-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KEUlgPftrQaz15uap+aPObSNt43JHVWuoxTT1cowDHaVGpG3zAbfpjWP+aS8FlSx Ebv0Qq1FxqA6b2rpH5Q9dQ== 0000950130-98-005873.txt : 19981214 0000950130-98-005873.hdr.sgml : 19981214 ACCESSION NUMBER: 0000950130-98-005873 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981211 ITEM INFORMATION: FILED AS OF DATE: 19981211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED RENTALS NORTH AMERICA INC CENTRAL INDEX KEY: 0001047166 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 061493538 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-13663 FILM NUMBER: 98768445 BUSINESS ADDRESS: STREET 1: FOUR GREENWICH OFFICE PARK CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036223131 MAIL ADDRESS: STREET 1: FOUR GREENWICH OFFICE PARK CITY: GREENWICH STATE: CT ZIP: 06830 FORMER COMPANY: FORMER CONFORMED NAME: UNITED RENTALS INC DATE OF NAME CHANGE: 19971020 8-K 1 FORM 8-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) DECEMBER 11, 1998 -------------------- UNITED RENTALS (NORTH AMERICA), INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------------------------------------------------- Delaware 1-13663 06-1493538 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (Commission file Number) (IRS Employer of Incorporation) Identification No.) Four Greenwich Office Park, Greenwich, Connecticut 06830 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (203) 622-3131 -------------- ================================================================================ Item 5. Other United Rentals (North America), Inc. ("URI") completed two acquisitions during 1998 that were accounted for as poolings-of-interests for financial accounting purposes. URI has restated its Consolidated Financial Statements for the three years ended December 31, 1997 in order to reflect these transactions. Such restated Consolidated Financial Statements are filed as an Exhibit hereto. Exhibit 99.1 Consolidated Financial Statements of United Rentals (North America), Inc. Report of Independent Auditors Report of Independent Accountants Consolidated balance sheets - December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, 1995 and 1994. Consolidated Statements of cash flows for the years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on this 11th day of December, 1998. UNITED RENTALS (NORTH AMERICA), INC. By: Michael J. Nolan --------------------------------- Name: Michael J. Nolan Title: Chief Financial Officer 3 EX-99.1 2 REPORT OF INDEPENDENT AUDITORS Exhibit 99.1 REPORT OF INDEPENDENT AUDITORS Board of Directors United Rentals, Inc. (Parent Company of United Rentals (North America), Inc.) We have audited the accompanying consolidated balance sheets of United Rentals (North America), Inc. as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the management of United Rentals (North America), Inc. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Rentals (North America), Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey November 17, 1998 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of United Rentals, Inc. (Parent Company of United Rentals (North America), Inc.) In our opinion, the accompanying consolidated statements of income, of cash flows and of changes in stockholders' equity for the year ended December 31, 1995 present fairly, in all material respects, the results of operations and cash flows of United Rentals (North America), Inc. for the year ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the management of United Rentals (North America), Inc.; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of United Rentals (North America), Inc. for any period subsequent to December 31, 1995. PricewaterhouseCoopers LLP Sacramento, California November 17, 1998 2 UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ----------------- 1997 1996 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Cash and cash equivalents.................................... $ 72,411 $ 2,906 Accounts receivable, net of allowance for doubtful accounts of $11,085 and $7,346 at 1997 and 1996, respectively........ 82,592 48,193 Notes receivable from affiliate.............................. 25,365 Inventory.................................................... 21,778 6,358 Prepaid expenses and other assets............................ 17,167 5,873 Rental equipment, net........................................ 461,026 235,055 Property and equipment, net.................................. 98,268 56,443 Intangible assets, net of accumulated amortization of $568 and $207 at 1997 and 1996, respectively..................... 73,648 1,035 -------- -------- $826,890 $381,228 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable........................................... $ 41,392 $ 23,912 Debt....................................................... 247,573 189,826 Notes payable to related parties........................... 17,000 24,511 Deferred taxes............................................. 25,275 -- Accrued expenses and other liabilities..................... 49,262 37,559 -------- -------- Total liabilities........................................ 380,502 275,808 Commitments and contingencies Stockholders' equity: Common stock--$.01 par value, 3,000 shares authorized, 1,000 shares issued and outstanding ...................... -- -- Additional paid-in capital................................. 402,320 13,505 Retained earnings.......................................... 44,068 91,915 -------- -------- Total stockholders' equity............................... 446,388 105,420 -------- -------- $826,890 $381,228 ======== ========
See accompanying notes. 3 UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------- 1997 1996 1995 -------- -------- -------- Revenues: Equipment rentals................................ $388,181 $295,308 $252,283 Sales of rental equipment........................ 41,406 25,518 11,155 Sales of new equipment, merchandise and other revenues........................................ 60,251 33,652 19,994 -------- -------- -------- Total revenues.................................... 489,838 354,478 283,432 Cost of revenues: Cost of equipment rentals, excluding depreciation.................................... 189,578 138,018 124,201 Depreciation of rental equipment................. 82,097 65,294 51,947 Cost of rental equipment sales................... 20,455 10,570 5,185 Cost of new equipment and merchandise sales and other operating costs........................... 48,416 27,563 12,901 -------- -------- -------- Total cost of revenues............................ 340,546 241,445 194,234 -------- -------- -------- Gross profit...................................... 149,292 113,033 89,198 Selling, general and administrative expenses...... 70,835 54,721 39,707 Non-rental depreciation and amortization.......... 13,424 9,387 6,916 Termination cost of deferred compensation agreements....................................... 20,290 -------- -------- -------- Operating income.................................. 44,743 48,925 42,575 Interest expense.................................. 11,157 11,620 6,755 Related party interest expense (income), net...... 690 (342) 735 Other (income) expense............................ (2,021) (499) 1,304 -------- -------- -------- Income before provision for income taxes and extraordinary item............................... 34,917 38,146 33,781 Provision for income taxes........................ 29,508 420 484 -------- -------- -------- Income before extraordinary item.................. 5,409 37,726 33,297 Extraordinary item, net of tax benefit of $995.... 1,511 -------- -------- -------- Net income........................................ $ 3,898 $ 37,726 $ 33,297 ======== ======== ======== Unaudited pro forma data (Note 9): Historical income before income taxes and extraordinary item.............................. $ 34,917 $ 38,146 $ 33,781 Pro forma income tax expense..................... 14,176 15,487 13,715 -------- -------- -------- Pro forma income before extraordinary item....... $ 20,741 $ 22,659 $ 20,066 ======== ======== ========
See accompanying notes. 4 UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ---------------- ADDITIONAL NUMBER PAID-IN RETAINED OF SHARES AMOUNT CAPITAL EARNINGS --------- ------ ---------- -------- (IN THOUSANDS EXCEPT SHARE AMOUNTS) Balance, December 31, 1994, as previously reported.................... -- $-- $ -- $ -- Poolings-of-interests................. 1,000 -- 13,593 64,006 ----- ---- -------- -------- Balance, December 31, 1994, as restated............................... 1,000 -- 13,593 64,006 Issuance of common stock.............. 17 Distributions to stockholders......... (6,584) Net income............................ 33,297 ----- ---- -------- -------- Balance, December 31, 1995.............. 1,000 -- 13,610 90,719 Distributions to stockholders......... (36,530) Treasury stock purchase............... (105) Net income............................ 37,726 ----- ---- -------- -------- Balance, December 31, 1996.............. 1,000 -- 13,505 91,915 Contributed capital from Parent....... 157,696 Issuance of common stock.............. 186,436 Distribution of non-operating assets, net.................................. (4,219) Reclassification of Subchapter S accumulated earnings to paid-in capital.......... 48,902 (48,902) Distributions to stockholders......... (2,843) Net income............................ 3,898 ----- ---- -------- -------- Balance, December 31, 1997.............. 1,000 $-- $402,320 $ 44,068 ===== ==== ======== ========
See accompanying notes. 5 UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................... $ 3,898 $ 37,726 $ 33,297 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................ 95,521 74,681 58,863 Gain on sale of rental equipment............. (20,951) (14,948) (5,970) Non-cash interest, net....................... 201 Loss on early extinguishment of debt......... 2,506 Deferred taxes............................... 25,075 Changes in operating assets and liabilities: Accounts receivable.......................... (19,837) (8,271) (6,578) Inventory.................................... (3,785) (1,148) (1,413) Prepaid expenses and other assets............ (9,821) (2,219) (2,323) Accounts payable............................. 11,704 (7,966) 8,058 Accrued expenses and other liabilities....... 8,618 8,116 5,360 --------- --------- --------- Net cash provided by operating activities..... 93,129 85,971 89,294 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of rental equipment................. (268,548) (116,021) (102,241) Purchases of property and equipment........... (53,653) (27,269) (14,433) Proceeds from sales of rental equipment....... 41,406 25,518 11,155 Collection (funding) of notes receivable...... 122 2,537 (1,061) Purchase of other companies................... (115,528) (15,033) In-process acquisition costs.................. (129) --------- --------- --------- Net cash used in investing activities......... (396,330) (130,268) (106,580) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock, net of issuance costs............................... 186,436 17 Capital contribution from Parent.............. 154,302 Proceeds from debt............................ 291,858 131,053 61,769 Payments on debt.............................. (271,418) (50,713) (37,144) Proceeds from related party notes............. 17,000 Purchase of treasury stock.................... (105) Cash retained by Predecessor in connection with Recapitalization........................ (998) Distributions to stockholders................. (2,843) (36,530) (6,584) Payment of debt financing costs............... (1,631) (230) --------- --------- --------- Net cash provided by financing activities..... 372,706 43,475 18,058 --------- --------- --------- Net increase (decrease) in cash and cash equivalents.................................. 69,505 (822) 772 Cash and cash equivalents at beginning of year......................................... 2,906 3,728 2,956 --------- --------- --------- Cash and cash equivalents at end of year...... $ 72,411 $ 2,906 $ 3,728 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest........................ $ 13,090 $ 13,766 $ 9,707 Cash paid for taxes........................... $ 11,487 $ 399 $ 613 Deferred compensation and bonus payments through issuance of common stock............. $ 486 Net assets retained by Predecessor in connection with Recapitalization............. $ 3,221 SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES The Company acquired the net assets and assumed certain liabilities of other companies as follows: Assets, net of cash acquired................. $ 162,954 $ 15,033 $ -- Liabilities assumed.......................... (43,301) Less: Amounts paid in common stock of the Parent... (3,825) Amount paid through issuance of convertible note........................................ (300) --------- --------- --------- Net cash paid................................. $ 115,528 $ 15,033 $ -- ========= ========= =========
See accompanying notes. 6 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE AMOUNTS) 1. ORGANIZATION AND BASIS OF PRESENTATION United Rentals, Inc. was incorporated in August 1997 for the purpose of creating a large, geographically diversified equipment rental company in the United States and Canada. On August 5, 1998 a reorganization was effected pursuant to which United Rentals, Inc became a wholly owned subsidiary of a newly formed holding company. The name of United Rentals, Inc was changed to United Rentals (North America), Inc. (referred to herein as the "Company"). The name of the new holding company became United Rentals, Inc. (referred to herein as the "Parent"). As a result of the Reorganization all periods presented have been adjusted to reflect the Company's capitalization of 1,000 shares of Common Stock as if it occurred at the beginning of the period. Pursuant to the Reorganization, the net proceeds from the Company's initial public offering completed in December 1997 has been reflected as Contributed Capital from the Parent in the accompanying statement of stockholders' equity. The Company rents a broad array of equipment to a diverse customer base that includes construction industry participants, industrial companies, homeowners and others. The Company also engages in related activities such as selling used rental equipment, acting as a distributor for certain new equipment and selling related merchandise and parts. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the accompanying balance sheets are presented on an unclassified basis. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements have been restated for all periods presented to include the accounts of U.S. Rentals, Inc. ("U.S. Rentals") and Rental Tools & Equipment Co. International Inc. ("Rental Tools"), two acquisitions accounted for as poolings-of-interests (See Note 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents. INVENTORY Inventory consists of equipment, tools, parts, fuel and related supply items. Inventory is stated at the lower of cost or market. Cost is determined on either a weighted average or first-in, first-out method. 7 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) RENTAL EQUIPMENT Rental equipment is recorded at cost and depreciated over the estimated useful lives of the equipment generally using the straight-line method. The range of useful lives estimated by management for rental equipment is two to ten years. Rental equipment is depreciated to a salvage value of zero to ten percent of cost. Rental equipment having a cost of $.5 or less is expensed at the time of purchase. Ordinary maintenance and repair costs are charged to operations as incurred. REVENUE RECOGNITION Revenue related to the sale of equipment and merchandise is recognized at the point of sale. Revenue related to rental equipment is recognized over the contract term. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The range of useful lives estimated by management for property and equipment is two to thirty-nine years. Ordinary maintenance and repair costs are charged to operations as incurred. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining life of the lease, whichever is shorter. INTANGIBLE ASSETS Intangible assets consist of the excess of cost over the value of identifiable net assets of businesses acquired and are being amortized on a straight-line basis over their estimated useful lives of forty years. LONG-LIVED ASSETS Long-lived assets are recorded at the lower of amortized cost or fair value. As part of an ongoing review of the valuation of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest they may be impaired. If this review indicates that the carrying value of these assets may not be recoverable, as determined by a nondiscounted cash flow analysis over the remaining useful life, the carrying value would be reduced to its estimated fair value. There have been no material impairments recognized in these financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheets for accounts receivable, accounts payable, accrued expenses and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair value of notes payable is determined using current interest rates for similar instruments as of December 31, 1997 and approximates the carrying value of these notes due to the fact that the underlying instruments include provision to adjust note balances and interest rates to approximate fair market value. ADVERTISING EXPENSE The Company advertises primarily through trade journals and the media. Advertising costs are expensed as incurred and totaled $6,866, $4,487 and $3,779 for the years ended December 31, 1997, 1996 and 1995, respectively. 8 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INCOME TAXES The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not realized in future periods. U.S. Rentals (prior to February 20, 1997) and Rental Tools (prior to August 28, 1998) elected to be treated as Subchapter S Corporations. See Note 9. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company maintains cash and cash equivalents with high quality financial institutions. Concentration of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company's customer base. No single customer represents greater than 10% of total accounts receivable. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. STOCK-BASED COMPENSATION The Company accounts for its stock based compensation arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees." Since stock options for Parent Company shares are granted with exercise prices at or greater than the fair value of the shares at the date of grant, no compensation expense is recognized. RELATED PARTY TRANSACTIONS As disclosed in these financial statements, the Company has participated in certain transactions with related parties during the current and previous years. In the opinion of management, all transactions with related parties have been conducted on terms which are fair and equitable. INSURANCE The Company is insured for general liability, workers' compensation, and group medical claims up to a specified claim and aggregate amounts (subject to deductibles of $250-$3,000). Insured losses subject to these deductibles are accrued based upon the aggregate liability for reported claims incurred and an estimated liability for claims incurred but not reported. These liabilities are not discounted. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and 9 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Related Information." The Company is required to adopt the provisions of these Statements in fiscal year 1998. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in primary financial statements. The Company is currently evaluating the reporting formats recommended under this Statement. SFAS No. 131 establishes a new method by which companies will report operating segment information. This method is based on the manner in which management organizes the segments within a company for making operating decisions and assessing performance. The Company continues to evaluate the provisions of SFAS No. 131 and, upon adoption, the Company may report operating segments. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits." SFAS No. 132 revises employers' disclosures about pension and other post retirement benefit plans but does not change the measurement or recognition of those plans. The Company is required to adopt SFAS No. 132 by December 31, 1998. The adoption of SFAS No. 132 is expected to have no effect on the Company's disclosure of employee benefit matters. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities. The Company is required to adopt SFAS No. 133 beginning January 1, 2000. The adoption of SFAS No. 133 is not expected to have a material effect on the Company's consolidated financial position or results of operations. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the 1997 presentation. 3. ACQUISITIONS On September 29, 1998 and August 24, 1998, the Company through its Parent merged with U.S. Rentals and Rental Tools, respectively. These transactions have been accounted for as poolings-of-interests and, accordingly, the consolidated financial statements of the Company have been restated for all periods presented to include the accounts of U.S. Rentals and Rental Tools. Separate revenue and net income (loss) of the Company prior to the above mergers ("United"), U.S. Rentals and Rental Tools prior to the combination are as follows:
US RENTAL UNITED RENTALS TOOLS COMBINED ------- -------- ------- -------- For the year ended December 31, 1997: Revenues.............................. $10,633 $430,443 $48,762 $489,838 Net income (loss)..................... 34 4,830 (966) 3,898 For the year ended December 31, 1996: Revenues.............................. 306,118 48,360 354,478 Net income............................ 33,084 4,642 37,726 For the year ended December 31, 1995: Revenues.............................. 242,847 40,585 283,432 Net income............................ 30,624 2,673 33,297
10 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1997 and 1996, the Company acquired certain assets and assumed certain liabilities of fifteen and two businesses, respectively. The acquisitions were financed through borrowings under the Company's lines of credit and have been recorded using the purchase method of accounting. A summary of the purchase price, assets acquired and liabilities assumed is as follows:
1997 1996 -------- ------- Rental equipment........................................... $ 59,486 $12,435 Inventories................................................ 11,008 -- Accounts receivable........................................ 14,625 1,348 Other assets............................................... 9,542 356 Goodwill................................................... 72,425 894 Liabilities assumed........................................ (43,301) -- -------- ------- $123,785 $15,033 ======== =======
All of the consideration paid for the acquisitions was in cash with the exception of two 1997 acquisitions. One acquisition included a $300 convertible note and the consideration for another acquisition was paid through the issuance of 318,712 shares of the Parent's Common Stock. These shares are subject to adjustment so that their value will equal $3,800 based upon the average daily closing price of the Parent's Common Stock during the 60 day period beginning December 18, 1997. In accordance with such provision, 137,600 shares of Common Stock issued by the Parent in connection with such acquisition were canceled. In addition, contingent consideration is due on that acquisition based upon a percentage of revenues up to a maximum of $2,800. These acquisitions have been accounted for as purchases and, accordingly, the results of their operations have been included in the Company's results of operations from their respective acquisition dates. The purchase prices have been allocated to the assets acquired and liabilities assumed based on their respective fair values at their respective acquisition dates. Contingent purchase price is capitalized when earned and amortized over the remaining life of the related asset. The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the years ended December 31, 1997 and 1996 as though each acquisition described above was made on January 1, for each of the periods.
1997 1996 -------- -------- Revenues................................................... $568,244 $464,097 Net income................................................. 24,715 30,391
The unaudited pro forma results are based upon certain assumptions and estimates which are subject to change. These results are not necessarily indicative of the actual results of operations that might have occurred, nor are they necessarily indicative of expected results in the future. 11 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. NOTES RECEIVABLE FROM AFFILIATE On February 20, 1997, U.S. Rentals completed a recapitalization upon completing its initial public offering whereby it exchanged 20,748,975 shares of its common stock for all the operating assets and liabilities of its predecessor (the "Recapitalization"). The predecessor retained only non- operating assets and liabilities, including $25,700 of notes receivable from an affiliate and $24,400 of notes payable to related parties. In conjunction with the Recapitalization, certain deferred compensation agreements totaling $20,290 were terminated and expensed. Unless otherwise indicated, U.S. Rentals also refers to the Predecessor prior to the Recapitalization. Prior to the Recapitalization, the Company earned interest income from the affiliate of $555, $3,420 and $3,343 for the years ended December 31, 1997, 1996 and 1995, respectively. The notes provide for positive or negative annual adjustments of the principal amount based on the change in the Consumer Price Index, limited to certain percentages of the affiliated entity's cumulative net income from December 31, 1984. The accompanying financial statements include principal adjustments in notes receivable and other income in the amounts of $146, $572 and $220 for the years ended December 31, 1997, 1996 and 1995, respectively. 5. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consists of the following:
DECEMBER 31 -------------------- 1997 1996 --------- --------- Rental equipment....................................... $ 718,960 $ 456,735 Less accumulated depreciation.......................... (257,934) (221,680) --------- --------- Rental equipment, net.................................. $ 461,026 $ 235,055 ========= =========
6. PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
DECEMBER 31 ------------------ 1997 1996 -------- -------- Land..................................................... $ 24,102 $ 16,582 Buildings................................................ 34,474 21,127 Vehicles and delivery equipment.......................... 52,407 34,601 Yard equipment........................................... 7,751 6,793 Furniture and fixtures................................... 9,521 4,626 Leasehold improvements................................... 17,846 11,041 -------- -------- 146,101 94,770 Less accumulated depreciation and amortization........... (47,833) (38,327) -------- -------- $ 98,268 $ 56,443 ======== ========
12 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following:
DECEMBER 31 1997 1996 ------- ------- Accrued profit sharing..................................... $12,844 $ 9,102 Insurance reserves......................................... 11,665 14,002 Accrued payroll............................................ 3,345 1,882 Accrued vacation........................................... 2,668 1,377 Deferred compensation...................................... 2,581 2,214 Accrued interest........................................... 924 2,962 Other...................................................... 15,235 6,020 ------- ------- $49,262 $37,559 ======= =======
8. DEBT AND NOTES PAYABLE TO RELATED PARTIES Debt and notes payable from related parties consists of the following:
DECEMBER 31 1997 1996 -------- -------- U.S. Rentals' revolving line of credit, interest payable monthly at money market rate (ranging from 6.03% to 6.34% at December 31, 1997)............................. $203,000 $ 43,000 Rental Tools' revolving line of credit, interest payable monthly at various rates (ranging from 7.58% to 8.50% at December 31, 1997), due 2003............................ 38,213 -- Subordinated convertible notes........................... 500 -- Senior notes payable to various parties, interest payable semiannually ranging from 6.82% to 7.76%................ -- 90,000 Revolving line of credit, interest payable monthly at reference rate plus .125% (8.25% at December 31, 1996).. -- 26,300 Notes payable to related parties: Demand note to a stockholder of the Parent, interest payable monthly at a rate tied to the Company's revolving line of credit (5.90% at December 31, 1997)................................................. 17,000 -- Subordinated note payable to The Colburn School of Performing Arts, interest payable quarterly at prime rate plus 5%.......................................... -- 20,000 Other related party notes.............................. -- 4,511 Other debt............................................... 5,860 30,526 -------- -------- $264,573 $214,337 ======== ========
The Company's credit facility with a group of financial institutions, for which Bank of America National Trust and Savings Association acts as agent, enables the Company to borrow up to $155,000 on a revolving basis (the "Facility"). The facility terminates on October 8, 2000, at which time all outstanding indebtedness is due. As of December 31, 1997, there was no outstanding indebtedness under the Facility. 13 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) U.S. Rentals' credit facility with various banks provides for an unsecured line of credit of $300,000 maturing no later than 2002. The revolving line of credit is unsecured and includes restrictions as to limitations upon certain ratios of liabilities to net worth and upon the minimum net worth of U.S. Rentals. The Senior and bank note agreements existing at December 31, 1996 were paid down with the proceeds from U.S. Rentals' IPO. During the third quarter, the Company paid down all of the amounts outstanding as of December 31, 1997 under the credit facilities with the proceeds of a new Credit Facility. The new revolving credit facility in the amount of $762,500 replaced the credit facilities that had been previously in place (the Credit Facility). The Credit Facility is with a group of financial institutions, for which Bank of America National Trust and Savings Association acts as the agent. The Revised credit facility requires that the aggregate commitment shall be reduced on the last day of each calendar quarter, beginning September 30, 2001 and continuing through June 30, 2003 by an amount equal to $19,062. The Revised Facility terminates on September 26, 2003, at which time all outstanding indebtedness is due. Borrowings by the Company under the Credit Facility accrue interest at the Company'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 the Company is equal to Bank of America's reserve adjusted eurodollar rate) plus a margin ranging from 0.950% to 1.625% per annum. Borrowings by a Canadian Subsidiary under the Credit Facility accrue interest, at such subsidiary's option, at either (x) the Prime Rate (which is equal to Bank of America Canada's prime rate), (y) the BA Rate (which is equal to Bank of America Canada's BA Rate) plus a margin ranging from 0.95% to 1.625% per annum or (z) the Eurodollar Rate (which for borrowing by the Canadian Subsidiary is equal to Bank of America Canada's reserve adjusted Eurodollar Rate) plus a margin ranging from 0.95% to 1.625% per annum. If at any time an event of default (as defined in the agreement governing the Credit Facility) exists, the interest rate applicable to each loan will increase by 2% per annum. The Company is also required to pay the banks an annual facility fee equal to 0.375% of the banks' $762,500 aggregate lending commitment under the Credit Facility (which fee may be reduced to 0.300% for periods during which the Company maintains a specified funded debt to cash flow ratio). The obligations of the Company under the Credit Facility are (i) secured by substantially all of its assets, the stock of its United States subsidiaries and a portion of the stock of the Company's Canadian subsidiaries and (ii) guaranteed by the Parent and secured by the stock of the Company. The Credit Facility contains certain covenants that require the Company to, among other things, satisfy certain financial tests relating to: (a) maximum leverage, (b) the ratio of senior debt to cash flow, (c) minimum interest coverage ratio, (d) the ratio of funded debt to cash flow, and (e) the ratio of senior debt to tangible assets. The agreements governing the Credit Facility also contains various other covenants that restrict the Company's ability to, among other things, (i) incur additional indebtedness, (ii) permit liens to attach to its assets, (iii) pay dividends or make other restricted payments on its common stock and certain other securities and (iv) make acquisitions unless certain financial conditions are satisfied. In addition, the agreement governing the Credit Facility requires the Company to maintain certain financial ratios and (b) provides that failure by any two of certain of the Company's executive officers to continue to hold executive positions with the Company for a period of 30 consecutive days constitutes an event of default unless replacement officers satisfactory to the lenders are appointed. The subordinated convertible notes consists of two notes; $300 in principal bearing interest at 7% per annum and $200 in principal bearing interest at 7 1/2% per annum. The $200 note was converted into 14,814 shares of the Parent's Common Stock during January 1998. The $300 note is repayable 14 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) in equal quarterly installments of principal and interest through October 2002, is convertible into the Parent's Common Stock at a conversion rate of $16.20 per share and is subordinated to the Company's Credit Facility. Maturities of the Company's debt for each of the next five years at December 31, 1997 are as follows: 1998................................................................ $ 17,394 1999................................................................ 491 2000................................................................ 239 2001................................................................ 182 2002................................................................ 69 Thereafter.......................................................... 246,198
9. INCOME TAXES U.S. Rentals (prior to February 20, 1997) and Rental Tools (prior to August 24, 1998), the companies acquired through mergers with the Company through its Parent in transactions accounted for as poolings-of-interests (see Note 3), had elected to be treated as Subchapter S Corporations. In general, the income or loss of a Subchapter S Corporation is passed through to its owners rather than being subjected to taxes at the entity level. Pro forma net income reflects a provision for income taxes on a pro forma basis for all periods presented as if all such companies were liable for federal and state income taxes as taxable corporate entities for all periods presented. The provision for historical federal and state income taxes is as follows:
YEAR ENDED DECEMBER 31 ------------------------ 1997 1996 1995 --------- -------------- Historical: Federal: Current......................................... $ 3,765 $ -- $ -- Deferred........................................ 14,276 Deferred tax recorded upon Recapitalization..... 6,141 --------- ------ ------ 24,182 -- -- State: Current......................................... 668 420 484 Deferred........................................ 3,279 Deferred tax recorded upon Recapitalization..... 1,379 --------- ------ ------ 5,326 420 484 --------- ------ ------ $ 29,508 $ 420 $ 484 ========= ====== ======
A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 35% to income before provision for income taxes is as follows:
YEAR ENDED DECEMBER 31, 1997 ------------ Computed tax rate at stat- utory tax rate........... $12,221 Increase (decrease) in taxes State income taxes, net of federal tax benefit................ 1,716 Cumulative deferred taxes recorded upon Recapitalization....... 7,520 Loss prior to Recapitalization excluded from taxable income................. 7,543 Other................... 508 ------- $29,508 =======
15 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of deferred income tax assets (liabilities) as of December 31, 1997 are as follows: Accrued liabilities............................................... $ 7,576 Net operating loss carryforward................................... 314 Property and equipment............................................ 44 Allowance for doubtful accounts................................... 2,079 State income taxes................................................ 1,636 Other, net........................................................ 923 -------- 12,572 Depreciation...................................................... (36,334) Intangibles and other............................................. (633) -------- $(24,395) ========
The Company has net short-term deferred tax assets in the amount of $880, which are reported in the balance sheet in prepaid expenses and other assets. The Company has net operating loss carryforwards ("NOL's") of $846 for income tax purposes that expire in 2012. 10. CAPITAL STOCK As of December 31, 1997 there are outstanding warrants to purchase an aggregate of 6,344,058 shares of Common Stock of the Parent. Each warrant provides for an exercise price of $10.00 per share, is currently exercisable and may be exercised at any time until September 12, 2007. 1997 Stock Option Plan The Board of Directors of the Parent has adopted the 1997 Stock Option Plan (the "Stock Option Plan") which provides for the granting of options to purchase not more than an aggregate of 5,000,000 shares of Common Stock of the Parent. All officers, employees and others who render services to the Company are eligible to participate in the Stock Option Plan. Each option granted pursuant to the Stock Option Plan must provide for an exercise price per share that is at least equal to the fair market value per share of Common Stock of the Parent on the date of grant. No options may be granted under the Stock Option Plan after August 21, 2007. The exercise price of each option, the period during which each option may be exercised and the other terms and conditions of each option are determined by the Board of Directors of the Parent (or by a committee appointed by the Board). During 1997, 904,583 options to purchase shares of the Parent's Common Stock were granted under the Stock Option Plan and remain outstanding at December 31, 1997. The weighted average exercise price per share of such options was $12.76. Such options had exercise prices ranging from $10 to $30 per share. Of such options 818,583 provided for an exercise price per share in the range of $10.00 to $19.99 (the weighted average exercise price and weighted average remaining life of the options in this range being $11.84 and 9.9 years, respectively) and 86,000 provided for an exercise price per share in the range of $20.01 to $30.00 (the weighted average exercise price and weighted average remaining life of the options in this range being $22.51 and 9.9 years, respectively). At December 31, 1997, 60,000 options to purchase the Parent's Common Stock at $15.00 per share were exercisable. 16 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1997 Performance Award Plan Effective February 20, 1997, U.S. Rentals adopted the 1997 Performance Award Plan under which stock options and other awards could be granted to key employees and directors at prices and terms established by U.S. Rentals at the date of grant. The exercise price of all options issued during 1997 equaled the fair value of the stock on the grant date which ranged from $17.88 to $26.88. Accordingly, no compensation expense has been recognized. Options outstanding at December 31, 1997 vest ratably over periods ranging from five to ten years and expire in 2007. The following table summarizes the activity under the Performance Award Plan:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- -------- Shares under option: Outstanding at December 31, 1996......................... -- $ -- Granted ($17.88-$20.00).................................. 3,867,387 $19.99 ($23.44-$26.88)...................................... 206,500 $25.78 --------- Outstanding at December 31, 1997......................... 4,073,887 $20.29 =========
There were no vested options outstanding and 526,113 shares were available for future grants under the Performance Award Plan at December 31, 1997. As a result of the merger, all outstanding options to purchase shares of U.S. Rentals common stock became fully vested and were converted into options to purchase the Parent's common stock at the exchange ratio of 0.9625. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for stock-based employee compensation arrangements whereby no compensation cost related to stock options is deducted in determining net income. Had compensation cost for the Company's stock option plans been determined pursuant to Financial Accounting Standards Board Statement No. 123 ("SFAS No. 123"), "Accounting for Stock- Based Compensation," the Company's net income and earnings per share would have differed. The Black-Scholes option pricing model estimates fair value of options using subjective assumptions which can materially affect fair value estimates and, therefore, does not necessarily provide a single measure of fair value of options. Using the Black-Scholes option pricing model and a risk-free interest rate ranging from 5.8% to 6.61%, a volatility factor for the market price of the Company's Common Stock of 32% and a weighted-average expected life of options of approximately three to five years, the Company's net income, after giving affect to the Recapitalization, would have been $17,055. For purposes of these pro forma disclosures, the estimated fair value of options is amortized over the options' vesting period. Since the number of options granted and their fair value may vary significantly from year to year, the pro forma compensation expense in future years may be materially different. At December 31, 1997 there are 6,344,058 shares of Common Stock of the Parent reserved for the exercise of warrants, 5,000,000 shares of Common Stock of the Parent reserved for issuance pursuant to options granted, and that may be granted in the future, under the 1997 Stock Option Plan and 33,332 shares of Common Stock of the Parent reserved for the future conversion of convertible debt. 17 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases rental equipment, real estate and certain office equipment under operating leases. Certain real estate leases require the Company to pay maintenance, insurance, taxes and certain other expenses in addition to the stated rentals. Future minimum lease payments, by year and in the aggregate, for noncancellable operating leases with initial or remaining terms of one year or more are as follows at December 31, 1997: 1998.............................................................. $ 9,185 1999.............................................................. 7,270 2000.............................................................. 5,709 2001.............................................................. 4,891 2002.............................................................. 3,418 Thereafter........................................................ 13,061 ------- $43,534 =======
Rent expense under non-cancelable operating leases totaled $6,367, $4,151 and $3,855 for the years ended December 31, 1997, 1996 and 1995, respectively. EMPLOYEE BENEFIT PLANS The Company sponsors two defined contribution 401(k) retirement plans (the Plans) which are subject to the provisions of ERISA. Under the Plans, the Company matches a minimum of 50% of the participants contributions up to a specified amount. Company contributions to the Plans were $358, $316 and $404 for the years ended December 31, 1997, 1996 and 1995, respectively. LEGAL MATTERS The Company is party to legal proceedings and potential claims arising in the ordinary course of its business. In the opinion of management, the Company has adequate legal defenses, reserves, or insurance coverage with respect to these matters so that the ultimate resolution will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. The Company has accrued $9,563 and $12,011 at December 31, 1997 and 1996, respectively, to cover the uninsured portion of possible costs arising from these pending claims and other potential unasserted claims. ENVIRONMENTAL MATTERS The Company and its operations are subject to various laws and related regulations governing environmental matters. Under such laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as investigation of property damage. The Company incurs ongoing expenses associated with the removal of underground storage tanks and the performance of appropriate remediation at certain of its locations. The Company believes that such removal and remediation will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. 18 UNITED RENTALS (NORTH AMERICA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) SELECTED FINANCIAL DATA The following table of quarterly financial information has been prepared from unaudited financial statements of the Company, and reflects adjustments which are, in the opinion of management, necessary for a fair presentation of the interim periods presented.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- -------- -------- -------- For the year ended December 31, 1997: Total revenues....................... $90,409 $108,395 $129,020 $162,014 Gross profit......................... 22,025 32,515 45,464 49,288 Income (loss) before extraordinary item................................ (24,165) 8,062 11,258 10,254 Extraordinary item................... 1,511 -- -- -- Net income(loss)..................... (25,676) 8,062 11,258 10,254 For the year ended December 31, 1996: Total revenues....................... 67,290 83,323 102,708 101,157 Gross profit......................... 17,784 24,973 35,859 34,417 Net income........................... 3,621 7,790 15,813 10,502
13. SUBSEQUENT EVENTS Subsequent to December 31, 1997 and through November 17, 1998, the Company completed the acquisition of 76 equipment rental companies (the "Acquisitions") and the aggregate consideration paid by the Company for the Acquisitions was $823,639 and consisted of approximately $731,355 in cash, 3,631,765 shares of the Parent's Common stock and warrants to purchase 30,000 shares of the Parent's Common Stock. The Company funded a portion of the cash consideration for these acquisitions with cash on hand and the balance with borrowings under the Credit Facility and proceeds from the public offering noted below. On March 11, 1998, the Parent completed a public offering of 8,625,000 shares of the Parent's Common Stock. Net proceeds of the offering were approximately $207,400 which were contributed by the Parent to the Company. On May 19, 1998, the Company through its Parent completed an offering of $200,000 of 9 1/2% Senior Subordinated Notes due 2008. Net proceeds of the offering were approximately $193,000. On August 5, United Rentals Trust I, a subsidiary of the Parent, completed a $300,000 offering of Convertible Quarterly Income Preferred Securities. Net proceeds of the offering of $290,000 were contributed by the Parent to the Company. On August 12, 1998, the Company completed an offering of $205,000 of 8.80% Senior Subordinated Notes due 2008. Net proceeds of the offering were approximately $197,500. 19 -----END PRIVACY-ENHANCED MESSAGE-----