-----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, Dln6rLtkzRWN+yhB/SjysTBq5T7S9Ew/uEsZvijmddcRCt09P95/kc1/u2hw//Is IND7JF64qR1hcl9pIFbhJQ== 0000950130-99-006490.txt : 19991117 0000950130-99-006490.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950130-99-006490 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED RENTALS INC /DE CENTRAL INDEX KEY: 0001067701 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 061522496 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14387 FILM NUMBER: 99754371 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 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-13663 FILM NUMBER: 99754372 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 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______________to___________________ Commission File No. 1-14387 United Rentals, Inc. Commission File No. 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 (I.R.S. Employer of incorporation or organization) Identification Nos.) Four Greenwich Office Park, Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip Code)
(203) 622-3131 (Registrants' telephone number, including area code) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. X Yes No___ --- As of November 1, 1999, there were 72,050,170 shares of the United Rentals, Inc. common stock, $.01 par value, outstanding. There is no market for the common stock of United Rentals (North America), Inc., all outstanding shares of which are owned by United Rentals, Inc. This combined Form 10-Q is separately filed by (i) United Rentals, Inc. and (ii) United Rentals (North America), Inc. (which is a wholly owned subsidiary of United Rentals, Inc.). United Rentals (North America), Inc. meets the conditions set forth in general instruction H(1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by such instruction. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED RENTALS, INC. UNITED RENTALS (NORTH AMERICA), INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 INDEX
Page ---- PART I FINANCIAL INFORMATION Item 1 Unaudited Consolidated Financial Statements United Rentals, Inc. Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 (unaudited)................................. 5 United Rentals, Inc. Consolidated Statements of Operations for the Nine and Three Months Ended September 30, 1999 and 1998 (unaudited)................................................... 6 United Rentals, Inc. Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 1999 (unaudited)................................................... 7 United Rentals, Inc. Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (unaudited)................................................... 8 United Rentals (North America), Inc. Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 (unaudited)............................. 9 United Rentals (North America), Inc. Consolidated Statements of Operations for the Nine and Three Months Ended September 30, 1999 and 1998 (unaudited)................................................... 10 United Rentals (North America), Inc. Consolidated Statement of Stockholder's Equity for the Nine Months Ended September 30, 1999 (unaudited).............................................. 11 United Rentals (North America), Inc. Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (unaudited)..... 12 Notes to Unaudited Consolidated Financial Statements........... 13 Management's Discussion and Analysis of Financial Condition and Item 2 Results of Operations......................................... 25 Item 3 Quantitative and Qualitative Disclosures about Market Risk..... 36 PART II OTHER INFORMATION Item 1 Legal Proceedings.............................................. 36 Item 2 Changes in Securities and Use of Proceeds...................... 36 Item 4 Submission of Matters to a Vote of Security Holders............ 39 Item 6 Exhibits and Reports on Form 8-K............................... 40 Signatures..................................................... 42
Certain of the 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 these factors are discussed in Item 2 of Part I of this Report under the caption "--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. UNITED RENTALS United Rentals is the largest equipment rental company in North America with 664 branch locations in 44 states, six Canadian provinces 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 one million customers. We have one of the most comprehensive and newest fleets in the equipment rental industry. The types of 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 $2.8 billion and a weighted average age of approximately 25 months (based on original purchase price). We began operations in October 1997 and have grown through a combination of internal growth, acquisitions and the opening of new rental locations. We have an ongoing acquisition program and have completed 182 acquisitions through October 28, 1999, including our merger with U.S. Rentals, Inc. ("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 the largest and most comprehensive equipment rental fleet in the industry, which enables 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; . minimize lost sales due to equipment being unavailable; and . serve attractive specialty equipment rental markets, such as aerial work platforms, trench shoring and highway safety. Operating Efficiencies. We generally group our branches into clusters of 10 to 30 locations that are in the same geographic area. Our information technology systems enable each branch to track equipment at other branches 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 specialties of different branches within each cluster, which increases revenues without increasing marketing expenses; 1 . reduce costs by centralizing common functions such as payroll, accounts payable and credit and collection into 36 credit offices and service centers; and . consolidate overlapping operations to better serve our customers. In the third quarter of 1999, approximately 9.5% of our rental revenue was attributable to equipment sharing among branches. 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. Information Technology Systems. We have modern information technology systems which facilitate decision-making and enable us to respond to changing market conditions. These systems provide management with a wide range of operating and financial data, including reports on inventory, receivables, customers, vendors, fleet utilization and price and sales trends. These systems are designed to enable 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. These systems include 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 specialists that supports our information technology systems and extends the systems 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 1% of our revenues during 1998 (on a pro forma basis as if the acquisitions that we completed in 1998 and 1999 had been completed at the beginning of 1998). Geographic Diversity. We have branches in 44 states, six Canadian provinces 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 individuals who have extensive operating experience in the equipment rental industry-- including former executives and managers of U.S. Rentals--with executives who have proven track records in a number of other industries. Strong and Motivated Branch Management. Each of our branches has a full-time branch manager who is supervised by one of our 53 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. We balance the autonomy that we grant branch managers with systems and controls, including detailed monthly operating reviews, 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 is engaged in identifying and evaluating acquisition candidates and executing our acquisition program. The core of this group consists of seasoned acquisition professionals. The team also includes former owners of businesses that we acquired, who have extensive industry experience and contacts with potential acquisition candidates. 2 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: . increasing the cross-marketing of our equipment specialties at different locations; . increasing our advertising and marketing--which become increasingly cost-effective as we grow because the benefits are spread over a larger number of branches; . expanding our national accounts program--which dedicates a portion of our sales force to establishing and expanding relationships with large customers that have a national or multi-regional presence; . increasing our rentals to industrial companies by developing a comprehensive marketing program specifically aimed at this sector; and . expanding and modernizing our equipment fleet. 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: . an audit group that is responsible for ensuring that we have adequate financial, operating, and management information controls throughout our organization; . a team of regional and district controllers that monitors each branch for compliance with financial and accounting procedures established at corporate headquarters; and . a 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 generates annual rental 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 25.2% from 1993 through 1998 (based upon revenues, 3 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 is being driven by the following trends: Recognition of Advantages of Renting. Equipment users are increasingly recognizing the many advantages that equipment rental may offer compared with ownership. They recognize that by renting they can: . avoid the large capital investment required for equipment purchases; . reduce storage and maintenance costs; . supplement owned equipment thereby increasing the range and number of jobs that can be worked on; . access a broad selection of equipment and select the equipment best suited for each particular job; . obtain equipment as needed and minimize the costs associated with idle equipment; and . 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 equipment. 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. Outsourcing by Industrial and Other Equipment Users. 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 will often be 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 other 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 remains 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 1998, there were only 12 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 1998 as provided 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 25% 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. 4 UNITED RENTALS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ----------------- ---------------- (In thousands, except share data) ASSETS Cash and cash equivalents.............. $ 31,071 $ 20,410 Accounts receivable, net of allowance for doubtful accounts of $56,170 in 1999 and $41,201 in 1998.............. 455,791 233,282 Inventory.............................. 160,287 70,994 Prepaid expenses and other assets...... 132,675 59,395 Rental equipment, net.................. 1,771,209 1,143,006 Property and equipment, net............ 286,983 185,511 Intangible assets, net of accumulated amortization of $40,889 in 1999 and $14,520 in 1998....................... 1,687,934 922,065 ---------------- ---------------- $ 4,525,950 $ 2,634,663 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable..................... $ 353,470 $ 121,940 Debt................................. 2,214,589 1,314,574 Deferred income taxes................ 89,123 43,560 Accrued expenses and other liabilities......................... 215,560 128,359 ---------------- ---------------- Total liabilities.................. 2,872,742 1,608,433 Commitments and contingencies Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust...... 300,000 300,000 Stockholders' equity: Preferred stock--$.01 par value, 5,000,000 shares authorized:........ Series A perpetual convertible preferred stock--$300,000 liquidation preference, 300,000 shares issued and outstanding in 1999............................... 3 Series B perpetual convertible preferred stock--$150,000 liquidation preference, 150,000 shares issued and outstanding in 1999............................... 2 Common stock--$.01 par value, 500,000,000 shares authorized in 1999 and 1998, 72,048,272 in 1999 and 68,427,999 in 1998 shares issued and outstanding..................... 720 684 Additional paid-in capital........... 1,217,497 689,018 Retained earnings.................... 135,128 36,809 Accumulated other comprehensive income.............................. (142) (281) ---------------- ---------------- Total stockholders' equity......... 1,353,208 726,230 ---------------- ---------------- $ 4,525,950 $ 2,634,663 ================ ================
The accompanying notes are an integral part of these consolidated financial statements. 5 UNITED RENTALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended Three Months Ended September 30, September 30, -------------------- ------------------- 1999 1998 1999 1998 ---------- --------- -------- --------- (In thousands, except per share data) Revenues: Equipment rentals.................. $1,112,244 $ 592,502 $468,942 $ 282,818 Sales of rental equipment.......... 159,803 73,703 72,609 30,481 Sales of equipment and merchandise and other revenues................ 292,542 138,057 127,067 65,775 ---------- --------- -------- --------- Total revenues...................... 1,564,589 804,262 668,618 379,074 Cost of revenues: Cost of equipment rentals, excluding depreciation............ 476,321 263,529 197,175 119,594 Depreciation of rental equipment... 200,761 119,970 76,694 52,953 Cost of rental equipment sales..... 92,457 39,820 42,538 17,261 Cost of equipment and merchandise sales and other operating costs... 220,016 106,893 95,232 50,549 ---------- --------- -------- --------- Total cost of revenues.............. 989,555 530,212 411,639 240,357 ---------- --------- -------- --------- Gross profit........................ 575,034 274,050 256,979 138,717 Selling, general and administrative expenses........................... 248,194 128,763 98,333 60,413 Merger-related expenses ............ 42,216 42,216 Non-rental depreciation and amortization....................... 43,208 23,693 16,688 11,201 ---------- --------- -------- --------- Operating income.................... 283,632 79,378 141,958 24,887 Interest expense.................... 93,541 39,170 42,235 23,924 Preferred dividends of a subsidiary trust.............................. 14,625 2,979 4,875 2,979 Other (income) expense, net......... 8,804 (4,524) (420) (291) ---------- --------- -------- --------- Income (loss) before provision for income taxes and extraordinary item............................... 166,662 41,753 95,268 (1,725) Provision for income taxes.......... 68,343 25,229 39,060 8,431 ---------- --------- -------- --------- Income (loss) before extraordinary item............................... 98,319 16,524 $ 56,208 (10,156) Extraordinary item, net of income taxes of $14,255................... 21,337 21,337 ---------- --------- -------- --------- Net income (loss)................... $ 98,319 $ (4,813) $ 56,208 $ (31,493) ========== ========= ======== ========= Basic earnings per share: Income (loss) before extraordinary item.............................. $ 1.39 $ 0.26 $ 0.78 $ (0.15) Extraordinary item, net............ (0.33) (0.31) ---------- --------- -------- --------- Net income (loss).................. $ 1.39 $ (0.07) $ 0.78 $ (0.46) ========== ========= ======== ========= Diluted earnings per share: Income (loss) before extraordinary item.............................. $ 1.06 $ 0.23 $ 0.60 $ (0.13) Extraordinary item, net............ (0.30) (0.28) ---------- --------- -------- --------- Net income (loss).................. $ 1.06 $ (0.07) $ 0.60 $ (0.41) ========== ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 6 UNITED RENTALS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Series A Series B Perpetual Convertible Perpetual Convertible Preferred Stock Preferred Stock Common Stock ---------------------- --------------------- ----------------- Additional Number of Number of Number of Paid-in Retained Comprehensive Shares Amount Shares Amount Shares Amount Capital Earnings Income ------------ --------- ------------ --------- ---------- ------ ---------- -------- ------------- (In thousands, except share data) Balance, December 31, 1998........... 68,427,999 $684 $ 689,018 $ 36,809 Comprehensive income: Net income..... 98,319 $98,319 Other comprehensive income: Foreign currency translation adjustments... 139 ------- Comprehensive income......... $98,458 ======= Issuance of Series A perpetual convertible preferred stock.......... 300,000 $ 3 286,997 Issuance of Series B perpetual convertible preferred stock.......... 150,000 $ 2 143,798 Issuance of common stock... 2,289,670 23 65,225 Exercise of common stock options.. 1,330,603 13 32,459 ----------- --------- ----------- --------- ---------- ---- ---------- -------- Balance, September 30, 1999.. 300,000 $ 3 150,000 $ 2 72,048,272 $720 $1,217,497 $135,128 =========== ========= =========== ========= ========== ==== ========== ======== Accumulated Other Comprehensive Income ------------- Balance, December 31, 1998........... $(281) Comprehensive income: Net income..... Other comprehensive income: Foreign currency translation adjustments... 139 Comprehensive income......... Issuance of Series A perpetual convertible preferred stock.......... Issuance of Series B perpetual convertible preferred stock.......... Issuance of common stock... Exercise of common stock options.. ------------- Balance, September 30, 1999.. $(142) =============
The accompanying notes are an integral part of these consolidated financial statements. 7 UNITED RENTALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ---------------------- 1999 1998 ---------- ---------- (In thousands) Cash Flows From Operating Activities: Net income (loss)..................................... $ 98,319 $ (4,813) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................ 243,969 143,663 Amortization of original issue discount and deferred financing fees...................................... 3,122 527 Gain on sale of rental equipment..................... (67,346) (33,883) Gain on sale of business............................. (3,644) Extraordinary item................................... 35,592 Write down of assets held for sale................... 4,040 Deferred income taxes................................ 44,257 402 Changes in operating assets and liabilities: Accounts receivable.................................. (116,783) (59,718) Inventory............................................ (23,242) (9,414) Prepaid expenses and other assets.................... (55,066) 10,272 Accounts payable..................................... 176,425 68,161 Accrued expenses and other liabilities............... 61,440 53,269 ---------- ---------- Net cash provided by operating activities........ 365,095 204,454 Cash Flows From Investing Activities: Purchases of rental equipment......................... (580,496) (423,073) Purchases of property and equipment................... (75,770) (66,134) Proceeds from sale of rental equipment................ 159,803 73,703 In-process acquisition costs.......................... (2,206) (4,413) Payments of contingent purchase price................. (7,194) (2,617) Purchases of other companies.......................... (905,267) (833,297) ---------- ---------- Net cash used in investing activities............ (1,411,130) (1,255,831) Cash Flows From Financing Activities: Proceeds from the issuance of common stock, net of issuance costs....................................... 65,198 206,456 Proceeds from the issuance of Series A Preferred, net of issuance costs.................................... 287,000 Proceeds from the issuance of Series B Preferred, net of issuance costs.................................... 143,800 Proceeds from the issuance of redeemable convertible preferred securities................................. 300,000 Proceeds from debt.................................... 2,105,702 1,934,137 Payments of debt...................................... (1,560,683) (1,410,122) Payments of debt financing costs...................... (11,341) (26,711) Proceeds from the exercise of common stock options.... 27,020 537 Subchapter S distributions of a pooled entity......... (3,536) ---------- ---------- Net cash provided by financing activities........ 1,056,696 1,000,761 ---------- ---------- Net increase (decrease) in cash and cash equivalents.. 10,661 (50,616) Cash and cash equivalents at beginning of period...... 20,410 72,411 ---------- ---------- Cash and cash equivalents at end of period............ $ 31,071 $ 21,795 ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest................................ $ 79,242 $ 17,795 Cash paid for income taxes............................ $ 15,870 $ 9,679 Supplemental disclosure 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......................... $1,355,288 $1,335,091 Liabilities assumed.................................. (440,626) (441,120) Less: Amounts paid in common stock and warrants.......... (60,674) Amounts paid through issuance of debt.............. (9,395) ---------- ---------- Net cash paid.................................... $ 905,267 $ 833,297 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 8 UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------- ------------ (In thousands, except share data) ASSETS Cash and cash equivalents........................... $ 38,552 $ 20,410 Accounts receivable, net of allowance for doubtful accounts of $56,170 in 1999 and $41,201 in 1998.... 455,791 233,282 Inventory........................................... 160,287 70,994 Prepaid expenses and other assets................... 79,326 43,176 Rental equipment, net............................... 1,771,209 1,143,006 Property and equipment, net......................... 265,969 170,537 Intangible assets, net of accumulated amortization of $40,889 in 1999 and $14,520 in 1998............. 1,687,934 922,065 ---------- ---------- $4,459,068 $2,603,470 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accounts payable.................................. $ 313,823 $ 108,426 Debt.............................................. 2,214,589 1,314,574 Deferred income taxes............................. 89,123 43,560 Accrued expenses and other liabilities............ 203,056 115,558 ---------- ---------- Total liabilities............................... 2,820,591 1,582,118 Commitments and contingencies Stockholder's equity: Common stock--$0.01 par value, 3,000 shares authorized, 1,000 shares issued and outstanding.. Additional paid-in capital........................ 1,507,314 984,345 Retained earnings................................. 131,305 37,288 Accumulated other comprehensive income............ (142) (281) ---------- ---------- Total stockholder's equity...................... 1,638,477 1,021,352 ---------- ---------- $4,459,068 $2,603,470 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 9 UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended Three Months Ended September 30, September 30, ----------------- -------------------- 1999 1998 1999 1998 ---------- -------- --------- --------- (In thousands) Revenues: Equipment rentals................. $1,112,244 $592,502 $ 468,942 $ 282,818 Sales of rental equipment......... 159,803 73,703 72,609 30,481 Sales of equipment and merchandise and other revenues............... 292,542 138,057 127,067 65,775 ---------- -------- --------- --------- Total revenues..................... 1,564,589 804,262 668,618 379,074 Cost of revenues: Cost of equipment rentals, excluding depreciation........... 476,321 263,529 197,175 119,594 Depreciation of rental equipment.. 200,761 119,970 76,694 52,953 Cost of rental equipment sales.... 92,457 39,820 42,538 17,261 Cost of equipment and merchandise sales and other operating costs.. 220,016 106,893 95,232 50,549 ---------- -------- --------- --------- Total cost of revenues............. 989,555 530,212 411,639 240,357 ---------- -------- --------- --------- Gross profit....................... 575,034 274,050 256,979 138,717 Selling, general and administrative expenses.......................... 248,194 128,763 98,333 60,413 Merger-related expenses............ 42,216 42,216 Non-rental depreciation amortization...................... 40,828 23,693 15,971 11,201 ---------- -------- --------- --------- Operating income................... 286,012 79,378 142,675 24,887 Interest expense................... 93,400 39,170 42,094 23,924 Other (income) expense, net........ 8,650 (4,524) (332) (291) ---------- -------- --------- --------- Income before provision for income taxes and extraordinary item...... 183,962 44,732 100,913 1,254 Provision for income taxes......... 75,320 26,450 41,360 9,652 ---------- -------- --------- --------- Income (loss) before extraordinary item.............................. 108,642 18,282 59,553 (8,398) Extraordinary item, net of income taxes of $14,255.................. 21,337 21,337 ---------- -------- --------- --------- Net income (loss).................. $ 108,642 $ (3,055) $ 59,553 $ (29,735) ========== ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 10 UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)
Common Stock ---------------- Additional Accumulated Number Paid-In Retained Comprehensive Other Comprehensive of Shares Amount Capital Earnings Income Income --------- ------ ---------- -------- ------------- ------------------- (In thousands, except share data) Balance, December 31, 1998................... 1,000 $ 984,345 $ 37,288 $(281) Comprehensive income: Net income............. 108,642 $108,642 Other comprehensive income: Foreign currency translation adjustments.......... 139 139 -------- Comprehensive income.... $108,781 ======== Contributed capital from parent................. 522,969 Dividend distributions to parent.............. (14,625) ----- --- ---------- -------- ----- Balance, September 30, 1999................... 1,000 $1,507,314 $131,305 $(142) ===== === ========== ======== =====
The accompanying notes are an integral part of these consolidated financial statements. 11 UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ------------------------ 1999 1998 ----------- ----------- (In thousands) Cash Flows From Operating Activities: Net income (loss)................................... $ 108,642 $ (3,055) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization...................... 241,589 143,663 Amortization of original issue discount and deferred financing fees........................... 2,964 527 Gain on sale of rental equipment................... (67,346) (33,883) Gain on sale of business........................... (3,644) Extraordinary item................................. 35,592 Writedown of assets held for sale.................. 4,040 Deferred income taxes.............................. 44,257 402 Changes in operating assets and liabilities: Accounts receivable................................ (116,783) (59,718) Inventory.......................................... (23,242) (9,414) Prepaid expenses and other assets.................. (38,460) 24,932 Accounts payable................................... 150,292 58,039 Accrued expenses and other liabilities............. 56,235 43,906 ----------- ----------- Net cash provided by operating activities........ 358,148 201,387 Cash Flows From Investing Activities: Purchases of rental equipment....................... (580,496) (423,073) Purchases of property and equipment................. (46,668) (53,997) Proceeds from sale of rental equipment.............. 159,803 73,703 In-process acquisition costs........................ (2,206) (4,413) Payments of contingent purchase price............... (7,194) (2,617) Purchases of other companies........................ (905,267) (833,297) ----------- ----------- Net cash used in investing activities............ (1,382,028) (1,243,694) Cash Flows From Financing Activities: Proceeds from debt.................................. 2,105,702 1,934,137 Payments of debt.................................... (1,560,683) (1,410,122) Payments of debt financing costs.................... (11,341) (26,711) Capital contributions by parent..................... 522,969 497,921 Dividend distributions to parent.................... (14,625) Subchapter S distributions of a pooled entity....... (3,536) ----------- ----------- Net cash provided by financing activities........ 1,042,022 991,689 ----------- ----------- Net increase (decrease) in cash and cash equivalents........................................ 18,142 (50,618) Cash and cash equivalents at beginning of period.... 20,410 72,411 ----------- ----------- Cash and cash equivalents at end of period.......... $ 38,552 $ 21,793 =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest.............................. $ 79,242 $ 17,795 Cash paid for income taxes.......................... $ 15,870 $ 9,679 Supplemental disclosure 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....................... $ 1,355,288 $ 1,335,091 Liabilities assumed................................ (440,626) (441,120) Less: Amounts paid in common stock and warrants........ (60,674) Amounts paid through issuance of debt............ (9,395) ----------- ----------- Net cash paid.................................. $ 905,267 $ 833,297 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 12 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation General United Rentals, Inc., is principally a holding company ("Holdings") and conducts its operations primarily through its wholly owned subsidiary United Rentals (North America), Inc. ("URI") and subsidiaries of URI. URI was incorporated in August 1997, initially capitalized in September 1997 and commenced equipment rental operations in October 1997. Holdings was incorporated in July 1998 and became the parent of URI on August 5, 1998, pursuant to the reorganization of the legal structure of URI. Prior to such reorganization, the name of URI was United Rentals, Inc. References herein to "United Rentals" or the "Company" refer to Holdings and its subsidiaries, with respect to periods following the reorganization, and to URI and its subsidiaries, with respect to periods prior to the reorganization. Separate footnote information is not presented for the financial statements of URI and subsidiaries as that information is substantially equivalent to that presented below. Earnings per share data is not provided for the operating results of URI and its subsidiaries as they are wholly owned subsidiaries of Holdings. The Consolidated Financial Statements of the Company included herein are unaudited and, in the opinion of management, such financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of the interim periods presented. Interim financial statements do not require all disclosures normally presented in year-end financial statements, and, accordingly, certain disclosures have been omitted. Results of operations for the nine and three month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The Consolidated Financial Statements included herein should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("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, 2001. 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. 2.Acquisitions Acquisitions Accounted for as Poolings-of-Interests On August 24, 1998, the Company issued 2,744,368 shares of its common stock for all of the outstanding shares of common stock of Rental Tools and Equipment Co. This transaction was accounted for as a pooling-of-interests. On September 24, 1998, the Company issued 1,456,997 shares of its common stock for all of the outstanding shares of common stock of Wynne Systems, Inc. This transaction was accounted for as a pooling-of-interests; however, this transaction was not material to the Company's consolidated operations and financial position and, therefore, the Company's financial statements have not been restated for this transaction but have been combined beginning July 1, 1998. On September 29, 1998, a merger (the "Merger") of United Rentals, Inc. and U.S. Rentals, Inc. ("U.S. Rentals") was completed. The Merger was effected by having a wholly owned subsidiary of United Rentals, Inc. merge with and into U.S. Rentals. Following the Merger, United Rentals, Inc. contributed the capital stock 13 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of U.S. Rentals to URI, a wholly owned subsidiary of United Rentals, Inc. Pursuant to the Merger, each outstanding share of common stock of U.S. Rentals was converted into the right to receive 0.9625 of a share of common stock of United Rentals, Inc. An aggregate of approximately 29.6 million shares of United Rentals, Inc. common stock were issued in the Merger in exchange for the outstanding shares of U.S. Rentals common stock. The Merger was accounted for as a pooling-of-interests. Acquisitions Accounted for as Purchases During the nine months ended September 30, 1999, the Company completed 89 acquisitions that were accounted for as purchases. The results of operations of the businesses acquired in these acquisitions have been included in the Company's results of operations from their respective acquisition dates. The aggregate initial consideration paid by the Company for such acquisitions that were accounted for as purchases was $832.5 million and consisted of approximately $823.1 million in cash and $9.4 million in seller notes. In addition, the Company repaid or assumed outstanding indebtedness of the companies acquired in such acquisitions in the aggregate amount of $350.4 million. The Company also agreed in connection with three of such acquisitions to pay additional amounts to the former owners based upon specified future revenues and/or new store openings. Such amounts are limited to a specified maximum amount which varies from $100,000 to $200,000, with the average being $133,000. The purchase prices for such acquisitions have been allocated to the assets acquired and liabilities assumed based on their respective fair values at their respective acquisition dates. However, the Company has not completed its valuation of all of its purchases and, accordingly, the purchase price allocations are subject to change when additional information concerning asset and liability valuations are completed. The following table summarizes, on an unaudited pro forma basis, the results of operations of the Company for the nine months ended September 30, 1999 and 1998 as though (i) each acquisition summarized above which was consummated during the nine months ended September 30, 1999, was made on January 1, 1999, in the case of the results for the nine months ended September 30, 1999, and (ii) each acquisition which was consummated during the period January 1, 1998 to September 30, 1999 as described above and in Note 3 to the Notes to Consolidated Financial Statements included in the Company's 1998 Annual Report on Form 10-K was made on January 1, 1998 in the case of the results for the nine months ended September 30, 1998 (in thousands, except per share data):
Nine Months Ended September 30, --------------------- 1999 1998 ---------- ---------- Revenues............................................ $1,879,556 $1,601,945 Income before extraordinary item.................... 103,032 38,918 Basic earnings per share............................ $ 1.45 $ 0.57 Diluted earnings per share.......................... $ 1.11 $ 0.52
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. 3. Revolving Credit Facility URI obtained a credit facility (the "Credit Facility") dated as of September 29, 1998, with a group of financial institutions. The Credit Facility enables URI to borrow up to $772.5 million on a revolving basis and 14 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) permits a Canadian subsidiary of URI to directly borrow up to $40 million under the Credit Facility (provided that the aggregate borrowings of URI and the Canadian subsidiary do not exceed $772.5 million). The Credit Facility terminates on September 26, 2003, at which time all outstanding indebtedness is due. The amount of indebtedness outstanding under the Credit Facility was $499.0 million at September 30, 1999. 4. Term Loan URI obtained a $450 million term loan dated as of July 15, 1999 from a group of financial institutions (the "Term Loan C"). The Term Loan C was increased to $600 million in November 1999 and matures in June 2006. URI used the net proceeds from the Term Loan C to repay a portion of the outstanding indebtedness under the Company's Credit Facility. Prior to maturity, quarterly installments of principal in the amount of $1.5 million are due on the last day of each calendar quarter, commencing September 30, 2000. The amount due at maturity is $565.5 million. The Term Loan C accrues 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 referenced rate) plus a margin of 0.625% per annum, or (b) the Eurodollar Rate (which for borrowings by URI is equal to Bank of America's reserve adjusted eurodollar rate) plus a margin of 2.50% per annum. 5.Senior Subordinated Notes On March 23, 1999, URI issued $250 million aggregate principal amount of 9% Senior Subordinated Notes which are due April 1, 2009. URI used approximately $102.0 million of the net proceeds from the sale of such notes to repay all of the then outstanding indebtedness under the Credit Facility and used the balance of such net proceeds from this offering for acquisitions, capital expenditures and general corporate purposes. 6. Series A Perpetual Convertible Preferred Stock On January 7, 1999, Holdings sold 300,000 shares of its Series A Perpetual Convertible Preferred Stock ("Series A Preferred"). The net proceeds from the sale of the Series A Preferred were approximately $287.0 million. Holdings contributed such net proceeds to URI and URI used such net proceeds to repay all of the then outstanding indebtedness under the Credit Facility. The Series A Preferred is convertible into 12,000,000 shares of Holdings common stock at $25 per share based upon the liquidation preference of $1,000 per share of Series A Preferred, subject to adjustment. 7. Series B Perpetual Convertible Preferred Stock On September 30, 1999, Holdings sold 150,000 shares of its Series B Perpetual Convertible Preferred Stock ("Series B Preferred"). The net proceeds from the sale of the Series B Preferred were approximately $143.8 million. Holdings contributed such net proceeds to URI and URI used such net proceeds to repay outstanding indebtedness under the Credit Facility. The Series B Preferred is convertible into 5,000,000 shares of Holding's common stock at $30 per share based upon a liquidation preference of $1,000 per share of Series B Preferred, subject to adjustment. 8. Common Stock On March 9, 1999, Holdings completed a public offering of 2,290,000 shares of common stock. The net proceeds to the Company from this offering were approximately $64.8 million (after deducting underwriting discounts and offering expenses). Holdings contributed such net proceeds to URI and URI used such net proceeds to repay outstanding indebtedness under the Credit Facility. 15 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three Months Nine Months Ended Ended September 30, September 30, ------------------ ---------------- 1999 1998 1999 1998 --------- -------- ------- -------- Numerator: Income (loss) before extraordinary item............. $ 98,319 $ 16,524 $56,208 $(10,156) Plus: preferred dividends of a subsidiary trust, net of taxes................................ 2,876 --------- -------- ------- -------- Income (loss) available to common stockholders....................................... $ 98,319 $ 16,524 $59,084 $(10,156) ========= ======== ======= ======== Denominator: Denominator for basic earnings per share weighted-average shares............................ 70,854 64,363 71,936 68,415 Effect of dilutive securities: Employee stock options............................ 5,346 2,335 4,121 2,720 Warrants.......................................... 4,228 4,296 4,012 4,437 Series A Preferred................................ 12,000 12,000 Series B Preferred................................ 18 54 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust................................... 6,876 --------- -------- ------- -------- Denominator for diluted earnings per share--adjusted weighted-average shares............................ 92,446 70,994 98,999 75,572 ========= ======== ======= ======== Basic earnings per share before extraordinary item.... $ 1.39 $ 0.26 $ 0.78 $ (0.15) ========= ======== ======= ======== Diluted earnings per share before extraordinary item.. $ 1.06 $ 0.23 $ 0.60 $ (0.13) ========= ======== ======= ========
16 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Condensed Consolidating Financial Information of Guarantor Subsidiaries Certain indebtedness of URI is guaranteed by URI's United States subsidiaries (the "guarantor subsidiaries") but is not guaranteed by URI's foreign subsidiaries (the "non-guarantor subsidiaries"). The guarantor subsidiaries are all wholly owned and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). All expenses incurred by URI have been charged by URI to its guarantor and non guarantor subsidiaries. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management has determined that such information would not be material to investors. However, condensed consolidating financial information as of September 30, 1999 and December 31, 1998 and for the nine and three months ended September 30, 1999 and 1998, are presented. The condensed consolidating financial information of URI and its subsidiaries are as follows: CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 1999 --------------------------------------------------------------- Non- Guarantor Guarantor Consolidated URI Subsidiaries Subsidiaries Eliminations Total ---------- ------------ ------------ ------------ ------------ (In thousands) ASSETS Cash and cash equiva- lents.................. $ 34,618 $ 3,934 $ 38,552 Accounts receivable, net.................... 421,043 34,748 455,791 Intercompany receivable (payable).............. $1,709,643 (1,463,045) (246,598) Inventory............... 136,739 23,548 160,287 Prepaid expenses and other assets........... 39,722 33,663 5,941 79,326 Rental equipment, net... 1,645,858 125,351 1,771,209 Property and equipment, net.................... 249,823 16,146 265,969 Investment in subsidiar- ies.................... 2,168,916 $(2,168,916) Intangible assets, net.. 1,542,295 145,639 1,687,934 ---------- ---------- -------- ----------- ---------- $3,918,281 $2,600,994 $108,709 $(2,168,916) $4,459,068 ========== ========== ======== =========== ========== LIABILITIES AND STOCK- HOLDER'S EQUITY Liabilities: Accounts payable....... $ 13,333 $ 276,496 $ 23,994 $ 313,823 Debt................... 2,154,794 51,746 8,049 2,214,589 Deferred income tax- es.................... 79,319 9,804 89,123 Accrued expenses and other liabilities..... 130,909 69,257 2,890 203,056 ---------- ---------- -------- ----------- ---------- Total liabilities.... 2,299,036 476,818 44,737 2,820,591 Commitments and contin- gencies Stockholder's equity: Common stock........... Additional paid-in capital............... 1,487,940 2,007,029 49,956 $(2,037,611) 1,507,314 Retained earnings...... 131,305 117,147 14,158 (131,305) 131,305 Accumulated other com- prehensive income..... (142) (142) ---------- ---------- -------- ----------- ---------- Total stockholder's equity.............. 1,619,245 2,124,176 63,972 (2,168,916) 1,638,477 ---------- ---------- -------- ----------- ---------- $3,918,281 $2,600,994 $108,709 $(2,168,916) $4,459,068 ========== ========== ======== =========== ==========
17 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1998 --------------------------------------------------------------- Non- Guarantor Guarantor Consolidated URI Subsidiaries Subsidiaries Eliminations Total ---------- ------------ ------------ ------------ ------------ (In thousands) ASSETS Cash and cash equiva- lents.................. $ 1,774 $ 16,257 $ 2,379 $ 20,410 Accounts receivable, net.................... 218,285 14,997 233,282 Intercompany receivable (payable).............. 898,641 (820,958) (77,683) Inventory............... 65,401 5,593 70,994 Prepaid expenses and other assets........... 30,963 10,816 1,397 43,176 Rental equipment, net... 1,099,539 43,467 1,143,006 Property and equipment, net.................... 165,803 4,734 170,537 Investment in subsidiar- ies.................... 1,390,706 $(1,390,706) Intangible assets, net.. 29 867,061 54,975 922,065 ---------- ---------- ------- ----------- ---------- $2,322,113 $1,622,204 $49,859 $(1,390,706) $2,603,470 ========== ========== ======= =========== ========== LIABILITIES AND STOCK- HOLDER'S EQUITY Liabilities: Accounts payable....... $ 3,250 $ 98,680 $ 6,496 $ 108,426 Debt................... 1,286,118 23,976 4,480 1,314,574 Deferred income tax- es.................... 43,560 43,560 Accrued expenses and other liabilities..... 30,535 82,112 2,911 115,558 ---------- ---------- ------- ----------- ---------- Total liabilities.... 1,319,903 248,328 13,887 1,582,118 Commitments and contin- gencies Stockholder's equity: Common stock........... Additional paid-in capital................ 964,922 1,338,576 34,265 $(1,353,418) 984,345 Retained earnings...... 37,288 35,300 1,988 (37,288) 37,288 Accumulated other com- prehensive income...... (281) (281) ---------- ---------- ------- ----------- ---------- Total stockholder's equity.............. 1,002,210 1,373,876 35,972 (1,390,706) 1,021,352 ---------- ---------- ------- ----------- ---------- $2,322,113 $1,622,204 $49,859 $(1,390,706) $2,603,470 ========== ========== ======= =========== ==========
18 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999 ------------------------------------------------------------ Non- Guarantor Guarantor Consolidated URI Subsidiaries Subsidiaries Eliminations Total --- ------------ ------------ ------------ ------------ (In thousands) Revenues: Equipment rentals..... $1,046,764 $65,480 $1,112,244 Sales of rental equip- ment................. 150,615 9,188 159,803 Sales of equipment and merchandise and other revenues............. 268,761 23,781 292,542 -------- ---------- ------- --------- ---------- Total revenues.......... 1,466,140 98,449 1,564,589 Cost of revenues: Cost of equipment rentals, excluding depreciation......... 446,348 29,973 476,321 Depreciation of rental equipment............ 189,638 11,123 200,761 Cost of rental equip- ment sales........... 86,998 5,459 92,457 Cost of equipment and merchandise sales and other operating costs................ 201,653 18,363 220,016 -------- ---------- ------- --------- ---------- Total cost of revenues.. 924,637 64,918 989,555 -------- ---------- ------- --------- ---------- Gross profit............ 541,503 33,531 575,034 Selling, general and ad- ministrative expenses............... 233,971 14,223 248,194 Non-rental depreciation and amortization....... 38,284 2,544 40,828 -------- ---------- ------- --------- ---------- Operating income........ 269,248 16,764 286,012 Interest expense........ 92,670 730 93,400 Other (income) expense, net.................... 9,112 (462) 8,650 -------- ---------- ------- --------- ---------- Income before provision for income taxes ...... 167,466 16,496 183,962 Provision for income taxes.................. 67,952 7,368 75,320 -------- ---------- ------- --------- ---------- Income before equity in net earnings of subsidiaries........ 99,514 9,128 $(108,642) Equity in net earnings of subsidiaries........ $108,642 108,642 -------- ---------- ------- --------- ---------- Net income.............. $108,642 $ 99,514 $ 9,128 $(108,642) $ 108,642 ======== ========== ======= ========= ==========
19 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998 ------------------------------------------------------------ Non- Guarantor Guarantor Consolidated URI Subsidiaries Subsidiaries Eliminations Total --- ------------ ------------ ------------ ------------ (In thousands) Revenues: Equipment rentals..... $572,884 $ 19,618 $592,502 Sales of rental equip- ment................. 71,019 2,684 73,703 Sales of equipment and merchandise and other revenues............. 127,216 10,841 138,057 ------- -------- -------- ------ -------- Total revenues.......... 771,119 33,143 804,262 Cost of revenues: Cost of equipment rentals, excluding depreciation......... 255,345 8,184 263,529 Depreciation of rental equipment............ 116,974 2,996 119,970 Cost of rental equip- ment sales........... 38,235 1,585 39,820 Cost of equipment and merchandise sales and other operating costs................ 98,157 8,736 106,893 ------- -------- -------- ------ -------- Total cost of revenues.. 508,711 21,501 530,212 ------- -------- -------- ------ -------- Gross profit............ 262,408 11,642 274,050 Selling, general and ad- ministrative expenses............... 123,129 5,634 128,763 Merger-related ex- penses................. 42,216 42,216 Non-rental depreciation and amortization....... 22,932 761 23,693 ------- -------- -------- ------ -------- Operating income........ 74,131 5,247 79,378 Interest expense........ 38,931 239 39,170 Other (income) expense, net.................... (4,491) (33) (4,524) ------- -------- -------- ------ -------- Income before provision for income taxes and ex- traordinary item....... 39,691 5,041 44,732 Provision for income taxes.................. 24,182 2,268 26,450 ------- -------- -------- ------ -------- Income before extraordinary item and equity in net earnings of subsidiaries........ 15,509 2,773 18,282 Extraordinary item, net.................... 21,337 21,337 ------- -------- -------- ------ -------- Income (loss) before equity in net earnings of subsidiaries........ (5,828) 2,773 $3,055 Equity in net earnings of subsidiaries........ $(3,055) (3,055) ------- -------- -------- ------ -------- Net income (loss)....... $(3,055) $ (5,828) $ 2,773 $3,055 $ (3,055) ======= ======== ======== ====== ========
20 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 1999 ----------------------------------------------------------- Non- Guarantor Guarantor Consolidated URI Subsidiaries Subsidiaries Eliminations Total --- ------------ ------------ ------------ ------------ (In thousands) Revenues: Equipment rentals..... $437,768 $31,174 $468,942 Sales of rental equip- ment................. 70,028 2,581 72,609 Sales of equipment and merchandise and other revenues............. 117,197 9,870 127,067 ------- -------- ------- -------- -------- Total revenues.......... 624,993 43,625 668,618 Cost of revenues: Cost of equipment rentals, excluding depreciation......... 184,408 12,767 197,175 Depreciation of rental equipment............ 71,784 4,910 76,694 Cost of rental equip- ment sales........... 41,003 1,535 42,538 Cost of equipment and merchandise sales and other operating costs................ 87,584 7,648 95,232 ------- -------- ------- -------- -------- Total cost of revenues.. 384,779 26,860 411,639 ------- -------- ------- -------- -------- Gross profit............ 240,214 16,765 256,979 Selling, general and ad- ministrative expenses............... 93,495 4,838 98,333 Non-rental depreciation and amortization....... 14,926 1,045 15,971 ------- -------- ------- -------- -------- Operating income........ 131,793 10,882 142,675 Interest expense........ 41,517 577 42,094 Other (income) expense, net.................... (295) (37) (332) ------- -------- ------- -------- -------- Income before provision for income taxes ...... 90,571 10,342 100,913 Provision for income taxes.................. 36,810 4,550 41,360 ------- -------- ------- -------- -------- Income before equity in net earnings of subsidiaries........ 53,761 5,792 $(59,553) Equity in net earnings of subsidiaries........ $59,553 59,553 ------- -------- ------- -------- -------- Net income.............. $59,553 $ 53,761 $ 5,792 $(59,553) $ 59,553 ======= ======== ======= ======== ========
21 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 1998 -------------------------------------------------------------- Non- Guarantor Guarantor Consolidated URI Subsidiaries Subsidiaries Eliminations Total --- ------------ ------------ ------------ ------------ (In thousands) Revenues: Equipment rentals..... $ 270,920 $ 11,898 $ 282,818 Sales of rental equip- ment................. 29,417 1,064 30,481 Sales of equipment and merchandise and other revenues............. 60,155 5,620 65,775 --------- --------- -------- -------- --------- Total revenues.......... 360,492 18,582 379,074 Cost of revenues: Cost of equipment rentals, excluding depreciation......... 114,649 4,945 119,594 Depreciation of rental equipment............ 51,207 1,746 52,953 Cost of rental equip- ment sales........... 16,714 547 17,261 Cost of equipment and merchandise sales and other operating costs................ 46,381 4,168 50,549 --------- --------- -------- -------- --------- Total cost of revenues.. 228,951 11,406 240,357 --------- --------- -------- -------- --------- Gross profit............ 131,541 7,176 138,717 Selling, general and ad- ministrative expenses............... 56,758 3,655 60,413 Merger-related ex- penses................. 42,216 42,216 Non-rental depreciation and amortization....... 10,691 510 11,201 --------- --------- -------- -------- --------- Operating income........ 21,876 3,011 24,887 Interest expense........ 23,781 143 23,924 Other (income) expense, net.................... (278) (13) (291) --------- --------- -------- -------- --------- Income (loss) before provision for income taxes and ex- traordinary item....... (1,627) 2,881 1,254 Provision for income taxes.................. 8,365 1,287 9,652 --------- --------- -------- -------- --------- Income (loss) before extraordinary items and equity in net earnings of subsidiaries........... (9,992) 1,594 (8,398) Extraordinary item, net.................... 21,337 21,337 --------- --------- -------- -------- --------- Income (loss) before equity in net earnings of subsidiaries........ (31,329) 1,594 29,735 Equity in net earnings of subsidiaries........ $ (29,735) (29,735) --------- --------- -------- -------- --------- Net income (loss)....... $ (29,735) $ (31,329) $ 1,594 $ 29,735 $ (29,735) ========= ========= ======== ======== =========
22 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the Nine Months Ended September 30, 1999 ------------------------------------------------------------------ Guarantor Non-guarantor URI Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------- ------------ ------------ (In thousands) Net cash provided by (used in) operating activities............. $ (138,529) $428,484 $68,193 $ 358,148 Cash flows from investing activities: Purchase of rental equipment............. (511,593) (68,903) (580,496) Purchase of property and equipment......... (41,444) (5,224) (46,668) Proceeds from sales of rental equipment...... 150,615 9,188 159,803 In-process acquisition costs................. (2,206) (2,206) Payment of contingent purchase price........ (5,495) (1,699) (7,194) Purchase of other companies............. (905,267) (905,267) ----------- -------- ------- ------ ---------- Net cash used in investing activities.......... (905,267) (410,123) (66,638) (1,382,028) Cash flows from financing activities: Proceeds from debt..... 2,105,702 2,105,702 Payments of debt....... (1,560,683) (1,560,683) Payment of debt financing costs....... (11,341) (11,341) Capital contribution by parent............. 522,969 522,969 Dividend distribution to parent............. (14,625) (14,625) ----------- -------- ------- ------ ---------- Net cash provided by financing activities.......... 1,042,022 1,042,022 Net increase in cash and cash equivalents........... (1,774) 18,361 1,555 18,142 Cash and cash equivalents at beginning of period... 1,774 16,257 2,379 20,410 ----------- -------- ------- ------ ---------- Cash and cash equivalents at end of period................ $ $ 34,618 $ 3,934 $ 38,552 =========== ======== ======= ====== ========== Supplemental disclosure of cash flow information: Cash paid during the period: Interest............. $ 79,242 $ 79,242 Income taxes......... $ 14,985 $ 885 15,870 Supplemental disclosure 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.............. $ 1,355,288 $1,355,288 Liabilities assumed.... (440,626) (440,626) Less: Amounts paid through issuance of debt.... (9,395) (9,395) ----------- -------- ------- ------ ---------- Net cash paid...... $ 905,267 $ 905,267 =========== ======== ======= ====== ==========
23 UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the Nine Months Ended September 30, 1998 ----------------------------------------------------------------- Guarantor Non-guarantor URI Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------- ------------- ------------ ------------ (In thousands) Net cash provided by (used in) operating activities............. $ (452,125) $648,222 $ 5,290 $ 201,387 Cash flows from investing activities: Purchase of rental equipment............. (414,538) (8,535) (423,073) Purchase of property and equipment......... (53,354) (643) (53,997) Proceeds from sales of rental equipment...... 71,019 2,684 73,703 In-process acquisition costs................. (4,413) (4,413) Payments of contingent purchase price........ (2,111) (506) (2,617) Purchase of other companies............. (820,787) (12,510) (833,297) ---------- -------- ------- ---- ---------- Net cash used in investing activities.......... (820,787) (415,907) (7,000) (1,243,694) Cash flows from financing activities: Proceeds from debt..... 1,896,086 10,187 27,864 1,934,137 Payments of debt....... (1,156,677) (230,685) (22,760) (1,410,122) Payment of debt financing costs....... (26,711) (26,711) Capital contribution by parent............. 497,921 497,921 Subchapter S distributions of a pooled entity......... (3,536) (3,536) ---------- -------- ------- ---- ---------- Net cash provided by financing activities.......... 1,210,619 (224,034) 5,104 991,689 Net increase (decrease) in cash and cash equivalents........... (62,293) 8,281 3,394 (50,618) Cash and cash equivalents at beginning of period... 67,200 5,211 72,411 ---------- -------- ------- ---- ---------- Cash and cash equivalents at end of period................ $ 4,907 $ 13,492 $ 3,394 $ 21,793 ========== ======== ======= ==== ========== Supplemental disclosure of cash flow information: Cash paid during the period: Interest............. $ 6,630 $ 11,098 $ 67 $ 17,795 Income taxes......... $ 7,434 $ 2,245 $ 9,679 Supplemental disclosure of non-cash investing and financing activities: The Company acquired the net assets and assumed certain liabilities of other companies as follows: Assets, net of cash acquired.............. $1,322,581 $ 12,510 $1,335,091 Liabilities assumed.... (441,120) (441,120) Less: Amounts paid in common stock and warrants............ (60,674) (60,674) ---------- -------- ------- ---- ---------- Net cash paid...... $ 820,787 $ 12,510 $ 833,297 ========== ======== ======= ==== ==========
11. Subsequent Events Completed Acquisitions Subsequent to September 30, 1999 (through October 28, 1999), the Company completed the acquisitions of three equipment rental companies. The aggregate consideration paid by the Company for these acquisitions was $26.6 million in cash. In addition, the Company repaid or assumed outstanding indebtedness of the companies acquired in such acquisitions in the aggregate amount of $6.7 million. The Company funded the consideration for these acquisitions with borrowings under the Company's Credit Facility. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion reviews the Company's operations for the nine and three months ended September 30, 1999 and 1998 and should be read in conjunction with the Unaudited Consolidated Financial Statements and related Notes thereto of the Company included herein and the Consolidated Financial Statements and related Notes thereto included in the Company's 1998 Annual Report on Form 10-K. Introduction The Company commenced equipment rental operations in October 1997 and has completed 182 acquisitions (through October 28, 1999), including a 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 2 of the Notes to the Unaudited Consolidated Financial Statements of the Company included elsewhere herein. The other 179 acquisitions completed by the Company were accounted for as "purchases". The results of operations of the businesses acquired in these acquisitions are included in the Company's financial statements only from their respective dates of acquisition. In view of the fact that the Company's operating results for 1999 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. United Rentals, Inc. ("Holdings") is principally a holding company and primarily conducts its operations through its wholly owned subsidiary, United Rentals (North America), Inc. ("URI"), and subsidiaries of URI. General The Company primarily derives revenues from the following sources: (i) equipment rental (including additional fees that may be charged for equipment delivery, fuel, repair of rental equipment, and damage waivers), (ii) the sale of rental equipment, (iii) the sale of 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 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 non-compete agreements and goodwill, which represents the excess of the purchase price of acquired companies over the estimated fair market value of the net assets acquired. Results of Operations Nine Months Ended September 30, 1999 and 1998 Revenues. Total revenues for the nine months ended September 30, 1999 were $1,564.6 million, representing an increase of 94.5% over total revenues of $804.3 million for the nine months ended September 30, 1998. The Company's revenues in the first nine months of 1999 and 1998 were attributable to: (i) equipment rental ($1,112.2 million, or 71.1% of revenues, in the first nine months of 1999 compared to $592.5 million, or 25 73.7% of revenues, in the first nine months of 1998), (ii) sales of rental equipment ($159.8 million, or 10.2% of revenues, in the first nine months of 1999 compared to $73.7 million, or 9.2% of revenues, in the first nine months of 1998) and (iii) sales of equipment and merchandise and other revenues ($292.5 million, or 18.7% of revenues, in the first nine months of 1999 compared to $138.1 million, or 17.1% of revenues, in the first nine months of 1998). The 94.5% increase in total revenues in the first nine months of 1999 reflected (i) increased revenues at locations open more than one year (which accounted for approximately 22.7 percentage points) and (ii) new rental locations acquired through acquisitions and the opening of start-up locations (which accounted for approximately 71.8 percentage points). The increase in revenues at locations open more than one year primarily reflected (a) an increase in the volume of rental transactions, (b) an 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 $575.0 million in the first nine months of 1999 from $274.1 million in the first nine months of 1998. This increase in gross profit was primarily attributable to the increase in revenues described above. The Company's gross profit margin by source of revenue in the first nine months of 1999 and 1998 was: (i) equipment rental (39.1% in the first nine months of 1999 and 35.3% in the first nine months of 1998), (ii) sales of rental equipment (42.1% in the first nine months of 1999 and 46.0% in the first nine months of 1998) and (iii) sales of equipment and merchandise and other revenues (24.8% in the first nine months of 1999 and 22.6% in the first nine months of 1998). The increase in the gross profit margin from rental revenues in the first nine months of 1999 was primarily attributable to greater equipment utilization rates and to economies of scale. The decrease in the gross profit margin from the sales of rental equipment in the first nine months of 1999 primarily reflected a shift in mix towards the sale of more late-model used equipment which generally generates lower gross profit margins than older equipment. The increase in the gross profit margin from sales of equipment and merchandise and other revenue in the first nine months of 1999 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 $248.2 million, or 15.9% of total revenues, during the first nine months of 1999 and $128.8 million, or 16.0% of total revenues, during the first nine months of 1998. SG&A in the first nine months of 1999 includes an $8.3 million charge primarily due to professional fees incurred in connection with the Company's terminated tender offer and consent and proxy solicitation for Rental Service Corporation, ("RSC"). Excluding this charge, SG&A as a percentage of revenues decreased to 15.3% in the first nine months of 1999, primarily due to certain economies of scale relating to the increase in revenues described above. Merger-related Expenses. The Company incurred merger-related expenses in the first nine months of 1998 of $42.2 million ($29.5 million after-tax) in connection with three acquisitions completed by the Company in 1998 that were accounted for as poolings-of-interests. These expenses consisted of (i) $18.5 million for investment banking, legal, accounting services and other merger costs, (ii) $14.5 million of expenses relating to the closing of duplicate facilities, (iii) $6.3 million for employee severance and (iv) $2.9 million in other expenses. Non-rental Depreciation and Amortization. Non-rental depreciation and amortization was $43.2 million, or 2.8% of total revenues, in the first nine months of 1999 and $23.7 million, or 2.9% of total revenues, in the first nine months of 1998. Non-rental depreciation and amortization primarily consists of (i) depreciation expense attributable to equipment not offered for rent, (ii) depreciation of rental facilities and (iii) amortization of goodwill. The decrease in non-rental depreciation as a percentage of revenues in 1999 primarily reflected economies of scale related to the increase in revenues described above. Interest Expense. Interest expense increased to $93.5 million in the first nine months of 1999 from $39.2 million in the first nine months of 1998. This increase primarily reflected the fact that the Company's indebtedness significantly increased in 1999, principally to fund acquisitions. 26 Preferred Dividends of a Subsidiary Trust. Preferred dividends of a subsidiary trust of Holdings were $14.6 million in the first nine months of 1999 compared with $3.0 million in the first nine months of 1998. These dividends relate to preferred securities issued in August 1998 by such subsidiary trust. Other (Income) Expense. Other expense was $8.8 million in the first nine months of 1999 compared with $4.5 million in other income in the first nine months of 1998. The increase in other expense in the first nine months of 1999 primarily reflected a $10.0 million charge that was principally due to commitment fees incurred in connection with a $2.0 billion financing commitment that was cancelled upon the termination of the Company's tender offer for RSC. Income Taxes. Income taxes increased to $68.3 million, or an effective rate of 41.0%, in the first nine months of 1999 from $25.2 million, or an effective rate of 60.4%, in the first nine months of 1998. During 1998 the Company's high effective tax rate reflected the following: (i) certain merger-related expenses incurred in 1998 were not deductible for income tax purposes and (ii) in connection with an acquisition in 1998 that was accounted for as a pooling- of-interests, the Company recorded a $4.8 million charge to recognize deferred tax liabilities of the acquired company which had been taxed as a Subchapter S Corporation prior to being acquired. Extraordinary Item. The Company recorded an extraordinary charge of $35.6 million ($21.3 million net of taxes) in the first nine months of 1998. The charge was incurred in connection with the early extinguishment of certain debt and primarily reflected prepayment penalties on certain debt of U.S. Rentals. Three Months Ended September 30, 1999 and 1998 Revenues. Total revenues for the three months ended September 30, 1999 were $668.6 million, representing an increase of 76.4% over total revenues of $379.1 million for the three months ended September 30, 1998. The Company's revenues in the three months ended September 30, 1999 and 1998 were attributable to: (i) equipment rental ($468.9 million, or 70.1% of revenues, in the three months September 30, 1999 compared to $282.8 million, or 74.6% of revenues, in the three months ended September 30, 1998), (ii) sales of rental equipment ($72.6 million, or 10.9% of revenues, in the three months ended September 30, 1999 compared to $30.5 million, or 8.0% of revenues, in the three months ended September 30, 1998) and (iii) sales of equipment and merchandise and other revenues ($127.1 million, or 19.0% of revenues, in the three months ended September 30, 1999 compared to $65.8 million, or 17.4% of revenues, in the three months ended September 30, 1998). The 76.4% increase in total revenues in the three months ended September 30, 1999 reflected (i) increased revenues at locations open more than one year (which accounted for approximately 21.4 percentage points) and (ii) new rental locations acquired through acquisitions and the opening of start-up locations (which accounted for approximately 55.0 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) an 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 $257.0 million in the three months ended September 30, 1999 from $138.7 million in the three months ended September 30, 1998. This increase in gross profit was primarily attributable to the increase in revenues described above. The Company's gross profit margin by source of revenue in the three months ended September 30, 1999 and 1998 was: (i) equipment rental (41.6% in the three months ended September 30, 1999 and 39% in the three months ended September 30, 1998), (ii) sales of rental equipment (41.4% in the three months ended September 30, 1999 and 43.4% in the three months ended September 30, 1998) and (iii) sales of equipment and merchandise and other revenues (25.1% in the three months ended September 30, 1999 and 23.1% in the three months ended September 30, 1998). The increase in the gross profit margin from rental revenues in the three months ended September 30, 1999 was primarily attributable to greater equipment utilization rates and to economies of scale. The decrease in the gross profit margin from the 27 sales of rental equipment in the three months ended September 30, 1999 primarily reflected a shift in mix towards the sale of more late-model used equipment which generally generates lower gross profit margins than older equipment. The increase in the gross profit margin from sales of new equipment, merchandise and other revenue in the three months ended September 30, 1999 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 $98.3 million, or 14.7% of total revenues, during the three months ended September 30, 1999 and $60.4 million, or 15.9% of total revenues, during the three months ended September 30, 1998. The decrease in SG&A as a percentage of revenues in the three months ended September 30, 1999, principally reflected certain economies of scale related to the increase in revenues. Merger-related Expenses. The Company incurred merger-related expenses in the three months ended September 30, 1998 of $42.2 million ($29.5 million after- tax) in connection with three acquisitions completed by the Company in such period that were accounted for as poolings-of-interests. These expenses consisted of (i) $18.5 million for investment banking, legal, accounting services and other merger costs, (ii) $14.5 million of expenses relating to the closing of duplicate facilities, (iii) $6.3 million for employee severance and (iv) $2.9 million in other expenses. Non-rental Depreciation and Amortization. Non-rental depreciation was $16.7 million, or 2.5% of total revenues, in the three months ended September 30, 1999 and $11.2 million, or 3.0% of total revenues, in the three months ended September 30, 1998. Non-rental depreciation and amortization primarily consists of (i) depreciation expense attributable to equipment not offered for rent, (ii) depreciation of rental facilities and (iii) amortization of goodwill. The decrease in non-rental depreciation as a percentage of revenues in 1999 primarily reflected economies of scale related to the increase in revenues described above. Interest Expense. Interest expense increased to $42.2 million in the three months ended September 30, 1999 from $23.9 million in the three months ended September 30, 1998. This increase primarily reflected the fact that the Company's indebtedness significantly increased in 1999, principally to fund acquisitions. Preferred Dividends of a Subsidiary Trust. Preferred dividends of a subsidiary trust of Holdings were $4.9 million in the three months ended September 30, 1999 compared with $3.0 million in the three months ended September 30, 1998. These dividends relate to preferred securities issued in August 1998 by such subsidiary trust. Other (Income) Expense. Other income was $0.4 million in the three months ended September 30, 1999 compared with $0.3 million in the three months ended September 30, 1998. Income Taxes. Income taxes increased to $39.1 million, or an effective rate of 41.0%, in the three months ended September 30, 1999 from $8.4 million in the three months ended September 30, 1998. During 1998, the Company recorded a provision for income taxes despite a pretax loss because: (i) certain merger- related expenses incurred in 1998 were not deductible for income tax purposes and (ii) in connection with an acquisition in 1998 that was accounted for as a pooling-of-interests, the Company recorded a $4.8 million charge to recognize deferred tax liabilities of the acquired company which had been taxed as a Subchapter S Corporation prior to being acquired. Extraordinary Item. The Company recorded an extraordinary charge of $35.6 million ($21.3 million net of taxes) during the three months ended September 30, 1998. Such charge was incurred in connection with the early extinguishment of certain debt and primarily reflected prepayment penalties on certain debt of U.S. Rentals. Liquidity and Capital Resources Recent Financings Set forth below is certain information concerning certain financing transactions entered into by the Company during 1999. 28 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. (collectively "Apollo"). The net proceeds from the sale of the Series A Preferred were approximately $287.0 million (after deducting issuance fees and expenses). Common Stock. In March 1999, Holdings completed a public offering of 2,290,000 shares of its common stock. The net proceeds to the Company from this offering were approximately $64.8 million (after deducting underwriting discounts and offering expenses). 9% Senior Subordinated Notes. In March 1999, URI sold $250 million aggregate principal amount of 9% Senior Subordinated Notes Due 2009 ("9% Notes") for aggregate consideration of $245.0 million (after deducting the initial purchaser's discount and offering expenses). 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 by Holdings to redeem up to 35% of the outstanding 9% Notes, at a redemption price of 109.00%. The indenture governing the 9% Notes contains certain restrictive covenants, including (i) limitations on additional indebtedness, (ii) limitations on restricted payments, (iii) limitations on liens, (iv) limitations on dividends and other payment restrictions, (v) limitations on preferred stock of certain subsidiaries, (vi) limitations on transactions with affiliates, (vii) limitations on the disposition of proceeds of asset sales and (viii) limitations on the ability of the Company to consolidate, merge or sell all or substantially all of its assets. Series B Perpetual Convertible Preferred Stock. In September 1999, Holdings sold 100,000 shares of its Series B Perpetual Convertible Preferred Stock ("Series B Preferred") to Apollo and 50,000 shares of its Series B Preferred to Chase Equity Associates, L.P. ("Chase"). The net proceeds from the sale of Series B Preferred to Apollo and Chase were approximately $143.8 million (after deducting issuance fees and expenses). For additional information concerning the Series B Preferred see Item 2 of Part II of this Report. Term Loan. URI obtained a $450 million term loan dated as of July 15, 1999 from a group of financial institutions (the "Term Loan C"). The Term Loan C was increased to $600 million in November 1999. URI used the net proceeds from the Term Loan C to repay a portion of the outstanding indebtedness under the Company's revolving credit facility (the "Credit Facility"). The Term Loan C matures in June 2006. Prior to maturity, quarterly installments of principal in the amount of $1.5 million are due on the last day of each calendar quarter, commencing September 30, 2000. The amount due at maturity is $565.5 million. The Term Loan C accrues 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 referenced rate) plus a margin of 0.625% per annum, or (b) the Eurodollar Rate (which for borrowings by URI is equal to Bank of America's reserve adjusted eurodollar rate) plus a margin of 2.50% per annum. If at any time an event of default exists, the interest rate applicable to URI's existing term loan and the Term Loan C will increase by 2% per annum. The Term Loan C is secured pari passu with the Credit Facility and URI's existing term loan, and the agreement governing the Term Loan C contains restrictive covenants substantially similar to those provided by the Credit Facility and URI's existing term loan. Sources and Uses of Cash During the first nine months of 1999, the Company (i) generated cash from operations of approximately $365.1 million, (ii) generated cash from the sale of rental equipment of approximately $159.8 million, (iii) received net proceeds of $287.0 million from the sale of the Series A Preferred, (iv) received net proceeds of $143.8 million from the sale of the Series B Preferred, (v) obtained a $450 million term loan, (vi) received net proceeds of $65.2 million from the issuance of common stock and (vii) received net proceeds of $245.0 million from the sale of the 9% Notes. The Company used cash during this period principally to (i) pay consideration for acquisitions (approximately $905.3 million), (ii) purchase rental equipment (approximately $580.5 million) and (iii) purchase other property and equipment (approximately $75.8 million). 29 Certain Balance Sheet Changes The acquisitions and the equipment purchases made by the Company in the first nine months of 1999 (and the financing of such acquisitions and purchases) were the principal reasons for the increase in the following items at September 30, 1999 compared with December 31, 1998: accounts receivable, inventory, prepaid expenses and other assets, rental equipment, property and equipment, intangible assets, accounts payable, debt and accrued expenses and other liabilities. The financing transactions completed by the Company during the first nine months of 1999 were the principal reasons for the increase in cash, debt and additional paid-in capital at September 30, 1999, compared with December 31, 1998. Certain Information Concerning the Company's Credit Facility URI has a revolving credit facility (the "Credit Facility") that enables URI to borrow up to $772.5 million on a revolving basis and permits a Canadian subsidiary of URI to directly borrow up to $40.0 million under the Credit Facility (provided that the aggregate borrowings of URI and the Canadian subsidiary do not exceed $772.5 million). The Credit Facility terminates on September 26, 2003, at which time all outstanding indebtedness is due. As of November 5, 1999, there was $523.0 million of indebtedness outstanding under the Credit Facility (not including undrawn outstanding letters of credit in the amount of $1.4 million). Cash Requirements Related to Operations The Company's principal existing sources of cash are borrowings available under the Credit Facility ($248.1 million available as of November 5, 1999) and cash generated from operations. The Company expects that its principal needs for cash relating to its existing operations over the next 12 months will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory of items offered for sale and (iii) debt service. The Company plans to fund such cash requirements relating to its existing operations from its existing sources of cash described above. The Company estimates that equipment expenditures over the next 12 months will be approximately $700 million for the existing operations of the Company. These expenditures are comprised of approximately $385 million of expenditures to maintain the average age of the Company's rental fleet and $315 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 $300 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 the amount of equipment expenditures that will be required in connection with new acquisitions. Principal elements of the Company's strategy include continued expansion through a disciplined acquisition program and the opening of new rental locations. The Company expects to pay for future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. To the extent that the Company's existing sources of cash described above are not sufficient to fund such future acquisitions, the Company will require additional financing and, consequently, the Company's indebtedness may increase as the Company implements its growth strategy. There can be no assurance, however, that any additional financing will be available or, if available, will be on terms satisfactory to the Company. Based upon the terms of the Company's currently outstanding indebtedness, the Company is scheduled to repay debt principal of approximately $22.5 million over the next 12 months. 30 Relationship Between Holdings and URI Holdings is principally a holding company and primarily conducts its operations through its wholly owned subsidiary URI and subsidiaries of URI. Holdings provides certain services to URI in connection with its operations. These services principally include: (i) senior management services, (ii) finance related services and support, (iii) information technology systems and support and (iv) acquisition related services. In addition, Holdings leases certain equipment and real property that are made available for use by URI and its subsidiaries. URI has made, and expects to continue to make, certain payments to Holdings in respect of the services provided by Holdings to the Company. The expenses relating to URI's payments to Holdings are reflected on URI's financial statements as selling, general and administrative expenses. In addition, although not legally obligated to do so, URI has in the past, and expects that it will in the future, make distributions to Holdings to, among other things, enable Holdings to pay dividends on certain preferred securities (the "Trust Preferred Securities") that were issued by a subsidiary trust of Holdings in August 1998. 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 recently installed information technology systems are 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 systems are 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. Fluctuations in Operating Results The Company expects that its revenues and operating results may fluctuate from quarter to quarter or over the longer term due to a number of factors, including: seasonal rental patterns of the Company's customers (with rental activity tending to be lower in the winter); changes in general economic conditions in the Company's markets; the timing of acquisitions and the opening of start-up locations 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; changes in demand for the Company's equipment or the prices therefor due to changes in economic conditions, competition or other factors. The Company is continually involved in the investigation and evaluation of potential acquisitions. In accordance with generally accepted accounting principles, the Company capitalizes certain direct out-of-pocket expenditures (such as legal and accounting fees) relating to potential or pending acquisitions. Indirect acquisition costs, such as executive salaries, general corporate overhead, public affairs and other corporate services, are expensed as incurred. The Company's policy is to charge against earnings any capitalized expenditures relating to any potential or pending acquisition that the Company determines will not be consummated. There can be no assurance that the Company in future periods will not be required to incur a charge against earnings in accordance with such policy, which charge, depending upon the magnitude thereof, could adversely affect the Company's results of operations. 31 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 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("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, 2001. The adoption of SFAS No. 133 is not expected to have a material effect on the Company's consolidated financial position or results of operations. Factors that May Influence Future Results and Accuracy of Forward-Looking Statements Sensitivity to Changes in Construction and Industrial Activities Our equipment is principally used in connection with construction and industrial activities. Consequently, a downturn in construction or industrial activity may lead to a decrease in demand for our equipment, which could adversely affect our business. We have identified below certain of the factors which may cause such a downturn, either temporarily or long-term: .a general slow-down of the economy; .an increase in interest rates; or .adverse weather conditions which may temporarily affect a particular region. Acquired Companies not Historically Operated as a Combined Business The businesses that we acquired have been in existence an average of 22 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 182 companies (through October 28, 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. 32 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 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 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 idemnify and 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) we generally do not 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 33 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. Fluctuations of Operating Results We expect that our revenues and operating results may fluctuate from quarter to quarter or over the longer term due to a number of factors, including: . seasonal rental patterns of our customers--with rental activity tending to be lower in the winter; . 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; . if we determine that a potential acquisition will not be consummated, the need to charge against earnings any expenditures relating to such transaction (such as financing commitment fees, merger and acquisition advisory fees and professional fees) previously capitalized; . the timing of expenditures for new equipment and the disposition of used equipment; and . changes in demand for our equipment or the prices therefor due to changes in economic conditions, competition or other factors. 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. 34 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. Dependence on Information Technology Systems Our ability to monitor and control our operations depends to a large extent on the proper functioning of our recently-installed information technology systems. Any disruption in these systems or the failure of these systems to operate as expected could, depending on the magnitude and duration of the problem, adversely affect our business and our ability to implement our growth strategy. Year 2000 Issues Our software vendors have informed us that our recently-installed information technology systems are 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 systems are 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, 35 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 3. Quantitative and Qualitative Disclosures about Market Risk Market risks relating to changes in interest rates and foreign currency exchanges rates were reported in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. There has been no material change in these market risks since the end of the fiscal year 1998. PART II OTHER INFORMATION Item 1. Legal Proceedings The Company and its subsidiaries are parties to various litigation matters, in most cases involving ordinary and routine claims incidental to the business of the Company. The ultimate legal and financial liability of the Company with respect to such pending litigation cannot be estimated with certainty but the Company believes, based on its examination of such matters, that such ultimate liability will not have a material effect on the business or financial condition of the Company. Item 2. Changes in Securities and Use of Proceeds Sale of Unregistered Securities Set forth below is certain information concerning sales by the Company of unregistered securities during the third quarter of 1999. The issuances by the Company of the securities sold in the transactions referenced below were not registered under the Securities Act of 1933, pursuant to the exemption contemplated by Section 4(2) thereof for transactions not involving a public offering. 1. In July 1999, the Company issued 1,749 shares of common stock to an executive officer pursuant to an employment agreement. 2. In July 1999, the Company issued, in connection with one acquisition, 8,602 shares of common stock as part of the consideration for such acquisition. 3. In August 1999, the Company issued, in connection with one acquisition, 50,000 warrants with an exercise price of $28.96 per share. 4. In September 1999, Holdings sold 100,000 shares of its Series B Perpetual Convertible Preferred Stock ("Series B Preferred") to Apollo and 50,000 shares of its Series B Preferred to Chase Equity Associates, L.P. ("Chase"). The net proceeds from the sale of Series B Preferred to Apollo and Chase were approximately $143.8 million (after deducting issuance fees and expenses). Certain Information Concerning Series B Preferred Holdings has designated 500,000 shares of Preferred Stock as Series B Perpetual Convertible Preferred Stock consisting of 450,000 shares designated as Class B-1 Perpetual Convertible Preferred Stock (the "B-1 Preferred Stock") and 50,000 shares designated as Class B-2 Perpetual Convertible Preferred Stock (the "B-2 Preferred Stock"). A complete description of the terms of the Series B Preferred is set forth in the Certificate of Designation therefor ("Designation"), which is an exhibit to this Report. Set forth below is a summary of certain terms of the Series B Preferred, which summary is qualified in its entirety by reference to the Designation. Except where otherwise indicated, (1) the terms set forth below apply to both the B-1 Preferred and B-2 Preferred and (2) each reference to the Series B Preferred includes both the B-1 Preferred and B-2 Preferred. 36 Ranking The Series B Preferred ranks (1) senior to the Common Stock with respect to distributions upon the liquidation, winding-up or dissolution of Holdings and (2) the same as the Series A Perpetual Convertible Preferred Stock ("Series A Preferred") with respect to such distributions. Liquidation Preference Upon any voluntary or involuntary liquidation, dissolution or winding-up of Holdings or reduction or decrease in its capital stock resulting in a distribution of assets to the holders of any class or series of Holding's capital stock, the holders of Series B Preferred will be entitled to payment out of the assets of Holdings available for distribution of an amount equal to $1,000 per share of Series B Preferred (the "Liquidation Preference"), plus accrued and unpaid dividends, if any, to the date fixed for liquidation, dissolution, winding-up or reduction or decrease in capital stock, before any distribution is made on the Common Stock. After payment in full of the Liquidation Preference and such dividends, if any, to which holders of Series B Preferred are entitled, such holders will not be entitled to any further participation in any distribution of assets of Holdings. Dividends The Series B Preferred bears no stated dividend. However, in the event that Holdings declares or pays any dividends or other distributions upon the Common Stock, Holdings must (subject to certain exceptions) also declare and pay to the holders of the Series B Preferred, at the same time that it declares and pays such dividends or other distributions to the holders of the Common Stock, the dividends or distributions which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Series B Preferred had all of the outstanding shares of Series B Preferred been converted immediately prior to the record date for such dividend or distribution, or if no record date is fixed, the date as of which the record holders of Common Stock entitled to such dividends or distributions are determined. Conversion Rights Subject to possible adjustment as described below, each share of Series B Preferred is convertible into 33 1/3 shares of Common Stock (representing a conversion price of $30 per share of Common Stock based on the Liquidation Preference of $1,000 per share of Series B Preferred). The Designation provides that the conversion price is subject to specified adjustments upon the occurrence of any of the following events: . a distribution in the form of Common Stock is made on any class of capital stock of Holdings (see subsection 3(d)(v) of the Designation); or . a person other than Holdings or a subsidiary purchases in a tender offer not opposed by Holdings more than 20% and less than 50% of Holdings's outstanding Common Stock and the tender offer price is less than the conversion price in effect on the day the tender offer is concluded (see subsection 3(d)(vi) of the Designation); or . Holdings issues certain rights, options or warrants to all holders of Common Stock entitling them to acquire shares of Common Stock at a price that is less than the then current market price for the Common Stock (see subsection 3(d)(vii) of the Designation); or . the outstanding shares of Common Stock are subdivided into a greater number of shares of Common Stock (see subsection 3(d)(viii) of the Designation); or . Holdings or any subsidiary makes a tender or exchange offer for any of the Common Stock and the consideration paid per share of Common Stock is greater than the market price for the Common Stock as of the trading day next succeeding the expiration of the offer (see subsection 3(d)(ix) of the Designation); or 37 . Holdings issues to an affiliate (subject to certain exceptions) Common Stock at a price per share that is less than the market price of the Common Stock on the date of such issuance. Redemption; Automatic Conversion If a Change in Control (as defined in the Designation) with respect to Holdings occurs (or Holdings enters into a binding agreement relating thereto), the following provisions will apply: Transaction Not Accounted For as Pooling-of Interests. If the Change of Control is not in connection with an acquisition that is accounted for under the "pooling-of-interests" method of generally accepted accounting principles, Holdings must offer to purchase, within 10 business days after the Change of Control, all of the then outstanding shares of Series B Preferred at a purchase price per share, in cash, equal to the Liquidation Preference thereof plus an amount equal to 6.25% of the Liquidation Preference, compounded annually from the date of issuance of such share to the purchase date (the "Call Price"). Transaction Accounted For as Pooling-of Interests. If the Change of Control is an acquisition that is accounted for under the "pooling-of-interests" method of generally accepted accounting principles, then, upon the occurrence of the Change in Control, all of the then outstanding Series B Preferred Stock will be automatically converted into Common Stock having a market value equal to 109.5% of the Call Price, valued at the closing price of the Common Stock at the close of business on the business day prior to the date of the Change in Control. Redemption Relating to Certain Issuances of Securities If, after 2 1/2 years following the date of the issuance of the Series B Preferred, Holdings issues for cash, Common Stock or a series of preferred stock convertible into Common Stock, in either a public offering or a bona fide private financing, for a price for the Common Stock (including any amount payable upon conversion of preferred stock) below the conversion price then in effect for the Series B Preferred (each such offering being referred to as a "Reduced Price Offering"), then Holdings will be required to make an offer to purchase the outstanding shares of Series B Preferred as follows: If Offer to Purchase Series A Preferred is Not Required. If the Reduced Price Offering is at a price that is not below the conversion price of the Series A Preferred of $25, subject to adjustment (i.e., it does not also trigger an obligation to offer to repurchase Series A Preferred), then Holdings will be required to offer to apply towards the purchase of Series B Preferred at the Call Price an amount equal to 40% of the Specified Amount (as hereinafter defined) with respect to such offering. The "Specified Amount" with respect to any Reduced Price Offering shall equal the amount by which the net cash proceeds from such Reduced Price Offering and for all other Reduced Price Offerings consummated during the preceding 12 months (but excluding any Reduced Price Offering prior to December 31, 2001) exceeds an aggregate of $50 million, less a credit for all amounts theretofore paid to the holders of the Series A Preferred and the Series B Preferred for such purchases during such 12-month period. If Offer to purchase Series A Preferred Stock is Also Required. If the Reduced Price Offering is at a price that is below the conversion price of the Series A Preferred of $25, subject to adjustment (i.e., it also triggers an obligation to offer to purchase Series A Preferred), then Holdings will be required to offer to apply the Call Percentage (as defined below) of the Specified Amount towards the purchase of both Series B Preferred and Series A Preferred. In such event, the Specified Amount shall be allocated to the purchase of Series B Preferred and Series A Preferred in proportion to the aggregate liquidation amount of each such series of preferred stock (provided that, if the aggregate liquidation amount of the Series B Preferred is in excess of $500 million, such excess shall be ignored in calculating such proportion). Any such purchase of Series B Preferred will be at the Call Price and any purchase of Series A Preferred will be at the price specified in the certificate of designation for the Series A Preferred. 38 For purposes of the preceding paragraph, the "Call Percentage" will be a function of the aggregate liquidation amount of the Series A Preferred and Series B Preferred as set forth in the following table:
Aggregate Liquidation Call Amount Percentage ----------- ---------- up to and including $500 million.............................. 40% more than $500 million to and including $550 million.......... 43% more than $550 million to and including $600 million.......... 46% more than $600 million to and including $650 million.......... 50% more than $650 million to and including $700 million.......... 53% more than $700 million to and including $750 million.......... 56% more than $750 million........................................ 60%
Voting General Voting Rights B-1 Preferred. Except as otherwise required by applicable law, the holders of B-1 Preferred are entitled to vote together with the holders of the Common Stock as a single class on all matters submitted to stockholders of Holdings for a vote. Each share of B-1 Preferred is entitled to one vote for each share of Common Stock issuable upon conversion of such share of B-1 Preferred. B-2 Preferred. Except as provided below under "--Class Voting Rights," the holders of the B-2 Preferred are not entitled to vote on any matter to be voted on by stockholders of Holdings. Class Voting Rights Holdings may not, without the affirmative vote or consent of the holders of at least a majority of the shares of Series B Preferred then outstanding voting or consenting as the case may be, as a separate class, take certain actions specified in the Designation, including, among others, the declaration or payment of an Extraordinary Dividend (as defined in the Designation). Right to Exchange Between Classes of Series B Preferred Subject to certain limitations set forth in the Designation, certain holders of shares of B-2 Preferred shall be entitled, without the payment of any additional consideration, to convert at any time and from time to time any or all shares of B-2 Preferred held by such holder into the same number of shares of B-1 Preferred and vice versa. Item 4. Submission of Matters to a Vote of Security Holders A Special Meeting of Stockholders was held on August 9, 1999. The holders of 71,594,208 common shares and 300,000 Series A Preferred shares were present either in person or by proxy. There were no broker non-votes at the meeting. The following two matters were voted on and approved at such meeting. 1. Approval of the sale by the Company of 100,000 shares of Series B Preferred stock to Apollo.
For Abstain Against ---------- ------- --------- 66,588,592 10,941 2,310,023 2. Approval of an amendment to the Certificate of Designation of the Series A Preferred stock in order to eliminate an inconsistency between the terms of the Series B Preferred and the Series A Preferred (as well as add an exception to the provision requiring that the conversion price be adjusted under certain circumstances). For Abstain Against ---------- ------- --------- 67,237,732 13,324 1,658,505
39 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
Exhibit Number Description of Exhibit ------- ---------------------- 3(a) Amended and Restated Certificate of Incorporation of United Rentals, Inc., in effect as of the date hereof (incorporated by reference to exhibit 3.1 of United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3(b) Certificate of Amendment to the United Rentals, Inc. Certificate of Incorporation dated September 29, 1998 (incorporated by reference to Exhibit 4.2 to the United Rentals, Inc. Registration Statement on Form S-3, No. 333-70151). 3(c) By-laws of United Rentals, Inc., in effect as of the date hereof (incorporated by reference to exhibit 3.2 of United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3(d) Form of Certificate of Designation for Series A Perpetual Convertible Preferred Stock (incorporated by reference to Exhibit 4(k) to the United Rentals, Inc. Amendment No. 1 on Form S-3 to Registration Statement on Form S-1, No. 333-64463) together with a certificate of amendment thereto (incorporated by reference to exhibit A of United Rental, Inc. Proxy Statement dated July 22, 1999). 3(e) Form of Certificate of Designation for Series B Perpetual Convertible Preferred Stock (incorporated by reference to exhibit B of United Rentals, Inc. Proxy Statement on Schedule 14A dated July 22, 1999). 3(f) Amended and Restated Certificate of Incorporation of United Rentals (North America), Inc., in effect as of the date hereof (incorporated by reference to Exhibit 3.3 of the United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3(g) By-laws of United Rentals (North America), Inc., in effect as of the date hereof (incorporated by reference to Exhibit 3.4 of the United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10(a) Preferred Stock Purchase Agreement, Series B Perpetual Convertible Preferred Stock dated July 16, 1999 between United Rentals, Inc. and Chase Equity Associates, L.P. including Form of Registration Rights Agreement (incorporated by reference to exhibit 10(c) of the United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10(b) Term Loan Agreement dated as of July 15, 1999 among United Rentals, Inc., United Rentals (North America), Inc., various financial institutions, Goldman Sachs Credit Partners L.P., as Syndication Agent and Bank of America National Trust and Savings Association, as Administrative Agent (incorporated by reference to exhibit 10(d) of the United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10(c) First Amendment dated as of August 12, 1999, to Term Loan Agreement dated as of July 15, 1999 among United Rentals, Inc., United Rentals (North America), Inc., various financial institutions, Goldman Sachs Credit Partners L.P., as syndication Agent and Bank of America National Trust and Savings Association, as administrative Agent (incorporated by reference to exhibit 10(e) of the United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10(d) Second Amendment dated as of July 14, 1999, to Term Loan Agreement dated as of July 10, 1998 among United Rentals, Inc., United Rentals (North America), Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent (incorporated by reference to exhibit 10(f) of the United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
40
Exhibit Number Description of Exhibit ------- ---------------------- 10(e) Second Amendment dated as of July 14, 1999, to Credit Agreement dated as of September 29, 1998, between United Rentals, Inc., United Rentals (North America), Inc., various financial institutions, Bank of America Canada, as Canadian agent, and Bank of America National Trust and Savings Association, as U.S. Agent (incorporated by reference to exhibit 10(g) of the United Rentals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10(f) Preferred Stock Purchase Agreement, Series B Perpetual Convertible Preferred Stock, dated June 28, 1999, among United Rentals, Inc., Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P., together with an Amendment dated as of July 16, 1999 (incorporated by reference to exhibit B of United Rental, Inc. Proxy Statement dated July 22, 1999) 27* Financial Data Schedule 27.1* Financial Data Schedule
- -------- *Filed herewith. (b)Reports on Form 8-K: none 41 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. United Rentals, Inc. Dated: November 12, 1999 /s/ Michael J. Nolan By: _________________________________ Michael J. Nolan Chief Financial Officer (Principal Financial Officer) Dated: November 12, 1999 /s/ Peter R. Borzilleri By: _________________________________ Peter R. Borzilleri Vice President, Corporate Controller (Chief Accounting Officer) United Rentals (North America), Inc. Dated: November 12, 1999 /s/ Michael J. Nolan By: _________________________________ Michael J. Nolan Chief Financial Officer (Principal Financial Officer) Dated: November 12, 1999 /s/ Peter R. Borzilleri By: _________________________________ Peter R. Borzilleri Vice President, Corporate Controller (Chief Accounting Officer) 42 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 0001067701 UNITED RENTALS INC. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 31,071 0 511,961 56,170 160,287 0 2,598,027 539,835 4,525,950 0 2,214,589 300,000 5 720 1,352,483 4,525,950 1,564,589 1,564,589 312,473 989,555 8,804 34,706 93,541 166,662 68,343 98,319 0 0 0 98,319 1.39 1.06
EX-27.2 3 FINANCIAL DATA SCHEDULE
5 0001047166 UNITED RENTALS (NORTH AMERCIA), INC. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 38,552 0 511,961 56,170 160,287 0 2,573,942 536,764 4,459,068 0 2,214,589 0 0 0 1,638,477 4,459,068 1,564,589 1,564,589 312,473 989,555 8,650 34,706 93,400 183,962 75,320 108,642 0 0 0 108,642 0 0
-----END PRIVACY-ENHANCED MESSAGE-----