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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999.
[ ] 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)
Delaware 06-1522496
Delaware 06-1493538
State or Other Jurisdiction of (I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
Common Stock, $.01 par value, of United
Rentals, Inc. New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 15, 2000, there were 72,062,743 shares of United Rentals, Inc.
common stock outstanding. The aggregate market value of such common stock held
by non-affiliates of the registrant at March 15, 2000 was approximately $623.8
million. Such aggregate market value was calculated by using the closing price
of such common stock as of such date on the New York Stock Exchange ($13.81).
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.
Documents incorporated by reference: Certain sections of the Proxy Statement
of United Rentals, Inc. to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 within 120 days of the registrant's fiscal year
are incorporated by reference into Part III of this Form 10-K.
This combined Form 10-K 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 I(1) (A) and (B) of Form 10-K and
is therefore filing this form with the reduced disclosure format permitted by
such instruction.
FORM 10-K REPORT INDEX
10-K Part
and Item No. Page No.
------------ --------
PART I
Item 1 Business.............................................. 1
Item 2 Properties............................................ 8
Item 3 Legal Proceedings..................................... 8
Item 4 Submission of Matters to a Vote of Security Holders... 9
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters................................... 9
Item 6 Selected Financial Data............................... 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 11
Item 7A Quantitative and Qualitative Disclosures About Market
Risk.................................................. 24
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 71
PART III
Item 10 Directors and Executive Officers of the Registrant.... 71
Item 11 Executive and Director Compensation................... 71
Item 12 Security Ownership of Certain Beneficial Owners and
Management............................................ 71
Item 13 Certain Relationships and Related Transactions........ 71
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................... 71
United Rentals, Inc. ("Holdings") is principally a holding company and
primarily conducts its operations 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 company of URI on August 5,
1998, in connection with a reorganization of URI's corporate structure that
was effected in order to facilitate certain financings. As part of such
reorganization, the outstanding common stock of URI was converted, on a share
for share basis, into common stock of Holdings and the common stock of
Holdings commenced trading on the New York Stock Exchange instead of the
common stock of URI. Prior to such reorganization, the name of United Rentals
(North America), Inc. was United Rentals, Inc. Unless otherwise indicated or
the context otherwise clearly requires, (i) the terms "we", "United Rentals"
and the "Company" refer collectively to URI and its subsidiaries, with respect
to periods prior to such reorganization, and to Holdings and its subsidiaries,
with respect to periods thereafter, and (ii) the term "Common Stock" refers to
the common stock of URI, with respect to periods prior to such reorganization,
and to the common stock of Holdings, with respect to periods thereafter.
Certain statements contained in this Report are forward-looking in nature.
Such statements can be identified by the use of forward-looking terminology
such as "believes," "expects," "may" "will," "should," or "anticipates" or the
negative thereof or comparable terminology, or by discussions of strategy. You
are cautioned that our business and operations are subject to a variety of
risks and uncertainties and, consequently, our actual results may materially
differ from those projected by any forward-looking statements. Certain of such
risks and uncertainties are discussed below under Item 7--"Management's
Discussion and Analysis of Financial Condition and Result of Operations--
Factors that May Influence Future Results and Accuracy of Forward-Looking
Statements." We make no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such
statement is made.
PART I
Unless otherwise indicated, the information under Items 1 and 2 is as of
February 29, 2000.
Item 1. Business
General
United Rentals is North America's largest equipment rental company with
over 700 branches in 45 states, six Canadian provinces and Mexico. We offer
for rent more than 600 different types of equipment to customers that include
construction and industrial companies, manufacturers, utilities,
municipalities, homeowners and others. During the past year, we completed more
than 6.4 million rental transactions and served over 1.1 million customers.
We have the largest fleet of rental equipment in the world, with over
500,000 units having an original purchase price of approximately $3.0 billion.
Our fleet includes:
. light to heavy construction and industrial equipment, such as aerial
lifts, backhoes, skid-steer loaders, forklifts, ditching equipment,
earth moving equipment, material handling equipment, compressors,
pumps and generators;
. traffic control equipment, such as barricades, cones, warning lights,
message boards and pavement marking systems;
. trench safety equipment for below ground work, such as trench shields,
aluminum hydraulic shoring systems, slide rails, crossing plates,
construction lasers, and line testing equipment;
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. special event equipment used for sporting, corporate and other large
events, such as light towers, air conditioning units, portable power
units, electrical cable, temporary kitchens and tents; and
. general tools and equipment, such as power washers, water pumps,
heaters and hand tools.
In addition to renting equipment, we sell used rental equipment, act as a
dealer for a wide variety of new equipment, and sell related merchandise, parts
and service.
We began operations in October 1997 and have grown through a combination of
internal growth, acquisitions and the opening of new rental locations. In
September 1998, we merged 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.
Competitive Advantages
We believe that we benefit from the following competitive advantages:
Large and Diverse Rental Fleet. We have the largest and most comprehensive
equipment rental fleet in the industry, which enables us to:
. attract customers by providing "one-stop" shopping;
. serve a diverse customer base, which reduces our dependence on any
particular customer or group of customers;
. serve large customers that require assurance that substantial
quantities of different types of equipment will be available as
required on a continuing basis; and
. serve attractive specialty equipment rental markets, such as the
traffic control equipment market which should benefit from a portion
of the more than $200 billion allocated by the Transportation Equity
Act for the 21st Century ("TEA-21") for the reconstruction of the
nation's transportation infrastructure.
Operating Efficiencies. We generally group our branches into clusters of 10
to 30 locations that are in the same geographic area. Our information
technology system enables each branch to access all available equipment within
a cluster. We believe that our cluster strategy produces significant operating
efficiencies by enabling us to: (1) market the equipment within a cluster
through multiple branches, (2) cross-market the equipment specialties of
different branches within each cluster, and (3) reduce costs by centralizing
common functions such as payroll, accounts payable and credit and collection
into 32 credit offices and four service centers. In 1999, approximately 9.4% of
our rental revenues, or $150 million, was attributable to equipment sharing
among branches.
Geographic Diversity. We have branches in 45 states, six Canadian provinces
and Mexico. We believe that our geographic diversity reduces the impact that
fluctuations in regional economic conditions have on our overall financial
performance. Our geographic diversity and large network of branch locations
also give us the ability to better serve National Account customers, better
serve customers that operate at multiple locations, and access used equipment
re-sale markets across the country.
Customer Diversity. Our customer base is highly diversified and ranges from
Fortune 500 companies to small companies and homeowners. We estimate that our
top ten customers accounted for approximately 1% of our revenues during 1999.
2
Strong and Motivated Branch Management. Each of our branches has a full-time
branch manager who is supervised by one of our 56 district managers and nine
regional vice presidents. We believe that our managers are among the most
knowledgeable and experienced in the industry, and we empower them--within
budgetary guidelines--to make day-to-day decisions concerning staffing,
pricing, equipment purchasing and other branch matters. Management closely
tracks branch, district and region performance with extensive systems and
controls, including performance benchmarks and detailed monthly operating
reviews. We promote equipment sharing among branches through our profit sharing
program, which directly ties the compensation of branch personnel to their
branch's financial performance and return on assets.
Significant Purchasing Power. We purchase large amounts of equipment and
other items, which enables us to negotiate favorable terms with our vendors. We
are continuing our efforts to increase our purchasing power by narrowing our
vendor base. We estimate that these efforts allowed us to reduce our equipment
purchase costs in 1999 by approximately $50 million, and our goal is to
increase these savings to a total of $150 million in 2000.
National Account Program. Our National Account sales force is dedicated to
establishing and expanding relationships with large customers, particularly
those with a national or multi-regional presence. We offer our National Account
customers the benefits of a consistent level of service across North America
and a single point of contact for all their equipment needs. We also help them
improve productivity by providing them with customized reports regarding their
equipment usage. Our National Account team currently includes 41 sales
professionals. Revenues from National Account customers increased by
approximately 300% in 1999, to $89 million. Our target is to reach $175 million
in 2000.
Information Technology System. Our information technology system facilitates
rapid and informed decision making and enables us to respond quickly to
changing market conditions. The system provides management with a wide range of
operating and financial data and enables branch personnel to search for needed
equipment throughout a geographic region, determine its closest location and
arrange for delivery to a customer's work site. An in-house group of 93
information technology specialists supports the system and extends it to new
locations. The system includes software developed by our Wynne Systems(TM)
subsidiary, which is the leading provider of proprietary software for use by
equipment rental companies in managing and operating multiple branch locations.
E-Rental Store(TM). In February 2000, we launched our business-to-business
e-commerce web site. The centerpiece of our site is the E-Rental Store(TM),
where customers can rent or buy equipment online, 24 hours a day, seven days a
week. The E-Rental Store(TM) is staffed by experienced managers, who have in-
depth product knowledge and real-time access to all our equipment. Customers
can also benefit from our URdata(TM) application, which gives them up-to-the-
minute reports on their business activity with us.
Risk Management and Safety Programs. We place great emphasis on risk
reduction and safety and believe that we have one of the most comprehensive
risk management and safety programs in the industry. Our risk management
department is staffed by 41 experienced professionals and is responsible for
implementing our safety programs and procedures, developing our employee and
customer training programs, and managing any claims asserted against us. We
estimate that in 1999 we had approximately 19% fewer accidents than comparable
companies, 45% lower workers' compensation claim costs and 50% lower liability
claims, resulting in significant cost savings.
3
Industry Background
Industry Size and Growth
The U.S. equipment rental industry has grown from about $6 billion in
annual rental revenues in 1989 to over $24 billion in 1999, representing a
compound annual growth rate of approximately 15%. This information is based on
data reported by Manfredi & Associates, Inc. In addition to reflecting general
economic growth, we believe that the growth in the equipment rental industry is
being driven by the following trends:
Recognition of Advantages of Renting. Equipment users are increasingly
recognizing the many advantages that equipment rental may offer compared
with ownership. They recognize that by renting they can:
. avoid the large capital investment required for equipment
purchases;
. access a broad selection of equipment and select the equipment
best suited for each particular job;
. reduce storage and maintenance costs; and
. access the latest technology without investing in new equipment.
Outsourcing. Although growth in the equipment rental industry has to
date been largely driven by an increase in rentals by the construction
industry, we believe that the cost and other advantages of renting,
together with the general trend toward the corporate outsourcing of non-
core competencies, are increasingly leading industrial companies,
municipalities, government agencies, utilities and others to rent
equipment.
Products and Services
We offer for rent a wide variety of equipment to customers that include
construction and industrial companies, manufacturers, utilities,
municipalities, homeowners and others. We also sell used equipment, act as a
dealer for many types of new equipment, and sell related merchandise, parts and
service. In addition, our Wynne Systems(TM) subsidiary develops and markets
software for use by equipment rental companies in managing and operating
multiple branch locations.
For financial information concerning our foreign and domestic operations,
see Note 15 of the Notes to Consolidated Financial Statements included
elsewhere in this report.
Equipment Rental
We offer for rent over 600 different types of equipment on a daily, weekly
or monthly basis. The types of equipment that we offer include light to heavy
construction and industrial equipment; traffic control equipment; trench safety
equipment; equipment for sporting, corporate and other special events; and
general tools and equipment.
We believe that our equipment rental fleet is the largest in the world and
one of the newest and best maintained. As of February 29, 2000, our fleet
included over 500,000 units and had an original purchase price of approximately
$3.0 billion and a weighted average age of approximately 25 months. We estimate
that each of the following categories accounted for 8% or more of our equipment
rental revenues in 1999: (i) aerial lift equipment (approximately 22%), (ii)
earth moving equipment (approximately 12%) and (iii) forklifts (approximately
8%).
4
We vary our equipment mix from branch to branch in response to local market
conditions and customer requirements. Most of our branches offer a general mix
of equipment, while some specialize in specific equipment categories such as
aerial work platforms and traffic control equipment.
Used Equipment Sales
In order to maintain a modern fleet and optimize our equipment mix, we
routinely sell used rental equipment and invest in new equipment. We have
generally been able to achieve favorable prices due to our comprehensive
maintenance program and our national sales force that can access many resale
markets across North America.
We principally sell used equipment through our sales force and our web site
(www.unitedrentals.com) which includes an online database of used equipment
available for sale. We also sell our used equipment to used equipment dealers
and through public auctions. In addition, we sometimes trade in used equipment
to our vendors when we buy new equipment.
New Equipment Sales
We are a dealer for many leading tool and equipment manufacturers. These
include Genie Industries, Inc., Grove Worldwide, JLG Industries, Inc., and
Snorkel (aerial lifts); Multiquip, Inc. (compaction equipment and compressors);
Bomag (compaction equipment); Omniquip International (forklifts, skid-steer
loaders, mini-excavators); and Honda USA (pumps and generators). Typically,
dealership agreements do not have a specific term and may be terminated at any
time. The type of new equipment that we sell varies by location.
Related Merchandise, Parts and Other Services
At most of our locations, we sell equipment parts and a variety of supplies
and merchandise that may be used with our rental equipment, such as saw blades,
fasteners, drill bits, hard hats, gloves and other safety equipment. At some of
our branches, we also offer repair and maintenance services for equipment that
is owned by our customers.
Our Wynne Systems(TM) Subsidiary
Our Wynne Systems(TM) subsidiary develops and markets software for use by
equipment rental companies in managing and operating multiple branch locations.
Eight of the ten largest equipment rental companies, including United Rentals,
use software developed by Wynne Systems(TM).
Customers
Our customer base is highly diversified and ranges from Fortune 500
companies to small businesses and homeowners. We estimate that no single
customer accounted for more than 0.5% of our revenues during 1999 and that our
top 10 customers accounted for approximately 1% of our revenues in 1999.
Our customer base varies by branch and is determined by several factors,
including the equipment mix and marketing focus of the particular branch and
the business composition of the local economy. Our customers include:
. construction companies that use equipment for building and renovating
commercial buildings, warehouses, industrial and manufacturing plants,
office parks, airports, residential developments and other facilities;
5
. industrial companies--such as manufacturers, chemical companies, paper
mills, railroads, ship builders, and utilities--that use equipment for
plant maintenance, upgrades, expansion and construction;
. municipalities that require equipment for a variety of purposes such
as traffic control and highway construction and maintenance;
. sponsors of sporting, corporate, entertainment and other large special
events--including events such as the Super Bowl, the U. S. Open Golf
Championship, the NASCAR Brickyard 400, the PGA Championship, the
Ryder Cup, concerts and charity events; and
. homeowners and other individuals that use equipment for projects that
range from simple repairs to major renovations.
Sales and Marketing
We market our products and services through multiple channels as described
below.
Sales Force. As of February 29, 2000, we had a total of 2,269 salespeople,
including 1,139 store-based customer service representatives and 1,130 field-
based salespeople. Our sales force calls on existing and potential customers
and assists our customers in planning for their equipment needs.
National Account Program. Our National Account sales force is dedicated to
establishing and expanding relationships with large customers, particularly
those with a national or multi-regional presence. The National Account team
closely coordinates its efforts with the local sales force in each area. Our
National Account team currently includes 41 sales professionals.
E-Rental Store(TM). We recently launched a business-to-business e-commerce
web site, which includes our E-Rental Store(TM) where customers can rent or buy
equipment online, 24 hours a day, seven days a week. Customers can also benefit
from our URdata(TM) application, which gives them an up-to-the-minute report on
their business activity with us.
Advertising. We promote our business through local and national advertising
in various media, including trade publications, yellow pages, the Internet, and
direct mail. We also regularly participate in industry trade shows and
conferences and sponsor a variety of local promotional events.
Suppliers
We estimate that our largest supplier accounted for approximately 9% of our
equipment purchases in 1999, and that our top 10 largest suppliers accounted
for approximately 35% our equipment purchases during that period.
Information Technology System
We have an advanced information technology system which facilitates rapid
and informed decision making and enables us to respond quickly to changing
market conditions. Each branch is equipped with one or more workstations that
are electronically linked to our other locations and to our AS/400 system
located at our data center. All rental transactions are entered at these
workstations and processed on a real-time basis. Personnel at each location are
able to access the system 24 hours a day in order to determine equipment
availability, monitor business activity on a real-time basis, and obtain a wide
range of operating and financial data.
Our information technology system and our web site are supported by our in-
house group of 93 information technology specialists. This group trains our
branch personnel, either at the branch or at
6
one of our four training centers; upgrades and customizes our system; provides
hardware and technology support; operates a support desk to assist branch
personnel in the day-to-day use of the system; extends the system to newly
acquired locations; and manages our web site.
Competition
The equipment rental industry is highly fragmented and competitive. Our
competitors primarily include small, independent businesses with one or two
rental locations; regional competitors which operate in one or more states;
public companies or divisions of public companies; and equipment vendors and
dealers who both sell and rent equipment directly to customers. We believe
that, in
general, large companies enjoy significant competitive advantages compared to
smaller operators, including greater purchasing power, a lower cost of capital,
the ability to provide customers with a broader range of equipment and services
and with newer and better maintained equipment, and greater flexibility to
transfer equipment among locations in response to customer demand. For
additional information, see "Competitive Advantages" above.
Environmental and Safety Regulations
There are numerous federal, state and local laws and regulations governing
environmental protection and occupational health and safety. Under these laws,
an owner or lessee of real estate may be liable on a no-fault basis for, among
other things, (1) the costs of removal or remediation of hazardous or toxic
substances located on, in, or emanating from, the real estate, as well as
related costs of investigation and property damage and substantial penalties,
and (2) environmental contamination at facilities where its waste is or has
been disposed. Activities that are or may be affected by these laws include our
use of hazardous materials to clean and maintain equipment and our disposal of
solid and hazardous waste and wastewater from equipment washing. We also
dispense petroleum products from underground and above-ground storage tanks
located at certain locations, and at times we must remove or upgrade tanks to
comply with applicable laws. We have acquired or lease certain locations which
have or may have been contaminated by leakage from underground tanks or other
sources, and we are in the process of assessing the nature of the required
remediation. Based on the conditions currently known to us, we believe that any
unreserved environmental remediation and compliance costs required with respect
to those conditions will not have a material adverse effect on our business.
However, we cannot be certain that we will not identify adverse environmental
conditions that are not currently known to us, that all potential releases from
underground storage tanks removed in the past have been identified, or that
environmental and safety requirements will not become more stringent or be
interpreted and applied more stringently in the future. If we are required to
incur environmental compliance or remediation costs that are not currently
anticipated by us, our business could be adversely affected depending on the
magnitude of the cost.
Employees
As of February 29, 2000, we had 13,635 employees. Of these employees, 3,591
are salaried personnel and 10,044 are hourly personnel. Collective bargaining
agreements relating to 40 separate locations cover approximately 580 of our
employees.
7
Item 2. Properties
We currently operate 702 branch locations. Of these locations, 625 are in
the United States, 76 are in Canada and one is in Mexico. The number of
locations in each state or province is shown below. We intend to continue to
expand our network of branches by opening new rental locations in attractive
markets and continuing our disciplined acquisition program.
United States
. Alabama (20) . Louisiana (6) . Oklahoma (7)
. Alaska (5) . Maine (1) . Oregon (24)
. Arizona (24) . Maryland (16) . Pennsylvania (15)
. Arkansas (3) . Massachusetts (9) . Rhode Island (3)
. California (98) . Michigan (7) . South Carolina (10)
. Colorado (15) . Minnesota (18) . South Dakota (10)
. Connecticut (8) . Missouri (12) . Tennessee (8)
. Delaware (4) . Nebraska (6) . Texas (47)
. Florida (32) . Nevada (14) . Utah (9)
. Georgia (20) . New Hampshire (1) . Virginia (13)
. Idaho (2) . New Jersey (7) . Washington (27)
. Illinois (16) . New Mexico (3) . Wisconsin (9)
. Indiana (15) . New York (12) . Wyoming (1)
. Iowa (15) . North Carolina (18)
. Kansas (6) . North Dakota (10)
. Kentucky (7) . Ohio (12)
Canada Mexico
. Alberta (3) . Nuevo Leon (1)
. British Columbia (18)
. Manitoba (2)
. Newfoundland (8)
. Ontario (32)
. Quebec (13)
Our branch locations generally include facilities for displaying equipment
and, depending on the location, may include separate equipment service areas
and storage areas.
We own 101 of our rental locations and lease the other locations. Our
leases provide for varying terms and include 38 leases that are on a month-to-
month basis and 16 leases that provide for a remaining term of less than one
year and do not provide a renewal option. We are currently negotiating renewals
for most of the leases that provide for a remaining term of less than one year.
We maintain a fleet of approximately 10,500 vehicles that is used for
delivery, maintenance and sales functions. We own a portion of this fleet and
lease a portion.
Our corporate headquarters are located in Greenwich, Connecticut, where we
occupy approximately 40,000 square feet under (1) a lease for approximately
12,000 square feet that extends until 2003 and (2) a lease for approximately
28,000 square feet that extends until 2004 (subject to extension rights).
Item 3. Legal Proceedings
The Company is party to various litigation matters, in most cases involving
ordinary and routine claims incidental to our business. The Company cannot
estimate with certainty its ultimate legal and financial liability with respect
to such pending litigation matters. However, the Company believes, based on its
examination of such matters, that the Company's ultimate liability will not
have a material adverse effect on its financial position, results of operations
or cash flows.
8
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1999, no matter was submitted to a vote of the
security holders of the Company.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "URI." The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock, as reported by the New York
Stock Exchange.
High Low
------ ------
1998:
First Quarter................................................... $27.38 $17.25
Second Quarter.................................................. 42.00 24.13
Third Quarter................................................... 48.00 18.12
Fourth Quarter.................................................. 33.75 10.56
1999:
First Quarter................................................... $35.69 $26.13
Second Quarter.................................................. 33.25 25.13
Third Quarter................................................... 31.00 21.75
Fourth Quarter.................................................. 21.94 14.31
As of March 15, 2000, there were approximately 290 holders of record of the
Common Stock. The Company believes that the number of beneficial owners is
substantially greater than the number of record holders, because a large
portion of the Common Stock is held of record in broker "street names."
Dividend Policy
The Company intends to retain all earnings for the foreseeable future for
use in the operation and expansion of its business and, accordingly, the
Company currently has no plans to pay dividends on its Common Stock. The
payment of any future dividends will be determined by the Board of Directors in
light of conditions then existing, including the Company's earnings, financial
condition and capital requirements, restrictions in financing agreements,
business conditions and other factors. Under the terms of certain agreements
governing the Company's outstanding indebtedness, the Company is prohibited or
restricted from paying dividends on its Common Stock. In addition, under
Delaware law, the Company is prohibited from paying any dividends unless it has
capital surplus or net profits available for this purpose. See Item 7--
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Information Concerning the Credit Facility and Other
Indebtedness."
Sales of Unregistered Securities During the Fourth Quarter of 1999
Set forth below is a listing of all sales by the Company of unregistered
equity securities during 1999, excluding sales that were previously reported on
a Quarterly Report on Form 10-Q. Unless otherwise indicated (i) such sales were
exempt from registration under the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4(2) of the Act, as they were transactions not
involving a public offering and (ii) the sales were made by the Company without
the assistance of any underwriters.
1. In December 1999, the Company issued 1,898 shares of Common Stock to an
executive officer pursuant to an employment agreement.
9
Item 6. Selected Financial Data
The data presented below with respect to the Company should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto of the Company included elsewhere in this Report and Item 7--
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
During the periods presented below, the Company completed certain
acquisitions that were accounted for as poolings-of-interests (including a
merger in September 1998 with U.S. Rentals) and others that were accounted for
as purchases. The selected financial data presented below has been restated for
all periods presented to include the accounts of the businesses acquired in
transactions accounted for as poolings-of-interests (excluding one such
transaction which was not material) as if the Company and these businesses
acquired were combined for all periods presented. The accounts of businesses
acquired in transactions accounted for as purchases are included from their
respective acquisition dates. In view of the fact that the Company's operating
results for the periods presented below were impacted by acquisitions that were
accounted for as purchases, the Company believes that its results of operations
for the years presented are not directly comparable. See Note 3 of the Notes to
the Consolidated Financial Statements of the Company included elsewhere in this
Report.
Year Ended December 31,
----------------------------------------------------
1995 1996 1997 1998 1999
--------- -------- -------- ---------- ----------
(dollars in thousands, except per share data)
Income statement data:
Total revenues.......... $ 283,432 $354,478 $489,838 $1,220,282 $2,233,628
Total cost of revenues.. 194,234 241,445 340,546 796,834 1,408,710
--------- -------- -------- ---------- ----------
Gross profit............ 89,198 113,033 149,292 423,448 824,918
Selling, general and
administrative
expenses............... 39,707 54,721 70,835 195,620 352,595
Merger-related
expenses............... 47,178
Non-rental depreciation
and amortization....... 6,916 9,387 13,424 35,248 62,867
Termination cost of
deferred compensation
agreements............. 20,290
--------- -------- -------- ---------- ----------
Operating income........ 42,575 48,925 44,743 145,402 409,456
Interest expense........ 7,490 11,278 11,847 64,157 139,828
Preferred dividends of a
subsidiary trust....... 7,854 19,500
Other (income) expense,
net.................... 1,304 (499) (2,021) (4,906) 8,321
--------- -------- -------- ---------- ----------
Income before provision
for income taxes and
extraordinary items.... 33,781 38,146 34,917 78,297 241,807
Provision for income
taxes.................. 484 420 29,508 43,499 99,141
--------- -------- -------- ---------- ----------
Income before
extraordinary items.... 33,297 37,726 5,409 34,798 142,666
Extraordinary items, net
(1).................... 1,511 21,337
--------- -------- -------- ---------- ----------
Net income.............. $ 33,297 $ 37,726 $ 3,898 $ 13,461 $ 142,666
========= ======== ======== ========== ==========
Pro forma provision for
income taxes before
extraordinary items
(2).................... $ 13,715 $ 15,487 $ 14,176 $ 44,386
Pro forma income before
extraordinary items
(2).................... 20,066 22,659 20,741 33,911
Basic earnings before
extraordinary items per
share.................. $ 1.47 $ 1.67 $ 0.12 $ 0.53 $ 2.00
Diluted earnings before
extraordinary items per
share.................. $ 1.47 $ 1.67 $ 0.11 $ 0.48 $ 1.53
Basic earnings per share
(3).................... $ 1.47 $ 1.67 $ 0.08 $ 0.20 $ 2.00
Diluted earnings per
share (3).............. $ 1.47 $ 1.67 $ 0.08 $ 0.18 $ 1.53
Other financial data:
EBITDA (4).............. $ 101,438 $123,606 $160,554 $ 403,738 $ 761,230
Depreciation and
amortization........... 58,863 74,681 95,521 211,158 343,508
Dividends on common
stock..................
December 31,
----------------------------------------------------
1995 1996 1997 1998 1999
--------- -------- -------- ---------- ----------
(dollars in thousands)
Balance sheet data:
Cash and cash
equivalents............ $ 3,728 $ 2,906 $ 72,411 $ 20,410 $ 23,811
Rental equipment, net... 182,082 235,055 461,026 1,143,006 1,659,733
Total assets............ 297,994 381,228 826,010 2,634,663 4,497,738
Total debt.............. 131,771 214,337 264,573 1,314,574 2,266,148
Company-obligated
mandatorily redeemable
convertible preferred
securities
of a subsidiary trust.. 300,000 300,000
Stockholders' equity.... 104,392 105,420 446,388 726,230 1,397,486
10
- --------
(1) The Company recorded an extraordinary item (net of income taxes) of $1.5
million in 1997 and an extraordinary item (net of income taxes) of $21.3
million in 1998. Such charge in 1997 resulted from the prepayment of
certain debt by U.S. Rentals. Such charge in 1998 resulted from the early
extinguishment of certain debt and primarily reflected prepayment penalties
on certain debt of U.S. Rentals.
(2) U.S. Rentals was taxed as a Subchapter S Corporation until its initial
public offering in February 1997, and another company acquired in a
pooling-of-interests transaction was taxed as a Subchapter S Corporation
until being acquired by the Company in 1998. 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 provision for
income taxes before extraordinary items and pro forma income before
extraordinary items reflect a provision for income taxes as if all such
companies were liable for federal and state income taxes as taxable
corporate entities for all periods presented.
(3) The Company's earnings during 1997 were impacted by $20.3 million of
expenses relating to the termination of certain deferred compensation
expenses in connection with U.S. Rentals' initial public offering, a $7.5
million charge to recognize deferred tax liabilities of U.S. Rentals and an
extraordinary item (net of income taxes) of $1.5 million. The Company's
earnings during 1998 were impacted by merger-related expenses of $47.2
million ($33.2 million net of taxes), a $4.8 million charge to recognize
deferred tax liabilities of a company acquired in a pooling-of-interests
transaction and an extraordinary item (net of income taxes) of $21.3
million. The Company's earnings during 1999 were impacted by $18.2 million
($10.8 million net of taxes) of expenses incurred related to a terminated
tender offer. Excluding such amounts, (i) basic earnings per share for the
years ended 1997, 1998 and 1999 would have been $0.70, $1.10 and $2.15,
respectively, and (ii) diluted earnings per share for the years ended 1997,
1998 and 1999 would have been $0.66, $1.00 and $1.65, respectively.
(4) EBITDA is defined as net income (excluding (i) non-operating income and
expense, (ii) a $20.3 million non-recurring charge incurred by U.S. Rentals
in 1997 arising from the termination of deferred compensation agreements
with certain executives, (iii) $47.2 million in merger-related expenses in
1998 related to the three acquisitions accounted for as poolings-of-
interests, including the merger with U.S. Rentals and (iv) $8.3 million of
expenses that are included in selling, general and administrative expenses
for 1999 and which related to a terminated tender offer), plus interest
expense, income taxes and depreciation and amortization. EBITDA data is
presented to provide additional information concerning the Company's
ability to meet its future debt service obligations and capital expenditure
and working capital requirements. However, EBITDA is not a measure of
financial performance under generally accepted accounting principles.
Accordingly, EBITDA should not be considered an alternative to net income
or cash flows as indicators of the Company's operating performance or
liquidity.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report. Certain of the statements contained in such discussion are
forward looking in nature. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or comparable terminology,
or by discussions of strategy. You are cautioned that our business and
operations are subject to a variety of risks and uncertainties and,
consequently, our actual results may materially differ from those projected by
any forward-looking statements. Certain of these factors are discussed below
under "--Factors that May Influence Future Results and Accuracy of Forward-
Looking Statements." We make no commitment to revise or update any forward-
looking statements in order to reflect events or circumstances after the date
any such statement is made.
11
Introduction
The Company commenced equipment rental operations in October 1997 and has
completed 196 acquisitions (through February 29, 2000), including the merger
with U.S. Rentals (the "U.S. Rentals Merger") which was completed in September
1998.
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
two of the companies acquired in such transactions (but were not restated for
one that was not material, which has been combined with the Company effective
July 1, 1998). See Note 3 to the Notes to the Consolidated Financial Statements
of the Company included elsewhere in this Report. As a result of such
restatement, the Company's financial statements include historical financial
information of these two acquired companies for periods that precede the date
on which the Company commenced its own operations.
The other 193 acquisitions completed by the Company 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 1999, 1998 and 1997 were impacted by acquisitions that
were accounted for as purchases, the Company believes that the results of its
operations for such periods are not directly comparable.
United Rentals, Inc. ("Holdings") is principally a holding company and
primarily conducts its operations through its wholly owned subsidiary, United
Rentals (North America), Inc. ("URI"), and subsidiaries of URI.
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 expenses primarily include sales
commissions, advertising and marketing expenses, management salaries, and
clerical and administrative overhead.
Non-rental depreciation and amortization primarily 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 non-compete agreements and
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
Years ended December 31, 1999 and 1998
Revenues. Total revenues for 1999 were $2,233.6 million, representing an
increase of 83.0% over total revenues in 1998 of $1,220.3 million. The
Company's revenues in 1999 and 1998 were attributable to: (i) equipment rental
($1,581.0 million, or 70.8% of revenues, in 1999 compared to
12
$895.5 million, or 73.4% of revenues, in 1998), (ii) sales of rental equipment
($235.7 million, or 10.6% of revenues, in 1999 compared to $119.6 million, or
9.8% of revenues, in 1998) and (iii) sales of equipment and merchandise and
other revenues ($416.9 million, or 18.6% of revenues, in 1999 compared to
$205.2 million, or 16.8% of revenues, in 1998).
The 83.0% increase in total revenues in 1999 reflected (i) increased
revenues at locations open more than one year (which accounted for
approximately 21.2 percentage points) and (ii) new rental locations acquired
through acquisitions and the opening of start-up locations (which accounted for
approximately 61.8 percentage points). The increase in revenues at locations
open more than one year primarily reflected (a) an increase in the volume of
rental transactions, (b) expansion of the product lines offered by the Company
for sale, (c) an increase in the sale of related merchandise and parts which
was driven by the increase in equipment rental and sales transactions and (d)
an increase in the sale of used equipment in order to maintain the quality of
the Company's rental fleet.
Gross Profit. Gross profit increased to $824.9 million in 1999 from $423.4
million in 1998. This increase in gross profit was primarily attributable to
the increase in revenues described above. The Company's gross profit margin by
source of revenue in 1999 and 1998 was: (i) equipment rental (39.4% in 1999 and
36.3% in 1998), (ii) sales of rental equipment (42.0% in 1999 and 44.7% in
1998) and (iii) sales of equipment and merchandise and other revenues (24.6% in
1999 and 22.0% in 1998). The increase in the gross profit margin from rental
revenues in 1999 was primarily attributable to greater equipment utilization
rates and to economies of scale. The decrease in the gross profit margin from
the sales of rental equipment in 1999 primarily reflected a shift in mix
towards the sale of more late-model used equipment which generally generates
lower gross profit margins than older equipment. The increase in the gross
profit margin from sales of equipment and merchandise and other revenue in 1999
primarily reflected the benefits of greater purchasing power.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $352.6 million, or 15.8% of total
revenues, during 1999 and $195.6 million, or 16.0% of total revenues, during
1998. SG&A in 1999 includes an $8.3 million charge primarily due to
professional fees incurred in connection with a terminated tender offer.
Excluding this charge, SG&A as a percentage of revenues decreased to 15.4% in
1999, primarily due to certain economies of scale relating to the increase in
revenues described above.
Merger-related Expenses. The Company incurred merger-related expenses in
1998 of $47.2 million ($33.2 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 and accounting services and other merger costs, (ii)
$14.5 million of expenses relating to the closing of duplicate facilities,
(iii) $8.2 million for employee severance and related matters, (iv) $2.1
million for the write down of the computer systems acquired through the U.S.
Rentals Merger and one of the other acquisitions accounted for as a pooling-of-
interests and (v) $3.9 million in other expenses.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $62.9 million, or 2.8% of total revenues, in 1999 and $35.2
million, or 2.9% of total revenues, in 1998. Non-rental depreciation and
amortization primarily consists of (i) depreciation expense attributable to
equipment not offered for rent, (ii) depreciation of rental facilities and
(iii) amortization of goodwill. The increase in the dollar amount of non-rental
depreciation and amortization in 1999 primarily reflected the amortization of
goodwill attributable to the acquisitions completed in 1999 and in 1998.
Interest Expense. Interest expense increased to $139.8 million in 1999 from
$64.2 million in 1998. This increase primarily reflected the fact that the
Company's indebtedness significantly increased in 1999, primarily to fund
acquisitions.
Preferred Dividends of a Subsidiary Trust. Preferred dividends of a
subsidiary trust of Holdings were $19.5 million in 1999 compared with $7.9
million in 1998. These dividends relate to the preferred securities issued in
August 1998 by such subsidiary trust.
13
Other (Income) Expense. Other expense was $8.3 million in 1999 compared
with other income of $4.9 million in 1998. The increase in other expense in
1999 primarily reflected a $9.9 million charge that was principally due to fees
incurred in connection with a financing commitment that was cancelled upon the
termination of a tender offer.
Income Taxes. Income taxes increased to $99.1 million, or an effective rate
of 41.0%, in 1999 from $43.5 million, or an effective rate of 55.6%, in 1998.
During 1998, the Company's high effective tax rate reflected (i) the non-
deductibility of $7.4 million for income tax purposes of certain merger related
expenses and (ii) a $4.8 million charge to recognize deferred tax liabilities
of an acquired business, which was a Subchapter S Corporation prior to being
acquired by the Company.
Extraordinary Item. The Company recorded an extraordinary charge of $35.6
million ($21.3 million net of taxes) in 1998. This charge was incurred in
connection with the early extinguishment of certain debt and primarily
reflected prepayment penalties on certain debt of U.S. Rentals.
Years Ended December 31, 1998 and 1997
Revenues. Total revenues for 1998 were $1,220.3 million, representing an
increase of 149.1% over total revenues in 1997 of $489.8 million. The Company's
revenues in 1998 and 1997 were attributable to: (i) equipment rental ($895.5
million, or 73.4% of revenues, in 1998 compared to $388.2 million, or 79.2% of
revenues, in 1997), (ii) sales of rental equipment ($119.6 million, or 9.8% of
revenues, in 1998 compared to $41.4 million, or 8.5% of revenues, in 1997) and
(iii) sales of equipment and merchandise and other revenues ($205.2 million, or
16.8% of revenues, in 1998 compared to $60.3 million, or 12.3% of revenues, in
1997).
The 149.1% increase in total revenues in 1998 reflected (i) increased
revenues at locations open more than one year (which accounted for
approximately 36.2 percentage points) and (ii) new rental locations acquired
through acquisitions and the opening of start-up locations (which accounted for
approximately 112.9 percentage points). The increase in revenues at locations
open more than one year primarily reflected (a) an increase in the volume of
rental transactions, (b) expansion of the product lines offered by the Company
for sale, (c) an increase in the sale of related merchandise and parts which
was driven by the increase in equipment rental and sales transactions and (d)
an increase in the sale of used equipment in order to maintain the quality of
the Company's rental fleet.
Gross Profit. Gross profit increased to $423.4 million in 1998 from $149.3
million in 1997. This increase in gross profit was primarily attributable to
the increase in revenues described above. The Company's gross profit margin by
source of revenue in 1998 and 1997 was: (i) equipment rental (36.3% in 1998 and
30.0% in 1997), (ii) sales of rental equipment (44.7% in 1998 and 50.6% in 1997
and (iii) sales of equipment and merchandise and other revenues (22.0% in 1998
and 19.6% in 1997). The increase in the gross profit margin from rental
revenues in 1998 was primarily attributable to greater equipment utilization
rates and to economies of scale. The decrease in the gross profit margin from
the sales of rental equipment in 1998 primarily reflected (i) a shift in mix
towards more late-model used equipment, which generally generates lower gross
profit margins than older equipment, and (ii) the sale of certain equipment
items which were acquired through acquisitions and which were not in optimal
condition for sale due to age, usage or other factors. The increase in the
gross profit margin from sales of equipment and merchandise and other revenue
in 1998 primarily reflected the benefits of greater purchasing power and a
shift in the sales mix to higher margin items.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $195.6 million, or 16.0% of total revenues, during
1998 and $70.8 million, or 14.5% of total revenues, during 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.
14
Merger-related Expenses. The Company incurred merger-related expenses in
1998 of $47.2 million ($33.2 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 and accounting services and other merger-related
costs, (ii) $14.5 million of expenses relating to the closing of duplicate
facilities, (iii) $8.2 million for employee severance and related matters, (iv)
$2.1 million for the write down of the computer systems acquired through the
U.S. Rentals Merger and one of the other acquisitions accounted for as a
pooling-of-interests and (v) $3.9 million in other expenses.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $35.2 million, or 2.9% of total revenues, in 1998 and $13.4
million, or 2.7% of total revenues, in 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 1997 were impacted by $20.3 million of expenses for "termination cost 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 $64.2 million in 1998 from
$11.8 million in 1997. This increase primarily reflected the fact that the
Company's indebtedness significantly increased in 1998, primarily to fund
acquisitions.
Preferred Dividends of a Subsidiary Trust. During 1998, preferred dividends
of a subsidiary trust of Holdings were $7.9 million. These dividends relate to
the preferred securities issued in August 1998 by such subsidiary trust.
Other (Income) Expense. Other income was $4.9 million in 1998 compared with
$2.0 million in 1997. The increase in other income in 1998 primarily reflected
gain realized in 1998 from the disposition of certain business lines that were
acquired as part of acquisitions but did not fit with the Company's strategy.
Income Taxes. Income taxes increased to $43.5 million, or an effective rate
of 55.6%, in 1998 from $29.5 million, or an effective rate of 84.5%, in 1997.
During 1998, the Company's high effective tax rate reflected (i) the non-
deductibility of $7.4 million for income tax purposes of certain merger related
expenses and (ii) a $4.8 million charge to recognize deferred tax liabilities
of an acquired business, which was a Subchapter 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 a Subchapter S Corporation prior to its initial public
offering, and (ii) the non-deductibility of $7.5 million 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 Item. The Company recorded an extraordinary charge of $35.6
million ($21.3 million net of taxes) in 1998 and an extraordinary charge of
$2.5 million ($1.5 million net of taxes) in 1997. This 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. This
charge in 1997 was incurred by U.S. Rentals in connection with the prepayment
of certain debt.
Liquidity and Capital Resources
Financing Transactions in 1999
Set forth below is certain information concerning certain financing
transactions entered into by the Company during 1999.
15
Series A Perpetual Convertible Preferred Stock. In January 1999, Holdings
sold 300,000 shares of its Series A Perpetual Convertible Preferred Stock
("Series A Preferred"). The net proceeds from the sale of the Series A
Preferred were approximately $287.0 million (after deducting issuance fees and
expenses). Holdings contributed such net proceeds to URI. For additional
information concerning the Series A Preferred, see "--Certain Information
Concerning Preferred Securities."
Common Stock. In March 1999, Holdings completed a public offering of
2,290,000 shares of common stock. The net proceeds from this offering were
approximately $64.7 million (after deducting underwriting discounts and
offering expenses). Holdings contributed such net proceeds to URI.
9% Senior Subordinated Notes. In March 1999, URI issued $250.0 million
aggregate principal amount of 9% senior subordinated notes (the "9% Notes").
The net proceeds from this issuance were approximately $245.0 million (after
deducting offering fees and expenses). For additional information concerning
these notes, see "--Certain Information Concerning the Credit Facility and
Other Indebtedness--9% Senior Subordinated Notes."
Term Loan C. In July 1999, URI obtained a $750.0 million term loan from a
group of financial institutions (the "Term Loan C"). For additional information
concerning this loan, see "--Certain Information Concerning the Credit Facility
and Other Indebtedness--Term Loan C."
Series B Perpetual Convertible Preferred Stock. In September 1999, Holdings
sold 150,000 shares of its Series B Perpetual Convertible Preferred Stock
("Series B Preferred"). The net proceeds from the sale of the Series B
Preferred were approximately $143.8 million (after deducting issuance fees and
expenses). Holdings contributed such net proceeds to URI. For additional
information concerning the Series B Preferred, see "--Certain Information
Concerning Preferred Securities."
Sources and Uses of Cash
During 1999, the Company (i) generated cash from operations of
approximately $421.4 million, (ii) generated cash from the sale of rental
equipment of approximately $235.7 million and (iii) obtained net proceeds from
financing activities of approximately $1,177.0 million. The Company used cash
during this period principally to (i) pay consideration for acquisitions
(approximately $986.8 million), (ii) purchase rental equipment (approximately
$718.1 million) and (iii) purchase other property and equipment (approximately
$123.6 million).
Certain Balance Sheet Changes
The acquisitions and the equipment purchases made by the Company in 1999
(and the financing of such acquisitions and purchases) were the principal
reasons for the increase in all asset and liability accounts at December 31,
1999 compared with December 31, 1998.
The increase in capital at December 31, 1999 compared with December 31,
1998, primarily reflects (i) the equity financing transactions completed in
1999 (as described under "--Financing Transactions in 1999") and (ii) the
exercise of 1,331,528 common stock options.
Cash Requirements Related to Operations
The Company's principal existing sources of cash are borrowings available
under its revolving credit facility ($334.5 million available as of March 15,
2000) and cash generated from operations. For additional information concerning
the Company's credit facility (the "Credit Facility"), see "--Certain
Information Concerning the Credit Facility and Other Indebtedness--Credit
Facility."
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 items offered for sale and (iii) debt service. The Company plans to
fund such cash requirements relating to its existing operations from its
existing sources of cash described above.
16
The Company estimates that equipment expenditures over the next 12 months
will be approximately $750.0 million for the existing operations of the
Company. These expenditures are comprised of approximately $450.0 million of
expenditures in order to maintain the average age of the Company's rental fleet
and $300.0 million of discretionary expenditures to increase the size of the
Company's rental fleet. The Company expects that it will fund such expenditures
from a combination of approximately $325.0 million of proceeds expected to be
generated from the sale of used equipment, cash generated from operations and,
if required, borrowings available under the Credit Facility. 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. To the extent that the
Company's existing sources of cash described above are not sufficient to fund
such future acquisitions, the Company will require additional financing 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.
Based upon the terms of the Company's currently outstanding indebtedness,
the Company is scheduled to repay debt principal of approximately $30.1 million
during 2000.
Relationship Between Holdings and URI
Holdings is principally a holding company and primarily conducts its
operations through its wholly owned subsidiary URI and subsidiaries of URI.
Holdings provides certain services to URI in connection with its operations.
These services principally include: (i) senior management services, (ii)
finance related services and support, (iii) information technology systems and
support and (iv) acquisition related services. In addition, Holdings leases
certain equipment and real property that are made available for use by URI and
its subsidiaries. URI has made, and expects to continue to make, certain
payments to Holdings in respect of the services provided by Holdings to the
Company. The expenses relating to URI's payments to Holdings are reflected on
URI's financial statements as selling, general and administrative expenses. In
addition, although not legally obligated to do so, URI has in the past, and
expects that it will in the future, make distributions to Holdings to, among
other things, enable Holdings to pay dividends on the Trust Preferred
Securities (as described under "--Certain Information Concerning Preferred
Securities").
The Trust Preferred Securities are the obligation of a subsidiary trust of
Holdings and are not the obligation of URI. As a result, the dividends payable
on these securities are reflected as an expense on the consolidated financial
statements of Holdings, but are not reflected as an expense on the consolidated
financial statements of URI.
Certain Information Concerning the Credit Facility and Other Indebtedness
Credit Facility. URI has a credit facility (the "Credit Facility") which
enables URI to borrow up to $772.5 million on a revolving basis and permits a
Canadian subsidiary of URI (the "Canadian Subsidiary") to directly borrow up to
$40.0 million under the Credit Facility (provided that the aggregate borrowings
of URI and the Canadian Subsidiary do not exceed $772.5 million). Up to $50.0
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
$19.3 million. The Credit Facility terminates on September 26, 2003, at which
17
time all outstanding indebtedness is due. As of March 15, 2000, there was
$411.5 million of indebtedness outstanding under the Credit Facility (not
including undrawn outstanding letters of credit in the amount of $26.5
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 0.825% to 1.500%
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 0.825%
to 1.500% 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 0.825% to 1.500% 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' $772.5 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 URI'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 contain 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 (a) 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 period of 30 consecutive days constitutes an event of default unless
replacement officers satisfactory to the lenders are appointed.
Term Loan B. In July 1998, URI obtained a $250.0 million term loan (the
"Term Loan B") from a group of financial institutions. The Term Loan B matures
on June 30, 2005. Prior to maturity, quarterly installments of principal in the
amount of $0.6 million are due on the last day of each calendar quarter,
commencing September 30, 1999. The amount due at maturity is $235.6 million.
The Term Loan B accrues interest, at the Company's option, at either (a) the
Base Rate (as defined with respect to the Credit Facility) plus a margin of
0.375% per annum, or (b) the Eurodollar Rate (as defined with respect to the
Credit Facility for borrowings by URI) plus a margin of 2.25% per annum. If at
any time an event of default exists, the interest rate applicable to the Term
Loan B will increase by 2% per annum. The Term Loan B is secured pari passu
with the Credit Facility and the Term Loan C (described below). The agreement
governing the Term Loan B contains restrictive covenants substantially similar
to those provided under the Credit Facility.
Term Loan C. In July 1999, URI obtained a $750.0 million term loan (the
"Term Loan C") from a group of financial institutions. The Term Loan C matures
in June 2006. Prior to maturity,
18
quarterly installments of principal in the amount of $1.9 million are due on
the last day of each calendar quarter, commencing September 30, 2000. The
amount due at maturity is $706.3 million. The Term Loan C accrues interest, at
URI's option, at either (a) the Base Rate (as defined with respect to the
Credit Facility) plus a margin of 0.625% per annum, or (b) the Eurodollar Rate
(as defined with respect to the Credit Facility for borrowings by URI) plus a
margin of 2.50% per annum. If at any time an event of default exists, the
interest rate applicable to the Term Loan C will increase by 2% per annum. The
Term Loan C is secured pari passu with the Credit Facility and the Term Loan B.
The agreement governing the Term Loan C contains restrictive covenants
substantially similar to those provided under the Credit Facility.
9 1/2% Senior Subordinated Notes. In May 1998, URI issued $200.0 million
aggregate principal amount of 9 1/2% senior subordinated notes, (the "9 1/2%
Notes") which are due June 1, 2008. The 9 1/2% Notes are unsecured. URI may, at
its option, redeem the 9 1/2% Notes on or after June 1, 2003 at specified
redemption prices which range from 104.75% in 2003 to 100.0% in 2006 and
thereafter. In addition, on or prior to June 1, 2001, URI may, at its option,
use the proceeds of a public equity offering to redeem up to 35% of the
outstanding 9 1/2% Notes, at a redemption price of 109.5%. The indenture
governing the 9 1/2% Notes contains certain restrictive covenants, including
(i) limitations on additional indebtedness, (ii) limitations on restricted
payments, (iii) limitations on liens, (iv) limitations on dividends and other
payment restrictions, (v) limitations on preferred stock of certain
subsidiaries, (vi) limitations on transactions with affiliates, (vii)
limitations on the disposition of proceeds of asset sales and (viii)
limitations on the ability of the Company to consolidate, merge or sell all or
substantially all of its assets.
8.80% Senior Subordinated Notes. In August 1998, URI issued $205.0 million
aggregate principal amount of 8.80% senior subordinated notes, (the "8.80%
Notes") which are due August 15, 2008. The 8.80% Notes are unsecured. URI may,
at its option, redeem the 8.80% Notes on or after August 15, 2003 at specified
redemption prices which range from 104.4% in 2003 to 100.0% in 2006 and
thereafter. In addition, on or prior to August 15, 2001, URI may, at its
option, use the proceeds of a public equity offering to redeem up to 35% of the
outstanding 8.80% Notes, at a redemption price of 108.8%. The indenture
governing the 8.80% Notes contains restrictions substantially similar to those
applicable to the 9 1/2% Notes.
9 1/4% Senior Subordinated Notes. In December 1998, URI issued $300.0 million
aggregate principal amount of 9 1/4% senior subordinated notes, (the "9 1/4%
Notes") which are due January 15, 2009. The 9 1/4% Notes are unsecured. URI
may, at its option, redeem the 9 1/4% Notes on or after January 15, 2004 at
specified redemption prices which range from 104.625% in 2004 to 100.0% in 2007
and thereafter. In addition, on or prior to January 15, 2002, URI may, at its
option, use the proceeds of a public equity offering to redeem up to 35% of the
outstanding 9 1/4% Notes, at a redemption price of 109.25%. The indenture
governing the 9 1/4% Notes contains restrictions substantially similar to those
applicable to the 9 1/2% Notes.
9% Senior Subordinated Notes. In March 1999, URI sold $250.0 million
aggregate principal amount of 9% senior subordinated notes, (the "9% Notes")
which are due on April 1, 2009. The 9% Notes are unsecured. URI may, at its
option, redeem the 9% Notes on or after April 1, 2004 at specified redemption
prices which range from 104.5% in 2004 to 100.0% in 2007 and thereafter. In
addition, on or prior to April 1, 2002, URI may, at its option, use the
proceeds of a public equity offering to redeem up to 35% of the outstanding 9%
Notes, at a redemption price of 109.0%. The indenture governing the 9% Notes
contains restrictions substantially similar to those applicable to the 9 1/2%
Notes.
19
Certain Information Concerning Preferred Securities
Trust Preferred Securities
In August 1998, a subsidiary trust (the "Trust") of Holdings sold $300.0
million of 6 1/2% Convertible Quarterly Income Preferred Securities (the "Trust
Preferred Securities"). The net proceeds from the sale of the Trust Preferred
Securities were approximately $290.0 million. The Trust used such proceeds to
purchase convertible subordinated debentures from Holdings which resulted in
Holdings receiving all of the proceeds from the sale of the Trust Preferred
Securities. Holdings in turn contributed the net proceeds from the sale of the
Trust Preferred Securities to its wholly owned subsidiary URI. The Trust
Preferred Securities are convertible into common stock of Holdings at a
conversion price equivalent to $43.63 per share.
Other Preferred Securities
In January 1999, Holding sold 300,000 shares of its Series A Preferred. The
outstanding shares of Series A Preferred are convertible into an aggregate of
12,000,000 shares of Holdings common stock, subject to adjustment (equivalent
to a conversion price of $25 per shared based upon the liquidation preference
of $1,000 per share of Series A Preferred).
In September 1999, Holdings sold 150,000 shares of its Series B Preferred.
The outstanding shares of Series B Preferred are convertible into an aggregate
of 5,000,000 shares of Holdings common stock, subject to adjustment (equivalent
to a conversion price of $30 per share based upon the liquidation preference of
$1,000 per share of Series B Preferred).
Fluctuations in Operating Results
The Company expects that its revenues and operating results may fluctuate
from quarter to quarter or over the longer term due to a number of factors,
including: (1) seasonal rental patterns of the Company's customers, with rental
activity tending to be lower in the winter; (2) changes in general economic
conditions in the Company's markets, including changes in construction and
industrial activities; (3) the timing of acquisitions, new location openings,
and related expenditures; (4) the effect of the integration of acquired
businesses and start-up locations; (5) if the Company determines that a
potential acquisition will not be consummated, the need to charge against
earnings any expenditures relating to such transaction (such as financing
commitment fees, merger and acquisition advisory fees and professional fees)
previously capitalized; (6) the timing of expenditures for new equipment and
the disposition of used equipment; and (7) changes in demand for the company's
equipment or the prices therefor due to changes in economic conditions,
competition or other factors.
The Company is continually involved in the investigation and evaluation of
potential acquisitions. In accordance with generally accepted accounting
principles, the Company capitalizes certain direct out-of-pocket expenditures
(such as legal and accounting fees) relating to potential or pending
acquisitions. Indirect acquisition costs, such as executive salaries, general
corporate overhead, public affairs and other corporate services, are expensed
as incurred. The Company's policy is to charge against earnings any capitalized
expenditures relating to any potential or pending acquisition that the Company
determines will not be consummated. There can be no assurance that the Company
in future periods will not be required to incur a charge against earnings in
accordance with such policy, which charge, depending upon the magnitude
thereof, could adversely affect the Company's results of operations.
The Company will be required to incur significant start-up expenses in
connection with establishing each start-up location. Such expenses may include,
among others, pre-opening expenses related to setting up the facility, and
expenses in connection with training employees, installing information systems
and marketing. The Company expects that, in general, start-up locations will
initially operate at a loss or at less than normalized profit levels.
Consequently, the opening of a start-up location may negatively impact the
Company's margins until the location achieves normalized profitability.
20
There may be a lag between the time that the Company purchases new
equipment and begins to incur the related depreciation and interest expenses
and the time that the equipment begins to generate revenues at normalized
rates. As a result, the purchase of new equipment, particularly equipment
purchased in connection with expanding and diversifying the Company's rental
equipment, may periodically reduce margins.
Year 2000
In prior years, the Company discussed the nature of its plans to become
Year 2000 compliant. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes
those systems successfully responded to the Year 2000 date change. The Company
is not aware of any material problems resulting from Year 2000 issues, either
with its equipment, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the Year 2000.
Inflation
Although the Company cannot accurately anticipate the effect of inflation
on its operations, the Company believes that inflation has not had, and is not
likely in the foreseeable future to have, a material impact on its results of
operations.
Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133". This standard delays the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", for one year,
to fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a new
model for accounting for derivatives and hedging activities. 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.
Factors that May Influence Future Results and Accuracy of Forward-Looking
Statements
Sensitivity to Changes in Construction and Industrial Activities
Our equipment is principally used in connection with construction and
industrial activities. Consequently, a downturn in construction or industrial
activity may lead to a decrease in demand for our equipment, which could
adversely affect our business. We have identified below certain of the factors
which may cause such a downturn, either temporarily or long-term:
. a general slow-down of the economy;
. an increase in interest rates;
. adverse weather conditions which may temporarily affect a particular
region; or
. government funding for highway and other construction projects does
not reach expected levels.
Fluctuations of Operating Results
We expect that our revenues and operating results may fluctuate from
quarter to quarter or over the longer term due to a number of factors,
including:
. seasonal rental patterns of our customers--with rental activity
tending to be lower in the winter;
21
. the timing of expenditures for new equipment and the disposition of
used equipment;
. changes in demand for our equipment or the prices therefor due to
changes in economic conditions, competition or other factors; and
. increases in the interest rates applicable to our floating rate debt.
Dependence on Additional Capital to Finance Growth
We will require substantial capital in order to execute our growth
strategy. We will require capital for, among other purposes, establishing new
rental locations, completing acquisitions, and acquiring rental equipment. If
the cash that we generate from our business, together with cash that we may
borrow under our credit facility, is not sufficient to fund our capital
requirements, we will require additional debt and/or equity financing. We
cannot, however, be certain that any additional financing will be available or,
if available, will be available on terms that are satisfactory to us. If we are
unable to obtain sufficient additional capital in the future, our ability to
implement our growth strategy could be limited.
Certain Risks Relating to Acquisitions
We have grown, in part, through acquisitions and expect to make additional
acquisitions. The making of acquisitions entails certain risks, including:
. acquired companies could have hidden liabilities that we fail to
discover during our due diligence investigations;
. we may have difficulty in assimilating the operations and personnel of
the acquired company with our existing operations;
. we may lose key employees of the acquired company; and
. we may have difficulty maintaining uniform standards, controls,
procedures and policies.
Dependence on Management
We are highly dependent upon our senior management team. Consequently, our
business could be adversely affected in the event that we lose the services of
any member of senior management. Furthermore, if we lose the services of
certain members of senior management, it is an event of default under the
agreements governing our credit facility and certain of our other indebtedness,
unless we appoint replacement officers satisfactory to the lenders within 30
days. We do not maintain "key man" life insurance with respect to members of
senior management.
Competition
The equipment rental industry is highly fragmented and competitive. Our
competitors primarily include small, independent businesses with one or two
rental locations; regional competitors which
22
operate in one or more states; public companies or divisions of public
companies; and equipment vendors and dealers who both sell and rent equipment
directly to customers. We may in the future encounter increased competition
from our existing competitors or from new companies. In addition, certain
equipment manufacturers may commence (or increase their existing efforts
relating to) renting and selling equipment directly to our customers.
Liability and Insurance
We are exposed to various possible claims relating to our business. These
include claims relating to (1) personal injury or death caused by equipment
rented or sold by us, (2) motor vehicle accidents involving our delivery and
service personnel and (3) employment related claims. We carry a broad range of
insurance for the protection of our assets and operations. However, such
insurance may not fully protect us for a number of reasons, including:
. our coverage is subject to a deductible of $1.0 million and limited to
a maximum of $97 million per occurrence;
. we do not maintain coverage for environmental liability, since we
believe that the cost for such coverage is high relative to the
benefit that it provides; and
. 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 our insurance.
We cannot be certain that insurance will continue to be available to us on
economically reasonable terms, if at all.
Environmental and Safety Regulations
There are numerous federal, state and local laws and regulations governing
environmental protection and occupational health and safety matters. These
include laws and regulations that govern wastewater discharges, the use,
treatment, storage and disposal of solid and hazardous wastes and materials,
air quality and the remediation of contamination associated with the release of
hazardous substances. Under these laws, an owner or lessee of real estate may
be liable for, among other things, (1) the costs of removal or remediation of
hazardous or toxic substances located on, in, or emanating from, the real
estate, as well as related costs of investigation and property damage and
substantial penalties, and (2) environmental contamination at facilities where
its waste is or has been disposed. These laws often impose liability whether or
not the owner or lessee knew of the presence of the hazardous or toxic
substances and whether or not the owner or lessee was responsible for these
substances. Our activities that are or may be affected by these laws include
our use of hazardous materials to clean and maintain equipment and our disposal
of solid and hazardous waste and wastewater from equipment washing. We also
dispense petroleum products from underground and above-ground storage tanks
located at certain rental locations, and at times we must remove or upgrade
tanks to comply with applicable laws. Furthermore, we have acquired or lease
certain locations which have or may have been contaminated by leakage from
underground tanks or other sources and are in the process of assessing the
nature of the required remediation. Based on the conditions currently known to
us, we believe that any unreserved environmental remediation and compliance
costs required with respect to those conditions will not have a material
adverse effect on our business. However, we cannot be certain that we will not
identify adverse environmental conditions that are not currently known to us,
that all potential releases from underground storage tanks removed in the past
have been identified, or that environmental and safety requirements will not
become more stringent or be interpreted and applied more stringently in the
future. If we are required to incur environmental compliance or remediation
costs that are not currently anticipated by us, our business could be adversely
affected depending on the magnitude of the cost.
23
Risks Related to International Operations
Our operations outside the United States are subject to risks normally
associated with international operations. These include the need to convert
currencies, which could result in a gain or loss depending on fluctuations in
exchange rates, and the need to comply with foreign laws.
Dependence on Information Technology System
Our ability to monitor and control our operations depends to a large extent
on the proper functioning of our information technology system. Any disruption
in this system or the failure of this system to operate as expected could,
depending on the magnitude and duration of the problem, adversely affect our
business and our ability to implement our growth strategy.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk primarily consists of (1) interest rate risk
associated with our variable rate debt and (2) foreign currency exchange rate
risk primarily associated with our Canadian operations.
Interest Rate Risk. The Company periodically utilizes interest rate swap
agreements to manage and mitigate its exposure to changes in interest rates. At
December 31, 1999, the Company had interest rate protection in the form of swap
agreements with an aggregate notional amount of $848.8 million. The effect of
these agreements is to limit the interest rate exposure to 5.82% on the
outstanding balance of Term Loan B and 5.81% on $600.0 million of Term Loan C.
All borrowings under our $772.5 million Credit Facility bear interest at a
variable rate of interest. The outstanding indebtedness under the Credit
Facility was $243.0 million as of December 31, 1999. Our other variable rate
debt primarily consists of a $248.7 million Term Loan B and a $750.0 million
Term Loan C. The weighted average interest rates applicable to our variable
rate debt as of December 31, 1999 were (i) 6.9% for the Credit Facility, (ii)
5.82% for the Term Loan B and (iii) 6.4% for the Term Loan C. Based upon the
amount of variable debt that we had outstanding as of December 31, 1999
(approximately $1.24 billion in the aggregate), our net income would decrease
by approximately $7.3 million for each one percentage point increase in the
interest rates applicable to our variable rate debt. The amount of our variable
rate indebtedness may fluctuate significantly as a result of changes in the
amount of indebtedness outstanding under the Credit Facility from time to time.
For additional information concerning the terms of our variable rate debt, see
Note 8 of the Notes to the Consolidated Financial Statements included elsewhere
herein.
Currency Exchange Risk. The functional currency for our Canadian operations
is the Canadian dollar. As a result, our future earnings could be affected by
fluctuations in the exchange rate between the U.S. and Canadian dollars. Based
upon the current level of our Canadian operations, a 10% change in this
exchange rate would not have a material impact on our earnings. In addition,
the Company periodically enters into foreign exchange contracts to hedge its
transaction exposures. At December 31, 1999, the Company had no outstanding
foreign exchange contracts. The Company does not engage in purchasing forward
exchange contracts for speculative purposes.
24
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
(1) Consolidated Financial Statements:
Report of Independent Auditors.......................................... 26
United Rentals, Inc. Consolidated Balance Sheets--December 31, 1999 and
1998................................................................... 27
United Rentals, Inc. Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997................................. 28
United Rentals, Inc. Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997....................... 29
United Rentals, Inc. Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997................................. 30
Notes to Consolidated Financial Statements.............................. 32
Report of Independent Auditors.......................................... 53
United Rentals (North America), Inc. Consolidated Balance Sheets--
December 31, 1999 and 1998............................................. 54
United Rentals (North America), Inc. Consolidated Statements of
Operations for the years ended December 31, 1999, 1998 and 1997........ 55
United Rentals (North America), Inc. Consolidated Statements of
Stockholder's Equity for the years ended December 31, 1999, 1998 and
1997................................................................... 56
United Rentals (North America), Inc. Consolidated Statements of Cash
Flows for the years ended December 31, 1999, 1998 and 1997............. 57
Notes to Consolidated Financial Statements.............................. 58
(2) Financial Statement Schedules:
Report of Independent Auditors on Financial Statement Schedules......... 65
Schedule I Condensed Financial Information of the Registrant............ 66
Schedule II Valuation and Qualifying Accounts........................... 70
Schedules other than those listed are omitted as they are not applicable or
the required or equivalent information has been included in the financial
statements or notes thereto.
25
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, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
MetroPark, New Jersey
February 29, 2000
26
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31
---------------------
1999 1998
---------- ----------
(In thousands, except
share data)
Assets
Cash and cash equivalents........................... $ 23,811 $ 20,410
Accounts receivable, net of allowance for doubtful
accounts of $50,736 and $41,201 at 1999 and 1998,
respectively....................................... 434,985 233,282
Inventory........................................... 129,473 70,994
Prepaid expenses and other assets................... 81,457 59,395
Rental equipment, net............................... 1,659,733 1,143,006
Property and equipment, net......................... 304,907 185,511
Intangible assets, net of accumulated amortization
of $51,231 and $14,520 at 1999 and 1998,
respectively....................................... 1,863,372 922,065
---------- ---------- ---
$4,497,738 $2,634,663
========== ========== ===
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable.................................. $ 242,946 $ 121,940
Debt.............................................. 2,266,148 1,314,574
Deferred taxes.................................... 81,229 43,560
Accrued expenses and other liabilities............ 209,929 128,359
---------- ---------- ---
Total liabilities............................... 2,800,252 1,608,433
Commitments and contingencies
Company-obligated manditorily redeemable convertible
preferred securities of a subsidiary trust......... 300,000 300,000
Stockholders' equity:
Preferred stock--$.01 par value, 5,000,000 shares
authorized:
Series A perpetual convertible preferred stock--
$300,000 liquidation preference, 300,000 shares
issued and outstanding in 1999.................. 3
Series B perpetual convertible preferred stock--
$150,000 liquidation preference, 150,000 shares
issued and outstanding in 1999.................. 2
Common stock--$.01 par value, 500,000,000 shares
authorized, 72,051,095 shares issued and
outstanding in 1999 and 68,427,999 in 1998....... 721 684
Additional paid-in capital........................ 1,216,968 689,018
Retained earnings................................. 179,475 36,809
Accumulated other comprehensive income............ 317 (281)
---------- ---------- ---
Total stockholders' equity...................... 1,397,486 726,230
---------- ---------- ---
$4,497,738 $2,634,663
========== ========== ===
See accompanying notes.
27
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
-------------------------------------------
1999 1998 1997
-------------- ------------- -------------
(in thousands, except per share amounts)
Revenues:
Equipment rentals................ $ 1,581,026 $ 895,466 $388,181
Sales of rental equipment........ 235,678 119,620 41,406
Sales of equipment and
merchandise and other revenues.. 416,924 205,196 60,251
-------------- ------------- ------------
Total revenues.................... 2,233,628 1,220,282 489,838
Cost of revenues:
Cost of equipment rentals,
excluding depreciation.......... 676,972 394,750 189,578
Depreciation of rental
equipment....................... 280,641 175,910 82,097
Cost of rental equipment sales... 136,678 66,136 20,455
Cost of equipment and merchandise
sales and other operating
costs........................... 314,419 160,038 48,416
-------------- ------------- ------------
Total cost of revenues............ 1,408,710 796,834 340,546
-------------- ------------- ------------
Gross profit...................... 824,918 423,448 149,292
Selling, general and
administrative expenses.......... 352,595 195,620 70,835
Merger-related expenses........... 47,178
Non-rental depreciation and
amortization..................... 62,867 35,248 13,424
Termination cost of deferred
compensation agreements.......... 20,290
-------------- ------------- ------------
Operating income.................. 409,456 145,402 44,743
Interest expense.................. 139,828 64,157 11,847
Preferred dividends of a
subsidiary trust................. 19,500 7,854
Other (income) expense, net....... 8,321 (4,906) (2,021)
-------------- ------------- ------------
Income before provision for income
taxes and extraordinary items.... 241,807 78,297 34,917
Provision for income taxes........ 99,141 43,499 29,508
-------------- ------------- ------------
Income before extraordinary
items............................ 142,666 34,798 5,409
Extraordinary items, net of tax
benefit of $14,255 in 1998 and
$995 in 1997..................... 21,337 1,511
-------------- ------------- ------------
Net income........................ $ 142,666 $ 13,461 $ 3,898
============== ============= ============
Earnings per share--basic:
Income before extraordinary
items........................... $ 2.00 $ 0.53 $ 0.12
Extraordinary items, net......... 0.33 0.04
-------------- ------------- ------------
Net income....................... $ 2.00 $ 0.20 $ 0.08
============== ============= ============
Earnings per share--diluted:
Income before extraordinary
items........................... $ 1.53 $ 0.48 $ 0.11
Extraordinary items, net......... 0.30 0.03
-------------- ------------- ------------
Net income....................... $ 1.53 $ 0.18 $ 0.08
============== ============= ============
Unaudited pro forma data (Note 9):
Historical income before income
taxes and extraordinary items... $ 78,297 $ 34,917
Pro forma income tax expense..... 44,386 14,176
------------- ------------
Pro forma income before
extraordinary items............. $ 33,911 $ 20,741
============= ============
Pro forma basic income before
extraordinary items per share... $ 0.51 $ 0.44
============= ============
Pro forma diluted income before
extraordinary items per share... $ 0.46 $ 0.42
============= ============
See accompanying notes.
28
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Series B
Perpetual Perpetual
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
---------------- ---------------- ------------------
Accumulated
Additional Other
Number Number Number Paid-in Retained Comprehensive Comprehensive
of Shares Amount of Shares Amount of Shares Amount Capital Earnings Income Income
--------- ------ --------- ------ ---------- ------ ---------- -------- ------------- -------------
(In thousands, except share amounts)
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)
Subchapter S
distributions of
a pooled
entity.......... (2,843)
Net income....... 3,898 $ 3,898
---------- ---- ---------- -------- ========
Balance, December
31, 1997......... 56,239,375 562 401,758 44,068
Comprehensive
income:
Net income...... 13,461 $ 13,461
Other
comprehensive
income:
Foreign
currency
translation
adjustments... (281) $(281)
--------
Comprehensive
income.......... $ 13,180
========
Issuance of
common stock and
warrants........ 10,813,255 108 267,214
Conversion of
convertible
notes........... 30,947 461
Cancellation of
common stock.... (137,600) (1) 1
Reclassification
of Subchapter S
accumulated
earnings to
paid-in-
capital......... 18,979 (18,979)
Pooling-of-
interests....... 1,456,997 15 (14) 1,795
Exercise of
common stock
options......... 25,025 619
Subchapter S
distributions of
a pooled
entity.......... (3,536)
---------- ---- ---------- -------- -----
Balance, December
31, 1998......... 68,427,999 684 689,018 36,809 (281)
Comprehensive
income:
Net income...... 142,666 $142,666
Other
comprehensive
income:
Foreign
currency
translation
adjustments... 598 598
--------
Comprehensive
income.......... $143,264
========
Issuance of
Series A
perpetual
convertible
preferred
stock........... 300,000 $ 3 286,997
Issuance of
Series B
perpetual
convertible
preferred
stock........... 150,000 $ 2 143,798
Issuance of
common stock.... 2,291,568 23 64,678
Exercise of
common stock
options......... 1,331,528 14 32,477
------- --- ------- --- ---------- ---- ---------- -------- -----
Balance, December
31, 1999......... 300,000 $ 3 150,000 $ 2 72,051,095 $721 $1,216,968 $179,475 $ 317
======= === ======= === ========== ==== ========== ======== =====
See accompanying notes.
29
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-----------------------------------
1999 1998 1997
----------- ----------- ---------
(In thousands)
Cash Flows From Operating Activities:
Net income................................ $ 142,666 $ 13,461 $ 3,898
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 343,508 212,311 95,521
Gain on sale of rental equipment......... (99,000) (53,484) (20,951)
Gain on sales of businesses.............. (1,842) (4,189)
Write down of assets held for sale....... 4,040
Extraordinary items...................... 35,592 2,506
Deferred taxes........................... 41,820 27,345 25,075
Changes in operating assets and
liabilities:
Accounts receivable...................... (93,716) (53,368) (19,837)
Inventory................................ (6,544) (6,392) (3,785)
Prepaid expenses and other assets........ 7,257 (3,526) (9,821)
Accounts payable......................... 64,453 39,251 11,704
Accrued expenses and other liabilities... 22,758 5,088 8,819
----------- ----------- ---------
Net cash provided by operating
activities.............................. 421,360 216,129 93,129
----------- ----------- ---------
Cash Flows From Investing Activities:
Purchases of rental equipment............. (718,112) (479,534) (268,548)
Purchases of property and equipment.......