SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
COMMISSION FILE NUMBER 1-14387
UNITED RENTALS, INC.
COMMISSION FILE NUMBER 1-13663
UNITED RENTALS (NORTH AMERICA), INC.
(Exact names of Registrants as specified in their charters)
06-1522496
Delaware 06-1493538
--------------------------- -------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification Nos.)
Four Greenwich Office Park, Greenwich, Connecticut 06830
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (203) 622-3131
--------------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. X Yes _____ No
-----
As of November 10, 1998 there were 68,407,964 shares of the United Rentals, Inc.
common stock, $.01 par value outstanding.
There is no market for the common stock of United Rentals (North America), Inc.,
all outstanding shares of which are owned by United Rentals, Inc.
This combined Form 10-Q is separately filed by (i) United Rentals, Inc. and (ii)
United Rentals (North America), Inc. (which is a wholly owned subsidiary of
United Rentals, Inc.). United Rentals (North America), Inc. meets the
conditions set forth in general instruction H(1)(A)and(B)of Form 10-Q and is
therefore filing this form with the reduced disclosure format permitted by such
instruction.
UNITED RENTALS, INC.
UNITED RENTALS (NORTH AMERICA), INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements
United Rentals, Inc. Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997
(unaudited).................................................. 7
United Rentals, Inc. Consolidated Statements of
Operations for the Nine and Three Months
Ended September 30, 1998 and 1997 (unaudited)................ 8
United Rentals, Inc. Consolidated Statements of
Stockholders' Equity for the Nine Months Ended
September 30, 1998 (unaudited)............................... 10
United Rentals, Inc. Consolidated Statements of Cash Flows
for the Nine Months Ended September 30,
1998 and 1997 (unaudited).................................... 11
United Rentals (North America), Inc. Consolidated Balance
Sheets as of September 30, 1998 and December 31, 1997
(unaudited).................................................. 13
United Rentals (North America), Inc. Consolidated
Statements of Operations for the Nine and Three Months
Ended September 30, 1998 and 1997 (unaudited)................ 14
United Rentals (North America), Inc. Consolidated Statements
Of Cash Flows for the Nine Months Ended September 30, 1998
and 1997 (unaudited)......................................... 15
Notes to Unaudited Consolidated Financial Statements......... 17
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 33
PART II OTHER INFORMATION
Item 2 Changes in Securities........................................ 52
Item 4 Submission of Matters to a Vote of Security Holders.......... 53
Item 6 Exhibits and Reports on Form 8-K............................. 54
Signatures................................................... 59
-2-
Unless otherwise indicated, all references herein to "the Company" or "United
Rentals" refer collectively to United Rentals, Inc. and its subsidiaries.
INTRODUCTION
THE COMPANY
United Rentals is the largest equipment rental company in North
America. The Company, through its network of over 400 branch locations, offers a
wide variety of equipment for rent (on a daily, weekly or monthly basis) to
customers that include construction industry participants, industrial companies,
homeowners and others. The Company also sells used rental equipment, acts as a
dealer for certain new equipment, and sells related merchandise and parts.
United Rentals began operations in October 1997 with the acquisition of six
well-established rental companies and has grown through a combination of
internal growth, the acquisition of 76 additional companies, and a merger in
September 1998 with U.S. Rentals, Inc. At the time of the merger, U.S. Rentals
was the second largest equipment rental company in the United States based on
1997 rental revenues.
The rental equipment offered by the Company includes a broad range of
light to heavy construction and industrial equipment (such as backhoes,
forklifts, aerial lifts, skid-steer loaders, compressors, pumps and generators)
and general tools and equipment (such as hand tools and garden and landscaping
equipment). 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 October 1, 1998, the Company's rental equipment
included approximately 260,000 units, had an original purchase price of
approximately $1.8 billion and had a weighted average age (based on original
purchase price)of approximately 26 months.
STRATEGY
The Company's strategy is to continue to expand through a combination
of internal growth and a disciplined acquisition program. The Company is
seeking to increase internal growth by expanding and modernizing its equipment
fleet, opening new rental locations, and capitalizing on the significant cost
and operating advantages available to the Company due to its size and
geographical diversification. These advantages include the ability of the
Company to:
-3-
. use its purchasing power to buy equipment at prices that are
significantly lower than those generally available to smaller rental
companies;
. obtain capital at a lower cost than is generally available to many
smaller companies;
. market items of equipment through multiple branches, rather than a
single branch, using the Company's new information technology system
which enables each branch within a geographic region to track and
access equipment anywhere in the region;
. cross-market the expertise and specialties of different branches in
the same region - for example, the Company's high-reach equipment is
marketed at its general rental locations;
. reduce costs by centralizing the common business functions, such as
payroll, credit and collection, and heavy maintenance, of clusters of
branches within a geographic region;
. access multiple used equipment re-sale markets across the country
through the Company's network of branch locations, field sales force
and web site;
. transfer equipment from regions where the economy may be weakening to
those where demand is increasing;
. maintain the quantity and diversity of equipment required to serve the
needs of large industrial companies, thereby providing the Company
with the potential to further penetrate this growing market for rental
equipment and mitigate cyclical swings in demand from construction
activities;
. maintain the quantity and diversity of equipment required to provide
customers with the benefits of "one-stop shopping".
The Company's acquisition strategy is to acquire multiple locations within
the regions that it enters, with the goal of creating clusters of locations that
can share equipment, marketing resources, back office functions and certain
maintenance functions. The Company is seeking to acquire companies of varying
size, including relatively large companies to serve as platforms for the
development of new regional clusters and smaller companies to complement
existing or
-4-
anticipated locations. In evaluating potential acquisition targets, the Company
considers a number of factors, including the quality of the target's rental
equipment and management, the opportunities to improve operating margins and
increase internal growth at the target, the economic prospects of the region in
which the target is located, the potential for additional acquisitions in the
region, and the competitive landscape in the target's markets. As the Company
completes acquisitions, the Company focuses substantial efforts on improving
operating margins at the 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.
INDUSTRY BACKGROUND
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 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
-5-
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 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.
-6-
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
ASSETS
Cash and cash equivalents $ 21,795 $ 72,411
Accounts receivable, net of
allowance for doubtful accounts
of $29,577 in 1998 and
$11,085 in 1997 232,448 82,592
Inventory 74,895 21,778
Prepaid expenses and other assets 36,700 17,167
Rental equipment, net 1,191,448 461,026
Property and equipment, net 180,622 98,268
Intangible assets, net of
accumulated amortization
of $8,675 in 1998 and
$568 in 1997 819,094 73,648
---------- --------
$2,557,002 $826,890
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 137,339 $ 41,392
Debt 1,235,508 264,573
Deferred income taxes 20,761 25,275
Accrued expenses and other liabilities 155,356 49,262
---------- --------
Total liabilities 1,548,964 380,502
Commitments and contingencies
Company-obligated mandatorily redeemable
convertible preferred securities of
a subsidiary trust 300,000
Stockholders' equity:
Preferred stock--$.01 par value,
5,000,000 shares authorized, no
shares issued and outstanding
Common stock--$.01 par value,
500,000,000 shares authorized in
1998 and 75,000,000 in 1997,
68,406,401 in 1998
and 56,239,375 in 1997 shares
issued and outstanding 684 562
Additional paid-in capital 689,102 401,758
Retained earnings 18,535 44,068
Cumulative translation adjustments (283)
---------- --------
Total stockholders' equity 708,038 446,388
---------- --------
$2,557,002 $826,890
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
IN THOUSANDS, EXCEPT PER SHARE DATA SEPTEMBER 30 SEPTEMBER 30
-------------------------------- ---------------------
1998 1997 1998 1997
----------- ------------ --------- ---------
Revenues:
Equipment rentals $ 592,502 $ 263,249 $ 282,818 $ 104,835
Sales of rental equipment 73,703 26,990 30,481 10,026
Sales of new equipment,
merchandise and other revenues 138,057 37,585 65,775 14,159
----------- ------------ --------- ---------
Total revenues 804,262 327,824 379,074 129,020
Cost of revenues:
Cost of equipment rentals, excluding
depreciation 263,529 127,799 119,594 46,687
Depreciation of rental equipment 119,970 56,715 52,953 21,221
Cost of rental equipment sales 39,820 13,084 17,261 4,594
Cost of new equipment and merchandise sales and
other operating costs 106,893 30,040 50,549 10,870
----------- ------------ --------- ---------
Total cost of revenues 530,212 227,638 240,357 83,372
----------- ------------ --------- ---------
Gross profit 274,050 100,186 138,717 45,648
Selling, general and administrative expenses 128,763 48,488 60,413 21,002
Merger-related expenses 42,216 42,216
Non-rental depreciation and amortization 23,693 9,223 11,201 3,492
Termination cost of deferred compensation agreements 20,290
----------- ------------ --------- ---------
Operating income 79,378 22,185 24,887 21,154
Interest expense 39,170 6,316 23,924 2,624
Preferred dividends of a subsidiary trust 2,979 2,979
Other (income) expense (4,524) (1,356) (291) (531)
----------- ------------ --------- ---------
Income (loss) before provision for
income taxes and extraordinary items 41,753 17,225 (1,725) 19,061
Provision for income taxes 25,229 21,875 8,431 7,363
----------- ------------ --------- ---------
Income (loss) before extraordinary items 16,524 (4,650) (10,156) 11,698
Extraordinary items, net of income taxes of $14,255
in 1998 and $995 in 1997 21,337 1,511 21,337
----------- ------------ --------- ---------
Net income (loss) $ (4,813) $ (6,161) $ (31,493) $ 11,698
=========== ============ ========= =========
The accompanying notes are an integral part of these consolidated financial
statements
-8-
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - CON'T
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
IN THOUSANDS, EXCEPT PER SHARE DATA SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
------- ------- -------- -------
Earnings (loss) per equivalent share - basic:
Income (loss) before extraordinary items $ 0.26 $ (0.10) $ (0.15) $ 0.24
Extraordinary items, net 0.33 0.03 0.31
------- ------- -------- -------
Net income (loss) $ (0.07) $ (0.13) (0.46) 0.24
======= ======= ======== =======
Earnings (loss) per equivalent share - diluted:
Income (loss) before extraordinary items $ 0.23 $ (0.10) $ (0.13) $ 0.24
Extraordinary items, net 0.30 0.03 0.28
------- ------- -------- -------
Net income (loss) $ (0.07) $ (0.13) $ (0.41) $ 0.24
======= ======= ======== =======
Supplemental pro forma data:
Historical income (loss) before provision
for income taxes and extraordinary items $41,753 $17,225 $ (1,725) $19,061
Pro forma provision for income taxes 27,162 21,637 9,604 7,803
------- ------- -------- -------
Pro forma net income (loss) before
extraordinary items $14,591 $(4,412) $(11,329) $11,258
======= ======= ======== =======
Pro forma basic net income (loss) before
extraordinary items per share $ 0.23 $ (0.10) $ (0.17) $ 0.24
======= ======= ======== =======
Pro forma diluted net income (loss) before
extraordinary items per share $ 0.21 $ (0.09) $ (0.15) $ 0.24
======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
-9-
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
IN THOUSANDS, EXCEPT SHARE DATA
COMMON STOCK
--------------------
NUMBER ADDITIONAL CUMULATIVE
OF PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS
----------- --------- ----------- ----------- ------------
Balance,
December 31, 1997 56,239,375 $562 $401,758 $ 44,068 --
Issuance of
common stock 10,807,790 108 267,559
Translation
adjustments $(283)
Conversion of
convertible note 14,814 200
Cancellation of
common stock (137,600) (1) 1
Reclassification of
Subchapter S
accumulated
earnings to paid-in
capital 18,979 (18,979)
Pooling-of-interest 1,456,997 15 (14) 1,795
Exercise of common
stock options 25,025 619
Subchapter S
distributions of
a pooled entity (3,536)
Net loss (4,813)
Balance, ----------- --------- ----------- ----------- ------------
September 30, 1998 68,406,401 $684 $689,102 $ 18,535 $(283)
=========== ========= =========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
-10-
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,813) $ (6,161)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and amortization 143,663 65,938
Amortization of original issue discount
and deferred financing fees 527
Extraordinary items 35,592 2,506
Write down of assets held for sale 4,040
Gain on sale of rental equipment (33,883) (13,906)
Deferred income taxes 402 12,829
Changes in operating assets and
liabilities:
Accounts receivable (59,718) (17,612)
Inventory (9,414) (3,100)
Prepaid expenses and other assets 10,272 (3,880)
Accounts payable 68,161 5,759
Accrued expenses and
other liabilities 53,269 4,319
------------ ------------
Net cash provided by operating
activities 208,098 46,692
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of rental equipment (426,717) (188,041)
Purchases of property and equipment (66,134) (34,258)
Proceeds from sales of rental
equipment 73,703 26,990
In-process acquisition costs (4,413)
Payment of contingent purchase price (2,617)
Purchases of other companies (833,297) (36,607)
------------ ------------
Net cash used in investing activities (1,259,475) (231,916)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of issuance costs 206,993 240,922
Proceeds from debt 1,934,137 105,776
Repayments of debt (1,410,122) (100,541)
Payment of debt financing costs (26,711) (3,841)
Proceeds from the issuance of redeemable
convertible preferred securities 300,000
Distribution to stockholders (3,536)
------------ ------------
Net cash provided by financing
activities 1,000,761 242,316
Net increase (decrease) in cash and
cash equivalents (50,616) 57,092
Cash and cash equivalents at
beginning of period 72,411 2,906
------------ ------------
Cash and cash equivalents at
end of period $ 21,795 $ 59,998
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-11-
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CON'T
(UNAUDITED)
IN THOUSANDS
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
1998 1997
--------- -----------
Supplemental disclosure of cash flow
information:
Cash paid during the period:
Interest $17,795 $ 11,131
Income taxes $ 9,679 $ 11,681
Supplemental disclosure of non-cash
investing and financing activities:
During the nine month period ended
September 30, 1998, a convertible note
in the principal amount of $200 was
converted into 15 shares of common
stock.
The Company acquired the net assets
and assumed certain liabilities of
other companies as follows:
Assets, net of cash acquired 1,335,091 36,607
Liabilities assumed (441,120)
Less:
Amounts paid in common stock and
warrants (60,674)
---------- ---------
Net cash paid $ 833,297 $ 36,607
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
-12-
THE FOLLOWING FINANCIAL STATEMENTS PRESENT THE
FINANCIAL POSITION AND RESULTS OF OPERATIONS
OF UNITED RENTALS (NORTH AMERICA), INC. AND
SUBSIDIARIES AS ISSUER OF 9.5% AND 8.8%
SENIOR SUBORDINATED NOTES BOTH DUE 2008.
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
IN THOUSANDS
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
ASSETS
Cash and cash equivalents $ 21,793 $ 72,411
Accounts receivable, net of
allowance for doubtful accounts
of $29,577 in 1998 and
$11,085 in 1997 232,448 82,592
Inventory 74,895 21,778
Prepaid expenses and other assets 23,316 17,167
Rental equipment, net 1,191,448 461,026
Property and equipment, net 168,689 98,268
Intangible assets, net of
accumulated amortization
of $8,675 in 1998 and
$568 in 1997 819,094 73,648
------------ -----------
$2,531,683 $826,890
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 127,217 $ 41,392
Debt 1,235,508 264,573
Deferred income taxes 20,761 25,275
Accrued expenses and other
liabilities 145,993 49,262
------------ -----------
Total liabilities 1,529,479 380,502
Commitments and contingencies
Stockholders' equity:
Common stock 334 562
Additional paid-in capital 981,860 401,758
Retained earnings 20,293 44,068
Cumulative translation adjustments (283)
------------ -----------
Total stockholders' equity 1,002,204 446,388
------------ -----------
$2,531,683 $826,890
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-13-
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
IN THOUSANDS SEPTEMBER 30 SEPTEMBER 30
------------------------- -----------------------
1998 1997 1998 1997
--------- -------- --------- ----------
Revenues:
Equipment rentals $592,502 $263,249 $282,818 $104,835
Sales of rental equipment 73,703 26,990 30,481 10,026
Sales of new equipment,
merchandise and other revenues 138,057 37,585 65,775 14,159
--------- -------- --------- ----------
Total revenues 804,262 327,824 379,074 129,020
Cost of revenues:
Cost of equipment rentals, excluding
depreciation 263,529 127,799 119,594 46,687
Depreciation of rental equipment 119,970 56,715 52,953 21,221
Cost of rental equipment sales 39,820 13,084 17,261 4,594
Cost of new equipment and merchandise
sales and other operating costs 106,893 30,040 50,549 10,870
--------- -------- --------- ----------
Total cost of revenues 530,212 227,638 240,357 83,372
--------- -------- --------- ----------
Gross profit 274,050 100,186 138,717 45,648
Selling, general and administrative expenses 128,763 48,488 60,413 21,002
Merger-related expenses 42,216 42,216
Non-rental depreciation and amortization 23,693 9,223 11,201 3,492
Termination cost of deferred compensation agreements 20,290
--------- -------- --------- ----------
Operating income 79,378 22,185 24,887 21,154
Interest expense 39,170 6,316 23,924 2,624
Other (income) expense (4,524) (1,356) (291) (531)
--------- -------- --------- ----------
Income before provision for
income taxes and extraordinary items 44,732 17,225 1,254 19,061
Provision for income taxes 26,450 21,875 9,652 7,363
--------- -------- --------- ----------
Income (loss) before extraordinary items 18,282 (4,650) (8,398) 11,698
Extraordinary items, net of income taxes of $14,255
in 1998 and $995 in 1997 21,337 1,511 21,337
--------- -------- --------- ----------
Net income (loss) $ (3,055) $ (6,161) $(29,735) $ 11,698
========= ======== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-14-
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1998 1997
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,055) $ (6,161)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and amortization 143,663 65,938
Amortization of original issue discount
and deferred financing fees 527
Extraordinary items 35,592 2,506
Write down of assets held for sale 4,040
Gain on sale of rental equipment (33,883) (13,906)
Deferred income taxes 402 12,829
Changes in operating assets and
liabilities:
Accounts receivable (58,440) (17,612)
Inventory (9,414) (3,100)
Prepaid expenses and other assets 23,654 (3,880)
Accounts payable 58,039 5,759
Accrued expenses and
other liabilities 43,906 4,319
----------- ---------
Net cash provided by operating
activities 205,031 46,692
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of rental equipment (426,717) (188,041)
Purchases of property and equipment (53,997) (34,258)
Proceeds from sales of rental
equipment 73,703 26,990
In-process acquisition costs (4,413)
Payment of contingent purchase price (2,617)
Purchases of other companies (833,297) (36,607)
----------- ---------
Net cash used in investing activities (1,247,338) (231,916)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of issuance costs 206,993 240,922
Proceeds from debt 1,934,137 105,776
Repayments of debt (1,410,122) (100,541)
Payment of debt financing costs (26,711) (3,841)
Capital contribution by parent 290,928
Distribution to stockholders (3,536)
----------- ---------
Net cash provided by financing
activities 991,689 242,316
----------- ---------
Net increase (decrease) in cash and
cash equivalents (50,618) 57,092
Cash and cash equivalents at
beginning of period 72,411 2,906
Cash and cash equivalents at
end of period $ 21,793 $ 59,998
=========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
-15-
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CON'T
(UNAUDITED)
IN THOUSANDS
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1998 1997
---------- ------------
Supplemental disclosure of cash flow
information:
Cash paid during the period:
Interest $17,795 $11,131
Income taxes $ 9,679 $11,681
Supplemental disclosure of non-cash
investing and financing activities:
During the nine month period ended
September 30, 1998, a convertible note in the
principal amount of $200 was converted
into 15 shares of common stock.
The Company acquired the net assets
and assumed certain liabilities of
other companies as follows:
Assets, net of cash acquired 1,335,091 36,607
Liabilities assumed (441,120)
Less:
Amounts paid in common stock and
warrants (60,674)
---------- --------
Net cash paid $ 833,297 $36,607
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
1. BASIS OF PRESENTATION
General
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
4. 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. Prior to the
formation of Holdings, the consolidated financial statements of the Company
represented the accounts of URI and its subsidiaries. Separate footnote
information is not presented for the financial statements of URI and
subsidiaries as that information is substantially equivalent to that presented
below. Earnings per share data is not provided for the operating results of URI
and its subsidiaries as they are wholly owned subsidiaries of Holdings.
The Company's consolidated balance sheet, statements of operations and
statements of cash flows as of December 31, 1997, and for the nine and three
month periods ended September 30, 1998 and 1997, have been restated to include
the accounts of certain acquisitions completed in 1998, that were accounted for
as poolings-of-interests. See Note 2.
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,
-17-
accordingly, certain disclosures have been omitted. Results of operations for
the nine and three month periods ended September 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 in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued 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
-18-
accounting for derivatives and hedging activities. The Company is required to
adopt SFAS No. 133 beginning January 1, 2000. The adoption of SFAS No. 133 is
not expected to have a material ffect on the Company's consolidated financial
position or results of operations.
2. ACQUISITIONS
During the nine months ended September 30, 1998, the Company completed 69
acquisitions. Three of such acquisitions were accounted for as poolings-of-
interests (the "Pooling Transactions")and 66 were accounted for as purchases.
Acquisitions Accounted for as Poolings-of-Interests
On August 24, 1998, the Company issued 2,744,368 shares of its Common Stock
for all of the outstanding shares of common stock of Rental Tools and Equipment
Co. ("Rental Tools"). This transaction was accounted for as a pooling-of-
interests and, accordingly, the consolidated financial statements at December
31, 1997 and for all periods presented have been restated to include the
accounts of Rental Tools.
On September 24, 1998, the Company issued 1,456,997 shares of its Common
Stock for all of the outstanding shares of common stock of Wynne Systems, Inc.
("Wynne"). The transaction was accounted for as a pooling-of-interests;
however, this transaction was not material to the Company's consolidated
operations and financial position and, therefore, the Company's financial
statements have not been restated for this transaction.
On September 29, 1998, a merger (the "Merger")of United Rentals, Inc. and
U.S. Rentals, Inc. ("U.S. Rentals") was completed. The Merger was effected by
having a wholly owned subsidiary of United Rentals, Inc. merge with and into
U.S. Rentals. Following the Merger, United Rentals, Inc. contributed the
capital stock of U.S. Rentals to URI, a wholly owned subsidiary of United
Rentals, Inc. Pursuant to the Merger, each outstanding share of common stock of
U.S. Rentals was converted into the right to receive 0.9625 of a share of common
stock of United Rentals, Inc. An aggregate of approximately 29.6 million shares
of United Rentals, Inc. Common Stock were issued in the
-19-
Merger in exchange for the outstanding shares of U.S. Rentals common stock. The
Merger was accounted for as a pooling-of-interests and, accordingly, the
consolidated financial statements at December 31, 1997, and for all periods
presented have been restated to include the accounts of U.S. Rentals.
The table below shows the separate revenue and net income (loss) of the
Company, U.S. Rentals and Rental Tools for periods prior to combination (in
thousands):
The Company U.S. Rentals Rental Tools Combined
------------------ ----------------- ------------------ ------------------
Nine months ended
September 30, 1998
Revenues $311,919 $451,101 $41,242 $804,262
Net income (loss) (53,178) 43,670 4,695 (4,813)
Nine months ended
September 30, 1997
Revenues 291,501 36,323 327,824
Net income (loss) (273) (6,471) 583 (6,161)
Three months ended
September 30, 1998
Revenues 184,566 178,219 16,289 379,074
Net income (loss) (61,398) 27,190 2,715 (31,493)
Three months ended
September 30, 1997
Revenues 114,020 15,000 129,020
Net income (loss) (273) 10,857 1,114 11,698
Rental Tools was accounted for as a Subchapter S Corporation prior to being
acquired by the Company. In general, the income or loss of a Subchapter S
Corporation is passed through to its stockholders rather than being subjected to
taxes at the corporate level.
Acquisitions Accounted for as Purchases
The acquisitions completed by the Company in the first nine months of 1998
include 66 that were accounted for as purchases. The results of operations of
the businesses acquired in these acquisitions have been included in the
Company's results of operations from their respective acquisition dates.
-20-
The aggregate initial consideration paid by the Company for such
acquisitions that were accounted for as purchases was $878.6 million and
consisted of approximately $818.4 million in cash and 5.1 million 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 in such acquisitions in the aggregate amount of $418.6
million. The Company also agreed in connection with 12 of such acquisitions to
pay additional amounts to the former owners based upon specified future revenues
and/or new store openings (such amounts being limited to (i) $10.0 million, $2.0
million, $1.4 million, 1.0 million, $0.8 million, $0.8 million, $0.5 million,
$0.5 million, $0.5 million $0.4 million and Cdn. $4.0 million, 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).
The purchase prices for such acquisitions have been allocated to the assets
acquired and liabilities assumed based on their respective fair values at their
respective acquisition dates. However, the Company has not completed its
valuation of all of its purchases and, accordingly, 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
results of operations of the Company for the nine months ended September 30,
1998 as though each acquisition described above that was accounted for as a
purchase was completed on January 1, 1998 (in thousands, except per share data):
NINE MONTHS ENDED
SEPTEMBER 30,1998
-----------------
Revenues $1,070,883
Net income 34,006
Basic earnings per share $ 0.49
Diluted earnings per share $ 0.44
-21-
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.
Merger-Related Expenses and Extraordinary Item
The results of operations for the third quarter of 1998 include pre-tax
expenses related to the three Pooling Transactions totaling approximately $42.2
million ($29.5 million after-tax), consisting of (i) $18.5 million for
investment banking, legal, accounting services and other merger costs, (ii)
$14.5 million of expenses relating to the closing of duplicate facilities, (iii)
$6.3 million for employee severance and (iv) $2.9 million in other expenses.
Certain merger related expenses are transitional in nature and, in accordance
with generally accepted accounting principles, are not presently accruable and
will be expensed in future quarters.
Additionally, in the third quarter of 1998, the Company recorded a pre-tax
extraordinary charge of $35.6 million ($21.3 million after-tax) relating to
early extinguishment of debt primarily related to the Merger with U.S. Rentals.
3. REVOLVING CREDIT FACILITY
In connection with the Merger, URI obtained a new credit facility (the
"Credit Facility") dated as of September 29, 1998, with a group of financial
institutions. The credit facility enables URI to borrow up to $762.5 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 $762.5 million). Up to $25 million is available in the form of
letters of credit. The agreement governing the Credit Facility requires that the
aggregate commitment shall be reduced on the last day of each calendar quarter,
beginning September 30, 2001 and continuing through June 30, 2003 by an amount
equal to $19.1 million. The Credit Facility terminates on September 26, 2003, at
which time all outstanding indebtedness is due. The amount of indebtedness
outstanding under the Credit Facility was $535.0 million at September 30, 1998.
-22-
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% or (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 the Bank of America Canada's reserve adjusted
Eurodollar Rate) plus a margin ranging from 0.95% 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. The Company is also required to pay the banks an annual facility fee
equal to 0.375% of the banks' $762.5 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).
4. 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 the new holding company 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 did 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.
-23-
5. 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. The term loan accrues interest, at the Company's option, at either (a) the
Base Rate (as defined with respect to the Credit Facility) plus a margin ranging
from 0% to 0.5% per annum, or (b) the Eurodollar Rate (as defined with respect
to the Credit Facility for borrowings by URI) plus a margin ranging from 1.875%
to 2.375% per annum. The Term Loan is secured pari passu with the Credit
Facility. URI used the net proceeds from the Term Loan for acquisitions.
6. 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.
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 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.
7. 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"). 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
Holdings which resulted in Holdings receiving all of the net proceeds of the
Preferred Securities Offering. Holdings in turn contributed the net
-24-
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. COMMON STOCK
On March 11, 1998, the Company completed a public offering of 8,625,000
shares of Common Stock. The net proceeds to the Company from this 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
this 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. At a special meeting of stockholders held on September 29, 1998,
the shareholders approved an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of Common Stock to
500,000,000.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Income (loss) before extraordinary items $16,524 $(4,650) $(10,156) $11,698
======= ======= ======== =======
Denominator:
Denominator for basic
earnings per share
weighted-average shares 64,363 46,072 68,415 47,863
Effect of dilutive securities:
Employee stock options 2,335 2,720
Warrants 4,296 1,644 4,437 1,644
Dilutive potential common
shares
Denominator for diluted
earnings per share -
adjusted weighted-average
shares 70,994 47,716 75,572 49,507
Basic earnings before extraordinary
items per share $ 0.26 $ (0.10) $ (0.15) $ 0.24
======= ======= ======== =======
Diluted earnings before
extraordinary items per share $ 0.23 $ (0.10) $ (0.13) $ 0.24
======= ======= ======== =======
-25-
10. 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 September 30, 1998 and for the nine and three months ended
September 30, 1998, are presented. The condensed consolidating financial
information as of and for the periods ended December 31, 1997 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:
-26-
CONDENSED CONSOLIDATING BALANCE SHEET
IN THOUSANDS
SEPTEMBER 30, 1998
------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------- -------------- ------------- -------------
ASSETS
Cash and cash equivalents $ 4,907 $ 13,492 $ 3,394 $ 21,793
Accounts receivable, net 217,279 15,169 232,448
Intercompany receivable
(payable) 766,764 (720,507) (46,257)
Inventory 68,931 5,964 74,895
Prepaid expenses and
other assets 11,290 10,368 1,658 23,316
Rental equipment, net 1,150,965 40,483 1,191,448
Property and equipment,
net 162,801 5,888 168,689
Investment in
subsidiaries 1,338,107 $(1,338,107)
Intangible assets, net 145 764,731 54,218 819,094
---------- ---------- -------- ----------- ----------
$2,121,213 $1,668,060 $ 80,517 $(1,338,107) $2,531,683
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts payable $ 6,572 $ 112,937 $ 7,708 $ 127,217
Debt 1,206,500 23,846 5,162 1,235,508
Deferred income taxes 1,906 18,855 20,761
Accrued expenses and
other liabilities 34,906 109,689 1,398 145,993
---------- ---------- -------- ----------- ----------
Total liabilities 1,249,884 265,327 14,268 1,529,479
Commitments and contingencies
Stockholders' equity:
Common stock 334 334
Additional paid-in
capital 963,076 1,296,837 60,054 $(1,338,107) 981,860
Retained earnings (92,081) 105,896 6,478 20,293
Cumulative translation
adjustments (283) (283)
---------- ---------- -------- ----------- ----------
Total stockholders'
equity 871,329 1,402,733 66,249 (1,338,107) 1,002,204
---------- ---------- -------- ----------- ----------
$2,121,213 $1,668,060 $ 80,517 $(1,338,107) $2,531,683
========== ========== ======== =========== ==========
-27-
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
IN THOUSANDS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------- -------------- ------------- -------------
Revenues:
Equipment rentals $572,884 $19,618 $592,502
Sales of rental
equipment 71,019 2,684 73,703
Sales of new
equipment,
merchandise and
other revenues 127,216 10,841 138,057
-------- -------- ------- -------- --------
Total revenues 771,119 33,143 804,262
Cost of revenues:
Cost of equipment
rentals,
excluding
depreciation 255,345 8,184 263,529
Depreciation of
rental equipment 116,974 2,996 119,970
Cost of rental
equipment sales 38,235 1,585 39,820
Cost of new
equipment and
merchandise sales
and other
operating costs 98,157 8,736 106,893
-------- -------- ------- -------- --------
Total cost of revenues 508,711 21,501 530,212
-------- -------- ------- -------- --------
Gross profit 262,408 11,642 274,050
Selling, general and
administrative
expenses $ 13,091 111,479 4,193 128,763
Merger-related expenses 24,048 18,168 42,216
Non-rental depreciation and
amortization 400 22,532 761 23,693
-------- -------- ------- -------- --------
Operating income (loss) (37,539) 110,229 6,688 79,378
Interest expense 20,389 18,542 239 39,170
Other(income)expense 297 (4,788) (33) (4,524)
-------- -------- ------- -------- --------
Income (loss) before
provision for income
taxes and extraordinary
item (58,225) 96,475 6,482 44,732
Provision for
income taxes 14,138 12,312 26,450
-------- -------- ------- -------- --------
Income (loss) before
extraordinary item and
equity in net earnings
of subsidiaries (72,363) 84,163 6,482 18,282
Extraordinary item, net 1,640 19,697 21,337
-------- -------- ------- -------- --------
Income (loss) before
equity in net earnings of
subsidiaries (74,003) 64,466 6,482 (3,055)
Equity in net earnings of
subsidiaries 70,948 $(70,948)
-------- -------- ------- -------- --------
Net income (loss) $ (3,055) $ 64,466 $ 6,482 $(70,948) $ (3,055)
======== ======== ======= ======== ========
-28-
CONSOLIDATING STATEMENT OF OPERATIONS
IN THOUSANDS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ---------------- ----------------- ----------------- ----------------
Revenues:
Equipment rentals $270,920 $11,898 $282,818
Sales of rental
equipment 29,417 1,064 30,481
Sales of new
equipment,
merchandise and
other revenues 60,155 5,620 65,775
------------- ---------------- ----------------- ----------------- ----------------
Total revenues 360,492 18,582 379,074
Cost of revenues:
Cost of equipment
rentals,
excluding
depreciation 114,649 4,945 119,594
Depreciation of
rental equipment 51,207 1,746 52,953
Cost of rental
equipment sales 16,714 547 17,261
Cost of new
equipment and
merchandise sales
and other
operating costs 46,381 4,168 50,549
------------- ---------------- ----------------- ----------------- ----------------
Total cost of revenues 228,951 11,406 240,357
------------- ---------------- ----------------- ----------------- ----------------
Gross profit 131,541 7,176 138,717
Selling, general and
administrative
expenses $ 5,463 52,735 2,215 60,413
Merger-related expenses 24,048 18,168 42,216
Non-rental depreciation
and amortization 83 10,609 509 11,201
------------- ---------------- ----------------- ----------------- ----------------
Operating income (loss) (29,594) 50,029 4,452 24,887
Interest expense 15,804 7,977 143 23,924
Other(income)expense 346 (626) (11) (291)
------------- ---------------- ----------------- ----------------- ----------------
Income (loss) before
provision for income
taxes and extraordinary
item (45,744) 42,678 4,320 1,254
Provision for
income taxes 8,435 1,217 9,652
------------- ---------------- ----------------- ----------------- ----------------
Income (loss) before
extraordinary item
and equity in net
earnings of
subsidiaries (54,179) 41,461 4,320 (8,398)
Extraordinary item, net 1,640 19,697 21,337
------------- ---------------- ----------------- ----------------- ----------------
Income (loss) before
equity in net earnings
of subsidiaries (55,819) 21,764 4,320 (29,735)
Equity in net earnings of
subsidiaries 26,084 $(26,084)
------------- ---------------- ----------------- ----------------- ----------------
Net income (loss) $(29,735) $ 21,764 $ 4,320 $(26,084) $(29,735)
============= ================ ================= ================= ================
-29-
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
IN THOUSANDS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------- -------------- --------------- -------------- --------------
Net cash provided by (used in)
operating activities $ (443,929) $ 638,566 $10,394 $ 205,031
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of rental
equipment (418,182) (8,535) (426,717)
Purchase of property
and equipment (8,887) (44,467) (643) (53,997)
Proceeds from sales of
rental equipment 71,019 2,684 73,703
In-process acquisition
costs (4,413) (4,413)
Payment of contingent
purchase price (2,111) (506) (2,617)
Purchase of other companies (820,787) (12,510) (833,297)
--------------- -------------- --------------- -------------- --------------
Net cash used in
investing activities (834,087) (406,251) (7,000) (1,247,338)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance
of common stock and
warrants, net of
issuance costs 206,993 206,993
Proceeds from debt 1,923,950 10,187 1,934,137
Repayment of debt (1,179,437) (230,685) (1,410,122)
Payment of debt
financing costs (26,711) (26,711)
Capital contribution by
parent 290,928 290,928
Distribution to
stockholders (3,536) (3,536)
--------------- -------------- --------------- -------------- --------------
Net cash provided by
(used in)financing
activities 1,215,723 (224,034) 991,689
Net increase (decrease)
in cash and cash
equivalents (62,293) 8,281 3,394 (50,618)
Cash and cash
equivalents at
beginning of period 67,200 5,211 72,411
--------------- -------------- --------------- -------------- --------------
Cash and cash
equivalents at
end of period $ 4,907 $ 13,492 $ 3,394 $ 21,793
=============== ============== ============== ============== ==============
-30-
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
IN THOUSANDS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
URI SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- -------------- -------------- -------------- -------------
Supplemental disclosure of
cash flow information:
Cash paid during the period:
Interest $ 6,630 $11,098 $ 67 $ 17,795
Income taxes $ 7,434 $2,245 $ 9,679
Supplemental disclosure of
non-cash investing and
financing activities:
During the nine month period
ended September 30, 1998, a
convertible note in the
principal amount of
$200 was converted
into 15 shares of
common stock
The Company acquired the
net assets and assumed
certain liabilities of
other companies as
follows:
Assets, net of cash
acquired $1,335,091 $1,335,091
Liabilities assumed (441,120) (441,120)
Less:
Amounts paid in common
stock and warrants (60,674) (60,674)
----------- -------------- -------------- -------------- -------------
Net cash paid $ 833,297 $ 833,297
=========== ============== ============== ============== =============
-31-
11. SUBSEQUENT EVENTS
Completed Acquisitions
Subsequent to September 30, 1998 (through November 10, 1998), the Company
completed the acquisition of eight equipment rental companies. The aggregate
consideration paid by the Company for these acquisitions was $22.9 million and
consisted of approximately $18.8 million in cash and notes, and 4,868 shares of
Common Stock. The Company also agreed in connection with one of the acquisitions
to pay the former owners additional amounts based upon specified future revenues
not to exceed $300,000 in the aggregate. The Company funded a portion of the
cash consideration for these acquisitions with cash on hand and the balance with
borrowings under the Company's revolving credit facility.
-32-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion reviews the Company's operations for the nine and
three months ended September 30, 1998 and 1997 and should be read in conjunction
with the Unaudited Consolidated Financial Statements and related Notes thereto
of the Company included herein and the Consolidated Financial Statements and
related Notes thereto included in the Company's 1997 Annual Report on Form 10-K.
The following discussion includes statements that are forward-looking in
nature. These statements are generally identified by the inclusion of phrases
such as "the Company expects," "the Company Plans," "the Company anticipates,"
"the Company believes," "the Company estimates," and other phrases of similar
meaning. Whether such statements ultimately prove to be accurate depends upon a
variety of factors that may affect the business and operations of the Company.
Certain of these factors are discussed below "Factors that May Influence Results
and Accuracy of Forward-Looking Statements".
United Rentals, Inc. is principally a holding company and conducts its
operations principally through its wholly owned subsidiary United Rentals (North
America), Inc. and subsidiaries of United Rentals (North America), Inc. Unless
otherwise indicated, (i) the term "Holdings" refers to United Rentals, Inc.,
(ii) the term "URI" refers to United Rentals (North America), Inc. a wholly
owned subsidiary of Holdings, and (iii) the term "the Company" refers to
Holdings and its subsidiaries (URI and its subsidiaries with respect to periods
prior to the reorganization described in Note 4 to the Unaudited Consolidated
Financial Statements of the Company included elsewhere herein).
Introduction
The Company commenced equipment rental operations in October 1997 by
acquiring six established equipment rental companies. The Company completed 77
additional acquisitions in the first eleven months of 1998 (through November 10,
1998), including a merger with U.S. Rentals (the "U.S. Rentals Merger") which
was completed in September 1998.
-33-
Three of the acquisitions completed by the Company (including the U.S.
Rentals Merger) were accounted for as "poolings-of-interests", and the
Company's financial statements have been restated to include the accounts of the
companies acquired in such transactions (excluding one that was not material).
See Note 2 to the Unaudited Consolidated Financial Statements of the Company
included elsewhere herein. As a result of such restatement, the Company's
financial statements include periods that precede the date on which the Company
commenced operations.
The other 66 acquisitions completed by the Company during the first nine
months of 1998 were accounted for as purchases. The results of operations of the
businesses acquired in these acquisitions are included in the Company's
financial statements only from their respective dates of acquisition. In view
of the fact that the Company's operating results for 1997 and 1998 were impacted
by these acquisitions that were accounted for as purchases, the Company believes
that the results of its operations for such periods are not directly comparable.
GENERAL
The Company primarily derives revenues from the following sources: (i)
equipment rental (including additional fees that may be charged for equipment
delivery, fuel, repair of rental equipment, and damage waivers), (ii) the sale
of rental equipment, (iii) the sale of new equipment, and (iv) the sale of
related merchandise and parts.
Cost of operations consists primarily of depreciation costs associated with
rental equipment, the cost of repairing and maintaining rental equipment, the
cost of rental and new equipment sold, personnel costs, occupancy costs and
supplies.
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.
-34-
Non-Rental depreciation and amortization includes (i) depreciation expense
associated with equipment that is not offered for rent (such as vehicles,
computers and office equipment) and amortization expense associated with
leasehold improvements and (ii) the amortization of intangible assets. The
Company's intangible assets include goodwill, which represents the excess of the
purchase price of acquired companies over the estimated fair market value of the
net assets acquired.
RESULTS OF OPERATIONS
Nine months ended September 30, 1998 and 1997
Revenues. Revenues for the first nine months of 1998 were $804.3 million,
representing an increase of 145.3% over revenues for the first nine months of
1997 of $327.8 million. Of this increase, approximately 126.2 percentage points
were attributable to new rental locations acquired through acquisitions and the
start-up of new locations. The remaining increase of approximately 19.1
percentage points was due to increased revenues at rental locations owned for
more than one year, primarily attributable to an increase in the volume of
rental transactions.
Gross Profit. Gross profit increased to $274.1 million during the first
nine months of 1998 from $100.2 million during the first nine months of 1997.
This increase in gross profit was primarily attributable to the increase in
revenues described above. As a percentage of revenue, gross profit was 34.1%
during 1998 and 30.6% during 1997.
Selling, General and Administrative Expense. Selling, general and
administrative expense ("SG&A") was $128.8 million or 16.0% of total revenues
during the first nine months of 1998 and $48.5 million or 14.8% of total
revenues during the first nine months of 1997. The increase in SG&A as a
percentage of revenues in 1998 primarily reflected the additional expenses for
senior management and corporate overhead that the Company began incurring in the
third quarter of 1997 as it built the management team and infrastructure
required to support its growth strategy.
-35-
Merger-Related Expenses. The Company incurred merger-related expenses in
the first nine months of 1998 of $42.2 million ($29.5 million after-tax) in
connection with three acquisitions completed by the Company in 1998 that were
accounted for as poolings-of-interests. These expenses consisted of (i) $18.5
million for investment banking, legal, accounting services and other merger
costs, (ii) $14.5 million of expenses relating to the closing of duplicate
facilities, (iii) $6.3 million for employee severance and (iv) $2.9 million in
other expenses. Certain merger related expenses are transitional in nature and,
in accordance with generally accepted accounting principles, are not presently
accruable and will be expensed in future quarters.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $23.7 million or 2.9% of total revenues during the first nine
months of 1998 and $9.2 million or 2.8% of total revenues during the first nine
months of 1997. The increase in the dollar amount of non-rental depreciation and
amortization in 1998 primarily reflected the amortization of goodwill
attributable to the acquisitions completed at the end of 1997 and in 1998.
Termination Cost of Deferred Compensation Agreements. The Company's results
for the first nine months of 1997 were impacted by $20.3 million of expenses for
"termination costs of deferred compensation agreements." These expenses reflect
one-time expenses that were incurred by U.S. Rentals in connection with the
termination of certain deferred incentive compensation agreements in connection
with its initial public offering.
Interest Expense. Interest expense increased to $39.2 million during the
first nine months of 1998 from $6.3 million during the first nine months of
1997. This increase primarily reflected the fact that the Company's indebtedness
increased subsequent to the first nine months of 1997 primarily as a result of
the completion of acquisitions.
Preferred Dividends of a Subsidiary Trust. During the first nine months of
1998, preferred dividends of a subsidiary trust were $3.0 million. These
dividends relate to the
-36-
preferred securities issued in August 1998 by a subsidiary trust of the Company
(as described under "--Liquidity and Capital Resources--Recent Financings").
Other(Income)Expense. Other income was $4.5 million during the first nine
months of 1998 compared with $1.4 million during the first nine months of 1997.
The increase in other income in 1998 primarily reflected increased interest
income in 1998 as a result of higher cash balances resulting from the financing
transactions completed in the fourth quarter of 1997 and in 1998.
Income Taxes. Income taxes increased to $25.2 million, or an effective
rate of 60.4%, during the first nine months of 1998 from $21.9 million, or an
effective rate of 127.0% during the first nine months of 1997. During 1998 the
Company's high effective tax rate reflected (i) the non-deductibility of certain
merger related expenses and (ii) a $4.8 million charge to recognize deferred tax
liabilities of a company, which was an S Corporation prior to being acquired by
the Company. During 1997 the Company's high effective tax rate reflected (i) a
$7.5 million charge to recognize deferred tax liabilities of U.S. Rentals, which
was an S Corporation prior to its initial public offering, and (ii) the non-
deductibility for income tax purposes of certain losses that were incurred by
U.S. Rentals prior to a recapitalization effected in connection with its initial
public offering.
Extraordinary Items. The Company recorded an extraordinary charge of $35.6
million ($21.3 million net of taxes) in the first nine months of 1998 and an
extraordinary charge of $1.5 million in the first nine months of 1997. Such
charge in 1998 was incurred in connection with the early extinguishment of
certain debt and primarily reflected prepayment penalties on certain debt of
U.S. Rentals. Such charges in 1997 were incurred by U.S. Rentals in connection
with the prepayment of certain debt.
Three months ended September 30, 1998 and 1997
Revenues. Revenues for three months ended September 30, 1998 were $379.1
million, representing an increase of 193.8% over revenues for the three months
ended September 30, 1997 of $129.0 million. Of this increase, approximately
166.0
-37-
percentage points were attributable to new rental locations acquired through
acquisitions and the start-up of new locations. The remaining increase of
approximately 27.8 percentage points was due to increased revenues at rental
locations owned for more than one year, primarily attributable to an increase in
the volume of rental transactions.
Gross Profit. Gross profit increased to $138.7 million during the three
months ended September 30, 1998 from $45.6 million during the three months ended
September 30, 1997. This increase in gross profit was primarily attributable to
the increase in revenues described above. As a percentage of revenue, gross
profit was 36.6% during the 1998 period and 35.4% during the 1997 period.
Selling, General and Administrative Expense. SG&A increased to $60.4
million during the three months ended September 30, 1998 from $21.0 million
during the three months ended September 30, 1997, but as a percentage of total
revenues decreased to 15.9% in the 1998 period from 16.3% in the 1997 period.
The decrease in SG&A as a percentage of revenues in 1998 primarily reflected the
fact that revenues increased without a commensurate increase in senior
management and corporate overhead expenses.
Merger-Related Expenses. The Company incurred merger-related expenses in
the three months ended September 30, 1998 of $42.2 million($29.5 million after-
tax) in connection with three acquisitions completed by the Company in such
period that were accounted for as poolings-of-interests. These expenses
consisted of (i) $18.5 million for investment banking, legal, accounting
services and other merger costs, (ii) $14.5 million of expenses relating to the
closing of duplicate facilities, (iii) $6.3 million for employee severance and
(iv) $2.9 million in other expenses. Certain merger related expenses are
transitional in nature and, in accordance with generally accepted accounting
principles, are not presently accruable and will be expensed in future quarters.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $11.2 million or 3.0% of total revenues during the three months
ended September 30, 1998 and $3.5 million or 2.7% of total revenues during the
three months ended September 30, 1997. The increase in the dollar amount of
-38-
non-rental depreciation and amortization in 1998 primarily reflected the
amortization of goodwill attributable to the acquisitions completed at the end
of 1997 and in 1998.
Interest Expense. Interest expense increased to $23.9 million during the
three months ended September 30, 1998 from $2.6 million during the three months
ended September 30, 1997. This increase primarily reflected the fact that the
Company's indebtedness increased subsequent to September 30, 1997 primarily as a
result of the completion of acquisitions.
Preferred Dividends of a Subsidiary Trust. During the three months ended
September 30, 1998, preferred dividends of a subsidiary trust were $3.0 million.
These dividends relate to the preferred securities issued in August 1998 by a
subsidiary trust of the Company (as described under "--Liquidity and Capital
Resources--Recent Financings").
Other(Income) Expense. Other income was $0.3 million during the three
months ended September 30, 1998 and $0.5 million during three months ended
September 30, 1997.
Income Taxes. Income taxes increased to $8.4 million during the three
months ended September 30, 1998 from $7.4 million, or an effective rate of
38.6%, during the three months ended September 30, 1997. During the 1998 period,
the Company recorded a provision for income taxes despite a pretax loss because
(i) certain merger-related expenses were not deductible for income tax purposes
and (ii) a $4.8 million charge was recorded to recognize deferred tax
liabilities of a company, which was an S Corporation prior to being acquired by
the Company.
Extraordinary Items. The Company recorded an extraordinary charge of $35.6
million ($21.3 million net of taxes) during the three months ended September 30,
1998. Such charge was incurred in connection with the early extinguishment of
certain debt and primarily reflected prepayment penalties on certain debt of
U.S. Rentals.
-39-
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company had cash-on-hand at the beginning of 1998 of approximately
$72.4 million, primarily representing the net proceeds of the Company's initial
public offering not used to repay indebtedness. During the first nine months of
1998, the Company(i) generated cash from operations of approximately $208.1
million,(ii) generated cash from the sales of rental equipment of approximately
$73.7 million and (iii) had net cash from financing activities of approximately
$1,000.8 million.
During the first nine months of 1998, the Company used cash principally to
(i) pay consideration for acquisitions (approximately $833.3 million), (ii)
repay indebtedness in connection with the U.S. Rentals Merger and Rental Tools
transaction (approximately $450.3 million), (iii) purchase rental equipment
(approximately $426.7 million) and (iv) purchase other property and equipment
(approximately $66.1 million). These cash expenditures were the principal
reason for the decrease in cash at September 30, 1998 compared with December 31,
1997.
The acquisitions and the equipment purchases made in 1998 (and the
financing of such acquisitions and purchases) were the principal reasons for the
increase in the following items at September 30, 1998 compared with December 31,
1997: accounts receivable, inventory, rental equipment, property and equipment,
intangible assets, accounts payable, debt, and accrued expenses and other
liabilities.
The increase in prepaid expenses and other assets at September 30, 1998
compared with December 31, 1997 primarily reflects (i) an increase in prepaid
expenses relating to the Company's operations, (ii) deferred tax assets recorded
in connection with acquisitions and (iii) certain direct costs relating to
potential acquisitions that were capitalized.
The increase in stockholders' equity at September 30, 1998 compared with
December 31, 1997, primarily reflects (i) the sale of 8,625,000 shares of Common
Stock in a public offering in
-40-
March 1998 for aggregate consideration of $207.4 million (after deducting the
underwriting discounts and estimated offering expenses) and (ii) the issuance of
an aggregate of 3,580,230 shares of Common Stock during the nine months ended
September 30, 1998 as consideration for acquisitions.
CERTAIN INFORMATION CONCERNING URI'S CREDIT FACILITY
In September 1998, URI obtained a new $762.5 million revolving credit
facility (the "Credit Facility"), with a group of financial institutions which
replaced the credit facility that had previously been used by URI. Set forth
below is certain information concerning the terms of the Credit Facility.
The Credit Facility enables URI to borrow up to $762.5 million on a
revolving basis and permits the 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 $762.5 million). Up to $25 million of the Credit Facility is
available in the form of letters of credit. The agreement governing the Credit
Facility requires that the aggregate commitment shall be reduced on the last day
of each calendar quarter, beginning September 30, 2001 and continuing through
June 30, 2003 by an amount equal to $19.1 million. The Credit Facility
terminates on September 26, 2003, at which time all outstanding indebtedness is
due. The amount of indebtedness outstanding under the Credit Facility was $535.0
million at September 30, 1998, and $583.0 million at November 10, 1998 (not
including undrawn outstanding letters of credit in the amount of $3.3 million).
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% or(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,
-41-
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 0.95% 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. The Company is also required to pay
the banks an annual facility fee equal to 0.375% of the banks' $762.5 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 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 the Company's Canadian subsidiaries and (ii)
guaranteed by Holdings 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.
The Credit Facility contains certain covenants that require the Company to,
among other things, satisfy certain financial tests relating to: (a) maximum
leverage, (b) the ratio of senior debt to cash flow, (c) minimum interest
coverage ratio, (d) the ratio of funded debt to cash flow, and (e) the ratio of
senior debt to tangible assets. The agreements governing the Credit Facility
also contains various other covenants that restrict the Company's ability to,
among other things, (i) incur additional indebtedness, (ii) permit liens to
attach to its assets, (iii) pay dividends or make other restricted payments on
its common stock and certain other securities and (iv) make acquisitions unless
certain financial conditions are satisfied. In addition, the agreement governing
the Credit Facility requires the Company to maintain certain financial ratios
and (b) provides that failure by any two of Messrs. Jacobs, Milne, Nolan and
Miner to continue to hold executive positions with the Company for a
-42-
period of 30 consecutive days constitutes an event of default unless replacement
officers satisfactory to the lenders are appointed.
RECENT FINANCINGS
Set forth below is certain information concerning certain financing
transactions completed by the Company in the third quarter of 1998.
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 URI's
option, at either (a) the Base Rate (as defined above with respect to the Credit
Facility) plus a margin ranging from 0% to 0.5% per annum, or (b) the Eurodollar
Rate (as defined above with respect to the Credit Facility for borrowings by
URI) plus a margin ranging from 1.875% to 2.375% per annum. The Term Loan is
secured pari passu with the Credit Facility, and the agreement governing the
Term Loan contains restrictive covenants substantially similar to those provided
by the Credit Facility.
8.80% SENIOR SUBORDINATED NOTES. In August 1998, URI issued $205 million
aggregate principal amount of 8.80% Senior Subordinated (the "8.80% Notes")
which are due August 15, 2008. The 8.80% Notes are unsecured.
PREFERRED SECURITIES. In August 1998, a subsidiary trust (the "Trust") of
Holdings sold in a private offering (the "Preferred Securities Offering") $300
million of 6 1/2% Convertible Quarterly Income Preferred Securities. The net
proceeds from the Preferred Securities Offering were approximately $290.0
million. The Trust used the proceeds from the Preferred Securities Offering to
purchase convertible subordinated debentures from Holdings which resulted in
Holdings receiving all of the proceeds from the Preferred Securities Offering.
Holdings in turn contributed the net proceeds of the Preferred Securities
Offering to its wholly owned subsidiary URI.
-43-
URI used approximately $281.0 million of such net proceeds to repay outstanding
indebtedness under its credit facility and used the balance of such net proceeds
for acquisitions. The preferred securities are convertible into Common Stock of
the Company at a conversion price equivalent to $43.63 per share.
CASH REQUIREMENTS RELATED TO OPERATIONS
The Company expects that its principal needs for cash relating to its
existing operations over the next 12 months 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 plans to
fund such cash requirements relating to its existing operations from cash
generated from operations supplemented, if required, by borrowings available
under the Credit Facility.
The Company estimates that equipment expenditures over the next 12 months
will be approximately $425 million for the existing operations of the Company.
These expenditures are comprised of approximately $225 million of expenditures
in order to maintain the average age of the Company's rental fleet and $200
million of discretionary expenditures to increase the size of the Company's
rental fleet. The Company expects to fund such expenditures from cash generated
from operations. In addition, the Company expects that it will be required to
make equipment expenditures in connection with new acquisitions. The Company
cannot quantify at this time the amount of equipment expenditures that will be
required in connection with new acquisitions.
Principal elements of the Company's strategy include continued expansion
through a disciplined acquisition program and the opening of new rental
locations. The Company expects to pay for future acquisitions using cash,
capital stock, notes and/or assumption of indebtedness. The Company expects that
it will require additional financing for future acquisitions and, consequently,
the Company's indebtedness may increase as the Company implements its growth
strategy. There can be no assurance, however, that any additional financing will
be available or, if available, will be on terms satisfactory to the Company.
-44-
The Company 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 $250,000 paid to date). The Company plans to fund
the cash requirements relating to such start-up locations from cash generated
from operations supplemented, if required, by borrowings available under the
Credit Facility.
The Company is in the process of extending its information technology
system to the locations acquired through the U.S. Rentals Merger and other
recent acquisitions. The Company estimates that the cost of completing this work
will be approximately $5.1 million.
Based upon the terms of the Company's currently outstanding indebtedness,
the Company is scheduled to repay approximately $1.9 million of indebtedness
during the balance of 1998 and $9.0 million during 1999. In addition, the
Company may be required at any time to repay a $21.5 million demand note that
the Company assumed in connection with the U.S. Rentals Merger.
YEAR 2000 COMPLIANCE
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.
-45-
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.
-46-
FACTORS THAT MAY INFLUENCE FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING
STATEMENTS
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.
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 certain of the agreements
governing certain of the Company's outstanding indebtedness, 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
-47-
the Company will succeed in identifying appropriate acquisition candidates or
sites for start-up locations or that the Company will be able to acquire any
acquisition candidate or site that it does identify on terms that are acceptable
to the Company.
NEED TO INTEGRATE NEW OPERATIONS
Realization of the anticipated benefits of completed and future acquisitions
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,
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.
-48-
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.
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 (as defined
herein) and Term Loan (as defined herein) provide that the failure of certain
members of the Company's current senior management to continue to hold executive
positions with the Company for a period of 30 consecutive days constitutes an
event of default under the Credit Facility and Term Loan unless replacement
officers satisfactory to the lenders are appointed.
-49-
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.
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
market price of the Common Stock.
LIABILITY AND INSURANCE
The Company is subject to various possible claims, including claims for
personal injury or death caused by equipment rented or sold by the Company or
motor vehicle accidents involving the Company's delivery and service personnel
and compensation and
-50-
other employment related claims. The Company carries abroad range of insurance
for the protection of its assets and operations. However, such coverage is
subject to a deductible of $1,000,000 and limited to a maximum of $97 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.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
United Rental's operations outside the United States are subject to risks
normally associated with international operations, including currency conversion
risks and complying with foreign laws.
-51-
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES
Sale of Unregistered Securities
Set forth below is certain information concerning sales by the Company of
unregistered securities during the third quarter of 1998. The issuances by the
Company of the securities sold in the transactions referenced below were not
registered under the Securities Act of 1933, pursuant to the exemption
contemplated by Section 4(2) thereof for transactions not involving a public
offering.
SHARES
MONTH ISSUED
- ----- ------
July 343,882
August 2,792,524
September 1,456,997
---------
Total 4,593,403
=========
Of the shares indicated above, 4,591,914 shares were issued as consideration
in connection with seven acquisitions and 1,489 shares were issues pursuant to
an employment agreement with an executive officer.
-52-
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held on September 29, 1998. The
holders of 29,989,352 shares were present either in person or by proxy. There
were 2,990,469 broker non-votes at the meeting. The following three matters were
voted on and approved at such meeting.
1. An amendment of the Certificate of Incorporation increasing the number of
authorized shares of the Company's Common Stock from 75,000,000 to
500,000,000.
Abstain
For or Withheld Against
--- ----------- -------
22,709,189 32,267 7,247,896
2. The issuance of the Company's Common Stock pursuant to an Agreement and Plan
of Merger, as amended and restated and dated on August 31, 1998, among the
Company, UR Acquisitions Corporation, a wholly owned subsidiary of the
Company and U.S. Rentals, Inc.
Abstain
For or Withheld Against
--- ----------- -------
29,923,152 23,558 42,642
3. The adoption of the United Rentals 1998 Stock Option Plan.
Abstain
For or Withheld Against
--- ----------- -------
24,575,082 348,647 5,065,623
-53-
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2 Amended and Restated Agreement and Plan of Merger dated as of August 31,
1998, among United Rentals, Inc., UR Acquisition Corporation and U.S.
Rentals, Inc. (incorporated by reference to Exhibit 2 of United Rentals,
Inc. Registration Statement on Form S-4, Registration No. 333-63171).
3.1 Amended and Restated Certificate of Incorporation of United Rentals, Inc.,
in effect as of the date hereof (incorporated by reference to exhibit 3.1
of United Rentals, Inc. Report on From 10-Q for the quarter ended June 30,
1998).
3.2 By-laws of United Rentals, Inc., in effect as of the date hereof
(incorporated by reference to exhibit 3.2 of United Rentals, Inc. Report on
Form 10-Q for the quarter ended June 30,1998).
4.1 Certificate of Trust of United Rentals Trust I (incorporated by reference
to Exhibit 4(a) of United Rentals, Inc. Registration Statement on Form S-1,
Registration No. 333-64463)
4.2 Amended and Restated Trust Agreement dated August 5, 1998 among United
Rentals, Inc., The Bank of New York, as Property Trustee, The Bank of New
York (Delaware), as Delaware Trustee, and the Administrative Trustees named
therein (incorporated by reference to Exhibit 10(ii) of United Rentals,
Inc. Registration Statement on Form S-4, Registration No. 333-63171)
4.3 Indenture dated August 5, 1998 by and between United Rentals, Inc. and The
Bank of New York, as Trustee (incorporated by reference to Exhibit 10(hh)
of United Rentals, Inc. Registration Statement on Form S-4, Registration
No. 333-63171)
-54-
4.4 Guarantee Agreement dated August 5, 1998 between United Rentals, Inc. and
The Bank of New York (incorporated by reference to Exhibit 10(jj) of United
Rentals, Inc. Registration Statement on Form S-4, Registration No.333-
63171)
4.5 Form of Certificate representing 6 1/2% Convertible Quarterly Income
Preferred Securities (incorporated by reference to Exhibit 4(e) of United
Rentals, Inc. Registration Statement on Form S-1, Registration No. 333-
64463)
4.6 Form of Certificate representing 6 1/2% Convertible Subordinated Debentures
(incorporated by reference to Exhibit 4(f) of United Rentals, Inc.
Registration Statement on Form S-1, Registration No. 333-64463)
10.1 First Amendment to Third Amended and Restated Credit Agreement dated as of
July 10, 1998 (incorporated by reference to Exhibit 10(a)(iii) to the
Registration Statement on Form S-4 filed by United Rentals (North America),
Inc. Registration No. 333-60467)
10.2 Credit Agreement dated as of September 29, 1998, between United Rentals
(North America), Inc., various financial institutions, Bank of America
Canada, as Canadian agent, and Bank of America National Trust, as U.S.
Agent.
10.3 First Amendment to the Term Loan Agreement dated as of September 29, 1998
among United Rentals (North America), Inc., various financial institutions
and Bank of America National Trust and Savings Association, as Agent.
10.4 Share Purchase Agreement dated July 30, 1998 among United Rentals (North
America), Inc. and the parties listed therein for all of the outstanding
shares of McClinch Equipment Services, Inc. (incorporated by reference to
Exhibit 10(ll) of United Rentals, Inc. Registration Statement on Form S-4,
Registration No. 333-63171)
-55-
10.5 Share Purchase Agreement dated July 30, 1998 among United Rentals (North
America), Inc. and the parties listed therein for all of the outstanding
shares of Grey Fox Equipment, Inc. (incorporated by reference to Exhibit
10(mm) of United Rentals, Inc. Registration Statement on Form S-4,
Registration No. 333-63171).
10.6 Share Purchase Agreement dated July 30, 1998 among United Rentals (North
America), Inc. and the parties listed therein for all of the outstanding
shares of McClinch, Inc. (incorporated by reference to Exhibit 10(dd) of
United Rentals, Inc. Registration Statement on Form S-4, Registration No.
333-63171).
10.7 Purchase Agreement dated July 30, 1998 relating to the initial sale by
United Rentals Trust I of $300 million aggregate principal amount of 6 1/2%
Convertible Quarterly Income Preferred Securities convertible into common
stock of United Rentals, Inc. (incorporated by reference to Exhibit
10(hh)of Amendment No. 1 to the Registration Statement on Form S-4 filed by
United Rentals (North America), Inc. Registration No. 333-60467).
10.8 Registration Rights Agreement dated August 5, 1998 between United Rentals
(North America), Inc., United Rentals, Inc., United Rentals Trust I,
Goldman Sachs & Co. and the other purchasers names therein (incorporated by
reference to exhibit 10(kk) of United Rentals, Inc. Registration Statement
on Form S-4, Registration No. 333-63171.
10.9 Purchase Agreement dated August 7, 1998 relating to the initial sale by
United Rentals (North America), Inc. of $205 million aggregate principal
amount of 8.80% Senior Subordinated Notes due 2008 (incorporated by
reference to exhibit 10(mm) of Amendment No. 1 to the Registration
Statement on Form S-4 filed by United Rentals (North America), Inc.,
Registration No. 333-60467.
-56-
10.10 Indenture dated August 12, 1998, among United Rentals (North America),
Inc., the Guarantors named therein and State Street Bank and Trust
Company, as trustee (incorporated by reference to Exhibit 10(bb) of United
Rentals, Inc. Registration Statement on Form S-4, Registration No. 333-
63171).
10.11 Notes Registration Rights Agreement dated as of August 12, 1998, among
United Rentals (North America), Inc., the subsidiaries of United Rentals,
Inc. named therein, and Merrill Lynch & Co. (incorporated by reference to
Exhibit 10(cc) of United Rentals, Inc. Registration Statement on Form S-4,
Registration No. 333-63171
10.12 Form of Employment Agreement with William Berry (incorporated by reference
to Exhibit 10(ee) of United Rentals, Inc. Registration Statement on
Form S-4, Registration No. 333-63171).
10.13 Form of Employment Agreement with John McKinney (incorporated by reference
to Exhibit 10(ff) of United Rentals, Inc. Registration Statement on
From S-4 Registration No. 333-63171).
10.14 Form of Registration Rights Agreement with certain affiliates of U.S.
Rentals (Incorporated by reference to exhibit 10(gg) of United Rentals,
Inc. Registration Statement on Form S-4, Registration No. 333-63171)
10.15 1998 Stock Option Plan of United Rentals, Inc. (incorporated by reference
to Exhibit 99.1 to United Rentals, Inc. Registration Statement on Form S-
4, Registration No. 333-63171).
27 Financial Data Schedule
27.1 Financial Data Schedule
-57-
(b) Reports on Form 8-K:
1 Form 8-K dated July 21, 1998 (earliest event reported July 10, 1998); Items
2 and 7 were reported. The Form 8-K includes (a) The combined financial
statements of Equipment Supply Co., Inc. and Affiliates, and (b) Pro Forma
consolidated financial statements of the Company.
2 Form 8-K dated August 7, 1998 (earliest event reported August 5, 1998),
Item 5 was reported.
3 Form 8-K dated September 16, 1998 (earliest event reported September 1,
1998); Items 2 and 7 were reported. The Form 8-K includes (a) the
consolidated financial statements of McClinch, Inc. and Subsidiaries and
the financial statements of McClinch Equipment Services, Inc., and (b) Pro
Forma consolidated financial statements of the Company.
4 Form 8-K dated October 9, 1998 (earliest event reported September 29,
1998); Items 2 and 7 were reported. The Form 8-K includes (a) the financial
statements of U.S. Rentals, Inc., and (b) Pro Forma consolidated financial
statements of the Company.
-58-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNITED RENTALS, INC.
Dated: November 13, 1998 By: /s/ Michael J. Nolan
----------------- ----------------------------------
Michael J. Nolan
Chief Financial Officer
(Principal Financial Officer)
Dated: November 13, 1998 By: /s/ Sandra E. Welwood
----------------- ----------------------------------
Sandra E. Welwood
Vice President,
(Chief Accounting Officer)
-59-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNITED RENTALS(NORTH AMERICA), INC.
Dated: November 13, 1998 By: /s/Michael J. Nolan
----------------- -----------------------------------
Michael J. Nolan
Chief Financial Officer
(Principal Financial Officer)
Dated: November 13, 1998 By: /s/Sandra E. Welwood
----------------- -----------------------------------
Sandra E. Welwood
Vice President,
Corporate Controller
(Chief Accounting Officer)
-60-