United Rentals Annual Report 2003

Plain-text annual report

U N I T E D R E N TA L S , I N C . 2003 Annual Report I N V E S T I N G I N O P P O RT U N I T Y 1 LETTER TO SHAREHOLDERS 5 FINANCIAL HIGHLIGHTS 6 CUSTOMERS AND MARKETS 8 SOUND STRATEGIES FOR GROWTH 22 FINANCIAL STATEMENTS U N I T E D R E N TA L S is North America’s largest equipment rental company, uniquely positioned to serve a diverse customer base that includes construction and industrial companies, utilities, municipalities, homeowners and others. We offer our 1.9 million customers many beneﬁts: 13,000 knowledgeable employees operating an integrated network of more than 730 locations in 47 states, seven Canadian provinces and Mexico The largest ﬂeet of rental equipment in the world — over 500,000 units with an original cost of $3.5 billion More than 600 different types of equipment for rent, including construction equipment, industrial and heavy machinery, aerial work platforms, trafﬁc control equipment, trench safety equipment and homeowner items Quality new and used equipment for sale, contractor supplies, parts and service A well-developed infrastructure that supports our full range of services, including comprehensive safety training and round-the-clock emergency assistance Industry-leading information technology that electronically links our branches and gives our customers access to every piece of equipment in our ﬂeet Customer-focused industry veterans who run our branches and ensure that we deliver on our promise of “The Right Equipment, Right Now!” D E A R F E L L OW S H A R E H O L D E R S Despite the improving economy, a weak non-residential construction market continued to impact our results in 2003. Private spending on non-residential construction declined 5 percent, following a 13 percent decline in 2002, and government spending on road and highway construction remained sluggish. We grew our revenues 1.6 percent in 2003 to $2.87 billion, despite weak demand. This equipment leases, debt reﬁnancing, write-off of notes receivable, and vesting of restricted shares increase, which outpaced our end markets, was not granted to executives in 2001. Because of these sufﬁcient to fully offset higher costs. As a result, charges, we ended the year with a net loss of our proﬁt margins for the year declined. Our $259 million. If we had not incurred these results were also impacted by $331 million of after- charges, we would have realized operating income tax charges for goodwill impairment, buy-out of of $339 million, net income of $72 million, and Wayland Hicks Chief Executive Ofﬁcer diluted earnings per share of $0.75.(1) Although our proﬁtability declined in 2003, we generated $524 million in cash ﬂow from opera- tions and the sale of rental equipment. After capital expenditures of $378 million for ﬂeet and facilities, our free cash ﬂow was $146 million. Faced with a difﬁcult year, we still realized considerable accomplishments that should help us as we move forward. We raised rental rates by more than 2 percent and at the same time increased same-store rental revenues by 3.7 percent. We also expanded our market share with the addition of 200,000 new customers. (1) For a reconciliation of as-adjusted results and GAAP results, please see the footnotes on page ﬁve. 1 “We expect our proﬁtability to be substantially better in 2004, even without an upswing in our key end market, private non-residential construction.” Wayland Hicks, Chief Executive Ofﬁcer We continued to beneﬁt from our geo- part of our debt to 2012 and beyond. This graphic diversity, and from our ability to share reﬁnancing will reduce our interest expense by equipment among our branches. During 2003, approximately $30 million in 2004. 11.5 percent of our rental revenues came from Last year, our extensive ﬂeet and superior equipment sharing, our best result to date. We also service enabled us to win a large number of rental repositioned over $400 million of underutilized contracts on high proﬁle jobs such as the expansion equipment to take advantage of market opportuni- of Miami International Airport, the modernization ties in areas where demand was stronger. of Soldier Field in Chicago, and the expansion of the While we continued to feel pressure on our Harley-Davidson plant in York, Pennsylvania. We cost base, we worked hard to become more produc- served jobsites as diverse as the Honda and Hyundai tive. We reduced our headcount by 1,000 over the plants in Alabama, and the Terminator 3 movie, past two years while maintaining our customer which featured our equipment. service levels, and ended the year with approxi- mately 13,000 employees. We also conserved our capital, extending the average age of our ﬂeet to 40 months by year-end. This is well within our target range of 35 to 45 months. In late 2003 and early 2004, we capitalized on favorable market conditions and completed the reﬁnancing of a substantial portion of our outstanding debt. As a result, we reduced the interest rates and extended the maturity of a large (from left) Michael Kneeland, Executive Vice President – Operations Wayland Hicks, Chief Executive Ofﬁcer John Milne, President and Chief Financial Ofﬁcer Our immediate priority in 2004 is to improve the proﬁtability of the business and its return on capital. We believe that we can substantially improve our proﬁtability, even without an upswing in our key end market, private non-residential construction. Let me share some insights into our plans. 3 Raising rental rates is the single most important action we can take in the near term to improve our proﬁtability. Even with sluggishness in our end markets, there is a lot that we are doing to achieve better rates. In 2004, for example, our sales force will receive 20,000 hours of training in value-based negotiation to build on the rate improvement we accomplished in 2003. We will spend $425 million to $450 mil- lion in replacement capital in 2004 to maintain one of our most important competitive advantages: the condition and size of our rental ﬂeet. In addition, we will spend $100 million to $200 million in growth capital to expand our ﬂeet. This modest expansion, combined with higher rental rates, contractor supply sales growth and lower interest expense, should substantially improve our proﬁtability. Our 2004 plan anticipates diluted earnings per share, excluding charges, of $1.00 to $1.10,(2) even in a ﬂat operating environment. Beyond 2004, a sustained rebound in our principal end market has the potential to drive revenues signiﬁcantly higher. Our goal is to double the size of the business over ﬁve years given stronger demand. We plan to achieve this through organic growth, additional locations, prudent acquisitions and expansion of complementary revenue streams such as contractor supply sales. Our ability to cap- italize on the substantial operating leverage of this business should allow us to expand our margins, resulting in earnings growth that signiﬁcantly outpaces our top line growth. 4 This is my ﬁrst letter to shareholders since I assumed leadership of United Rentals last December. Our company has an extraordinary history of accomplishments under the guidance of my friend and predecessor, Brad Jacobs. I am excited to take the reins of a vibrant organization with a legacy of being the best in its business. The stewardship of United Rentals is both a privilege and a responsibility, and I appreciate the conﬁ- dence the board has in me. We are fortunate to have John Milne, with whom I have worked closely for over six years, con- tinue to play a key leadership role as president and chief ﬁnancial ofﬁcer. We are also fortunate to have Mike Kneeland join our senior management team in the newly-created position of executive vice presi- dent – operations. Mike has more than 25 years’ experience in the equipment rental business, includ- ing more than ﬁve years with United Rentals. Finally, I would like to take this opportu- nity to thank all United Rentals employees for their enthusiasm and spirit during a difﬁcult year. Together, we rolled up our sleeves and fought for every inch of progress. The work ethic of our employees is a constant inspiration and the bedrock of our company culture. With their con- tinued focus we will expand on our strengths, maintain our industry leadership position, and carve out new opportunities for United Rentals. Wayland Hicks Chief Executive Ofﬁcer March 30, 2004 (2) Excludes ﬁrst half reﬁnancing charges, a ﬁrst quarter charge for the vesting of restricted shares granted to executives in 2001, and any non-cash goodwill write-offs and other special charges that may be required. F I N A N C I A L H I G H L I G H TS The ﬁnancial highlights for 2003, 2002 and 2001 are adjusted to exclude certain charges as explained in the notes to the table. After giving effect to these charges, operating income, net income (loss) and diluted EPS (loss) in accordance with accounting principles generally accepted in the United States (“GAAP”), were $30.4 million, $(258.6) million and $(3.35), respectively, in 2003, $111.9 million, $(397.8) million and $(4.78), respectively, in 2002 and $462.0 million, $111.3 million and $1.18, respectively, in 2001. See Selected Financial Data on page 23. (In millions, except per share data) 2001 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,886.6 Operating Income, as adjusted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490.9 Net Income, as adjusted (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147.0 Diluted EPS, as adjusted (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.56 2002 $2,821.0 388.1 107.6 $1.11 2003 $2,867.2 339.1 71.8 $0.75 (1)We had GAAP operating income in 2003 of $30.4 million. Our operating income, as adjusted, for 2003 excludes: (i) a $296.9 million goodwill impairment charge; and (ii) a $11.8 million charge due to vesting of restricted stock granted to executives in 2001. We had GAAP operating income in 2002 of $111.9 million. Our operating income, as adjusted, for 2002 excludes: (i) a $28.3 million restructuring charge; and (ii) a $247.9 million goodwill impairment charge. We had GAAP operating income in 2001 of $462.0 million. Our operating income, as adjusted, for 2001 excludes a $28.9 million restructuring charge. (2)We had a GAAP net loss in 2003 of $258.6 million or $3.35 per share. Our net income and diluted EPS, as adjusted, for 2003 excludes the following charges: (i) a $296.9 million goodwill impairment charge (net of tax equal to $238.9 million or $3.10 per share); (ii) a $95.1 million charge relating to the buy-out of equipment leases (net of tax equal to $57.7 mil- lion or $0.75 per share); (iii) $28.9 million in reﬁnancing costs (net of tax equal to $17.1 million or $0.22 per share); (iv) a $11.1 million charge due to notes receivables write-off (net of tax equal to $6.6 million or $0.09 per share); and (v) a $11.8 million charge due to vesting of restricted stock granted to executives in 2001 (net of tax equal to $10.2 million or $0.13 per share). The results for 2003 also exclude the positive impacts on diluted earnings per share of repurchases by the company of its 61/2% convertible quarterly income preferred securities. These repurchases added $0.01 to diluted earnings per share in 2003. Diluted EPS, as adjusted for 2003, is calculated on a fully diluted shares outstanding basis (96.1 million shares), whereas the GAAP net loss results are calculated on basic shares outstanding (77.0 million shares). We had a GAAP net loss in 2002 of $397.8 million or $4.78 per share. Our net income and diluted EPS, as adjusted, for 2002 excludes the following charges: (i) a $28.3 million restructuring charge (net of tax equal to $17.3 million or $0.23 per share); (ii) a $247.9 million goodwill impairment charge (net of tax equal to $198.8 million or $2.62 per share); (iii) $1.6 million in reﬁnancing costs (net of tax equal to $0.9 million or $0.01 per share); and (iv) a $348.9 million charge due to a change in accounting principle relating to goodwill (net of tax equal to $288.3 million or $3.80 per share). The results for 2002 also exclude the positive impacts on diluted earnings per share of repurchases by the company of its 61/2% convertible quarterly income preferred securities. These repurchases added $0.47 to diluted earnings per share in 2002. Diluted EPS, as adjusted for 2002, is calculated on a fully diluted shares outstanding basis (96.7 million shares), whereas the GAAP net loss results are calculated on basic shares outstanding (75.8 million shares). We had GAAP net income in 2001 of $111.3 million or $1.18 per diluted share. Our net income and diluted EPS, as adjusted, for 2001 excludes the following charges: (i) a $28.9 million restructuring charge (net tax equal to $19.2 million or $0.20 per diluted share); and (ii) a $25.9 million charge for reﬁnancing costs (net of tax equal to $16.5 million or $0.18 per diluted share). R EV E N U E S O PE R AT I N G I N CO M E (as adjusted) N E T I N CO M E (as adjusted) D I LU T E D E P S (as adjusted) $3,000 2,250 1,500 750 $600 450 300 150 $160 120 80 40 $2.00 1.50 1.00 .50 ’01 ’02 ’03 ’01 ’02 ’03 ’01 ’02 ’03 ’01 ’02 ’03 5 C U S T O M E R S A N D M A R K E T S United Rentals is in the business of supply- ing equipment to construction, renovation and facility maintenance jobsites across North America. The majority of our equipment is used in private non-residential construction, our primary end mar- ket. This includes the construction of manufacturing plants, airports, warehouses and distribution centers, shopping malls, ofﬁce buildings, utilities and sports arenas, as well as a variety of smaller projects. We also rent equipment to contractors who work on roads, highways and bridges, and to consumers who need equipment for home projects and remodeling. Same-store rental revenues INCREASED 3.7% Our growth is primarily dependent on three factors: the growth of the private non-residential construction market, a continuation of the trend toward renting equipment rather than owning it, and our ability to continue to gain market share in a very fragmented industry. 6 Reversed a 4.8% rate decline in 2002 to a 2.1% RATE INCREASE IN 2003 Our industry’s historical double-digit growth rate was not sustainable in the weak economy of the past several years. We ﬁrst saw private non-residential construction spending slip in 2001, followed by annual declines of 13 percent and 5 percent. In 2004, we face ﬂat to very modest market growth according to most industry estimates. Any uptick in construction activity has positive implications for our business, since it should spark demand for our equipment, services and supplies. We believe that trends toward renting versus owning equipment will continue. Rented equipment will account for a greater percentage of all construction equipment on jobsites in the future, as contractors increasingly choose to avoid the capital outlays, techno- logical obsolescence, maintenance, insurance and other costs of owning equipment. 1.9 MILLION customers The equipment rental market in North America is still very underdeveloped. We estimate that rented equipment is only about 30 percent of all construction equipment — far below the 60 to 70 percent penetration of some of the more mature rental markets overseas. While we serve the largest equipment rental customer base in North America, our revenues are estimated to represent less than 10 percent of the total industry. We believe that our passionate customer service, superior equipment and supplies and strong brand recognition will continue to attract market share. P OW E R F U L C O N N E C T I O N S W I T H C U S T O M E R S Throughout 2003, we worked hard to capitalize on our strengths. We attracted 200,000 new customers, bringing our total base to 1.9 million and solidifying our industry leadership. We also communicated a strong message about our ability to provide customers with superior value per dollar. This is important to contractors who value productivity and safety. We continued to serve a wide variety of customers in 2003: approximately 50 percent of our rental revenues came from commercial construction companies, 25 percent from industrial customers, and 15 percent from infrastructure contractors. As in past years, the remaining 10 percent came primarily from homeowner rentals. Our top ten customers account for less than 3 percent of total revenues. Our National Account revenues increased for the ﬁfth straight year as we continued to satisfy the requirements of industry leaders such as CBS Sports, Boeing, EMCOR Group, Granite Construction and Coors Brewing Company. Our National Account cus- tomers include many Fortune 1000 and Engineering News Record 400/600 companies with multiple job- sites and extensive equipment needs. Although rental equipment demand declined nationally, we grew our business in areas where con- struction remained robust. This was particularly true in areas anchored by large, long-term construction projects, such as the southeastern United States and western Canada. Our broad geography and ﬂeet mobility allow us to capitalize on regional opportuni- ties such as the Syncrude Aurora Mine Project in Alberta, Canada, which has utilized about 400 United Rentals machines. A N I N T E G R AT E D P R O D U C T A N D S E RV I C E M I X In 2003, revenues from equipment rental, our primary business, accounted for 76 percent of total revenues. New equipment sales were 7 percent, used equipment sales 6 percent, and contractor supply sales 6 percent. The remainder came from the sale of service and other revenues. In addition to offering general construction equipment for rental and sale, United Rentals has invested in ﬂeet, personnel and a network of branches to serve trench safety, trafﬁc control, and pump and power customers. We believe that these investments have the potential to generate superior growth and cross-selling opportunities. Last year, for example, our revenues from the rental of trench safety equipment grew by 22 percent. United Rentals also offers customers comple- mentary products and services that reinforce the convenience of one-stop shopping. About 500 differ- ent types of contractor supplies are now stocked in our branches, and hundreds of additional items are available by catalog. Last year, more than 200,000 customers took advantage of these offerings, which are cross-sold by our sales force at little incremental cost to the company. Our contractor supply sales were $184 million in 2003 and we expect to grow these sales by at least 20 percent per year over the next several years. Contractor supply sales PROJECTED TO GROW 20% per year Additionally, we continue to explore new ways to develop our rental business and generate a higher return on assets. In 2003, for example, we invested in product niches such as winter heat equip- ment to supplement our more traditional rental rev- enues. We also require all locations to cross-promote a common pool of general construction, aerial, trench safety and trafﬁc control ﬂeet. Our customers know that they can turn to United Rentals for changing equipment needs throughout a project’s lifecycle. 7 S O U N D S T R AT E G I E S F O R G R OW T H Customers put their own success on the training programs that teach safe practices. line when choosing a rental company, and view us Customers want to be productive and cost efﬁcient as a true partner in their construction activities. at the same time. We invest in rental ﬂeet that is We meet their expectations through ongoing broad enough to match the individual needs of investments in our rental equipment, company each application. We also offer customers our infrastructure and people. Our strengths in URdata® software, which provides detailed track- these three areas enable United Rentals to satisfy ing of equipment usage and rental status. customer needs better than any other equipment Throughout a challenging economy, rental company. United Rentals has continued to invest in equip- Customers often want advice, and we ment, personnel, software development, retail staff our branches with knowledgeable people. inventories, parts and maintenance, safety, Customers want to work safely, and we offer employee training and the sharing of best 8 “It’s a great feeling to WO R K O N E - O N - O N E with customers every day. I make sure that every customer who comes into the equipment yard knows I’m here to help.” J O H N D AV I S Customer Service Associate United Rentals Scissor lift 9 Telescopic forklift 10 “Our company was built on three principles: S E RV I C E , I N T E G R I T Y A N D QUA L I T Y. We look for the same thing in our suppliers and found it in United Rentals.” D AV I D H E S L O P Vice President, Operations Preston Pipelines, Inc. 2 0 0 , 0 0 0 new customers added equipment in real time. A branch that needs to locate a light tower can check availability in a matter of seconds — not just within its own ﬂeet, practices. We see these areas as competitive advan- but also at other locations in the area. The system tages that provide our customers with compelling digs deeper than current availability, telling reasons to choose United Rentals. At the same time, the inquirer when units are due back on open we are focused on returning value to shareholders contracts, how many units are off-rent for repair through disciplined management of our assets. and how many reservations are pending. S T R U C T U R E D F O R R E S U LT S Cradle-to-grave asset management is at the heart of our business. Has the equipment been purchased at $250 MILLION of rental revenues from equipment sharing a favorable price? Is there sufﬁcient demand for it? Shared equipment, made possible by Could it generate more revenue somewhere else? shared information, effectively puts more ﬂeet at How much does it cost to service the equipment? the disposal of more customers. This is a good To deliver it? Are there any special rate pressures on example of an efﬁciency that beneﬁts our cus- that model? Can it be sold at a favorable price at the tomers and company alike. By treating our equip- end of its rental life? These are the dynamics that ment as one asset pool, we improve its availability drive our business. We understand them very well. for each rental request. Shared equipment produces We are just as diligent about ensuring the satisfaction of our customers through equipment selection and availability, delivery and pickup, on- site maintenance, contractor supplies, and operator training in the safe and productive use of equip- ment. All of these are important to the customer. Our employees are trained to communicate that United Rentals delivers signiﬁcantly higher value — a modern, well-maintained ﬂeet of enormous scope, 24/7 emergency service, and one-stop convenience. Our employees are supported in these efforts by a single, powerful information system that integrates our entire network and tracks 12 Trafﬁc control equipment “We can make one call to United Rentals and have equipment available within hours, no matter where we’re working. That S AV E S U S T I M E A N D M O N EY.” J I M D A R N E L L Safety Engineer MCM Construction, Inc. 13 “In this business, S A F E T Y H A S TO CO M E F I R S T. Our customers trust our equipment. We also spend time on site to make sure the project goes smoothly.” H E I D I VA N H O N S E B R O U C K Assistant Manager United Rentals Steel trench shield 15 “It’s easy to feel proud of your job when you work on the B E S T R E N TA L F L E E T I N T H E I N D U S T RY. Nothing goes out the door until it passes our inspection.” E M M A N U E L R E Y E S Shop Foreman United Rentals 16 higher utilization and a greater return on investment. T H E H U M A N FA C E O F R E N TA L Last year, equipment sharing generated 11.5 percent Equipment rental is ultimately a service business, of rental revenues, or $250 million. From a broader and therefore a people business. Each rental perspective, the use of shared information optimizes contract is a coordinated customer service effort asset utilization and deployment. In 2003, for exam- involving salespeople, mechanics, dispatchers, ple, we permanently shifted over $400 million of drivers, customer service associates, ofﬁce workers, under-performing ﬂeet to other locations where this credit personnel and managers. United Rentals is equipment can generate better returns. committed to differentiating our brand on the Our disciplined management approach basis of quality people and exceptional service. We includes the use of benchmarking and performance work to achieve this through effective recruitment, analysis to drive improvements throughout our retention and professional development. organization. Field managers gain valuable guidance from key performance indicators and from positive disciplines such as monthly operating reviews. 1 6 6 , 0 0 0 H O U R S of employee training In 2003 we continued to add industry expertise to our organization, supplementing a workforce that has always had an exceptional depth of experience. Our district managers, for example, typically have more than seven years of experience in the rental industry. Drum roller 17 “The word gets around that United Rentals is willing to go the extra mile. I make sure that EV E RY C U S TO M E R I S S AT I S F I E D, even if it means visiting a jobsite at midnight.” R A N D Y PA R K S Sales Coordinator United Rentals 18 Light tower “We work within strict timeframes and budgets. United Rentals gives me exactly what I ask for every time, no surprises. That M A K E S M Y J O B E A S I E R .” J E N N I F E R E L L I S Facilities Planning California Department of Corrections 20 We also invested heavily in our existing Early in our company’s development we employee base. Our employees received a total of recognized the importance of communicating 166,000 hours of professional training in 2003, in individual knowledge as a way to drive total per- skills ranging from workplace safety to value-based formance. Every person who works for United negotiation and retail sales methods. Our Coaching Rentals is encouraged to share best practices. Call trainers, for example, call each of our 1,200 District success stories are analyzed and transferred sales coordinators at least six times a year to test to other areas of the country. Training programs their customer service and communication skills. are reﬁned based on input during implementation. This year we will launch an e-learning initiative By sharing best practices within the world’s largest that will be the foundation for our employee and most experienced equipment rental workforce, training program going forward. we become a better company every day. 1 3 , 0 0 0 dedicated employees In six short years, United Rentals has grown to be the leader in a highly attractive and customer-driven industry. Our company is grounded in sound strategies, a resilient business model and a culture of continuous improvement. These strengths, together with a remarkable and energetic employee base, will continue to propel our growth. On-site contractor supply trailer 21 CO N T E N TS 23 SELECTED FINANCIAL DATA 24 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 38 REPORT OF INDEPENDENT AUDITORS 39 CONSOLIDATED BALANCE SHEETS 40 CONSOLIDATED STATEMENTS OF OPERATIONS 41 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 42 CONSOLIDATED STATEMENTS OF CASH FLOWS 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 62 UNITED RENTALS LOCATIONS 64 CORPORATE INFORMATION 22 S E L E C T E D F I N A N C I A L D ATA We completed a number of acquisitions during the periods presented below. We accounted for these acquisitions as purchases. This means that the results of operations of the acquired company are included in our ﬁnancial statements only from the date of acquisition. We believe that our results for the periods presented below are not directly comparable because of the impact of the acquisitions accounted for as purchases. For additional information, see note 3 of our notes to consolidated ﬁnancial statements included elsewhere in this report. Year Ended December 31 (In thousands, except per share data) 1999 2000 2001 2002 2003 I N CO M E S TAT E M E N T D ATA : Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-rental depreciation and amortization . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends of a subsidiary trust . . . . . . . . . . . . . . . . . . . . . . Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before provision (beneﬁt) for income taxes and cumulative effect of change in accounting principle . . . . . . . . Provision (beneﬁt) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of change in accounting principle, net (1) . . . . . . . . Net income (loss) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings (loss) available to common stockholders before cumulative effect of change in accounting principle per share (2) . Diluted earnings (loss) available to common stockholders before cumulative effect of change in accounting principle per share (2) . . Basic earnings (loss) available to common stockholders per share (2) . Diluted earnings (loss) available to common stockholders per share(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OT H E R F I N A N C I A L D ATA : Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,233,628 1,408,710 824,918 352,595 $2,918,861 1,830,291 1,088,570 454,330 $2,886,605 1,847,135 1,039,470 441,751 62,867 409,456 139,828 19,500 8,321 241,807 99,141 86,301 547,939 228,779 19,500 (1,836) 301,496 125,121 28,922 106,763 462,034 221,563 19,500 24,497 196,474 85,218 142,666 176,375 111,256 $ 142,666 $ 176,375 $ 111,256 $2,820,989 1,934,712 886,277 438,918 247,913 28,262 59,301 111,883 195,961 18,206 (900) $2,867,236 2,019,268 847,968 451,347 296,873 69,300 30,448 209,328 14,590 133,051 (101,384) 8,102 (326,521) (67,940) (109,486) (288,339) $ (397,825) (258,581) $ (258,581) $2.00 $1.53 $2.00 $1.53 $2.48 $1.89 $2.48 $1.89 $1.54 $1.18 $1.54 $1.18 $(0.98) $(0.98) $(4.78) $(4.78) $(3.35) $(3.35) $(3.35) $(3.35) $ 343,508 — $ 414,432 — $ 427,726 — $ 384,849 — $ 401,910 — December 31 (In thousands) 1999 2000 2001 2002 2003 B A L A N C E S H E E T D ATA : Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill, net (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated convertible debentures (4) . . . . . . . . . . . . . . . . . . . . . . . Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust (4) . . . . . . . . . . . . . . . . . . . . . . . . . . Series A and B preferred stock (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,811 $ 1,659,733 1,853,279 4,497,738 2,266,148 34,384 $ 1,732,835 2,215,532 5,123,933 2,675,367 27,326 $ 1,747,182 2,199,774 5,061,516 2,459,522 19,231 $ 1,845,675 1,705,191 4,690,557 2,512,798 $ 79,449 2,071,492 1,437,809 4,722,141 2,817,088 221,550 300,000 430,800 966,686 300,000 430,800 1,115,143 300,000 226,550 1,625,510 1,331,505 1,140,875 (1) The cumulative effect of change in accounting principle in 2002 resulted from a goodwill impairment charge recognized upon the adoption of a new accounting standard. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Goodwill and Other Intangible Assets” and note 4 to our notes to consolidated ﬁnan- cial statements included elsewhere in this report. (2) Our earnings during 1999 were impacted by $18.2 million ($10.8 million net of tax or $0.12 per diluted share) of expenses incurred related to a terminated tender offer. Our earn- ings during 2001 were impacted by a restructuring charge of $28.9 million ($19.2 million net of tax or $0.20 per diluted share) and a $25.9 million ($16.5 million net of tax or $0.18 per diluted share) charge, recorded in other expense, relating to reﬁnancing costs. Our earnings during 2002 were impacted by a restructuring charge of $28.3 million ($17.3 million net of tax or $0.23 per share), a $247.9 million goodwill impairment charge ($198.8 million net of tax or $2.62 per share), a $1.6 million charge ($0.9 million net of tax or $0.01 per share) recorded in other expense relating to reﬁnancing costs, and a cumulative effect of change in accounting principle (net of tax) of $288.3 million ($3.80 per share). Our earnings during 2003 were impacted by a $296.9 million goodwill impairment charge ($238.9 million net of tax or $3.10 per share), a $95.1 million charge ($57.7 million net of tax or $0.75 per share) recorded in other expense relating to the buy-out of equipment leases, a $28.9 million charge ($17.1 million net of tax or $0.22 per share) recorded in other expense relating to reﬁnancing costs, an $11.1 million charge ($6.6 million net of tax or $0.09 per share) recorded in other expense relating to the write-off of certain notes receivable and an $11.8 million charge ($10.2 million net of tax or $0.13 per share) for the vesting of restricted shares granted to executives in 2001. (3) Goodwill is deﬁned as the excess of cost over the fair value of identiﬁable net assets of businesses acquired. Until January 1, 2002, we amortized our goodwill on a straight-line basis over forty years. Beginning January 1, 2002, in accordance with the adoption of a new accounting standard, we no longer amortize goodwill. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Goodwill and Other Intangible Assets” and note 4 to our notes to consolidated ﬁnancial statements included else- where in this report. (4) A subsidiary trust issued trust preferred securities in 1998 and we recorded such preferred securities as a separate category on our balance sheet. In 2003, the FASB issued FIN 46 and upon adoption of this standard as of December 31, 2003, we deconsolidated the trust. Upon deconsolidation, the trust preferred securities were removed from our consolidated balance sheets at December 31, 2003 and the subordinated convertible debentures that we issued to the subsidiary trust, which previously had been eliminated in our consolidated balance sheets, were no longer eliminated in our consolidated balance sheets at December 31, 2003. The carrying amount of the trust preferred securities removed from the consol- idated balance sheets was the same as the carrying amount of the subordinated convertible debentures added to the consolidated balance sheets. However, the subordinated con- vertible debentures are reﬂected as a component of liabilities on the consolidated balance sheets at December 31, 2003, whereas the trust preferred securities were reﬂected as a separate category prior to December 31, 2003. See “—Impact of Recently Issued Accounting Standards” and note 11 to our notes to consolidated ﬁnancial statements included else- where in this report. (5) We issued series A and B perpetual convertible preferred stock in 1999 and included such preferred stock in stockholders’ equity. In July 2001, the SEC issued guidance to all public companies as to when redeemable preferred stock may be classiﬁed as stockholders’ equity. Under this guidance, the series A and B preferred would not be included in stockholders’ equity because this stock would be subject to mandatory redemption on a hostile change of control. On September 28, 2001, we entered into an agreement effecting the exchange of new series C and D perpetual convertible preferred stock for the series A and B preferred. The series C and D preferred is not subject to mandatory redemption on a hostile change of control, and is included in stockholders’ equity under the recent SEC guidance. The effect of the foregoing is that our perpetual convertible preferred stock is included in stockholders’ equity as of September 28, 2001 and thereafter, but is outside of stockholders’ equity for earlier dates. 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S You should read the following data together with the Consolidated Financial Statements and related Notes. Certain statements contained in this report are forward- looking in nature. Such statements can be identiﬁed by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “on-track,” “plan,” “intend” or “anticipate,” 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 pro- jected by any forward-looking statements. Factors that could cause actual results to differ from those projected include, but are not limited to, the following: (i) unfavor- able economic and industry conditions can reduce demand and prices for our products and services; (ii) governmental funding for highway and other construction projects may not reach expected levels; (iii) we may not have access to capital that we may require; and (iv) any companies that we acquire could have undiscovered liabilities and may be difﬁ- cult to integrate. These risks and uncertainties, as well as others, are discussed in greater detail in our ﬁlings with the Securities and Exchange Commission (“SEC”), including our most recent report on Form 10-K. We make no com- mitment to revise or update any forward-looking state- ments in order to reﬂect events or circumstances after the date any such statement is made. We ﬁle reports and other information with the SEC pursuant to the information requirements of the Securities Exchange Act of 1934. Readers may read and copy any document we ﬁle at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our ﬁlings are also available to the public from commercial document retrieval services and at the SEC’s website at www.sec.gov. We make available on our internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports as soon as practicable after we electronically ﬁle such reports with the SEC. Our website address is www.unitedrentals.com. The information contained in our website is not incorporated by reference in this report. 24 G E N E R A L United Rentals is the largest equipment rental company in North America. Our revenues are divided into three categories: • Equipment rentals —This category includes our revenues from renting equipment. This category also includes related revenues such as the fees we charge for equip- ment delivery, fuel, repair of rental equipment and damage waivers. • Sales of rental equipment —This category includes our revenues from the sale of used rental equipment. • Sales of equipment and merchandise and other revenues — This category principally includes our revenues from the following sources: (i) the sale of new equipment; (ii) the sale of contractor supplies and merchandise; (iii) repair services and the sale of parts for equipment owned by customers; and (iv) the operations of our subsidiary that develops and markets software for use by equipment rental companies in managing and operating multiple branch locations. Our cost of operations consists primarily of: (i) deprecia- tion costs relating to the rental equipment that we own and lease payments for the rental equipment that we hold under operating leases; (ii) the cost of repairing and maintaining rental equipment; (iii) the cost of the items that we sell including new and used equipment and related parts, mer- chandise and supplies; and (iv) personnel costs, occupancy costs and supply costs. We record rental equipment expenditures at cost and depreciate equipment using the straight-line method over the estimated useful life (which ranges from two to ten years), after giving effect to an estimated salvage value of 0% to 10% of cost. Selling, general and administrative expenses primarily include: (i) sales force compensation; (ii) bad debt expense; (iii) advertising and marketing expenses; (iv) management salaries; and (v) 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; (ii) the amortization of deferred ﬁnancing costs; and (iii) the amortization of other intangible assets. Our other intangible assets consist of non-compete agreements. As described below, effective January 1, 2002, we no longer amortize goodwill. We completed acquisitions in each of 2001, 2002 and 2003. See note 3 to our notes to consolidated ﬁnancial statements included elsewhere in this report. In view of the fact that our operating results for these years were affected by acquisitions, we believe that our results for these periods are not directly comparable. G O O DW I L L A N D OT H E R I N TA N G I B L E A S S E TS Prior to January 1, 2002, we amortized our goodwill over a 40-year period in accordance with accounting standards then in effect. Our goodwill amortization in 2001 amounted to approximately $58.4 million. Effective January 1, 2002, we adopted Statement of Finan- cial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” issued by the Financial Accountants Standards Board (“FASB”). Under this stan- dard, we no longer amortize our goodwill over a ﬁxed period. Instead, we are required to periodically review our goodwill for impairment. In general, this means that we must determine whether the fair value of the goodwill, calculated in accordance with applicable accounting stan- dards, is at least equal to the recorded value shown on our balance sheet. If the fair value of the goodwill is less than the recorded value, we are required to write off the excess goodwill as an operating expense. This new standard only impacts our goodwill. We continue to amortize our other intangible assets over their estimated useful lives. As of December 31, 2003, we had other net intangible assets of approximately $3.2 million. We completed our initial impairment analysis in the ﬁrst quarter of 2002 and recorded a non-cash charge of approxi- mately $348.9 million ($288.3 million, net of tax). The charge associated with the initial impairment analysis is reﬂected on our statement of operations as a “Cumulative effect of change in accounting principle.” We completed subsequent impairment analyses in the fourth quarter of 2002 and fourth quarter of 2003 and recorded additional non-cash impairment charges. The additional charge in the fourth quarter of 2002 was approximately $247.9 million ($198.8 million, net of tax), and the additional charge in the fourth quarter of 2003 was approximately $296.9 million ($238.9 million, net of tax). These charges are reﬂected on our statement of operations as “goodwill impairment.” The number of branches at which there was some impair- ment in 2003 represented approximately 25% of our total branches. However, a substantial part of the total impair- ment charge in 2003 (approximately 85%) reﬂected impairment at approximately 11% of our total branches. We will be required to review our goodwill for further impairment at least annually. We test for goodwill impair- ment on a branch-by-branch basis rather than on an aggre- gate basis. This means that a goodwill write-off is required even if only one or a limited number of our branches has impairment as of the annual testing date or at any other date when an indicator of impairment may exist and even if there is no impairment for all our branches on an aggregate basis. In addition, we assess impairment solely on the basis of recent historical performance and without reference to expected future performance. This means that, if the his- torical data for a branch indicates impairment, a goodwill write-off is required even when we believe that branch’s future performance will be signiﬁcantly better. The fact that we test for impairment on a branch-by-branch basis and use only historical ﬁnancial data in assessing impair- ment increases the likelihood that we will be required to take additional non-cash goodwill write-offs in the future, although we cannot quantify at this time the magnitude of any future write-offs. Future goodwill write-offs, if required, may have a material adverse effect on our results. C R I T I C A L ACCO U N T I N G P O L I C I E S We prepare our ﬁnancial statements in accordance with accounting principles generally accepted in the United States. A summary of our signiﬁcant accounting policies is contained in note 2 to our notes to consolidated ﬁnancial statements included elsewhere in this report. In applying many accounting principles, we need to make assumptions, estimates and/or judgments. These assumptions, estimates and judgments are often subjective and may change based on changing circumstances or changes in our analysis. Material changes in these assumptions, estimates and judg- ments have the potential to materially alter our results of operations. We have identiﬁed below those of our account- ing policies that we believe could potentially produce mate- rially different results were we to change underlying assumptions, estimates and judgments. A L LOWA N C E F O R D O U B T F U L ACCO U N TS We maintain allowances for doubtful accounts. These allowances reﬂect our estimate of the amount of our receiv- ables that we will be unable to collect. We make such esti- mate based upon a combination of an analysis of our accounts receivable on a speciﬁc accounts basis and histori- cal write-off experience. Our estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowance. U S E F U L L I V E S O F R E N TA L E QU I P M E N T A N D P RO PE RT Y A N D E QU I P M E N T We depreciate rental equipment and property and equip- ment over their estimated useful lives, after giving effect to an estimated salvage value of 0% to 10% of cost. The useful life of an asset is determined based on our estimate of the period the asset will generate revenues, and the salvage value is determined based on our estimate of the minimum value we will realize from the asset after such period. We may be required to change these estimates based on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets. I M PA I R M E N T O F G O O DW I L L As described above, we must periodically determine whether the fair value of our goodwill is at least equal to the recorded value shown on our balance sheet. See “— Goodwill and Other Intangible Assets.” We must make estimates and assumptions in evaluating the fair value of goodwill. We may be required to change these estimates and assumptions based on changes in economic conditions, changes in our business prospects or other changing cir- cumstances. If these estimates change in the future, we may be required to record additional impairment charges for goodwill. 25 I M PA I R M E N T O F LO N G - L I V E D A S S E TS We review the valuation of our long-lived assets on an ongoing basis and assess the carrying value of such assets if facts and circumstances suggest they may be impaired. If this review indicates that the carrying value of these assets may not be recoverable, then the carrying value is reduced to its estimated fair value. The determination of recover- ability is based upon a nondiscounted cash ﬂow analysis over the asset’s remaining useful life. We must make esti- mates and assumptions when applying the nondiscounted cash ﬂow analysis. These estimates and assumptions may prove to be inaccurate due to factors such as changes in economic conditions, changes in our business prospects or other changing circumstances. If these estimates change in the future, we may be required to recognize write-downs on our long-lived assets. D E F E R R E D I N CO M E TA X E S We have not provided a valuation allowance related to our deferred tax assets because we believe such assets will be recovered during the carryforward period. If sufﬁcient evi- dence becomes apparent that it is more likely than not that our deferred tax assets will not be utilized, we may be required to record a valuation allowance for such assets resulting in additional income tax expense. R E S E RV E S F O R C L A I M S We are exposed to various claims relating to our business. These may include claims relating to: (i) personal injury or death caused by equipment rented or sold by us; (ii) motor vehicle accidents involving our delivery and service person- nel; and (iii) employment related claims. We establish reserves for reported claims that are asserted against us and for claims that we believe have been incurred but not reported. These reserves reﬂect our estimate of the amounts that we will be required to pay in connection with these claims net of expected insurance recoveries. Our estimate of reserves is based upon our judgment as to the probability of losses and our historical payment experience related to claims settlements. These estimates may change based on, among other things, changes in our claims history or receipt of additional information relevant to assessing the claims. Furthermore, these estimates may prove to be inaccurate due to factors such as adverse judicial determinations or settlements at higher than estimated amounts. Accordingly, we may be required to increase or decrease our reserves. R E S T RU C T U R I N G During 2001 and 2002, we recorded reserves in connec- tion with the restructuring plans described below. These reserves include estimates pertaining to workforce reduc- tion costs and costs of vacating facilities and related settle- ments of contractual obligations. Although we do not anticipate signiﬁcant changes, the actual costs may differ from these estimates and we may be required to record additional expense not previously recorded. R E S T RU C T U R I N G P L A N S I N 2 0 0 1 A N D 2 0 0 2 We adopted a restructuring plan in April 2001 and a sec- ond restructuring plan in October 2002 as described below. These plans were adopted in response to adverse 26 changes in economic conditions and in branch perfor- mance in certain of our markets. In connection with these plans, we recorded a restructuring charge of $28.9 million in 2001 (including a non-cash component of approximately $10.9 million) and $28.3 million in the fourth quarter of 2002 (including a non-cash component of approximately $2.5 million). The 2001 plan involved the following principal elements: (i) 31 underperforming branches and ﬁve administrative ofﬁces were closed or consolidated with other locations; (ii) the reduction of our workforce by 489 through the termination of branch and administrative personnel; and (iii) certain information technology hardware and software was no longer used. The 2002 plan involved the following principal elements: (i) 40 underperforming branches and ﬁve administrative ofﬁces were closed or consolidated with other locations; (ii) the reduction of our workforce by 412 through the termination of branch and administrative personnel; and (iii) a certain information technology project was abandoned. The aggregate annual revenues from the 40 branches that were eliminated as part of the 2002 restructuring amounted to approximately $80 million. The portion of these revenues that we were able to retain was signiﬁcantly less than we had originally anticipated primarily because continued weakness in our end markets limited the amount of equipment from the closed branches that we were able to redeploy to other branches. The table below provides certain information concerning our restructuring charges. For additional information, see note 5 to our notes to consolidated ﬁnancial statements included elsewhere herein. Components of our restructur- ing charges follows: (In thousands) Balance Balance December 31, Activity in December 31, 2002(1) 2003(2) 2003(3) Costs to vacate facilities(4) . . . . . $22,258 Workforce reduction costs(5) . . . 3,462 Information $7,298 1,706 $14,960 1,756 technology costs(6) . . . . . . . . 1,395 782 613 Total . . . . . . . . . . . . . . . . . . . . . $27,115 $9,786 $17,329 (1) Represents the aggregate balance of the 2001 and 2002 charges that had not been utilized as of December 31, 2002. (2) Represents: (i) the non-cash component of the 2002 charge that relates to the elements of the 2002 restructuring plan that were implemented in 2003; and (ii) the cash components of the 2001 and 2002 charges that were paid in 2003. (3) Represents the aggregate balance of the 2001 and 2002 charges that had not been utilized as of December 31, 2003. (4) These costs primarily represent: (i) payment of obligations under leases offset by estimated sublease opportunities; and (ii) the write-off of capital improvements made to such facilities. (5) These costs primarily represent severance. (6) These costs primarily represent the abandonment of certain information technology projects and the payment of obligations under equipment leases relating to such projects. As indicated in the table above, the aggregate balance of the 2001 and 2002 charges was $17.3 million as of December 31, 2003. We estimate that approximately $6.8 million of the remaining 2001 and 2002 charges will be paid by December 31, 2004 and approximately $10.5 million in future periods. These payments will not affect our future earnings because the charges associated with these pay- ments have already been recorded in our 2002 or 2001 results. We expect to make these payments with cash from our operations. C H A RG E S R E L AT E D TO D E B T R E F I N A N C I N G S , L E A S E B U Y- O U TS A N D N OT E S W R I T E - O F F Transactions in 2001. We reﬁnanced an aggregate of $1,695.7 million of indebtedness and other obligations in April 2001. In connection with this transaction, we recorded the following charges: (i) a pre-tax charge of $18.1 million ($11.3 million, net of tax) that relates to the reﬁnancing of indebtedness and primarily reﬂects the write-off of deferred ﬁnancing fees attributable to the debt that was reﬁnanced; and (ii) a pre-tax charge of $7.8 mil- lion ($5.2 million, net of tax) that relates to the reﬁnancing of a synthetic lease. When the foregoing charges were origi- nally recorded, we recorded the $18.1 million charge as an extraordinary item and the other charge as other (income) expense, net. However, upon adoption of SFAS No. 145 on January 1, 2003, we reclassiﬁed the $18.1 charge to other (income) expense, net. See “—Impact of Recently Issued Accounting Standards.” Transactions in 2002. We reﬁnanced approximately $199.4 million of indebtedness in December 2002. In con- nection with this transaction, we recorded a $1.6 million charge ($0.9 million, net of tax) for the write-off of deferred ﬁnancing fees attributable to the debt that was reﬁnanced. This charge is recorded in other (income) expense, net. Transactions in 2003. During the fourth quarter of 2003, we sold new notes and used the proceeds to redeem $405.0 million face amount of previously issued senior sub- ordinated notes and buy out existing equipment leases. See “—Liquidity and Capital Resources—Recent Financing Transactions.” We recorded a pre-tax charge of $28.9 mil- lion ($17.1 million, net of tax) in connection with such redemption of notes and a pre-tax charge of $95.1 million ($57.7 million, net of tax) in connection with such buy-out of equipment leases. The charge related to the redemption of notes primarily reﬂects the redemption price premium and the write-off of previously capitalized ﬁnancing costs relating to such notes. The charge relating to the buy-out of equipment leases primarily reﬂects the excess of the buy- out price over the fair value of the equipment purchased, early termination fees and the write-off of previously capi- talized ﬁnancing costs related to such leases. All such charges are recorded in other (income) expense, net. During the fourth quarter of 2003, we wrote off notes receivable that were deemed to be impaired. We received these notes as consideration for non-core assets that we dis- posed of in prior years. In connection with these write-offs, we recorded a pre-tax charge of $11.1 million ($6.6 million, net of tax) in other (income) expense, net. E X PE C T E D C H A RG E S I N F I R S T QUA RT E R O F 2 0 0 4 During the ﬁrst quarter of 2004, we reﬁnanced approxi- mately $2.1 billion of our debt. See “—Liquidity and Capi- tal Resources—Recent Financing Transactions.” In connec- tion with the foregoing, we estimate that we will incur aggregate pre-tax charges in 2004 of approximately $175 million to approximately $185 million attributable to: (i) the redemption premium for notes redeemed as part of the reﬁnancing; and (ii) the write-off of previously capitalized costs relating to the debt reﬁnanced. These charges will be recorded in other (income) expense, net. We incurred a pre-tax non-cash charge of approximately $7.0 million in the ﬁrst quarter of 2004 due to the vesting of restricted shares granted to senior executives in 2001. This charge represents the unamortized portion of the deferred compensation charge associated with the award of such shares. R E S U LTS O F O PE R AT I O N S G E N E R A L LY ACC E P T E D ACCO U N T I N G P R I N C I P L E S ( “ G A A P ” ) R E S U LTS A N D A D J U S T E D R E S U LTS We had a net loss in 2003 of $258.6 million compared with a net loss of $397.8 million for 2002. The loss in 2003 reﬂects $330.5 million of charges, net of tax, relating to goodwill impairment, buy-out of equipment leases, debt reﬁnancing, notes receivable write-off and vesting of restricted shares granted to executives in 2001. The loss in 2002 reﬂects $505.4 million of charges, net of tax, relating to goodwill impairment, restructuring costs, debt reﬁnancing and a change in accounting principle relating to goodwill. Excluding the charges described above for each period, we would have had adjusted net income in 2003 of $71.8 mil- lion compared with adjusted net income of $107.6 million in 2002. We provide this adjusted data because we believe that this data may be useful to investors in analyzing the period-to-period changes in our results that are due to changes in business conditions and that are not due to the writeoff of goodwill or other assets. The table below recon- ciles the adjusted results with our results in accordance with GAAP. (In millions) Net loss as reported . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . Buy out of equipment leases . . . . . . . . . . . Reﬁnancing costs . . . . . . . . . . . . . . . . . . . Write off of notes receivable . . . . . . . . . . . Vesting of restricted shares granted to executives in 2001 . . . . . . . . . . . . . . . . . Restructuring charge . . . . . . . . . . . . . . . . . Tax effect of above items . . . . . . . . . . . . . . Cumulative effect of accounting change, net of tax . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31 2003 2002 $(258.6) 296.9 95.1 28.9 11.1 11.8 — (113.4) $(397.8) 247.9 — 1.6 — — 28.3 (60.7) — 288.3 Income, as adjusted . . . . . . . . . . . . . . . . . . $ 71.8 $ 107.6 OV E RV I EW O F 2 0 0 3 A S A D J U S T E D R E S U LTS Our rental rates increased 2.1% in 2003, and same-store rental revenues increased 3.7%. The rate increases primar- ily occurred in the second half of the year as rental rates in the third quarter and fourth quarter of 2003 increased 3.4% and 5.6%, respectively, on a year-over-year basis. The increase in same-store rental revenues was partially offset by 27 revenues lost due to branch closings and a reduction in the size of our rental ﬂeet. The net effect was that our total revenues for the year increased by 1.6% to $2.87 billion. Our ability to increase revenues was constrained by contin- ued weakness in our principal end market. According to Department of Commerce data, private non-residential con- struction activity declined 5.2% in 2003 following a decline of 13.2% in 2002. In addition, government spending on road and highway construction remained sluggish. The 1.6% increase in our revenues in 2003 was more than offset by a 4.4% increase in our cost of revenues. This increase was attributable to higher costs in several cate- gories, including insurance and claims, ﬂeet repair and maintenance, fuel and delivery, and depreciation of rental equipment. The increase in cost of revenues, and in partic- ular the cost of rental revenues, resulted in gross proﬁts decreasing to $848.0 million, or 29.6% of revenues in 2003, from $886.3 million, or 31.4% of revenues in 2002. We also had increases in non-rental depreciation and amor- tization and interest expense of $10.0 million and $9.8 mil- lion, respectively. The increase in non-rental depreciation and amortization was primarily attributable to upgrades to our delivery ﬂeet and facilities. The increase in interest expense was primarily due to the additional interest expense attributable to the senior notes we issued in December 2002 and April 2003. As described below, in the ﬁrst quarter of 2004 we reﬁnanced these senior notes with lower interest rate notes. The cost increases described above, net of taxes, were the primary reason that income, as adjusted, in 2003 decreased to $71.8 million from income, as adjusted, of $107.6 million in 2002. Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 3 A N D 2 0 0 2 R EV E N U E S We had total revenues of $2,867.2 million in 2003, repre- senting an increase of 1.6% from total revenues of $2,821.0 million in 2002. The different components of our revenues are discussed below: 1. Equipment Rentals. Our revenues from equipment rentals were $2,177.5 million in 2003, representing an increase of 1.1% from $2,154.7 million in 2002. These revenues accounted for 75.9% of our total revenues in 2003 com- pared with 76.4% of our total revenues in 2002. Our equipment dollar utilization rate in 2003 was 57.1% com- pared to 57.0% in 2002. The 1.1% increase in rental rev- enues principally reﬂected the following: • Our rental revenues from locations open more than one year, or same-store rental revenues, increased by approx- imately 3.7%. This increase reﬂected the 2.1% increase in rental rates discussed above and a 1.6% increase in the net volume of rental activity. The volume increase was primarily driven by the transfer to these locations of equipment that had previously been deployed at branches that were closed or consolidated. Although our same-store rental volume increased on an overall basis, the volume of trafﬁc equipment rentals decreased 28 primarily due to continued weakness in state spending for infrastructure projects. • We lost revenues due to the closing or sale of branches and added revenues through acquisitions and start-ups. The net effect of these two factors was a loss of revenues that partially offset the increase in same-store rental revenues. 2. Sales of Rental Equipment. Our revenues from the sale of rental equipment were $181.3 million in 2003, represent- ing an increase of 2.9% from $176.2 million in 2002. These revenues accounted for 6.3% of our total revenues in 2003 compared with 6.2% of our total revenues in 2002. The increase in these revenues in 2003 reﬂected an increase in the volume of equipment sold as used equipment prices remained relatively ﬂat. 3. Sales of Equipment and Merchandise and Other Revenues. Our revenues from “sale of equipment and merchandise and other revenues” were $508.5 million in 2003, repre- senting an increase of 3.7% from $490.1 million in 2002. These revenues accounted for 17.7% of our total revenues in 2003 compared with 17.4% of our total revenues in 2002. The increase in these revenues in 2003 principally reﬂected an increase in the volume of merchandise and contractor supplies sold partially offset by a decrease in sales of new equipment. G RO S S P RO F I T Gross proﬁt decreased to $848.0 million in 2003 from $886.3 million in 2002. This decrease primarily reﬂected the decrease in gross proﬁt margin described below from equipment rentals. Information concerning our gross proﬁt margin by source of revenue is set forth below: 1. Equipment Rentals. Our gross proﬁt margin from equip- ment rental revenues was 30.0% in 2003 and 32.1% in 2002. The decrease in 2003 principally reﬂected cost increases and the decrease in trafﬁc equipment rentals described above. The cost increases were attributable to several factors including: (i) higher costs for insurance and claims, ﬂeet repair and maintenance, and fuel and delivery; and (ii) an increase in depreciation expense. 2. Sales of Rental Equipment. Our gross proﬁt margin from sales of rental equipment was 32.7% in 2003 and 33.7% in 2002. The decrease in 2003 primarily reﬂected a change in the mix of types of equipments sold. 3. Sales of Equipment and Merchandise and Other Revenues. Our gross proﬁt margin from “sales of equipment and mer- chandise and other revenues” was 26.8% in 2003 and 27.6% in 2002. The decrease in gross proﬁt margin in 2003 primarily reﬂected a change in the mix of types of new equipment sold and, to a lesser extent, the mix of types of merchandise and contractor supplies sold. S E L L I N G , G E N E R A L A N D A D M I N I S T R AT I V E E X PE N S E S Selling, general and administrative expenses (“SG&A”) were $451.3 million, or 15.7% of total revenues, in 2003 and $438.9 million, or 15.6% of total revenues, in 2002. The increase in 2003 was primarily attributable to the accelerated vesting of restricted shares granted in 2001. G O O DW I L L I M PA I R M E N T We recorded a goodwill impairment charge of $296.9 mil- lion in 2003 and $247.9 million in 2002. See “—Goodwill and Other Intangible Assets” for additional information. R E S T RU C T U R I N G C H A RG E We recorded a restructuring charge of $28.3 million in 2002. See “—Restructuring Plans in 2001 and 2002” for additional information. N O N - R E N TA L D E P R E C I AT I O N A N D A M O RT I Z AT I O N Non-rental depreciation and amortization was $69.3 mil- lion, or 2.4% of total revenues, in 2003 and $59.3 million, or 2.1% of total revenues, in 2002. The increase in 2003 was primarily attributable to an upgrade in transportation equipment and an increase in leasehold improvements in connection with branch upgrades. O PE R AT I N G I N CO M E We recorded operating income of $30.4 million in 2003 compared with operating income of $111.9 million in 2002. The principal reasons for the decrease in 2003 were the decline in gross proﬁt, the higher goodwill impairment charge and the higher non-rental depreciation and amorti- zation described above. I N T E R E S T E X PE N S E Interest expense increased to $209.3 million in 2003 from $196.0 million in 2002. This increase primarily reﬂected higher interest costs related to the senior notes we issued in December 2002 and April 2003, partially offset by lower interest rates on our variable rate debt. As described below, in the ﬁrst quarter of 2004 we reﬁnanced these senior notes with lower interest rate notes. P R E F E R R E D D I V I D E N D S O F A S U B S I D I A RY T RU S T Preferred dividends of a subsidiary trust were $14.6 million during 2003 as compared to $18.2 million during 2002. The decrease in 2003 reﬂects our repurchase of a portion of our outstanding trust preferred securities, primarily in the fourth quarter of 2002. OT H E R ( I N CO M E ) E X PE N S E Other expense was $133.1 million in 2003 compared with other income of $0.9 million in 2002. The other expense in 2003 primarily reﬂects the charges described under “— Charges Related to Debt Reﬁnancings, Lease Buy-Outs and Notes Write-Off.” Excluding these charges, other income would have been $2.1 million in 2003 primarily reﬂecting gains related to the sale of non-rental assets. The other income in 2002 was primarily attributable to the favorable settlement of a lawsuit for net proceeds of $4.0 million, partially offset by other expenses including the write-off of $1.6 million of deferred ﬁnancing fees described under “—Charges Related to Debt Reﬁnancings, Lease Buy-Outs and Notes Write-Off.” I N CO M E TA X E S Income taxes were a beneﬁt of $67.9 million in 2003 com- pared with a provision of $8.1 million in 2002. The effec- tive tax rates during the two periods are not comparable because: (i) a portion of the goodwill impairment charge in each such period was not deductible for income tax pur- poses; (ii) certain expenses in 2003 associated with the amortization of deferred compensation expense attributable to restricted stock awards were not deductible for income tax purposes; and (iii) the 2003 rate was impacted by the charges relating to the buy-out of equipment leases, debt reﬁnancing, and notes receivables write-off and the 2002 rate was impacted by restructuring costs and charges asso- ciated with debt reﬁnancing. Excluding the foregoing expenses and charges, our effective tax rate would have been approximately 39% in 2003 and 2002. LO S S B E F O R E C U M U L AT I V E E F F E C T O F C H A N G E I N ACCO U N T I N G P R I N C I P L E We had a loss before cumulative effect of change in accounting principle of $258.6 million in 2003 compared with a loss before cumulative effect of change in accounting principle of $109.5 million in 2002. The higher loss in 2003 principally reﬂects the decrease in operating income and the charges reﬂected in other expense described above. Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 2 A N D 2 0 0 1 R EV E N U E S We had total revenues of $2,821.0 million in 2002, repre- senting a decrease of 2.2% from total revenues of $2,886.6 million in 2001. The different components of our revenues are discussed below: 1. Equipment Rentals. Our revenues from equipment rentals were $2,154.7 million in 2002, representing a decrease of 2.6% from $2,212.9 million in 2001. These revenues accounted for 76.4% of our total revenues in 2002 compared with 76.7% of our total revenues in 2001. The decrease in rental revenues principally reﬂected the following: • Our rental revenues from locations open more than one year, or same-store rental revenues, decreased by approx- imately 2.7%. This decrease reﬂected a 4.8% decrease in rental rates, which was partially offset by a 2.1% increase in the net volume of rental activity. The decrease in rental rates principally reﬂected continued weakness in non-residential construction spending. • The decrease in same-store rental revenues was partially offset by additional revenues attributable to new locations that we acquired or opened. These additional revenues, net of revenues lost due to locations sold or closed, caused our overall decline in rental revenues to be 0.1 percentage point less than it would otherwise have been. 2. Sales of Rental Equipment. Our revenues from the sale of rental equipment were $176.2 million in 2002, represent- ing an increase of 19.8% from $147.1 million in 2001. These revenues accounted for 6.2% of our total revenues in 2002 compared with 5.1% of our total revenues in 2001. The increase in these revenues in 2002 reﬂected an increase in volume partially offset by weaker pricing. 3. Sales of Equipment and Merchandise and Other Revenues. Our revenues from “sale of equipment and merchandise and other revenues” were $490.1 million in 2002, repre- senting a decrease of 6.9% from $526.6 million in 2001. These revenues accounted for 17.4% of our total revenues in 2002 compared with 18.2% of our total revenues in 2001. The decrease in these revenues in 2002 principally reﬂected a decrease in the volume of new equipment sales. 29 G RO S S P RO F I T Gross proﬁt decreased to $886.3 million in 2002 from $1,039.5 million in 2001. This decrease reﬂected the decrease in total revenues discussed above, as well as the decrease in gross proﬁt margin described below from equipment rentals and the sale of rental equipment. Infor- mation concerning our gross proﬁt margin by source of revenue is set forth below: 1. Equipment Rentals. Our gross proﬁt margin from equip- ment rental revenues was 32.1% in 2002 and 37.9% in 2001. The decrease in 2002 principally reﬂected the decrease in rental rates described above and, to a lesser extent, higher costs related to employee beneﬁts, ﬂeet maintenance and delivery, and facilities. 2. Sales of Rental Equipment. Our gross proﬁt margin from sales of rental equipment was 33.7% in 2002 and 39.7% in 2001. The decrease in 2002 primarily reﬂected continued price weakness in the used equipment market. 3. Sales of Equipment and Merchandise and Other Revenues. Our gross proﬁt margin from “sales of equipment and mer- chandise and other revenues” was 27.6% in 2002 and 27.1% in 2001. The increase in the gross proﬁt margin in 2002 primarily reﬂected better margins for our service revenue. S E L L I N G , G E N E R A L A N D A D M I N I S T R AT I V E E X PE N S E S SG&A was $438.9 million, or 15.6% of total revenues, in 2002 and $441.8 million, or 15.3% of total revenues, in 2001. Our bad debt expense, which is a component of SG&A, was approximately $9.5 million higher in 2002 than in 2001, primarily reﬂecting an increase in our allowance for doubtful accounts. Without this increase in bad debt expense, our SG&A as a percentage of revenues would have decreased to 15.2% of total revenues in 2002 from 15.6% in 2001. This decrease in SG&A, excluding the change in bad debt expense, primarily reﬂected our ongoing efforts at cutting costs, including reducing the number of administrative personnel, reducing discretionary expenditures and consolidating certain credit and collec- tion facilities. G O O DW I L L I M PA I R M E N T We recorded a goodwill impairment charge of $247.9 mil- lion in the fourth quarter of 2002. See “—Goodwill and Other Intangible Assets” for additional information. R E S T RU C T U R I N G C H A RG E We recorded a restructuring charge of $28.3 million in 2002 and $28.9 million in 2001. See “—Restructuring Plans in 2001 and 2002” for additional information. N O N - R E N TA L D E P R E C I AT I O N A N D A M O RT I Z AT I O N Non-rental depreciation and amortization was $59.3 mil- lion, or 2.1% of total revenues, in 2002 and $106.8 million, or 3.7% of total revenues, in 2001. This decrease was primarily attributable to a new accounting standard (see “—Goodwill and Other Intangible Assets”) which elimi- nated the amortization of goodwill effective January 1, 2002. If goodwill amortization had been eliminated in 2001, then non-rental depreciation and amortization would have been $48.5 million, or 1.7% of total revenues, in 2001. The increase in non-rental depreciation and 30 amortization in 2002 as compared to the amount in 2001, after eliminating goodwill amortization, primarily reﬂected an increase in our non-rental assets such as facilities and transportation equipment. O PE R AT I N G I N CO M E We recorded operating income of $111.9 million in 2002 compared with operating income of $462.0 million in 2001. The principal reason for the decrease in 2002 was the $247.9 million non-cash goodwill impairment charge that we recorded in 2002. However, after excluding that charge our operating income was still lower by approximately $102.2 million from the 2001 level. The principal reason for this decrease was the declines in revenues and gross proﬁt described above. The adverse effects of these factors were partially offset by the decrease in non-rental depreciation and amortization described above. I N T E R E S T E X PE N S E Interest expense decreased to $196.0 million in 2002 from $221.6 million in 2001. This decrease primarily reﬂected lower interest rates on our variable rate debt. P R E F E R R E D D I V I D E N D S O F A S U B S I D I A RY T RU S T Preferred dividends of a subsidiary trust were $18.2 million during 2002 as compared to $19.5 million during 2001. The decrease in 2002 reﬂects our repurchase of a portion of our outstanding trust preferred securities. OT H E R ( I N CO M E ) E X PE N S E Other income was $0.9 million in 2002 compared with other expense of $24.5 million in 2001. The other income in 2002 was primarily attributable to the favorable settle- ment of a lawsuit for net proceeds of $4.0 million, partially offset by other charges including the write-off of $1.6 mil- lion of deferred ﬁnancing fees as described above. The other expense in 2001 was primarily attributable to $25.9 million of charges relating to debt and other indebtedness reﬁnanc- ings. See “—Charges Related to Debt Reﬁnancings, Lease Buy-Outs and Notes Write-Off.” I N CO M E TA X E S Income taxes were $8.1 million in 2002 compared with $85.2 million in 2001. Although we had a loss in 2002, we recorded income tax expense because a portion of our $247.9 million goodwill impairment charge was not deductible for federal income tax purposes. If you exclude the goodwill impairment charge in calculating our income, then our effective tax rate in 2002 would have been 39.0% compared with 43.4% in 2001. The decrease in such effective rate in 2002 reﬂects the elimination of goodwill amortization in 2002 and the non-deductibility for income tax purposes of certain costs included in the 2001 restructuring charge. LO S S B E F O R E C U M U L AT I V E E F F E C T O F C H A N G E I N ACCO U N T I N G P R I N C I P L E We had a loss before cumulative effect of change in accounting principle of $109.5 million in 2002 compared with income before cumulative effect of change in account- ing principle of $111.3 million in 2001. The loss in 2002 principally reﬂects the decrease in operating income described above. C U M U L AT I V E E F F E C T O F C H A N G E I N ACCO U N T I N G P R I N C I P L E As described under “—Goodwill and Other Intangible Assets,” we recorded an amount of $288.3 million, net of tax, for impairment of goodwill as part of our transitional impairment test upon the adoption of SFAS No. 142. L I QU I D I T Y A N D C A PI TA L R E S O U RC E S R E C E N T F I N A N C I N G T R A N S AC T I O N S T R A N S AC T I O N S CO M P L E T E D I N T H E F O U RT H QUA RT E R O F 2 0 0 3 17⁄ 8% Convertible Senior Subordinated Notes. In October and December 2003, we sold $143.8 million aggregate principal amount of 17⁄8% Convertible Senior Subordinated Notes due October 15, 2023. We used substantially all of the net proceeds from the sale of these notes to buy out existing equipment leases. These notes were issued by United Rentals (North America), Inc. (“URI”), a wholly owned subsidiary of United Rentals, Inc. (“Holdings”), and guaranteed by Holdings. 7 3⁄4% Senior Subordinated Notes. In November 2003, we sold $525 million aggregate principal amount of 73⁄4% Senior Subordinated Notes due 2013. We used the net pro- ceeds from the sale of these notes to: (i) redeem or repur- chase $205 million face amount of our outstanding 8.8% Senior Subordinated Notes due 2008; (ii) redeem or repur- chase $200 million face amount of our outstanding 91⁄2% Senior Subordinated Notes due 2008; and (iii) buy out existing equipment leases. These notes were issued by URI and guaranteed by Holdings and, subject to limited excep- tions, our domestic subsidiaries. T R A N S AC T I O N S CO M P L E T E D I N 2 0 0 4 In the ﬁrst quarter of 2004, we reﬁnanced approximately $2.1 billion of our debt. The purpose of this reﬁnancing was to reduce our interest expense and extend the maturi- ties on a substantial amount of our debt. As part of this reﬁnancing, we: • obtained a new senior secured credit facility to replace the senior secured credit facility we previously had in place; • sold $1 billion of 61⁄2% Senior Notes due 2012; • sold $375 million of 7% Senior Subordinated Notes due 2014; • repaid $639 million of term loans and $52 million of borrowings that were outstanding under our old credit facility; • repurchased $845 million principal amount of our 103⁄4% Senior Notes due 2008, pursuant to a tender offer, for aggregate consideration of $970 million; • redeemed $300 million principal amount of our out- standing 91⁄4% Senior Subordinated Notes due 2009 at an aggregate redemption price of $314 million; and • called for redemption $250 million principal amount of our outstanding 9% Senior Subordinated Notes due 2009 at an aggregate redemption price of $261 million (with such redemption scheduled to be completed on April 1, 2004). The new notes described above were issued by URI and guaranteed by Holdings and, subject to limited exceptions, our domestic subsidiaries. The following table shows our actual debt at December 31, 2003 and such debt as adjusted for completion of the fore- going reﬁnancing: (in millions) Revolving credit facility . . . Term loan . . . . . . . . . . . . . . Receivables securitization . . 6.5% Senior notes . . . . . . . 7% Senior subordinated notes . . . . . 7.75% Senior $ Actual 52.6 639.0 — — As Adjusted Scheduled Maturity $ 147.4 750.0 February 2009 February 2011 — September 2006 February 2012 1,000.0 — 375.0 February 2014 subordinated notes . . . . . 525.0 525.0 November 2013 17⁄ 8% Convertible senior subordinated notes . . . . . 10.75% Senior notes . . . . . 9.25% Senior 143.8 860.9 143.8 15.2 October 2023 April 2008 subordinated notes . . . . . 300.0 9% Senior subordinated notes . . . . . Other debt . . . . . . . . . . . . . 250.0 45.8 — — 43.6 Total debt . . . . . . . . . . . . . . $2,817.1 $3,000.0 C E RTA I N A D D I T I O N A L I N F O R M AT I O N CO N C E R N I N G O U R N EW C R E D I T FAC I L I T Y Our new senior secured credit facility includes: (i) a $650 million revolving credit facility; (ii) a $150 million institu- tional letter of credit facility; and (iii) a $750 million term loan. The revolving credit facility, institutional letter of credit facility and term loan are governed by the same credit agreement. Set forth below is certain additional information concern- ing the revolving credit facility, institutional letter of credit facility and term loan. R EVO LV I N G C R E D I T FAC I L I T Y The revolving credit facility enables URI to borrow up to $650 million on a revolving basis and enables certain of our Canadian subsidiaries to borrow up to $150 million (pro- vided that the aggregate borrowings of URI and the Cana- dian subsidiaries may not exceed $650 million). A portion of the revolving credit facility, up to $250 million, is available in the form of letters of credit. The revolving credit facility is scheduled to mature and terminate in February 2009. I N S T I T U T I O N A L L E T T E R O F C R E D I T FAC I L I T Y ( “ I LC F ” ) The ILCF provides for up to $150 million in letters of credit. The ILCF is in addition to the letter of credit capac- ity under the revolving credit facility. The total combined letter of credit capacity under the revolving credit facility and the ILCF is $400 million. Subject to certain conditions, all or part of the ILCF may be converted into term loans. The ILCF is scheduled to terminate in February 2011. T E R M LOA N The term loan will be obtained in two draws. An initial draw of $550 million was obtained upon the closing of the credit 31 facility in February 2004, and an additional $200 million is expected to be obtained on April 1, 2004. Amounts repaid in respect of the term loan may not be reborrowed. The term loan must be repaid in installments as follows: (i) during the period from and including June 30, 2004 to and including March 31, 2010, URI must repay on each March 31, June 30, September 30 and December 31 of each year an amount equal to one-fourth of 1% of the original aggregate principal amount of the term loan; and (ii) URI must repay on each of June 30, 2010, September 30, 2010, December 31, 2010, and February 14, 2011 an amount equal to 23.5% of the original aggregate principal amount of the term loan. I N T E R E S T As of February 17, 2004, borrowings by URI under the revolving credit facility accrue interest, at URI’s option, at either (a) the ABR rate (which is equal to the greater of: (i) the Federal Funds Rate plus 0.5%; and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25%, or (b) an adjusted LIBOR rate plus a margin of 2.25%. The above interest rate margins are adjusted quarterly based on our Funded Debt to Cash Flow Ratio, up to the maximum mar- gins described in the preceding sentence and down to mini- mum margins of 0.75% and 1.75% for revolving loans based on the ABR rate and the adjusted LIBOR rate, respectively. As of February 17, 2004, Canadian dollar borrowings under the revolving credit facility accrue interest, at the borrower’s option, at either (a) the Canadian prime rate (which is equal to the greater of: (i) the CDOR rate plus 1% and (ii) JPMorgan Chase Bank, Toronto Branch’s prime rate) plus a margin of 1.25%; or (b) the B/A rate (which is equal to JPMorgan Chase Bank, Toronto Branch’s B/A rate) plus a margin of 2.25%. These above interest rate margins are adjusted quarterly based on our Funded Debt to Cash Flow Ratio, up to the maximum margins described in the pre- ceding sentence and down to minimum margins of 0.75% and 1.75% for revolving loans based on the Canadian prime rate and the B/A rate, respectively. URI is also required to pay the lenders a commitment fee equal to 0.5% per annum in respect of undrawn commit- ments under the revolving credit facility. As of February 17, 2004, borrowings under the term loan accrue interest, at URI’s option, at either (a) the ABR rate (which is equal to the greater of: (i) the Federal Funds Rate plus 0.5%; and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25%, or (b) an adjusted LIBOR rate plus a margin of 2.25% (which margins may be reduced to 1.00% and 2.00%, respectively, for certain periods based on our Funded Debt to Cash Flow Ratio). If at any time an event of default under the credit agree- ment exists, the interest rate applicable to each revolving loan and term loan will be based on the highest margins described above plus 2%. URI is also required to pay a fee at the rate of 0.10% per annum on the amount of the ILCF. In addition, URI is required to pay participation fees and fronting fees in respect of letters of credit. For letters of credit obtained 32 under the ILCF, these fees accrue at the rate of 2.25% and 0.25% per annum, respectively. C E RTA I N I N F O R M AT I O N CO N C E R N I N G R E C E I VA B L E S S E C U R I T I Z AT I O N We have an accounts receivable securitization facility under which one of our subsidiaries can borrow up to $250 mil- lion against a collateral pool of accounts receivable. The borrowings under this facility and the receivables in the collateral pool are included in the liabilities and assets, respectively, reﬂected on our consolidated balance sheet. However, such assets are only available to satisfy the obligations of the borrower subsidiary. Key terms of this facility include: • borrowings may be made only to the extent that the face amount of the receivables in the collateral pool exceeds the outstanding loans by a speciﬁed amount; • the facility is structured so that the receivables in the collateral pool are the lenders’ only source of repayment; • prior to expiration or early termination of the facility, amounts collected on the receivables may, subject to cer- tain conditions, be retained by the borrower, provided that the remaining receivables in the collateral pool are sufﬁcient to secure the then outstanding borrowings; and • after expiration or early termination of the facility, no new amounts will be advanced under the facility and collec- tions on the receivables securing the facility will be used to repay the outstanding borrowings. Outstanding borrowings under the facility generally accrue interest at the commercial paper rate plus 1%. However, after expiration or early termination of the facility, outstanding borrowings will accrue interest at 0.5% plus the greater of: (i) the prime rate; and (ii) the Federal Funds Rate plus 0.5%. We are also required to pay a commitment fee of 0.45% per annum in respect of undrawn commitments under the facil- ity. As of March 1, 2004 and December 31, 2003, there were no outstanding borrowings under this facility. The agreement governing this facility is scheduled to expire on September 30, 2006. However, the lenders under this facility, at their option, may terminate the facility earlier upon the occurrence of certain events, including: (i) the long-term senior secured debt rating of United Rentals (North America), Inc. or, subject to certain conditions, United Rentals, Inc., is downgraded to be at or below “B” by Standard & Poor’s Rating Services; (ii) the long-term senior unsecured debt rating of United Rentals (North America), Inc. or, subject to certain conditions, United Rentals, Inc., is downgraded to be at or below “CCC+” by Standard & Poor’s Rating Services; (iii) the long-term issuer rating of United Rentals (North America), Inc. or, subject to certain conditions, United Rentals, Inc., is downgraded to be at or below “Caa” by Moody’s Investors Service; (iv) the long-term senior implied rating of United Rentals (North America), Inc. or, subject to certain condi- tions, United Rentals, Inc., is downgraded to be at or below “B3” by Moody’s Investors Service; or (v) either Standard & Poor’s Rating Services or Moody’s Investors Service ceases to provide any such rating. C E RTA I N B A L A N C E S H E E T C H A N G E S The increase in rental equipment at December 31, 2003 as compared to December 31, 2002 was primarily attributable to the buy-out of equipment leases in 2003. The decrease in goodwill at December 31, 2003 as compared to Decem- ber 31, 2002 was attributable to the goodwill impairment recognized in 2003 as further described under “—Goodwill and Other Intangible Assets.” The increase in debt at December 31, 2003 as compared to December 31, 2002 was primarily attributable to the debt reﬁnancings in the fourth quarter of 2003 as further described under “—Liquidity and Capital Resources—Recent Financing Transactions.” The increase in subordinated convertible debentures, and corresponding decrease in company- obligated mandatorily redeemable convertible preferred securities of a subsidiary trust, at December 31, 2003 as compared to December 31, 2002 was due to the deconsoli- dation of a subsidiary trust as further described under “—Impact of Recently Issued Accounting Standards.” The decrease in retained earnings and stockholders’ equity at December 31, 2003 as compared to December 31, 2002, primarily reﬂects our net loss in 2003. S O U RC E S A N D U S E S O F C A S H During 2003, we: (i) generated cash from operations of $342.3 million; (ii) generated cash from the sale of rental equipment of $181.3 million; and (iii) obtained cash from borrowings, net of repayments and ﬁnancing costs, of approximately $257.4 million. Our cash ﬂow from opera- tions during 2003 was reduced by $88.3 million of cash charges related to our buy-out of equipment leases. We used cash during this period principally to: (i) purchase rental equipment of $335.9 million; (ii) buy-out equip- ment leases of $335.4 million (excluding the $88.3 million charge relating thereto described above); and (iii) purchase other property and equipment of $42.0 million. C A S H R E QU I R E M E N TS R E L AT E D TO O PE R AT I O N S Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment and borrowings available under our revolving credit facility and receivables securitization facility. As of March 1, 2004, we had $516.6 million of borrowing capacity available under our $650 million revolving credit facility (reﬂecting out- standing loans of approximately $92.1 million and out- standing letters of credit in the amount of approximately $41.3 million). We believe that our existing sources of cash will be sufﬁcient to support our existing operations over the next twelve months. We expect that our principal needs for cash relating to our existing operations over the next twelve months will be to fund: (i) operating activities and working capital; (ii) the purchase of rental equipment and inventory items offered for sale; (iii) payments due under operating leases; (iv) debt service; and (v) costs relating to our restructuring plans. We plan to fund such cash requirements relating to our existing operations from our existing sources of cash described above. In addition, we may seek additional ﬁnanc- ing through the securitization of some of our equipment or through the use of additional operating leases. For infor- mation on the scheduled principal payments coming due on our outstanding debt and on the payments coming due under our existing operating leases, see “—Certain Information Concerning Contractual Obligations.” The amount of our future capital expenditures will depend on a number of factors, including general economic condi- tions and growth prospects. Based on current conditions, we estimate that capital expenditures for the year 2004 will be approximately $575 million to $700 million for our existing operations. These expenditures are comprised of approximately: (i) $425 million to $450 million of expendi- tures to replace rental equipment sold; (ii) $100 million to $200 million of discretionary expenditures to increase the size of our rental ﬂeet; and (iii) $50 million of expenditures for the purchase of property and equipment. We expect that we will fund such expenditures from proceeds from the sale of used equipment, cash generated from operations and, if required, borrowings available under our revolving credit facility and receivables securitization facility. While emphasizing internal growth, we may also continue to expand through a disciplined acquisition program. We will consider potential transactions of varying sizes and may, on a selective basis, pursue acquisition or consolida- tion opportunities involving other public companies or large privately-held companies. We expect to pay for future acquisitions using cash, capital stock, notes and/or assump- tion of indebtedness. To the extent that our existing sources of cash described above are not sufﬁcient to fund such future acquisitions, we will require additional debt or equity ﬁnancing and, consequently, our indebtedness may increase or the ownership of existing stockholders may be diluted as we implement our growth strategy. 33 C E RTA I N I N F O R M AT I O N CO N C E R N I N G CO N T R AC T UA L O B L I G AT I O N S The table below provides certain information concerning the payments coming due under certain categories of our existing con- tractual obligations. The information is as of December 31, 2003, as adjusted to give effect to the $2.1 billion reﬁnancing that we completed in the ﬁrst quarter of 2004 as described under “—Liquidity and Capital Resources—Recent Financing Transactions.” (In thousands) Debt excluding capital leases(1) . . . . . . . . . . . . . . . . . Capital leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases(1): Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . Other equipment . . . . . . . . . . . . . . . . . . . . . . . . . Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities reﬂected on balance sheet in accordance with GAAP(2) . . . . . . . . . . . . 2004 $ 13,291 12,210 66,139 64,099 23,384 2005 7,720 9,750 $ 59,816 38,628 12,486 2006 7,500 5,733 $ 54,750 41,558 9,181 2007 2008 Thereafter Total $ 7,500 3,340 $22,700 944 $2,909,269 21 $2,967,980 31,998 50,237 18,304 5,080 40,449 8,737 3,272 102,966 4,523 382 374,357 175,849 53,785 221,550 221,550 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $179,123 $128,400 $118,722 $84,461 $76,102 $3,238,711 $3,825,519 (1) The payments due with respect to a period represent: (i) in the case of debt and capital leases, the scheduled principal payments due in such period; and (ii) in the case of operating leases, the minimum lease payments due in such period under non-cancelable operating leases plus the maximum potential guarantee amounts discussed below under “—Certain Information Concerning Off-Balance Sheet Arrangements.” (2) Represents subordinated convertible debentures. See note 11 to our notes to consolidated ﬁnancial statements included elsewhere in this report for further information. C E RTA I N I N F O R M AT I O N CO N C E R N I N G O F F - B A L A N C E S H E E T A R R A N G E M E N TS R E S T R I C T E D S TO C K We have granted to employees other than executive ofﬁcers and directors approximately 1,200,000 shares of restricted stock that contain the following provisions. The shares vest in 2004, 2005 or 2006 or earlier upon a change in control of the Company, death, disability, retirement or certain ter- minations of employment, and are subject to forfeiture prior to vesting on certain other terminations of employ- ment, the violation of non-compete provisions and certain other events. If a holder of restricted stock sells his stock and receives sales proceeds that are less than a speciﬁed guaranteed amount set forth in the grant instrument, we have agreed to pay the holder the shortfall between the amount received and such speciﬁed amount. However, the foregoing only applies to sales that are made within ﬁve trading days of the vesting date. The speciﬁed guaran- teed amounts are: (i) $15.17 per share with respect to approximately 500,000 shares scheduled to vest in 2004; (ii) $27.26 per share with respect to approximately 300,000 shares scheduled to vest in 2005; and (iii) $9.18 per share with respect to approximately 400,000 shares scheduled to vest in 2006. O PE R AT I N G L E A S E S We lease real estate, rental equipment and non-rental equipment under operating leases as a regular business activity. As part of many of our equipment operating leases, we guarantee that the value of the equipment at the end of the term will not be less than a speciﬁed projected residual value. The use of these guarantees helps to lower our monthly operating lease payments. We do not know at this time the extent to which the actual residual values may be less than the guaranteed residual values and, accordingly, cannot quantify the amount that we ultimately will be required to pay, if any, under these guarantees. However, under current circumstances we do not anticipate paying signiﬁcant amounts under these guarantees in the future. If the actual residual value for all equipment subject to such guarantees were to be zero, then our maximum potential 34 liability under these guarantees would be approximately $36.5 million. This potential liability was not reﬂected on our balance sheet as of December 31, 2003 or any prior date. For additional information concerning lease payment obligations under our operating leases, see “—Certain Information Concerning Contractual Obligations” above. C E RTA I N I N F O R M AT I O N CO N C E R N I N G S U B O R D I N AT E D CO N V E RT I B L E D E B E N T U R E S In August 1998, a subsidiary trust of United Rentals, Inc. sold six million shares of 61⁄2% Convertible Quarterly Income Preferred Securities (“Trust Preferred Securities”) for aggregate consideration of $300 million. The trust used the proceeds from the sale of the Trust Preferred Securities to purchase 61⁄2% subordinated convertible debentures due 2028 from Holdings which resulted in Holdings receiving all of the net proceeds of the sale. Upon the adoption as of December 31, 2003 of a recently issued accounting stan- dard, we deconsolidated the subsidiary trust that had issued the Trust Preferred Securities. As a result of such deconsolidation: (i) the Trust Preferred Securities were removed from our consolidated balance sheets at December 31, 2003; and (ii) the subordinated convertible debentures that we issued to the subsidiary trust, which previously had been eliminated in our consolidated balance sheets, were no longer eliminated in our consolidated balance sheets at December 31, 2003. However, the subordinated convert- ible debentures are reﬂected as a component of liabilities on the consolidated balance sheets at December 31, 2003, whereas the Trust Preferred Securities were reﬂected as a separate category prior to December 31, 2003. See “—Impact of Recently Issued Accounting Standards” and note 11 to our notes to consolidated ﬁnancial statements included elsewhere in this report. During 2003, the trust repurchased 100,000 of these shares for aggregate consider- ation of approximately $3.6 million, which represents a discount of approximately 29% relative to the aggregate liquidation preference of approximately $5.0 million. Dur- ing 2002, the trust repurchased 1,469,000 of these shares for aggregate consideration of approximately $38.1 million, which represents a discount of approximately 48% relative to the aggregate liquidation preference of approximately $73.5 million. conditions, competition or other factors; (viii) changes in interest rates applicable to our ﬂoating rate debt; and (ix) the possible need, from time to time, to take goodwill write-offs or special charges. R E L AT I O N S H I P B E T W E E N H O L D I N G S A N D U R I 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. Holdings provides certain services to URI in connection with its operations. These services principally include: (i) senior management services; (ii) ﬁnance and tax related services and support; (iii) information technology systems and support; (iv) acquisition related services; (v) legal services; and (vi) human resource support. In addition, Holdings leases certain equipment and real property that are made avail- able 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 URI. 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 made, and expects that it will in the future make, distributions to Holdings to, among other things, enable Holdings to pay interest on the convertible debentures that were issued to a subsidiary trust of Holdings as described above. The Trust Preferred Securities are the obligation of a sub- sidiary trust of Holdings and are not the obligation of URI. Historically, the dividends payable on these securities were reﬂected as an expense on the consolidated ﬁnancial state- ments of Holdings, but were not reﬂected as an expense on the consolidated ﬁnancial statements of URI. This is the principal reason for the difference in the historical net income (loss) reported on the consolidated ﬁnancial state- ments of URI and the net income (loss) reported on the consolidated ﬁnancial statements of Holdings. F LU C T UAT I O N S I N O PE R AT I N G R E S U LTS We expect that our revenues and operating results may ﬂuc- tuate from quarter to quarter or over the longer term due to a number of factors, including: (i) seasonal rental patterns of our customers, with rental activity tending to be lower in the winter; (ii) changes in general economic conditions in our markets, including changes in construction and indus- trial activities; (iii) the timing of acquisitions, new location openings and related expenditures; (iv) the effect of the integration of acquired businesses and start-up locations; (v) if we determine that a potential acquisition will not be consummated, the need to charge against earnings any expenditures relating to such acquisition (such as ﬁnancing commitment fees, merger and acquisition advisory fees and professional fees) previously capitalized; (vi) changes in the size of our rental ﬂeet or in the rate at which we sell our used equipment; (vii) changes in demand for our equip- ment or the prices thereof due to changes in economic ACCO U N T I N G F O R C E RTA I N E X PE N S E S R E L AT I N G TO P OT E N T I A L ACQU I S I T I O N S In accordance with accounting principles generally accepted in the United States, we capitalize 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 corpo- rate overhead, public affairs and other corporate services are expensed as incurred. Our policy is to charge against earnings any capitalized expenditures relating to any poten- tial or pending acquisition that we determine will not be consummated. There can be no assurance that in future periods we 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 our results of operations. S E A S O N A L I T Y Our business is seasonal with demand for our rental equip- ment tending to be lower in the winter months. The sea- sonality of our business is heightened because we offer for rent trafﬁc control equipment. Branches that rent a signiﬁ- cant amount of this type of equipment tend to generate most of their revenues and proﬁts in the second and third quarters of the year, slow down during the fourth quarter and operate at a loss during the ﬁrst quarter. I N F L AT I O N Although we cannot accurately anticipate the effect of inﬂation on our operations, we believe that inﬂation has not had, and is not likely in the foreseeable future to have, a material impact on our results of operations. However, as described above, cost increases have, from time to time, impacted our results. I M PAC T O F R E C E N T LY I S S U E D ACCO U N T I N G S TA N D A R D S In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This standard rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This stan- dard also rescinds SFAS No. 44, “Accounting for Intangi- ble Assets of Motor Carriers.” This standard amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsis- tency related to the required accounting for sale-leaseback transactions and certain lease modiﬁcations. This standard also amends other existing authoritative pronouncements 35 this standard did not otherwise have a material effect on our statements of ﬁnancial position or results of operations. In April 2003, the FASB issued SFAS No. 149, “Amend- ment of Statement 133 on Derivative Instruments and Hedging Activities.” This standard amends and clariﬁes ﬁnancial accounting and reporting for derivative instru- ments and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This standard is effective for contracts entered into or modiﬁed after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003. The provisions of this standard that relate to SFAS No. 133 Implementation Issues that have been effec- tive for ﬁscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of this standard regarding the provisions effective after June 30, 2003 did not have a material effect on our statements of ﬁnancial position or operations. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for how an issuer classiﬁes and measures certain ﬁnancial instruments with characteristics of both liabilities and equity. This standard requires that ﬁnancial instruments falling within the scope of this standard be classiﬁed as lia- bilities. This standard is effective for ﬁnancial instruments entered into or modiﬁed after May 31, 2003 and otherwise is effective with the ﬁrst interim period beginning after June 15, 2003. The adoption of this standard did not have a material effect on our statements of ﬁnancial position or results of operations. QUA N T I TAT I V E A N D QUA L I TAT I V E D I S C LO S U R E S A B O U T M A R K E T R I S K Our exposure to market risk primarily consists of: (i) inter- est rate risk associated with our variable rate debt; and (ii) foreign currency exchange rate risk primarily associated with our Canadian operations. I N T E R E S T R AT E R I S K We periodically utilize interest rate swap agreements to manage our interest costs and exposure to changes in interest rates. At December 31, 2003, we had swap agree- ments with an aggregate notional amount of $1,160 mil- lion. The effect of these agreements was to convert $1,160 million of our ﬁxed rate notes to ﬂoating rate instru- ments. The ﬁxed rate notes being converted consisted of: (i) $300 million of our 91⁄4% senior subordinated notes through 2009; (ii) $210 million of our December 2002 issued 103⁄4% senior notes through 2008; (iii) $200 million to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. We adopted this standard on January 1, 2003, and reclassiﬁed a pre-tax extraordinary loss of approximately $18.1 million recognized during the second quarter of 2001 to operating income. The adoption of the remaining provisions of SFAS No. 145 did not have a material effect on our consolidated ﬁnancial position or results of operations. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This standard provides alternative meth- ods of transition to the fair value method of accounting for stock-based employee compensation under SFAS No. 123, “Accounting for Stock-Based Compensation,” but does not require us to use the fair value method. This standard also amends certain disclosure requirements related to stock- based employee compensation. We adopted the disclosure portion of this standard as of December 31, 2002 and such adoption is reﬂected in note 2 to our consolidated ﬁnancial statements included elsewhere in this report. In January 2003, the FASB issued Interpretation No. 46 (“FIN 46,” revised December 2003), “Consolidation of Variable Interest Entities,” which addresses consolidation of variable interest entities (“VIEs”). FIN 46 requires a VIE to be consolidated by a parent company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A VIE is a corporation, partnership, trust or any other legal structure used for busi- ness purposes that either does not have equity investors with voting rights or has equity investors that do not pro- vide sufﬁcient ﬁnancial resources for the entity to support its activities. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. For entities created prior to February 1, 2003, the effective date of these requirements, which originally was July 1, 2003, had been deferred so as not to apply until the ﬁrst period ending after December 15, 2003. Upon adoption of this standard, as of December 31, 2003, we deconsolidated a subsidiary trust that had issued Trust Preferred Securities as described above. As a result of such deconsolidation: (i) the Trust Preferred Securities issued by our subsidiary trust, which had previously been reﬂected on our consoli- dated balance sheets, were removed from our consolidated balance sheets at December 31, 2003; and (ii) the subordi- nated convertible debentures that we issued to the sub- sidiary trust, which previously had been eliminated in our consolidated balance sheets, were no longer eliminated in our consolidated balance sheets at December 31, 2003. The carrying amount of the Trust Preferred Securities removed from the consolidated balance sheets was the same as the carrying amount of the subordinated convertible deben- tures added to the consolidated balance sheets. However, the subordinated convertible debentures are reﬂected as a component of liabilities on the consolidated balance sheets at December 31, 2003, whereas the Trust Preferred Securi- ties were reﬂected as a separate category prior to December 31, 2003. See note 11 to our consolidated ﬁnancial state- ments included elsewhere in this report. The adoption of 36 of our April 2003 issued 103⁄4% senior notes through 2008; (iv) $200 million of our 9% senior subordinated notes through 2009; and (v) $250 million of our 73⁄4% senior subordinated notes through 2013. At December 31, 2002, we had swap agreements with an aggregate notional amount of $500 million. The effect of some of these agree- ments was to limit the interest rate exposure to 9.5% on $200 million of our then outstanding term loan. The effect of the remainder of these agreements was to convert $300 million of our ﬁxed rate 91⁄4% notes to a ﬂoating rate instrument through 2009. Subsequent to December 31, 2003, we reﬁnanced a signiﬁcant portion of our indebtedness as described under “—Liquidity and Capital Resources—Recent Financing Transactions.” In connection with this reﬁnancing, we ter- minated certain of the swap agreements described above and entered into certain new swap agreements. As of March 1, 2004, we had swap agreements with an aggregate notional amount of $1,145 million. The effect of these agreements is to convert $1,145 million of our ﬁxed rate notes to ﬂoating rate instruments. The ﬁxed rate notes con- verted consist of: (i) $245 million of our 61⁄2% senior notes through 2012; (ii) $525 million of our 73⁄4% senior subordi- nated notes through 2013; and (iii) $375 million of our 7% senior subordinated notes through 2014. As of March 1, 2004, after giving effect to our interest rate swap agreements, we had an aggregate of $1,787.1 million of indebtedness that bears interest at variable rates. This debt includes, in addition to the $1,145.0 million of debt subject to the swap agreements described above: (i) all borrowings under our $650 million revolving credit facility ($92.1 mil- lion outstanding as of March 1, 2004); (ii) our term loan ($550.0 million outstanding as of March 1, 2004); and (iii) all borrowings under our $250 million accounts receiv- able securitization facility (none outstanding as of March 1, 2004). The weighted average interest rates applicable to our variable rate debt on March 1, 2004 were: (i) 4.6% for the revolving credit facility (represents the Canadian rate since the amount outstanding was Canadian borrowings); (ii) 3.4% for the term loan; and (iii) 3.9% for the debt sub- ject to our swap agreements. As of March 1, 2004, based upon the amount of our variable rate debt outstanding, after giving effect to our interest rate swap agreements, our annual earnings would decrease by approximately $10.9 million for each one percentage point increase in the interest rates applicable to our variable rate debt. The amount of our variable rate indebtedness may ﬂuctuate signiﬁcantly as a result of changes in the amount of indebtedness outstanding under our revolving credit facility and receivables securitiza- tion facility from time to time. For additional information concerning the terms of our variable rate debt, see note 9 to our notes to consolidated ﬁnancial statements included elsewhere in this report. C U R R E N C Y E XC H A N G E R I S K The functional currency for our Canadian operations is the Canadian dollar. As a result, our future earnings could be affected by ﬂuctuations in the exchange rate between the U.S. and Canadian dollars. Based upon the level of our Canadian operations during 2003 relative to the company as a whole, a 10% change in this exchange rate would not have a material impact on our earnings. In addition, we periodically enter into foreign exchange contracts to hedge our transaction exposures. We had no outstanding foreign exchange contracts as of December 31, 2003 and 2002. We do not engage in purchasing forward exchange contracts for speculative purposes. P R I C E R A N G E O F CO M M O N S TO C K Our common stock trades on the New York Stock Exchange under the symbol URI. The following table sets forth, for the periods indicated, the high and low composite stock sale prices for our common stock, as reported by the New York Stock Exchange. 2003: First Quarter . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . 2002: First Quarter . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . High Low $12.60 14.75 18.59 19.85 $30.83 28.87 19.40 10.86 $ 8.00 9.08 13.00 15.62 $19.30 20.80 8.40 5.88 As of March 1, 2004, there were approximately 541 holders of record of our common stock. We believe that the num- ber of beneﬁcial owners is substantially greater than the number of record holders, because a large portion of our common stock is held of record in broker “street names.” D I V I D E N D P O L I C Y We intend to retain all earnings for the foreseeable future for use in the operation and expansion of our business and, accordingly, we currently have no plans to pay dividends on our common stock. The payment of any future dividends will be determined by the Board of Directors in light of conditions then existing, including our earnings, ﬁnancial condition and capital requirements, restrictions in ﬁnanc- ing agreements, business conditions and other factors. Under the terms of certain agreements governing our outstanding indebtedness, we are prohibited or restricted from paying dividends on our common stock. In addition, under Delaware law, we are prohibited from paying any div- idends unless we have capital surplus or net proﬁts available for this purpose. 37 R E P O RT O F I N D E P E N D E N T AU D I T O R S Board of Directors United Rentals, Inc. We have audited the accompanying consolidated balance sheets of United Rentals, Inc. as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders’ equity, and cash ﬂows for each of the three years in the period ended December 31, 2003. These con- solidated ﬁnancial statements are the responsibility of the management of United Rentals, Inc. Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audits. We conducted our audits in accordance with auditing stan- dards generally accepted in the United States. Those stan- dards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes exam- ining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signif- icant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all material respects, the consolidated ﬁnancial position of United Rentals, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash ﬂows for each of the three years in the period ended December 31, 2003 in confor- mity with accounting principles generally accepted in the United States. As discussed in Notes 2 and 4 to the consolidated ﬁnancial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. MetroPark, New Jersey February 24, 2004 38 C O N S O L I D AT E D B A L A N C E S H E E T S (In thousands, except share data) A S S E TS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for doubtful accounts of $47,439 in 2003 and $48,542 in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L I A B I L I T I E S A N D S TO C K H O L D E R S ’ E QU I T Y Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Company-obligated mandatorily redeemable convertible preferred December 31 2003 2002 $ 79,449 $ 19,231 499,433 105,987 118,145 2,071,492 406,601 1,437,809 3,225 466,196 91,798 131,293 1,845,675 425,352 1,705,191 5,821 $4,722,141 $4,690,557 $ 150,796 2,817,088 221,550 165,052 226,780 3,581,266 $ 207,038 2,512,798 225,587 187,079 3,132,502 securities of a subsidiary trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,550 Stockholders’ equity: Preferred stock — $.01 par value, 5,000,000 shares authorized: Series C perpetual convertible preferred stock — $300,000 liquidation preference, 300,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series D perpetual convertible preferred stock — $150,000 liquidation preference, 150,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 Common stock — $.01 par value, 500,000,000 shares authorized, 77,150,277 shares issued and outstanding in 2003 and 76,657,521 in 2002 . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Accumulated deﬁcit) retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771 1,329,946 (25,646) (189,300) 25,099 1,140,875 3 2 765 1,341,290 (52,988) 69,281 (26,848) 1,331,505 $4,722,141 $4,690,557 See accompanying notes. 39 C O N S O L I D AT E D S TAT E M E N T S O F O P E R AT I O N S (In thousands, except per share amounts) 2003 2002 2001 Year Ended December 31 R EV E N U E S : Equipment rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of equipment and merchandise and other revenues . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CO S T O F R EV E N U E S : Cost of equipment rentals, excluding depreciation . . . . . . . . . . . . . . . . . . Depreciation of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of rental equipment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of equipment and merchandise sales and other operating costs . . . . Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-rental depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends of a subsidiary trust . . . . . . . . . . . . . . . . . . . . . . . . . . Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before provision for income taxes and cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . Provision (beneﬁt) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before cumulative effect of change in $2,177,462 181,282 508,492 2,867,236 1,192,638 332,610 121,998 372,022 2,019,268 847,968 451,347 296,873 69,300 30,448 209,328 14,590 133,051 $2,154,681 176,179 490,129 2,820,989 1,137,609 325,548 116,821 354,734 1,934,712 886,277 438,918 247,913 28,262 59,301 111,883 195,961 18,206 (900) (326,521) (67,940) (101,384) 8,102 $2,212,900 147,101 526,604 2,886,605 1,053,635 320,963 88,742 383,795 1,847,135 1,039,470 441,751 28,922 106,763 462,034 221,563 19,500 24,497 196,474 85,218 accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (258,581) (109,486) 111,256 Cumulative effect of change in accounting principle, net of tax beneﬁt of $60,529 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings (loss) per share — basic: Income (loss) available to common stockholders before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of change in accounting principle, net . . . . . . . . . . . Income (loss) available to common stockholders . . . . . . . . . . . . . . . . . . Earnings (loss) per share — diluted: Income (loss) available to common stockholders before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of change in accounting principle, net . . . . . . . . . . . Income (loss) available to common stockholders . . . . . . . . . . . . . . . . . . See accompanying notes. (288,339) $ (258,581) $ (397,825) $ 111,256 $(3.35) $(3.35) $(3.35) $(3.35) $(0.98) (3.80) $(4.78) $(0.98) (3.80) $(4.78) $1.54 $1.54 $1.18 $1.18 40 C O N S O L I D AT E D S TAT E M E N T S O F S T O C K H O L D E R S ’ E Q U I T Y Series C Perpetual Series D Perpetual Convertible Convertible Preferred Stock Preferred Stock (In thousands) Balance, December 31, 2000 . . . . . . . . . . . Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income: Foreign currency translation adjustments . . Cumulative effect on equity of adopting SFAS 133, net of tax of $1,784 . . . . . . . . Derivatives qualifying as hedges, net of tax of $3,212 . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . Issuance of common stock under deferred compensation plans . . . . . . . . . . . . . . . . Amortization of deferred compensation . . . Issuance of Series C perpetual convertible preferred stock . . . . . . . . . . . . . . . . . . . $3 Common Stock Number of Shares Amount Additional Paid-in Capital Deferred Compensation (Accumulated Deﬁcit) Retained Earnings Comprehensive Income (Loss) 71,066 $711 $ 765,529 $ 355,850 Accumulated Other Comprehensive Income (Loss) $ (6,947) 111,256 $ 111,256 (16,137) (16,137) (2,516) (2,516) (4,527) $ 88,076 (4,527) 2,928 29 61,941 $ (61,970) 6,176 Issuance of Series D perpetual convertible preferred stock . . . . . . . . . . . . . . . . . . . Issuance of common stock . . . . . . . . . . . . . Exercise of common stock options . . . . . . . Shares repurchased and retired . . . . . . . . . . Balance, December 31, 2001 . . . . . . . . . . . Comprehensive income (loss): Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income: Foreign currency translation adjustments . . Derivatives qualifying as hedges, net of tax of $999 . . . . . . . . . . . . . . . . . Comprehensive loss . . . . . . . . . . . . . . . . . . Issuance of common stock under deferred compensation plans . . . . . . . . . . . . . . . . Amortization of deferred compensation . . . Exercise of common stock options . . . . . . . Common stock repurchased and retired . . Convertible debt converted to common stock . . . . . . . . . . . . . . . . . . . . Liquidation preference in excess of amounts paid for Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust . . . . . . . . Balance, December 31, 2002 . . . . . . . . . . . Comprehensive income (loss): Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income: Foreign currency translation adjustments . . Derivatives qualifying as hedges, net of tax of $4,001 . . . . . . . . . . . . . . . . Comprehensive loss . . . . . . . . . . . . . . . . . . Issuance of common stock under deferred compensation plans, net of forfeitures . . Amortization of deferred compensation . . . Exercise of common stock options and warrants . . . . . . . . . . . . . . . . . . . . . Common stock issuances . . . . . . . . . . . . . . Tax effect of liquidation preference in excess of amounts paid for Company-obligated mandatorily redeemable preferred securities of a subsidiary previously repurchased . . Liquidation preference in excess of amounts paid for Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust . . . . . . . . Balance, December 31, 2003 . . . . . . . . . . . See accompanying notes. $2 3 2 3 715 (1,351) 73,361 8 (14) 734 286,734 143,667 50 10,409 (24,744) 1,243,586 (55,794) 467,106 (30,127) (397,825) $(397,825) 2,484 2,484 795 $(394,546) 795 469 3 8,634 (8,637) 11,443 3,736 (1,066) 37 (11) 77,768 (26,715) 157 2 2,678 3 2 76,657 765 35,339 1,341,290 (52,988) 69,281 (26,848) (258,581) $(258,581) 45,699 45,699 6,248 $(206,634) 6,248 342 105 46 4 2 (931) 927 26,415 1,309 500 (13,118) 896 $3 $2 77,150 $771 $1,329,946 $(25,646) $(189,300) $ 25,099 41 C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L OW S (In thousands) C A S H F LOW S F RO M O PE R AT I N G AC T I V I T I E S Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt reﬁnancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of a change in accounting principle, net of tax . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . C A S H F LOW S F RO M I N V E S T I N G AC T I V I T I E S Purchases of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . Buy-outs of equipment leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of other companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of contingent purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . In-process acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits on rental equipment purchases . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C A S H F LOW S F RO M F I N A N C I N G AC T I V I T I E S Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale—leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of ﬁnancing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from the exercise of common stock options, net of tax . . . . . . . . Shares repurchased and retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust repurchased and retired . . . . . . . . . . . . . Net cash provided by (used in) ﬁnancing activities . . . . . . . . . . . . . . . . . . Effect of foreign exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31 2003 2002 2001 $(258,581) $(397,825) $ 111,256 401,910 (59,284) 26,415 296,873 20,950 (70,237) (33,237) 10,817 21,159 (56,242) 41,763 342,306 (335,881) (42,044) 181,282 (335,376) (5,420) 384,850 (59,359) 11,443 2,497 247,913 288,339 5,871 (6,949) 21,189 8,353 2,252 9,335 517,909 (492,259) (38,599) 176,179 (172,583) (4,342) (4,644) 427,726 (58,359) 6,176 10,893 18,076 100,683 24,888 87,084 8,148 (58,713) 18,852 696,710 (449,770) (47,548) 147,101 (54,838) (2,103) (2,485) (537,439) (536,248) (409,643) 888,016 (613,855) (16,731) 1,102 (3,575) 254,957 394 60,218 19,231 508,316 (491,728) (6,197) 63,755 (26,726) (38,111) 9,309 935 (8,095) 27,326 2,053,467 (2,300,507) 12,435 (29,042) 10,417 (24,758) (277,988) (16,137) (7,058) 34,384 $ 79,449 $ 19,231 $ 27,326 42 C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L OW S ( C O N T I N U E D ) (In thousands) S U P P L E M E N TA L D I S C LO S U R E O F C A S H F LOW I N F O R M AT I O N Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S U P P L E M E N TA L S C H E D U L E O F N O N - C A S H I N V E S T I N G A N D F I N A N C I N G AC T I V I T I E S Conversion of operating leases to capital leases . . . . . . . . . . . . . . . . . . . . . Conversion of convertible debt to common stock . . . . . . . . . . . . . . . . . . . Issuances of common stock as non-cash compensation . . . . . . . . . . . . . . . The Company acquired the net assets and assumed certain liabilities of other companies as follows: Assets, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Amounts paid through issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . Due to seller and other payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes. Year Ended December 31 2003 2002 2001 $224,691 $ (2,974) $212,199 $ (1,454) $230,385 $ (30,799) $ 31,451 2,680 $ $ 500 $ 3,965 (50) $172,222 (4,705) 3,915 1,505 $ 5,420 167,517 5,066 $172,583 $ 21,465 (4,612) (600) 16,253 38,585 $ 54,838 43 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 1 . O RG A N I Z AT I O N A N D B A S I S O F P R E S E N TAT I O N United Rentals, Inc. (“Holdings” or the “Company”) is principally a holding company and conducts its operations primarily through its wholly owned subsidiary United Rentals (North America), Inc. (“URI”) and subsidiaries of URI. Holdings’ primary asset is its sole ownership of all issued and outstanding shares of common stock of URI. URI’s various credit agreements and debt instruments place restrictions on its ability to transfer funds to its shareholder. The Company rents a broad array of equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, home- owners and others in the United States, Canada and Mex- ico. In addition to renting equipment, the Company sells used rental equipment, acts as a dealer for new equipment and sells related merchandise and contractor supplies, parts and service. The nature of the Company’s business is such that short-term obligations are typically met by cash ﬂow generated from long-term assets. Therefore, the accompa- nying balance sheets are presented on an unclassiﬁed basis. The accompanying consolidated ﬁnancial statements include the accounts of the Company and its wholly owned subsidiaries. All signiﬁcant intercompany accounts and transactions have been eliminated. 2 . S U M M A RY O F S I G N I F I C A N T ACCO U N T I N G P O L I C I E S C A S H E QU I VA L E N TS The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents. A L LOWA N C E F O R D O U B T F U L ACCO U N TS The Company maintains an allowance for doubtful accounts. This allowance reﬂects the Company’s estimate of the amount of its receivables that it will be unable to collect. I N V E N TO RY Inventory consists of equipment, merchandise and con- tractor supplies, tools, parts, fuel and related supply items. Inventory is stated at the lower of cost or market and is net of a reserve for obsolescence and shrinkage of $5.5 mil- lion and $6.5 million at December 31, 2003 and 2002, respectively. Cost is determined, depending on the type of inventory, on either a weighted average or ﬁrst-in, ﬁrst-out method. 44 R E N TA L E QU I P M E N T Rental equipment is recorded at cost and depreciated over the estimated useful lives of the equipment using the straight-line method. The range of estimated useful lives for rental equipment is two to ten years. Rental equipment is depreciated to a salvage value of 0% to 10% of cost. Ordinary repair and maintenance costs are charged to operations as incurred. P RO PE RT Y A N D E QU I P M E N T Property and equipment are recorded at cost and depreci- ated over their estimated useful lives using the straight-line method. The range of estimated useful lives for property and equipment is two to thirty-nine years. Ordinary repair and maintenance costs are charged to operations as incurred. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining life of the lease, whichever is shorter. G O O DW I L L Goodwill consists of the excess of cost over the fair value of identiﬁable net assets of businesses acquired and was amor- tized on a straight-line basis over forty years prior to Janu- ary 1, 2002. Goodwill is no longer amortized, but is tested on at least an annual basis for impairment. See Note 4. OT H E R I N TA N G I B L E A S S E TS Other intangible assets consists of non-compete agree- ments. The non-compete agreements are amortized on a straight-line basis for periods ranging from three to eight years. LO N G - L I V E D A S S E TS Long-lived assets are recorded at the lower of amortized cost or fair value. As part of an ongoing review of the valua- tion of long-lived assets, the Company assesses the carrying value of such assets if facts and circumstances suggest they may be impaired. If this review indicates that the carrying value of these assets may not be recoverable, as determined by a nondiscounted cash ﬂow analysis over the remaining useful life, the carrying value would be reduced to its esti- mated fair value. There have been no impairments recog- nized in these ﬁnancial statements. D E R I VAT I V E F I N A N C I A L I N S T RU M E N TS Under SFAS No. 133, “Accounting for Derivative Instru- ments and Hedging Activities,” all derivatives are required to be recorded as assets or liabilities and measured at fair value. Gains or losses resulting from changes in the values of derivatives are recognized immediately or deferred, depending on the use of the derivative and whether or not it qualiﬁes as a hedge. Derivative ﬁnancial instruments are periodically used by the Company in the management of its interest rate and foreign currency exposures. Derivative ﬁnancial instruments are not used for trading purposes. T R A N S L AT I O N O F F O R E I G N C U R R E N C Y Assets and liabilities of the Company’s subsidiaries operat- ing outside the United States which account in a functional currency other than U.S. dollars are translated into U.S. dollars using exchange rates at the end of the year. Rev- enues and expenses are translated at average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of accu- mulated other comprehensive income (loss) within shareholders’ equity. FA I R VA LU E O F F I N A N C I A L I N S T RU M E N TS The carrying amounts reported in the balance sheets for accounts receivable, accounts payable, and accrued (In thousands) expenses and other liabilities approximate fair value due to the immediate to short-term maturity of these ﬁnancial instruments. The fair values of the revolving credit facility, term loan, and receivables securitization are determined using current interest rates for similar instruments as of December 31, 2003 and 2002 and approximate the carry- ing value of these ﬁnancial instruments due to the fact that the underlying instruments include provisions to adjust interest rates to approximate fair market value. The esti- mated fair value of the Company’s other ﬁnancial instru- ments at December 31, 2003 and 2002 are based upon available market information and are as follows: 2003 2002 Carrying Amount Fair Value Carrying Amount Fair Value Redeemable convertible preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior and senior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 221,550 2,079,684 45,779 $ 183,887 2,228,138 42,739 $ 226,550 $ 126,324 1,605,947 61,984 1,454,113 57,041 P R E F E R R E D S TO C K The Company issued Series A Perpetual Convertible Pre- ferred Stock (“Series A Preferred”) and Series B Perpetual Convertible Preferred Stock (“Series B Preferred”) in 1999 and included such preferred stock in stockholders’ equity. In July 2001, the SEC issued guidance to all public compa- nies as to when redeemable preferred stock may be classi- ﬁed as stockholders’ equity. This guidance indicates that preferred stock that would be subject to redemption on the occurrence of an event outside the control of the issuer may not be classiﬁed as equity and that the probability of the event occurring is not a factor to be considered. Under this guidance, the Series A Preferred and Series B Preferred would not be included in stockholders’ equity because this stock would be subject to mandatory redemption on a hostile change of control. On September 28, 2001, the Company entered into an agreement effecting the exchange of new Series C Perpetual Convertible Preferred Stock (“Series C Preferred”) for the Series A Preferred and new Series D Perpetual Convertible Preferred Stock (“Series D Preferred”) for the Series B Preferred (see Note 12). The Series C Preferred and Series D Preferred stock is not subject to mandatory redemption on a hostile change of control, and is classiﬁed as stockholders’ equity under the SEC guidance. The effect of the foregoing is that the Company’s perpetual convertible preferred stock is classiﬁed as stockholders’ equity as of September 28, 2001 and thereafter, but is clas- siﬁed outside of stockholders’ equity for earlier dates. Accordingly, the Company has restated the 2000 balance sheet to show its $430.8 million of perpetual convertible preferred stock under “Series A and B Preferred Stock” rather than under “Stockholders’ Equity.” The Company has also made a corresponding change to the related Con- solidated Statements of Stockholders’ Equity. In all other respects, the ﬁnancial statements remain unchanged, including total assets and liabilities, revenues, operating income, net income and earnings per share. R EV E N U E R E CO G N I T I O N Revenue related to the sale of equipment and merchandise is recognized at the time of delivery to, or pick-up by, the customer. Revenue related to equipment rental is recog- nized over the contract term. A DV E RT I S I N G E X PE N S E The Company advertises primarily through trade publica- tions and Yellow Pages. Advertising expense is recognized over the period of related beneﬁt. Advertising expense was $8.4 million, $7.8 million and $11.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. I N CO M E TA X E S The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between ﬁnancial statement and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not realized in future periods. U S E O F E S T I M AT E S The preparation of ﬁnancial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the ﬁnan- cial statements and accompanying notes. Signiﬁcant esti- mates include restructuring charges, allowance for doubtful accounts, useful lives for depreciation, goodwill and other asset impairments, deferred income taxes, claim reserves, loss contingencies and fair values of ﬁnancial instruments. Actual results could materially differ from those estimates. 45 CO N C E N T R AT I O N S O F C R E D I T R I S K Financial instruments that potentially subject the Com- pany to signiﬁcant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company maintains cash and cash equivalents with high quality ﬁnancial institutions. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base. The Company’s largest customer in 2003 represented less than 1% of total revenues and no single customer represented greater than 1% of total accounts receivable. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. S TO C K - B A S E D CO M PE N S AT I O N The Company accounts for its stock-based compensation arrangements using the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opin- ion No. 25, “Accounting for Stock Issued to Employees.” At December 31, 2003, the Company had six stock-based compensation plans (see Note 13). Since stock options are granted by the Company with exercise prices at or greater than the fair value of the shares at the date of grant, no compensation expense is recognized. Restricted stock awards granted by the Company are recognized as deferred compensation. The Company recognizes compensation expense related to these restricted stock awards over their vesting periods or earlier upon acceleration of vesting. Dur- ing 2003, the Company recognized increased amortization for the accelerated vesting of approximately 866,000 shares of restricted stock. The following table provides additional information related to the Company’s stock-based compen- sation arrangements for the years ended December 31, 2003, 2002 and 2001: (In thousands) 2003 2002 2001 December 31 Net income (loss), as reported . . Plus: Stock-based compensation expense included in reported net income (loss), net of tax . . Less: Stock-based compensation expense determined using the fair value method, net of tax . . . . . . . . . . . . . . . $(258,581) $(397,825) $111,256 20,281 6,980 3,613 (22,869) (11,402) (11,798) Pro forma net income (loss) . . . $(261,169) $(402,247) $103,071 Basic earnings (loss) available to common stockholders per share: As reported . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . Diluted earnings (loss) available to common stockholders per share: $(3.35) $(3.38) $(4.78) $(4.84) $1.54 $1.43 As reported . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . $(3.35) $(3.38) $(4.78) $(4.84) $1.18 $1.09 The weighted average fair value of options granted was $5.47, $5.57 and $7.34 during 2003, 2002 and 2001, respectively. The fair value is estimated on the date of grant using the Black-Scholes option pricing model which uses subjective assumptions which can materially affect fair value estimates and therefore does not necessarily provide 46 a single measure of fair value of options. The Company used a risk-free interest rate average of 1.81%, 2.01% and 3.74% in 2003, 2002 and 2001, respectively, a volatility fac- tor for the market price of the Company’s common stock of 63%, 66% and 49% in 2003, 2002 and 2001, respectively, and a weighted-average expected life of options of approxi- mately three years in 2003, 2002 and 2001. For purposes of these pro forma disclosures, the estimated fair value of options is amortized over the options’ vesting period. Since the number of options granted and their fair value may vary signiﬁcantly from year to year, the pro forma compen- sation expense in future years may be materially different. I N S U R A N C E The Company is insured for general liability, automobile liability, workers’ compensation, and group medical claims up to a speciﬁed claim and aggregate amounts (subject to deductibles per occurrence of $2 million for general liabil- ity, $2 million for workers’ compensation and $3 million for automobile liability). Insured losses subject to this deductible are accrued based upon the aggregate liability for reported claims incurred and an estimated liability for claims incurred but not reported. These liabilities are not discounted. I M PAC T O F R E C E N T LY I S S U E D ACCO U N T I N G S TA N D A R D S In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This standard rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This stan- dard also rescinds SFAS No. 44, “Accounting for Intangi- ble Assets of Motor Carriers.” This standard amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsis- tency related to the required accounting for sale-leaseback transactions and certain lease modiﬁcations. This standard also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted this standard on January 1, 2003, and reclassiﬁed a pre-tax extraordinary loss of approxi- mately $18.1 million recognized during the second quarter of 2001 to operating income. The adoption of the remain- ing provisions of SFAS No. 145 did not have a material effect on the Company’s consolidated ﬁnancial position or results of operations. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This standard provides alternative meth- ods of transition to the fair value method of accounting for stock-based employee compensation under SFAS No. 123, “Accounting for Stock-Based Compensation,” but does not require the Company to use the fair value method. This standard also amends certain disclosure requirements related to stock-based employee compensation. The Company adopted the disclosure portion of this standard as of December 31, 2002 and such adoption is reﬂected within this Note. In January 2003, the FASB issued Interpretation No. 46 (“FIN 46,” revised December 2003), “Consolidation of Variable Interest Entities,” which addresses consolidation of variable interest entities (“VIEs”). FIN 46 requires a VIE to be consolidated by a parent company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A VIE is a corporation, partnership, trust or any other legal structure used for busi- ness purposes that either does not have equity investors with voting rights or has equity investors that do not pro- vide sufﬁcient ﬁnancial resources for the entity to support its activities. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. For entities created prior to February 1, 2003, the effective date of these requirements, which originally was July 1, 2003, had been deferred so as not to apply until the ﬁrst period ending after December 15, 2003. Upon adoption of this standard, as of December 31, 2003, the Company deconsolidated a subsidiary trust that had issued convert- ible preferred securities. As a result of such deconsolidation: (i) the Company-obligated mandatorily redeemable con- vertible preferred securities of a subsidiary trust, which had previously been reﬂected on the Company’s consolidated balance sheets, were removed from its consolidated balance sheets at December 31, 2003; and (ii) the subordinated convertible debentures that were issued to the subsidiary trust, which previously had been eliminated in the Com- pany’s consolidated balance sheets, were no longer elimi- nated in its consolidated balance sheets at December 31, 2003. The carrying amount of the convertible preferred securities removed from the consolidated balance sheets was the same as the carrying amount of the subordinated convertible debentures added to the consolidated balance sheets. However, the subordinated convertible debentures are reﬂected as a component of liabilities on the consoli- dated balance sheets at December 31, 2003, whereas the convertible preferred securities were reﬂected as a separate category prior to December 31, 2003. See Note 11. The adoption of this standard did not otherwise have a material effect on the Company’s statements of ﬁnancial position or results of operations. In April 2003, the FASB issued SFAS No. 149, “Amend- ment of Statement 133 on Derivative Instruments and Hedging Activities.” This standard amends and clariﬁes ﬁnancial accounting and reporting for derivative instru- ments and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This standard is effective for contracts entered into or modiﬁed after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003. The provisions of this standard that relate to SFAS No. 133 Implementation Issues that have been effec- tive for ﬁscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of this standard regarding the provisions effective after June 30, 2003 did not have a material effect on the Company’s statements of ﬁnancial position or operations. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for how an issuer classiﬁes and measures certain ﬁnancial instruments with characteristics of both liabilities and equity. This standard requires that ﬁnancial instruments falling within the scope of this standard be classiﬁed as lia- bilities. This standard is effective for ﬁnancial instruments entered into or modiﬁed after May 31, 2003 and otherwise is effective with the ﬁrst interim period beginning after June 15, 2003. The adoption of this standard did not have a material effect on the Company’s statements of ﬁnancial position or results of operations. 3 . ACQU I S I T I O N S The acquisitions completed during the years ended December 31, 2003, 2002 and 2001 include one, two, and three acquisitions, respectively, 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 acquisition made in 2003 was insigniﬁcant to the Company’s operations. On June 30, 2002, the Company acquired 35 rental loca- tions from National Equipment Services, Inc. for initial consideration of approximately $111.6 million in cash, which was determined based primarily on the number of locations acquired and their ﬁnancial performance. The acquisition of these rental locations, which offer trench safety equipment rental, was made to complement the Company’s existing network of rental locations. The results of operations of the acquisitions are included in the Com- pany’s statement of operations as of the date of acquisition. The initial consideration paid by the Company for the other 2002 acquisition was approximately $45.9 million in cash. The Company estimates that approximately $93.1 million of goodwill related to the 2002 acquisitions will be deductible for tax purposes. The aggregate initial consideration paid by the Company for 2001 acquisitions that were accounted for as purchases was approximately $12.1 million and consisted of approxi- mately $11.5 million in cash and $0.6 million in seller notes. In addition, the Company repaid or assumed out- standing indebtedness in the aggregate amount of approxi- mately $4.9 million. The purchase prices for all acquisitions accounted for as purchases have been allocated to the assets acquired and liabilities assumed based on their respective fair values at their respective acquisition dates. Purchase price allocations are subject to change when additional information con- cerning asset and liability valuations are completed. The preliminary purchase price allocations that are subject to change primarily consist of rental and non-rental equip- ment valuations. These allocations are ﬁnalized within 12 months of the acquisition date and are not expected to result in signiﬁcant differences between the preliminary and ﬁnal allocations. 47 The Company completed its initial impairment analysis in the ﬁrst quarter of 2002 and recorded a non-cash charge of approximately $348.9 million ($288.3 million, net of tax). The charge associated with the initial impairment analysis is reﬂected on the Company’s statement of operations as a “Cumulative Effect of Change in Accounting Principle.” The Company completed subsequent impairment analyses in the fourth quarter of 2002 and fourth quarter of 2003 and recorded additional non-cash impairment charges. The additional charge in the fourth quarter of 2002 was approx- imately $247.9 million ($198.8 million, net of tax), and the additional charge in the fourth quarter of 2003 was approx- imately $296.9 million ($238.9 million, net of tax). These charges are reﬂected on the Company’s statement of opera- tions as “goodwill impairment.” The impairment charges recognized in 2003 and 2002 related to certain branches that decreased in value. The fac- tors that negatively affected the value of these branches included the following: (i) continued weakness in private non-residential construction spending which negatively affected the earnings of the Company’s branches; and (ii) to a lesser extent, operational weakness at some branches and increased competition for some branches. Fair values used in impairment testing were based upon valuation techniques using multiples of earnings and revenues. The Company is required to review its goodwill for further impairment at least annually. The Company tests for good- will impairment on a branch-by-branch basis rather than on an aggregate basis. This means that a goodwill write-off is required even if only one or a limited number of the Company’s branches has impairment as of the annual test- ing date or at any other date when an indicator of impair- ment may exist and even if there is no impairment for all the Company’s branches on an aggregate basis. In addition, the Company assesses impairment solely on the basis of recent historical performance and without reference to expected future performance. This means that, if the his- torical data for a branch indicates impairment, a goodwill write-off is required even when the Company believes that branch’s future performance will be signiﬁcantly better. The fact that the Company tests for impairment on a branch-by-branch basis and uses only historical ﬁnancial data in assessing impairment increases the likelihood that the Company will be required to take additional non-cash goodwill write-offs in the future, although it cannot quan- tify at this time the magnitude of any future write-offs. Future goodwill write-offs, if required, may have a material adverse effect on the Company’s results. The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the years ended December 31, 2002 and 2001 as though each acquisition described above was made on January 1, 2001. (In thousands, except per share data) 2002 2001 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before cumulative effect of $2,851,853 $3,000,196 change in accounting principle . . . . . . . . (108,871) 114,023 Basic earnings (loss) available to common stockholders before cumulative effect of change in accounting principle per share . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings (loss) available to common stockholders before cumulative effect of change in accounting principle per share . . . . . . . . . . . . . . . . . . . . . . . . . $(0.97) $1.58 $(0.97) $1.21 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. The acquisition made in 2003 had an insigniﬁcant impact on the Company’s pro forma results of operations for the year ended December 31, 2003. Therefore, pro forma results of operations for such year are not shown. 4 . G O O DW I L L A N D OT H E R I N TA N G I B L E A S S E TS Changes in the Company’s carrying amount of goodwill for 2003 are as follows: (In thousands) Balance at December 31, 2002 . . . . . . . . . . . . . . . . . . . . Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation and other adjustments . . . . Goodwill related to acquisitions . . . . . . . . . . . . . . . . . . . $1,705,191 (296,873) 26,985 2,506 Balance at December 31, 2003 . . . . . . . . . . . . . . . . . . . . $1,437,809 The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” issued by the Financial Accoun- tants Standards Board (“FASB”). Under this standard, goodwill, which was previously amortized over 40 years, is no longer amortized. The Company amortized approxi- mately $58.4 million of goodwill in 2001. The Company’s approximately $3.2 million of other intangible assets will continue to be amortized over their estimated useful lives. The Company is required to periodically review its goodwill for impairment. In general, this means that the Company must determine whether the fair value of the goodwill, calculated in accordance with applicable accounting standards, is at least equal to the recorded value shown on its balance sheet. If the fair value of the goodwill is less than the recorded value, the Company is required to write off the excess goodwill as an expense. 48 The reconciliation of previously reported net income and earnings per share to adjusted net income and earnings per share excluding goodwill amortization is as follows for the years ended December 31, 2003, 2002 and 2001: (In thousands, except per share data) Income (loss) before cumulative effect of change in accounting principle . . . . . . Goodwill amortization expense, net of tax . . . . . . . . . . . . . . . Adjusted income (loss) before cumulative effect of change in accounting principle . . . . Net income (loss) . . . . . . . . . . . Goodwill amortization expense, net of tax . . . . . . . . . . . . . . . 2003 2002 2001 $(258,581) $(109,486) $111,256 47,046 $(258,581) $(109,486) $158,302 $(258,581) $(397,825) $111,256 47,046 respectively. The weighted-average remaining period of amortization as of December 31, 2003 is approximately 14 months. As of December 31, 2003, estimated amortization expense of other intangible assets for each of the next ﬁve years is as follows: (In thousands) 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,653 867 490 95 83 37 $3,225 Adjusted net income (loss) . . . . $(258,581) $(397,825) $158,302 5 . R E S T RU C T U R I N G C H A RG E S Earnings (loss) per share—basic: Income (loss) available to common stockholders before cumulative effect of change in accounting principle . . . . Goodwill amortization expense, net of tax . . . . . . . . . . . . . . . Adjusted income (loss) available to common stockholders before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . Income (loss) available to common stockholders . . . . . Goodwill amortization expense, net of tax . . . . . . . . . . . . . . . Adjusted income (loss) available to common stockholders . . . Earnings (loss) per share—diluted: Income (loss) available to common stockholders before cumulative effect of change in accounting principle . . . . Goodwill amortization expense, net of tax . . . . . . . . . . . . . . . Adjusted income (loss) available to common stockholders before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . Income (loss) available to $(3.35) $(0.98) $1.54 0.65 $(3.35) $(0.98) $2.19 $(3.35) $(4.78) $1.54 0.65 $(3.35) $(4.78) $2.19 $(3.35) $(0.98) $1.18 0.49 $(3.35) $(0.98) $1.67 common stockholders . . . . . $(3.35) $(4.78) $1.18 Goodwill amortization expense, net of tax . . . . . . . . Adjusted income (loss) available to common stockholders . . . 0.49 $(3.35) $(4.78) $1.67 Other intangible assets consist of non-compete agreements and are amortized over periods ranging from three to eight years. The cost of other intangible assets and the related accumulated amortization as of December 31, 2003 were $18.2 million and $15.0 million, respectively, and as of December 31, 2002 were $17.0 million and $11.2 million, respectively. Amortization expense of other intangible assets was $4.2 million, $3.5 million and $3.2 million for the years ended December 31, 2003, 2002 and 2001, The Company adopted a restructuring plan in 2001 and a second restructuring plan in 2002 as described below. In connection with these plans, the Company recorded restructuring charges of $28.9 million in 2001 (including a non-cash component of approximately $10.9 million) and $28.3 million in the fourth quarter of 2002 (including a non-cash component of approximately $2.5 million). The 2001 plan involved the following principal elements: (i) 31 underperforming branches were closed or consoli- dated with other locations; (ii) ﬁve administrative ofﬁces were closed or consolidated with other locations; (iii) the reduction of the Company’s workforce by 489 through the termination of branch and administrative personnel; and (iv) certain information technology hardware and software was no longer used. The 2002 plan involved the following principal elements: (i) 40 underperforming branches and ﬁve administrative ofﬁces were closed or consolidated with other locations; (ii) the reduction of the Company’s workforce by 412 through the termination of branch and administrative personnel; and (iii) a certain information technology project was abandoned. The costs to vacate facilities primarily represent the pay- ment of obligations under leases offset by estimated sub- lease opportunities, the write-off of capital improvements made to such facilities and the write-off of related goodwill (only in 2001). The workforce reduction costs primarily represent severance. The information technology costs rep- resent the payment of obligations under equipment leases relating to the abandonment of certain information tech- nology projects. The aggregate balance of the 2001 and 2002 charges was $17.3 million as of December 31, 2003. The Company esti- mates that approximately $6.8 million of this amount will be incurred by December 31, 2004 and approximately $10.5 million in future periods. 49 Components of the restructuring charges are as follows: 9 . D E B T (In thousands) Balance Balance December 31, Activity in December 31, 2003 2003 2002 Costs to vacate facilities . . . Workforce reduction $22,258 $7,298 $14,960 costs . . . . . . . . . . . . . . . . 3,462 1,706 1,756 Information technology costs . . . . . . . . . . . . . . . . 1,395 782 613 $27,115 $9,786 $17,329 6 . R E N TA L E QU I P M E N T Rental equipment consists of the following: (In thousands) December 31 2003 2002 Rental equipment . . . . . . . . . . . . . . . . . . . . $2,957,506 Less accumulated depreciation . . . . . . . . . . (886,014) $2,682,258 (836,583) Rental equipment, net . . . . . . . . . . . . . . . . . $2,071,492 $1,845,675 7 . P RO PE RT Y A N D E QU I P M E N T Property and equipment consist of the following: (In thousands) December 31 2003 2002 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . Furniture and ﬁxtures . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . $ 48,975 103,613 290,533 45,337 76,616 74,651 $ 46,623 94,842 278,853 45,086 73,722 70,545 Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . (233,124) (184,319) Property and equipment, net . . . . . . . . . . . . $ 406,601 $ 425,352 639,725 609,671 8 . ACC RU E D E X PE N S E S A N D OT H E R L I A B I L I T I E S Accrued expenses and other liabilities consist of the following: (In thousands) December 31 2003 2002 Accrued incentive compensation . . . . . . . . . Accrued insurance . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . Restructuring accrual . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,808 46,188 48,866 17,329 18,656 68,933 $ 30,397 22,226 49,639 27,115 3,178 54,524 $226,780 $187,079 50 Debt consists of the following: (In thousands) Credit Facility, interest payable at a weighted average rate of 5.3% at December 31, 2003 and 2002 . . . . . . . . . $ Term Loan, interest payable at 4.2% and at 4.8% at December 31, 2003 and 2002, respectively . . . . . . . . . . . . . . . . . . 91⁄2% Senior Subordinated Notes, interest payable semi-annually . . . . . . . . . . . . . . . 8.8% Senior Subordinated Notes, interest payable semi-annually . . . . . . . . . . . . . . . 91⁄4% Senior Subordinated Notes, interest December 31 2003 2002 52,592 $ 45,332 639,033 639,033 200,000 202,153 payable semi-annually . . . . . . . . . . . . . . . 300,000 300,000 9% Senior Subordinated Notes, interest payable semi-annually . . . . . . . . . . . . . . . 250,000 250,000 73⁄4% Senior Subordinated Notes, interest payable semi-annually . . . . . . . . . . . . . . . 525,000 103⁄4% Senior Notes, interest payable semi-annually . . . . . . . . . . . . . . . . . . . . . 860,934 653,795 17⁄8% Convertible Senior Subordinated Notes, interest payable semi-annually . . . 143,750 Receivables securitization, interest payable at 2.2% at December 31, 2002 . . . . . . . . Other debt, including capital leases, interest payable at various rates ranging from 5% to 10% at December 31, 2003 and 2002, due through 2009 . . . . . . . . . 160,501 45,779 61,984 $2,817,088 $2,512,798 R E F I N A N C I N G T R A N S AC T I O N S Reﬁnancing Transaction in 2001. The Company reﬁnanced outstanding secured indebtedness of approximately $1,664.5 million and obligations under a synthetic lease of $31.2 million with proceeds from a new senior secured credit facility and the issuance of senior notes. As a result of the reﬁnancing, the Company recorded a charge of approx- imately $18.1 million ($11.3 million, net of tax), primarily related to the write-off of ﬁnancing fees and a charge of approximately $7.8 million related to reﬁnancing costs of the synthetic lease. These charges were recorded in “other (income) expense, net.” Reﬁnancing Transaction in 2002. The Company used net proceeds from the issuance of senior notes to: (i) repay approximately $99.7 million of outstanding indebtedness under the Company’s then existing term loan; and (ii) repay approximately $99.7 million of outstanding borrow- ings under the revolving credit facility. As a result of the reﬁnancing, the Company recorded in “other (income) expense” a charge of approximately $1.6 million ($0.9 million, net of tax) related to the write-off of ﬁnancing fees. Reﬁnancing Transactions in 2003. During the fourth quarter of 2003, the Company reﬁnanced $405 million of its debt and bought-out equipment leases. As part of these transac- tions, the Company: • sold approximately $144 million of 17⁄8% Convertible Senior Subordinated Notes Due 2023; • sold $525 million of 73⁄4% Senior Subordinated Notes Due 2013; • redeemed $205 million principal amount of the Company’s outstanding 8.8% Senior Subordinated Notes Due 2008 (the “8.8% Notes”); • redeemed $200 million principal amount of the Company’s outstanding 91⁄2% Senior Subordinated Notes Due 2008 (the “91⁄2% Notes”); and • paid approximately $347 million for the buy-out of equipment leases. As a result of the transactions discussed above, the Com- pany recorded in “other (income) expense” a charge of $28.9 million ($17.1 million, net of tax) in connection with the redemption of the notes and a charge of $95.1 million ($57.7 million, net of tax) in connection with the buy-out of equipment leases. The charge relating to the redemption of notes primarily reﬂects the redemption price premium and the write-off of ﬁnancing fees relating to such notes. The charge relating to the buy-out of equipment leases pri- marily reﬂects the excess of the buy-out price over the fair value of the equipment purchased, early termination fees and the write-off of ﬁnancing fees related to such leases. Reﬁnancing Transactions in First Quarter of 2004. During the ﬁrst quarter of 2004, the Company reﬁnanced approxi- mately $2.1 billion of its debt. As part of this reﬁnancing, the Company: • obtained a new senior secured credit facility to replace the senior secured credit facility the Company previously had in place; • sold $1 billion of 61⁄2% Senior Notes Due 2012; • sold $375 million of 7% Senior Subordinated Notes Due 2014; • repaid $639 million of term loans and $52 million of borrowings that were outstanding under the old credit facility; • repurchased $845 million principal amount of the Company’s 103⁄4% Senior Notes Due 2008 (the “103⁄4% Notes”), pursuant to a tender offer; • redeemed $300 million principal amount of the Company’s outstanding 91⁄4% Senior Subordinated Notes Due 2009 (the “91⁄4% Notes”); and • called for redemption $250 million principal amount of the Company’s outstanding 9% Senior Subordinated Notes Due 2009 (with such redemption scheduled to be completed on April 1, 2004). In connection with the reﬁnancings in the ﬁrst quarter of 2004, the Company will incur aggregate pre-tax charges in 2004 of approximately $175 million to $185 million attrib- utable to: (i) the redemption premium for notes redeemed as part of the reﬁnancing; and (ii) the write-off of previ- ously capitalized costs relating to the debt reﬁnanced. I N F O R M AT I O N CO N C E R N I N G D E B T O U TS TA N D I N G A S O F D E C E M B E R 3 1 , 2 0 0 3 17⁄ 8% Convertible Senior Subordinated Notes. In October and December 2003, URI issued approximately $144 mil- lion aggregate principal amount of 17⁄ 8% Convertible Senior Subordinated Notes (the “17⁄ 8% Convertible Notes”) which are due October 15, 2023. The net proceeds from the sale of the 17⁄ 8% Convertible Notes were approximately $140 million (after deducting the initial purchasers’ dis- count and offering expenses). The 17⁄ 8% Convertible Notes are unsecured and are guaranteed by Holdings. Holders of the 17⁄ 8% Convertible Notes may convert them into shares of Holdings’ common stock prior to their maturity at a conversion price of approximately $25.67 per share (subject to adjustment in certain circumstances), unless the 17⁄ 8% Convertible Notes have previously been redeemed or repur- chased, if: (i) the price of Holdings’ common stock reaches a speciﬁc threshold; (ii) the 17⁄ 8% Convertible Notes are called for redemption; (iii) speciﬁed corporate transactions occur or; (iv) the trading price of the 17⁄ 8% Convertible Notes falls below certain thresholds. The 17⁄ 8% Convertible Notes mature on October 15, 2023 and may be redeemed by URI on or after October 20, 2010, at 100.0% of the principal amount. Holders of the 17⁄ 8% Convertible Notes may require URI to repurchase all or a portion of the 17⁄ 8% Convertible Notes in cash on each of October 15, 2010, October 15, 2013 and October 15, 2018 at 100.0% of the principal amount of the 17⁄ 8% Convertible Notes to be repurchased. 7 3⁄4% Senior Subordinated Notes. In November 2003, URI issued $525 million aggregate principal amount of 73⁄4% Senior Subordinated Notes (the “73⁄4% Notes”) which are due November 15, 2013. The net proceeds from the sale of the 73⁄4% Notes were approximately $523 million (after deducting the initial purchasers’ discount and offering expenses). The 73⁄4% Notes are unsecured and are guaran- teed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries. The 73⁄4% Notes mature on Novem- ber 15, 2013 and may be redeemed by URI on or after November 15, 2008, at speciﬁed redemption prices that range from 103.875% in 2008 to 100.0% in 2011 and thereafter. In addition, on or prior to November 15, 2006, URI may, at its option, use the proceeds of a public equity offering to redeem up to 35% of the outstanding 73⁄4% Notes at a redemption price of 107.75%. The indenture governing the 73⁄4% Notes contains certain restrictive covenants, including limitations on: (i) additional indebt- edness; (ii) restricted payments; (iii) liens; (iv) dividends and other payments; (v) preferred stock of certain sub- sidiaries; (vi) transactions with afﬁliates; (vii) the disposi- tion of proceeds of asset sales; and (viii) the Company’s ability to consolidate, merge or sell all or substantially all of its assets. 10 3⁄4% Senior Notes. The Company issued an aggregate of $860 million principal amount of 103⁄4% Notes which are due April 15, 2008 in three separate transactions in 2001, 2002 and 2003. As part of the reﬁnancing transaction in the ﬁrst quarter of 2004, the Company repurchased through a tender offer substantially all of the 103⁄4% Notes and, as a result, only approximately $15 million principal amount of these notes were outstanding as of March 1, 2004. Other Senior Subordinated Notes. The 91⁄4% Senior Subordi- nated Notes and the 9% Senior Subordinated Notes shown in the debt table above were redeemed or called for redemption as part of the 2004 reﬁnancing described above and, as a result, are no longer outstanding. 51 Old Revolving Credit Facility. As of December 31, 2003, the Company had a revolving credit facility that enabled URI to borrow up to $650 million on a revolving basis and enabled one of its Canadian subsidiaries to borrow up to $100 million (provided that the aggregate borrowings of URI and the Canadian subsidiary did not exceed $650 million). Up to $250 million of the revolving credit facility was available in the form of letters of credit ($187 million outstanding as of December 31, 2003). This facility was repaid and replaced by a new facility in connection with the 2004 reﬁnancing described above. Old Term Loan. As of December 31, 2003, the Company had a $639 million term loan. This loan was repaid and replaced with a new term loan in connection with the 2004 reﬁnancing described above. Receivables Securitization. On June 17, 2003, the Company obtained a new accounts receivable securitization facility under which one of its subsidiaries can borrow up to $250 million based upon a qualifying collateral pool of accounts receivable. Upon obtaining this facility, the Company terminated its existing accounts receivable securitization facility. The borrowings under the new facility and the receivables in the collateral pool are included in the liabilities and assets, respectively, reﬂected on the Company’s consoli- dated balance sheet. However, such assets are only available to satisfy the obligations of the borrower subsidiary. Key terms of this facility include: • borrowings may be made only to the extent that the face amount of the receivables in the collateral pool exceeds the outstanding loans by a speciﬁed amount; • the facility is structured so that the receivables in the col- lateral pool are the lenders’ only source of repayment; • prior to expiration or early termination of the facility, amounts collected on the receivables may, subject to cer- tain conditions, be retained by the borrower, provided that the remaining receivables in the collateral pool are sufﬁcient to secure the then outstanding borrowings; and • after expiration or early termination of the facility, no new amounts will be advanced under the facility and collec- tions on the receivables securing the facility will be used to repay the outstanding borrowings. Outstanding borrowings under the facility generally accrue interest at the commercial paper rate plus 1%. However, after expiration or early termination of the facility, out- standing borrowings will accrue interest at 0.5% plus the greater of: (i) the prime rate; and (ii) the Federal Funds Rate plus 0.5%. The Company is also required to pay a commitment fee of 0.45% per annum in respect of undrawn commitments under the facility. As of December 31, 2003, there was no amount outstanding under the facility. As of December 31, 2002, the outstanding borrow- ings under the facility were approximately $160.5 million and the aggregate face amount of the receivables in the collateral pool was approximately $346.8 million. The agreement governing this facility is scheduled to expire on September 30, 2006. However, the lenders under this 52 facility, at their option, may terminate the facility earlier upon the occurrence of certain events, including: (i) the long-term senior secured debt rating of URI or, subject to certain conditions, Holdings, is downgraded to be at or below “B” by Standard & Poor’s Rating Services; (ii) the long-term senior unsecured debt rating of URI or, subject to certain conditions, Holdings, is downgraded to be at or below “CCC+” by Standard & Poor’s Rating Services; (iii) the long-term issuer rating of URI or, subject to certain conditions, Holdings, is downgraded to be at or below “Caa” by Moody’s Investors Service; (iv) the long-term senior implied rating of URI or, subject to certain condi- tions, Holdings, is downgraded to be at or below “B3” by Moody’s Investors Service; or (v) either Standard & Poor’s Rating Services or Moody’s Investors Service ceases to pro- vide any such rating. I N F O R M AT I O N CO N C E R N I N G D E B T I N C U R R E D S U B S E QU E N T TO D E C E M B E R 3 1 , 2 0 0 3 7% Senior Subordinated Notes. In January 2004 as part of the reﬁnancing in 2004 described above, URI issued $375 million aggregate principal amount of 7% Senior Subordinated Notes (the “7% Notes”) which are due Feb- ruary 15, 2014. The net proceeds from the sale of the 7% Notes were approximately $369 million (after deducting the initial purchasers’ discount and offering expenses). The 7% Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic sub- sidiaries. The 7% Notes mature on February 15, 2014 and may be redeemed by URI on or after February 15, 2009, at speciﬁed redemption prices that range from 103.5% in 2009 to 100.0% in 2012 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of a public equity offering to redeem up to 35% of the outstanding 7% Notes at a redemption price of 107.0%. The indenture governing the 7% Notes contains certain restrictive covenants, including limitations on: (i) additional indebtedness; (ii) restricted payments; (iii) liens; (iv) dividends and other payments; (v) preferred stock of certain subsidiaries; (vi) transactions with afﬁliates; (vii) the disposition of proceeds of asset sales; and (viii) the Company’s ability to consolidate, merge or sell all or substantially all of its assets. 6 1⁄2% Senior Notes. In February 2004 as part of the reﬁ- nancing in 2004 described above, URI issued $1 billion aggregate principal amount of 61⁄2% Senior Notes (the “61⁄2% Notes”) which are due February 15, 2012. The net proceeds from the sale of the 61⁄2% Notes were approxi- mately $984 million (after deducting the initial purchasers’ discount and offering expenses). The 61⁄2% Notes are unse- cured and are guaranteed by Holdings. The 61⁄2% Notes mature on February 15, 2012 and may be redeemed by URI on or after February 15, 2008, at speciﬁed redemption prices that range from 103.25% in 2008 to 100.0% in 2010 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of a public equity offering to redeem up to 35% of the outstanding 61⁄2% Notes at a redemption price of 106.5%. The inden- ture governing the 61⁄2% Notes contains certain restrictive covenants, including limitations on: (i) additional indebt- edness; (ii) restricted payments; (iii) liens; (iv) dividends and other payments; (v) preferred stock of certain sub- sidiaries; (vi) transactions with afﬁliates; (vii) the disposi- tion of proceeds of asset sales; (viii) the Company’s ability to consolidate, merge or sell all or substantially all of its assets; and (ix) sale-leaseback transactions. New Credit Facility. In the ﬁrst quarter of 2004, as part of the reﬁnancing in 2004 described above, the Company obtained a new senior secured credit facility. The new facil- ity includes: (i) a $650 million revolving credit facility; (ii) a $150 million institutional letter of credit facility; and (iii) a $750 million term loan. The revolving credit facility, institutional letter of credit facility and term loan are gov- erned by the same credit agreement. Set forth below is cer- tain additional information concerning the revolving credit facility, institutional letter of credit facility and term loan. Revolving Credit Facility. The revolving credit facility enables URI to borrow up to $650 million on a revolving basis and enables certain of the Company’s Canadian sub- sidiaries to borrow up to $150 million (provided that the aggregate borrowings of URI and the Canadian subsidiaries may not exceed $650 million). A portion of the revolving credit facility, up to $250 million, is available in the form of letters of credit. The revolving credit facility is scheduled to mature and terminate in February 2009. Institutional Letter of Credit Facility (“ILCF ”). The ILCF provides for up to $150 million in letters of credit. The ILCF is in addition to the letter of credit capacity under the revolving credit facility. The total combined letter of credit capacity under the revolving credit facility and the ILCF is $400 million. Subject to certain conditions, all or part of the ILCF may be converted into term loans. The ILCF is scheduled to terminate in February 2011. Term Loan. The term loan will be obtained in two draws. An initial draw of $550 million was obtained upon the closing of the credit facility in February 2004, and an addi- tional $200 million is expected to be obtained on April 1, 2004. Amounts repaid in respect of the term loan may not be reborrowed. The term loan must be repaid in installments as follows: (i) during the period from and including June 30, 2004 to and including March 31, 2010, URI must repay on each March 31, June 30, September 30 and December 31 of each year an amount equal to one-fourth of 1% of the origi- nal aggregate principal amount of the term loan; and (ii) URI must repay on each of June 30, 2010, September 30, 2010, December 31, 2010, and February 14, 2011 an amount equal to 23.5% of the original aggregate principal amount of the term loan. Interest. As of February 2004, borrowings by URI under the revolving credit facility accrue interest, at URI’s option, at either (a) the ABR rate (which is equal to the greater of: (i) the Federal Funds Rate plus 0.5%; and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25%, or (b) an adjusted LIBOR rate plus a margin of 2.25%. The above interest rate margins are adjusted quarterly based on the Company’s Funded Debt to Cash Flow Ratio, up to the maximum margins described in the preceding sentence and down to minimum margins of 0.75% and 1.75% for revolving loans based on the ABR rate and the adjusted LIBOR rate, respectively. As of February 2004, Canadian dollar borrowings under the revolving credit facility accrue interest, at the borrower’s option, at either (a) the Canadian prime rate (which is equal to the greater of: (i) the CDOR rate plus 1%; and (ii) JPMorgan Chase Bank, Toronto Branch’s prime rate) plus a margin of 1.25%, or (b) the B/A rate (which is equal to JPMorgan Chase Bank, Toronto Branch’s B/A rate) plus a margin of 2.25%. These above interest rate margins are adjusted quarterly based on the Company’s Funded Debt to Cash Flow Ratio, up to the maximum margins described in the preceding sentence and down to minimum margins of 0.75% and 1.75% for revolving loans based on the Canadian prime rate and the B/A rate, respectively. URI is also required to pay the lenders a commitment fee equal to 0.5% per annum in respect of undrawn commit- ments under the revolving credit facility. As of February 2004, borrowings under the term loan accrue interest, at URI’s option, at either (a) the ABR rate (which is equal to the greater of: (i) the Federal Funds Rate plus 0.5%; and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25%; or (b) an adjusted LIBOR rate plus a margin of 2.25% (which margins may be reduced to 1.00% and 2.00%, respectively, for certain periods based on the Company’s Funded Debt to Cash Flow Ratio). If at any time an event of default under the credit agree- ment exists, the interest rate applicable to each revolving loan and term loan will be based on the highest margins described above plus 2%. URI is required to pay a fee which accrues at the rate of 0.10% per annum on the amount of the ILCF. In addition, URI is required to pay participation fees and fronting fees in respect of letters of credit. For letters of credit obtained under the ILCF, these fees accrue at the rate of 2.25% and 0.25% per annum, respectively. Covenants. Under the agreement governing the Company’s senior secured credit facility, the Company is required to, among other things, satisfy certain ﬁnancial tests relating to: (i) interest coverage ratio; (ii) the ratio of funded debt to cash ﬂow; (iii) the ratio of senior secured debt to tangible assets; and (iv) the ratio of senior secured debt to cash ﬂow. If the Company is unable to satisfy any of these covenants, the lenders could elect to terminate the credit facility and require the Company to repay the outstanding borrowings under the credit facility. The Company is also subject to various other covenants under the agreements governing its credit facility and other indebtedness. These covenants limit or prohibit, among other things, the Company’s abil- ity to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, create liens, make acquisitions, sell assets and engage in mergers and acquisitions. Interest Rate Swap Agreements. As of December 31, 2003, the Company had outstanding interest rate swap agree- ments that converted $1,160 million of its ﬁxed rate notes to ﬂoating rate instruments. The ﬁxed rate notes being converted consisted of: (i) $300 million of 91⁄4% senior 53 subordinated notes through 2009; (ii) $210 million of December 2002 issued 103⁄4% senior notes through 2008; (iii) $200 million of April 2003 issued 103⁄4% senior notes through 2008; (iv) $200 million of 9% senior subordinated notes through 2009; and (v) $250 million of 73⁄4% senior subordinated notes through 2013. Subsequent to December 31, 2003, as part of the reﬁnanc- ing in 2004 described above, the Company terminated cer- tain of the swap agreements described above and entered into certain new swap agreements. As of March 1, 2004, the Company had swap agreements with an aggregate notional amount of $1,145 million. The effect of these agreements is to convert $1,145 million of the Company’s ﬁxed rate notes to ﬂoating rate instruments. The ﬁxed rate notes converted consist of: (i) $245 million of our 61⁄2% senior notes through 2012; (ii) $525 million of our 73⁄4% senior subordinated notes through 2013; and (iii) $375 million of our 7% senior subordinated notes through 2014. The Company’s swap agreements that convert its ﬁxed rate notes to ﬂoating rate instruments are designated as fair value hedges. Changes in the fair values of the Company’s fair value hedges, as well as the offsetting fair value changes in the hedged items, are recorded on the statement of operations. There is no ineffectiveness related to the Company’s hedges. Maturities. Maturities of the Company’s debt for each of the next ﬁve years and thereafter at December 31, 2003, as adjusted to give effect to the reﬁnancing transactions in the ﬁrst quarter of 2004 described above, are as follows: (In thousands) 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,501 17,470 13,233 10,840 23,644 2,909,290 54 1 0 . I N CO M E TA X E S The provision for federal, state and provincial income taxes is as follows: (In thousands) Domestic federal: Current . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . Domestic state: Current . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . Total domestic . . . . . . . . . . . . . Foreign federal: Current . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . Foreign provincial: Current Deferred . . . . . . . . . . . . . . . . Total foreign . . . . . . . . . . . . . . . Year Ended December 31 2003 2002 2001 $(58,423) $ 3,963 $75,180 (58,423) 3,963 75,180 419 (15,551) (15,132) (73,555) 1,878 2,277 4,155 1,460 1,460 5,615 1,057 (1,825) (768) 3,195 1,529 2,109 3,638 1,269 1,269 4,907 1,978 4,138 6,116 81,296 1,626 1,603 3,229 693 693 3,922 $(67,940) $ 8,102 $85,218 A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 35% to income before provision for income taxes and extraordinary item is as follows: Year Ended December 31 (In thousands) 2003 2002 2001 Computed tax at statutory tax rate . . . . . . . . . . . . . . . . . $(114,283) $(35,483) $68,737 State income taxes, net of federal tax beneﬁt . . . . . . . . . Non-deductible goodwill . . . . . Other . . . . . . . . . . . . . . . . . . . (9,835) 51,424 4,754 (499) 42,679 1,405 3,824 11,723 934 $ (67,940) $ 8,102 $85,218 The components of deferred income tax assets (liabilities) are as follows: (In thousands) Property and equipment . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . Reserves and allowances . . . . . . . . . . . . . . . Net operating loss and credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other December 31 2003 2002 $(572,437) 62,291 53,768 $(539,431) 32,799 57,057 280,585 10,741 221,905 2,083 $(165,052) $(225,587) The deferred tax assets and liabilities at December 31, 2003 include the effects of certain reclassiﬁcations related to dif- ferences between the income tax provisions and tax returns for prior years. These reclassiﬁcations had no effect on net income. In addition to the deferred tax liabilities described above, the Company has reserves for certain tax-related matters resulting from its acquisitions. For ﬁnancial reporting purposes, income before income taxes and cumulative effect of change in accounting princi- ple for the Company’s foreign subsidiaries was $5.1 million, $9.2 million and $8.6 million for the years ended Decem- ber 31, 2003, 2002 and 2001, respectively. At December 31, 2003 and 2002, unremitted earnings (deﬁcit) of foreign subsidiaries were approximately $(2.2) million and $(1.7) million, respectively. Since it is the Company’s intention to indeﬁnitely reinvest these earnings, no United States taxes have been provided. Determination of the amount of unrecognized deferred tax liability on these unremitted taxes is not practicable. The Company has net operating loss carryforwards (“NOLs”) of $635 million for federal income tax purposes that expire through 2023. The Company has not recorded a valuation allowance against its deferred tax assets because it is deemed likely that such beneﬁt will be realized in the future. 1 1 . S U B O R D I N AT E D CO N V E RT I B L E D E B E N T U R E S In August 1998, a subsidiary trust (the “Trust”) of Hold- ings issued and sold in a private offering (the “Preferred Securities Offering”) $300 million of 30 year, 61⁄2% Con- vertible Quarterly Income Preferred Securities (the “Pre- ferred Securities”). The Trust used the proceeds from the Preferred Securities Offering to purchase 61⁄2% convertible subordinated debentures due 2028 (the “Debentures”) from Holdings which resulted in Holdings receiving all of the net proceeds of the Preferred Securities Offering. Hold- ings in turn contributed the net proceeds of the Preferred Securities Offering to URI. The Preferred Securities are non-voting securities, carry a liquidation value of $50 per security and are convertible into the Company’s common stock at an initial rate of 1.146 shares per security (equiva- lent to an initial conversion price of $43.63 per share). They are convertible at any time at the holders’ option and are redeemable, at the Company’s option, after three years, subject to certain conditions. Holders of the Preferred Securities are entitled to preferen- tial cumulative cash distributions from the Trust at an annual rate of 61⁄2% of the liquidation value, accruing from the original issue date and payable quarterly in arrears beginning February 1, 1999. The distribution rate and dates correspond to the interest rate and payment dates on the Debentures. Holdings may defer interest payments on the Debentures for up to twenty consecutive quarters, but not beyond the maturity date of the Debentures. If interest payments on the Debentures are deferred, so are the pay- ments on the Preferred Securities. Under this circum- stance, Holdings will be prohibited from paying dividends on any of its capital stock or making payments with respect to its debt that rank pari passu with or junior to the Debentures. In accordance with FIN 46, the Company is considered to hold a variable interest in the Trust. Since no one party holds a majority of the Preferred Securities, the Company is not deemed to be the primary beneﬁciary. Additionally, the Trust’s common stock equity held by the Company would not be considered at risk and therefore, the common stock equity would not absorb any expected losses of the Trust. Accordingly, the Company does not have a signiﬁcant vari- able interest in the Trust. Therefore, as of December 31, 2003, the Company deconsolidated the Trust upon adop- tion of FIN 46 thereby removing the amount previously recorded as Company-obligated mandatorily redeemable securities of a subsidiary trust and no longer eliminating the Debentures, the result of which is recognition of subor- dinated convertible debentures as a component of the Company’s liabilities. As of December 31, 2003, upon the deconsolidation of the Trust, the Company had recorded on its balance sheets, in prepaid expenses and other assets, an investment in the Trust of approximately $8.2 million. Holdings has executed a guarantee with regard to payment of the Preferred Securities to the extent that the Trust has insufﬁcient funds to make the required payments. 1 2 . S E R I E S A , B , C A N D D P R E F E R R E D S TO C K S E R I E S A P R E F E R R E D A N D S E R I E S B P R E F E R R E D The Company sold 300,000 shares of its Series A Preferred on January 7, 1999 and sold 150,000 shares of its Series B Preferred on September 30, 1999. On September 28, 2001, the Company entered into an agreement effecting: (i) the exchange of the outstanding Series A Preferred for an equal number of shares of Series C Preferred; and (ii) the exchange of the outstanding Series B Preferred for an equal number of shares of Series D Preferred. S E R I E S C P R E F E R R E D A N D S E R I E S D P R E F E R R E D There are 300,000 shares of the Company’s Series C Pre- ferred outstanding and 150,000 shares of the Company’s Series D Preferred outstanding. The Series D Preferred includes 105,252 shares designated as Class D-l and 44,748 shares designated as Class D-2. The rights of the two classes of Series D Preferred are substantially the same, except that only the Class D-l has the voting rights described below. Principal terms of the Series C Preferred and Series D Pre- ferred include the following (subject to the special provi- sions described below that will apply in the event of certain Non-Approved Change of Control transactions): (i) each share is entitled to a liquidation preference of $1,000 per share; (ii) at holder’s option, each share of Series C Pre- ferred is convertible into 40 shares of common stock sub- ject to adjustment (representing a conversion price of $25 per share based on the liquidation preference) and each share of Series D Preferred is convertible into 331⁄3 shares of common stock subject to adjustment (representing a con- version price of $30 per share based on the liquidation pref- erence); (iii) the holders of the Series C Preferred and Series D Preferred (on an as-converted basis) and the holders of the common stock vote together as a single class on all mat- ters (except that the Series C Preferred may vote as a sepa- rate class as described in the next clause); (iv) the holders of the Series C Preferred, voting separately as a single class, may elect two directors (subject to reduction to one, if the shares of Series C Preferred owned by speciﬁed holders cease to represent, on an as-converted basis, at least eight 55 1 3 . C A PI TA L S TO C K WA R R A N TS As of December 31, 2003 there were outstanding warrants to purchase an aggregate of 7,037,154 shares of common stock. The weighted average exercise price of the warrants is $11.78 per share. The warrants may be exercised through 2011 and there were 7,033,754 warrants exercisable as of December 31, 2003. CO M M O N S TO C K R E P U RC H A S E P RO G R A M The Board has authorized a repurchase program under which the Company may, from time to time, repurchase shares of its common stock or securities convertible into its common stock. Under this program, the Company was given authority to make up to $200 million of purchases, during the period from May 2000 to May 2003, and up to $200 million of additional purchases, during the period from May 2003 to March 2005. Pursuant to this program, the Company: (i) during 2001, repurchased and retired 1,350,600 shares of common stock at an aggregate cost of approximately $24.8 million; (ii) during 2002, repurchased and retired 1,066,641 shares of common stock and repur- chased 1,469,000 shares of its Preferred Securities at an aggregate cost of approximately $64.8 million for all the 2002 repurchases; and (iii) during 2003, repurchased 100,000 shares of its Preferred Securities at an aggregate cost of approximately $3.6 million. 2 0 0 1 S E N I O R S TO C K P L A N In June 2001, the Company’s shareholders approved the adoption of the 2001 Senior Stock Plan. This plan provides for the awarding of common stock and other equity-linked awards to our ofﬁcers, directors and a limited number of key employees. The maximum number of shares of com- mon stock that can be issued under the plan is 4,000,000. The Company records each share that is awarded under this plan at an amount not less than 100% of the fair mar- ket value per share at the date of the award. No shares may be awarded under this plan after June 5, 2011. As of December 31, 2003, 2,026,592 shares had been awarded under this plan at a weighted-average price of $23.79 per share with vesting periods up to ten years. Determinations concerning the persons to receive awards, the form, amount and timing of such awards and terms and provisions of such awards are made by the Board (or a committee appointed by the Board). 2 0 0 1 S TO C K P L A N In March 2001, the Company adopted the 2001 Stock Plan. This plan provides for the awarding of common stock and other equity-linked awards to certain employees (other than ofﬁcers and directors) and others who render services to the Company. The maximum number of shares of com- mon stock that can be issued under the plan is 2,000,000. The Company records each share that is awarded under this plan at an amount not less than 100% of the fair mar- ket value per share at the date of the award. No shares may million shares of common stock, and reduction to zero, if such shares of Series C Preferred cease to represent at least four million shares of common stock); (v) there are no stated dividends on the Series C Preferred or Series D Pre- ferred, but the Series C Preferred and Series D Preferred, on an as converted basis, will participate in any dividends declared on the common stock; (vi) upon the occurrence of speciﬁed change of control transactions, other than a Non- Approved Change of Control (as deﬁned below), the Com- pany must offer to redeem the Series C Preferred and Series D Preferred at a price per share equal to the liquidation preference plus an amount equal to 6.25% of the liquida- tion preference compounded annually from the date of the issuance of the Series A Preferred, in the case of the Series C Preferred, and the date of the issuance of the Series B Preferred, in the case of the Series D Preferred, to the redemption date; (vii) if the Company issues for cash com- mon stock (or a series of preferred stock convertible into common stock) and the price for the common stock is below the conversion price of the Series C Preferred, then the Company must offer to repurchase a speciﬁed portion of the outstanding Series C Preferred at the price per share set forth in the preceding clause; and (viii) if the Company issues for cash common stock (or a series of preferred stock convertible into common stock) for a price for the common stock below the conversion price of the Series D Preferred, then the Company must offer to repurchase a speciﬁed por- tion of the outstanding Series D Preferred at the price per share speciﬁed in the second preceding clause. S PE C I A L R I G H TS O F S E R I E S C P R E F E R R E D A N D S E R I E S D P R E F E R R E D U P O N N O N - A P P ROV E D C H A N G E O F CO N T RO L In general, a Non-Approved Change of Control transaction is a change of control transaction that the Board of Direc- tors (the “Board”) has disapproved and which the Board has not facilitated by such actions as weakening or elimi- nating the Company’s Stockholder Rights Plan. If a Non- Approved Change of Control occurs, and the Board does not offer the holders of the Series C Preferred and Series D Preferred essentially the same redemption rights that apply to an Approved Change of Control transaction: (i) the holders of the Series C Preferred would elect a majority of the Board for a speciﬁed period; (ii) the holders of the Series C Preferred and Series D Preferred would be entitled to an additional 6.25% return on the liquidation prefer- ence, compounded annually from January 1999 for the Series C Preferred and from September 1999 for the Series D Preferred; (iii) after the holders of the common stock receive an amount equivalent to the liquidation preference, the holders of the Series C Preferred and Series D Preferred would share with the holders of the common stock, on an as converted basis, in any remaining amounts available for distribution; and (iv) the Series C Preferred and Series D Preferred would accrue dividends at a maximum annual rate, compounded annually, equal to 18% of the liquida- tion preference. 56 be awarded under this plan after March 23, 2011. As of December 31, 2003, 1,712,677 shares had been awarded under this plan at a weighted-average price of $15.26 per share with vesting periods up to three and one-half years. Determinations concerning the persons to receive awards, the form, amount and timing of such awards and terms and provisions of such awards are made by the Board (or a committee appointed by the Board). The Company records the issuance of common shares under the 2001 Senior Stock Plan and the 2001 Stock Plan at the quoted market price on the date of the grants. Amortization of deferred compensation is then recognized on a straight-line basis over the related vesting period. Amortization expense recognized for the years ended December 31, 2003 and 2002 for the awards of the above stock plans was approximately $26.4 million and $11.4 million, respectively. 1 9 9 7 S TO C K O P T I O N P L A N The Company’s 1997 Stock Option Plan provides for the granting of options to purchase not more than an aggregate of 5,000,000 shares of common stock. Some or all of such options may be “incentive stock options” within the mean- ing of the Internal Revenue Code. All ofﬁcers, directors and employees of the Company and other persons who perform services on behalf of the Company are eligible to partici- pate in this plan. Each option granted pursuant to this plan must provide for an exercise price per share that is at least equal to the fair market value per share of common stock on the date of grant. No options may be granted under this plan after August 31, 2007. As of December 31, 2003 and 2002, options to purchase an aggregate of 3,932,130 shares and 4,033,030 shares of common stock, respectively, were outstanding under this plan. The exercise price of each option, the period during which each option may be exer- cised and other terms and conditions of each option are determined by the Board (or by a committee appointed by the Board). 1 9 9 8 S TO C K O P T I O N P L A N The Company’s 1998 Stock Option Plan provides for the granting of options to purchase not more than an aggregate of 4,200,000 shares of common stock. Some or all of the options issued under the 1998 Stock Option Plan may be “incentive stock options” within the meaning of the Inter- nal Revenue Code. All ofﬁcers, directors and a limited number of key employees of the Company and its sub- sidiaries are eligible to participate in the 1998 Stock Option Plan. Each option granted pursuant to the 1998 Stock Option Plan must provide for an exercise price per share that is at least equal to the fair market value per share of common stock on the date of grant. No options may be granted under the 1998 Stock Option Plan after August 20, 2008. As of December 31, 2003 and 2002, options to pur- chase an aggregate of 2,250,000 shares were outstanding pursuant to this plan to executive ofﬁcers and directors. The exercise price of each option, the period during which each option may be exercised and other terms and condi- tions of each option are determined by the Board (or by a committee appointed by the Board). 1 9 9 8 S U P P L E M E N TA L S TO C K O P T I O N P L A N The Company has adopted a stock option plan pursuant to which options, for up to an aggregate of 5,600,000 shares of common stock, may be granted to employees who are not ofﬁcers or directors and to consultants and indepen- dent contractors who perform services for the Company or its subsidiaries. As of December 31, 2003 and 2002, options to purchase an aggregate of 4,519,421 shares and 4,752,565 shares of common stock, respectively, were out- standing pursuant to this plan. The exercise price of each option, the period during which each option may be exer- cised and other terms and conditions of each option are determined by the Board (or by a committee appointed by the Board). 1 9 9 7 PE R F O R M A N C E AWA R D P L A N Effective February 20, 1997, US Rentals adopted the 1997 Performance Award Plan under which stock options and other awards could be granted to key employees and direc- tors at prices and terms established by US Rentals at the date of grant. The options expire in 2007. As a result of the Company’s merger with US Rentals, all outstanding options to purchase shares of US Rentals common stock became fully vested and were converted into options to purchase the Company’s common stock. As of December 31, 2003 and 2002, options to purchase an aggregate of 1,561,123 shares were outstanding pursuant to this plan. A summary of the transactions within the Company’s stock option plans follows here and on the next page: Outstanding at December 31, 2000 . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2001 . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2002 . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted Average Exercise Price $20.23 19.78 14.24 23.94 20.22 11.94 17.32 25.03 20.20 12.31 12.46 23.16 Shares 17,096,095 633,400 (715,143) (592,338) 16,422,014 722,550 (3,735,666) (812,180) 12,596,718 85,200 (94,446) (324,798) Outstanding at December 31, 2003 . . . . . . 12,262,674 $20.05 Exercisable at December 31, 2003 . . . . . . . . 11,416,784 $20.49 57 Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life 7.5 years 5.3 years 6.4 years 5.9 years 5.2 years 4.7 years 5.7 years Weighted Average Exercise Price $ 9.69 12.72 16.38 21.74 27.33 35.20 20.05 Weighted Average Exercise Price $ 9.84 12.68 16.47 21.72 27.29 35.20 20.49 Amount Exercisable 243,406 2,485,034 1,587,234 4,994,180 1,107,681 999,249 11,416,784 Amount Outstanding 567,854 2,667,479 1,820,434 5,058,478 1,149,180 999,249 12,262,674 1 4 . ACC U M U L AT E D OT H E R CO M P R E H E N S I V E I N CO M E The following table sets forth the components of the Com- pany’s accumulated other comprehensive income (loss): Foreign Accumulated Currency Derivatives Other Com- prehensive Income/(Loss) Translation Qualifying as Hedges Adjustments (In thousands) Balance at December 31, 2000 . . . . . . $ (6,947) (16,137) 2001 activity . . . . . . . . . . . . . . $(7,043) $ (6,947) (23,180) Balance at December 31, 2001 . . . . . . . 2002 activity . . . . . . . . . . . . . . (23,084) 2,484 Balance at December 31, 2002 . . . . . . 2003 activity . . . . . . . . . . . . . . (20,600) 45,699 (7,043) 795 (6,248) 6,248 (30,127) 3,279 (26,848) 51,947 Balance at December 31, 2003 . . . . . . $ 25,099 — $ 25,099 Range of Exercise Prices $ 5.00 - $10.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 - 15.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.01 - 20.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.01 - 25.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.01 - 30.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.01 - 50.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2003 there were: (i) 7,037,154 shares of common stock reserved for the exercise of warrants; (ii) 12,262,674 shares of common stock reserved for issuance pursuant to options granted under the Company’s stock option plans; (iii) 5,077,926 shares of common stock reserved for the issuance of outstanding preferred securities of a subsidiary trust; (iv) 17,000,000 shares of common stock reserved for the issuance of Series C and Series D pre- ferred stock; and (v) 5,802,845 shares of common stock reserved for the conversion of convertible debt. Stockholders’ Rights Plan. The Company adopted a Stock- holders’ Rights Plan on September 28, 2001. This plan and other provisions of the Company’s charter and bylaws may have the effect of deferring hostile takeovers or delaying or preventing changes in control or management of the Com- pany, including transactions in which the shareholders of the Company might otherwise receive a premium for their shares over then current market prices. The rights expire on September 27, 2011. 58 1 5 . E A R N I N G S PE R S H A R E The following table sets forth the computation of basic and diluted earnings per share: (In thousands, except share and per share data) Numerator: Income (loss) before cumulative effect of change in accounting principle . . . Plus: Liquidation preference in excess of amounts paid for convertible preferred securities . . . . . . . . . . . . . . Income (loss) available to Year Ended December 31 2003 2002 2001 $(258,581) $(109,486) $111,256 896 35,339 common stockholders . . . . $(257,685) $ (74,147) $111,256 Denominator: Denominator for basic earnings per share— weighted-average shares . . . 76,959,151 Effect of dilutive securities: Employee stock options . . . . . 431,481 Warrants . . . . . . . . . . . . . . . . 1,754,884 Series C Preferred . . . . . . . . . 12,000,000 Series D Preferred . . . . . . . . . 5,000,000 Denominator for dilutive earnings per share— adjusted weighted- average shares . . . . . . . . . . 96,145,516 75,787,693 72,141,128 1,507,820 1,162,530 3,738,239 2,780,047 12,000,000 12,000,000 5,000,000 5,000,000 96,730,270 94,387,187 Earnings (loss) per share—basic: Income (loss) available to common stockholders before cumulative effect of change in accounting principle . . . . . . . . . . . . . . Cumulative effect of change in accounting principle, net . . . . . . . . . . . Income (loss) available to $(3.35) $(0.98) $1.54 (3.80) common stockholders . . . . $(3.35) $(4.78) $1.54 Earnings (loss) per share—diluted: Income (loss) available to common stockholders before cumulative effect of change in accounting principle . . . . . . . . . . . . . . Cumulative effect of change in accounting principle, net . . . . . . . . . . . Income (loss) available to $(3.35) $(0.98) $1.18 (3.80) common stockholders . . . . $(3.35) $(4.78) $1.18 The diluted share base for years where the numerator repre- sents a loss excludes incremental weighted shares for the above-captioned “—Effect of dilutive securities” due to their antidilutive effect. For the year ended December 31, 2003, the approximate 5.6 million shares that are potentially issuable upon conver- sion of all of the Company’s 17⁄ 8% Convertible Notes that were issued in 2003 are not included in the Company’s cal- culation of earnings per share because such notes are only convertible if speciﬁed conditions are satisﬁed and none of such conditions have to date been met. See Note 9 for fur- ther information. For the years ended December 31, 2003, 2002 and 2001, the shares that are potentially issuable upon conversion of the Preferred Securities are not included in the Company’s calculation of earnings per share because of their antidilutive effect. See Note 11 for further information. 1 6 . CO M M I T M E N TS A N D CO N T I N G E N C I E S O PE R AT I N G L E A S E S The Company leases rental equipment, real estate and cer- tain ofﬁce equipment under operating leases. Certain real estate leases require the Company to pay maintenance, insurance, taxes and certain other expenses in addition to the stated rentals. Future minimum lease payments, by year and in the aggregate, for non-cancelable operating leases with initial or remaining terms of one year or more are as follows at December 31, 2003: (In thousands) Real Other Rental Estate Equipment Equipment Leases Leases Leases 2004 . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . $ 66,139 59,816 54,750 50,237 40,449 102,966 $ 64,099 38,628 41,558 18,304 8,737 4,523 $23,384 12,486 9,181 5,080 3,272 382 $374,357 $175,849 $53,785 As part of certain of its equipment operating leases, the Company guarantees that the value of the equipment at the end of the lease term will not be less than a speciﬁed projected residual value. The use of these guarantees helps to lower the Company’s monthly operating lease payments. The Company does not know at this time the extent to which the actual residual values may be less than the guar- anteed residual values and, accordingly, cannot quantify the amount that it will be required to pay, if any, under these guarantees. If the actual residual value for all equip- ment subject to such guarantees were to be zero, then the Company’s maximum potential liability under these guar- antees would be approximately $36.5 million. This poten- tial liability was not reﬂected on the Company’s balance sheet as of December 31, 2003, or any prior date. 59 The Company was the seller-lessee in sale-leaseback trans- actions with unrelated third parties in which it sold rental equipment for aggregate proceeds of $3.4 million in 2002 and rental equipment and real estate for aggregate proceeds of $51.0 million in 2001. For the 2002 transactions, the Company leased back the rental equipment for a minor period of one to eight months. For the 2001 transactions, the Company leased back the real estate over a 10-year period and the rental equipment for a minor period of one to eight months. The total gains related to these transac- tions in 2002 and 2001 were, respectively, approximately $1.5 million of which none was deferred and $21.6 million of which $1.4 million was deferred. The deferred gains are amortized over the respective lease periods on a straight- line basis. Rent expense under all non-cancelable real estate, rental equipment and other equipment operating leases totaled $176.2 million, $185.0 million, and $170.9 million for the years ended December 31, 2003, 2002, and 2001, respec- tively. The Company’s real estate leases provide for varying terms, including leases subject to customary escalation clauses, and include 42 leases that are on a month-to- month basis and 30 leases that provide for a remaining term of less than one year and do not provide a renewal option. R E S T R I C T E D S TO C K AWA R D S The Company has granted to employees other than execu- tive ofﬁcers and directors approximately 1,200,000 shares of restricted stock that contain the following provisions. The shares vest in 2004, 2005 or 2006 or earlier upon a change in control of the Company, death, disability, retire- ment or certain terminations of employment, and are subject to forfeiture prior to vesting on certain other terminations of employment, the violation of non-compete provisions and certain other events. If a holder of restricted stock sells his stock and receives sales proceeds that are less than a speciﬁed guaranteed amount set forth in the grant instrument, the Company has agreed to pay the holder the shortfall between the amount received and such speciﬁed amount. However, the foregoing only applies to sales that are made within ﬁve trading days of the vesting date. The speciﬁed guaranteed amount is: (i) $15.17 per share with respect to approximately 500,000 shares scheduled to vest in 2004; (ii) $27.26 per share with respect to approximately 300,000 shares scheduled to vest in 2005; and (iii) $9.18 per share with respect to approximately 400,000 shares scheduled to vest in 2006. E M P LOY E E B E N E F I T P L A N S The Company currently sponsors one deﬁned contribution 401(k) retirement plan which is subject to the provisions of ERISA. The Company also sponsors a deferred proﬁt sharing plan for the beneﬁt of the full-time employees of its Canadian subsidiaries. Under these plans, the Company matches a percentage of the participants’ contributions up to a speciﬁed amount. Company contributions to the plans were $5.0 million, $5.2 million, and $6.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. L E G A L A N D I N S U R A N C E M AT T E R S The Company is party to legal proceedings and potential claims arising in the ordinary course of its business. In the opinion of management, the Company has adequate legal defenses, reserves, or insurance coverage with respect to these matters so that the ultimate resolution will not have a material adverse effect on the Company’s ﬁnancial position, results of operations or cash ﬂows. The Company had accrued $46.2 million and $22.2 million at December 31, 2003 and 2002, respectively, to cover the uninsured por- tion of estimated costs arising from these pending claims and other potential unasserted claims. The Company records claims related to recoveries from third parties when such recoveries are deemed realizable. E N V I RO N M E N TA L M AT T E R S The Company and its operations are subject to various laws and related regulations governing environmental matters. Under such laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as investigation of property damage. The Company incurs ongoing expenses associated with the removal of underground storage tanks and the performance of appropriate remediation at certain of its locations. The Company believes that such removal and remediation will not have a material adverse effect on the Company’s ﬁnancial position, results of operations, or cash ﬂows. 1 7 . R E L AT E D PA RT Y The Company has from time to time purchased equipment from Terex Corporation (“Terex”) and expects to do so in the future. The chief executive ofﬁcer and a director of Terex is also a director of the Company. The Company pur- chased equipment from Terex of approximately $85.2 mil- lion, $52.3 million and $16.6 million during 2003, 2002 and 2001, respectively. The increase from 2002 to 2003 was attributable to Terex’s acquisition of one of the Com- pany’s existing suppliers towards the end of 2002. 60 1 8 . S E G M E N T I N F O R M AT I O N Each of the Company’s branch locations is an operating segment which consists of the rental and sale of equipment and related merchandise and parts. Certain of the Com- pany’s branches also provide specialty trafﬁc control ser- vices as a product line. Of the total revenues for these branches, the amount of revenue attributable to such trafﬁc control services was $277.0 million, $291.6 million, and $272.2 million during the years ended December 31, 2003, 2002 and 2001, respectively. All of the Company’s branches have been aggregated into one reportable segment because they offer similar products and services in similar markets and the factors determining strategic decisions are comparable. The Company operates in the United States, Canada and Mexico. Revenues are attributable to countries based upon the location of the customers. Geographic area information for the years ended December 31, 2003, 2002 and 2001 is as follows: (In thousands) 2003 2002 2001 Year Ended December 31 Revenues from external customers Domestic . . . . . . . . . . . . . . . . . $2,669,321 Foreign . . . . . . . . . . . . . . . . . . 197,915 $2,658,969 $2,740,694 145,911 162,020 Total revenues from external customers . . . . . . . $2,867,236 $2,820,989 $2,886,605 Rental equipment, net Domestic . . . . . . . . . . . . . . . . . $1,915,149 Foreign . . . . . . . . . . . . . . . . . . 156,343 $1,713,406 $1,630,411 116,771 132,269 Total consolidated rental equipment, net . . . . . . . . . . $2,071,492 $1,845,675 $1,747,182 Property and equipment, net Domestic . . . . . . . . . . . . . . . . . $ 388,901 Foreign . . . . . . . . . . . . . . . . . . 17,700 $ 409,785 $ 393,541 16,512 15,567 Total consolidated property and equipment, net . . . . . . . $ 406,601 $ 425,352 $ 410,053 Goodwill and other intangible assets, net Domestic . . . . . . . . . . . . . . . . . $1,361,409 Foreign . . . . . . . . . . . . . . . . . . 79,625 $1,588,066 $2,086,481 121,220 122,946 Total consolidated goodwill and other intangible assets, net . . . . . . . . . . . . . . $1,441,034 $1,711,012 $2,207,701 1 9 . QUA RT E R LY F I N A N C I A L I N F O R M AT I O N ( U N AU D I T E D ) S E L E C T E D F I N A N C I A L D ATA The following table of quarterly ﬁnancial information has been prepared from unaudited ﬁnancial statements of the Company, and reﬂects adjustments which are, in the opin- ion of management, necessary for a fair presentation of the interim periods presented. (In thousands, except per share data) For the year ended December 31, 2003 First Fourth Quarter Quarter Quarter Quarter Second Third Total revenues . . . . . . . $591,851 $728,056 $805,134 $742,196 Gross proﬁt . . . . . . . . . 212,355 Goodwill impairment . 296,873 Net income (loss) . . . . . 31,884 (305,135) Income (loss) 258,559 223,066 153,989 (8,723) 23,391 available to common stockholders per share—basic . . . . . . . Income (loss) available to common stockholders per share—diluted . . . . . For the year ended December 31, 2002 $(0.11) $0.30 $0.43 $(3.96) $(0.11) $0.25 $0.34 $(3.96) Total revenues . . . . . . . $598,965 $744,759 $783,103 $694,162 Gross proﬁt . . . . . . . . . 208,060 Goodwill impairment . 247,913 Restructuring charge . . 28,262 Income (loss) before 179,208 245,747 253,262 cumulative effect of change in accounting principle . . . . . . . . . . Cumulative effect of change in accounting principle . . . . . . . . . . Net income (loss) . . . . . Income (loss) available to common stockholders before cumulative effect of change in accounting principle per share—basic . . . . Income (loss) available to common stockholders before cumulative effect of change in accounting principle per share—diluted . . 7,584 51,114 40,767 (208,951) (288,339) (280,755) 51,114 40,767 (208,951) $0.17 $0.67 $0.53 $(2.33) $0.13 $0.51 $0.43 $(2.33) 2 0 . S U B S E QU E N T EV E N TS During the ﬁrst quarter of 2004, the Company acquired 843504 Alberta Ltd. (formerly known as Skyreach Equip- ment, Ltd.) which has annual revenues of approximately $40 million. During the ﬁrst quarter of 2004, the Company reﬁnanced approximately $2.1 billion of its debt. See Note 9 for further information. 61 U N I T E D R E N TA L S L O C AT I O N S Lancaster Lodi Long Beach (4) Los Alamitos Los Angeles Madera Marysville Merced Modesto (4) Montclair Monterey Mountain View Napa (2) Oakland Oxnard Pico Rivera Redding Ridgecrest Riverside Rocklin Sacramento (3) Salinas San Diego San Francisco San Jose (5) San Juan Capistrano San Leandro San Luis Obispo Santa Ana Santa Cruz Santa Fe Springs Santa Maria Santa Rosa (2) Sunnyvale Susanville South Lake Tahoe Stockton (3) Tracy Turlock Vacaville Van Nuys Ventura (2) Visalia COLORADO Brighton Colorado Springs (3) Commerce City Denver (5) Fort Collins Grand Junction Loveland Pueblo Westminster CONNECTICUT Bloomﬁeld Danbury Darien Fairﬁeld Groton Manchester Milford North Stonington Old Saybrook Plainville Shelton Stamford West Haven DELAWARE Bear Delmar Frederica Middletown Newark FLORIDA Bradenton Clearwater (2) Davie Deerﬁeld Beach Fort Lauderdale Fort Myers (2) Fort Pierce Fort Walton Beach Gainesville Holly Hill Jacksonville (3) Jupiter Lakeland Longwood Melbourne Miami (2) Naples Orlando (5) Panama City Beach Pompano Beach (2) Port Saint Lucie Tampa (3) West Palm Beach GEORGIA Acworth Augusta Bogart Carrollton Columbus Conyers Douglasville Fairburn Forest Park (2) Garden City Jesup Kingsland Leesburg Macon McDonough Norcross Remerton Ringgold Sugar Hill Villa Rica IDAHO Boise Lewiston ILLINOIS Addison Bloomingdale Bloomington (2) Carbon Cliff Carbondale Champaign Chicago Fairview Heights Mokena Moline Rockford (2) Springﬁeld Villa Park UNITED STATES ALABAMA Bessemer (2) Birmingham Decatur Dothan Florence (2) Hope Hull Madison (2) Mobile Montgomery (2) Oxford ALASKA Anchorage (2) Fairbanks Palmer Soldotna Wasilla ARIZONA Bullhead City (2) Cottonwood Flagstaff (2) Glendale Kingman Lake Havasu City Phoenix (6) Prescott (2) Show Low Tucson (2) Yuma ARKANSAS Fayetteville Little Rock Rogers CALIFORNIA Antioch Arroyo Grande Bakersﬁeld (3) Baldwin Park Buena Park Burbank Burlingame Canoga Park Carmichael Castro Valley Cathedral City Chico Chula Vista Corona Downey Dublin Elk Grove Escondido (2) Eureka Folsom Fontana Fremont (2) Fresno (3) Fullerton Gardena Gilroy Hayward (2) Hesperia Huntington Beach (2) Indio Lakeside 62 INDIANA Bloomington Edinburgh Evansville (2) Fort Wayne (2) Greenﬁeld Indianapolis (3) Lafayette (2) Richmond South Bend Valparaiso West Terre Haute IOWA Cedar Rapids Council Bluffs Des Moines (3) Dubuque Grimes (2) Iowa City Mason City Sioux City (2) Waterloo KANSAS Overland Park (2) Salina Topeka Wichita (3) KENTUCKY Georgetown Lexington Louisville (5) Paducah LOUISIANA Baton Rouge Gonzales (2) Harvey Monroe Saint Rose (2) Shreveport MAINE Bangor Scarborough MARYLAND Annapolis Baltimore (2) Beltsville Bladensburg Delmar Frederick (4) Gaithersburg Glen Burnie Joppa Lexington Park Pasadena Prince Frederick Silver Springs Upper Marlboro MASSACHUSETTS Agawam Boston Canton Everett Four Rivers Kingston (2) Ludlow Millbury Mystic Watertown West Yarmouth Worcester MICHIGAN Covert Grand Rapids Hudsonville Portage Romulus Taylor Traverse City Wixom MINNESOTA Brainerd Hastings Hermantown (2) Mankato Minneapolis (2) Rochester Rogers (2) Roseville Saint Michael Saint Paul Savage MISSISSIPPI Canton Olive Branch Pearl MISSOURI Belton Bridgeton Kansas City (2) Saint Joseph Saint Louis (2) Springﬁeld Strafford MONTANA Billings Missoula NEBRASKA Lincoln (2) Norfolk Omaha Papillion NEVADA Carson City Elko Gardnerville Las Vegas (2) North Las Vegas Reno (4) Sparks NEW HAMPSHIRE Hudson Manchester NEW JERSEY Bellmawr Burlington Carlstadt Egg Harbor (2) Elmwood Park Piscataway Richland Ridgeﬁeld Park (2) Vineland NEW MEXICO Albuquerque (2) Farmington Las Cruces NEW YORK Batavia Brooklyn Clifton Park Depew East Syracuse Falconer Flushing (2) Highland Holtsville (2) New York New Windsor Rochester (5) Williamsville NORTH CAROLINA Arden Charlotte (2) Durham Fayetteville Garner Goldsboro Greensboro (3) Jacksonville Pilot Mountain Raleigh (2) Salisbury Wilmington Winston-Salem NORTH DAKOTA Bismarck (2) Fargo (4) Grand Forks Minot OHIO Brooklyn Heights Cleveland Cincinnati (2) Columbiana Columbus (2) East Liverpool Independence Irontown (2) Marietta North Olmstead (2) Perrysburg Toledo OKLAHOMA Oklahoma City Tulsa OREGON Albany Bend Clackamas Corvallis Eugene (2) Grants Pass Gresham Hermiston Hillsboro Lebanon Medford (2) Portland (7) Redmond Roseburg Salem (2) Seaside Tigard Tualatin PENNSYLVANIA Hatﬁeld Lebanon Mechanicsburg (2) Middletown Murrysville Oakdale Palmyra Philadelphia Quakertown State College Watsontown Wilkes-Barre York RHODE ISLAND Cranston Smithﬁeld (2) SOUTH CAROLINA Anderson Charleston (2) Columbia Conway Greenville Rock Hill Spartanburg SOUTH DAKOTA Rapid City (3) Sioux Falls (3) TENNESSEE Franklin Kingsport Knoxville (3) Memphis Nashville (2) Spring Hill TEXAS Arlington Austin (3) Beaumont (2) Carrollton Cedar Park Conroe Corpus Christi (2) Corsicana Dallas (3) El Paso (3) Fort Worth (4) Garland Georgetown Greenville Houston (7) Irving (2) Katy Keller (2) La Porte Laredo League City Lubbock Lufkin Manor Odessa Palestine Plano Rosenberg San Antonio (3) Sherman Temple The Woodlands Tyler (2) Wichita Falls UTAH Kaysville Orem Saint George Salt Lake City (4) Sandy Tooele VIRGINIA Chantilly Charlottesville Chesapeake (2) Fairfax Glen Allen Hampton Hopewell Richmond Roanoke Sterling Winchester WASHINGTON Airway Heights Arlington Auburn Bellingham Bonney Lake Bothell Bremerton (2) Burien Burlington Chehalis Covington Ellensburg Federal Way Gig Harbor Kirkland Longview Marysville Monroe Moses Lake Pasco Port Angeles Puyallup Renton (2) Seattle Spokane (2) Sumner Tacoma Tukwila Tumwater Union Gap Vancouver Woodinville WISCONSIN De Pere Madison Marshﬁeld Milwaukee (3) WYOMING Casper Cheyenne CANADA ALBERTA Calgary (3) Edmonton (2) Fort McMurray Lethbridge Medicine Hat Red Deer BRITISH COLUMBIA Abbotsford Burnaby (2) Campbell River Chilliwack Genelle Kamloops Langley (2) Maple Ridge Nanaimo North Vancouver Port Coquitlam Prince George Richmond Surrey Vancouver Victoria Whistler White Rock MANITOBA Thompson Winnipeg NEWFOUNDLAND Arnold’s Cove Clarenville Corner Brook Goose Bay Grand Falls Windsor Marystown Mount Pearl Saint John’s Wabush ONTARIO Barrie Belleville Bracebridge Brampton Brantford Cambridge Collingwood Dryden Guelph Kenora Kingston Kitchener (2) London (3) Meaford Mississauga North Bay Oshawa Ottawa Saint Catherines Sarnia Scarborough Stoney Creek (2) Stratford Sudbury Toronto Walkerton Waterloo Weston QUEBEC Chicoutimi Longueuil Mont-Tremblant Saint Laurent Saint Leonard Sept-Iles Shawinigan Trois-Rivieres Ville Vanier SASKATCHEWAN Regina Saskatoon MEXICO NUEVO LAREDO Escobedo 63 CORPORATE INFORMATION OFFICERS WAYLAND R. HICKS Vice Chairman and Chief Executive Ofﬁcer JOHN N. MILNE President and Chief Financial Ofﬁcer MICHAEL J. KNEELAND Executive Vice President – Operations BOARD OF DIRECTORS BRADLEY S. JACOBS Chairman WAYLAND R. HICKS Vice Chairman and Chief Executive Ofﬁcer JOHN N. MILNE President and Chief Financial Ofﬁcer LEON D. BLACK Founding Principal Apollo Management, L.P. HOWARD L. CLARK, JR. Vice Chairman Lehman Brothers Inc. RONALD M. DEFEO Chairman and Chief Executive Ofﬁcer Terex Corporation MICHAEL S. GROSS Founding Principal Apollo Management, L.P. BRIAN D. MCAULEY Partner NH II, LLC JOHN S. MCKINNEY Director GERALD TSAI, JR. Director CHRISTIAN M. WEYER President Enerﬁn S.A. 64 UNITED RENTALS STOCK LISTING United Rentals common stock is listed on the New York Stock Exchange under the symbol URI. The common stock is included in the Standard & Poor’s MidCap 400 Index and the Russell 2000 Index®. UNITED RENTALS COMMON STOCK PRICES New York Stock Exchange Composite Prices 2003 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. High . . . . . Low . . . . . Close . . . . $12.60 8.00 9.62 $14.75 9.08 13.89 $18.59 $19.85 15.62 19.26 13.00 16.09 2002 High . . . . . Low . . . . . Close . . . . $30.83 19.30 27.48 $28.87 20.80 21.80 $19.40 8.40 8.44 $10.86 5.88 10.76 CORPORATE HEADQUARTERS United Rentals, Inc. Five Greenwich Ofﬁce Park Greenwich, CT 06830 Phone: (203) 622-3131 Fax: (203) 622-6080 www.unitedrentals.com INDEPENDENT AUDITORS Ernst & Young LLP 99 Wood Avenue South Iselin, NJ 08830 (732) 516-4200 C Y N , . c n I , s e v I & r o l y a T y b d e c u d o r p d n a d e n g i s e D 2004 ANNUAL MEETING Thursday, May 20, 2004 at 3:00 pm. Delamar Greenwich Harbor Hotel 500 Steamboat Road Greenwich, CT 06830 INVESTOR INFORMATION For United Rentals investor information, including our quarterly earnings releases, webcasts and Securities Exchange Act reports: www.unitedrentals.com Investment professionals may contact: Charles K. Wessendorf Vice President, Investor Relations and Corporate Communications cwessendorf@ur.com (203) 618-7318 SHAREHOLDER SHAREHOLDER INFORMATION INFORMATION Write: American Stock Transfer & Trust Company 40 Wall Street New York, NY 10005 By overnight mail only: American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 (718) 921-8210 www.amstock.com For shareholder services 24 hours a day: Call toll-free (800) 937-5449 in the U.S. and Canada, or (718) 921-8200. E-mail: investors@unitedrentals.com To speak to a shareholder services representative, please call between 9:00 am and 5:00 pm Eastern Time, Monday through Friday. • Account information • Transfer requirements • Lost certiﬁcates • Change of address • Tax forms ® ®

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