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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, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-14387
United Rentals, Inc.
Commission File Number 1-13663
United Rentals (North America), Inc.
(Exact Names of Registrants as Specified in Their Charters)
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 06083
(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 22, 1999, there were 70,788,238 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 22, 1999 was approximately $1.1
billion. 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 ($27.13).
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.
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PART I
Item 1 Business.............................................. 1
Item 2 Properties............................................ 15
Item 3 Legal Proceedings..................................... 16
Item 4 Submission of Matters to a Vote of Security Holders... 16
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters................................... 16
Item 6 Selected Financial Data............................... 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 19
Quantitative and Qualitative Disclosures About Market
Item 7A Risk.................................................. 30
Item 8 Financial Statements and Supplementary Data........... 31
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 73
PART III
Item 10 Directors and Executive Officers of the Registrant.... 73
Item 11 Executive and Director Compensation................... 73
Security Ownership of Certain Beneficial Owners and
Item 12 Management............................................ 73
Item 13 Certain Relationships and Related Transactions........ 73
PART IV
Exhibits, Financial Statement Schedules, and Reports
Item 14 on Form 8-K........................................... 73
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 "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
or 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 1--"Business--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
All pro forma operating and financial data contained under Item 1 and Item 2
with respect to the year ended December 31, 1998 gives effect to all
acquisitions completed by the Company (through March 22, 1999) after the
beginning of the period and the financing of such acquisitions, as if all such
transactions had occurred at the beginning of the period. Unless otherwise
indicated, the information under Item 1 and Item 2 is as of March 22, 1999.
Item 1. Business
General
United Rentals is the largest equipment rental company in North America
with 453 branch locations in 39 states, Canada and Mexico. We offer for rent
over 600 different types of equipment on a daily, weekly or monthly basis and
serve customers that include construction industry participants, industrial
companies and homeowners. We also sell used rental equipment, act as a dealer
for many types of new equipment, and sell related merchandise and parts. In the
past year, we have served over 900,000 customers.
We have one of the most comprehensive and newest equipment rental fleets in
the industry. The types of rental equipment that we offer include a broad range
of light to heavy construction and industrial equipment, such as backhoes,
aerial lifts, skid-steer loaders, forklifts, compressors, pumps and generators,
as well as a variety of smaller tools and equipment. Our equipment fleet has an
original purchase price of approximately $2.2 billion and a weighted average
age of approximately 26 months (based on original purchase price).
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We began operations in October 1997 and have grown through a combination of
internal growth and the acquisition of 103 companies. Our completed
acquisitions include our merger with U.S. Rentals in September 1998. 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:
Full Range of Rental Equipment. We have one of the largest and most
comprehensive equipment rental fleets in the industry, enabling us to:
. attract customers by providing the benefit of "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
. minimize lost sales due to equipment being unavailable.
Operating Efficiencies. We generally group our branches into clusters of 10
to 30 locations that are in the same area. Our management information system
enables each branch to track equipment at any other branch and to access all
available equipment within a cluster. We believe that our cluster strategy
produces significant operating efficiencies by enabling us to:
. market the equipment within a cluster through multiple branches,
rather than a single branch, which increases our equipment utilization
rate;
. cross-market the equipment specialities of different branches within
each cluster, which increases revenues without increasing marketing
expenses; and
. reduce costs by centralizing common functions such as payroll, credit
and collection, and certain equipment delivery.
Significant Purchasing Power. We have significant purchasing power because
of our volume purchases. As a result, we can generally buy new equipment and
related merchandise and parts at prices that are significantly lower than
prices paid by smaller companies. We can also buy many other products and
services--such as insurance, telephone and fuel--at attractive rates.
Management Information System. We have a modern management information
system which 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 real time operating and financial data, including reports
on inventory, receivables, customers, vendors, fleet utilization and price and
sales trends. The system also 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. The system includes software
developed by our Wynne Systems subsidiary, which is the leading provider of
proprietary software for use by equipment rental companies in managing and
operating multiple branch locations. We have an in-house staff of 35 management
information specialists that supports our system and extends it to new
locations.
Customer Diversity. Our customer base is highly diversified and ranges from
Fortune 100 companies to small contractors and homeowners. We estimate that our
top ten customers accounted for approximately 4% of our pro forma revenues
during 1998.
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Geographic Diversity. We have branches in 39 states, Canada and Mexico. We
believe that our geographic diversity should reduce 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 serve national accounts and access used equipment
re-sale markets across the country.
Experienced Senior Management. Our senior management combines executives
who have extensive operating experience in the equipment rental industry with
executives who have proven track records in other industries. Our senior
management includes former officers of United Waste Systems, Inc., which was a
publicly-traded solid waste management company that successfully executed a
growth strategy combining a disciplined acquisition program, the integration
and optimization of acquired facilities, and internal growth. Our senior
management also includes former executives of U.S. Rentals who have extensive
experience in the equipment rental industry.
Strong and Motivated Branch Management. Each of our branches has a full-
time branch manager who is supervised by one of our 35 district managers and
eight regional vice presidents. We believe that our branch and district
managers, who average over 20 years of experience in the equipment rental
industry, are among the most knowledgeable and experienced in the industry. We
encourage entrepreneurship at the branch level by giving branch managers a
high degree of autonomy relating to day-to-day operations. For example, each
branch manager is empowered to make decisions--within budgetary guidelines--
concerning staffing, pricing and equipment purchasing. We also promote
entrepreneurship at the branch level, as well as equipment sharing among
branches, through our profit sharing program which directly ties the
compensation of branch personnel to their branch's financial performance and
equipment utilization rates. We balance the autonomy that we grant branch
managers with systems through which senior management closely tracks branch
performance. We also share information across branches so that each branch can
measure its operating performance relative to other branches and benefit from
the best practices developed throughout our organization.
Professional Acquisition Team. Our 25-person acquisition team works full-
time on identifying and evaluating acquisition candidates and executing our
acquisition program. The core of this group consists of seasoned acquisition
professionals--most of whom were members of the acquisition team at United
Waste Systems, where they completed over 200 acquisitions. The team also
includes former owners of businesses that we acquired, who have extensive
industry experience and contacts with potential acquisition candidates.
Growth Strategy
Our plan for future growth includes the following key elements.
Continue Strong Internal Growth. We are seeking to sustain our strong
internal growth by:
. expanding and modernizing our equipment fleet;
. increasing the cross-marketing of our equipment specialties at
different locations;
. increasing our advertising--which becomes increasingly cost-effective
as we grow because the benefit is spread over a larger number of
branches;
. expanding our national accounts program--which dedicates a portion of
our sales force to establishing and expanding our relationships with
large customers that have a national or multi-regional presence; and
. increasing our rentals to industrial companies by developing a
comprehensive marketing program specifically aimed at this sector.
3
Execute Disciplined Acquisition Program. We intend to continue our
disciplined acquisition program. We generally seek to acquire multiple
locations within the regions that we enter, with the goal of creating clusters
of locations that can share various resources, including equipment, marketing
resources, back office functions, and certain equipment delivery. We are
seeking to acquire companies of varying sizes, including relatively large
companies to serve as platforms for new regional clusters and smaller companies
to complement existing or anticipated locations. In considering whether to buy
a company, we evaluate a number of factors, including purchase price,
anticipated impact on earnings, the quality of the target's rental equipment
and management, the opportunities to improve operating margins and increase
internal growth at the target, the economic prospects of the region in which
the target is located, the potential for additional acquisitions in the region,
and the competitive landscape in the target's markets.
Open New Rental Locations. Because most of the businesses that we acquired
grew through developing start-up rental locations, many of our managers have
substantial experience in this area. We intend to leverage this experience by
selectively opening new rental locations in attractive markets where there are
no suitable acquisition targets available or where the economics of a start-up
location are more attractive than buying an existing business.
Increase Cost Savings. We work to reduce costs by efficiently integrating
new and existing operations, eliminating duplicative costs, centralizing common
functions, consolidating locations that serve the same areas, and using our
purchasing power to negotiate discounts from suppliers.
Continue to Emphasize Management Systems and Controls. We intend to further
strengthen our management systems and controls, which currently include:
. a 12-person internal audit department that is responsible for ensuring
that we have adequate financial, operating, and management information
controls throughout our organization;
. a team of 25 regional and district controllers that monitors each
branch for compliance with financial and accounting procedures
established at corporate headquarters; and
. a 32-person risk management and safety department that is responsible
for: (1) developing and implementing safety programs and procedures,
(2) developing our customer and employee training programs and (3)
investigating and managing any claims that may be asserted against us.
Industry Background
Industry Size and Growth
We estimate that the U.S. equipment rental industry (including used and new
equipment sales by rental companies) generates annual revenues in excess of $20
billion. The combined equipment rental revenues of the 100 largest equipment
rental companies have increased at an estimated compound annual rate of
approximately 23% from 1992 through 1997 (based upon 1992 revenues and 1997 pro
forma revenues, giving effect to certain acquisitions completed after the
beginning of 1997, reported by the Rental Equipment Register, an industry trade
publication). In addition to reflecting general economic growth, we believe
that the growth in the equipment rental industry reflects 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: (1) avoid the
large capital investment required for equipment purchases, (2) reduce
storage and maintenance costs, (3) supplement the equipment that they own
and thereby increase the range and number of jobs that they can work on,
(4) access a
4
broad selection of equipment and select the equipment best suited for each
particular job, (5) obtain equipment as needed and minimize the costs
associated with idle equipment, and (6) access the latest technology
without investing in new equipment. These advantages frequently allow
equipment users to reduce their overall costs by renting, rather than
buying, the equipment they need.
Increase in Rentals by Contractors. There has been a fundamental shift
in the way contractors meet their equipment needs. While contractors have
historically used rental equipment on a temporary basis--to provide for
peak period capacity, meet specific job requirements or replace broken
equipment--many contractors are now also using rental equipment on an
ongoing basis to meet their long-term equipment requirements.
Although growth in the equipment rental industry has to date been largely
driven by the increase in rentals by the construction industry, we believe that
other equipment users may increasingly contribute to future industry growth.
For example, many industrial companies require equipment for operating,
repairing, maintaining and upgrading their facilities, and renting this
equipment is often more cost-effective than purchasing because typically this
equipment is not used full-time. We believe that the cost and other advantages
of renting, together with the general trend toward the corporate outsourcing of
non-core competencies, may increasingly lead industrial companies to rent
equipment. We also believe that these same considerations may lead others
equipment users--such as municipalities, government agencies and utilities--to
increasingly rent equipment. Because the penetration of these markets by the
equipment rental industry is very low in comparison to its penetration of the
construction market, we believe there is significant potential for additional
growth in these markets.
Industry Fragmentation
The equipment rental industry is highly fragmented. It consists of a small
number of multi-location regional or national operators and a large number of
relatively small, independent businesses that serve discrete local markets.
This fragmentation is reflected in the following data:
. in 1997, there were only 10 equipment rental companies that had
equipment rental revenues in excess of $100 million and approximately
100 equipment rental companies that had equipment rental revenues
between $5 million and $100 million (based upon rental revenues for
1997 as reported by the Rental Equipment Register, an industry trade
publication);
. we estimate that there are more than 20,000 companies with annual
equipment rental revenues of less than $5 million; and
. we estimate that the 100 largest equipment rental companies combined
have less than a 30% share of the market.
We believe that the fragmented nature of the industry presents substantial
consolidation and growth opportunities for companies with access to capital and
the ability to implement a disciplined acquisition program. We also believe
that our management team's extensive experience in acquiring and effectively
integrating acquisition targets should enable us to capitalize on these
opportunities.
Acquisitions
We have completed 103 acquisitions to date (through March 22, 1999),
including our merger with U.S. Rentals that was completed in September 1998. 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.
5
We believe that there will continue to be a large number of attractive
acquisition opportunities in the equipment rental industry due to the highly
fragmented nature of the industry, the capital constraints facing many small
and mid-sized equipment rental companies looking to expand and modernize, and
the desire of many long-time owners for liquidity. We have an experienced
acquisition team of 25 professionals dedicated to identifying and evaluating
acquisition candidates and executing our acquisition program. The team includes
seasoned acquisition professionals with extensive acquisition, operating and
financial experience. The team also includes former owners of businesses that
we acquired, who have extensive equipment rental industry experience and
contacts with potential acquisition candidates.
Start-up Locations
Because most of the businesses that we acquired grew through developing
start-up rental locations, many of our managers have substantial experience in
this area. We intend to leverage this experience by selectively opening new
rental locations in attractive markets where there are no suitable acquisition
targets available or where the economics of a start-up location are more
favorable than buying an existing business.
Products and Services
We offer for rent a wide variety of equipment to customers that include
construction industry participants, industrial companies, homeowners and
others. We also sell used equipment, act as a dealer for many types of new
equipment, and sell related merchandise and parts. In addition, our Wynne
Systems subsidiary develops and markets software for use by equipment rental
companies in managing and operating multiple branch locations. For financial
information concerning our industry segment and foreign and domestic
operations, see Note 15 of the Notes to the Consolidated Financial Statements
of the Company included elsewhere in this Report.
Equipment Rental
We offer for rent a broad range of light to heavy construction and
industrial equipment and general tools and equipment. Customers may rent
equipment by the hour, day, week or month. The following are examples of the
types of equipment that we offer for rent:
Construction and Industrial: aerial lifts (such as boom and scissor
lifts), air compressors, backhoes, ditching equipment, earth moving
equipment, forklifts, generators, pumps and skid-steer loaders.
General Tools and Equipment: garden and landscaping equipment, hand
tools, high-pressure washers, paint sprayers, power tools and roto-
tillers.
We believe that our rental fleet is one of the newest, most comprehensive
and well maintained in the industry. As of March 22, 1999, our rental fleet had
an original purchase price of approximately $2.2 billion and a weighted average
age (based on original purchase price) of approximately 26 months. We estimate
that (based on original purchase price) construction and industrial equipment
represents approximately 95% of our rental equipment and that general tools and
equipment represents approximately 5%. We also estimate that each of the
following categories represents more than 12% of our rental equipment: (i)
aerial lift equipment (represents approximately 23%), (ii) earth moving
equipment (represents approximately 17%) and (iii) forklifts (represents
approximately 13%). 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 lift equipment.
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We seek to maintain the quality of our fleet by regularly investing in new
equipment and selling used equipment. We also devote substantial efforts to
preventive maintenance and believe that we have one of the most advanced
preventive maintenance programs in the equipment rental industry. This program
increases the reliability, extends the life, and enhances the resale value of
our equipment.
Used Equipment Sales
We routinely sell used rental equipment and are generally able to achieve
favorable prices due to our preventive maintenance program and our national
sales force that can access many resale markets across North America. In
addition, the incentives created by our profit sharing program motivate our
branch managers to carefully consider the best time for selling equipment in
view of maintenance costs, rental demand patterns and resale prices.
We principally sell used equipment through our sales force. 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); Ingersoll-Rand Co., Inc. (air compressors, tools,
pumps); Kubota (earthmoving equipment); Trak International (loaders and
forklifts); Multiquip, Inc. (compaction equipment and compressors); Stihl, Inc.
(chain saws and power cut-off saws); Edco Manufacturing (surfacing equipment);
and Wacker (compaction equipment). Typically, dealership agreements do not have
a specific term and may be terminated at any time. The types of new equipment
that we sell varies by branch.
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 certain
of our branches, we also offer maintenance services for equipment that is owned
by our customers.
Operations of Our Wynne Systems Subsidiary
Our Wynne Systems 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.
Customers
We estimate that on a pro forma basis we rented equipment to approximately
940,000 customers in 1998. Our customer base is highly diversified and ranges
from Fortune 100 companies to small contractors and homeowners. We estimate
that (1) no single customer accounted for more than 0.5% of our pro forma
revenues during 1998 and (2) our top 10 customers accounted for approximately
4% of our pro forma revenues in 1998.
Our customer base varies widely 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. We classify our
customer base into the following general categories:
. construction industry participants--such as construction companies,
contractors and subcontractors--that require equipment for commercial
and residential construction projects;
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. industrial companies--such as manufacturers, chemical companies, paper
mills and utilities--that require equipment for plant maintenance,
upgrades, expansion and construction; and
. homeowners and other individuals.
We estimate that on a pro forma basis (1) construction industry
participants and industrial companies combined accounted for 90% of our
revenues in 1998 and (2) homeowners and others accounted for 10% of such
revenues.
Sales and Marketing
We are establishing a distinct corporate identity throughout North America.
In promoting our corporate identity, we emphasize the benefits that United
Rentals seeks to offer its customers, including:
. a comprehensive selection of equipment that is available when required
by the customer;
. on-time equipment delivery and pick-up;
. equipment that is well-maintained and reliable;
. rapid repair or replacement of equipment when required;
. instructions and training for equipment usage and safety; and
. experienced and knowledgeable sales personnel available to assist
customers.
We market our products and services through multiple channels as described
below.
Sales Force. We market our products and services though our own sales force
which consists of approximately 947 in-store customer service representatives
and 739 field-based salespeople. Our field-based sales force calls on
contractors' offices and job sites and industrial facilities and assists our
customers in planning for their equipment needs. We provide our sales force
with extensive training. Supplier representatives also frequently visit our
facilities and train our personnel on the operating features and maintenance
requirements of new equipment.
We have established a national accounts program. Under this program, a
portion of our sales force is assigned to calling on the corporate headquarters
of our large customers, particularly those with a national or multi-regional
presence. The goal of this program is to expand existing business relationships
with these customers to include additional facilities and construction sites.
The efforts of our national accounts sales force supplement the efforts of our
branch-based sales personnel, who deal directly with the management of the
local facilities of these customers.
Internet Site. We have an Internet web site (www.unitedrentals.com) that
describes our locations, products and services, and used equipment available
for sale. The site allows visitors to search for a particular type of used
equipment and obtain detailed information about each item of used equipment
available for sale.
Advertising. We promote our business through advertising in various media,
including trade publications, yellow pages, billboards and direct mail. We also
regularly participate in industry trade shows and conferences.
Branch Management
We currently operate 453 branch locations. Each branch has a full-time
branch manager who is responsible for the day-to-day operations of the branch.
In addition, each branch is staffed with
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additional personnel which, depending on the specific needs of the location,
may include an assistant manager, sales personnel, back office clerks, truck
drivers, and mechanics. We believe that our branch managers, who average over
20 years of experience in the equipment rental industry, are among the most
knowledgeable and experienced in the industry.
We encourage entrepreneurship at the branch level by giving branch managers
a high degree of autonomy with respect to day-to-day operations. For example,
each branch manager is empowered to make decisions--within budgetary
guidelines--concerning staffing, pricing and equipment purchases. We also
promote entrepreneurship at the branch level, as well as equipment sharing
among our branches, through a profit sharing program that directly ties the
compensation of branch personnel to their branch's financial performance and
equipment utilization rates.
We balance the autonomy that we grant to our branch managers with extensive
systems and procedures through which senior management closely tracks branch
performance. In addition, we share information across branches so that each
branch can measure its operating performance relative to other branches and
benefit from the best practices developed throughout our organization.
Important elements of the systems and procedures that we use to manage our
branches include:
. our eight regional vice presidents and 35 district managers supervise
our branch managers--with each branch manager reporting to a district
manager and each district manager reporting to a regional vice
president;
. all levels of management can obtain a wide range of branch-level
operating data on a real-time basis through our management information
system;
. on a monthly basis (1) each branch manager meets with his or her
district manager and thoroughly reviews the operation of his or her
branch and (2) a detailed operating report for each branch is provided
to senior management;
. each district manager generally meets with a member of senior
management on a quarterly basis to review in detail the operations of
the branches within his or her district;
. our 12-person internal audit department is engaged full-time in
ensuring that we have adequate financial, operating and information
technology controls throughout our organization; and
. our team of 25 regional and district controllers monitor each branch
for compliance with financial and accounting procedures established at
corporate headquarters.
We encourage cooperation among our branches. In furtherance of this
objective, we have established procedures and policies to facilitate the
sharing of equipment and other resources among the branches in the same
cluster. In addition, we have guidelines that are intended to eliminate
competition among branches for the same customers.
Purchasing
We have significant purchasing power because of our volume purchases. As a
result, we can generally buy new equipment and related merchandise and parts at
prices that are significantly lower than prices paid by smaller companies. We
can also buy many other products and services--such as insurance, telephone and
fuel--at attractive rates. We believe that our purchasing power will continue
to increase as we expand and further consolidate purchasing.
We estimate that on a pro forma basis our largest supplier accounted for
approximately 15% of our equipment purchases in 1998, and that our top 10
largest suppliers accounted for approximately 60% our equipment purchases
during that period. We believe that we have sufficient alternative sources of
supply for the equipment that we purchase in each of our principal product
categories.
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Management Information System
We have a modern management information system designed to facilitate rapid
and informed decision-making and enable us to respond quickly to changing
market conditions. Each branch at which the system is operational is equipped
with a workstation that is electronically linked to each of our other locations
and to our centralized databases. All rental transactions are entered at these
workstations and processed on a real-time basis through a centralized AS400
system located at corporate headquarters. Personnel at each location are able
to access the system 24 hours a day in order to determine equipment
availability, monitor business activity on a real-time basis, and obtain a wide
range of operating and financial data. The data available through the system
includes: (1) inventory reports, (2) accounts receivable information, (3)
customer and vendor information, (4) sales by store, region, equipment category
or customer, (5) fleet utilization by individual asset or asset class and (6)
financial results by store or region. The system also enables branch personnel
to search for needed equipment throughout their district, determine the closest
location of such equipment and arrange for delivery to a customer's work site.
Our management information system is supported by our in-house group of 35
management information specialists. This group operates a support desk to
assist branch personnel in the day-to-day use of the system; trains our branch
personnel, either at the branch or at one of our four training centers;
provides hardware and technology support; and extends the system to newly
acquired locations.
It generally takes us three to five weeks to extend our management
information system to newly acquired locations (but may take longer in the case
of very large acquisitions). We have extended the system to all of the
locations that we acquired in the U.S. Rentals merger.
Risk and Safety Management
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. We have a separate department, which includes 32 experienced
professionals, that is responsible for: (1) developing and implementing safety
programs and procedures, (2) developing our employer and customer training
programs and (3) investigating and managing any claims that may be asserted
against us.
We are among the few equipment rental companies that have on staff
personnel who are certified by the National Safety Council (a government
sponsored agency) to provide training in the use of equipment. In 1997, our
equipment training program received the National Safety Council Chairman's
Award--granted for effectively promoting safety within a business organization.
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.
Environmental and Safety Regulations
There are numerous federal, state and local laws and regulations governing
environmental protection and occupational health and safety. These include laws
and regulations that govern wastewater discharges, the use, treatment, storage
and disposal of solid and hazardous wastes and
10
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.
Employees
We have 8,501 employees. These include 271 corporate and regional
management employees, 6,544 operational employees and 1,686 sales people. Of
these employees, 2,162 are salaried personnel and 6,339 are hourly personnel.
Collective bargaining agreements relating to 23 separate locations cover
approximately 310 of our employees. We consider our labor relations to be good.
Factors that May Influence Future Results and Accuracy of Forward-Looking
Statements
The Company, in an effort to help keep its stockholders and the public
informed about the Company's operations, may from time to time issue certain
statements, either in writing or orally, that contain or may contain forward-
looking information. 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. 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.
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; or
. adverse weather conditions which may temporarily affect a particular
region.
11
Acquired Companies Not Historically Operated as a Combined Business
The businesses that we acquired have been in existence an average of 29
years and some have been in existence for more than 50 years. However, these
businesses were not historically managed or operated as a single business.
Although we believe that we can successfully manage and operate the acquired
businesses as a single business, we cannot be certain of this.
Limited Operating History
We commenced equipment rental operations in October 1997 and have grown
through a combination of internal growth and the acquisition of 103 companies
(through March 22, 1999), including a merger in September 1998 with U.S.
Rentals. Due to the relatively recent commencement of our operations, we have
only a limited history upon which you can base an assessment of our business
and prospects.
Risks Relating to Growth Strategy
Key elements of our growth strategy are to continue to expand through a
combination of internal growth, a disciplined acquisition program and the
opening of new rental locations. We have identified below some of the risks
relating to our growth strategy:
Availability of Acquisition Targets and Sites for Start-Up Locations. We
may encounter substantial competition in our efforts to acquire additional
rental companies and sites for start-up locations. Such competition could have
the effect of increasing the prices that we will have to pay in order to
acquire such businesses and sites. We cannot guarantee that any additional
businesses or sites that we may wish to acquire will be available to us on
terms that are acceptable to us.
Need to Integrate New Operations. Our ability to realize the expected
benefits from completed and future acquisitions depends, in large part, on our
ability to integrate the new operations with our existing operations in a
timely and effective manner. Accordingly, we devote substantial efforts to the
integration of new operations. We cannot, however, guarantee that these efforts
will always be successful. In addition, under certain circumstances, these
efforts could adversely affect our existing operations.
Debt Covenants. Certain of the agreements governing our outstanding
indebtedness provide that we may not make acquisitions unless certain financial
conditions are satisfied or the consent of the lenders is obtained. Our ability
to grow through acquisitions may be constrained as a result of these
provisions.
Certain Risks Related to Start-Up Locations. We expect that start-up
locations may initially have a negative impact on our results of operations and
margins for a number of reasons, including that (1) we will incur significant
start-up expenses in connection with establishing each start-up location and
(2) it will generally take some time following the commencement of operations
for a start-up location to become profitable. Although we believe that start-
ups can generate long-term growth, we cannot guarantee that any start-up
location will become profitable within any specific time period, if at all.
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, completing
acquisitions, establishing new rental locations, 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
12
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.
Possible Undiscovered Liabilities of Acquired Companies
Prior to making an acquisition, we seek to assess the liabilities of the
target company that we will become responsible for as a result of the
acquisition. Nevertheless, we may fail to discover certain of such liabilities.
We seek to reduce our risk relating to these possible hidden liabilities by
generally obtaining the agreement of the seller to reimburse us in the event
that we discover any material hidden liabilities. However, this type of
agreement, if obtained, may not fully protect us against hidden liabilities
because (1) the seller's obligation to reimburse us is generally limited in
duration and/or amount and (2) the seller may not have sufficient financial
resources to reimburse us. Furthermore, when we acquire a public company (such
as when we acquired U.S. Rentals) there is no seller from which to obtain this
type of agreement.
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 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.
Quarterly Fluctuations of Operating Results
We expect that our revenues and operating results may fluctuate from
quarter to quarter due to a number of factors, including:
. seasonal rental patterns of our customers--with rental activity
tending to be lower in the winter;
. changes in general economic conditions in our markets, including
changes in construction and industrial activities;
. the timing of acquisitions, new location openings, and related
expenditures;
. the effect of the integration of acquired businesses and start-up
locations;
. the timing of expenditures for new equipment and the disposition of
used equipment; and
. price changes in response to competitive factors.
13
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 $0.5 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.
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.
14
Year 2000 Issues
Our software vendors have informed us that our recently-installed
management information system is year 2000 compliant. We have, therefore, not
developed any contingency plans relating to year 2000 issues and have not
budgeted any funds for year 2000 issues. Although we believe that our system is
year 2000 compliant, unanticipated year 2000 problems may arise which,
depending on the nature and magnitude of the problem, could adversely affect
our business. Furthermore, year 2000 problems involving third parties may have
a negative impact on our customers or suppliers, the general economy or on the
ability of businesses generally to receive essential services (such as
telecommunications, banking services, etc.). Any such problem could adversely
affect our business. We are unable at this time to assess the possible impact
on our business of year 2000 problems involving any third party.
Restrictive Covenants
The agreements governing our existing long-term indebtedness contain, and
future agreements governing our long-term indebtedness may also contain,
certain restrictive financial and operating covenants which affect, and in many
respects significantly limit or prohibit, among other things, our ability to
incur indebtedness, make prepayments of certain indebtedness, make investments,
create liens, make acquisitions, sell assets and engage in mergers and
consolidations. These covenants may significantly limit our operating and
financial flexibility.
Item 2. Properties
We currently operate 453 branch locations. Of these locations, 388 are in
the United States, 64 are in Canada and one is in Mexico. The number of
locations in each state or province is shown below:
United States
. Alabama (12) . Kentucky (8) . North Carolina (17)
. Arizona (4) . Louisiana (3) . Ohio (3)
. Arkansas (3) . Maryland (18) . Oklahoma (2)
. California (83) . Massachusetts (2) . Oregon (23)
. Colorado (9) . Michigan (5) . Pennsylvania (6)
. Connecticut (7) . Minnesota (5) . Rhode Island (3)
. Delaware (4) . Missouri (2) . South Carolina (9)
. Florida (18) . Nebraska (1) . Tennessee (5)
. Georgia (3) . Nevada (11) . Texas (32)
. Idaho (2) . New Hampshire (1) . Utah (8)
. Indiana (8) . New Jersey (6) . Virginia (12)
. Illinois (6) . New Mexico (2) . Washington (33)
. Kansas (2) . New York (9) . Wisconsin (1)
Canada Mexico
. Alberta (2) . Nuevo Leon (1)
. British Columbia (13)
. Newfoundland (8)
. Ontario (31)
. Quebec (10)
Our branch locations generally include facilities for displaying equipment
and, depending on the location, may include separate equipment service areas
and storage areas.
15
We own 78 of our rental locations and lease the other locations. Our leases
provide for varying terms and include 25 leases that are on a month-to-month
basis and 31 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. Certain
of our leases were entered into (or assumed) in connection with acquisitions
and most of the lessors under these leases are former owners of businesses that
we acquired.
We maintain a fleet of vehicles that is used for delivery, maintenance and
sales functions. We own a portion of this fleet and lease a portion. The fleet
includes approximately 9,748 vehicles.
Our corporate headquarters are located in Greenwich, Connecticut, where we
occupy approximately 27,000 square feet under (1) a lease for approximately
15,000 square feet that extends until 2001 (subject to extension rights) and
(2) a lease for approximately 12,000 square feet that extends until 2003.
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.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1998, 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 commenced trading on the New York Stock Exchange
on December 18, 1997 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
------ ------
1997:
Fourth Quarter (from December 18, 1997)......................... $19.31 $14.38
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 (through March 22, 1999).......................... 35.69 26.44
As of March 22, 1999, there were approximately 281 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."
16
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 1998
Set forth below is a listing of all sales by the Company of unregistered
equity securities during 1998, 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 August 1998, a subsidiary trust of Holdings sold for cash $300
million of 6 1/2% Convertible Quarterly Income Preferred Securities.
The initial purchasers of these securities were Goldman, Sachs & Co.;
BT Alex. Brown, Deutsche Bank Securities; Donaldson, Lufkin & Jenrette;
Merrill Lynch & Co.; and Salomon Smith Barney. The initial purchasers
reoffered the securities in reliance on Rule 144A under the Act. For
additional information concerning this offering, see Item 7--
"Managements' Discussion and Analysis of Financial Condition and
Results of Operations--Certain Information Concerning Preferred
Securities."
2. In October 1998, the Company issued 1,578 shares of Common Stock to an
executive officer pursuant to an employment agreement.
3. In October and December 1998, the Company issued, in connection with
two acquisitions, 15,259 shares of Common Stock as part of the
consideration for such acquisitions.
4. In November and December 1998, the Company issued, in connection with
two acquisitions, (i) a convertible note in the principal amount of
$1,200,000 which provides for a conversion price of $28.56 per share
and (ii) a convertible note in the principal amount of $1,000,000 which
provides for a conversion price of $22.25 per share.
17
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,
--------------------------------------------------
1994 1995 1996 1997 1998
-------- --------- -------- -------- ----------
(dollars in thousands, except per share data)
Income statement data:
Total revenues.......... $222,326 $ 283,432 $354,478 $489,838 $1,220,282
Total cost of
operations............. 153,769 194,234 241,445 340,546 796,834
-------- --------- -------- -------- ----------
Gross profit............ 68,557 89,198 113,033 149,292 423,448
Selling, general and
administrative
expenses............... 34,948 39,707 54,721 70,835 195,620
Merger-related
expenses............... 47,178
Non-rental depreciation
and amortization....... 5,107 6,916 9,387 13,424 35,248
Termination cost of
deferred compensation
agreements............. 20,290
-------- --------- -------- -------- ----------
Operating income........ 28,502 42,575 48,925 44,743 145,402
Interest expense........ 6,245 7,490 11,278 11,847 64,157
Preferred dividends of a
subsidiary trust....... 7,854
Other (income) expense,
net.................... (3,768) 1,304 (499) (2,021) (4,906)
-------- --------- -------- -------- ----------
Income before provision
for income taxes and
extraordinary items.... 26,025 33,781 38,146 34,917 78,297
Provision for income
taxes.................. 523 484 420 29,508 43,499
-------- --------- -------- -------- ----------
Income before
extraordinary items.... 25,502 33,297 37,726 5,409 34,798
Extraordinary items, net
(1).................... 1,511 21,337
-------- --------- -------- -------- ----------
Net income.............. $ 25,502 $ 33,297 $ 37,726 $ 3,898 $ 13,461
======== ========= ======== ======== ==========
Pro forma provision for
income taxes before
extraordinary items
(2).................... $ 10,637 $ 13,715 $ 15,487 $ 14,176 $ 44,386
Pro forma income before
extraordinary items
(2).................... 15,388 20,066 22,659 20,741 33,911
Basic earnings before
extraordinary items per
share.................. $ 1.28 $ 1.47 $ 1.67 $ 0.12 $ 0.53
Diluted earnings before
extraordinary items per
share.................. $ 1.28 $ 1.47 $ 1.67 $ 0.11 $ 0.48
Basic earnings per share
(3).................... $ 1.28 $ 1.47 $ 1.67 $ 0.08 $ 0.20
Diluted earnings per
share (3).............. $ 1.28 $ 1.47 $ 1.67 $ 0.08 $ 0.18
Other financial data:
EBITDA (4).............. $ 73,446 $ 101,438 $123,606 $160,554 $ 403,738
Depreciation and
amortization........... 44,944 58,863 74,681 95,521 211,158
Dividends on common
stock..................
December 31,
--------------------------------------------------
1994 1995 1996 1997 1998
-------- --------- -------- -------- ----------
(dollars in thousands)
Balance sheet data:
Cash and cash
equivalents............ $ 2,956 $ 3,728 $ 2,906 $ 72,411 $ 20,410
Rental equipment, net... 136,731 182,082 235,055 461,026 1,143,006
Total assets............ 233,359 297,994 381,228 826,010 2,634,663
Total debt.............. 107,284 131,771 214,337 264,573 1,314,574
Company-obligated
mandatorily redeemable
convertible preferred
securities
of a subsidiary trust.. 300,000
Stockholders' equity.... 77,600 104,392 105,420 446,388 726,230
18
- --------
(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. Excluding such amounts, (i) basic earnings per share for the years
ended 1997 and 1998 would have been $0.70 and $1.10, respectively, and (ii)
diluted earnings per share for the years ended 1997 and 1998 would have
been $0.66 and $1.00, 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 and (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) 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 under
Item 1--"Business--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.
19
Introduction
The Company commenced equipment rental operations in October 1997 and has
completed 103 acquisitions (through March 22, 1999), 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 100 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 1996, 1997 and 1998 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.
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 includes (i) depreciation expense
associated with equipment that is not offered for rent (such as vehicles,
computers and office equipment) and amortization expense associated with
leasehold improvements and (ii) the amortization of intangible assets. The
Company's intangible assets include goodwill, which represents the excess of
the purchase price of acquired companies over the estimated fair market value
of the net assets acquired.
Results of Operations
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
20
$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 new equipment, 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 new equipment, 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 somewhat 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 new equipment, 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 ("SG&A") 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.
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, 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 $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 U.S.
Rentals' initial public offering in February 1997.
21
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 United Rentals were $7.9 million. These dividends
relate to the preferred securities issued in August 1998 by such subsidiary
trust. See "--Certain Information Concerning Preferred Securities."
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 Items. 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.
Years Ended December 31, 1997 and 1996
Revenues. Total revenues for 1997 were $489.8 million, representing an
increase of 38.2% over total revenues in 1996 of $354.5 million. The Company's
revenues in 1997 and 1996 were attributable to: (i) equipment rental ($388.2
million, or 79.2% of revenues in 1997, compared to $295.3 million, or 83.3% of
revenues, in 1996), (ii) sales of rental equipment ($41.4 million, or 8.5% of
revenues, in 1997 compared to $25.5 million, or 7.2% of revenues, in 1996) and
(iii) sales of new equipment, merchandise and other revenues ($60.3 million, or
12.3% of revenues, in 1997 compared to $33.7 million, or 9.5% of revenues, in
1996).
The 38.2% increase in total revenues in 1997 reflected (i) increased
revenues at locations open more than one year (which accounted for
approximately 24.8 percentage points) and (ii) new rental locations acquired
through acquisitions and the opening of start-up locations (which accounted for
approximately 13.4 percentage points). The increase in such revenues at
locations open more than one year primarily reflected (a) an increase in
customer demand for rental equipment and for new and used equipment offered for
sale, (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
sales efforts relating to used equipment.
Gross Profit. Gross profit increased to $149.3 million in 1997 from $113.0
million in 1996. 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 was: (i) equipment rental (30.0% in 1997 and 31.2% in 1996),
(ii) sales of rental equipment (50.6% in 1997 and 58.6% in 1996) and (iii)
sales
22
of new equipment, merchandise and other revenues (19.6% in 1997 and 18.1% in
1996). The decrease in the gross profit margin from rental revenues in 1997
primarily reflected the fact that the Company in 1997 incurred expenses in
connection with expanding its rental fleet and opening new rental locations.
The increase in the gross profit margin from sales of new equipment,
merchandise and other revenues in 1997 primarily reflected a shift in sales mix
to higher margin items.
Selling, General and Administrative Expenses. SG&A increased to $70.8
million in 1997 from $54.7 million in 1996, but as a percentage of revenues
decreased to 14.5% in 1997 from 15.4% in 1996. This decrease in SG&A as a
percentage of revenues in 1997 primarily reflected (i) increased operating
efficiencies and (ii) certain economies of scale related to the increase in
revenue described above.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $13.4 million, or 2.7% of total revenues in 1997, and $9.4
million, or 2.6% of total revenues, in 1996. The increase in the dollar amount
of non-rental depreciation and amortization in 1997 primarily reflected
increases in (i) depreciation expense attributable to equipment not offered for
rent, (ii) depreciation expense associated with rental facility locations and
(iii) amortization expense relating to leaseholds.
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 $11.8 million in 1997 from
$11.3 million in 1996. This increase was primarily the result of an increase in
related party interest expense, offset by a decrease in interest as a result of
lower average debt outstanding during 1997 due to repayment of certain debt
with proceeds from U.S. Rentals' initial public offering.
Other (Income) Expense. Other income was $2.0 million in 1997 compared with
$0.5 million in 1996. The increase in other income in 1997 primarily reflected
increased interest income in 1997 as a result of higher cash balances resulting
from the financing transactions completed during 1997.
Income Taxes. Income taxes were $29.5 million, or an effective rate of
84.5%, in 1997 and $0.4 million, or an effective rate of 1.1%, in 1996. The
Company's low effective tax rate in 1996 reflected the fact that (i) U.S.
Rentals was taxed as a Subchapter S Corporation for federal and state purposes
until its initial public offering in February 1997 and (ii) Rental Tools
(another company that United Rentals acquired in a transaction that was
accounted for as a pooling-of-interests) was taxed as a Subchapter S
Corporation for federal and state purposes until it was acquired by the Company
in 1998. The Company's high effective tax rate in 1997 primarily reflected (i)
a $7.5 million charge to recognize deferred tax liabilities of U.S. Rentals 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 $2.5
million ($1.5 million net of taxes) during 1997. This charge was incurred by
U.S. Rentals in connection with the prepayment of certain debt.
Liquidity and Capital Resources
General
Since commencing operations in October 1997, the Company has funded its
cash requirements from a combination of cash generated from operations, the
sale of rental equipment, borrowings
23
under a revolving credit facility and the proceeds of other financing
transactions. These other financing transactions included (i) the sale of
Common Stock and warrants in private placements for aggregate consideration of
$54.7 million, (ii) the sale of Common Stock in public offerings in December
1997 and March 1998 for aggregate consideration of $307.0 million (after
deducting underwriting discounts and offering expenses), (iii) the sale of $200
million aggregate principal amount of 9 1/2% senior subordinated notes (the "9
1/2% Notes") in May 1998 for aggregate consideration of $193.0 million (after
deducting the initial purchasers' discount and offering expenses), (iv) a $250
million term loan (the "Term Loan") obtained in July 1998, (v) the issuance by
a subsidiary trust of Holdings of preferred securities (the "Trust Preferred
Securities") in August 1998 which resulted in the Company receiving net
proceeds of $290.0 million, (vi) the sale of $205 million aggregate principal
amount of 8.80% senior subordinated notes (the "8.80% Notes") in August 1998
for aggregate consideration of $196.0 million (after deducting the initial
purchaser's discount and offering expenses), (vii) the sale of $300 million
aggregate principal amount of 9 1/4% Senior Subordinated Notes ("9 1/4% Notes")
in December 1998 for aggregate consideration of $292.1 million (after deducting
the initial purchaser's discount and estimated offering expenses), (viii) the
sale of 300,000 shares of Series A Perpetual Convertible Preferred Stock in
January 1999 for aggregate consideration of $287.0 million (after deducting
issuance fees and expenses), (ix) the sale of Common Stock in a public offering
in March 1999 for the aggregate consideration of $64.8 million (after deducting
underwriting discounts and estimated offering expenses) and (x) the sale of
$250 million aggregate principal amount of 9% Senior Subordinated Notes ("9%
Notes") in March 1999 for aggregate consideration of $245.0 million (after
deducting the initial purchasers' discount and estimated offering expenses).
For additional information concerning certain of the financings described
above, see "--Certain Information Concerning the Credit Facility and Other
Indebtedness" and "--Certain Information Concerning Preferred Securities."
During 1998, the Company (i) generated cash from operations of
approximately $216.1 million, (ii) generated cash from the sale of rental
equipment of approximately $119.6 million and (iii) had net cash from financing
activities of approximately $1,082.1 million. The Company used cash during this
period principally to (i) pay consideration for acquisitions (approximately
$911.8 million), (ii) repay indebtedness in connection with the U.S. Rentals
Merger and the acquisition of Rental Tools (approximately $450.3 million),
(iii) purchase rental equipment (approximately $479.5 million) and (iv)
purchase other property and equipment (approximately $84.6 million). These cash
expenditures were the principal reason for the decrease in cash at December 31,
1998 compared with December 31, 1997.
In September 1998, URI obtained a new $762.5 million revolving credit
facility (the "Credit Facility") from a group of financial institutions. This
facility replaced the credit facility that had previously been used by URI. For
additional information concerning the Credit Facility, see "--Certain
Information Concerning the Credit Facility and Other Indebtedness."
Certain Balance Sheet Changes
The acquisitions and the equipment purchases made by the Company in 1998
(and the financing of such acquisitions and purchases) were the principal
reasons for the increase in the following items at December 31, 1998 compared
with December 31, 1997: accounts receivable, inventory, rental equipment,
property and equipment, intangible assets, accounts payable, debt, and accrued
expenses and other liabilities.
The increase in prepaid expenses and other assets at December 31, 1998
compared with December 31, 1997 primarily reflects (i) an increase in prepaid
expenses relating to the Company's operations and (ii) certain direct costs
relating to potential acquisitions that were capitalized.
24
The Company-obligated manditorily redeemable convertible preferred
securities of a subsidiary trust at December 31, 1998, reflects the issuance of
Trust Preferred Securities in August 1998 as described under "--Certain
Information Concerning Preferred Securities."
The increase in stockholders' equity at December 31, 1998 compared with
December 31, 1997, primarily reflects (i) the sale of 8,625,000 shares of
Common Stock in a public offering in March 1998 for aggregate consideration of
$207.4 million (after deducting underwriting discounts and offering expenses)
and (ii) the issuance of an aggregate of 2,188,255 shares of Common Stock and
warrants during the year ended December 31, 1998, primarily as consideration
for acquisitions.
Cash Requirements Related to Operations
The Company's principal existing sources of cash are (i) borrowings
available under the Credit Facility ($760.5 million available as of March 23,
1999), (ii) cash generated from operations and (iii) the remaining net proceeds
from the sale by the Company of its 9% Notes in March 1999 (approximately
$125.0 million as of March 23, 1999).
The Company expects that its principal needs for cash relating to its
existing operations over the next 12 months will be to fund (i) operating
activities and working capital, (ii) the purchase of rental equipment and
inventory of items offered for sale and (iii) debt service. The Company plans
to fund such cash requirements relating to its existing operations from its
existing sources of cash described above.
The Company estimates that equipment expenditures over the next 12 months
will be approximately $475.0 million for the existing operations of the
Company. These expenditures are comprised of approximately $255.0 million of
expenditures in order to maintain the average age of the Company's rental fleet
and $220.0 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 $190.0 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 approximately $14.3 million during 1999. In
addition, the Company may be required at any time to repay a $21.5 million
demand note that the Company assumed in connection with the U.S. Rentals
Merger.
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,
25
(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. This is the principal reason why the net income
reported on the consolidated financial statements of URI is higher than the net
income reported on the consolidated financial statements of Holdings.
Year 2000 Compliance
The Company has been informed by its software vendors that the Company's
new management information system is year 2000 compliant. The Company has,
therefore, not developed any contingency plans relating to year 2000 issues and
has not budgeted any funds for year 2000 issues. Although the Company believes
that its system is year 2000 compliant, there can be no assurance that
unanticipated year 2000 problems will not arise which, depending on the nature
and magnitude of the problem, could have a material adverse effect on the
Company's business and financial condition. Furthermore, year 2000 problems
involving third parties may have a negative impact on the Company's customers
or suppliers, the general economy or on the ability of businesses generally to
receive essential services (such as telecommunications, banking services,
etc.). Any such problem could have a material adverse effect on the Company's
business and financial condition. The Company is unable at this time to assess
the possible impact on its business of year 2000 problems involving any third
party.
Certain Information Concerning the Credit Facility and Other Indebtedness
Credit Facility. In September 1998, URI obtained a new $762.5 million
revolving Credit Facility from a group of financial institutions. This facility
replaced the credit facility that had previously been used by URI. Set forth
below is certain information concerning the terms of the Credit Facility.
The Credit Facility enables URI to borrow up to $762.5 million on a
revolving basis and permits 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 $762.5 million). Up to $25.0 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 $19.1 million. The Credit Facility
terminates on September 26, 2003, at which time all outstanding indebtedness is
due. As of March 23, 1999, no amount of indebtedness was outstanding under the
Credit Facility (not including undrawn outstanding letters of credit in the
amount of $2.0 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
26
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' $762.5 million aggregate lending commitment under
the Credit Facility (which fee may be reduced to 0.300% for periods during
which the Company maintains a specified funded debt to cash flow ratio).
The obligations of URI under the Credit Facility are (i) secured by
substantially all of its assets, the stock of its United States subsidiaries
and a portion of the stock of 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. In July 1998, URI obtained a $250 million term loan from a group
of financial institutions. The term loan matures on June 30, 2005. Prior to
maturity, quarterly installments of principal in the amount of $625,000 are due
on the last day of each calendar quarter, commencing September 30, 1999. The
amount due at maturity is $235,625,000. The term loan accrues interest, at the
Company's option, at either (a) the Base Rate (as defined above with respect to
the Credit Facility) plus a margin ranging from 0% to 0.5% per annum, or (b)
the Eurodollar Rate (as defined above with respect to the Credit Facility for
borrowings by the Company) plus a margin ranging from 1.875% to 2.375% per
annum. The Term Loan is secured pari passu with the Credit Facility. The
agreement governing the Term Loan contains restrictive covenants substantially
similar to those provided under the Credit Facility.
9 1/2% Senior Subordinated Notes. In May 1998, URI issued $200 million
aggregate principal amount of 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 100.00% 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
27
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 million
aggregate principal amount of 8.80% Notes which are due August 15, 2008. The
8.80% Notes are unsecured. URI may, at its option, redeem the 8.80% Notes on or
after August 15, 2003 at specified redemption prices which range from 104.40%
in 2003 to 100.00% in 2006 and thereafter. In addition, on or prior to August
15, 2001, URI may, at its option, use the proceeds of a public equity offering
to redeem up to 35% of the outstanding 8.80% Notes, at a redemption price of
108.8%. The indenture governing the 8.80% Notes contains restrictions
substantially similar to those applicable to the 9 1/2% Notes.
9 1/4% Senior Subordinated Notes. In December 1998, URI issued $300 million
aggregate principal amount of 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 100.00% 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 issued $250 million
aggregate principal amount of 9% Notes which are due 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 104.50% in 2004
to 100.00% 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 109.00%. The
indenture governing the 9% Notes contains restrictions substantially similar to
those applicable to the 9 1/2% Notes.
Certain Information Concerning Preferred Securities
Trust Preferred Securities
In August 1998, a subsidiary trust (the "Trust") of Holdings sold $300
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 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.
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") to Apollo Investment Fund
IV, L.P. and Apollo Overseas Partners IV, L.P. The net proceeds from the sale
of the Series A Preferred were approximately $287.0 million. Holdings
contributed such net proceeds to URI.
Fluctuations in Operating Results
The Company expects that its revenues and operating results may fluctuate
from quarter to quarter due to a number of factors, including: seasonal rental
patterns of the Company's customers (with rental activity tending to be lower
in the winter); changes in general economic conditions in the
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Company's markets; the timing of acquisitions and the opening of start-up
locations and related costs; the effect of the integration of acquired
businesses and start-up locations; the timing of expenditures for new equipment
and the disposition of used equipment; and price changes in response to
competitive factors.
The Company is continually involved in the investigation and evaluation of
potential acquisitions. In accordance with generally accepted accounting
principles, the Company capitalizes certain direct out-of-pocket expenditures
(such as legal and accounting fees) relating to potential or pending
acquisitions. Indirect acquisition costs, such as executive salaries, general
corporate overhead, public affairs and other corporate services, are expensed
as incurred. The Company's policy is to charge against earnings any capitalized
expenditures relating to any potential or pending acquisition that the Company
determines will not be consummated. There can be no assurance that the Company
in future periods will not be required to incur a charge against earnings in
accordance with such policy, which charge, depending upon the magnitude
thereof, could adversely affect the Company's results of operations.
The Company will be required to incur significant start-up expenses in
connection with establishing each start-up location. Such expenses may include,
among others, pre-opening expenses related to setting up the facility, 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.
There may be a lag between the time that the Company purchases new
equipment and begins to incur the related depreciation and interest expenses
and the time that the equipment begins to generate revenues at normalized
rates. As a result, the purchase of new equipment, particularly equipment
purchased in connection with expanding and diversifying the Company's rental
equipment, may periodically reduce margins.
General Economic Conditions and Inflation
The Company's operating results may be adversely affected by (i) changes in
general economic conditions, including changes in construction and industrial
activity, or increases in interest rates, or (ii) adverse weather conditions
that may temporarily decrease construction and industrial activity in a
particular geographic area. Although the Company cannot accurately anticipate
the effect of inflation on its operations, the Company believes that inflation
has not had, and is not likely in the foreseeable future to have, a material
impact on its results of operations.
Recently Issued Accounting Standards
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in primary
financial statements. SFAS No. 130 requires the Company's foreign currency
translation adjustments to be included in other comprehensive income. The
adoption of SFAS No. 130 had no impact on the Company's net income or
shareholders' equity.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
establishes a new method by which companies will report operating segment
information. This method is based on the manner in which management organizes
the segments within a company for making operating decisions and assessing
performance. SFAS No. 131 also establishes standards for related disclosures
about
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products and services, geographic areas and major customers. The Company had
included the required disclosures in the notes to its financial statements
included elsewhere herein.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities.
The Company will adopt SFAS No. 133 beginning January 1, 2000. The adoption of
SFAS No. 133 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk primarily consists of interest rate risk
associated with our variable rate debt and foreign currency exchange rate risk
primarily associated with our Canadian operations. We do not use, nor have we
historically used, derivative financial instruments to manage or reduce market
risk.
Interest Rate Risk. All borrowings under our $762.5 million Credit Facility
bear interest at a variable rate of interest. The outstanding indebtedness
under the C