sheets are presented on an
unclassified basis.
Inventory
Inventories consists primarily of general replacement parts and fuel for the
equipment and are stated at the lower of cost, determined under the first-in,
first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the statements of
operations.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over estimated useful lives
of 5 to 10 years.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Company advertises primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expenses amounted to approximately $74,400 and $43,000 in the
years ended December 31, 1995 and 1996, respectively, and $49,500 in the
period from January 1, 1997 to October 24, 1997.
Income Taxes
The Company has elected, by unanimous consent of its shareholders, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
both federal and state purposes. Under those provisions the Company does not
pay federal or state income taxes; instead, the shareholders are liable for
individual income taxes on the Company's profits. Therefore, no provision for
federal or state income taxes is included in the accompanying financial
statements.
F-334
BRONCO HI-LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounting 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.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with a quality financial institution
and, accordingly, management believes this mitigates the amount of credit
risk. Concentrations of credit risk with respect to customer receivables are
limited due to the large number of customers comprising the Company's customer
base and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following:
OCTOBER
DECEMBER 31, 24,
1996 1997
------------ ----------
Rental equipment.................................... $5,176,658 $5,943,569
Less accumulated depreciation....................... 3,203,748 3,218,105
---------- ----------
Rental equipment, net............................... $1,972,910 $2,725,464
========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, OCTOBER 24,
1996 1997
------------ -----------
Furniture and fixtures.............................. $ 59,572 $172,839
Transportation equipment............................ 520,356 664,543
Shop equipment...................................... 37,591 37,591
-------- --------
617,519 874,973
Less accumulated depreciation....................... 382,605 451,055
-------- --------
Total............................................. $234,914 $423,918
======== ========
F-335
BRONCO HI-LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of the following:
OCTOBER
DECEMBER 31 24,
1996 1997
----------- ----------
Citicorp Dealer Finance Agreement.................... $1,585,000 $2,135,000
GMAC note dated October 27, 1994 paid in full in
August 1997......................................... 17,564 --
Kenworth/Trial-EZE dated July 11, 1994 paid in full
in September 1997................................... 49,147 --
Notes payable to a former shareholder for $900,000
and $500,000 at an annual interest rate of 9%. The
$900,000 note requires monthly interest payments
through January 31, 1998 at which time the note is
due in full. The $500,000 note requires monthly
interest payments through January 31, 1997.
Beginning February 1, 1997, the note is payable in
60 monthly installments of principal and interest of
$10,379 through December 31, 2001. The above
$500,000 note is subordinated to the Citicorp Dealer
Finance Agreement................................... 1,400,000 1,338,516
---------- ----------
$3,051,711 $3,473,516
========== ==========
Substantially all of the Company's assets collateralize the debt outstanding
under the Financing Agreement. All debt at October 24, 1997 was paid off in
connection with the acquisition discussed in Note 10.
6. OPERATING LEASES
During 1994, the Company leased 7,000 square feet of office and shop space
on a twelve month lease, renewable annually. For the period from January 1,
1995 to April 30, 1995, the Company leased approximately 7,000 square feet of
office and shop space under a new month to month lease. Effective May 1, 1995,
the Company moved to a new location and entered into a lease agreement with a
related party, Coyote Investments, LLC ("Coyote") (see Note 9). The facility
consists of 17,000 square feet of office and shop area located on 1.8 acres.
The 15 year lease expires April 30, 2010. The Company is responsible for all
operating expenses of the facility including property taxes, assessments,
insurance, repairs and maintenance.
Rent expense under these leases totaled $52,000 and $78,000 for the years
ended December 31, 1995 and 1996 and $65,000 for the period from January 1,
1997 to October 24, 1997. Under the lease agreement with Coyote, rent is
payable in monthly installments of $6,500 for the first two years of the
lease. Thereafter the rent shall be increased annually to reflect the then
current fair market rent for the premises, provided that each annual increase
shall not exceed 10% of the previous year's rental rate. Future minimum rent
commitments are $78,000 each for years ended December 31, 1998 to December 31,
2009 and $26,000 for January 1, 2010 to April 30, 2010, provided there is no
increase in fair market rent for the premises.
7. COMMITMENTS
The Company has employment agreements, which expire in 1998, with three
officers which grant certain severance pay rights to these officers provided
that certain conditions of employment are met. Under terms of the employment
agreements, the officers received approximately $253,000, $703,000, and
$521,000 for the years ended December 31, 1995 and 1996 and for the period
from January 1, 1997 to October 24, 1997, respectively. Additional
compensation to be paid to the officers, until the agreements expire, amounts
to approximately $100,000 for the two months ended December 31, 1997 and
$270,000 during 1998.
The Company guarantees Coyote's debt on the building leased by the Company
(see Note 9).
F-336
BRONCO HI-LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1995 and 1996 and for the period from
January 1, 1997 to October 24, 1997, total interest paid was $171,305,
$335,686 and $224,016, respectively.
During 1995, the Company purchased $726,355, of equipment which was
financed. There were no purchases in 1996 or for the period from January 1,
1997 to October 24, 1997.
On December 20, 1995, the Company purchased and retired 12,000 shares of its
stock for two notes totaling $1,400,000. On December 21, 1995, the Company
issued 2,000 shares of its stock to two officers of the Company in exchange
for $100,000 cash and $500,000 of notes receivable from these officers. During
1996, the officers repaid $200,000 in accordance with the note agreements. In
October of 1997, the notes were repaid in full.
During 1997, the Company paid dividends of $515,000, of which $30,000
represented a non-cash transfer of a fixed asset.
9. RELATED PARTY TRANSACTIONS
Coyote is owned by the shareholders of the Company. The Company leases its
office and shop facility from Coyote (see Note 6). All stockholders and the
Company have guaranteed Coyote's debt on the facility. The amount of debt
principal on the facility was $555,080 at December 31, 1996 and $540,200 at
October 24, 1997.
Advances to Coyote were $412,113 at December 31, 1995. Coyote paid $3,434 of
interest to the Company during 1996. As part of the Citicorp Amendment No. 1
Refinancing Agreement, the Company owed Coyote $152,187, which it paid with
interest of $7,990 during August 1996. These obligations were fulfilled with a
non-cash transaction in connection with the above mentioned amended agreement.
On December 21, 1995 the Company issued 2,000 shares to two officers of the
Company in exchange for $100,000 cash and two notes for $250,000 each. The
notes bear interest at 9% per annum and are payable bi-annually. Principal on
each note is payable $100,000 in 1996, $100,000 in 1997 and $50,000 in 1998.
Interest paid to the Company during 1996 by these stockholders was $42,400. In
October of 1997, the notes were repaid in full.
10. SUBSEQUENT EVENT
On October 24, 1997, the Company entered into a stock purchase agreement
with United Rentals, Inc. ("United"). Under the terms of the stock purchase
agreement, United purchased all of the issued and outstanding capital stock of
the Company.
F-337
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- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NO BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUER OR ANY OF THE INITIAL PURCHASERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
EXCHANGE NOTES OR GUARANTEES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGES IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE ISSUER SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
PAGE
----
Available Information..................................................... 1
Cautionary Notice Regarding Forward Looking Statements.................... 1
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 15
The Exchange Offer........................................................ 23
Registration Rights Agreement............................................. 30
Use of Proceeds........................................................... 33
Ratio of Earnings to Fixed Charges........................................ 33
Capitalization............................................................ 34
Selected Historical and Pro Forma Consolidated Financial Information...... 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 37
Business.................................................................. 45
Certain Information Concerning Pending Merger............................. 55
Management................................................................ 58
Certain Transactions...................................................... 65
Principal Stockholders.................................................... 66
Description of the Notes.................................................. 68
Plan of Distribution...................................................... 97
Legal Matters............................................................. 98
Experts................................................................... 98
Index to Financial Statements............................................. F-1
- --------------------------------------------------------------------------------
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$200,000,000
UNITED RENTALS (NORTH AMERICA), INC.
OFFER TO EXCHANGE
9 1/2% SENIOR SUBORDINATED
NOTES DUE 2008, SERIES B
FOR 9 1/2% SENIOR SUBORDINATED
NOTES DUE 2008, SERIES A
--------------------------------
PROSPECTUS
--------------------------------
SEPTEMBER 18, 1998
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