Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Rentals, Inc.
We have audited the accompanying consolidated balance sheets of United
Rentals, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the management of United Rentals, Inc. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
United Rentals, Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
November 17, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
United Rentals, Inc.
In our opinion, the accompanying consolidated statements of income, of cash
flows and of changes in stockholders' equity for the year ended December 31,
1995 present fairly, in all material respects, the results of operations and
cash flows of United Rentals, Inc. for the year ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the management of United Rentals, Inc.; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which required that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of United
Rentals, Inc. for any period subsequent to December 31, 1995.
PricewaterhouseCoopers LLP
Sacramento, California
November 17, 1998
2
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE
DATA)
ASSETS
Cash and cash equivalents.................................... $ 72,411 $ 2,906
Accounts receivable, net of allowance for doubtful accounts
of $11,085 and $7,346 at 1997 and 1996, respectively........ 82,592 48,193
Notes receivable from affiliate.............................. 25,365
Inventory.................................................... 21,778 6,358
Prepaid expenses and other assets............................ 17,167 5,873
Rental equipment, net........................................ 461,026 235,055
Property and equipment, net.................................. 98,268 56,443
Intangible assets, net of accumulated amortization of $568
and $207 at 1997 and 1996, respectively..................... 73,648 1,035
-------- --------
$826,890 $381,228
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable........................................... $ 41,392 $ 23,912
Debt....................................................... 247,573 189,826
Notes payable to related parties........................... 17,000 24,511
Deferred taxes............................................. 25,275 --
Accrued expenses and other liabilities..................... 49,262 37,559
-------- --------
Total liabilities........................................ 380,502 275,808
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.01 par value, 5,000,000 shares authorized,
No shares issued and outstanding.......................... -- --
Common stock--$.01 par value, 75,000,000 shares authorized,
56,239,375 and 22,636,765 shares issued and
outstanding at 1997 and 1996, respectively................ 562 227
Additional paid-in capital................................. 401,758 13,278
Retained earnings.......................................... 44,068 91,915
-------- --------
Total stockholders' equity............................... 446,388 105,420
-------- --------
$826,890 $381,228
======== ========
See accompanying notes.
3
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
----------------------------
1997 1996 1995
-------- -------- --------
Revenues:
Equipment rentals................................ $388,181 $295,308 $252,283
Sales of rental equipment........................ 41,406 25,518 11,155
Sales of new equipment, merchandise and other
revenues........................................ 60,251 33,652 19,994
-------- -------- --------
Total revenues.................................... 489,838 354,478 283,432
Cost of revenues:
Cost of equipment rentals, excluding
depreciation.................................... 189,578 138,018 124,201
Depreciation of rental equipment................. 82,097 65,294 51,947
Cost of rental equipment sales................... 20,455 10,570 5,185
Cost of new equipment and merchandise sales and
other operating costs........................... 48,416 27,563 12,901
-------- -------- --------
Total cost of revenues............................ 340,546 241,445 194,234
-------- -------- --------
Gross profit...................................... 149,292 113,033 89,198
Selling, general and administrative expenses...... 70,835 54,721 39,707
Non-rental depreciation and amortization.......... 13,424 9,387 6,916
Termination cost of deferred compensation
agreements....................................... 20,290
-------- -------- --------
Operating income.................................. 44,743 48,925 42,575
Interest expense.................................. 11,157 11,620 6,755
Related party interest expense (income), net...... 690 (342) 735
Other (income) expense............................ (2,021) (499) 1,304
-------- -------- --------
Income before provision for income taxes and
extraordinary item............................... 34,917 38,146 33,781
Provision for income taxes........................ 29,508 420 484
-------- -------- --------
Income before extraordinary item.................. 5,409 37,726 33,297
Extraordinary item, net of tax benefit of $995.... 1,511
-------- -------- --------
Net income........................................ $ 3,898 $ 37,726 $ 33,297
======== ======== ========
Basic earnings before extraordinary item per share $0.12 $1.67 $1.47
======== ======== ========
Diluted earnings before extraordinary item per
share............................................ $0.11 $1.67 $1.47
======== ======== ========
Basic earnings per share.......................... $0.08 $1.67 $1.47
======== ======== ========
Diluted earnings per share........................ $0.08 $1.67 $1.47
======== ======== ========
Unaudited pro forma data (Note 9):
Historical income before income taxes and
extraordinary item.............................. $ 34,917 $ 38,146 $ 33,781
Pro forma income tax expense..................... 14,176 15,487 13,715
-------- -------- --------
Pro forma income before extraordinary item....... $ 20,741 $ 22,659 $ 20,066
======== ======== ========
Pro forma basic income before extraordinary
item per share.................................. $0.44 $1.00 $0.89
======== ======== ========
Pro forma diluted income before extraordinary
item per share.................................. $0.42 $1.00 $0.89
======== ======== ========
See accompanying notes.
4
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------- ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS
--------- ------ ---------- --------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Balance, December 31, 1994, as
previously reported.................... -- $-- $ -- $ --
Poolings-of-interests................. 22,659,191 227 13,366 64,006
---------- ---- -------- --------
Balance, December 31, 1994, as
restated............................... 22,659,191 227 13,366 64,006
Issuance of common stock.............. 2,803 17
Distributions to stockholders......... (6,584)
Net income............................ 33,297
---------- ---- -------- --------
Balance, December 31, 1995.............. 22,661,994 227 13,383 90,719
Distributions to stockholders......... (36,530)
Treasury stock purchase............... (25,229) (105)
Net income............................ 37,726
---------- ---- -------- --------
Balance, December 31, 1996.............. 22,636,765 227 13,278 91,915
Issuance of common stock and warrants. 33,602,610 335 343,797
Distribution of non-operating assets,
net.................................. (4,219)
Reclassification of Subchapter S
accumulated
earnings to paid-in capital.......... 48,902 (48,902)
Distributions to stockholders......... (2,843)
Net income............................ 3,898
---------- ---- -------- --------
Balance, December 31, 1997.............. 56,239,375 $562 $401,758 $ 44,068
========== ==== ======== ========
See accompanying notes.
5
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................... $ 3,898 $ 37,726 $ 33,297
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 95,521 74,681 58,863
Gain on sale of rental equipment............. (20,951) (14,948) (5,970)
Non-cash interest, net....................... 201
Loss on early extinguishment of debt......... 2,506
Deferred taxes............................... 25,075
Changes in operating assets and liabilities:
Accounts receivable.......................... (19,837) (8,271) (6,578)
Inventory.................................... (3,785) (1,148) (1,413)
Prepaid expenses and other assets............ (9,821) (2,219) (2,323)
Accounts payable............................. 11,704 (7,966) 8,058
Accrued expenses and other liabilities....... 8,618 8,116 5,360
--------- --------- ---------
Net cash provided by operating activities..... 93,129 85,971 89,294
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of rental equipment................. (268,548) (116,021) (102,241)
Purchases of property and equipment........... (53,653) (27,269) (14,433)
Proceeds from sales of rental equipment....... 41,406 25,518 11,155
Collection (funding) of notes receivable...... 122 2,537 (1,061)
Purchase of other companies................... (115,528) (15,033)
In-process acquisition costs.................. (129)
--------- --------- ---------
Net cash used in investing activities......... (396,330) (130,268) (106,580)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of
issuance costs............................... 340,738 17
Proceeds from debt............................ 291,858 131,053 61,769
Payments on debt.............................. (271,418) (50,713) (37,144)
Proceeds from related party notes............. 17,000
Purchase of treasury stock.................... (105)
Cash retained by Predecessor in connection
with Recapitalization........................ (998)
Distributions to stockholders................. (2,843) (36,530) (6,584)
Payment of debt financing costs............... (1,631) (230)
--------- --------- ---------
Net cash provided by financing activities..... 372,706 43,475 18,058
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 69,505 (822) 772
Cash and cash equivalents at beginning of
year......................................... 2,906 3,728 2,956
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 72,411 $ 2,906 $ 3,728
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest........................ $ 13,090 $ 13,766 $ 9,707
Cash paid for taxes........................... $ 11,487 $ 399 $ 613
Deferred compensation and bonus payments
through issuance of common stock............. $ 486
Net assets retained by Predecessor in
connection with Recapitalization............. $ 3,221
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
The Company acquired the net assets and
assumed certain liabilities of other
companies as follows:
Assets, net of cash acquired................. $ 162,954 $ 15,033 $ --
Liabilities assumed.......................... (43,301)
Less:
Amounts paid in common stock ................ (3,825)
Amount paid through issuance of convertible
note........................................ (300)
--------- --------- ---------
Net cash paid................................. $ 115,528 $ 15,033 $ --
========= ========= =========
See accompanying notes.
6
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION
United Rentals, Inc. was incorporated in August 1997 for the purpose of
creating a large, geographically diversified equipment rental company in the
United States and Canada. On August 5, 1998, a reorganization was effected
pursuant to which existing United Rentals, Inc. became a wholly-owned subsidiary
of United Rentals Holdings, Inc. (Holdings), a newly formed holding company. The
name of existing United Rentals, Inc. changed to United Rentals (North America),
Inc. The name of Holdings was changed to United Rentals, Inc. (referred to
herein as the "Company"). As a result of the Reorganization, the Holding
Company's primary asset is its sole ownership of all issued and outstanding
shares of common stock of United Rentals (North America), Inc., through which
substantially all of the Company's operations are conducted. United Rentals
(North America) Inc.'s various credit agreements and debt instruments place
restrictions on its ability to transfer funds to its shareholder.
The Company rents a broad array of equipment to a diverse customer base that
includes construction industry participants, industrial companies, homeowners
and others. The Company also engages in related activities such as selling used
rental equipment, acting as a distributor for certain new equipment and selling
related merchandise and parts. The nature of the Company's business is such that
short-term obligations are typically met by cash flow generated from long-term
assets. Consequently, consistent with industry practice, the accompanying
balance sheets are presented on an unclassified basis.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, giving retro-active effect for the
reorganization for all periods presented. All significant intercompany accounts
and transactions have been eliminated. The accompanying consolidated financial
statements have been restated for all periods presented to include the accounts
of U.S. Rentals, Inc. ("U.S. Rentals") and Rental Tools & Equipment Co.
International Inc. ("Rental Tools"), two acquisitions accounted for as poolings-
of-interests (See Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORY
Inventory consists of equipment, tools, parts, fuel and related supply
items. Inventory is stated at the lower of cost or market. Cost is determined
on either a weighted average or first-in, first-out method.
7
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RENTAL EQUIPMENT
Rental equipment is recorded at cost and depreciated over the estimated
useful lives of the equipment generally using the straight-line method. The
range of useful lives estimated by management for rental equipment is two to
ten years. Rental equipment is depreciated to a salvage value of zero to ten
percent of cost. Rental equipment having a cost of $.5 or less is expensed at
the time of purchase. Ordinary maintenance and repair costs are charged to
operations as incurred.
REVENUE RECOGNITION
Revenue related to the sale of equipment and merchandise is recognized at
the point of sale. Revenue related to rental equipment is recognized over the
contract term.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. The range of useful
lives estimated by management for property and equipment is two to thirty-nine
years. Ordinary maintenance and repair costs are charged to operations as
incurred. Leasehold improvements are amortized using the straight-line method
over their estimated useful lives or the remaining life of the lease,
whichever is shorter.
INTANGIBLE ASSETS
Intangible assets consist of the excess of cost over the value of
identifiable net assets of businesses acquired and are being amortized on a
straight-line basis over their estimated useful lives of forty years.
LONG-LIVED ASSETS
Long-lived assets are recorded at the lower of amortized cost or fair value.
As part of an ongoing review of the valuation of long-lived assets, management
assesses the carrying value of such assets if facts and circumstances suggest
they may be impaired. If this review indicates that the carrying value of
these assets may not be recoverable, as determined by a nondiscounted cash
flow analysis over the remaining useful life, the carrying value would be
reduced to its estimated fair value. There have been no material impairments
recognized in these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for accounts receivable,
accounts payable, accrued expenses and other liabilities approximate fair
value due to the immediate to short-term maturity of these financial
instruments. The fair value of notes payable is determined using current
interest rates for similar instruments as of December 31, 1997 and
approximates the carrying value of these notes due to the fact that the
underlying instruments include provision to adjust note balances and interest
rates to approximate fair market value.
ADVERTISING EXPENSE
The Company advertises primarily through trade journals and the media.
Advertising costs are expensed as incurred and totaled $6,866, $4,487 and
$3,779 for the years ended December 31, 1997, 1996 and 1995, respectively.
8
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
differences between financial statement and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not realized in future periods.
U.S. Rentals (prior to February 20, 1997) and Rental Tools (prior to August
28, 1998) elected to be treated as Subchapter S Corporations. See Note 9.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company maintains cash and cash equivalents with high
quality financial institutions.
Concentration of credit risk with respect to accounts receivable are limited
because a large number of geographically diverse customers make up the
Company's customer base. No single customer represents greater than 10% of
total accounts receivable. The Company controls credit risk through credit
approvals, credit limits, and monitoring procedures.
STOCK-BASED COMPENSATION
The Company accounts for its stock based compensation arrangements under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Since stock options are granted by the Company with exercise prices at or
greater than the fair value of the shares at the date of grant, no compensation
expense is recognized.
COMPUTATION OF EARNINGS PER SHARE
Earnings per share is calculated under the provisions of recently issued
Statement 128, Earnings Per Share. Common Stock issued for consideration below
the initial public offering price offering ("IPO price") of $13.50 per share at
which shares were sold in the Company's initial public offering (the "IPO"), and
stock options and warrants granted with exercise prices below the IPO price per
share during the twelve months preceding the date of the initial filing of the
registration statement for the IPO are included in the calculation of common
equivalent shares at the IPO price per share.
RELATED PARTY TRANSACTIONS
As disclosed in these financial statements, the Company has participated in
certain transactions with related parties during the current and previous
years. In the opinion of management, all transactions with related parties
have been conducted on terms which are fair and equitable.
INSURANCE
The Company is insured for general liability, workers' compensation, and
group medical claims up to a specified claim and aggregate amounts (subject to
deductibles of $250-$3,000). Insured losses subject to these deductibles are
accrued based upon the aggregate liability for reported claims incurred and an
estimated liability for claims incurred but not reported. These liabilities
are not discounted.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and
9
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Related Information." The Company is required to adopt the provisions of these
Statements in fiscal year 1998. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in primary
financial statements. The Company is currently evaluating the reporting
formats recommended under this Statement. SFAS No. 131 establishes a new
method by which companies will report operating segment information. This
method is based on the manner in which management organizes the segments
within a company for making operating decisions and assessing performance. The
Company continues to evaluate the provisions of SFAS No. 131 and, upon
adoption, the Company may report operating segments.
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 expected to have no effect
on the Company's disclosure of employee benefit matters.
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 is required to 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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the 1997
presentation.
3. ACQUISITIONS
On September 29, 1998 and August 24, 1998, the Company issued 29,620,913 and
2,744,368 shares of its common stock for all outstanding shares of common stock
of U.S. Rentals and Rental Tools, respectively. These transactions have been
accounted for as poolings-of-interests and, accordingly, the consolidated
financial statements of the Company have been restated for all periods presented
to include the accounts of U.S. Rentals and Rental Tools.
Separate revenue and net income (loss) of the Company prior to the above
mergers ("United"), U.S. Rentals and Rental Tools prior to the combination are
as follows:
US RENTAL
UNITED RENTALS TOOLS COMBINED
------- -------- ------- --------
For the year ended December 31, 1997:
Revenues.............................. $10,633 $430,443 $48,762 $489,838
Net income (loss)..................... 34 4,830 (966) 3,898
For the year ended December 31, 1996:
Revenues.............................. 306,118 48,360 354,478
Net income............................ 33,084 4,642 37,726
For the year ended December 31, 1995:
Revenues.............................. 242,847 40,585 283,432
Net income............................ 30,624 2,673 33,297
10
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997 and 1996, the Company acquired certain assets and assumed
certain liabilities of fifteen and two businesses, respectively. The
acquisitions were financed through borrowings under the Company's lines of
credit and have been recorded using the purchase method of accounting. A
summary of the purchase price, assets acquired and liabilities assumed is as
follows:
1997 1996
-------- -------
Rental equipment........................................... $ 59,486 $12,435
Inventories................................................ 11,008 --
Accounts receivable........................................ 14,625 1,348
Other assets............................................... 9,542 356
Goodwill................................................... 72,425 894
Liabilities assumed........................................ (43,301) --
-------- -------
$123,785 $15,033
======== =======
All of the consideration paid for the acquisitions was in cash with the
exception of two 1997 acquisitions. One acquisition included a $300
convertible note and the consideration for another acquisition was paid
through the issuance of 318,712 shares of the Company's Common Stock. These
shares are subject to adjustment so that their value will equal $3,800 based
upon the average daily closing price of the Company's Common Stock during the
60 day period beginning December 18, 1997. In accordance with such provision,
137,600 shares of Common Stock issued by the Company in connection with such
acquisition were canceled. In addition, contingent consideration is due on
that acquisition based upon a percentage of revenues up to a maximum of
$2,800.
These acquisitions have been accounted for as purchases and, accordingly,
the results of their operations have been included in the Company's results of
operations from their respective acquisition dates. The purchase prices have
been allocated to the assets acquired and liabilities assumed based on their
respective fair values at their respective acquisition dates. Contingent
purchase price is capitalized when earned and amortized over the remaining
life of the related asset.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company for the years ended December 31,
1997 and 1996 as though each acquisition described above was made on January
1, for each of the periods.
1997 1996
-------- --------
Revenues................................................... $568,244 $464,097
Net income................................................. 24,715 30,391
Basic earnings per share................................... $0.53 $1.32
====== ======
Diluted earings per share.................................. $0.50 $1.32
====== ======
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.
11
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES RECEIVABLE FROM AFFILIATE
On February 20, 1997, U.S. Rentals completed a recapitalization upon
completing its initial public offering whereby it exchanged 20,748,975 shares
of its common stock for all the operating assets and liabilities of its
predecessor (the "Recapitalization"). The predecessor retained only non-
operating assets and liabilities, including $25,700 of notes receivable from
an affiliate and $24,400 of notes payable to related parties. In conjunction
with the Recapitalization, certain deferred compensation agreements totaling
$20,290 were terminated and expensed. Unless otherwise indicated, U.S. Rentals
also refers to the Predecessor prior to the Recapitalization.
Prior to the Recapitalization, the Company earned interest income from the
affiliate of $555, $3,420 and $3,343 for the years ended December 31, 1997,
1996 and 1995, respectively. The notes provide for positive or negative annual
adjustments of the principal amount based on the change in the Consumer Price
Index, limited to certain percentages of the affiliated entity's cumulative
net income from December 31, 1984. The accompanying financial statements
include principal adjustments in notes receivable and other income in the
amounts of $146, $572 and $220 for the years ended December 31, 1997, 1996 and
1995, respectively.
5. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
DECEMBER 31
--------------------
1997 1996
--------- ---------
Rental equipment....................................... $ 718,960 $ 456,735
Less accumulated depreciation.......................... (257,934) (221,680)
--------- ---------
Rental equipment, net.................................. $ 461,026 $ 235,055
========= =========
6. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
DECEMBER 31
------------------
1997 1996
-------- --------
Land..................................................... $ 24,102 $ 16,582
Buildings................................................ 34,474 21,127
Vehicles and delivery equipment.......................... 52,407 34,601
Yard equipment........................................... 7,751 6,793
Furniture and fixtures................................... 9,521 4,626
Leasehold improvements................................... 17,846 11,041
-------- --------
146,101 94,770
Less accumulated depreciation and amortization........... (47,833) (38,327)
-------- --------
$ 98,268 $ 56,443
======== ========
12
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
DECEMBER 31
1997 1996
------- -------
Accrued profit sharing..................................... $12,844 $ 9,102
Insurance reserves......................................... 11,665 14,002
Accrued payroll............................................ 3,345 1,882
Accrued vacation........................................... 2,668 1,377
Deferred compensation...................................... 2,581 2,214
Accrued interest........................................... 924 2,962
Other...................................................... 15,235 6,020
------- -------
$49,262 $37,559
======= =======
8. DEBT AND NOTES PAYABLE TO RELATED PARTIES
Debt and notes payable from related parties consists of the following:
DECEMBER 31
1997 1996
-------- --------
U.S. Rentals' revolving line of credit, interest payable
monthly at money market rate (ranging from 6.03% to
6.34% at December 31, 1997)............................. $203,000 $ 43,000
Rental Tools' revolving line of credit, interest payable
monthly at various rates (ranging from 7.58% to 8.50% at
December 31, 1997), due 2003............................ 38,213 --
Subordinated convertible notes........................... 500 --
Senior notes payable to various parties, interest payable
semiannually ranging from 6.82% to 7.76%................ -- 90,000
Revolving line of credit, interest payable monthly at
reference rate plus .125% (8.25% at December 31, 1996).. -- 26,300
Notes payable to related parties:
Demand note to stockholder, interest payable monthly at
a rate tied to the Company's revolving line of credit
(5.90% at December 31, 1997).......................... 17,000 --
Subordinated note payable to The Colburn School of
Performing Arts, interest payable quarterly at prime
rate plus 5%.......................................... -- 20,000
Other related party notes.............................. -- 4,511
Other debt............................................... 5,860 30,526
-------- --------
$264,573 $214,337
======== ========
United Rentals (North America) Inc.'s credit facility with a group of
financial institutions, for which Bank of America National Trust and Savings
Association acts as agent, enables the Company to borrow up to $155,000 on a
revolving basis (the "Facility"). The facility terminates on October 8, 2000, at
which time all outstanding indebtedness is due. As of December 31, 1997, there
was no outstanding indebtedness under the Facility.
13
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
U.S. Rentals' credit facility with various banks provides for an unsecured
line of credit of $300,000 maturing no later than 2002. The revolving line of
credit is unsecured and includes restrictions as to limitations upon certain
ratios of liabilities to net worth and upon the minimum net worth of U.S.
Rentals. The Senior and bank note agreements existing at December 31, 1996
were paid down with the proceeds from U.S. Rentals' IPO.
During the third quarter, United Rentals (North America) Inc. paid down all of
the amounts outstanding as of December 31, 1997 under the credit facilities with
the proceeds of a new Credit Facility. The new revolving credit facility in the
amount of $762,500 replaced the credit facilities that had been previously in
place (the Credit Facility). The Credit Facility is with a group of financial
institutions, for which Bank of America National Trust and Savings Association
acts as the agent. The Revised 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
$19,062. The Revised Facility terminates on September 26, 2003, at which time
all outstanding indebtedness is due. Borrowings by United Rentals (North
America) Inc. under the Credit Facility accrue interest at United Rentals (North
America) Inc.'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 United
Rentals (North America) Inc. 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 a 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 0.95% 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. United
Rentals (North America) Inc. is also required to pay the banks an annual
facility fee equal to 0.375% of the banks' $762,500 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 United Rentals (North America) Inc. 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 the Company and secured by the stock of the
Company.
The Credit Facility contains certain covenants that require United Rentals
(North America) Inc. 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
certain of the Company's executive officers to continue to hold executive
positions with the Company for a period of 30 consecutive days constitutes an
event of default unless replacement officers satisfactory to the lenders are
appointed.
The subordinated convertible notes consists of two notes; $300 in principal
bearing interest at 7% per annum and $200 in principal bearing interest at 7
1/2% per annum. The $200 note was converted into 14,814 shares of Common Stock
during January 1998. The $300 note is repayable
14
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in equal quarterly installments of principal and interest through October
2002, is convertible into the Company's Common Stock at a conversion rate of
$16.20 per share and is subordinated to the Company's Credit Facility.
Maturities of the Company's debt for each of the next five years at December
31, 1997 are as follows:
1998................................................................ $ 17,394
1999................................................................ 491
2000................................................................ 239
2001................................................................ 182
2002................................................................ 69
Thereafter.......................................................... 246,198
9. INCOME TAXES
U.S. Rentals (prior to February 20, 1997) and Rental Tools (prior to August
24, 1998), the companies acquired through mergers with the Company in
transactions accounted for as poolings-of-interests (see Note 3), had elected to
be treated as Subchapter S Corporations. In general, the income or loss of a
Subchapter S Corporation is passed through to its owners rather than being
subjected to taxes at the entity level. Pro forma net income reflects a
provision for income taxes on a pro forma basis for all periods presented as if
all such companies were liable for federal and state income taxes as taxable
corporate entities for all periods presented.
The provision for historical federal and state income taxes is as follows:
YEAR ENDED DECEMBER 31
------------------------
1997 1996 1995
--------- --------------
Historical:
Federal:
Current......................................... $ 3,765 $ -- $ --
Deferred........................................ 14,276
Deferred tax recorded upon Recapitalization..... 6,141
--------- ------ ------
24,182 -- --
State:
Current......................................... 668 420 484
Deferred........................................ 3,279
Deferred tax recorded upon Recapitalization..... 1,379
--------- ------ ------
5,326 420 484
--------- ------ ------
$ 29,508 $ 420 $ 484
========= ====== ======
A reconciliation of the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 35% to income before
provision for income taxes is as follows:
YEAR ENDED
DECEMBER 31,
1997
------------
Computed tax rate at stat-
utory tax rate........... $12,221
Increase (decrease) in
taxes
State income taxes, net
of federal tax
benefit................ 1,716
Cumulative deferred
taxes recorded upon
Recapitalization....... 7,520
Loss prior to
Recapitalization
excluded from taxable
income................. 7,543
Other................... 508
-------
$29,508
=======
15
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred income tax assets (liabilities) as of December
31, 1997 are as follows:
Accrued liabilities............................................... $ 7,576
Net operating loss carryforward................................... 314
Property and equipment............................................ 44
Allowance for doubtful accounts................................... 2,079
State income taxes................................................ 1,636
Other, net........................................................ 923
--------
12,572
Depreciation...................................................... (36,334)
Intangibles and other............................................. (633)
--------
$(24,395)
========
The Company has net short-term deferred tax assets in the amount of $880,
which are reported in the balance sheet in prepaid expenses and other assets.
The Company has net operating loss carryforwards ("NOL's") of $846 for
income tax purposes that expire in 2012.
10. CAPITAL STOCK
The Company's Board of Directors has the authority to designate 5,000,000
shares of $.01 par value preferred stock in series, to establish as to each
series the designation and number of shares to be issued and the rights,
preferences, privileges and restrictions of the shares of each series, and to
determine the voting powers, if any, of such shares. At December 31, 1997, the
Company's Board of Directors had not designated any shares.
As of December 31, 1997 there are outstanding warrants to purchase an
aggregate of 6,344,058 shares of Common Stock. Each warrant provides for an
exercise price of $10.00 per share, is currently exercisable and may be
exercised at any time until September 12, 2007.
1997 Stock Option Plan
The Board of Directors of the Company has adopted the 1997 Stock Option Plan
(the "Stock Option Plan") which provides for the granting of options to purchase
not more than an aggregate of 5,000,000 shares of Common Stock. All officers,
employees and others who render services to the Company are eligible to
participate in the Stock Option Plan. Each option granted pursuant to the Stock
Option Plan must provide for an exercise price per share that is at least equal
to the fair market value per share of Common Stock on the date of grant. No
options may be granted under the Stock Option Plan after August 21, 2007. The
exercise price of each option, the period during which each option may be
exercised and the other terms and conditions of each option are determined by
the Board of Directors (or by a committee appointed by the Board).
During 1997, 904,583 options to purchase shares of the Common Stock were
granted under the Stock Option Plan and remain outstanding at December 31, 1997.
The weighted average exercise price per share of such options was $12.76. Such
options had exercise prices ranging from $10 to $30 per share. Of such options
818,583 provided for an exercise price per share in the range of $10.00 to
$19.99 (the weighted average exercise price and weighted average remaining life
of the options in this range being $11.84 and 9.9 years, respectively) and
86,000 provided for an exercise price per share in the range of $20.01 to $30.00
(the weighted average exercise price and weighted average remaining life of the
options in this range being $22.51 and 9.9 years, respectively). At December 31,
1997, 60,000 options to purchase Common Stock at $15.00 per share were
exercisable.
16
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 Performance Award Plan
Effective February 20, 1997, U.S. Rentals adopted the 1997 Performance Award
Plan under which stock options and other awards could be granted to key
employees and directors at prices and terms established by U.S. Rentals at the
date of grant. The exercise price of all options issued during 1997 equaled
the fair value of the stock on the grant date which ranged from $17.88 to
$26.88. Accordingly, no compensation expense has been recognized. Options
outstanding at December 31, 1997 vest ratably over periods ranging from five
to ten years and expire in 2007.
The following table summarizes the activity under the Performance Award
Plan:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Shares under option:
Outstanding at December 31, 1996......................... -- $ --
Granted ($17.88-$20.00).................................. 3,867,387 $19.99
($23.44-$26.88)...................................... 206,500 $25.78
---------
Outstanding at December 31, 1997......................... 4,073,887 $20.29
=========
There were no vested options outstanding and 526,113 shares were available
for future grants under the Performance Award Plan at December 31, 1997.
As a result of the merger, all outstanding options to purchase shares of
U.S. Rentals common stock became fully vested and were converted into options
to purchase United Rentals common stock at the exchange ratio of 0.9625.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for stock-based employee
compensation arrangements whereby no compensation cost related to stock
options is deducted in determining net income. Had compensation cost for the
Company's stock option plans been determined pursuant to Financial Accounting
Standards Board Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-
Based Compensation," the Company's net income and earnings per share would
have differed. The Black-Scholes option pricing model estimates fair value of
options using subjective assumptions which can materially affect fair value
estimates and, therefore, does not necessarily provide a single measure of
fair value of options. Using the Black-Scholes option pricing model and a
risk-free interest rate ranging from 5.8% to 6.61%, a volatility factor for
the market price of the Company's Common Stock of 32% and a weighted-average
expected life of options of approximately three to five years, the Company's net
income, basic earnings per share and diluted earnings per share after giving
affect to the Recapitalization, would have been $17,055, $0.37 and $0.35,
respectively. For purposes of these pro forma disclosures, the estimated fair
value of options is amortized over the options' vesting period. Since the number
of options granted and their fair value may vary significantly from year to
year, the pro forma compensation expense in future years may be materially
different.
At December 31, 1997 there are 6,344,058 shares of Common Stock reserved for
the exercise of warrants, 5,000,000 shares of Common Stock reserved for issuance
pursuant to options granted, and that may be granted in the future, under the
1997 Stock Option Plan and 33,332 shares of Common Stock reserved for the future
conversion of convertible debt.
17
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. EARNINGS PER SHARE
The following table sets forth the computation of historical basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
Numerator:
Net income $3,898 $37,726 $33,297
===========================================
Denominator:
Denominator for basic earnings per share-
weighted-average shares 46,660,955 22,654,599 22,660,013
Effect of dilutive securities:
Employee stock options 743,597
Warrants 1,644,445
Denominator for dilutive earnings per shares- -------------------------------------------
adjusted weighted-average shares 49,048,997 22,654,599 22,660,013
===========================================
Basic earnings before extraordinary item per share $0.12 $1.67 $1.47
===========================================
Diluted earnings before extraordinary item per share $0.11 $1.67 $1.47
===========================================
Basic earnings per share $0.08 $1.67 $1.47
===========================================
Diluted earnings per share $0.08 $1.67 $1.47
===========================================
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases rental equipment, real estate and certain office
equipment under operating leases. Certain real estate leases require the
Company to pay maintenance, insurance, taxes and certain other expenses in
addition to the stated rentals. Future minimum lease payments, by year and in
the aggregate, for noncancellable operating leases with initial or remaining
terms of one year or more are as follows at December 31, 1997:
1998.............................................................. $ 9,185
1999.............................................................. 7,270
2000.............................................................. 5,709
2001.............................................................. 4,891
2002.............................................................. 3,418
Thereafter........................................................ 13,061
-------
$43,534
=======
Rent expense under non-cancelable operating leases totaled $6,367, $4,151
and $3,855 for the years ended December 31, 1997, 1996 and 1995, respectively.
EMPLOYEE BENEFIT PLANS
The Company sponsors two defined contribution 401(k) retirement plans (the
Plans) which are subject to the provisions of ERISA. Under the Plans, the
Company matches a minimum of 50% of the participants contributions up to a
specified amount. Company contributions to the Plans were $358, $316 and $404
for the years ended December 31, 1997, 1996 and 1995, respectively.
LEGAL MATTERS
The Company is party to legal proceedings and potential claims arising in
the ordinary course of its business. In the opinion of management, the Company
has adequate legal defenses, reserves, or insurance coverage with respect to
these matters so that the ultimate resolution will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows. The Company has accrued $9,563 and $12,011 at December 31, 1997 and
1996, respectively, to cover the uninsured portion of possible costs arising
from these pending claims and other potential unasserted claims.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to various laws and related
regulations governing environmental matters. Under such laws, an owner or
lessee of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances located on or in, or emanating from,
such property, as well as investigation of property damage. The Company incurs
ongoing expenses associated with the removal of underground storage tanks and
the performance of appropriate remediation at certain of its locations. The
Company believes that such removal and remediation will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
18
UNITED RENTALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
SELECTED FINANCIAL DATA
The following table of quarterly financial information has been prepared
from unaudited financial statements of the Company, and reflects adjustments
which are, in the opinion of management, necessary for a fair presentation of
the interim periods presented.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- -------- --------
For the year ended December 31, 1997:
Total revenues....................... $90,409 $108,395 $129,020 $162,014
Gross profit......................... 22,025 32,515 45,464 49,288
Income (loss) before extraordinary
item................................ (24,165) 8,062 11,258 10,254
Extraordinary item................... 1,511 -- -- --
Net income(loss)..................... (25,676) 8,062 11,258 10,254
For the year ended December 31, 1996:
Total revenues....................... 67,290 83,323 102,708 101,157
Gross profit......................... 17,784 24,973 35,859 34,417
Net income........................... 3,621 7,790 15,813 10,502
14. SUBSEQUENT EVENTS
Subsequent to December 31, 1997 and through November 17, 1998, the Company
completed the acquisition of 76 equipment rental companies (the "Acquisitions")
and the aggregate consideration paid by the Company for the Acquisitions was
$823,639 and consisted of approximately $731,355 in cash, 3,631,765 shares of
the Common stock and warrants to purchase 30,000 shares of the Common Stock. The
Company funded a portion of the cash consideration for these acquisitions with
cash on hand and the balance with borrowings under the Credit Facility and
proceeds from the public offering noted below.
On March 11, 1998, the Company completed a public offering of 8,625,000 shares
of its Common Stock. Net proceeds of the offering were approximately $207,400.
On May 19, 1998, United Rentals (North America) Inc. completed an offering of
$200,000 of 9 1/2% Senior Subordinated Notes due 2008. Net proceeds of the
offering were approximately $193,000.
On August 5, 1998 United Rentals Trust I, a subsidiary of the Company,
completed a $300,000 offering of Convertible Quarterly Income Preferred
Securities. Net proceeds of the offering were approximately $290,000.
On August 12, 1998, United Rentals (North America) Inc. completed an offering
of $205,000 of 8.80% Senior Subordinated Notes due 2008. Net proceeds of the
offering were approximately $197,500.
On September 29, 1998, the shareholders of United approved an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 75,000,000 shares to 500,000,000 shares.
19