<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
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COMMISSION FILE NUMBER 001-14299
---------------
NATIONSRENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1570069
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
450 EAST LAS OLAS BLVD.,
FORT LAUDERDALE, FL 33301
(Address of principal executive offices) (Zip Code)
(954) 760-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, par value $0.01 per share, outstanding on
November 9, 1999 was 56,453,781.
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<PAGE> 2
NATIONSRENT, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998................................. 1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998..................................................................... 2
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998..................................................................... 3
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS..................................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................... 8
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDINGS.............................................. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................. 17
SIGNATURES................................................................................................. 19
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONSRENT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................ $ 17,606 $ 10,597
Accounts receivable, net ............................................. 113,446 72,951
Inventories .......................................................... 41,513 23,147
Prepaid expenses and other assets .................................... 43,929 24,451
Rental equipment, net ................................................ 520,789 382,573
Property and equipment, net .......................................... 55,250 37,839
Intangible assets related to acquired businesses, net ................ 619,684 524,254
Net assets held for sale ............................................. 14,800 --
---------- ----------
Total Assets ............................................... $1,427,017 $1,075,812
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ................................................... $ 42,643 $ 68,177
Accrued compensation and related taxes ............................. 7,053 4,901
Accrued expenses and other liabilities ............................. 30,558 32,970
Debt ............................................................... 923,497 678,035
Income taxes payable ............................................... 198 3,115
Deferred income taxes .............................................. 21,264 6,384
---------- ----------
Total liabilities .......................................... 1,025,213 793,582
========== ==========
Commitments and Contingencies
Stockholders' Equity:
Preferred stock -- $0.01 par value, 5,000,000 shares authorized:
Series A convertible, $100,000 liquidation preference,
100,000 shares issued and outstanding at September 30, 1999 ..... 1 --
Common stock -- $0.01 par value, 250,000,000 shares authorized,
56,453,781 shares and 55,618,023 shares issued and outstanding at
September 30, 1999 and December 31, 1998, Respectively .......... 565 556
Additional paid-in capital ......................................... 366,745 268,019
Retained earnings .................................................. 34,493 13,655
---------- ----------
Total stockholders' equity ................................. 401,804 282,230
---------- ----------
Total Liabilities and Stockholders' Equity ................. $1,427,017 $1,075,812
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE> 4
NATIONSRENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Equipment rentals ........................................................ $ 121,915 $ 49,625 $ 293,943 $ 73,644
Sales of equipment, merchandise, service, parts and supplies ............. 32,980 18,705 93,576 39,084
--------- --------- --------- ---------
Total revenue .................................................... 154,895 68,330 387,519 112,728
--------- --------- --------- ---------
Cost of revenue:
Cost of equipment rentals ................................................ 36,002 14,036 89,587 23,195
Rental equipment depreciation and lease expense .......................... 24,826 10,112 63,082 15,555
Cost of sales of equipment, merchandise, service, parts and supplies ..... 21,912 13,611 62,543 28,090
--------- --------- --------- ---------
Total cost of revenue ............................................ 82,740 37,759 215,212 66,840
--------- --------- --------- ---------
Gross profit ............................................................... 72,155 30,571 172,307 45,888
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses ............................. 29,171 13,435 72,667 22,287
Expenses related to abandoned merger, net ................................ -- -- 3,932 --
Non-rental equipment depreciation and amortization ....................... 5,293 1,865 14,843 2,931
--------- --------- --------- ---------
Operating income ........................................................... 37,691 15,271 80,865 20,670
--------- --------- --------- ---------
Other (income)/expense:
Interest expense, net .................................................... 17,698 5,846 48,130 9,248
Other, net ............................................................... (287) (162) (2,885) (395)
--------- --------- --------- ---------
17,411 5,684 45,245 8,853
--------- --------- --------- ---------
Income before provision for income taxes ................................... 20,280 9,587 35,620 11,817
Provision for income taxes ............................................... 8,416 4,026 14,782 4,963
--------- --------- --------- ---------
Net income ................................................................. $ 11,864 $ 5,561 $ 20,838 $ 6,854
========= ========= ========= =========
Net income per share:
Basic .................................................................... $ 0.21 $ 0.15 $ 0.37 $ 0.23
========= ========= ========= =========
Diluted .................................................................. $ 0.17 $ 0.14 $ 0.34 $ 0.23
========= ========= ========= =========
Weighted average common shares outstanding:
Basic .................................................................... 56,454 37,909 55,976 29,894
========= ========= ========= =========
Diluted .................................................................. 75,805 44,271 68,460 33,501
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 5
NATIONSRENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................................... $ 20,838 $ 6,854
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
Depreciation and amortization .......................................................................... 55,089 16,742
Gain on sale of rental equipment ....................................................................... (13,232) (2,910)
Gain on sale of lift truck dealership .................................................................. (1,818) --
Deferred income tax provision .......................................................................... 15,418 3,580
Changes in operating assets and liabilities:
Accounts receivable ............................................................................ (36,340) (14,175)
Inventories .................................................................................... (10,890) 917
Prepaid expenses and other assets .............................................................. (13,754) (3,666)
Accounts payable ............................................................................... (28,418) 32,588
Accrued expenses and other liabilities ......................................................... (10,648) 270
Income taxes payable ........................................................................... (2,997) (903)
--------- ---------
Net cash (used in)/provided by operating activities ............................................ (26,752) 39,297
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ....................................................... (134,179) (207,967)
Payment of contingent acquisition consideration ....................................................... (500) --
Proceeds from sale of lift truck dealership ........................................................... 23,315 --
Purchases of rental equipment ......................................................................... (133,774) (76,816)
Purchases of property and equipment ................................................................... (24,742) (6,004)
Proceeds from sale of rental equipment ................................................................ 42,808 12,808
--------- ---------
Net cash used in investing activities .......................................................... (227,072) (277,979)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ........................................................... -- 123,277
Proceeds from issuance of preferred stock, net ........................................................ 93,569 --
Capital contribution .................................................................................. -- 23,400
Proceeds from debt .................................................................................... 764,750 560,173
Repayments of debt .................................................................................... (589,897) (456,885)
Debt issuance costs ................................................................................... (7,589) (3,545)
--------- ---------
Net cash provided by financing activities ...................................................... 260,833 246,420
--------- ---------
Net increase in cash and cash equivalents ................................................................ 7,009 7,738
Cash and cash equivalents, beginning of period ........................................................... 10,597 1,493
--------- ---------
Cash and cash equivalents, end of period ................................................................. $ 17,606 $ 9,231
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................................................................ $ 47,436 $ 7,416
========= =========
Cash paid for income taxes ............................................................................ $ 6,017 $ 1,791
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired the net assets and assumed certain liabilities of certain businesses as follows:
Total assets, net of cash acquired .................................................................... $ 220,666 $ 497,008
Total liabilities assumed ............................................................................. (66,547) (229,760)
Amount paid with common stock and warrants ............................................................ -- (9,227)
Amount paid through the issuance of debt and future contractual payments .............................. (19,940) (50,054)
--------- ---------
Net cash paid .................................................................................. $ 134,179 $ 207,967
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 6
NATIONSRENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared by NationsRent, Inc. (the "Company") and reflect all adjustments
of a normal recurring nature which are, in the opinion of management, necessary
for a fair presentation of financial results for the three and nine months ended
September 30, 1999 and 1998, in accordance with generally accepted accounting
principles for interim financial reporting and pursuant to Article 10 of
Regulation S-X. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. For
interim reporting purposes, advertising expenses are charged to earnings in
proportion to the relationship that revenue for such period bears to estimated
full year revenue and related advertising expenses. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 1998 appearing
in the Company's Annual Report on Form 10-K/A filed with the Securities and
Exchange Commission. The results of operations for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results which may
be reported for the year ending December 31, 1999.
The unaudited interim consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes criteria
for determining which costs of developing or obtaining internal-use computer
software should be charged to expense and which should be capitalized. SOP 98-1
is effective for all transactions entered into in fiscal years beginning after
December 15, 1998. The Company adopted SOP 98-1 prospectively effective January
1, 1999. The adoption of SOP 98-1 did not have a material effect on the
Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires
that all non-governmental entities expense costs of start-up activities,
including pre-operating, pre-opening and organization activities, as those costs
are incurred. The Company adopted SOP 98-5 effective January 1, 1999. The
adoption of SOP 98-5 did not have a material effect on the Company's financial
position or results of operations.
NOTE 2 -- ACQUISITIONS
The Company made eleven acquisitions of equipment rental businesses during
the nine months ended September 30, 1999. The aggregate consideration for these
acquisitions was $155,621,000 and consisted of (i) $135,681,000 of cash, (ii)
$750,000 of subordinated debt, (iii) $17,775,000 of subordinated convertible
debt and (iv) $1,415,000 of future contractual cash payments. The cash portion
of the consideration was funded through borrowings under the Company's senior
credit facility (the "Credit Facility"). In addition, the Company repaid or
assumed outstanding indebtedness of the acquired companies in the aggregated
amount of $56,654,000. These acquisitions have been accounted for using the
purchase method and, accordingly, the acquired assets and assumed liabilities,
including goodwill, have been recorded at their estimated fair values as of the
date of acquisition. Purchase accounting values for these acquisitions have been
assigned on a preliminary basis, and are subject to adjustment when final
information as to the fair values of the net assets acquired is available. The
Company is awaiting information from third-party appraisers as to the fair value
of certain rental equipment acquired and the final determination of certain
liabilities assumed. The Company does not believe the final assignment of the
fair value of the net assets acquired will have a significant impact on future
operating results. The operations of the acquired businesses have been included
in the Company's consolidated statements of income since the date of
acquisition.
The following table sets forth the estimated fair value of the assets
acquired and liabilities assumed for the aforementioned acquisitions (in
thousands):
Assets, including cash.................................... $ 109,739
Goodwill.................................................. 97,629
Assets Held for Sale...................................... 14,800
Liabilities............................................... 66,547
4
<PAGE> 7
NATIONSRENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1999
The following table sets forth the unaudited pro forma consolidated results
of operations for the three and nine months ended September 30, 1999 and 1998
giving effect to the acquisitions completed during 1999 and 1998 as if the
acquisitions had occurred on January 1, 1998 (in thousands, except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue................................................. $ 164,473 $ 154,063 $ 438,885 $ 409,340
Net income.............................................. 13,231 12,045 27,841 21,863
Basic earnings per share................................ 0.23 0.21 0.50 0.39
Diluted earnings per share.............................. 0.17 0.16 0.38 0.30
</TABLE>
The above unaudited pro forma consolidated results of operations are based
upon certain assumptions and estimates which the Company believes are
reasonable. The unaudited pro forma consolidated results of operations may not
be indicative of the operating results that actually would have been reported
had the acquisitions been consummated on January 1, 1998, nor are they
necessarily indicative of results which will be reported in the future.
During the nine months ended September 30, 1999, the Company paid
consideration of $500,000 of cash and 78,973 shares of common stock to the
former owners of a previously acquired business related to the achievement of
certain operating results. The Company records amounts paid for contingent
consideration as additional purchase price once they are incurred since the
consideration is required regardless of the former owner's continued association
with the Company.
NOTE 3 -- PREFERRED STOCK
In July 1999, the Company entered into a Preferred Stock Purchase Agreement
with NR Holdings Limited and NR Investments Limited, affiliates of Investcorp,
S.A., pursuant to which the Company agreed to sell 100,000 shares of its
perpetual Series A Convertible Preferred Stock ("Preferred Stock") for an
aggregate purchase price of $100,000,000. On July 20, 1999, pursuant to the
Preferred Stock Purchase Agreement, the Company sold 78,000 shares of Preferred
Stock for an aggregate purchase price of $78,000,000. The sale of the additional
22,000 shares of Preferred Stock, for an aggregate purchase price of
$22,000,000, was completed on August 31, 1999, following approval of the
stockholders of the Company at a special meeting. The proceeds of the sale of
the Preferred Stock were used to pay down amounts outstanding under the Credit
Facility. The 100,000 shares of Preferred Stock are convertible into 14,285,714
shares of the Company's common stock, $0.01 par value per share ("Common
Stock"), based on a liquidation preference of $1,000 per share of Preferred
Stock and a conversion price of $7.00 per share of Common Stock. The holders of
the Preferred Stock were granted certain demand and piggy-back registration
rights with respect to the shares of the Company's Common Stock issuable upon
conversion of the Preferred Stock, pursuant to a Registration Rights Agreement
among the Company, NR Holdings Limited, NR Investments Limited and certain of
the Company's stockholders. The terms of the Preferred Stock are set forth in
the Certificate of Designation filed as an exhibit to this Quarterly Report on
Form 10-Q along with the Preferred Stock Purchase Agreement and the Registration
Rights Agreement.
NOTE 4 -- SEASONALITY
The Company's revenue and income are dependent upon the activity in the
construction industry in the markets served by the Company. Construction
activity is dependent upon weather and the traditional seasons for construction
work. Because of this variability in demand, the Company's quarterly revenue may
fluctuate, and revenue for the first quarter of each year can be expected to be
lower than the remaining quarters. Although the Company believes that the
historical trend in quarterly revenue for the second, third and fourth quarters
of each year is generally higher than the first quarter, there can be no
assurance that this will occur in future periods. Accordingly, quarterly or
other interim results should not be considered indicative of results to be
expected for any quarter or for the full year.
5
<PAGE> 8
NATIONSRENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1999
NOTE 5 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per share -- net income..... $ 11,864 $ 5,561 $ 20,838 $ 6,854
Interest expense on convertible subordinated debt, net of
income taxes.......................................... 789 488 2,268 821
----------- ----------- ----------- -----------
Numerator-- diluted earnings per share................... $ 12,653 $ 6,049 $ 23,106 $ 7,675
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share-- weighted-average shares....................... 56,454 37,909 55,976 29,894
Effect of dilutive securities:
Convertible subordinated debt......................... 9,177 6,083 8,892 3,430
Preferred stock....................................... 9,745 -- 3,284 --
Employee stock options................................ 429 279 308 177
----------- ----------- ----------- -----------
Denominator for diluted earnings per share -- adjusted
weighted-average shares.................................. 75,805 44,271 68,460 33,501
=========== =========== =========== ===========
Basic earnings per share................................... $ 0.21 $ 0.15 $ 0.37 $ 0.23
=========== =========== =========== ===========
Diluted earnings per share................................. $ 0.17 $ 0.14 $ 0.34 $ 0.23
=========== =========== =========== ===========
</TABLE>
NOTE 6 -- DEBT
In February 1999, the Company completed an exchange offer to replace its
privately issued 10.375% Senior Subordinated Notes due 2008 with publicly
registered notes.
In July 1999, the Company amended its Credit Facility to increase the total
aggregate commitment to $800,000,000. At that time the term loan (the "Term
Loan") was increased to $300,000,000 and the aggregate commitment under the
revolving credit facility (the "Revolver") was increased to $500,000,000. The
Revolver has a five-year term scheduled to expire in July 2004 and the Term Loan
has a seven-year term scheduled to expire in July 2006. The Term Loan bears
interest at 3.00% over the Eurodollar market rate. Borrowings under the Revolver
bear interest at either the BankBoston base rate or, at the Company's option,
the Eurodollar market rate plus a percentage ranging from 1.50% to 2.50%. The
percentage over the Eurodollar market rate is based on the Company's financial
performance as measured by the total funded debt ratio. The Credit Facility is
secured by a security interest in substantially all of the assets of the
Company. The Credit Facility also imposes, among other covenants, a tangible
assets to senior debt covenant, a restriction on all of the Company's retained
earnings including the declaration and payment of cash dividends, consent
requirements on certain acquisitions and a restriction on the ratio of total
funded debt to earnings before interest, income taxes, depreciation and
amortization.
NOTE 7 -- COMPREHENSIVE INCOME
The objective of reporting comprehensive income is to disclose all changes
in equity of an enterprise that result from transactions and other economic
events in a period other than transactions with owners. The comprehensive income
of the Company was equal to net income for all periods presented.
NOTE 8 -- NON-RECURRING ITEMS
In January of 1999, the Company received net proceeds of $23,315,000 related
to the sale of a lift truck dealership acquired as part of an acquisition made
in April 1998. The carrying value of the tangible assets sold was $14,670,000
resulting in proceeds in excess of carrying value of $8,645,000. The Company
recorded a pre-tax gain of $1,818,000 based on the increase in value of the
dealership since the date of acquisition. The remaining $6,727,000 of proceeds
in excess of carrying value was recorded as a reduction of goodwill. The Company
continues to evaluate the carrying value of its goodwill for impairment in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of."
6
<PAGE> 9
NATIONSRENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1999
In January 1999, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Rental Service Corporation ("RSC"), a Delaware
corporation, pursuant to which the Company was to be merged with and into RSC
with RSC continuing as the surviving corporation to be named RSC NationsRent. On
May 20, 1999, the Company entered into a Termination and Release Agreement (the
"Termination Agreement"), with RSC, pursuant to which the Company and RSC have
mutually agreed to terminate the Merger Agreement and to abandon the proposed
merger between the parties. As part of the Termination Agreement, RSC paid the
Company $6,000,000 as reimbursement of out-of-pocket costs and expenses incurred
in connection with or relating to the Merger Agreement and the Termination
Agreement and the performance of the Company's obligations thereunder through
the date of termination. The Company recorded a pre-tax charge of $3,932,000 in
the second quarter of 1999 for the unreimbursed portion of expenses incurred
related to the proposed merger.
NOTE 9 -- SUBSEQUENT EVENTS
The Company has completed two acquisitions of rental equipment businesses
since September 30, 1999 for aggregate consideration of $14,054,000. Such
consideration consisted of an aggregate (i) $8,805,000 of cash, (ii) $3,100,000
of subordinated convertible debt, (iii) 116,102 shares of the Company's Common
Stock and (iv) $1,220,000 of future contractual cash payments. The cash portion
of the consideration was funded through borrowings under the Credit Facility. In
addition, the Company repaid or assumed outstanding indebtedness of the acquired
companies in the aggregate amount of $10,133,000. Each of the acquisitions has
been accounted for using the purchase method.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated results of
operations and financial condition should be read in conjunction with the
unaudited interim consolidated financial statements and the related notes
included herein and the consolidated financial statements for the year ended
December 31, 1998 appearing in our Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission.
GENERAL
NationsRent is one of the fastest growing equipment rental companies in the
United States. We have acquired a platform of equipment rental businesses
concentrated in selected markets and are building a network of nationally
branded locations. As of November 12, 1999, we operated 160 equipment rental
locations in 25 states. We have become a leading provider of rental equipment as
a result of our strategy to acquire core businesses, open or acquire additional
locations concentrated around those businesses and expand our fleet of rental
equipment. We believe that this cluster strategy enables us to increase
profitability in our acquired stores and achieve profitability in our newly
opened locations more quickly than our competitors. By implementing the cluster
strategy and expanding our fleet of rental equipment, we are able to provide a
full range of rental equipment to customers with a wide variety of equipment
rental needs.
NationsRent seeks to acquire businesses that have:
o strong positions in their geographic market;
o experienced local management teams that will continue to work with
us following the acquisition;
o high quality inventory of rental equipment; and
o physical and operating characteristics that are suited to
conversion to the NationsRent format.
During the period January 1, 1999 through November 12, 1999, we have
acquired 13 equipment rental businesses. We paid an aggregate of approximately
$169.6 million for these 13 acquisitions which consisted of approximately:
o $144.5 million in cash;
o $20.9 million of subordinated convertible debt;
o $0.8 million of subordinated debt;
o $2.6 million of future contractual payments; and
o 116,102 shares of our common stock.
We funded the cash portion of the consideration paid for these acquisitions
with borrowings under our senior credit facilities. The acquisitions have been
accounted for using the purchase method and, accordingly, the acquired assets
and assumed liabilities have been recorded at their estimated fair values as of
the date of acquisition. Purchase accounting values for certain acquisitions
have been assigned on a preliminary basis, and are subject to adjustment when
additional information as to the fair values of the net assets acquired is
available. We are awaiting information from third-party appraisers as to the
fair value of certain rental equipment acquired and the final determination of
certain liabilities assumed. We do not believe the final assignment of the fair
value of the net assets acquired will have a significant impact on future
operating results.
After making an acquisition, we convert acquired locations to the
NationsRent format. Distinguishing characteristics of this format include
drive-through lanes, clearly marked equipment aisles, prominent use of the
NationsRent logo and colors and attractive, well-organized and clean store
facilities. The cost of converting an acquired location to the NationsRent
format varies depending on the physical properties of the acquired location and
the condition, breadth and depth of rental equipment inventory at such location,
which are factors considered in the selection and pricing of acquisition
candidates. Once we have established a presence in a particular market, we may
open new locations in that geographic area or adjacent areas. During the nine
months ended September 30, 1999, we opened nine of the 12 new locations we plan
to open in 1999. We continue to evaluate the need for new locations as we
acquire equipment rental companies in new markets. The cost of opening our new
locations has varied depending on whether we leased or purchased the underlying
real property, the size of the location and the breadth and depth of inventory
at each location. See "-- Liquidity and Capital Resources."
We derive our revenue from equipment rentals, sales of new and used
equipment, spare parts and supplies and maintenance and repair services. Rental
revenue is dependent on several factors including demand for rental equipment,
the amount and quality of equipment available for rent, rental rates and general
economic conditions. Revenue generated from the sale of used equipment is
affected by price,
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general economic conditions and the condition of the equipment. Revenue from the
sale of new equipment is affected by price and general economic conditions.
Revenue from the sale of spare parts and supplies as well as maintenance and
repair services is primarily affected by equipment rental and sales volume.
The principal components of our cost of revenue include depreciation of
rental equipment, costs of new and used equipment sold, personnel costs,
occupancy costs, the cost of rental equipment under operating leases, repair and
maintenance costs and vehicle operations. Rental equipment depreciation is
calculated using the straight-line method over the estimated useful life of such
equipment. The range of useful lives estimated by management for rental
equipment is primarily three to ten years and is depreciated to a salvage value
ranging from zero to ten percent of original cost. Since the second quarter of
1998, we have financed approximately $258.5 million of rental fleet additions
with operating leases. In order to more clearly reflect the cost of our rental
fleet, we have combined operating lease expense related to our rental fleet with
rental equipment depreciation and reported these amounts on a separate line in
our statements of income.
Selling, general and administrative expenses include management salaries,
advertising and marketing, travel, administrative and clerical salaries and data
processing.
Non-rental equipment depreciation and amortization includes the depreciation
of fixed assets that are not offered for rent, amortization of leasehold
improvements and amortization of intangible assets related to the acquired
businesses.
During May 1999 we abandoned our merger with Rental Service Corporation
("RSC") and entered into a Termination and Release Agreement (the "Termination
Agreement") with RSC. Pursuant to the Termination Agreement RSC reimbursed us
for $6.0 million of expenses incurred in connection with the transaction, which
partially offset a total of $9.9 million of expenses incurred by the Company in
connection with the transaction. The net $3.9 million of unreimbursed expenses
is included in operating expenses in the nine months ended September 30, 1999.
HISTORICAL RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUE. The following table sets forth our revenue by type for the three
and nine months ended September 30, 1999 and 1998 (in thousands, except
percentages):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equipment rentals .............................. $121,915 78.7% $ 49,625 72.6% $293,943 75.9% $ 73,644 65.3%
Sales of equipment, merchandise,
service, parts and supplies ................ 32,980 21.3% 18,705 27.4% 93,576 24.1% 39,084 34.7%
-------- ----- -------- ----- -------- ----- -------- -----
$154,895 100.0% $ 68,330 100.0% $387,519 100.0% $112,728 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Total revenue increased $86.6 million and $274.8 million for the three and
nine months ended September 30, 1999, respectively, when compared to the same
periods in 1998. These increases were due primarily to the inclusion of revenue
from businesses acquired during 1998 and 1999. Also contributing to the growth
in revenue was an increase in equipment rental revenue resulting from the
expansion of our rental fleet at existing locations. Equipment rental revenue as
a percentage of total revenue was 78.7% and 75.9% for the three and nine months
ended September 30, 1999, respectively, up from 72.6% and 65.3% for the same
periods in 1998. The higher mix of rental revenue in the 1999 periods is due
primarily to the acquisition of companies with a higher percentage of equipment
rentals and the expansion of our rental fleet. This higher mix of rental revenue
also is the result of a decrease in the sales of new equipment, parts and
service resulting from the sale in January 1999 of a lift truck dealership that
derived the majority of its revenue from sales of new equipment and related
parts and service.
GROSS PROFIT. Gross profit increased $41.6 million and $126.4 million for
the three and nine months ended September 30, 1999, respectively, when compared
to the same periods in 1998. These increases in gross profit were primarily due
to the increase in total revenue. Gross profit as a percentage of total revenue
was 46.6% and 44.5% for the three and nine months ended September 30, 1999,
respectively, compared to 44.7% and 40.7% for the same periods in 1998. The
increase in gross profit as a percentage of total revenue was due to the growth
in revenue from equipment rentals. We derive higher margins from equipment
rental revenue than revenue from sales of equipment, merchandise, service, parts
and supplies.
OPERATING EXPENSES. Selling, general and administrative expenses increased
$15.7 million and $50.4 million for the three and nine months ended September
30, 1999, respectively, when compared to the same periods in 1998. These
increases were due primarily to the inclusion of such costs from companies
acquired during 1998 and 1999 and additional corporate expenses including costs
associated with our strategic marketing initiatives. Also included in operating
expenses for the nine months ended September 30, 1999 is the aforementioned $3.9
million of unreimbursed expenses incurred in connection with the abandoned
merger with RSC. Selling, general and administrative expenses as a percentage of
total revenue were 18.8% for the three and nine months ended September 30, 1999.
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Non-rental equipment depreciation and amortization increased $3.4 million
and $11.9 million for the three and nine months ended September 30, 1999,
respectively, when compared to the same periods in 1998. These increases were
due primarily to the increase in goodwill amortization in connection with
acquisitions completed during 1998 and 1999.
OPERATING INCOME. Operating income increased $22.4 million and $60.2 million
for the three and nine months ended September 30, 1999, respectively, when
compared to the same periods in 1998. Operating income as a percentage of total
revenue was 24.3% and 20.9% for the three and nine months ended September 30,
1999, respectively, compared to 22.4% and 18.3% for the same periods in 1998.
These increases were due primarily to the higher percentage of revenue from
equipment rentals in 1999.
OTHER INCOME AND EXPENSE. Interest expense increased $11.9 million and $38.9
million for the three and nine months ended September 30, 1999, respectively,
when compared to the same periods in 1998. These increases were due primarily to
the increase in debt incurred to finance acquisitions and the expansion of our
rental fleet during 1998 and 1999. Interest expense is primarily attributable to
borrowings under our senior credit facilities, notes issued to finance the
purchase of equipment, subordinated notes issued to sellers of businesses we
acquired and our senior subordinated notes issued in December 1998.
Other income for the nine months ended September 30, 1999 included a pre-tax
gain of approximately $1.8 million from the sale in January of a lift truck
dealership. See "Note 8 to the unaudited consolidated financial statements."
INCOME TAXES. Our effective income tax rate for the three and nine months
ended September 30, 1999 was 41.5%. The amount above statutory income tax rates
is attributable primarily to non-deductible goodwill amortization for federal
income tax purposes.
NET INCOME. Net income increased $6.3 million and $14.0 million for the
three and nine months ended September 30, 1999, respectively, when compared to
the same periods in 1998. The increase in net income was due to the factors
discussed above, offset by the aforementioned charge related to the abandoned
merger with RSC. Net income, excluding the charge related to the abandoned
merger with RSC, would have been $23.1 million or $0.37 diluted earnings per
share for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our primary uses of cash have been the funding of acquisitions and capital
expenditures. To date, we have funded our cash requirements primarily with
borrowings under our senior credit facilities, proceeds from the issuance of
debt and equity securities, equity contributions from our founding stockholders
and cash provided by operations.
Our net cash used by operations was $26.8 million for the nine months ended
September 30, 1999 compared to net cash provided by operations of $39.3 million
for the same period in 1998. The increase in cash used by operations was due
primarily to an increase in the working capital required as a result of our
acquisitions and to fund our internal growth. Net cash used in investing
activities was $227.1 million for the nine months ended September 30, 1999. Cash
used in investing activities in the period was primarily a result of $133.8
million of purchases of rental equipment, $24.7 million for purchases of and
improvements to property and equipment and cash consideration of $134.2 million
for the acquisition of businesses. Cash provided by financing activities was
$260.8 million for the nine months ended September 30, 1999 and was primarily a
result of net borrowings under our senior credit facilities and the sale of
convertible preferred stock.
In July 1999, we increased our senior credit facilities from $500.0 million
to $800.0 million consisting of a $300.0 million term loan due July 2006 and a
$500.0 million revolving line of credit due July 2004. The senior credit
facilities can be used to complete permitted acquisitions, make capital
expenditures, enter into standby letters of credit or for working capital and
other general corporate purposes. Borrowings under the revolving line of credit
bear interest at either the BankBoston, N.A. base rate or, at our option, the
Eurodollar market rate plus a percentage ranging from 1.50% to 2.50%. The term
loan bears interest at 3.00% over the Eurodollar market rate. The percentage
over the Eurodollar market rate is based on our financial performance as
measured by the total funded debt ratio. The senior credit facilities are
secured by a security interest in substantially all of our assets. The senior
credit facilities also impose, among other covenants, a tangible assets to
senior debt covenant, a restriction on all of our retained earnings including
cash dividends, consent requirements on certain acquisitions and a restriction
on the ratio of total funded debt to earnings before interest, income taxes,
depreciation and amortization. On September 30, 1999, $257.0 million and $300.0
million of cash borrowings were outstanding under the revolving line of credit
and term loan, respectively.
In July 1999, we entered into an agreement to sell 100,000 shares of
perpetual convertible preferred stock for an aggregate purchase price of $100.0
million to certain affiliates of Investcorp, S.A., a global investment group
with a prior successful investment in the equipment rental industry. The 100,000
shares of preferred stock are convertible into approximately 14.3 million shares
of our common stock at any time based on a liquidation preference of $1,000 per
share of preferred stock and a conversion price of $7.00 per share of common
stock. The private placement was completed in two steps, $78.0 million was
completed in July 1999 and $22.0 million was completed in August 1999 following
stockholder approval at a special meeting of stockholders. Proceeds from the
private placement have been used to repay borrowings under our senior credit
facilities.
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During the nine months ended September 30, 1999, we added $143.4 million of
new equipment to our rental equipment fleet using operating leases. These
operating leases have terms expiring over the next seven years.
Our short-term cash requirements for our existing operations consist
primarily of:
o capital expenditures to maintain, modernize and expand our rental
equipment inventory;
o working capital requirements; and
o repair and maintenance of rental equipment, purchase of
merchandise inventory and other operating activities.
We estimate that equipment expenditures over the next 12 months for our
existing locations and for new store openings will be in the range of $175.0
million to $225.0 million, net of proceeds from used equipment sales.
Approximately one-third of the estimated net capital expenditures is to replace
existing rental equipment. We believe that we will be able to finance our
short-term cash needs through borrowings under the senior credit facilities, the
use of equipment leases and cash generated from operations. We estimate that
such sources will be sufficient to fund the cash required for our existing
operations for at least 12 months.
During the nine months ended September 30, 1999, we opened nine new
locations in markets where we already have a presence. We estimate that the
average aggregate capital costs associated with each such new location were in
the range of $2.0 million to $4.5 million. We expect to open a total of 12 new
locations in 1999. We believe that cash generated from operations and borrowings
under our senior credit facilities will be sufficient to fund these costs
without the issuance of additional debt or equity securities.
We are developing a management information system that became operational at
certain locations in the fourth quarter of 1998. We estimate the total cost to
complete development and installation of the system at our existing locations
will range from $6.0 million to $8.0 million over the next several years and we
believe cash generated from operations and borrowings under our senior credit
facilities will be sufficient to fund these costs.
We plan to continue our acquisition strategy and believe that, in connection
with new acquisitions, we will be required to make additional expenditures to
expand and modernize rental equipment of acquired companies. We expect to
finance future acquisitions and related rental equipment expenditures using
cash, capital stock, notes and/or assumption of indebtedness. To fully implement
our growth strategy and meet the resulting capital requirements, we will be
required to increase amounts available under our senior credit facilities or
raise additional capital through issuance of additional debt or equity
securities. There can be no assurance that additional capital, if and when
required, will be available on terms satisfactory to us or at all.
There may be liabilities that we fail or are unable to discover in the
course of performing due diligence investigations on each company or business we
have acquired or seek to acquire in the future. Such liabilities could include,
among others, those arising from employee benefits contribution obligations of a
prior owner or non-compliance with applicable federal, state or local
environmental requirements by prior owners for which we, as a successor owner or
operator, may be responsible. We try to minimize these risks by conducting such
due diligence, including employee benefit and environmental reviews, as we deem
appropriate under the circumstances. However, we cannot assure you that we have
identified, or in the case of future acquisitions, will identify, all existing
or potential risks. We also generally require each seller of acquired businesses
or properties to indemnify us against undisclosed liabilities. In some cases
this indemnification obligation may be supported by deferring payment of a
portion of the purchase price or other appropriate security. However, we cannot
assure you that the indemnification, even if obtained, will be enforceable,
collectible or sufficient in amount, scope or duration to fully offset the
possible liabilities associated with the business or property acquired. Any such
liabilities, individually or in the aggregate, could have a material adverse
effect on our business, financial condition or results of operations.
SEASONALITY AND FLUCTUATIONS IN OPERATING RESULTS
Our revenue and income are dependent upon activity in the construction
industry in the markets we serve. Construction activity is dependent upon
weather and other seasonal factors affecting construction in the geographic
areas where we have operations. Because of this variability in demand, our
quarterly revenue may fluctuate, and revenue for the first quarter of each year
can be expected to be lower than the remaining quarters. Although we believe
that the historical trend in quarterly revenue for the second, third and fourth
quarters of each year is generally higher than the first quarter, there can be
no assurance that this will occur in future periods. Accordingly, quarterly or
other interim results should not be considered indicative of results to be
expected for any other quarter or for a full year.
Operating results may fluctuate due to other factors including, but not
limited to:
o changes in general economic conditions including changes in
national, regional or local construction or industrial activities;
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<PAGE> 14
o the timing of acquisitions and opening of new locations;
o the timing of expenditures for new rental equipment and the
disposition of used equipment;
o competitive pricing pressures; and
o changes in interest rates.
We will incur significant expenses in opening new locations, such as
employee training, marketing and facility set-up costs. Initially, new locations
may generate lower operating margins than established locations and may operate
at a loss for a period of time. Our new locations have on average achieved
profitability within approximately five months of their opening. In addition,
when we purchase new rental equipment, the depreciation related to such
equipment may contribute to near-term margin decline, because such equipment may
not initially generate revenue at a rate that is sufficient to match such
increased depreciation expense. As such, the opening of new rental locations and
the purchase of new equipment to expand our current rental equipment inventory
may reduce our operating margins during a start-up period.
INFLATION
We do not believe that inflation has been a significant factor to the cost
of our operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes criteria
for determining which costs of developing or obtaining internal-use computer
software should be charged to expense and which should be capitalized. SOP 98-1
is effective for all transactions entered into in fiscal years beginning after
December 15, 1998. We adopted SOP 98-1 prospectively effective January 1, 1999.
The adoption of SOP 98-1 did not have a material effect on our financial
position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires
that all non-governmental entities expense costs of start-up activities,
including pre-operating, pre-opening and organization activities, as those costs
are incurred. We adopted SOP 98-5 effective January 1, 1999. The adoption of SOP
98-5 did not have a material effect on our financial position or results of
operations.
YEAR 2000
Since many computer systems and other equipment with embedded chips or
microprocessors use only two digits to represent the year, these systems may be
unable to process accurately certain data before, during or after the year 2000.
As a result, business and governmental entities are at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the "Year 2000" issue. We may be affected
by Year 2000 issues in our own information technology ("IT") systems or non-IT
systems, as well as by Year 2000 issues related to IT and non-IT systems
operated by third parties.
STATE OF READINESS
Our plan to address the Year 2000 issue is structured in five phases:
inventory, assessment, correction, testing and implementation. The inventory
phase is an investigation of all our operations to identify the software and
hardware of all of our systems. The assessment phase is an analysis of each
component of each system to determine date sensitivity to the year 2000. The
correction phase is the effort to correct, replace, upgrade or eliminate
non-compliant hardware and software. The testing phase involves verifying that
corrections to our systems are Year 2000 compliant. Finally, the implementation
phase is the effort to deploy the corrected and verified systems throughout our
current operations.
IT SYSTEMS. Our current state of progress with our IT systems is as follows:
o INVENTORY AND ASSESSMENT. Each of the equipment rental companies we have
acquired have had its own information system for rental counter
operations, inventory control and financial reporting. In assessing the
systems of the companies that we acquired, we determined that there was
no one system that could manage our projected growth and that was Year
2000 compliant. We determined, therefore, that we needed to develop our
own Year 2000 compliant management information system. We believe the
inventory and assessment phases of our IT systems are complete.
o CORRECTION AND TESTING. During the second quarter of 1998, we began
developing our own management information system that included software
modules for rental counter operations, inventory control, database and
financial reporting to replace the
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information systems of businesses we have acquired. During the
development of our systems, we tested and validated them for Year 2000
compliance and selected our third-party vendors for the software modules
and hardware components of our new system based on their certification
of Year 2000 compliance. To date, we have handled our Year 2000 plan
with our own internal personnel and have not engaged any third-party
consultants. The system is functional and we believe we have completed
the testing of all of the components. We are not currently aware of any
Year 2000 problems relating to our new IT system or the systems and
hardware supplied by third parties which would have a material adverse
effect on our business, results of operations or financial condition.
o IMPLEMENTATION. For us, the implementation phase consists of the
conversion and replacement of the non-Year 2000 compliant systems of our
acquired businesses with our new management information system. During
October 1998, we began converting our operations to our new management
information system. As of November 12, 1999, we operated 160 locations.
We have completely converted all locations to our new system except for
approximately 20 locations that were recently acquired. We expect to
have all of our current operations fully converted to our new system
prior to December 31, 1999.
NON-IT SYSTEMS. We have completed all phases of our Year 2000 Plan for our
non-IT systems (such as chips and microprocessors that may be embedded in our
facilities and equipment) except our recently acquired locations which we
believe will be completed prior to December 31, 1999. As a result of the
completion of the Year 2000 plan phases for non-IT systems, we have identified
areas of concern and have either remedied the problems or incorporated into our
contingency plan actions to address these concerns in the event Year 2000
problems occur. We believe there is a minimal amount of dependence of our
critical operations on non-IT systems.
THIRD-PARTY SYSTEMS. We rely on third-party suppliers for operating
supplies, merchandise for sale, utilities, transportation, equipment for rent
and retail sales and other key services. Interruption of any such third-party's
operations due to Year 2000 issues could have a material adverse effect on our
business, results of operations or financial condition. We are continuing to
evaluate the progress of our critical third-party suppliers and customers
relative to their Year 2000 issues. We have had communications with all
significant third parties with which we do business to assess their Year 2000
readiness. To the extent necessary, we will seek alternative third-party
suppliers if circumstances warrant. Based on our discussions with third-party
suppliers and customers, we believe there will be minimal disruption to our
operations as a result of failures of their systems, however, there can be no
assurance thereof since we are unable to test their systems for Year 2000
compliance and must rely upon their representations.
COSTS
The majority of our costs to address the Year 2000 issue are related to the
development of our new management information system. Such costs principally
consist of licensing and developing software and purchasing hardware. To date,
we have spent a total of approximately $9.6 million for the new system, of which
approximately $7.0 million was related to software development and approximately
$2.6 million was related to purchases of hardware. Such costs have been
capitalized in accordance with generally accepted accounting principles. We
expect to incur in the range of approximately $0.5 million to $1.0 million in
additional software and hardware costs installing the new IT system at the rest
of our current locations in 1999. The aggregate cost of conversion and training
employees to the new IT system, which will be charged to expense in the period
incurred, is expected to range from $1.0 million to $1.3 million. Although we do
not expect to incur significant expenses to address the Year 2000 issue beyond
our capital investment in the new IT system software and hardware, Year 2000
problems may require us to incur unanticipated expenses which could have a
material adverse effect on our business, financial condition or results of
operations. These costs account for approximately 90% of our information
technology budget for 1999. To date, the development of our management
information system has run concurrent with and been a part of our Year 2000
compliance efforts. No other major projects have been deferred as a result of
the system development effort. The source of the funds for our Year 2000
compliance efforts has been cash generated from operations and borrowings under
our senior credit facilities.
RISKS RELATING TO THE OUR FAILURE TO BECOME YEAR 2000 COMPLIANT
Our worst case scenarios resulting from the Year 2000 issue include:
o Interruptions in our customers' operations which could prevent
them from renting or purchasing our equipment, using our services
or paying for equipment (rented or purchased) or services
rendered.
o Disruptions to our utilities and other service providers which
could prevent our locations from operating in the normal course of
business.
o Failure of our suppliers' operations which could result in our
inability to obtain rental equipment and other supplies to meet
the demands of our customers.
o Failure to convert all of our locations to our new management
information system before December 31, 1999 which could prevent
such locations from processing invoices from our counter systems
and tracking accounts receivable, equipment
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<PAGE> 16
utilization and other critical financial data. This could also
prevent our locations from sharing equipment and data to service
our customers in a timely manner.
o Failure to convert all of the systems of the businesses we acquire
during the fourth quarter of 1999 to our system prior to the year
2000 which could prevent these locations from being integrated
into the rest of our operations.
Such failures could materially and adversely affect our business, results of
operations and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers and customers, we are unable to determine at
this time what our most reasonably likely worst case scenario would be or
whether the consequences of Year 2000 failures will have a material adverse
impact on our results of operations, liquidity or financial condition. However,
we have addressed the worst case scenarios in our contingency plan.
CONTINGENCY PLANS
Our Year 2000 efforts are ongoing and our overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. Contingency plans for Year 2000-related interruptions have
been developed and include emergency backup and recovery procedures for lost
data, manual invoicing, billing and collection procedures, identification of
alternate suppliers, acceleration of conversion times to our management
information system and increasing inventory levels of critical supplies and
rental equipment. These activities are intended to provide a means of managing
risk, but cannot eliminate the potential for disruption due to third-party
failure.
FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q may
include "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including in particular the statements about our plans,
strategies and prospects under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Although we believe that our
plans, intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure you that such plans,
intentions or expectations will be achieved. Important factors that could cause
actual results to differ materially from our forward-looking statements are set
forth below and elsewhere in this Quarterly Report on Form 10-Q. Such factors
include, among others: the ability to develop and implement operational and
financial systems to manage rapidly growing operations; competition in our
principal businesses; the ability to integrate and successfully operate acquired
businesses and the risks associated with such businesses; the ability to obtain
financing on terms acceptable to us to finance our growth strategy, and for us
to operate within the limitations imposed by financing arrangements; and the
ability to properly assess and capitalize on future business opportunities.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(b) ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK
In July and August 1999, the Company issued an aggregate of 100,000 shares
of its Series A Convertible Preferred Stock to affiliates of Investcorp, S.A.
for an aggregate purchase price of $100,000,000. The preferred stock ranks
senior to the common stock with respect to distributions upon the liquidation,
winding-up and dissolution of the Company. The preferred stock also has
additional rights, including certain class voting, dividend participation,
conversion, redemption and preemptive rights, among others. For a description of
the rights and preferences of the preferred stock, refer to the Certificate of
Designation for Series A Convertible Preferred Stock and the Amendment to the
Certificate of Designation for Series A Convertible Preferred Stock both of
which are filed as exhibits to this Quarterly Report on Form 10-Q.
(c) RECENT SALES OF UNREGISTERED SECURITIES
During the period covered by this report (July 1, 1999 through September 30,
1999), the Company has issued securities in the transactions set forth below.
Each of these transactions was intended to be exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) thereunder based on being issued in a transaction not involving a public
offering.
In June 1999, in connection with the acquisition of Pierce & Associates,
Inc. the Company issued promissory notes in the aggregate principal amount of
$2,000,000, which are convertible into shares of common stock at the option of
the holder at a price of $10.00 per share.
In July 1999, in connection with the acquisition of the assets of Chapman
Equipment Company, the Company issued a promissory note in the principal amount
of $2,000,000, which is convertible into shares of common stock at the option of
the holder at a price of $10.00 per share.
In August 1999, in connection with the acquisition of the assets of Troy
Equipment Rent-All, the Company issued a promissory note in the principal amount
of $200,000, which is convertible into shares of common stock at the option of
the holder at a price of $10.00 per share.
In July and August 1999, the Company issued an aggregate of 100,000 shares
of its Series A Convertible Preferred Stock to affiliates of Investcorp, S.A.
for an aggregate purchase price of $100,000,000. The 100,000 shares of preferred
stock are convertible into 14,285,714 shares of common stock based on a
liquidation preference of $1,000 per share of preferred stock and a conversion
price of $7.00 per share of common stock. The Company paid to an affiliate of
the purchasers of the preferred stock a fee of equal to 4% of the aggregate
purchase price. The Company also paid to Bear, Stearns & Co., Inc. and Deutsche
Bank Alex. Brown financial advisory fees of 2% and 1.75%, respectively, of the
aggregate purchase price.
In September 1999, in connection with the acquisition of K.D.S. Enterprises,
Inc., the Company issued promissory notes in the aggregate principal amount of
$650,000, which are convertible into shares of common stock at the option of the
holder at a price of $10.00 per share.
In September 1999, in connection with the acquisition of the assets of
G.R.S. & S., Inc., d/b/a Gosselin Rental Sales and Services, the Company issued
a promissory note in the principal amount of $250,000, which is convertible into
shares of common stock at the option of the holder at a price of $10.00 per
share.
In September 1999, in connection with the acquisition of the assets of
Jack's Tool Rental, Inc., the Company issued a promissory note in the principal
amount of $4,000,000, which is convertible into shares of common stock at the
option of the holder at a price of $10.00 per share.
In September 1999, in connection with the acquisition of the assets of
Contractors Equipment Corporation, the Company issued a promissory note in the
principal amount of $3,500,000, which is convertible into shares of common stock
at the option of the holder at a price of $10.00 per share.
From July 1, 1999 to September 30, 1999, the Company granted options to
certain of its employees to purchase an aggregate of 109,719 shares of common
stock at exercise prices ranging from $6.1875 to $7.3750 per share. These
options generally vest over a four year period at the rate of 25% per year
beginning on the first anniversary of the date of grant.
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<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDINGS
On July 21, 1999, the Company held an annual meeting of the stockholders
with respect to the following matters: (1) to elect six persons to the Company's
Board of Directors; (2) to approve an amendment to the Company's 1998 Stock
Option Plan (the "1998 Stock Option Plan") to increase from 5,000,000 to
7,000,000 the maximum number of shares of the Company's common stock subject to
awards under the 1998 Stock Option Plan; and (3) to ratify the appointment of
Arthur Andersen LLP as independent auditors for the fiscal year ending December
31, 1999.
The following table sets forth the votes for and votes withheld with respect
to the election of directors:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
James L. Kirk 52,214,835 102,674
H. Wayne Huizenga 52,214,397 103,112
Harris W. Hudson 52,213,340 104,169
Gary L. Gabriel 52,213,329 104,180
Thomas H. Bruinooge 52,210,565 106,944
Ivan W. Gorr 52,210,553 106,956
With respect to approval of the amendment to the Company's 1998 Stock Option
Plan, 51,823,498 votes were cast for this matter, 287,266 votes were cast
against this matter and there were 33,398 abstentions and 173,347 broker
non-votes.
With respect to ratification of the appointment of Arthur Andersen LLP as
independent auditors, 52,286,201 votes were cast for this matter, 23,925 votes
were cast against this matter and there were 7,383 abstentions.
On August 31, 1999, the Company held a special meeting of the stockholders
to approve the following matters: (1) the issuance, in a series of transactions,
of 100,000 shares of Series A Convertible Preferred Stock (the "Preferred
Stock") to NR Holdings Limited and NR Investments Limited, 78,000 shares of
which had already been issued and 22,000 shares of which were to be issued after
stockholder approval was obtained, as well as the issuance of shares of common
stock upon the conversion of such Preferred Stock; (2) the future issuance of
common stock or securities convertible into or exercisable for common stock to
the holders of the Preferred Stock from time to time pursuant to their exercise
of the preemptive rights to which they were entitled under the Certificate of
Designation for the Preferred Stock; and (3) an amendment to the Certificate of
Designation for the Preferred Stock.
With respect to approval of the issuance of 100,000 shares of Preferred
Stock, 45,662,761 votes were cast for this matter, 65,663 votes were cast
against this matter and there were 6,300 abstentions.
With respect to approval of future issuance of common stock or securities
convertible into or exercisable for common stock to the holders of the Preferred
Stock from time to time pursuant to their exercise of the preemptive rights to
which they are entitled under the Certificate of Designation, 45,662,561 votes
were cast for this matter, 65,663 votes were cast against this matter and there
were 6,500 abstentions.
With respect to approval of an amendment to the Certificate of Designation
for the Preferred Stock, 45,646,861 votes were cast for this matter, 81,363
votes were cast against this matter and there were 6,500 abstentions.
16
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of January 20, 1999,
between the Company and Rental Service Corporation.(5)
2.2 Stock Option Agreement, dated as of January 20, 1999, between
the Company and Rental Service Corporation.(5)
2.3 Stock Option Agreement, dated as of January 20, 1999, between
Rental Service Corporation and the Company.(5)
2.4 Voting Agreement, dated as of January 20, 1999, between Kirk
Holdings Limited Partnership, H. Family Investments, Inc. and
Huizenga Investments Limited Partnership, as shareholders, and
Rental Service Corporation.(5)
2.5 Termination and Release Agreement, dated May 20, 1999, between
the Company and Rental Service Corporation.(6)
2.6 Stock Option Termination Agreement dated May 20, 1999, between
the Company and Rental Service Corporation.(6)
3.1 Amended and Restated Certificate of Incorporation of the
Company.(2)
3.2 Amended and Restated By-Laws of the Company.(1)
3.3 Certificate of Designation for Series A Convertible Preferred
Stock.(8)
3.4 Certificate of Amendment to Certificate of Designation for
Series A Convertible Preferred Stock.(7)
4.1 Unregistered 10 3/8% Global Senior Subordinated Notes due
2008.(4)
4.2 Registered 10 3/8% Senior Subordinated Notes due 2008.(4)
4.3 Senior Subordinated Guarantee dated December 11, 1998, of the
Guarantors as defined therein.(4)
4.4 Indenture, dated December 11, 1998, by and among Company, the
Guarantors and The Bank of New York.(4)
4.5 Registration Rights Agreement, dated December 11, 1998, by and
among the Company, the Guarantors and the Initial Purchasers
as defined therein.(4)
4.6 Fourth Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of July 20, 1999, by and among the
Company, its subsidiaries, BankBoston N.A., as administrative
agent, Bankers Trust Company, as syndication agent, BancBoston
Robertson Stevens Inc. and Deutsche Bank Securities Inc., as
coarrangers, and the other lending institutions named
therein.(8)
4.7 Amended and Restated Security Agreement, dated as of July 20,
1999, between the Company, its subsidiaries and BankBoston,
N.A.(8)
4.8 Amended and Restated Stock Pledge Agreement, dated as of July
20, 1999, between the Company, NRGP, Inc. and BankBoston,
N.A.(8)
10.1 Stock Purchase Agreement, dated August 15, 1997, by and among
the Company, Sam's and the shareholders of Sam's, together
with Amendment nos.1-6.(1)
10.2 Form of Unsecured Subordinated Promissory Notes-Sam's.(1)
10.3 Form of Unsecured Convertible Promissory Notes-Sam's.(1)
10.4 Form of Unsecured Contingent Convertible Subordinated
Promissory Notes-Sam's.(1)
10.5 Agreement, dated September 22, 1997, between the Company and
Gary L. Gabriel.(1)
10.6 Asset Purchase Agreement, dated December 8, 1997, by and among
NationsRent of Ohio, Inc., R&R Rental, Inc. ("R&R") and the
sole shareholder of R&R, together with an Amendment dated
December 10, 1997.(1)
10.7 Form of Unsecured Subordinated Promissory Note-R&R.(1)
10.8 Asset Purchase Agreement, dated December 8, 1997, as amended,
among NationsRent of Indiana, Inc. and C&E Rental and Service,
Inc. ("C&E"), together with an Amendment dated December 23,
1997.(1)
10.9 Form of Unsecured Convertible Subordinated Promissory Note
C&E.(1)
10.10 Stock Purchase Agreement, dated December 20, 1997, as amended,
among NationsRent of West Virginia, Inc., Titan, together with
an Amendment dated December 31, 1997.(1)
10.11 Form of Unsecured Convertible Subordinated Promissory Note -
Titan.(1)
10.12 Stock Purchase Agreement, dated March 24, 1998, among the
Company, Bode-Finn Limited Partnership ("Bode-Finn") and the
shareholders of Bode-Finn, together with Amendment No. 1,
dated April 6, 1998, and Amendment No. 2, dated April 17,
1998.(1)
10.13 Form of Unsecured Convertible Subordinated Promissory
Notes-Bode-Finn.(1)
10.14 Form of Warrant-Bode-Finn.(1)
10.15 Registration Rights Agreement, dated May 5, 1998, among the
Company, Bode-Finn, and Raymond E. Mason Foundation.(1)
10.16 Asset Purchase Agreement, dated March 25, 1998, among
NationsRent of Indiana, Inc., RFL, Enterprises, Inc. and the
sole shareholder of RFL Enterprises, Inc. ("RFL").(1)
17
<PAGE> 20
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.17 Asset Purchase Agreement, dated April 21, 1998, among
NationsRent of Florida, Inc. and Naples Rent-All and Sales
Company, Inc. ("Naples").(1)
10.18 Form of Unsecured Convertible Subordinated Promissory
Note-Naples.(1)
10.19 Stock Purchase Agreement, dated May 7, 1998, among the
Company, Raymond Equipment Co. ("Raymond Equipment") and the
shareholders of Raymond Equipment.(1)
10.20 Form of Unsecured Subordinated Promissory Notes-Raymond
Equipment.(1)
10.21 Form of Unsecured Convertible Subordinated Promissory
Notes-Raymond Equipment.(1)
10.22 Asset Purchase Agreement, dated May 14, 1998, among the
Company and General Rental, Inc.(1)
10.23 Stock Purchase Agreement, dated May 30, 1998, among the
Company, J. Kelly Co., Inc. ("J. Kelly") and the shareholders
of J. Kelly.(1)
10.24 Form of Unsecured convertible Subordinated Promissory Note-J.
Kelly.(1)
10.25 Form of Registration Rights Agreement among the Company and
the shareholders of J. Kelly.(1)
10.26 Asset Purchase Agreement, dated June 7, 1998, among the
Company, Associated Rental Equipment Management Company, Inc.
("Associated") and the sole shareholder of Associated.(1)
10.27 Form of Unsecured Convertible Subordinated Promissory
Note-Associated.(1)
10.28 Form of Registration Rights Agreement-Associated.(1)
10.29 Form of Subscription Agreement, dated May 1998, between the
Company and certain subscribers.(1)
10.30 NationsRent Amended and Restated 1998 Stock Option Plan.(8)
10.31 Form of Stock Option Agreement.(1)
10.32 Amended and Restated Purchase Agreement, dated as of September
9, 1998, by and among NationsRent, Inc., Ray L. O'Neal, Inc.,
Arenco, L.L.C., Don R. O'Neal, Elizabeth M. O'Neal and the
O'Neal Revocable Trust dated December 29, 1987.(3)
10.33 Unsecured Convertible Subordinated Promissory Note, dated as
of October 23, 1998, from the Company to Ray L. O'Neal,
Inc.(3)
10.34 Preferred Stock Purchase Agreement, dated July 20, 1999, by
and among the Company, NR Holdings Limited and NR Investments
Limited.(8)
10.35 Registration Rights Agreement, dated as of July 20, 1999, by
and between the Company, NR Holdings Limited, NR Investments
Limited, James L. Kirk and H. Wayne Huizenga.(8)
27.1* Financial Data Schedule. (for SEC use only)
-------------
* Filed herewith
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended, Commission File No. 333-56233.
(2) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed on November 9, 1998.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-4, Commission File No. 333-69691.
(5) Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 8, 1999.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 21, 1999.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-3, Commission File No. 333-88603.
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1999.
(b) REPORTS ON FORM 8-K
The Company filed no Current Reports on Form 8-K during the quarter ended
September 30, 1999.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONSRENT, INC.
Date: November 12, 1999 By: /s/ JAMES L. KIRK
------------------------------
James L. Kirk
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 12, 1999 By: /s/ GENE J. OSTROW
------------------------------
Gene J. Ostrow
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999 By: /s/ KRIS E. HANSEL
------------------------------
Kris E. Hansel
Vice President and Controller
(Principal Accounting Officer)
19
<PAGE> 22
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule (for SEC use only)
20
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,606
<SECURITIES> 0
<RECEIVABLES> 120,667
<ALLOWANCES> 7,221
<INVENTORY> 41,513
<CURRENT-ASSETS> 0
<PP&E> 644,390
<DEPRECIATION> 68,351
<TOTAL-ASSETS> 1,427,017
<CURRENT-LIABILITIES> 0
<BONDS> 923,497
0
1
<COMMON> 565
<OTHER-SE> 401,238
<TOTAL-LIABILITY-AND-EQUITY> 1,427,017
<SALES> 93,576
<TOTAL-REVENUES> 387,519
<CGS> 62,543
<TOTAL-COSTS> 215,212
<OTHER-EXPENSES> 91,442
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<INTEREST-EXPENSE> 48,130
<INCOME-PRETAX> 35,620
<INCOME-TAX> 14,782
<INCOME-CONTINUING> 20,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,838
<EPS-BASIC> .37
<EPS-DILUTED> .34
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