United Rentals Annual Report 2005

Plain-text annual report

2005 annual report ® united rentals is the world’s largest equipment rental company, uniquely positioned to serve a diverse customer base including construction and industrial customers, utilities, municipalities, homeowners and others. We offer our customers many beneﬁts: • 13,400 knowledgeable employees operating an integrated network of more than 750 rental locations in 48 states, 10 Canadian provinces and Mexico • The largest ﬂeet of rental equipment in the world — over 260,000 units with an original cost of $3.9 billion • More than 20,000 classes of equipment, including construction equipment, industrial and heavy machinery, aerial work platforms, trafﬁc control equipment, trench safety equipment and homeowner items • Quality new and used equipment, contractor supplies, parts and service for sale • A well-developed infrastructure that supports our full range of services, including comprehensive safety training and round-the-clock emergency assistance • Industry-leading information technology that electronically links our branches and provides our customers with access to every piece of equipment in our ﬂeet • Customer-friendly online services, including URdata® account management, a comprehensive website and United Rentals Certiﬁed Auctions on eBay® • Knowledgeable industry veterans who run our branches and ensure that when a customer comes to us with a project need, they can Consider It Done. Contents Page 1 Financial Highlights Page 2 Letter to Shareholders Page 8 Boca Raton Backhoe Page 10 Washington, D.C. Boom Lift Page 12 St. Louis Reach Forklift Page 14 Whistler Portable Heat System Page 16 New Orleans Aerial Work Platforms Page 18 Charleston Telescopic Lift Page 20 Salt Lake City Slide Rail System Page 22 Detroit Warehouse Forklift ﬁnancial highlights ($ millions, unless otherwise indicated) 2003 2004 2005 Total Revenues .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Equipment Rental Revenues .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Contractor Supplies Sales .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. $2,882 2,176 184 $3,094 2,289 225 $3,563 2,583 324 Dollar Utilization .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 57.1% 59.9% 65.1% Original Equipment Cost ($ billions) .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. $ 3.5 $ 3.7 $ 3.9 Total Revenues Equipment Rental Revenues $2,882 $3,094 $3,563 $4,000 3,000 2,000 1,000 0 ’03 ’04 ‘05 $3,000 2,250 1,500 750 0 $2,176 $2,289 $2,583 ’03 ’04 ‘05 Contractor Supplies Sales Dollar Utilization $4 3 2 1 0 $324 $184 $225 ’03 ’04 ‘05 80% 60 40 20 0 57.1% 59.9% 65.1% ’03 ’04 ‘05 Original Equipment Cost ($ billions) $3.7 $3.9 $3.5 ’03 ’04 ‘05 1 $4 3 2 1 0 dear fellow shareholders United Rentals delivered significant growth and record revenues in 2005. We increased our total revenues 15.2% to $3.56 billion, outpacing the gradual improvement in our operating environment. This acceleration in our revenue growth from 2004 was driven by a combination of organic growth in our core business, rental rate improvement, and expanding contractor supplies sales, supported by growth in our primary end market. Our operating income in 2005 was $500 million and net income was $187 million, up 95% and $271 million, respectively, from 2004. Diluted earnings per share were $1.80, exceed- ing our outlook for the year. Net cash from operations and the proceeds from sales of rental equipment were $950 million. Of this amount, we spent $578 million for replacement capital needed Our revenue growth was driven by a combination of organic growth in our core business, rental rate improvement, and expanding contractor supplies sales, supported by growth in our primary end market. to maintain the size and age of our existing rental ﬂeet and $163 million to expand the ﬂeet. Our free cash ﬂow, after total rental and non-rental capital expenditures of $823 million, was $130 million. We invested $40 million of this free cash ﬂow in acquisitions. We achieved improvements in several key operating metrics in 2005. All three segments of our business gener- ated higher returns, and total revenues grew 15.2%. This outpaced growth in our primary end market, private 2 non-residential construction, which increased 5.2% last year according to Department of Commerce data. Dollar utilization was a record 65.1%, an increase of 5.2 percentage points from 2004. Organic growth remained strong throughout 2005, with a full-year increase of 11.8% in same-store rental revenues. This included a 23% increase in same-store rental revenues for our trench safety, pump and power business. Early in 2005 we identiﬁed three key initiatives, which we have vigorously pursued. These initiatives supported our stated goals of driving revenue growth, improving our margins and increasing our return on capital. Our immediate priorities were to drive a further improvement in rental rates, maintain strong organic growth, and expand our contractor supplies business. Our employees understand that our rates initiative, with its corresponding impact on proﬁtability, allows us to continue to provide our customers with superior service and the largest and most diverse ﬂeet in the industry. We made progress on all three initiatives in 2005. We were able to increase rates by an additional 6%, following the 7.5% increase we achieved in 2004. The combination of these increases helped us generate more than $250 million in incremental revenue last year, and we believe there are additional pricing opportunities. Our employees understand that our rates initiative, with its corresponding impact on proﬁtability, allows us to continue to provide our customers with superior service and the largest and most diverse ﬂeet in the industry. 3 We opened 37 new locations in 2005, with a quarter of them focused on market opportunities in trench safety, pump and power rentals. In addition, we enhanced our network with two acquisitions, the HSS RentX Colorado locations and Sandvick Equipment & Supply Company. The Sandvick acquisition extended our presence in trench safe- ty, where we lead the industry. We also completed our contractor supplies distribution network with the opening of six regional warehouse facili- ties, bringing the total to nine. We are now in a position to expedite deliveries and expand our product lines. The growth in our contractor supplies sales was nothing short of explosive in 2005. Revenues increased 44% from 2004 to $324 million, even without the full beneﬁt of our new infrastructure. We anticipate that our contractor supplies program will continue to grow in importance, both ﬁnan- cially and as a competitive differentiator. The 9,200 different supply items we offer are a compelling example of the one- stop shopping convenience we provide to our customers. These accomplishments, together with the absence of goodwill impairment and reﬁnancing charges incurred in 2004, were largely responsible for the improvement in our results in 2005. We made capital investments of $823 million, including $741 million invested in new rental equipment, which allowed us to grow faster than our end markets. Our return on invested capital improved 2.4 per- centage points to 12% in 2005 and we ended the year with $316 million of cash. At the same time, we had a number of internal challenges to address. The ongoing inquiry by the Securities and Exchange Commission, initiated in 2004, resulted in an extensive internal review by a special committee of our board of directors. We continue to cooperate 4 fully with the SEC in an effort to resolve their inquiry. United Rentals is dedicated to the highest standards of conduct in our business. There is every indication that 2006 will be another strong year for United Rentals. The construction market is continuing to improve. At the same time, equipment rental is growing in importance to contractors who are increas- ingly renting equipment as an alternative to owning their own. For our part, we continue to drive our business forward with a passion for customer service and a determi- nation to increase our return on capital. This requires good people and we have more than 13,000 of the best. In the short-term, we have extended our three key ini- tiatives in 2006. We expect further improvements in our rental rates, which represent the single most important action we can take to further enhance our proﬁtability. We also expect to beneﬁt from the investment in our contractor supplies infrastructure and achieve further marketplace penetration. We remain focused on expanding our network and plan to open another 30 to 35 new branch- es in 2006. We also expect to continue to grow the business by way of acquisition. (from left) Martin Welch, executive vice president and chief ﬁnancial ofﬁcer, Michael Kneeland, executive vice president — Operations, Wayland Hicks, chief executive ofﬁcer 5 We will continue to increase the size of our rental ﬂeet in existing locations and invest in high-growth categories such as trench safety services, pump rentals and power generation. As always, our ﬂeet decisions are guided by the evolving needs of our customers. Our 2006 plan calls for the investment of $175 million to $200 million in growth capital for new rental equipment and $625 million to $650 million in replacement capital required to maintain the size and age of our rental ﬂeet. In 2006, our plan anticipates that we will continue to grow at a faster pace than private non-residential construc- tion, our primary end market. End market growth, combined with strategic investments and our inherent operating lever- age, should generate substantial bottom line improvement. We expect to achieve diluted earnings per share of $2.13 to $2.23 and $4.0 billion in total revenues. Two years ago in my letter to shareholders, I stated that our goal was to double the size of the business over ﬁve years following a recovery in our primary end market. We are now in the second year following that recovery, and our plans are solidly in place to realize that goal. We will accom- plish this with the help of highly motivated employees and the leadership of an experienced management team. Our 2006 plan anticipates diluted earnings per share of $2.13 to $2.23 with $4.0 billion in total revenues. I am particularly pleased that Martin Welch joined us early this year as executive vice president and chief ﬁnancial ofﬁcer. Marty is a seasoned ﬁnancial leader with a talent for establishing robust ﬁnancial organizations. Looking beyond 2006, the North American equipment rental market presents tremendous opportunities for United Rentals, as do the related markets for equipment sales, serv- ice and contractor supplies. The investments we have been making in the business will enable us to take advantage of these growth opportunities. Our results in 2005 and our ﬁve-year outlook are consistent with the vision that has shaped our company since its inception — to make this business a success for every stakeholder in United Rentals. Wayland Hicks Chief Executive Ofﬁcer April 30, 2006 7 boca Opposite Page In the Southeast, United Rentals responded around the clock as Florida communities faced a seemingly endless series of storms. Our people played a key role in setting up dozens of emergency staging areas, many within 24 hours, as Florida Power & Light (FPL) worked to restore power to millions of customers. “It was a remark- able feat,” said Keith White (left), FPL logistics manager, integrated supply chain. “It gave our crews the best conditions to work under so that we could be as productive as possible, as quickly as possible.” Rhys Butler (center), United Rentals’ national accounts coordinator, and David Murphy (right), branch manager, coordinated the rental of hundreds of light towers, forklifts, pallet jacks and emergency signs. raton United Rentals grew revenues from $3.09 billion in 2004 to $3.56 billion in 2005 in our primary market’s second year of recovery. Spending in our primary end market, private non-residential construction, increased 5.2% year-over-year. We expect spending in private non-residential construction — the driving force behind our industry’s growth — to continue to grow at moderate levels in 2006. Growth is a deﬁning characteristic of the U.S. equipment rental industry, where revenues were estimated to be $31 billion in 2005. This represents a compound annual growth rate of more than 9% since 1990. While our industry has proven sensitive to changes in construction activity and equipment demand, it also reacts favorably to the changing needs of our customers. Paramount among these needs is the trend toward renting equipment rather than owning it. Given any market conditions, more and more equipment end users are recognizing the many beneﬁts of equipment rental. These beneﬁts include the elimination of large capital outlays and the avoidance of costs related to storage, maintenance, insurance and other ownership responsi- bilities. The appeal of renting has also been inﬂuenced by research and development conducted by our industry’s leading manufacturers. As new and better equipment technologies come to market, rental companies assume the costs of investing in 9 Opposite Page The impressive Woodrow Wilson Bridge project has a seven and a half mile footprint that begins in Maryland and connects to Virginia over the Potomac River. Crews are working to replace the existing bridge and upgrade four interchanges to ease congestion in the area. United Rentals’ Kevin Hernon (left), senior risk control manager, and Susan Nichols (center), sales representative, were a familiar presence at the site, where three bridge specialist companies have partnered under the name Potomac Constructors. By 2008, they will have built the largest drawspan bridge in the world. To date, United Rentals has supplied more than 250 pieces of equipment, and yet that’s only half the story. “We insist on same-day response time on service calls and ongoing safety orientation for our workers,” said Jarred Musser (right), ﬁeld engineer for Potomac Constructors. “These are two services that United Rentals performs very well.” washing these technologies to make them available to customers. New models and expanded rental ﬂeets result in better productivity for the end user, who can utilize the ideal equipment for the job. Productivity — and ultimately satisfaction — is a tremendous customer motivator in our business. United Rentals’ business model allows our company to capitalize on the full potential of an expanding marketplace. In 2005, for example, our revenues were largely driven by strong organic growth, rental rate improvement and an increase in contractor supplies sales, supported by growth in our primary end market. These results are rooted in a widespread and effective branch network, superior equipment ﬂeet, knowledgeable people and our ability to provide one-stop shopping conven- ience. By meeting our customers’ every jobsite need, we are able to ask for and receive better rates. Our branch network is the point of customer contact for the majority of our business. We currently operate more than 750 branches that serve 1.6 million customers in the United States, Canada and Mexico. The expansion of our rental net- work ﬁgures prominently into our growth strategy. Our footprint is designed to capitalize on sustained construction activity by expanding our penetration in some areas, and extending into other areas where our presence can attract new business. 10 ton, d.c. st. An important component of our branch network is its strategic placement of rental assets — our equipment ﬂeet. The majority of our branches make up our general rentals business. These locations offer a wide range of general construction and industrial equipment for rent, including aerial work platforms. In addition, we have dedicated branches associated with our trafﬁc control business, and our trench safety, pump and power business. These locations carry specialized equipment and provide specialized services as well. In total, we offer more than 20,000 classes of equipment for rent on an hourly, daily, weekly or monthly basis. Purchases of new rental ﬂeet are carefully planned by location, to optimize our investment. Branches are encouraged to share equipment and information, improving utilization and customer service. Our dollar utilization in 2005 reached a record 65.1%, up 5.2 percentage points from 2004. We routinely transfer equipment between branches on a short-term or permanent basis. This is especially true when a particu- lar asset might generate better returns at a neighboring branch, or when one of our rental locations does not have a particular piece of equipment readily available. Occasionally, equipment is redeployed to meet extreme customer needs, as was the case with hurricanes Katrina and Rita in 2005. Our emergency response call center was able to route equipment and contractor supplies to the hardest-hit areas of the Gulf Coast, drawing on ﬂeet and employees from throughout our network. 12 Opposite Page St. Louis Cardinals fans have been eagerly awaiting their new, downtown baseball stadium, with its custom-built village of retail shops and attractions. The 130-ft.-tall structure covers more than 12 acres and is equally impressive when viewed from the ground or from high atop one of our 80-ft. boom lifts. Kim Cliffe (left), sales representative for United Rentals, visited the site during con- struction to review equipment requirements with Gordon Wright, project supervisor for Sachs Electric Company. “Our companies share similar business perspectives,” said Wright. “Sachs Electric was founded in 1925 based on a vision for providing every customer with quality work and personal service. Our experience is that United Rentals places the same importance on customer relation- ships.” When the call went out for 20 boom lifts and 80 scissor lifts, our company stepped up to the plate. louis whi Opposite Page Construction of the massive infrastructure for the 2010 Olympic Winter Games began years in advance near Vancouver, British Columbia, where United Rentals helped general contractor PCL keep productivity humming through a cold Canadian winter. Diana Harrison (left), PCL site safety coordinator, and Douglas Head (right), sales representative for United Rentals, discussed climate control during work on the Delta Hotel in Whistler. “The Olympic construction plan is very ambitious. It requires intense cooperation among all the companies involved,” said Harrison. “We’ve built a relationship with United Rentals as a national account. We consider them part of the team.” United Rentals was on site from start to ﬁnish, supplying PCL with boom lifts, defrosters and dehumidiﬁers, as well as more than 60 industrial heating units. stler Our rental ﬂeet is at the heart of our competitive advantage. Its breadth, depth and age are all important considerations to our customers. Behind the scenes, it is the extent and integration of our resources that allow us to meet and exceed customer expectations time and again. In addition to equipment rentals, our branches also offer new and used equipment for sale. We are a distributor for many of the industry’s leading manufacturers, including Genie®, JLG®, Mulitquip®, Wacker® and Honda USA®. Used rental equipment is principally sold by our sales force, which has access to many retail markets across North America. In 2005, our company launched United Rentals Certiﬁed Auctions on eBay® to establish a new online channel for used equipment sales. New and used equipment sales, like contractor supplies sales, safety training and our other services, encourage customer loyalty and provide cross-selling opportunities. We have seen signiﬁcant growth in our contractor supplies business. This initiative is ﬁnancially and strategically important to our business plans: it drives incremental revenue and sets United Rentals apart as a one-stop shopping solution for our customers. Our revenues from contractor supplies sales grew from $184 mil- lion in 2003, to $225 million in 2004, to $324 million in 2005. We market a wide 15 Opposite Page Drawing on our national resources, United Rentals helped the Gulf Coast meet the challenges of a devastating hurricane season head on. We responded to calls for assistance from federal, state and local governments, private contractors and homeowners, providing hundreds of pieces of equipment and thousands of contractor sup- plies within 72 hours of Hurricane Katrina’s landfall. Our employees helped set up communication channels and made equipment drops to staging areas such as the FEMA Village. Chris Miano (right), sales representative for United Rentals, worked side by side with customers such as Joseph Gioe, vice president of ﬁeld operations for Broadmoore, to support the massive cleanup effort in New Orleans. “We had, and continue to have, an overwhelming job ahead of us,” said Gioe. “Through all the exhaustion and uncertainty, United Rentals’ equipment and people kept coming through.” new orleans range of construction consumables, tools, small equipment, and safety supplies through our sales force, branches and product catalogs. Our network of nine regional distribution centers, completed in 2005, gives us the ability to expedite customer orders for 9,200 in-stock items. As our top line grew by more than 15% in 2005, our customer mix remained largely the same. We serve a highly diversiﬁed customer base that varies by branch and reﬂects several factors, including ﬂeet mix, marketing focus and the local construction economy. Our customers include, among others, construction and industrial companies, manufacturers, municipalities and utilities. We rent to Fortune 500 companies as well as to the small independent contractor and homeowner. In 2005, as in 2004, our largest customer accounted for less than 1% of revenues and our top 10 customers accounted for less than 2% of revenues. National Accounts is a distinct component of our customer base, with a sales force dedicated to establishing and servicing these national and multi-regional relationships. We offer large customers a consistent level of service across North America, and a single point of contact through our National Accounts Service Center. We currently serve approximately 1,500 National Accounts customers as 17 Opposite Page The Cooper River Bridge project made history in 2005 when the 1,546-ft. structure connected Charleston and Mount Pleasant, S.C., with the longest cable-stay span in North America. United Rentals partnered with general contractor Palmetto Bridge Company (PBC) to help the huge towers take shape, providing pumps, welders, light towers, forklifts, water trucks, air compressors, contractor supplies, and dozens of aerial lifts, including the 120-ft. boom shown here. Warren Collier (left) and Dave Kampman (second from right), both senior superintendents with PBC, and Leuma Doctor (right), PBC deck hand, toured the site with Joey Bray and Kellie Copeland-Burnup, district sales manager and aerial sales representative, respectively, for United Rentals. “Safety is priority one with us,” said Collier. “Our crews typically work hundreds of feet in the air. We trust the quality of equipment from United Rentals — the condition, the maintenance, everything.” charle well as approximately 750 agencies of the U.S. government. Revenues from these customers increased to more than $650 million in 2005, compared with approximately $550 million in 2004. To provide diverse solutions to thousands of customers each day, we rely on the talents of a strong and motivated branch management team. Our branch managers receive guidance in the form of performance benchmarks and attend monthly operating reviews. At the same time, managers are empowered, within budgetary guidelines, to make daily decisions at the branch. We believe that our managers are among the most knowledgeable and experienced in the industry. They are in the best position to help us strengthen our brand and service reputation. To support our branch operations throughout North America, we have imple- mented a powerful technological framework that links our network and informs the decision-making of our branch managers. Each branch uses our RENTALMAN® information technology system to communicate with other branches and with our central data center. Rental transactions are processed on a real-time basis, so that an employee at one location can check the current and future availability of equipment at other locations in the area. 18 ston salt lake Opposite Page In early 2005, the $64 million Point of the Mountain Aqueduct was little more than a trench carved out of the ground in Salt Lake City, Utah. By 2007, this massive pipeline will handle up to 77 million gallons of water a day. United Rentals’ trench safety experts teamed with general contractor W.W. Clyde to keep the 12-mile project on schedule. Tim Badberg (right), branch manager for United Rentals, coordinated the installation of a custom-engineered slide rail shoring system that is one of the longest conﬁgurations of its kind ever used in North America. “United Rentals proved they have the expertise and resources necessary for a project of this scope,” said Kim Buller (left), Group IV operator, for W.W. Clyde. “Their trench safety experts have been at our right hand from day one.” Our branches also provided contractor supplies, conﬁned space equipment and safety fencing for the project. city In addition, our INFOMANAGER® software extracts raw data from transactions and transforms it into meaningful information for management. These two systems illustrate the critical importance we place on timely information in our business. By providing branch management with local, district and regional intelligence, our managers are better able to serve customers and generate returns on the assets assigned to them. Our information technology is a considerable advantage in an industry that is very competitive. We also insist that our employees understand the ﬁner points of jobsite needs so that they can relate to customers at ground level. Our company draws a direct correlation between its commitment to customers and its commitment to employees. We want to attract and retain talented, energetic and experienced individuals who share our commitment to customer service. To support this, our culture emphasizes ongoing training and development at every level. In 2005 and 2004, our employees enhanced their skills in excess of 300,000 and 200,000 hours of training, respectively. In 2005, we extended our commitment to employee development by executing a number of initiatives rooted in employee suggestions. Many of these ideas came from our company’s ongoing Town Hall Meeting series. More than 450 meetings were 21 det held throughout North America last year alone, giving over 8,000 employees the opportunity to address senior management face-to-face. Hundreds of suggestions were collected from truck drivers, salespeople, bookkeepers, mechanics, managers and safety ofﬁcers, among others. By year-end, dozens of viable suggestions had become reality, including a new online eLearning curriculum. These many initiatives serve to support our company’s short-term and long-term objectives for growth. United Rentals has proven it is relatively resistant to down- turns and responsive to periods of growth. Now, in an improving marketplace, we are focused on continuing to build value to customers and translating that value into ﬁnancial returns. As demand for equipment increases, we expect that the utilization rates for our equipment will continue to increase as well. Customers will seek out a partner with the capabilities to meet a complete range of jobsite needs. Our compa- ny is positioned to capitalize on its strengths and to continue to outpace the relatively strong environment it operates in. For further information on non-GAAP ﬁnancial measures and forward looking statements in the Letter to Shareholders and this narrative, see “Financial Overview” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” contained elsewhere in this report. 22 Opposite Page Preparation for Super Bowl XL hit the ground running weeks before the big game in Detroit, where event-related needs ranged from material handling and transportation to temporary lighting and power. United Rentals demonstrated bench strength by delivering 15 light towers, 20 message boards, and over a dozen other pieces of equipment to Ford Field. Carolyn Lesley (left), vice president of operations for Noel Lesley Event Services, met with Bryce Mulligan (right), branch manager for United Rentals, to map out a game plan. “The Super Bowl showcases our country in front of the world’s eyes,” said Lesley. “United Rentals was completely comfortable with the pressure of staging an event of this magnitude. Everything worked like clockwork, from installation to dismantling.” roit Contents 25 Selected Financial Data 26 Management’s Discussion and Analysis of Financial Condition and Results of Operations 45 Report of Independent Auditors 46 Consolidated Balance Sheets 47 Consolidated Statements of Operations 48 Consolidated Statements of Cash Flows 50 Notes to Consolidated Financial Statements 76 United Rentals Rental Locations 78 Corporate Information selected ﬁnancial data The following selected ﬁnancial data reﬂects the results of operations and balance sheet data for the years ended 2002 to 2005. The data below should be read in conjunction with, and is qualiﬁed by reference to, MD&A and our consolidated ﬁnancial statements and notes thereto. The ﬁnancial information presented may not be indicative of our future performance. The following selected consolidated ﬁnancial data for 2003 and 2002 has been restated to reﬂect adjustments resulting from matters discussed in the MD&A and in note 3 to our consolidated ﬁnancial statements (the “Restatement Note”). We have not restated our previously reported consolidated ﬁnancial statements for the ﬁscal years ended December 31, 2001 and 2000, and we have not presented any ﬁnancial data from those peri- ods below. In light of the systems and records presently available to us, it is not possible for us to reconstruct detailed ﬁnancial data for 2001 and prior periods with any amount of effort or expense due to the current state of historical records used to prepare the ﬁnancial statements for such periods. The selected ﬁnancial data for 2001 and 2000 would not have a material impact on a reader’s understanding of the Company’s ﬁnan- cial results and condition as disclosed in this report. Previously published ﬁnancial information for 2001 and earlier periods should not be relied upon. We encourage you to read MD&A and the Restatement Note for further discussion of the restatement adjustments. (in millions, except per share data) Year Ended December 31, 2005 2004 2003 (Restated) 2002 (Restated) Income Statement Data: Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and asset impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-rental depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense — subordinated convertible debentures . . . . . . . . . . . . . . . . . . . . . Preferred dividends of a subsidiary trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other (income) expense, net (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) Basic earnings (loss) available to common stockholders before cumulative $3,563 2,398 1,165 596 — — 69 500 185 14 — (9) 310 123 187 — $ 187 $3,094 2,135 959 497 139 (1) 67 257 155 14 — 176 (88) (4) (84) — $ (84) $2,882 2,100 782 449 297 — 72 (36) 209 — 15 43 (303) (49) (254) — $ (254) $2,821 1,945 876 443 248 28 61 96 196 — 18 (1) (117) 1 (118) (288) $ (406) effect of change in accounting principle per share . . . . . . . . . . . . . . . . . . . . . . . . $1.97 $(1.07) $(3.29) $(1.08) Diluted earnings (loss) available to common stockholders before cumulative effect of change in accounting principle per share . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings (loss) available to common stockholders per share . . . . . . . . . . . . . Diluted earnings (loss) available to common stockholders per share . . . . . . . . . . . Other Financial Data: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance Sheet Data: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated convertible debentures (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.80 $1.97 $1.80 454 316 2,252 1,328 5,274 2,930 222 — 1,229 $(1.07) $(1.07) $(1.07) $(3.29) $(3.29) $(3.29) $(1.08) $(4.88) $(4.88) 445 403 385 303 2,123 1,293 4,882 2,945 222 — 1,026 79 2,062 1,412 4,694 2,817 222 — 1,069 19 1,835 1,681 4,667 2,513 — 227 1,246 (1) Other (income) expense, net primarily includes interest income in 2005. The 2004 expense primarily relates to $171 million of reﬁnancing costs. The 2003 expense of $43 million includes $29 million of charges incurred in connection with the redemption of previously issued sub- ordinated notes as well as an $11 million write-off of notes receivable that were deemed impaired. (2) 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 note 5 to our consolidated ﬁnancial statements included elsewhere in this report. (3) 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 decon- solidation, the trust preferred securities were removed from our consolidated balance sheets at December 31, 2003 and the subordinated con- vertible 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 consolidated balance sheets was the same as the carrying amount of the subordinated convertible debentures added to the consoli- dated 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 securities were reﬂected as a separate category prior to December 31, 2003. 25 management’s discussion and analysis of ﬁnancial condition and results of operations (Dollars in millions, except per share data and unless otherwise indicated) The following management discussion and analysis gives effect to the restatement discussed below and in the Restatement Note. Executive Overview We are the largest equipment rental company in the world with an integrated network of 751 rental loca- tions in the United States, Canada and Mexico. Although the equipment rental industry is highly fragmented and diverse, we believe we are well posi- tioned to take advantage of this environment because larger companies often have signiﬁcant competitive advantages over smaller competitors. These advan- tages include greater purchasing power, the ability to provide customers with a broader range of equipment and services as well as with newer and better main- tained equipment, and greater ﬂexibility to transfer equipment among branches. We offer for rent over 20,000 classes of rental equip- ment, including construction equipment, industrial and heavy machinery, aerial work platforms, trafﬁc control equipment, trench safety equipment and homeowner items. Our revenues are derived from the following sources: equipment rentals, sales of rental (used) equipment, sales of new equipment, contractor supplies sales and service and other. Rental equip- ment revenues have historically accounted for more than 70 percent of our total revenues and we expect this trend to continue. In August 2004, we received notice from the SEC that it was conducting a non-public, fact-ﬁnding inquiry of the Company. The SEC inquiry appears to relate to a broad range of the Company’s accounting practices and is not conﬁned to a speciﬁc period. In March 2005, our board of directors formed a Special Com- mittee of independent directors to review matters related to the SEC inquiry. Our board of directors received and acted upon ﬁndings of the Special Com- mittee in January 2006. The actions that we took with respect to the Special Committee’s ﬁndings relat- ing to the minor sale-leaseback transactions and the trade packages, as well as some other accounting matters, are discussed below. With respect to the accounting for purchase business combinations, the primary focus of the Special Committee’s inquiry was our historical practices concerning the valuation of rental equipment acquired in purchase business com- binations and the practice of recognizing proﬁt on sales of this equipment within one year of its acquisi- tion. These practices are further discussed below. The SEC inquiry is ongoing and we are continuing to cooperate fully with the SEC. Restatement and Reclassiﬁcation of Previously Issued Consolidated Financial Statements, Certain Findings of the Special Committee and Related Matters Subsequent to the ﬁling of our Form 10-K for the year ended December 31, 2003, which included our consolidated ﬁnancial statements for the years ended December 31, 2003 and 2002, it was determined that the Company’s originally issued ﬁnancial statements for those periods required restatement to correct the accounting for (i) the recognition of equipment rental revenue; (ii) irregularities identiﬁed by the Special Committee with respect to six short-term, or minor, equipment sale-leaseback transactions; (iii) self-insur- ance reserves; (iv) customer relationships; and (v) the provision for income taxes. In addition, we identiﬁed other matters for which we are not restating but for which we have determined additional disclosure would be useful. Restatement of Financial Statements The effects of the restatement adjustments on our originally reported results of operations for the years ended December 31, 2003 and 2002 and on our origi- nally reported retained earnings at December 31, 2001, are summarized below. Net Loss Year Ended December 31, Retained Earnings at December 31, 2003 2002 $(259) $(398) 2001 $467 (2) 20 8 (2) 24 (9) 15 (10) 5 (3) 2 (13) (1) (15) 6 (9) 1 (8) (17) (33) (41) — (91) 35 (56) (9) (65) As originally reported . . . . . . . Adjustments for: Equipment rental revenues (a) . . . . . . . . . . . . Sale-leaseback transactions (b) Self-insurance reserves (c) Customer relationships (d) . . . . . . . . . . . . . Pre-tax impact . . . . . . . . . . . . Related tax effects . . . . . . . . . Adjustments, net of tax . . . . . . . Income taxes (e) . . . . . . . . . . . Total adjustments, net of tax . . As restated . . . . . . . . . . . . . . . . $(254) $(406) $402 Below is a summary of the nature and amount of the adjustments reﬂected in the restatement (all amounts are presented on a pre-tax basis unless otherwise noted). As discussed above, in light of the systems and records presently available to us, it is not possi- ble for us to reconstruct detailed ﬁnancial data for 2001 and prior periods with any amount of effort or expense. Accordingly, we do not have the ability to restate, and we have not restated, our previously reported consolidated ﬁnancial statements for the ﬁs- cal years ended December 31, 2001 and 2000. How- ever, we have provided below the impact on originally reported pre-tax and/or net income for 2001 and 2000 26 of certain of the items for which we are restating, as information for these discrete items is available to us and we believe this information is useful. (a) Recognition of equipment rental revenues. Our originally reported results reﬂected the recognition of equipment rental revenues based on the minimum amounts which became due and payable under the terms of our applicable rental contracts. We have determined that equipment rental revenues should be recognized on a straight-line basis and have restated our previously reported results to reﬂect this correc- tion of an error. Our restatement had the impact of increasing/(decreasing) originally reported pre-tax income for 2001, 2000 and for periods prior to 2000 by $6, $4, and $(27), respectively. (b) Sale-leaseback transactions. In 2002, 2001, and 2000 we previously recognized gross proﬁts of $1, $20 and $12, respectively, in conjunction with six minor sale-leaseback transactions. It has been deter- mined that the accounting for these transactions involved irregularities, and we are restating our ﬁnancial statements to properly reﬂect the account- ing for these six transactions. At the dates of the original minor sale-leaseback transactions, we recog- nized a premium (excess proﬁt above fair value) on these transactions. In exchange for receiving this proﬁt premium, we agreed to disburse cash in later periods as well as pay premiums for subsequent equipment purchases (“subsequent purchases”). Our restatement for the sale-leaseback transactions had the impact of increasing/(decreasing) originally reported pre-tax income for 2003, 2002, 2001 and 2000 by $20, $2, $(21), and $(12), respectively. These restatement adjustments reﬂect the elimination of the premium originally received in the minor sale-lease- back transactions as well as the deferral of any proﬁt until all of our obligations associated with the origi- nally received premiums were settled. Additionally, the adjustments reﬂect a reduction in previously recorded depreciation expense because this expense reﬂected capitalized equipment costs for subsequent purchases that were overstated. (c) Self-insurance reserves. We self-insure for certain types of claims associated with our business, includ- ing (i) workers compensation claims and (ii) claims by third parties for injury or property damage caused by our equipment or personnel. These types of claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associ- ated with a particular claim may not be known for an extended period of time. Our prior methodology for developing self-insurance reserves was based on man- agement estimates of ultimate liability which were developed without obtaining actuarial valuations. In 2004, management adopted an estimation approach based on third party actuarial calculations that prop- erly reﬂects and incorporates actuarial assumptions. Based on actuarial calculations performed by our third party actuaries in late 2004 and 2005, we con- cluded that the estimation process we previously used did not adequately take into account certain fac- tors and that, as a result, a restatement was required. The factors that were not adequately addressed by our historical estimation process included future changes in the cost of known claims over time, cost inﬂation and incurred but not reported claims. Our restatement for the self-insurance reserves had the impact of increasing/(decreasing) originally reported pre-tax income for 2003, 2002, 2001, 2000 and for periods prior to 2000 by $8, $(13), $(11), $(18) and $(12), respectively. (d) Customer relationships. In 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), which required the use of the purchase method of accounting for business combinations and prohibited the use of the pooling of interests method. SFAS No. 141 also changed the deﬁnition of intangible assets acquired in a purchase business combination, provid- ing speciﬁc criteria for the initial recognition and measurement of intangible assets apart from good- will. SFAS 141 applied to all business combinations accounted for using the purchase method for which the acquisition date is July 1, 2001 or later. We have reviewed acquisitions we made since July 1, 2001 and have determined that a portion of the pur- chase price for these acquisitions previously allocated to goodwill should be recorded as a separate intangi- ble asset — customer relationships. This restatement reﬂects the amortization expense associated with the reallocation of a portion of the purchase price from goodwill (which is not amortized) to customer rela- tionships (which are amortized). This correction of an error had the impact of decreasing originally reported pre-tax income for 2003 and 2002 by $2 and $1, respectively. (e) Income taxes. We have restated our income tax provision to (i) correctly reﬂect all book-to-tax tempo- rary differences (primarily depreciation and nonde- ductible reserves and accruals); (ii) reﬂect appropriate tax beneﬁts for net operating loss and alternative minimum tax credits; (iii) calculate deferred taxes at appropriate legal entity tax rates; and (iv) account for the settlement of an IRS audit examination. Our restatement for income taxes had the impact of increasing/(decreasing) originally reported net income for 2003, 2002, 2001, 2000 and for periods prior to 2000 by $(10), $1, $ (3), $ (2) and $(4), respectively. Buy-out of operating lease. In addition to the restatement matters discussed above, we have deter- mined that $88 of costs for the year ended December 31, 2003 previously classiﬁed below operating income should be reclassiﬁed to cost of equipment revenues and included in operating income. This amount pri- marily represents the amount in excess of the fair value related to the buy-out of equipment under oper- ating leases. This reclassiﬁcation, which has the effect of reducing gross proﬁt and other expense (income), net by $88, has no impact on originally reported net income or earnings per share for the year ended December 31, 2003. Trade packages. During the period from the fourth quarter of 2000 through 2002, the Company sold used equipment to certain suppliers (referred to as “trade packages”). In certain of the trade pack- ages, prices may have included a premium above fair value. In order to induce these suppliers to buy used equipment at premium prices, the Company made commitments or concessions to the suppliers. It has been determined that the accounting for those trans- actions involved irregularities and that the Company improperly recognized revenue from the transactions 27 involving the undisclosed inducements. However, because records were not created that would have permitted the linkage of the sales and inducements (as a result of instructions given by certain former employees of the Company), the Company is unable to determine the portion of the revenue and gross proﬁt recognized in connection with trade packages with these suppliers between 2000 and 2002 that was improperly recognized. During this period, all sales of used equipment to these suppliers (which includes all trade package transactions) generated total revenues and gross proﬁts of $38 and $9, respec- tively. Notwithstanding the lack of records relating to these transactions, the Company believes that its ﬁnancial statements from and after 2002 are materially correct with respect to the effect of these transactions. The Special Committee concluded that, based on the evidence it reviewed, the practices regarding certain trade packages and minor sale-leaseback transac- tions described above appear to have been directed by the Company’s two former chief ﬁnancial ofﬁcers. Both of these individuals, who are no longer with the Company, declined to cooperate with the Special Com- mittee’s investigation. Based upon recommendations of the Special Committee, the Company’s board of directors directed the Company, among other things, to evaluate potential claims relating to certain former company personnel, including these individuals and compensation and beneﬁts previously received by them described elsewhere in this report. Purchase Accounting. The Company was formed and began operations in 1997 with the acquisition of six equipment rental companies. During the subse- quent three year period, we grew rapidly and com- pleted approximately 230 additional acquisitions. By the end of 1999, we were the largest equipment rental company in the world, with annual revenues of approximately $2.9 billion. With management’s focus now turned toward organic growth, the pace of our acquisitions signiﬁcantly slowed and from September 2001 through the date of this report we completed only eight acquisitions. Substantially all of the busi- ness combinations that we have completed since the inception of the Company were accounted for as pur- chases, however, there were several signiﬁcant busi- ness combinations accounted for in the earlier period that were accounted for as poolings. Accounting standards applicable to purchase busi- ness combinations require the acquiring company to recognize the assets acquired and the liabilities assumed based on their fair values at the time of acquisition. Any excess between the cost of an acquired company and the sum of the fair values of tangible and identiﬁable intangible assets less liabili- ties assumed should be recognized as goodwill. In our historical accounting for these purchase busi- ness combinations, long-lived ﬁxed assets (comprised primarily of rental equipment) and goodwill gener- ally represented the largest components of our acqui- sitions. As a result, when we performed our purchase price allocation process, the purchase price was pri- marily allocated to these assets. As discussed above, in March 2005, our Board of Directors formed a Special Committee of independent directors to review matters related to the SEC inquiry. The Special Committee made certain ﬁndings related to the Company’s historical practices concerning the valuation of rental equipment acquired in purchase business combinations. The committee concluded that certain of these practices were not adequate between 1997 and August 2000. These practices included, among other things, the use of inconsistent valuation methodologies, some of which were reﬂected in mem- oranda that were not provided to or reviewed by the Company’s auditors, suggestions contained in those memoranda that improper methods of valuation be used (although the committee did not ﬁnd evidence that such improper methods were generally applied), inadequate supervision of personnel, inadequate coor- dination with providers of outside valuations and apparent confusion on the part of one of those providers. The Special Committee concluded that cer- tain Company personnel (whom the committee was unable to identify) may have sought to manipulate opening balance sheet values for equipment acquired in purchase business combinations by causing them to be understated and that these opening balance sheet values may have been understated by an amount the committee was unable to determine. Following our review of our historical practices and the ﬁndings of the Special Committee, the Company considered whether the effect of the deﬁciencies iden- tiﬁed by the committee required a restatement of pre- viously reported results. These deﬁciencies in our historical practices between 1997 and August 2000 may have resulted in inaccurate values being ascribed to rental equipment that we acquired in pur- chase business combinations, including in some cases values that may have been below fair value. However, we do not have the ability to revalue this equipment because we are unable to currently determine its his- torical physical condition and the records that cur- rently exist for this equipment are not sufﬁcient to establish the physical condition of the equipment at the time of its acquisition. The equipment valuations performed at the time of the acquisition, some of which included a physical inspection, reﬂected an assessment of the condition of the equipment. While, as the Special Committee iden- tiﬁed, there were various deﬁciencies in our historical valuation practices, it is not possible to accurately revalue this equipment to assess the reasonableness of speciﬁc valuations. Therefore, we believe the only feasible approach is to give effect to the valuations that were performed contemporaneously with these acquisitions. Accordingly, we have determined that restatement is not appropriate. However, we have also determined that it would be useful to illustrate what our historical results would have been had these equipment values been higher. The analysis below reﬂects the hypothetical impact on total gross proﬁt (including gross proﬁt on equip- ment rentals as well as sales of rental equipment) and net income (loss) for the years 2002 through 2005 had the rental equipment we acquired in purchase acquisitions during the period between 1997 and August 2000 been valued at an amount 10 percent and 20 percent higher than it was previously valued. The hypothetical impact on gross proﬁt does not reﬂect costs and expenses that are considered operat- ing expenses and are appropriately classiﬁed below gross proﬁt. 28 Hypothetical impact of understatement of equipment values (1)(2)(3) As 20 percent 10 percent Reported(4) Hypothetical Hypothetical 2002 Total gross proﬁt . . . . . . Net loss . . . . . . . . . . . . . 2003 Total gross proﬁt . . . . . . Net loss . . . . . . . . . . . . . 2004 Total gross proﬁt . . . . . . Net loss . . . . . . . . . . . . . 2005 Total gross proﬁt . . . . . . Net income . . . . . . . . . . . $ 876 (406) $ 782 (254) $ 959 (84) $1,165 187 $ 870 (410) $ 779 (256) $ 957 (85) $1,164 186 $ 864 (413) $ 777 (257) $ 956 (86) $1,163 186 (1) This analysis reﬂects the hypothetical revaluation of equipment acquired in connection with purchase business combinations of the type associated with our general rentals and trench safety, pump and power segments, which constituted approximately 85 percent of all acquisitions we completed during the subject period. We have not reﬂected in this chart the favorable impact of reduced goodwill impairment charges associated with a hypothetical reallocation of the purchase price between goodwill and rental asset values. (2) In light of the systems and records presently available to us, it is not possible to perform this analysis for years prior to 2002. Because of our current inability to push-down certain reconciling items on our general ledger and sub-ledger to individual rental asset records, we cannot calculate the amounts ultimately attributed to rental assets in our historical purchase price allocation process. Accordingly, we do not have a reasonable basis for applying this sensitivity analysis to periods prior to 2002. However, we have performed an analysis of this prior period in the table below. (3) This analysis reﬂects the revaluation of equipment to reﬂect our hypothetical total gross proﬁt had the rental equipment we acquired during the relevant period been valued higher. To the extent the revaluation of the equipment converted a gain to a hypothetical loss, we limited the revaluation (increase in basis of the equipment) to an amount that would reduce the gain to zero. Similarly, to the extent that equipment was originally sold at a loss, the revaluation does not increase the basis of the related equipment. (4) The As Reported results reﬂect the results included in this report, including restated results for 2003 and 2002. Any potential impact on gross proﬁt and net income (loss) had this rental equipment acquired between 1997 and August 2000 been valued 10 percent or 20 percent higher than it was previously valued would not have a material impact on our reported results of operations for 2002 through 2005. Accord- ingly, notwithstanding deﬁciencies in the Company’s historical valuation process as it relates to purchase business combinations, the Company does not believe a restatement is required and believes that its ﬁnancial statements from and after 2002 are materially correct with respect to the effect of equipment valuations. In addition to the deﬁciencies identiﬁed by the Special Committee related to our historical practices described above, instances were identiﬁed where equipment acquired in purchase business combina- tions between 1997 and August 2000 was sold within a short time following the acquisition at gross mar- gins that indicate the value initially ascribed to the equipment may have been too low. For the reasons described above, however, we are unable to assess the reasonableness of allocations of basis to speciﬁc acquired assets. Notwithstanding the impracticabil- ity associated with making this assessment, however, we believe it is useful to illustrate what our gross proﬁt would have been for the period between 1998 and 2001 had our gross margin on sales of all rental equipment (including equipment acquired in connec- tion with purchase acquisitions) been different. The analysis below reﬂects the hypothetical impact on previously reported gross margins and gross proﬁts on sales of all rental equipment for the years 1998 through 2001 had these gross margins been 40 per- cent and 35 percent. Hypothetical impact of reduced gross margins (1) Previously Reported Reduced GM Reduced GM 1998 Gross margin . . . . . . . . . Gross proﬁt . . . . . . . . . . 1999 Gross margin . . . . . . . . . Gross proﬁt . . . . . . . . . . 2000 Gross margin . . . . . . . . . Gross proﬁt . . . . . . . . . . 2001 Gross margin . . . . . . . . . Gross proﬁt . . . . . . . . . . 45% $ 54 42% $ 99 40% $140 40% $ 58 40% $48 40% $94 40% n/a 40% n/a 35% $ 42 35% $ 83 35% $122 35% $ 52 (1) We have not reﬂected in this chart the favorable impact of reduced goodwill impairment charges associated with a hypothetical reallocation of the purchase price between goodwill and rental asset values. Any potentially overstated gross proﬁt associated with these sales, the latest of which would have occurred in August 2001, would not have a material impact on our reported results of operations for 2002 through 2005. Accordingly, notwithstanding deﬁ- ciencies in the Company’s historical valuation process as it relates to purchase business combinations, the Company does not believe a restatement is required and believes that its ﬁnancial statements from and after 2002 are materially correct with respect to the effect of equipment valuations. 29 Financial Overview Free Cash Flow GAAP Reconciliation We deﬁne “free cash ﬂow” as (i) net cash provided by operating activities less (ii) purchases of rental equip- ment, purchases of other property and equipment and buy-outs of equipment leases plus (iii) proceeds from sales of rental equipment, proceeds from sales of rental locations and proceeds from sales-leaseback transactions. Management believes free cash ﬂow provides useful additional information concerning cash ﬂow available to meet future debt service obliga- tions and working capital requirements. However, free cash ﬂow is not a measure of ﬁnancial perfor- mance or liquidity under Generally Accepted Accounting Principles (“GAAP”). Accordingly, free cash ﬂow should not be considered an alternative to net income or cash ﬂow from operating activities as indicators of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash ﬂow. Full Year Ended December 31, 2005 2004 2003 Net cash provided by operating activities . . . . . . . $ 643 $ 737 $ 306 Purchases of rental equipment . . . . . . . . . . . . . . . (741) (592) (379) Purchases of property and equipment . . . . . . . . . . . . . . . Buy-outs of equipment leases . . Proceeds from sales of rental (82) — (57) — (33) (304) equipment . . . . . . . . . . . . . . . 307 275 233 Proceeds from sales of rental locations . . . . . . . . . . . . . . . . Proceeds from sales-leaseback . . 3 — — 23 — — Free Cash Flow . . . . . . . . . . . . $ 130 $ 386 $(177) In 2005, we reported revenues and free cash ﬂow of $3.6 billion and $130, respectively. Our 2005 revenue growth of 15.2 percent outpaced our primary end market, private non-residential construction, which grew 5.0 percent in 2005 according to Department of Commerce data. This revenue growth reﬂects increased rental rates of 6.0 percent and a 5.2 per- centage point increase in dollar equipment utilization to 65.1 percent. (Dollar equipment utilization is cal- culated with consideration to our equipment rental revenue and the average original cost of equipment in our rental ﬂeet.) In 2004, we reported revenues and free cash ﬂow of $3.1 billion and $386, respec- tively. Our 2004 revenue growth of 7.4 percent outpaced our primary end market, private non- residential construction, which grew 4.2 percent in 2004 according to Department of Commerce data. This growth reﬂects increased rental rates of 7.5 per- cent and a 2.8 percentage point increase in dollar equipment utilization to 59.9 percent. We signiﬁcantly improved our proﬁtability in 2005 as compared to 2004. Our increased proﬁtability was driven by a 6.0 percent growth in rental rates and a 44.0 percent increase in contractor supplies sales. The improved proﬁtability also reﬂects a $122 reduc- tion in goodwill impairment charges and a $101 reduction in reﬁnancing charges. In addition to improving our proﬁtability, we reported free cash ﬂow of $130 in 2005, after investing approximately $839 in capital expenditures. Our rental ﬂeet had an original equipment cost of $3.9 billion at December 31, 2005, as compared to $3.7 billion at December 31, 2004. We ended 2005 with a cash balance of approxi- mately $316. In 2004, we substantially reduced our net loss from 2003. This was accomplished through a 7.5 percent growth in rental rates, a 22.3 percent increase in con- tractor supplies sales, a 25.8 percent reduction in interest expense and the expansion of our rental ﬂeet. The reduced net loss also reﬂects a $117 reduction in goodwill impairment charges, partially offset by increased reﬁnancing costs of approximately $84. Our rental ﬂeet had an original equipment cost of $3.7 billion at December 31, 2004 as compared to $3.5 billion at December 31, 2003. Additionally, we reported free cash ﬂow of $386 in 2004, after invest- ing $649 in capital expenditures. In 2004, we also reﬁnanced approximately $2.1 billion of debt. This reﬁnancing extended our debt maturities, reduced interest expense and provided the company with greater ﬁnancial ﬂexibility. As a result of our signiﬁ- cantly improved operations and reﬁnancing activity, we ended 2004 with a cash balance of $303. In 2003, despite a weak non-residential construction market, we substantially reduced our net loss and increased our revenues 2.2 percent to $2.9 billion. The reduced net loss reﬂected increased rental rates of 2.0 percent. Additionally, the reduced net loss reﬂected the absence of a $288 charge associated with a cumulative effect of change in accounting principle as well as a $17 restructuring charge, partially offset by a $58 charge for the buy-out of equipment leases and a $17 charge for reﬁnancing costs. In 2003, we generated $306 in cash ﬂow from operations and our free cash ﬂow was $(177). We are committed to capitalizing on future growth opportunities. Our goal is to grow revenues by approx- imately 11 percent to approximately $4.0 billion in 2006. We are on track to achieve this objective and expect organic growth, prudent acquisitions and the expansion of complementary revenue streams such as contractor supplies to contribute to our growth. Revenues for each of the four years in the period ended December 31, 2005 were as follows: Year Ended December 31, 2005 2004 2003 2002 (Restated) (Restated) Equipment rentals . . . . . . $2,583 Sales of rental equipment . . . . . . . . . . . Sales of new equipment . . . Contractor supplies sales . . . . . . . . . . . . . . . Service and other . . . . . . . . 307 208 324 141 $2,289 $2,176 $2,152 275 178 225 127 233 170 184 119 223 170 160 116 Total revenues . . . . . . . . . . $3,563 $3,094 $2,882 $2,821 Percent Change 2005 2004 2003 Equipment rentals . . . . . . . . . . . . . . . Sales of rental equipment . . . . . . . . . . Sales of new equipment . . . . . . . . . . . Contractor supplies sales . . . . . . . . . . Service and other . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . 12.8 11.6 16.9 44.0 11.0 15.2 5.2 18.0 4.7 22.3 6.7 7.4 1.1 4.5 — 15.0 2.6 2.2 30 Equipment rentals include our revenues from rent- ing equipment, as well as related revenues such as the fees we charge for equipment delivery, fuel, repair of rental equipment and damage waivers. Sales of rental equipment include our revenues from the sale of used rental equipment. Contractor supplies sales include our sales of supplies utilized by contrac- tors, which include construction consumables, tools, small equipment and safety supplies. Services and other includes our repair services (including parts sales) as well as the operations of our subsidiaries that develop and market software for use by equip- ment rental companies in managing and operating multiple branch locations. 2005 total revenues of $3.6 billion increased 15.2 per- cent compared with total revenues of $3.1 billion in 2004. The increase primarily results from a 12.8 per- cent increase in equipment rentals and a 44.0 percent increase in contractor supplies sales. The increase in equipment rentals reﬂects a 6.0 percent increase in rental rates and a 5.2 percentage point increase in dollar equipment utilization. The increase in contrac- tor supplies sales reﬂects increased volume as we expanded our product offering. Equipment rentals represented approximately 72 percent and 74 percent of our revenues in 2005 and 2004, respectively. 2004 total revenues of $3.1 billion increased 7.4 per- cent compared with total revenues of $2.9 billion in 2003. The increase resulted primarily from a 5.2 per- cent increase in equipment rentals, an 18.0 percent increase in sales of rental equipment and a 22.3 per- cent increase in contractor supply sales. The increase in equipment rentals reﬂects a 7.5 percent increase in rental rates and a 2.8 percentage point increase in dollar equipment utilization. The increase in contrac- tor supplies sales reﬂects increased sales volume. The increase in sales of rental equipment reﬂects increased volume. Equipment rentals represented approximately 74 percent and 76 percent of our rev- enues in 2004 and 2003, respectively. 2003 total rev- enues of $2.9 billion increased 2.2 percent compared with total revenues of $2.8 billion in 2002. The increase primarily relates to increased equipment rental revenues and increased contractor supplies sales. Equipment rentals represented approximately 76 percent of our revenues in 2003 and 2002. Net income (loss) for each of the four years in the period ended December 31, 2005 was as follows: Year Ended December 31, 2005 2004 2003 (Restated) 2002 (Restated) Net income (loss) . . . . . . $187 $(84) $(254) $(406) 2005 net income was $187 or $1.80 per diluted share. 2004 net loss of $84, or $1.07 per diluted share, included an after-tax charge of $122 ($139 pre-tax), or $1.57 per diluted share, relating to goodwill impairment and an after-tax charge of $101 ($171 pre-tax), or $1.30 per diluted share, related to reﬁ- nancing costs. 2003 net loss of $254, or $3.29 per diluted share, included an after-tax charge of $239 ($297 pre-tax), or $3.10 per diluted share, relating to goodwill impairment, an after-tax charge of $58 ($95 pre-tax), or $0.75 per diluted share, relating to the buy-out of equipment leases, and an after-tax charge of $17 mil- lion ($29 pre-tax), or $0.22 per diluted share, related to reﬁnancing costs. 2002 net loss of $406, or $4.88 per diluted share, included an after-tax charge of $288 as a cumulative effect of change in accounting principle, an after-tax charge of $199 ($248 pre-tax), or $2.62 per diluted share, relating to goodwill impairment, and an after- tax charge of $17 ($28 pre-tax), or $0.23 per diluted share, relating to a restructuring charge. Critical Accounting Policies We prepare our consolidated ﬁnancial statements in accordance with U.S generally accepted accounting principles. A summary of our signiﬁcant accounting policies is contained in note 2 to our consolidated ﬁnancial statements. In applying many accounting principles, we make assumptions, estimates and/or judgments. These assumptions, estimates and judg- ments are often subjective and may change based on changing circumstances or changes in our analysis. Material changes in these assumptions, estimates and judgments have the potential to materially alter our results of operations. We have identiﬁed below our accounting policies that we believe could poten- tially produce materially different results were we to change underlying assumptions, estimates and judgments. Although actual results may differ from those estimates, we believe the estimates are reasonable and appropriate. Revenue Recognition We recognize equipment rental revenue on a straight- line basis. Our rental contract periods are daily, weekly or monthly. By way of example, if a customer were to rent a piece of equipment and the daily, weekly and monthly rental rates for that particular piece were (in actual dollars) $100, $300 and $900, respectively, we would recognize revenue of $32.14 per day. The daily rate is calculated by dividing the monthly rate of $900 by 28 days, the monthly term. As part of this straight-line methodology, when the equipment is returned, we recognize as incremental revenue the excess, if any, between the amount the customer is contractually required to pay over the cumulative amount of revenue recognized to date. Revenues from the sale of rental equipment and new equipment are recognized at the time of delivery to, or pick-up by, the customer and when collectibility is reasonably assured. Sales of contractor supplies are also recognized at the time of delivery to, or pick-up by, the customer. For construction-related contracts in our trafﬁc control segment which comprise approximately 8 percent of our total revenues, rev- enues are recognized based on the percentage of work completed. Use of the percentage-of-completion method requires management to make estimates of the expected total revenues, total costs and the extent of progress toward completion. 31 Allowance for Doubtful Accounts We maintain allowances for doubtful accounts. These allowances reﬂect our estimate of the amount of our receivables that we will be unable to collect. We base our estimate on a combination of an analysis of our accounts receivable on a speciﬁc accounts basis and historical write-off experience. Our estimate could require change based on changing circumstances, including changes in the economy or in the particu- lar circumstances of individual customers. Accord- ingly, we may be required to increase or decrease our allowance. Useful Lives of Rental Equipment and Property and Equipment We depreciate rental equipment and property and equipment over their estimated useful lives, after giv- ing effect to an estimated salvage value which ranges from 0 percent to 10 percent of cost. The useful life of an asset is determined based on our estimate of the period the asset will generate revenues, and the sal- vage 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 esti- mates 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. Purchase Price Allocation We have made a signiﬁcant number of acquisitions in the past and expect that we will continue to make acquisitions in the future. We allocate the cost of the acquired enterprise to the assets acquired and liabili- ties assumed based on their respective fair values at the date of acquisition. With the exception of good- will, long-lived ﬁxed assets generally represent the largest component of our acquisitions. The long-lived ﬁxed assets that we acquire are primarily rental equipment, transportation equipment and real estate. With limited exceptions, virtually all of the rental equipment that we have acquired through purchase business combinations has been classiﬁed as “To be Used,” rather than as “To be Sold.” Equipment that we acquire and classify as “To be Used” is recorded at fair value, as determined by replacement cost to the Company of such equipment. We use third party val- uation experts to help calculate replacement cost. In addition to long-lived ﬁxed assets, we also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the book values reﬂected on the acquired entities balance sheets. However, when appropriate, we adjust these book values for factors such as collectibility and exis- tence. The intangible assets that we have acquired are primarily goodwill, customer-related intangibles (speciﬁcally customer relationships) and covenants not-to-compete. Goodwill is calculated as the excess of the cost of the acquired entity over the net of the amounts assigned to the assets acquired and the liabilities assumed. Customer relationships have been valued based on an excess earnings or income approach with consideration to projected cash ﬂows. When speciﬁcally negotiated by the parties in the applicable purchase agreements, we have valued non- compete agreements based on the amounts assigned to them in the purchase agreements as these amounts represent the amounts negotiated in an arm’s length transaction. When not negotiated by the parties in the applicable purchase agreements, we estimated the fair value of non-compete agreements based on a percentage of the acquisition’s goodwill. Impairment of Goodwill We have made acquisitions in the past that included the recognition of a signiﬁcant amount of goodwill. Commencing January 1, 2002, goodwill is no longer amortized, but instead is reviewed for impairment annually or more frequently as events occur that indicate a decline in fair value below its carrying value. In general, this means that we must determine whether the fair value of the goodwill, calculated in accordance with applicable accounting standards, is at least equal to the recorded value 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. Prior to January 1, 2004, we tested for goodwill impairment on a branch-by-branch basis. Accord- ingly, a goodwill write-off was required even if only one or a limited number of our branches had an impairment as of the testing date and even if there was no impairment for all our branches on an aggre- gate basis. Commencing January 1, 2004, we began testing for goodwill impairment at a regional, rather than a branch level. We began testing for impairment at this level because accounting standards require that goodwill impairment testing be performed at the reporting unit level. In 2004, following a reorganiza- tion of our reporting structure, our regions became our reporting units. This change in reporting units may impact future goodwill impairment analyses because there are substantially fewer regions (nine) than there are branches (in excess of 700). Impairment of Long-Lived Assets 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 recoverability is based upon an undiscounted cash ﬂow analysis over the asset’s remaining useful life. We must make estimates and assumptions when applying the undiscounted 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. 32 Income Taxes We recognize deferred tax assets in accordance with applicable accounting standards and we record deferred tax assets based on current enacted tax rates and laws. The future realization of the deferred tax beneﬁts and carryforwards are determined by consid- ering historical proﬁtability, projected future taxable income, the expected timing of the reversals of exist- ing temporary differences and tax planning strate- gies. We generally evaluate projected taxable income for a ﬁve-year period to determine the recoverability of all deferred tax assets and, in addition, examine the length of the carryforward to ensure that the deferred tax assets are established at an amount that is more likely than not to be realized. We have not provided a valuation allowance related to our federal deferred tax assets because we believe such assets will be recovered during the carryforward period. If sufﬁcient evidence becomes apparent that it is more likely than not that our deferred tax assets will not be utilized, we would be required to record a valuation allowance for such assets, which would result in additional income tax expense. We have provided a valuation allowance related to certain state operating loss carryforwards. We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based on the proba- ble outcomes of such matters. In addition, when applicable, we adjust the previously recorded tax expense to reﬂect examination results. Our ongoing assessments of the probable outcomes of the examina- tions and related tax positions require judgment and could increase or decrease our effective tax rate as well as impact our operating results. Reserves for Claims We are exposed to various claims relating to our busi- ness, including those for which we provide self-insur- ance. Claims for which we self-insure include (i) workers compensation claims and (ii) claims by third parties for injury or property damage caused by our equipment or personnel. These types of claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associated with a particular claim may not be known for an extended period of time. Our methodology for developing self-insurance reserves is based on management estimates which incorporate actuarial valuations that are periodically prepared by our third party actuar- ies. Our estimation process considers, among other matters, the cost of known claims over time, cost inﬂation and incurred but not reported claims. These estimates may change based on, among other things, changes in our claims history or receipt of additional information relevant to assessing the claims. Fur- ther, 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 reserve levels. Legal Contingencies We are involved in a variety of claims, lawsuits, inves- tigations and proceedings, as described in “Item 3 — Legal Proceedings” and elsewhere in this report. We determine whether an estimated loss from a contin- gency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our liti- gation and regulatory matters using available infor- mation. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litiga- tion and settlement strategies. Should developments in any of these matters cause a change in our deter- mination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a ﬁnal adverse judg- ment or be settled for signiﬁcant amounts, they could have a material adverse effect on our results of opera- tions in the period or periods in which such change in determination, judgment or settlement occurs. Results of Operations As discussed in note 19 to the consolidated ﬁnancial statements, our current reportable segments are gen- eral rentals, trafﬁc control and trench safety, pump and power. Prior to 2004, we had one reportable seg- ment: general rentals. In the ﬁrst quarter of 2004, we began reporting information for two reporting seg- ments: general rentals and trafﬁc control. In 2005, we began reporting for an additional segment, trench safety, pump and power. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include con- struction and industrial companies, manufacturers, utilities, municipalities and homeowners. The gen- eral rentals segment operates throughout the United States and Canada and has one location in Mexico. The trafﬁc control segment includes the rental of equipment used in the management of trafﬁc-related services and activities. The trafﬁc control segment’s customers include construction companies involved in infrastructure projects and municipalities. The trafﬁc control segment operates in the United States. The trench safety, pump and power segment includes the rental of specialty construction products and related services. The trench safety, pump and power segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates in the United States and has one location in Canada. 33 These segments align the Company’s external seg- ment reporting to how management evaluates and allocates resources. The Company evaluates segment performance based on segment operating results. We completed acquisitions in each of 2002, 2003, 2004 and 2005 which are discussed further in note 4 to the consolidated ﬁnancial statements. 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, although there is no material impact from these acquisitions. Revenues by segment for each of the four years in the period ended December 31, 2005 were as follows: General rentals Trench safety, pump and power Trafﬁc control Total 2005 Equipment rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractor supplies sales . . . . . . . . . . . . . . . . . . . . . . . . . . . Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 Equipment rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractor supplies sales . . . . . . . . . . . . . . . . . . . . . . . . . . . Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 Equipment rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractor supplies sales . . . . . . . . . . . . . . . . . . . . . . . . . . . Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 Equipment rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractor supplies sales . . . . . . . . . . . . . . . . . . . . . . . . . . . Service and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,203 291 191 291 137 $3,113 $1,961 259 170 196 123 $2,709 $1,792 222 161 152 116 $2,443 $1,761 215 163 122 114 $2,375 $140 13 14 10 3 $180 $101 13 7 6 3 $130 $ 85 11 6 4 3 $109 $ 71 7 4 3 2 $ 87 $240 3 3 23 1 $270 $227 3 1 23 1 $255 $299 — 3 28 — $330 $320 1 3 35 — $359 $2,583 307 208 324 141 $3,563 $2,289 275 178 225 127 $3,094 $2,176 233 170 184 119 $2,882 $2,152 223 170 160 116 $2,821 Equipment rentals. Equipment rentals represent our revenues from renting equipment. 2005 equipment rentals of $2,583 increased $294, or 12.8 percent, reﬂecting a 6.0 percent increase in rental rates and a 5.2 percentage point increase in our dollar equipment utilization. Equipment rentals represented approximately 72 percent of total revenues in 2005. On a segment basis, equip- ment rentals represented approximately 71 percent, 78 percent and 89 percent of total revenues for general rentals, trench safety, pump and power and trafﬁc control, respectively. General rentals equip- ment rentals increased $242 or 12.3 percent reﬂect- ing increased rental rates and a 10.6 percent increase in same-store rental revenues. Trench safety, pump and power equipment rentals increased $39, or 38.6 percent, reﬂecting a 22.8 percent increase in same-store rental revenues. Trafﬁc control equipment rentals increased $13, or 5.7 percent, reﬂecting a 19.2 percent increase in same-store rental revenues, partially offset by reduced revenues associated with closed locations. 2004 equipment rentals of $2,289 increased $113, or 5.2 percent, reﬂecting a 7.5 percent increase in rental rates and a 2.8 percentage point increase in dollar equipment utilization, partially offset by reduced vol- ume. Equipment rentals represented approximately 74 percent of total revenues in 2004. On a segment basis, equipment rentals represented approximately 72 percent, 78 percent and 89 percent of total rev- enues for general rentals, trench safety, pump and power and trafﬁc control, respectively. General rentals equipment rentals increased $169, or 9.4 per- cent, reﬂecting increased rental rates and a 10.9 per- cent increase in same-store rental revenues. Trench safety, pump and power equipment rentals increased $16, or 18.8 percent, reﬂecting a 14 percent increase in same-store rental revenues. Trafﬁc control equip- ment rentals decreased $72, or 24.1 percent, reﬂect- ing a reduction in the volume of rentals due to continued weakness in state spending for infrastruc- ture projects. 2003 equipment rentals of $2,176 increased $24, or 1.1 percent, reﬂecting a 2.0 percent increase in rental rates. Equipment rentals represented approxi- mately 76 percent of total revenues in 2003. On a segment basis, equipment rentals represented approx- imately 73 percent, 78 percent and 91 percent of total revenues for general rentals, trench safety, pump and power and trafﬁc control, respectively. General rentals equipment rentals increased $31, or 1.8 percent. 34 Trench safety, pump and power equipment rentals increased $14. Trafﬁc control equipment rentals decreased $21, or 6.6 percent, reﬂecting a reduction in the volume of rentals due to continued weakness in state spending for infrastructure projects. Sales of rental equipment. For each of the four years in the period ended December 31, 2005, sales of rental equipment have represented between 7 and 9 percent of our total revenues and our general rentals segment accounted for approximately 95 per- cent of these sales. Sales of rental equipment for trafﬁc control and trench safety, pump and power have been insigniﬁcant. 2005 sales of rental equipment of $307 increased $32 or 11.6 percent as compared to 2004. The 11.6 percent increase as compared to 2004 reﬂected an increase in the volume of equipment sold. 2004 sales of rental equipment of $275 increased $42 or 18.0 percent as compared to 2003. This increase reﬂected an increase in the volume of equipment sold. 2003 sales of rental equipment of $233 increased $10or 4.5 percent as compared to 2002. This increase as compared to 2002 reﬂected an increase in the vol- ume of equipment sold, as used equipment prices remained relatively ﬂat. Sales of new equipment. For each of the four years in the period ended December 31, 2005, sales of new equipment represented approximately 6 percent of our total revenues. Our general rentals segment accounted for approximately 95 percent of these sales. Sales of new equipment for trafﬁc control and trench safety, pump and power have been insigniﬁcant. 2005 sales of new equipment of $208 increased $30 or 16.9 percent as compared to 2004. The 16.9 per- cent increase as compared to 2004 reﬂected an increase in the number of units sold. 2004 sales of new equipment of $178 increased $8 or 4.7 percent as compared to 2003. The 4.7 percent increase as compared to 2003 reﬂected an increase in the volume of equipment sold. 2003 sales of new equipment of $170 was unchanged from 2002. Sales of contractor supplies. Sales of contractor sup- plies represent our revenues associate with selling a variety of contractor supplies including construction consumables, tools, small equipment and safety sup- plies. Contractor supplies sales have increased from $160, or 5.7 percent of our total revenues, in 2002 to $324, or 9.1 percent of our total revenues, in 2005. Consistent with sales of rental and used equipment, general rentals accounts for substantially all of our contractor supplies sales. Between 2003 and 2005, general rentals accounted for approximately 85 per- cent of total sales of contractor supplies. 2005 sales of contractor supplies of $324 increased $99 or 44.0 percent as compared to 2004. The 44.0 percent increase as compared to 2004 reﬂected an increase in the volume of supplies sold. 2004 sales of contractor supplies of $225 increased $41 or 22.3 percent as compared to 2003. The 22.3 percent increase as compared to 2003 reﬂected an increase in the volume of supplies sold. 2003 sales of contractor supplies of $184 increased $24 or 15.0 percent as compared to 2002. The 15.0 percent increase as com- pared to 2002 reﬂected an increase in the volume of supplies sold. Service and other. Service and other represent our revenues earned from providing services (including parts sales). Consistent with sales of rental and new equipment as well as sales of contractor supplies, general rentals accounts for substantially all of our service and other revenue. Between 2002 and 2005, general rentals accounted for approximately 97 per- cent of total service and other revenue. Service and other revenue increased 2.8 percent, 6.7 percent and 11.0 percent in 2003, 2004 and 2005, respectively. Segment Operating Proﬁt Segment operating proﬁt and operating margin for each of the four years in the period ended December 31, 2005 were as follows: General rentals Trench safety, pump and power Trafﬁc control Total 2005 Operating Proﬁt/(Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 Operating Proﬁt/(Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 Operating Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 Operating Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $472 15.2% $416 15.4% $234 9.6% $338 14.2% $48 26.7% $31 23.8% $23 21.1% $22 25.3% $(20) (7.4)% $(52) (20.4)% $ 4 1.2% $ 12 3.3% $500 14.0% $395 12.8% $261 9.1% $372 13.2% 35 The following is a reconciliation of segment proﬁt to total company operating income (loss): Total segment proﬁt . . . . . . Unallocated items: Goodwill impairment charges . . . . . . . . . . . . Restructuring and asset impairment charges . . 2005 2004 2003 2002 $500 $ 395 $ 261 $ 372 — — (139) (297) (248) 1 — (28) Operating income (loss) . . . $500 $ 257 $ (36) $ 96 General rentals. For each of the four years in the period ended December 31, 2005, general rentals accounted for at least 90 percent of the total operat- ing proﬁt. This contribution percentage is consistent with general rentals’ revenue contribution over the same period, which has ranged from approximately 85 to 90 percent. General rentals operating margin in 2005 decreased 0.2 percentage points from 2004. The reduction in operating margin reﬂects an increase in selling, general & administrative expenses. Operating mar- gin in 2004 increased 5.8 percentage points from 2003. The improvement in operating margin reﬂects a 7.5 percent increase in rental rates. Operating margin in 2003 decreased 4.6 percentage points from 2002. The reduction in operating margin reﬂects the incurrence of $88 of costs associated with the buy-out of equipment leases as well as rental costs outpacing revenue growth, particularly in repairs and maintenance and delivery. Trench safety, pump and power. Trench safety, pump and power operating proﬁt increased $17 in 2005 reﬂecting a $50 increase in revenues. Operating proﬁt in 2004 increased $8 reﬂecting the gross mar- gin associated with the $21 increase in revenues. Operating proﬁts in 2003 were essentially unchanged from 2002. Trafﬁc control. Trafﬁc control operating loss decreased $32 in 2005. This improvement reﬂects a 6 percent increase in trafﬁc control equipment rental revenues as well as cost reductions. Operating loss in 2004 increased $56 primarily reﬂecting the gross margin associated with the $72, or 24.1 percent, reduction in trafﬁc control equipment rental rev- enues. Operating proﬁt in 2003 decreased $8 primar- ily reﬂecting the gross margin associated with the $21, or 6.6 percent, reduction in trafﬁc control equip- ment rental revenues. Gross Margin We have historically realized higher gross margins on sales of rental equipment than on sales of new equipment. This is consistent with the marketplace in general and not peculiar to United Rentals. Gross margins by revenue classiﬁcation were as follows: Total gross margin . . . . . . . Equipment rentals . . . . . Sales of rental equipment . . . . . . . . . . Sales of new equipment . . Contractor supplies sales . . . . . . . . . . . . . . Service and other . . . . . . Year Ended December 31, 2005 2004 2003 2002 32.7 34.8 26.7 18.3 23.8 49.7 31.0 31.7 28.3 17.4 27.3 49.2 27.2 26.2 36.9 13.5 27.2 45.0 31.0 31.6 33.2 14.7 27.4 45.8 2005 gross margin of 32.7 percent increased 1.7 per- centage points from 2004. The improved margin per- formance was primarily a result of a 3.1 percentage point increase in equipment rentals gross margin, partially offset by a 3.5 percentage point reduction in gross margins on contractor supplies sales. The improved equipment rental margin reﬂected a 6.0 percent increase in rental rates as well as a 5.2 per- centage point improvement in dollar equipment uti- lization. The reduction in contractor supplies sales gross margin reﬂects costs incurred to open distribu- tion centers in the United States and Canada. The reduction in gross margins on sales of rental equip- ment, as well as the increased margin realized in sales of new equipment, reﬂect a change in the mix of equipment sold. 2004 gross margin of 31.0 percent increased 3.8 per- centage points from 2003. The improved margin per- formance was primarily a result of a 5.5 percentage point increase in equipment rentals gross margin, partially offset by an 8.6 percentage point reduction in gross margins on sales of rental equipment. The improved equipment rental margin reﬂected a 7.5 percent increase in rental rates as well as a 2.8 per- centage point improvement in dollar equipment uti- lization. The reduction in gross margins on sales of rental equipment, as well as the increased margin realized on sales of new equipment, reﬂect a change in the mix of equipment sold. 2003 gross margin of 27.2 percent decreased 3.8 per- cent from 2002. This reduction primarily reﬂects a 5.4 percentage point reduction in equipment rentals gross margin. The reduction in equipment rentals gross margin reﬂects the incurrence of $88 of costs associated with the buy-out of equipment leases. Excluding this charge, equipment rental gross mar- gins would have approximated 30.2 percent, reﬂect- ing reduced equipment rentals in trafﬁc control as well as cost increases associated with higher costs for insurance and claims, ﬂeet repair and maintenance and fuel and delivery. Selling, general and administrative expenses (SG&A) SG&A expense information for each of the four years in the period ended December 31, 2005 was as follows: Year Ended December 31, 2005 2004 2003 2002 $596 $497 $449 $443 Total SG&A expenses . . . . . SG&A as a percentage of revenue . . . . . . . . . . . . 16.7 16.1 15.6 15.7 SG&A expense primarily includes sales force compen- sation, bad debt expense, advertising and marketing expenses, third party professional fees, management salaries and clerical and administrative overhead. 2005 SG&A expense of $596 increased 20.0 percent as compared to 2004 and represented 16.7 percent of revenue as compared to 16.1 percent in 2004. This increase reﬂects increased commissions associated with revenue growth as well as an increase in the number of sales people. In addition to these higher selling costs related to growth in the business, the year-over-year growth in SG&A expense reﬂects nor- mal inﬂationary increases as well as increased profes- sional costs related to regulatory issues and related matters of $28. 36 2004 SG&A expense of $497 increased 10.7 percent as compared to 2003 and represented 16.1 percent of revenue as compared to 15.6 percent in 2003. 2004 SG&A expense included charges of $7 associated with the vesting of restricted stock granted to execu- tives in 2001. As a percentage of revenue, SG&A expense has been consistent for each of the three years in the period ended December 31, 2004. 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 well as customer-related intangible assets. The amount of non-rental depreciation and amortization has approximated 2 percent of revenues for each of the four years in the period ended December 31, 2005. 2003 SG&A expense of $449 increased 1.4 percent as compared to 2002 and represented 15.6 percent of revenue as compared to 15.7 percent in 2002. The increase in 2003 as compared to 2002 was primarily attributable to the accelerated vesting of restricted shares granted in 2001. This charge was $12 in 2003 and there was no corresponding charge in 2002. Goodwill impairment charge Pursuant to an accounting standard adopted in 2002, we no longer amortize goodwill. 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, cal- culated 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 expense. We are required to review our goodwill for impair- ment annually as of a scheduled review date; how- ever, if events or circumstances suggest that our goodwill could be impaired, we may be required to conduct an earlier review. Our scheduled review date is October 1 of each year; however, we reviewed our trafﬁc control segment goodwill as of September 30, 2004 because continued weakness in this segment suggested that the goodwill associated with this seg- ment could be impaired. In the fourth quarter of 2003, we recorded a goodwill impairment charge of $297. Additionally, in the third quarter of 2004, we recorded a goodwill impairment charge of $139 to write off the remaining goodwill associated with our trafﬁc control segment. The charge in the fourth quarter of 2003 reﬂected weak- ness in the ﬁnancial performance of certain of our branches. The charge in the third quarter of 2004 reﬂected the unfavorable ﬁnancial performance of our trafﬁc control operations. Restructuring and asset impairment charge The restructuring and asset impairment charge of $(1) in 2004 relates to the reversal of excess restruc- turing reserves established in prior years of $5, partially offset by asset impairment charges of $4 related to our trafﬁc control segment. Non-rental depreciation and amortization for each of the four years in the period ended December 31, 2005 was as follows: Year Ended December 31, 2005 2004 2003 2002 Non-rental depreciation and amortization . . . . . . $69 $67 $72 $61 Non-rental depreciation and amortization includes (i) depreciation expense associated with equipment that is not offered for rent (such as vehicles, comput- ers and ofﬁce equipment) and amortization expense Interest expense for each of the four years in the period ended December 31, 2005 was as follows: Year Ended December 31, 2005 2004 2003 2002 Interest expense . . . . . . . . . $185 $155 $209 $196 Interest expense for the year ended December 31, 2005 increased $30 or 19.4 percent as compared to 2004, reﬂecting the increase in interest rates applica- ble to our ﬂoating rate debt. As of December 31, 2005, approximately 45 percent of our total debt was ﬂoat- ing rate debt. Interest expense for the year ended December 31, 2004 decreased $54, or 25.9 percent, as compared to 2003. This decrease was attributable to lower interest rates on our debt primarily due to (i) the debt reﬁnancings that we completed in the fourth quarter of 2003 and in 2004 and (ii) the posi- tive impact of interest rate swaps that increased the portion of our interest expense that was based on ﬂoating interest rates. As of December 31, 2004, approximately 45 percent of our total debt was ﬂoat- ing rate debt. Interest expense for the year ended December 31, 2003 increased $13 or 6.8 percent. This increase primarily reﬂected higher interest costs related to the senior notes we issued in December 2002 and April 2003, partially offset by lower inter- est 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. Interest expense — subordinated convertible debentures and Preferred dividends of a subsidiary trust for each of the four years in the period ended December 31, 2005 was as follows: Year Ended December 31, 2005 2004 2003 2002 $14 $14 — — Interest expense — subordinate convertible debentures . . . . . . . . . . . Preferred dividends of a subsidiary trust . . . . . . . — — $15 $18 In August 1998, a subsidiary trust of Holdings sold certain trust preferred securities and used the pro- ceeds from such sale to purchase certain convertible subordinated debentures from Holdings. The sub- sidiary trust that issued the trust preferred securities was consolidated with Holdings until December 31, 2003, when it was deconsolidated following the adop- tion of a new accounting principle. For periods prior to the deconsolidation, the divi- dends on the trust preferred securities were reﬂected as an expense on our consolidated statements of oper- ations and the interest on the subordinated convert- ible debentures was eliminated in consolidation and thus was not reﬂected as an expense on our consoli- dated statement of operations. For periods after the deconsolidation, the dividends on the trust preferred 37 securities are no longer reﬂected as an expense on our consolidated statements of operations and the interest on the subordinated convertible debentures is no longer eliminated in consolidation and thus is now reﬂected as an expense on our consolidated statements of operations. Because the interest on the subordinated convertible debentures corresponds to the dividends on the trust preferred securities, this change does not alter the total amount of expense reported. Other (income) expense, net for each of the four years in the period ended December 31, 2005 was as follows: Year Ended December 31, 2005 2004 2003 2002 Other (income) expense, net . . . . . . . . . . . . . . . . . . $(9) $176 $43 $(1) 2005 other income of $(9) primarily represents inter- est income. 2004 other expense of $176 primarily relates to approximately $171 of charges incurred in the ﬁrst quarter of 2004 related to the reﬁnancing of approximately $2.1 billion of debt. This reﬁnancing is discussed further below; see “Liquidity and Capital Resources.” 2003 other expense of $43 includes $29 of charges incurred in connection with the redemp- tion of previously issued senior subordinated notes as well as an $11 write-off of notes receivable that were deemed impaired. The charge related to the redemp- tion of notes primarily reﬂects the redemption price premium and the write-off of previously capitalized ﬁnancing costs related to such notes. The charge associated with the notes receivable write-off relates to notes received as consideration for non-core assets that were disposed of in prior years. Income Taxes The following table summarizes our consolidated pro- vision (beneﬁt) for income taxes and the related effec- tive tax rate for each respective period: 2005 2004 2003 2002 Pre-tax income (loss) Provision (beneﬁt) for . . . . . $310 $(88) $(303) $(117) income taxes . . . . . . . . . . . . . . . . Effective tax rate (1) 123 39.7% (4) 4.5% (49) 16.2% 1 (0.9)% (1) A detailed reconciliation of the consolidated effective tax rate to the U.S. federal statutory income tax rate is included in note 11 to our consolidated ﬁnancial statements. The difference between the 2005 consolidated effec- tive tax rate of 39.7 percent and the U.S. federal statutory income tax rate of 35.0 percent relates pri- marily to state taxes and certain nondeductible charges. The difference between the 2004 consoli- dated effective tax rate of 4.5 percent and the U.S. fed- eral statutory income tax rate of 35.0 percent relates primarily to state taxes, the goodwill impairment charge and other nondeductible charges. The differ- ence between the 2003 consolidated effective tax rate of 16.2 percent and the U.S. federal statutory income tax rate of 35.0 percent relates primarily to state taxes, the goodwill impairment charge, deferred restatement charges and other nondeductible charges. The difference between the 2002 consoli- dated effective tax rate of (0.9) percent and the U.S. federal statutory income tax rate of 35.0 percent relates primarily to state taxes and the goodwill impairment charges. Our consolidated effective income tax rate will change based on discrete events (such as audit settle- ments) as well as other factors, including the geo- graphical mix of income before taxes and the related tax rates in those jurisdictions. We anticipate that our 2006 annual consolidated effective tax rate will approximate 40 percent. Recent Accounting Pronouncements See note 2 to the consolidated ﬁnancial statements for a full description of recent accounting pro- nouncements, including the respective dates of adoption and effects on our results of operations and ﬁnancial condition. Liquidity and Capital Resources Liquidity. We manage our liquidity using internal cash management practices, which are subject to (1) the statutes, regulations and practices of each of the local jurisdictions in which we operate, (2) the legal requirements of the agreements to which we are a party and (3) the policies and cooperation of the ﬁnancial institutions we utilize to maintain and pro- vide cash management services. Our principal existing sources of cash are cash gener- ated from operations and from the sale of rental equip- ment and borrowings available under our revolving credit facility and receivables securitization facility. As of December 31, 2005, we had (i) $450 of borrowing capacity available under the revolving credit facility portion of our $1.55 billion senior secured credit facil- ity and (ii) $200 of borrowing capacity available under our receivables securitization facility (reﬂecting the size of the eligible collateral pool as of such date and no loans outstanding). We believe that our existing sources of cash will be sufﬁcient to support our exist- ing 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) acquisitions. We plan to fund such cash require- ments from our existing sources of cash. In addition, we may seek additional ﬁnancing through the securi- tization of some of our equipment or real estate or through the use of additional operating leases. For information on the scheduled principal and interest 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 conditions and growth prospects. We esti- mate that our capital expenditures for 2006 will range between $900 and $925. 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 intend to continue to expand through a disciplined acquisition program. We will consider potential transactions of varying sizes and may, on a selective basis, pursue 38 acquisition or consolidation opportunities involving other public companies or large privately-held com- panies. We expect to pay for future acquisitions using cash, capital stock, notes and/or assumption 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 exist- ing stockholders may be diluted as we implement our growth strategy. Transactions Completed in 2004 We reﬁnanced approximately $2.1 billion of debt in 2004 (“the Reﬁnancing”). The Reﬁnancing extended debt maturities, reduced interest expense going forward and provided the Company with greater ﬁnancial ﬂexibility. As part of the Reﬁnancing, the Company: • amended and restated URI’s senior secured credit facility (“New Credit Facility”) to replace URI’s pre- vious $1.3 billion senior secured credit facility; • sold $1 billion of URI’s 61⁄2 percent Senior Notes Due 2012; • sold $375 of URI’s 7 percent Senior Subordinated Notes Due 2014; • repaid $639 of term loans and $52 of borrowings that were outstanding under the old credit facility; • repurchased $845 principal amount of URI’s 103⁄4 percent Senior Notes Due 2008 (the “103⁄4 percent Notes”), pursuant to a tender offer; • redeemed $300 principal amount of URI’s out- standing 91⁄4 percent Senior Subordinated Notes Due 2009 (the “91⁄4 percent Notes”); and • redeemed $250 principal amount of URI’s out- standing 9 percent Senior Subordinated Notes Due 2009 (the “9 percent Notes”). The Reﬁnancing was completed during the ﬁrst quar- ter of 2004, except that (i) the redemption of the 9 percent Notes was completed on April 1, 2004 and a portion of the term loan that is part of the New Credit Facility was drawn on such date and (ii) an additional $4 of the 103⁄4 percent Notes were repurchased on April 7, 2004. In connection with the Reﬁnancing, the Company incurred aggregate charges of approximately $171. These charges were attributable primarily to (i) the redemption and tender premiums for notes redeemed or repurchased as part of the Reﬁnancing and (ii) the write-off of previously capitalized costs relating to the debt reﬁnanced. These charges were recorded in other (income) expense, net. 7 percent Senior Subordinated Notes. In January 2004, as part of the Reﬁnancing described above, URI issued $375 aggregate principal amount of 7 percent Senior Subordinated Notes (the “7 percent Notes”) which are due February 15, 2014. The net proceeds from the sale of the 7 percent Notes were approxi- mately $369, after deducting offering expenses. The 7 percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries. The 7 percent 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 percent in 2009 to 100.0 percent in 2012 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of public equity offerings to redeem up to an aggregate of 35 percent of the outstanding 7 percent Notes at a redemption price of 107.0 percent. The indenture governing the 7 percent Notes con- tains certain restrictive covenants, including limita- tions on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other pay- ments, (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 percent Senior Notes. In February 2004, as part of the Reﬁnancing described above, URI issued $1 bil- lion aggregate principal amount of 61⁄2 percent Senior Notes (the “61⁄2 percent Notes”) which are due Febru- ary 15, 2012. The net proceeds from the sale of the 61⁄2 percent Notes were approximately $985, after deducting offering expenses. The 61⁄2 percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic sub- sidiaries. The 61⁄2 percent 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 percent in 2008 to 100.0 per- cent in 2010 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of public equity offerings to redeem up to an aggregate of 35 percent of the outstanding 61⁄2 per- cent Notes at a redemption price of 106.5 percent. The indenture governing the 61⁄2 percent Notes con- tains certain restrictive covenants, including limita- tions on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other pay- ments, (v) preferred stock of certain subsidiaries, (vi) transactions with afﬁliates, (vii) the disposition 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 described above, the Company amended and restated URI’s senior secured credit facility. The amended and restated facility includes (i) a $650 revolving credit facility, (ii) a $150 institu- tional letter of credit facility and (iii) a $750 term loan. The revolving credit facility, institutional letter of credit facility and term loan are governed by the same credit agreement. URI’s obligations under the credit facility are guaranteed by Holdings and, sub- ject to limited exceptions, URI’s domestic subsidiaries and are secured by liens on substantially all of the assets of URI, Holdings and URI’s domestic sub- sidiaries. Set forth below is certain additional infor- mation concerning the amended and restated facility. Revolving Credit Facility. The revolving credit facility enables URI to borrow up to $650 on a revolving basis and enables certain of the Com- pany’s Canadian subsidiaries to borrow up to $150 (provided that the aggregate borrowings of URI and the Canadian subsidiaries may not exceed $650). A portion of the revolving credit facility, up to $250, is available for issuance of letters of credit. The revolving credit facility is scheduled 39 to mature and terminate in February 2009. As of December 31, 2005 and 2004, the outstanding bor- rowings under this facility were approximately $137 and $133, respectively, and utilized letters of credit were $64 and $50, respectively. All out- standing borrowings under the revolving credit facility at December 31, 2005 and December 31, 2004 were Canadian subsidiary borrowings. U.S. dollar borrowings under the revolving credit facility accrue interest, at the option of URI’s Cana- dian subsidiaries, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5 percent and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25 percent. 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 percent and (ii) JPMorgan Chase Bank, Toronto Branch’s prime rate) plus a margin of 1.25 percent, or (b) the B/A rate (which is equal to JPMorgan Chase Bank, Toronto Branch’s B/A rate) plus a maximum margin of 2.25 percent. The rate applicable to Canadian borrowings outstanding under the revolving credit facility was 5.29 and 4.81 at December 31, 2005 and 2004, respectively. URI is also required to pay the lenders a commit- ment fee equal to 0.5 percent per annum, payable quarterly, in respect of undrawn commitments under the revolving credit facility. Institutional Letter of Credit Facility (“ILCF”). The ILCF provides for up to $150 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 revolv- ing credit facility and the ILCF is $400. 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. As of both Decem- ber 31, 2005 and 2004, the outstanding letters of credit under the ILCF were approximately $150. URI is required to pay a fee which accrues at the rate of 0.1 percent per annum on the amount of the ILCF. In addition, URI is required to pay par- ticipation and other fees in respect of letters of credit. For letters of credit obtained under both the ILCF and the revolving credit facility, these fees accrue at the rate of 2.25 percent per annum. In May 2005, based on the Company’s ﬁrst quarter 2005 funded debt to cash ﬂow ratio, the participa- tion fee was reduced to 2.0 percent. Term Loan. The term loan was obtained in two draws. An initial draw of $550 was made upon the closing of the credit facility in February 2004 and an additional draw of $200 was made 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 percent 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 at maturity on February 14, 2011 an amount equal to 23.5 percent of the original aggregate principal amount of the term loan. As of December 31, 2005 and 2004, amounts outstanding under the term loan were approximately $737 and $744, respectively. Borrowings under the term loan accrue interest, at URI’s option, at either (a) the ABR rate plus a maxi- mum margin of 1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25 per- cent. The rate was 6.63 percent and 4.67 percent at December 31, 2005 and 2004, respectively. Covenants. Under the agreement governing the New Credit Facility, the Company is required to, among other things, satisfy certain ﬁnancial tests relating to: (a) interest coverage ratio, (b) the ratio of funded debt to cash ﬂow, (c) the ratio of senior secured debt to tangible assets and (d) 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 require the Company to timely ﬁle audited annual and quar- terly ﬁnancial statements with the SEC and limit or prohibit, among other things, the Company’s ability to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, create liens, make acquisitions, sell assets and engage in mergers and acquisitions. If at any time an event of default under the New Credit Facility exists, the interest rate applicable to each revolving and term loan will be based on the highest margins above plus 2 percent. Transactions Completed in 2005 Matters Relating to Consent Solicitation: In 2005, the Company successfully solicited consents for amendments to the indentures governing the following securities: • 61⁄2 percent Senior Notes due 2012 • 73⁄4 percent Senior Subordinated Notes due 2013 • 7 percent Senior Subordinated Notes due 2014 • 17⁄8 percent Convertible Senior Subordinated Notes due 2023 (“Convertible Notes”) • 61⁄2 percent Convertible Quarterly Income Pre- ferred Securities due 2028 (“QUIPs”) The indentures for these securities require annual and other periodic reports to be ﬁled with the SEC. On September 19, 2005, the Company obtained con- sents from holders of these securities and entered into supplemental indentures amending the applica- ble covenants to allow the Company until March 31, 2006 to comply with the requirement to make timely SEC ﬁlings (and waiving related defaults that occurred prior to the effectiveness of the amend- ments). In addition, the supplemental indenture relat- ing to the Convertible Notes changed the conversion 40 rate from 38.9520 to 44.9438 shares of United Rentals common stock for each $1,000 (“one thou- sand dollars”) principal amount of Convertible Notes. Pursuant to the terms of the consent solicitation, the Company paid aggregate consent fees of approxi- mately $34 to holders of its nonconvertible notes and QUIPs. These costs are being amortized through the maturity dates of the nonconvertible notes and QUIPs. Amortization expense recorded in 2005 for these costs was $1. In March 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC ﬁlings and extended the Company’s deadline to make SEC ﬁlings until June 29, 2005 for our 2004 Annual Report on Form 10-K and until August 15, 2005 for our ﬁrst quarter 2005 Form 10-Q. In June 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making cer- tain SEC ﬁlings and extended the Company’s deadline to make SEC ﬁlings until December 31, 2005 for our 2004 Annual Report on Form 10-K and for our 2005 Form 10-Qs. Both of these consents were obtained without the payment of any consent fees. In Novem- ber 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC ﬁlings and extended the Company’s deadline to make SEC ﬁlings until March 31, 2006. Consent fees in the amount of $1 were paid to the lenders under the New Credit Facility. On March 31, 2006, the Company obtained its lenders’ consent to an additional amendment to the New Credit Facility that (1) waived the covenant vio- lation from the delay in making certain SEC ﬁlings, (2) extended the Company’s deadline to make its SEC ﬁlings until April 28, 2006 and (3) limited the Com- pany’s ability to borrow under the New Credit Facility to amounts necessary to ﬁnd obligations to be paid in the ordinary course during the one-week period fol- lowing the applicable borrowing until these SEC ﬁl- ings are made. Accounts Receivable Securitization: On May 31, 2005, we obtained a new $200 accounts receivable securiti- zation facility and terminated our then existing $250 accounts receivable securitization facility. The new facility provides for generally lower borrowing costs than the old facility. In addition, the new facility pro- vides for a substantially longer term, with the sched- uled termination date being May 29, 2009, compared with September 30, 2006 under the old facility. There were no outstanding borrowings under the old facil- ity at the time it was terminated. In connection with terminating the old facility, we incurred a charge of approximately $1, representing the write-off of previ- ously capitalized costs relating to the old facility. The new facility enables one of our subsidiaries to borrow up to $200 against a collateral pool of eligible accounts receivable. Consistent with the old facility, the borrowings under the new facility will be reﬂected as debt on our consolidated balance sheets and the receivables in the collateral pool will be reﬂected as assets on our consolidated balance sheets. However, such assets are only available to satisfy the obligations of the borrower subsidiary, and once the obligations of the borrower subsidiary are satisﬁed, the remaining assets will be available to be divi- dended to the parent. 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 certain conditions, be retained by the borrower, provided that the remaining receivables in the collateral pool are sufﬁcient to secure the then outstanding borrowings; • after expiration or early termination of the facility, no new amounts will be advanced under the facil- ity and collections on the receivables securing the facility will be used to repay the outstanding bor- rowings; and • the facility contains standard termination events including, without limitation, a termination event if (i) the long-term senior secured rating of URI falls below either B+ from Standard & Poor’s Rat- ing Services or B2 from Moody’s Investors Service or (ii) our New Credit Facility is terminated. Our current ratings are discussed below. Outstanding borrowings under the facility generally accrue interest at the commercial paper rate plus a speciﬁed spread not to exceed 1.0 percent. There were no outstanding borrowings under this facility at December 31, 2005. We are also required to pay a commitment fee based on the long-term senior secured ratings of URI. This commitment fee was 0.55 percent at December 31, 2005. Redemption of remaining 103⁄4 Senior Notes: In April 2005, the Company redeemed $12 principal amount of URI’s 103⁄4 Senior Notes due 2008 (the “103⁄4 Notes”). The principal repurchased represented the amounts of the 103⁄4 Notes still outstanding after the 2004 ten- der offer. In connection with this redemption, the Company incurred charges of approximately $1. These charges were attributed primarily to (i) the redemption for notes redeemed and (ii) the write-off of previously capitalized costs. These charges were recorded in other (income) expense, net. Loan Covenants and Compliance As of December 31, 2005 and 2004, we were in com- pliance with the covenants of the 7 percent Notes and the 61⁄2 percent Notes, as amended, as discussed above, as well as the covenants of our 73⁄4 percent Senior Subordinated Notes due 2013, Convertible Notes, the QUIPs and the New Credit Facility. As dis- cussed above (see “Transactions Completed in 2005 — Matters Relating to Consent Solicitations”), on September 19, 2005, we amended the indentures governing the above-described securities and our New Credit Facility to allow the Company until March 31, 2006 to comply with the requirement to make timely SEC ﬁlings. As described above, on 41 March 31, 2006 the Company obtained its lenders’ consent to an additional amendment to the New Credit Facility that extended the Company’s deadline to make its SEC ﬁlings until April 28, 2006. As of March 31, 2006 we have ﬁled our annual reports on Form 10-K for the years ended December 31, 2005 and 2004; however, we have not yet ﬁled any of our quarterly reports on Form 10-Q for the periods ended in 2005. Therefore, as of March 31, 2006, we are in violation of the amendments to our indentures due to not ﬁling our quarterly reports (see “Risk Fac- tors — We will be unable to ﬁle our delinquent quar- terly reports on Form 10-Q by the end of the extension period granted by holders of our bonds, which will give our bondholders the right to declare an event of default.”). The Company is currently in compliance with the New Credit Facility, as amended, as of March 31, 2006. However, if the Company were not to ﬁle the required SEC reports by April 28, 2006, the Company would be required to obtain an additional extension or be in immediate default under the New Credit Facility. If the Company’s bondholders declare an event of default under any of the Company’s inden- tures, the waiver of default contained in the March 31, 2006 amendment will nevertheless continue until April 28, 2006. In addition, the amendment to our New Credit Facility limits our ability to make borrow- ings as discussed above. At December 31, 2005 and 2004, we were in full com- pliance with all our ﬁnancial covenants in the New Credit Facility and the indentures governing our notes and convertible securities. We consider our most restrictive covenant to be the Minimum Interest Coverage ratio. The minimum amount permitted under this covenant is as follows: Period Ratio June 30, 2004 through December 31, 2004 . . . . . . . . . . 1.35 to 1.0 January 1, 2005 through December 31, 2005 . . . . . . . . . 1.45 to 1.0 January 1, 2006 and thereafter . . . . . . . . . . . . . . . . . . . 1.65 to 1.0 Our actual minimum interest coverage ratios for the years ended December 31, 2005 and 2004 were 2.22 and 2.06, respectively. Sources and Uses of Cash During 2005, we (i) generated cash from operations of $643, (ii) generated cash from the sale of rental equipment of $307 and (iii) utilized cash for debt repayments and ﬁnancing costs of $74. We used cash during this period principally to (i) purchase rental equipment of $741, (ii) purchase other property and equipment of $82 and (iii) purchase other companies, net of cash acquired, of $40. During 2004, we (i) generated cash from operations of $737, (ii) generated cash from the sale of rental equipment of $275 and (iii) utilized cash for debt repayments, net of borrowings, and ﬁnancing costs of $51. We used cash during this period principally to (i) purchase rental equipment of $592, (ii) purchase other property and equipment of $57 and (iii) pur- chase other companies, net of cash acquired, of $102. Our credit ratings as of March 31, 2006 were as follows: Corporate Rating Moody’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2 BB– BB Outlook Negative Negative Negative Both our ability to obtain ﬁnancing and the related cost of borrowing are affected by our credit ratings, which are periodically reviewed by these rating agen- cies. Our current credit ratings are below investment grade and we expect our access to the public debt markets to be limited to the non-investment grade segment until our ratings reﬂect an investment grade rating. Certain Information Concerning Contractual Obligations The table below provides certain information concerning the payments coming due under certain categories of our existing contractual obligations as of December 31, 2005: Debt excluding capital leases (1) . . . . . . . . . . . . . . . . . . . . . Interest due on debt (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital leases (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases (1): Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service agreements (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase obligations (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated convertible debentures (5) 2006 $ 8 206 19 78 70 30 3 483 14 2007 $ 8 204 17 73 38 20 2 — 14 2008 $ 8 203 12 63 31 13 1 — 14 2009 $145 192 7 50 9 9 — — 14 2010 Thereafter Total $531 172 4 36 — 6 — — 14 $2,167 295 4 $2,867 1,272 63 129 — 2 — — 475 429 148 80 6 483 545 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $911 $376 $345 $426 $763 $3,072 $5,893 (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) Estimated interest payments have been calculated based on the principal amount of debt and the effective interest rates as of December 31, 2005. (3) These represent service agreements with third parties to operate the distribution centers associated with our contractor supplies business. (4) As of December 31, 2005, the Company had outstanding purchase orders with its equipment and inventory suppliers. These purchase orders, which were negotiated in the ordinary course of business, aggregate approximately $483. These purchase commitments can be cancelled by the Company, generally with 30 days notice and without cancellation penalties. The equipment and inventory receipts from the suppliers for these purchases and related payments to the suppliers are expected to be completed throughout 2006. (5) Includes interest payments. 42 Certain Information Concerning Restricted Stock We have granted to employees other than executive ofﬁcers and directors approximately 567,000 shares of restricted stock that have not yet vested. The shares vest in 2006, 2007 or 2008 or earlier upon a change in control of the Company, death, disability, retirement or certain terminations of employment, and are subject to forfeiture prior to vesting on cer- tain 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 instru- ment, 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 guaranteed amount is (i) $9.18 per share with respect to approximately 326,000 shares, $17.20 per share with respect to approximately 9,000 shares, and $27.26 per share with respect to approxi- mately 8,000 shares scheduled to vest in 2006 and (ii) $17.20 per share with respect to approximately 167,000 shares scheduled to vest in 2007 and (iii) $19.86 per share with respect to approximately 57,000 shares scheduled to vest in 2008. Certain Information Concerning Off-Balance Sheet Arrangements We lease real estate, rental equipment and non-rental equipment under operating leases as a `regular busi- ness activity. As part of some of our equipment oper- ating 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. If the actual residual value for all equipment subject to such guar- antees were to be zero, then our maximum potential liability under these guarantees would be approxi- mately $26. Under current circumstances we do not anticipate paying signiﬁcant amounts under these guarantees; however, we cannot be certain that changes in market conditions or other factors will not cause the actual residual values to be lower than those currently anticipated. In accordance with FIN 45, “Guarantor’s Accounting and Disclosure Require- ments for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” this potential liability was not reﬂected on our balance sheet as of December 31, 2005 and 2004 or any prior date because the leases associated with such guarantees were entered into prior to January 1, 2003. For additional information concerning lease payment obligations under our operating leases, see “ — Certain Information Concern- ing Contractual Obligations” above. Certain Information Concerning Trust Preferred Securities In August 1998, a subsidiary trust of Holdings sold $300 of QUIPs. The trust used the proceeds from the sale of these securities to purchase 61⁄2 percent subor- dinated convertible debentures due 2028 which resulted in Holdings receiving all of the net proceeds of the sale. The subsidiary trust that issued the trust preferred securities was consolidated with Holdings until December 31, 2003, when it was deconsolidated. For periods prior to the deconsolidation, the divi- dends on the trust preferred securities were reﬂected as an expense on our consolidated statements of oper- ations and the interest on the subordinated convert- ible debentures was eliminated in consolidation and thus was not reﬂected as an expense on our consoli- dated statements of operations. For periods after the deconsolidation, the dividends on the trust preferred securities are no longer reﬂected as an expense on our consolidated statements of operations and the interest on the subordinated convertible debentures is no longer eliminated in consolidation and thus is now reﬂected as an expense on our consolidated state- ments of operations. Because the interest on the sub- ordinated convertible debentures corresponds to the dividends on the trust preferred securities, this change does not alter the total amount of expense required to be recorded. Relationship Between Holdings and URI Holdings is principally a holding company and pri- marily conducts its operations through its wholly owned subsidiary URI and subsidiaries of URI. Hold- ings 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 available for use by URI and its subsidiaries. URI has made, and expects to continue to make, certain payments to Holdings in respect of the services provided by Hold- ings to URI. The expenses relating to URI’s payments to Holdings are reﬂected on URI’s ﬁnancial state- ments 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. As discussed above, our consolidated ﬁnancial state- ments reﬂect (i) for periods prior to January 1, 2004, expenses related to dividends on certain trust pre- ferred securities issued by a subsidiary trust of Hold- ings and (ii) for periods after January 1, 2004, expenses related to certain subordinated convertible debentures issued by Holdings to such subsidiary trust; however, the foregoing expenses are not reﬂected on the consolidated ﬁnancial statements of URI because URI is not obligated with respect to the foregoing securities. This is the principal reason for the difference in the historical net income (loss) reported on the consolidated ﬁnancial statements of URI and the net income (loss) reported on the consoli- dated ﬁnancial statements of Holdings. 43 quantitative and qualitative disclosures about market risk Our exposure to market risk primarily consists of (1) interest rate risk associated with our variable rate debt and (2) foreign currency exchange rate risk pri- marily associated with our Canadian operations. Interest Rate Risk We periodically utilize interest rate swap agreements and interest rate cap agreements to manage our interest costs and exposure to changes in interest rates. As of December 31, 2005 and December 31, 2004, we had swap agreements with an aggregate notional amount of $1.2 billion and cap agreements with an agreement notional amount of $725. The effect of the swap agreement was, at December 31, 2005 and December 31, 2004, to convert $1.2 billion of our ﬁxed rate notes to ﬂoating rate instruments. The ﬁxed rate notes being converted consisted of (i) $445 of our 61⁄2 percent Notes through 2012, (ii) $375 of our 7 percent Notes, and (iii) $375 of our 73⁄4 percent senior subordinated notes through 2013. As of December 31, 2005, after giving effect to our interest rate swap and cap agreements, we had an aggregate of $1.3 billion of indebtedness that bears interest at variable rates. For this purpose, the portion of the term loan subject to the cap is considered ﬁxed. The debt that is subject to ﬂuctuations in interest rates includes $136 of borrowings under our revolver Cana- dian facility, $1.2 billion in swaps, and $11 of term loans not subject to an interest rate cap. The weighted- average interest rates applicable to our variable rate debt on December 31, 2005 were (i) 5.3 percent for the revolving credit facility (represents the Canadian rate since the amount outstanding was Canadian borrow- ings), (ii) 6.6 percent for the term loan and (iii) 6.7 per- cent for the debt subject to our swap agreements. As of December 31, 2005, based upon the amount of our variable rate debt outstanding, after giving effect to our interest rate swap agreements, our annual earn- ings would decrease by approximately $13.4 for each one percentage point increase in the interest rates applicable to our variable rate debt. As of December 31, 2004, after giving effect to our interest rate swap and cap agreements, we had an aggregate of approximately $1.3 billion of indebted- ness that bears interest at variable rates. For this purpose, the portion of the term loan subject to the cap is considered ﬁxed. The debt that is subject to ﬂuctuations in interest rates includes $133 of bor- rowings under our revolver Canadian facility, $1.2 billion in swaps, and $19 of term loans not subject to an interest rate cap. The weighted-average interest rates applicable to our variable rate debt on December 31, 2004 were (i) 4.8 percent for the revolving credit facility (represents the Canadian rate since the amount outstanding was Canadian borrowings), (ii) 4.7 percent for the term loan and (iii) 4.7 percent for the debt subject to our swap agreements. As of December 31, 2004, based upon the amount of our variable rate debt outstanding, after giving effect to our interest rate swap agreements, our annual earn- ings would decrease by approximately $13 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 securitization facility from time to time. For additional information concerning the terms of our variable rate debt, see note 10 to our consolidated ﬁnancial statements. Currency Exchange Risk The functional currency for our Canadian operations is the Canadian dollar. As a result, our future earn- ings 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 2004 and 2005 relative to the company as a whole, a 10 percent change in this exchange rate would not have a material impact on our earnings. In addi- tion, we periodically enter into foreign exchange contracts to hedge our transaction exposures. We had no outstanding foreign exchange contracts as of December 31, 2005, 2004 and 2003. We do not engage in purchasing forward exchange contracts for speculative purposes. Forward-Looking Statements Certain statements contained in this report and the accompanying materials are forward-looking in nature. These statements can be identiﬁed by the use of forward-looking terminology such as “believes,” “expects,” “plans,” “intends,” “projects,” “forecasts,” “may,” “will,” “should,” “on track” or “anticipates” or the negative thereof or comparable terminology, or by discussions of strategy or outlook. The company’s busi- ness and operations are subject to a variety of risks and uncertainties and, consequently, actual results may differ materially from those projected by any forward- looking statements. Factors that could cause actual results to differ from those projected include, but are not limited to, the following: (1) unfavorable economic and industry conditions can reduce demand and prices for the company’s products and services, (2) govern- mental funding for highway and other construction projects may not reach expected levels, (3) the company may not have access to capital that it may require, (4) any companies that United Rentals acquires could have undiscovered liabilities and may be difﬁcult to integrate, (5) rates may increase less than anticipated or costs may increase more than anticipated, (6) the SEC inquiry is ongoing and there can be no assurance that the outcome of the SEC inquiry or internal review will not require additional changes in the company’s accounting policies and practices, restatements of ﬁnancial statements, revisions of guidance, and/or otherwise be adverse to the company, and (7) the com- pany may incur additional signiﬁcant expenses in connection with the SEC inquiry of the company, the related internal review or the class action lawsuits and derivative actions that were ﬁled in light of the SEC inquiry. Certain of these risks and uncertainties, as well as others, are discussed in greater detail in the company’s ﬁlings with the SEC. The company makes no commitment to revise or update any forward- looking statements in order to reﬂect events or circum- stances after the date any such statement is made. 44 report of independent registered public accounting ﬁrm on ﬁnancial statements Board of Directors and Stockholders United Rentals, Inc. period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We have audited the accompanying consolidated balance sheets of United Rentals, Inc. and sub- sidiaries (the Company) as of December 31, 2005, 2004 and 2003, and the related consolidated state- ments of operations, stockholders’ equity, and cash ﬂows for each of the four years in the period ended December 31, 2005. These ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Over- sight Board (United States). Those standards require that we plan and perform the audit to obtain reason- able assurance about whether the ﬁnancial state- ments are free of material misstatement. An audit includes examining, on a test basis, evidence support- ing the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management as well as evaluating the over- all ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the con- solidated ﬁnancial position of United Rentals, Inc. and subsidiaries at December 31, 2005, 2004 and 2003, and the consolidated results of their operations and their cash ﬂows for each of the four years in the As discussed in note 2 to the consolidated ﬁnancial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. As discussed in note 3 to the consolidated ﬁnancial statements, the Company has restated its 2003 and 2002 ﬁnancial statements. We also have audited, in accordance with the stan- dards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Com- pany’s internal control over ﬁnancial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread- way Commission and our report dated March 29, 2006 expressed an unqualiﬁed opinion on management’s assessment of the effectiveness of internal control over ﬁnancial reporting and an adverse opinion on the effectiveness of internal control over ﬁnancial report- ing because of the existence of a material weakness. New York, New York March 29, 2006 45 consolidated balance sheets (In millions, except share data) Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for doubtful accounts of $45 in 2005, $53 in 2004 and $48 in 2003 . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . Rental equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets, net Liabilities and Stockholders’ Equity Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity: Preferred stock — $.01 par value, 5,000,000 shares authorized: Series C perpetual convertible preferred stock — $.30 liquidation preference, 300,000 shares issued and outstanding . . . . . . . . . Series D perpetual convertible preferred stock — $.15 liquidation preference, 150,000 shares issued and outstanding . . . . . . . . . Common stock — $.01 par value, 500,000,000 shares authorized, 77,302,915, 77,869,576, and 77,150,277 shares issued and outstanding in 2005, 2004 and 2003, respectively . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deﬁcit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes. December 31, 2005 2004 2003 (Restated) $ 316 $ 303 $ 79 572 174 154 2,252 445 1,328 33 490 119 120 2,123 397 1,293 37 483 106 118 2,062 407 1,412 27 $5,274 $4,882 $4,694 $ 211 420 2,930 222 262 4,045 $ 217 323 2,945 222 149 3,856 $ 151 272 2,817 222 163 3,625 — — — — — — 1 1,345 (12) (155) 50 1,229 1 1,349 (19) (342) 37 1,026 1 1,330 (26) (258) 22 1,069 $5,274 $4,882 $4,694 46 consolidated statements of operations (In millions, except per share amounts) Revenues: Equipment rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . New equipment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractor supplies sales . . . . . . . . . . . . . . . . . . . . . . . . Service and other revenues . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Revenues: Cost of equipment rentals, excluding depreciation . . . . . Depreciation of rental equipment . . . . . . . . . . . . . . . . . . Cost of rental equipment sales . . . . . . . . . . . . . . . . . . . . Cost of new equipment sales . . . . . . . . . . . . . . . . . . . . . . Cost of contractor supplies sales . . . . . . . . . . . . . . . . . . . Cost of service and other revenue . . . . . . . . . . . . . . . . . . Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment Restructuring and asset impairment charge . . . . . . . . . Non-rental depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense — subordinated convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . 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, Year Ended December 31, 2005 2004 2003 2002 (Restated) (Restated) $2,583 307 208 324 141 3,563 $2,289 275 178 225 127 3,094 $2,176 233 170 184 119 2,882 $2,152 223 170 160 116 2,821 1,299 385 225 170 247 72 2,398 1,165 596 — — 69 500 185 14 — (9) 310 123 187 1,185 378 197 147 163 65 2,135 959 497 139 (1) 67 257 155 14 — 176 1,275 331 147 147 134 66 2,100 782 449 297 — 72 (36) 209 — 15 43 1,147 324 149 145 116 64 1,945 876 443 248 28 61 96 196 — 18 (1) (88) (4) (303) (49) (117) 1 (84) (254) (118) net of tax beneﬁt of $61 . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 187 — $ (84) — $ (254) (288) $ (406) 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 $1.97 $(1.07) $(3.29) $(1.08) principle, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) available to common stockholders . . . . . — $1.97 — $(1.07) — $(3.29) (3.80) $(4.88) 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 $1.80 $(1.07) $(3.29) $(1.08) principle, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) available to common stockholders . . . . . — $1.80 — $(1.07) — $(3.29) (3.80) $(4.88) See accompanying notes. 47 consolidated statements of cash ﬂows (In millions) Cash Flows from Operating Activities 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase premiums for debt reﬁnancing . . . . . . . . . . Write-off of notes receivable and deferred ﬁnancing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . Cash Flows from Investing Activities Purchases of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment Proceeds from sales of rental equipment . . . . . . . . . . . . Buy-outs of equipment leases . . . . . . . . . . . . . . . . . . . . . Purchases of other companies . . . . . . . . . . . . . . . . . . . . . Proceeds from sale leaseback . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of branches . . . . . . . . . . . . . . . . . . . . In-process acquisition costs . . . . . . . . . . . . . . . . . . . . . . Deposits on rental equipment purchases . . . . . . . . . . . . Year Ended December 31, 2005 2004 2003 2002 (Restated) (Restated) $ 187 $ (84) $(254) $(406) 454 (82) 8 — — — — — — 112 (78) (32) 11 (6) 69 643 (741) (82) 307 — (40) — 3 — — 445 (78) 23 (5) 139 4 151 — — (8) 10 12 43 62 23 737 (592) (57) 275 — (102) 23 — — — 403 (86) 26 — 297 — 21 24 — (46) (32) (2) (2) (56) 13 306 (379) (33) 233 (304) (5) — — — — 385 (74) 11 2 248 — — — 288 (2) (4) — 11 2 17 478 (498) (38) 223 (173) — — (4) (5) Net cash used in investing activities . . . . . . . . . . . . . . . . $(553) $(453) $(488) $(495) 48 consolidated statements of cash ﬂows (continued) Cash and cash equivalents at end of year . . . . . . . . . . . . $ 316 $ (In millions) Cash Flows from Financing Activities Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of interest rate caps . . . . . . . . . . . . . . . . . . . . . Payments of ﬁnancing costs . . . . . . . . . . . . . . . . . . . . . . Proceeds from the exercise of common stock options . . . 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 . . . . . . . Supplemental disclosure of cash ﬂow information Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for taxes, net of refunds . . . . . . . . . . . . . . . . . Supplemental schedule of non-cash investing and ﬁnancing activities 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 . . . . . . . . . . . . . . . . . . . . . . Less: liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . Due to seller and other payments . . . . . . . . . . . . . . . . . . Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40 $ See accompanying notes. Year Ended December 31, 2005 2004 2003 2002 (Restated) (Restated) $ — (39) — (35) 2 (8) $ 2,211 (2,225) (14) (37) 6 (5) — (80) 3 13 303 — (64) 4 224 79 303 $ 879 (614) — (17) 1 — (3) 246 (4) 60 19 $ 508 (492) — (6) 64 (27) (38) 9 — (8) 27 $ 79 $ 19 $ 197 8 $ 175 (10) $ 225 (3) $ 212 (1) — — — 43 (3) 40 — — — — 119 (17) 102 — 102 — — 1 4 — 4 1 5 $ 31 3 — 172 (4) 168 5 $ 173 49 notes to consolidated ﬁnancial statements (Dollars in millions, except per share data and unless otherwise indicated) 1. Organization and Basis of Presentation United Rentals, Inc. (“Holdings,” “United Rentals” 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. We rent equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others in the United States, Canada and Mexico. In addition to renting equipment, we sell new and used rental equipment, as well as related contractor supplies, parts and service. The nature of our busi- ness is such that short-term obligations are typically met by cash ﬂow generated from long-term assets. Therefore, the accompanying balance sheets are presented on an unclassiﬁed basis. The accompanying consolidated ﬁnancial statements include our accounts and those of our wholly owned subsidiaries. All signiﬁcant intercompany accounts and transactions have been eliminated. Certain reclassiﬁcations of prior year amounts have been made to conform to the current year presentation. 2. Summary of Signiﬁcant Accounting Policies Cash Equivalents We consider all highly liquid instruments with matu- rities of three months or less when purchased to be cash equivalents. Included in the cash balance at December 31, 2005 is $75 that we agreed to maintain in an investment account for a trafﬁc control sub- sidiary to conduct trafﬁc control business with the state of Florida. In March 2006, we signed an agree- ment with the state of Florida whereby we are no longer required to maintain these funds in any type of account. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts. This allowance reﬂects our estimate of the amount of our receivables that we will be unable to collect. Inventory Inventory consists of new equipment, merchandise and contractor 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 $16, $14, and $9 at December 31, 2005, 2004 and 2003, respectively. Cost is determined, depending on the type of inventory, on either a weighted average or ﬁrst-in, ﬁrst-out method. Rental Equipment 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 zero to ten percent of cost. Ordinary repair and main- tenance costs are charged to operations as incurred. Repair and maintenance costs are included in cost of revenues on our consolidated statements of opera- tions. Repair and maintenance expense was $213, $201, $184, and $144, for the years ended December 31, 2005, 2004, 2003 and 2002, respectively. Property and Equipment Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The range of estimated use- ful 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. Goodwill Goodwill consists of the excess of cost over the fair value of identiﬁable net assets of businesses acquired. As discussed in note 4, goodwill is tested for impair- ment on at least an annual basis. Prior to January 1, 2004, we tested for goodwill impairment on a branch- by-branch basis. Accordingly, a goodwill write-off was required even if only one or a limited number of our branches had an impairment as of the testing date and even if there was no impairment for all our branches on an aggregate basis. Commencing Janu- ary 1, 2004, we began testing for goodwill impair- ment at a regional, rather than a branch, level. We began testing for impairment at this level because Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” requires that goodwill impairment testing be performed at the reporting unit level. In 2004, following a reorganization of our reporting struc- ture, our regions became our reporting units. This change in reporting units may impact future good- will impairment analyses because there are substan- tially fewer regions (nine) than there are branches (in excess of 700). 50 Other Intangible Assets Other intangible assets consist of non-compete agree- ments and customer-related intangibles (speciﬁcally customer relationships). The non-compete agree- ments are being amortized on a straight-line basis over periods ranging from three to eight years. The customer relationships are being amortized on a straight-line basis over twelve years. Long-Lived Assets Long-lived assets are recorded at the lower of amor- tized cost or fair value. As part of an ongoing review of the valuation of long-lived assets, we assess the car- rying 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 an undiscounted cash ﬂow analysis over the remaining useful life, the carry- ing value would be reduced to its estimated fair value. Derivative Financial Instruments Under SFAS No. 133, “Accounting for Derivative Instruments 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 recog- nized immediately or deferred, depending on the use of the derivative and whether or not it qualiﬁes as a hedge. We periodically use derivative ﬁnancial instru- ments in the management of our interest rate and foreign currency exposures. Derivative ﬁnancial instruments are not used for trading purposes. Translation of Foreign Currency Assets and liabilities of our subsidiaries operating outside the United States which have a functional currency other than U.S. dollars are translated into U.S. dollars using exchange rates at the end of the year. Revenues and expenses are translated at average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of accumulated other com- prehensive income (loss) within shareholders’ equity. Fair Value of Financial Instruments The carrying amounts reported in our consolidated balance sheets for accounts receivable, accounts payable, and accrued 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 and term loan are determined using current interest rates for similar instruments as of December 31, 2005, 2004 and 2003 and approximate the carrying 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 estimated fair value of our other ﬁnancial instru- ments at December 31, 2005, 2004 and 2003 have been calculated based upon available market informa- tion and are as follows: Subordinated convertible debentures . . . . . . . . Senior and senior subordinated notes . . . . . . . . Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 2003 Carrying Amount $ 222 2,044 12 Fair Value $ 192 1,997 9 Carrying Amount $ 222 2,056 12 Fair Value $ 191 1,994 11 Carrying Amount $ 222 2,080 46 Fair Value $ 183 2,228 43 Revenue Recognition Our rental contract periods are daily, weekly or monthly and we recognize equipment rental revenue on a straight-line basis. By way of example, if a cus- tomer were to rent a piece of equipment and the daily, weekly and monthly rental rates for that particular piece were (in actual dollars) $100, $300 and $900, respectively, we would recognize revenue of $32.14/day. The daily rate is calculated by dividing the monthly rate of $900 by 28 days, the monthly term. As part of this straight-line methodology, when the equipment is returned, we recognize as incremen- tal revenue the excess, if any, between the amount the customer is contractually required to pay over the cumulative amount of revenue recognized to date. Revenues from the sale of rental equipment and new equipment are recognized at the time of delivery to, or pick-up by, the customer and when collectibility is reasonably assured. Sales of contractor supplies are also recognized at the time of delivery to, or pick-up by, the customer. For construction-related contracts in our trafﬁc control segment which comprise approximately 8 percent of our total revenues, rev- enues are recognized based on the percentage of work completed. Application of the percentage of completion method is appropriate for these contracts because these services are essential to the repair and construction of tangible property such as roads, highways, bridges and other infrastructure. Advertising Expense We advertise primarily through trade publications and yellow pages. Advertising expense is recognized over the period of the related beneﬁt. Advertising expense was $22, $19, $8 and $8 for the years ended December 31, 2005, 2004, 2003 and 2002, respectively. Insurance We are insured for general liability, workers’ compen- sation, and automobile liability, subject to deductibles per occurrence of $2 for general liability, $1 for work- ers’ compensation and $2 for automobile liability as of March 1, 2006. Losses within these deductible amounts are accrued based upon the aggregate liability for reported claims incurred, as well as an estimated liability for claims incurred but not yet reported. These liabilities are not discounted. The company is self insured for group medical claims but purchases “stop loss” insurance to protect itself from any one loss exceeding $330,000 (actual dollars). 51 Income Taxes We use 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. Recog- nition of deferred tax assets is limited to amounts considered by management to be more likely than not realized in future periods. Use of Estimates The preparation of ﬁnancial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assump- tions that affect the amounts reported in the ﬁnancial statements and accompanying notes. Signiﬁcant esti- mates include restructuring and goodwill impair- ment charges, allowance for doubtful accounts, useful lives for depreciation and amortization, deferred income taxes, claim reserves, loss contingen- cies and fair values of ﬁnancial instruments. Actual results could materially differ from those estimates. Concentrations of Credit Risk Financial instruments that potentially subject us to signiﬁcant concentrations of credit risk consist prin- cipally of cash and cash equivalents and accounts receivable. We maintain cash and cash equivalents with high quality ﬁnancial institutions. Concentra- tion of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up our customer base. Our largest customer accounted for less than 1 percent of total revenues in each of 2005 and 2004 and no sin- gle customer represented greater than 1 percent of total accounts receivable at December 31, 2005 and 2004. We control credit risk through credit approvals, credit limits, and monitoring procedures. Stock-Based Compensation We account for stock-based compensation arrange- ments using the intrinsic value method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. At December 31, 2005, we had six stock-based compensation plans (see note 14 to our consolidated ﬁnancial statements). Since stock options have been granted with exercise prices at or greater than the fair value of the shares at the date of grant, no compensation expense has been recognized. Restricted stock awards that we have granted are rec- ognized as deferred compensation. We recognize com- pensation expense related to these restricted stock awards over their vesting periods, or earlier, upon acceleration of vesting. During 2004 and 2003, we recognized increased amortization expense for the accelerated vesting of approximately 404,000 and 866,000 shares of restricted stock, respectively. The following table provides additional information related to our stock-based compensation arrange- ments for each of the four years in the period ended December 31, 2005: December 31, 2005 2004 2003 2002 (Restated) (Restated) Net income (loss), as reported . . . . . . . . $ 187 $ (84) $ (254) $ (406) 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 . . . . . . . . . . Pro forma net 5 13 20 7 (6) (17) (23) (11) income (loss) . . . . . . . $ 186 $ (88) $ (257) $ (410) Basic earnings (loss) available to common stockholders per share: As reported . . . . . . Pro forma . . . . . . . Diluted earnings (loss) available to common stockholders per share: As reported . . . . . . Pro forma . . . . . . . $1.97 $1.96 $(1.07) $(1.13) $(3.29) $(3.32) $(4.88) $(4.96) $1.80 $1.79 $(1.07) $(1.13) $(3.29) $(3.32) $(4.88) $(4.96) The weighted average fair value of options granted was $8.18, $7.33, $5.47 and $5.57 during 2005, 2004, 2003 and 2002, 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 a single measure of fair value of options. We used a risk-free interest rate average of 3.9, 2.9, 1.81 and 2.01 percent in 2005, 2004, 2003 and 2002 respec- tively, a volatility factor for the market price of our common stock of 60, 62, 63 and 66 percent in 2005, 2004, 2003 and 2002, respectively, and a weighted- average expected life of options of approximately three years in 2005, 2004, 2003 and 2002. For pur- poses of these pro forma disclosures, the estimated fair value of options is amortized over the options’ vesting period. New Accounting Pronouncements During the years ended December 31, 2005 and 2004, the Financial Accounting Standards Board (“FASB”) issued several pronouncements of signiﬁcance to us which are discussed in detail below. In addition, the FASB issued several other pronouncements, includ- ing standards on inventory (SFAS No. 151 “Inventory Costs, an amendment of ARB 43, Chapter 4”), exchanges of nonmonetary assets (SFAS No. 153 “Exchanges of Nonmonetary Assets”), and account- ing changes (SFAS No. 154 “Accounting Changes and Error Corrections”), with which we either cur- rently comply or are not anticipating to have a signif- icant impact on our future ﬁnancial condition or results of operations. 52 In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), “Share- Based Payment” (“FAS 123(R)”), an amendment of FAS No. 123, “Accounting for Stock-Based Compensa- tion,” which supersedes APB 25 and requires compa- nies to recognize compensation expense using a fair value based method for costs related to share-based payments, including stock options. As permitted by the SEC, the requirements of FAS 123(R) are effective for our ﬁscal year beginning January 1, 2006. Upon adoption, we will elect to apply the modiﬁed prospec- tive transition method and therefore we will not restate the results of prior periods. The implementa- tion of FAS 123(R) is not expected to have a material impact on the Company. FAS 123(R) also requires that the beneﬁts of tax deductions in excess of recognized compensation cost be reported as a ﬁnancing cash ﬂow, rather than as an operating cash ﬂow as required under current lit- erature. This requirement will reduce net operating cash ﬂows and increase net ﬁnancing cash ﬂows in periods after the effective date. While we can not esti- mate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options and the fair value of our common stock on the date of exercise), the amount of operating cash ﬂows recognized in 2005 for such excess tax deductions was $1. In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 requires an entity to rec- ognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. A conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional upon a future event that may or may not be within control of the entity. The adoption of FIN 47 in 2005 did not have a material impact on the Company. 3. Restatement Restatement and Reclassiﬁcation of Previously Issued Consolidated Financial Statements and Related Matters Subsequent to the ﬁling of our Form 10-K for the year ended December 31, 2003, which included our consolidated ﬁnancial statements for the years ended December 31, 2003 and 2002, it was determined that the Company’s originally issued ﬁnancial statements for those periods required restatement to correct the accounting for (i) the recognition of equipment rental revenue; (ii) irregularities identiﬁed by the Special Committee with respect to six short-term, or minor, equipment sale-leaseback transactions; (iii) self-insur- ance reserves; (iv) customer relationships; and (v) the provision for income taxes. The effects of the restatement adjustments on our originally reported results of operations for the years ended December 31, 2003 and 2002 and on our origi- nally reported retained earnings at December 31, 2001, are summarized below. Net Loss Year Ended December 31, 2003 2002 Retained Earnings at December 31, 2001 $(259) $(398) $467 As originally reported . . . . . Adjustments for: Equipment rental revenues (a) . . . . . . . . . . (2) Sale-leaseback transactions (b) . . . . . . . Self-insurance reserves (c) . . . . . . . . . . . Customer relationships (d) . . . . . . . Pre-tax impact . . . . . . . . . . Related tax effects . . . . . . . Adjustments, net of tax . . . . Income taxes (e) . . . . . . . . . Total adjustments, 20 8 (2) 24 (9) 15 (10) net of tax . . . . . . . . . . . . . . 5 (3) 2 (13) (1) (15) 6 (9) 1 (8) As restated . . . . . . . . . . . . . . $(254) $(406) (17) (33) (41) — (91) 35 (56) (9) (65) $402 Below is a summary of the nature and amount of the adjustments reﬂected in the restatement (all amounts are presented on a pre-tax basis unless otherwise noted). We have provided below the impact on originally reported pre-tax and/or net income for 2001 and 2000 of certain of the items for which we are restating. (a) Recognition of equipment rental revenues. Our originally reported results reﬂected the recognition of equipment rental revenues based on the minimum amounts which became due and payable under the terms of our applicable rental contracts. We have determined that equipment rental revenues should be recognized on a straight-line basis and have restated our previously reported results to reﬂect this correc- tion of an error. Our restatement had the impact of increasing/(decreasing) originally reported pre-tax income for 2001, 2000 and for periods prior to 2000 by $6, $4 and $(27), respectively. (b) Sale-leaseback transactions. In 2002, 2001, and 2000 we previously recognized gross proﬁts of $1, $20 and $12, respectively, in conjunction with six minor sale-leaseback transactions. It has been deter- mined that the accounting for these transactions constituted irregularities and we are restating our ﬁnancial statements to properly reﬂect the account- ing for these six transactions. At the dates of the original minor sale-leaseback transactions, we recog- nized a premium (excess proﬁt above fair value) on these transactions. In exchange for receiving this proﬁt premium, we agreed to disburse cash in later periods as well as pay premiums for subsequent equipment purchases (“subsequent purchases”). 53 Our restatement for the sale-leaseback transactions had the impact of increasing/(decreasing) originally reported pre-tax income for 2003, 2002, 2001 and 2000 by $20, $2, $(21), and $(12), respectively. These restatement adjustments reﬂect the elimination of the premium originally received in the minor sale-lease- back transactions as well as the deferral of any proﬁt until all of our obligations associated with the origi- nally received premiums were settled. Additionally, the adjustments reﬂect a reduction in previously recorded depreciation expense because this expense reﬂected capitalized equipment costs for subsequent purchases that were overstated. (c) Self-insurance reserves. We self-insure for certain types of claims associated with our business, includ- ing (i) workers compensation claims and (ii) claims by third parties for injury or property damage caused by our equipment or personnel. These types of claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associ- ated with a particular claim may not be known for an extended period of time. Our prior methodology for developing self-insurance reserves was based on management estimates of ultimate liability which were developed without obtaining actuarial valua- tions. In 2004, management adopted an estimation approach based on third party actuarial calculations that properly reﬂects and incorporates actuarial assumptions. Based on actuarial calculations per- formed by our third party actuaries in late 2004 and 2005, we concluded that the estimation process we previously used did not adequately take into account certain factors and that, as a result, a restatement was required. The factors that were not adequately addressed by our historical estimation process included future changes in the cost of known claims over time, cost inﬂation and incurred but not reported claims. Our restatement for the self- insurance reserves had the impact of increasing/ (decreasing) originally reported pre-tax income for 2003, 2002, 2001, 2000 and for periods prior to 2000 by $8, $(13), $(11), $(18) and $(12), respectively. (d) Customer relationships. In 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), which required the use of the purchase method of accounting for business combinations and prohibited the use of the pooling of interests method. SFAS No. 141 also changed the deﬁnition of intangible assets acquired in a purchase business combination, provid- ing speciﬁc criteria for the initial recognition and measurement of intangible assets apart from good- will. SFAS 141 applied to all business combinations accounted for using the purchase method for which the acquisition date is July 1, 2001, or later. We have reviewed acquisitions we made since July 1, 2001 and have determined that a portion of the pur- chase price for these acquisitions previously allocated to goodwill should be recorded as a separate intangi- ble asset — customer relationships. This restatement reﬂects the amortization expense associated with the reallocation of a portion of the purchase price from goodwill (which is not amortized) to customer rela- tionships (which are amortized). This correction of an error had the impact of decreasing originally reported pre-tax income for 2003 and 2002 by $2 and $1, respectively. (e) Income taxes. We have restated our income tax pro- vision to (i) correctly reﬂect all book-to-tax temporary differences (primarily depreciation and nondeductible reserves and accruals); (ii) reﬂect appropriate tax ben- eﬁts for net operating loss and alternative minimum tax credits; (iii) calculate deferred taxes at appropriate legal entity tax rates; and (iv) account for the settle- ment of an IRS audit examination. Our restatement for income taxes had the impact of increasing/ (decreasing) originally reported net income for 2003, 2002, 2001, 2000 and for periods prior to 2000 by $(10), $1, $(3), $(2) and $(4), respectively. Buy-out of operating lease In addition to the restatement matters discussed above, we have determined that $88 of costs for the year ended December 31, 2003 previously classiﬁed below operating income should be reclassiﬁed to cost of equipment rentals and included in operating income. This amount primarily represents the amount in excess of the fair value related to the buy- out of equipment under operating leases. This reclas- siﬁcation, which has the effect of reducing gross proﬁt and other expense (income), net by $88, has no impact on originally reported net income or earnings per share for the year ended December 31, 2003. Trade packages During the period from the fourth quarter of 2000 through 2002, the Company sold used equipment to certain suppliers (referred to as “trade packages”). In certain of the trade packages, prices may have included a premium above fair value. In order to induce these suppliers to buy used equipment at pre- mium prices, the Company made commitments or concessions to the suppliers. It has been determined that the accounting for those transactions involved irregularities and that the Company improperly rec- ognized revenue from the transactions involving the undisclosed inducements. However, because records were not created that would have permitted the link- age of the sales and inducements (as a result of instructions given by certain former employees of the Company), the Company is unable to determine the portion of the revenue and gross proﬁt recognized in 54 connection with trade packages with these suppliers between 2000 and 2002 that was improperly recog- nized. During this period, all sales of used equipment to these suppliers (which includes all trade package transactions) generated total revenues and gross proﬁts of $38 and $9, respectively. Notwithstanding the lack of records relating to these transactions, the Company believes that its ﬁnancial statements from and after 2002 are materially correct with respect to the effect of these transactions. The Special Committee concluded that, based on the evidence it reviewed, the practices regarding certain trade packages and minor sale-leaseback transactions described above appear to have been directed by the Company’s two former chief ﬁnancial ofﬁcers. Both of these individuals, who are no longer with the Company, declined to cooperate with the Spe- cial Committee’s investigation. Based upon recom- mendations of the Special Committee, the Company’s board of directors directed the Company, among other things, to evaluate potential claims relating to certain former company personnel, including these individuals and compensation and beneﬁts previously received by them described elsewhere in this report. Purchase Accounting The Company was formed and began operations in 1997 with the acquisition of six equipment rental companies. During the subsequent three year period, we grew rapidly and completed approximately 230 additional acquisitions. By the end of 1999, we were the largest equipment rental company in the world, with annual revenues of approximately $2.9 billion. With management’s focus now turned toward organic growth, the pace of our acquisitions signiﬁcantly slowed and from September 2001 through the date of this report we completed only eight acquisitions. Substantially all of the business combinations that we have completed since the inception of the Com- pany were accounted for as purchases, however, there were several signiﬁcant business combinations accounted for in the earlier period that were accounted for as poolings. Accounting standards applicable to purchase busi- ness combinations require the acquiring company to recognize the assets acquired and the liabilities assumed based on their fair values at the time of acquisition. Any excess between the cost of an acquired company and the sum of the fair values of tangible and identiﬁable intangible assets less liabili- ties assumed should be recognized as goodwill. In our historical accounting for these purchase busi- ness combinations, long-lived ﬁxed assets (comprised primarily of rental equipment) and goodwill gener- ally represented the largest components of our acqui- sitions. As a result, when we performed our purchase price allocation process, the purchase price was primarily allocated to these assets. As discussed above, in March 2005, our Board of Directors formed a Special Committee of independent directors to review matters related to the SEC inquiry. The Special Committee made certain ﬁndings related to the Company’s historical practices concerning the valuation of rental equipment acquired in purchase business combinations. The committee concluded that certain of these practices were not adequate between 1997 and August 2000. These practices included, among other things, the use of inconsistent valuation methodologies, some of which were reﬂected in memo- randa that were not provided to or reviewed by the Company’s auditors, suggestions contained in those memoranda that improper methods of valuation be used (although the committee did not ﬁnd evidence that such improper methods were generally applied), inadequate supervision of personnel, inadequate coordination with providers of outside valuations and apparent confusion on the part of one of those providers. The Special Committee concluded that cer- tain Company personnel (whom the committee was unable to identify) may have sought to manipulate opening balance sheet values for equipment acquired in purchase business combinations by causing them to be understated and that these opening balance sheet values may have been understated by an amount the committee was unable to determine. Following our review of our historical practices and the ﬁndings of the Special Committee, the Company considered whether the effect of the deﬁciencies iden- tiﬁed by the committee required a restatement of previously reported results. These deﬁciencies in our historical practices between 1997 and August 2000 may have resulted in inaccurate values being ascribed to rental equipment that we acquired in pur- chase business combinations, including in some cases values that may have been below fair value. However, we do not have the ability to revalue this equipment because we are unable to currently determine its his- torical physical condition and the records that cur- rently exist for this equipment are not sufﬁcient to establish the physical condition of the equipment at the time of its acquisition. The equipment valuations performed at the time of the acquisition, some of which included a physical inspection, reﬂected an assessment of the condition of the equipment. While, as the Special Committee identiﬁed, there were various deﬁciencies in our historical valuation practices, it is not possible to accurately revalue this equipment to assess the reasonableness of speciﬁc valuations. Therefore, we believe the only feasible approach is to give effect to the valuations that were performed contemporane- ously with these acquisitions. Accordingly, notwith- standing deﬁciencies in the Company’s historical valuation process as it relates to purchase business combinations, the Company does not believe a restate- ment is required and believes that its ﬁnancial state- ments from and after 2002 are materially correct with respect to the effect of equipment valuations. 55 Below are our consolidated statements of operations, consolidated balance sheet and consolidated statements of cash ﬂows as restated and as previously reported. Consolidated Statements of Operations Year Ended December 31, 2003 Year Ended December 31, 2002 As Originally Reported Restated As Originally Reported Restated Revenues: Equipment rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New equipment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractor supplies sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues: Cost of equipment rentals, excluding depreciation . . . . . . . . . . . . . . . Depreciation of rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of rental equipment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of new equipment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of contractor supplies sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of service and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and asset impairment charge . . . . . . . . . . . . . . . . . . . . . . Non-rental depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends of a subsidiary trust . . . . . . . . . . . . . . . . . . . . . . . . Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before provision for income taxes and cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision (beneﬁt) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before cumulative effect of change in accounting principle . . . . . . Cumulative effect of change in accounting principle, net of tax beneﬁt of $61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,177 181 205 184 119 2,867 1,192 332 121 172 134 66 2,019 848 451 297 — 69 30 209 15 133 (327) (68) (259) — $2,176 233 170 184 119 2,882 1,275 331 147 147 134 66 2,100 782 449 297 — 72 (36) 209 15 43 (303) (49) (254) — Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (259) $ (254) Loss per share — basic: Loss available to common stockholders before cumulative effect of change in accounting principle . . . . . . . . . . . . Cumulative effect of change in accounting principle, net . . . . . . . . . . Loss available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . Loss per share — diluted: Loss available to common stockholders before cumulative effect of change in accounting principle . . . . . . . . . . . . Cumulative effect of change in accounting principle, net . . . . . . . . . . Loss available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . $ (3.35) — $ (3.35) $ (3.35) — $ (3.35) $ (3.29) — $ (3.29) $ (3.29) — $ (3.29) $2,155 176 214 160 116 2,821 1,138 326 117 174 116 64 1,935 886 439 248 28 59 111 196 18 (1) (101) 8 (109) (288) $ (398) $ (0.98) (3.80) $ (4.78) $ (0.98) (3.80) $ (4.78) $2,152 223 170 160 116 2,821 1,147 324 149 145 116 64 1,945 876 443 248 28 61 96 196 18 (1) (117) 1 (118) (288) $ (406) $ (1.08) (3.80) $ (4.88) $ (1.08) (3.80) $ (4.88) 56 Consolidated Balance Sheet ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for doubtful accounts of $47 and $48, respectively . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity: Preferred stock — $.01 par value, 5,000,000 shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock — $.01 par value, 500,000,000 shares authorized, 77,150,277 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deﬁcit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows December 31, 2003 As Originally Reported Restated $ 79 499 106 118 2,072 407 1,438 3 $ 79 483 106 118 2,062 407 1,412 27 $4,722 $4,694 $ 151 226 2,817 222 165 3,581 — 1 1,329 (25) (189) 25 1,141 $ 151 272 2,817 222 163 3,625 — 1 1,330 (26) (258) 22 1,069 $4,722 $4,694 Year Ended December 31, 2003 Year Ended December 31, 2002 As Originally Reported Restated As Originally Reported Restated Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . $ 19 $ 19 $ 27 $ 27 Cash ﬂows provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . Cash ﬂows used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash ﬂows provided by ﬁnancing activities . . . . . . . . . . . . . . . . . . . . . . . Effect of foreign exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . 342 (537) 255 — 60 306 (488) 246 (4) 60 518 (536) 9 1 (8) 478 (495) 9 — (8) Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 79 $ 79 $ 19 $ 19 57 4. Acquisitions We completed two, three, one and two acquisitions during the years ended December 31, 2005, 2004, 2003 and 2002, respectively. The results of opera- tions of the businesses acquired in these acquisitions have been included in our results of operations from their respective acquisition dates. In December 2005, we acquired Sandvick Equipment & Supply Company, a trench safety company, with annual revenues of approximately $21. In June 2005, we acquired HSS RentX branch loca- tions in Colorado. Total 2004 revenues of the acquired branches were approximately $9. The aggregate purchase price for these acquisitions was approximately $42, less liabilities assumed of approx- imately $10. In October 2004, we acquired Atlantic Rentals Ltd., which had revenues in 2003 of approximately $32. In February 2004, we acquired 843504 Alberta Ltd. (formerly known as Skyreach Equipment, Ltd.), which had annual revenues in 2003 of approximately $35. The aggregate purchase price for these 2004 acquisitions was approximately $91, less liabilities assumed of $22. In June 2002, we acquired 35 rental locations from National Equipment Services, Inc. The aggregate ini- tial consideration we paid for this acquisition as well as the other 2002 acquisition was approximately $158, which was paid in cash. The purchase prices for all acquisitions have been allocated to the assets acquired and liabilities assumed based on their respective fair values at their respective acquisition dates. Purchase price alloca- tions are subject to change when additional informa- tion concerning asset and liability valuations is completed. The preliminary purchase price alloca- tions that are subject to change primarily consist of rental and non-rental equipment valuations. These allocations are ﬁnalized within twelve months of the acquisition date and are not expected to result in signiﬁcant differences between the preliminary and ﬁnal allocations. Pro forma combined results of operations giving effect to these acquisitions would not vary materially from historical results. 5. Goodwill and Other Intangible Assets The following table presents the changes in the carrying amount of goodwill for each of the four years in the period ended December 31, 2005: General rentals Trench safety, pump and power Trafﬁc control Balance at January 1, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . Impairment charges(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill related to acquisitions . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation and other adjustments . . . . . Balance at December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill related to acquisitions . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation and other adjustments . . . . . Balance at December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill related to acquisitions . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation and other adjustments . . . . . Balance at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . Goodwill related to acquisitions . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation and other adjustments . . . . . $1,787 (395) 8 1 1,401 (226) 2 25 1,202 — 35 (14) 1,223 4 4 $ 35 (19) 66 — 82 (12) — — 70 — — — 70 27 — $ 381 (183) — — 198 (59) 1 — 140 (139) — (1) — — — Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . $1,231 $ 97 $ — Total $2,203 (597) 74 1 $1,681 (297) 3 25 $1,412 (139) 35 (15) $1,293 31 4 $1,328 (1) Includes cumulative effect of change in accounting principle. We completed our initial impairment analysis in the ﬁrst quarter of 2002 and recorded a charge of approximately $349 ($288 net of tax). The charge associated with the initial impairment analysis is reﬂected on our statements of operations as a “Cumu- lative 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 impairment charges. The additional charge in the fourth quarter of 2002 was approximately $248 and the additional charge in the fourth quarter of 2003 was approximately $297. These charges are reﬂected on our statement of operations as “goodwill impairment.” The impairment charges recognized in 2003 and 2002 related to certain branches that decreased in value. The factors that negatively affected the value of these branches included the following: (i) contin- ued weakness in non-residential construction spend- ing which negatively affected the earnings of our branches and (ii) to a lesser extent, operational weak- ness at some branches and increased competition for some branches. Fair values used in impairment test- ing were based upon valuation techniques using mul- tiples of earnings and revenues. 58 We are required to review our goodwill for impair- ment annually as of a scheduled review date. How- ever, if events or circumstances suggest that goodwill could be impaired, we may be required to conduct an earlier review. The scheduled review date is October 1 of each year; however, we reviewed our trafﬁc control segment goodwill as of September 30, 2004 because continued weakness in this segment suggested the goodwill associated with this segment may have been impaired. Based on this review, we recorded an impairment charge of approximately $139 to write- off the remaining goodwill associated with our trafﬁc control segment. This charge is reﬂected on our statements of operations as “goodwill impairment.” Other intangible assets primarily consist of customer relationships and non-compete agreements. Intangible assets were comprised of the following at December 31, 2005, 2004 and 2003: Average Remaining Amortization Period 2005 2004 Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 months 9 years 28 months 10 years As of December 31, 2005 Gross Carrying Amount $21 $40 Accumulated Amortization Net Amount $18 $10 $ 3 $30 As of December 31, 2004 As of December 31, 2003 Gross Carrying Amount Accumulated Amortization Net Amount Non-compete agreements . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . $21 $39 $16 $ 7 $ 5 $32 Gross Carrying Amount $18 $28 Accumulated Amortization Net Amount $15 $ 4 $ 3 $24 Amortization expense for other intangible assets was $5, $4, $6 and $5 for the years ended December 31, 2005, 2004, 2003 and 2002, respectively. As of December 31, 2005, estimated amortization expense for other intangible assets for each of the next ﬁve years and thereafter is as follows: 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 4 4 4 4 13 $33 6. Restructuring Charges We recorded restructuring charges of $28 (including a non-cash component of approximately $3) and $29 (including a non-cash component of approximately $11) in 2002 and 2001, respectively. The 2002 charge involved the following principal elements: (i) 40 underperforming branches and ﬁve administrative ofﬁces were closed or consolidated with other loca- tions; (ii) the reduction of the Company’s workforce by 412 through the termination of branch and admin- istrative personnel, and (iii) an information technol- ogy project was abandoned. The 2001 charge involved the following principal elements: (i) 31 underperform- ing branches were closed or consolidated 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 termi- nation of branch and administrative personnel, and (iv) certain information technology hardware and software was written-off. The costs to vacate facilities primarily represent the payment of obligations under leases, partially offset by estimated sublease opportunities, the write-off of capital improvements made to such facilities and the write-off of related goodwill (only in 2001). The work- force reduction costs primarily represent severance. The information technology costs represent the pay- ment of obligations under equipment leases relating to the abandonment of certain information technol- ogy projects. In connection with our restructuring initiatives, we generally redeploy most of the rental equipment from the closed branches to continuing branches with the expectation that the redeployed equipment will generate stronger results (i.e., higher equipment utilization). In connection with these activities, the continuing branches that absorb the redeployed ﬂeet generally incur incremental operat- ing costs as a result of having larger operations and/or requiring additional personnel. Because we have not historically tracked these items and because we have a mobile ﬂeet with equipment being fre- quently transferred or shared among branches, it is not possible to quantify the true “cost savings” from these restructurings. The aggregate balance of the restructuring reserves was $5, $8 and $17 as of December 31, 2005, 2004 and 2003, respectively. We estimate that approxi- mately $2 of the amount accrued at December 31, 2005 will be spent during 2006 and approximately $3 will be spent in subsequent periods. 59 The restructuring and asset impairment charges in the consolidated statements of operations were $–, $(1), $–, and $28 in 2005, 2004, 2003 and 2002, respectively. Detailed information related to restructuring program activity during each of the four years in the period ended December 31, 2005 is outlined below. Costs to vacate facilities Workforce reduction costs Information technology costs Balance at December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . Restructuring provision . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash payments charged against reserve . . . . . . . . . . . . . . . Other non-cash charges against reserves . . . . . . . . . . . . . . Balance at December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . Cash payments charged against reserve . . . . . . . . . . . . . . . Balance at December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . Cash payments charged against reserve . . . . . . . . . . . . . . . Reversal of excess reserves . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . Cash payments charged against reserve . . . . . . . . . . . . . . . $ 3 24 (2) (3) 22 (7) 15 (3) (4) 8 (3) Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 2 3 (2) — 3 (2) 1 — (1) — — $ — $ 2 1 (1) — 2 (1) 1 (1) — — — Total $ 7 28 (5) (3) 27 (10) 17 (4) (5) 8 (3) $ — $ 5 7. Rental Equipment Rental equipment consists of the following: Rental equipment . . . . . . . . . . . Less accumulated December 31, 2005 2004 2003 $ 3,289 $3,082 $2,987 depreciation . . . . . . . . . . . . . . (1,037) (959) (925) Rental equipment, net . . . . . . . $ 2,252 $2,123 $2,062 8. Property and Equipment Property and equipment consist of the following: Land . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . Transportation and equipment . . . . . . . . . . . . . . . Machinery and equipment . . . . Furniture and ﬁxtures . . . . . . . Leasehold improvements . . . . . Less accumulated depreciation and amortization . . . . . . . . . . 2005 $ 65 131 322 53 93 90 754 (309) Property and equipment, net . . $ 445 December 31, 2004 $ 58 113 301 48 84 77 681 2003 $ 49 104 290 45 77 75 640 (284) $ 397 (233) $ 407 9. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following: December 31, Self-insurance reserve . . . . . . . Accrued compensation . . . . . . . Financial derivative instruments . . . . . . . . . . . . . . Interest payable . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . Accrued beneﬁt costs . . . . . . . . Professional fees . . . . . . . . . . . . Restructuring reserves . . . . . . . . . . . . . . . . . . . . . . . . . . Other(1) Accrued expenses and 2005 $ 88 72 54 45 20 14 11 5 111 2004 $ 81 49 31 43 20 15 8 8 68 2003 $ 92 27 4 49 26 13 2 17 42 other liabilities . . . . . . . . . . . $420 $323 $272 (1) Other includes several items, none of which are individually signiﬁcant. 60 10. Debt Debt consists of the following: Credit Facility, interest payable at a weighted average rate of 5.29, 4.81 and 5.30 percent at December 31, 2005, 2004 and 2003, respectively . . . . . . . . . Term Loan, interest payable at 6.63, 4.67 and 4.20 percent at December 31, 2005, 2004 and 2003, respectively . . . . . . 91⁄4 percent Senior Subordinated Notes, interest payable semi-annually . . . . . . . . . . . . 9 percent Senior Subordinated Notes, interest payable semi-annually . . . . . . . . . . . . 73⁄4 percent Senior Subordinated Notes, interest payable semi-annually . . . . . . . . . . . . 7 percent Senior Subordinated Notes, interest payable semi-annually . . . . . . . . . . . . 61⁄2 percent Senior Notes, interest payable semi-annually . . . . . . . . . . . . 103⁄4 percent Senior Notes, interest payable semi-annually . . . . . . . . . . . . 17⁄8 percent Convertible Senior Subordinated Notes, interest payable semi-annually . . . . . Other debt, including capital leases, interest payable at various rates ranging from 5 percent to 10 percent at December 31, 2005, 2004 and 2003, due through 2009 . . . . December 31, 2005 2004 2003 $ 137 $ 133 $ 52 737 744 639 — — — — 300 250 525 525 525 375 375 1,000 1,000 — — — 12 861 144 144 144 12 12 46 $2,930 $2,945 $2,817 Transactions Completed in 2004 We reﬁnanced approximately $2.1 billion of debt in 2004 (“the Reﬁnancing”). The Reﬁnancing extended debt maturities, reduced interest expense going forward and provided the Company with greater ﬁnancial ﬂexibility. As part of the Reﬁnancing, the Company: • amended and restated URI’s senior secured credit facility (“New Credit Facility”) to replace URI’s pre- vious $1.3 billion senior secured credit facility; • sold $1 billion of URI’s 61⁄2 percent Senior Notes Due 2012; • sold $375 of URI’s 7 percent Senior Subordinated Notes Due 2014; • repaid $639 of term loans and $52 of borrowings that were outstanding under the old credit facility; • repurchased $845 principal amount of URI’s 103⁄4 percent Senior Notes Due 2008 (the “103⁄4 percent Notes”), pursuant to a tender offer; • redeemed $300 principal amount of URI’s out- standing 91⁄4 percent Senior Subordinated Notes Due 2009 (the “91⁄4 percent Notes”); and • redeemed $250 principal amount of URI’s out- standing 9 percent Senior Subordinated Notes Due 2009 (the “9 percent Notes”). The Reﬁnancing was completed during the ﬁrst quar- ter of 2004, except that (i) the redemption of the 9 percent Notes was completed on April 1, 2004 and a portion of the term loan that is part of the New Credit Facility was drawn on such date and (ii) an additional $4 of the 103⁄4 percent Notes were repurchased on April 7, 2004. In connection with the Reﬁnancing, the Company incurred aggregate charges of approximately $171. These charges were attributable primarily to (i) the redemption and tender premiums for notes redeemed or repurchased as part of the Reﬁnancing and (ii) the write-off of previously capitalized costs relating to the debt reﬁnanced. These charges were recorded in other (income) expense, net. 7 percent Senior Subordinated Notes. In January 2004, as part of the Reﬁnancing described above, URI issued $375 aggregate principal amount of 7 percent Senior Subordinated Notes (the “7 percent Notes”) which are due February 15, 2014. The net proceeds from the sale of the 7 percent Notes were approxi- mately $369, after deducting offering expenses. The 7 percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries. The 7 percent Notes mature on February 15, 2014 and may be redeemed by URI on or after February 15, 2009, at speciﬁed redemp- tion prices that range from 103.5 percent in 2009 to 100.0 percent in 2012 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of public equity offerings to redeem up to an aggregate of 35 percent of the outstanding 7 percent Notes at a redemption price of 107.0 percent. The indenture governing the 7 percent Notes contains certain restrictive covenants, including limi- tations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other pay- ments, (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. 61⁄2 percent Senior Notes. In February 2004, as part of the Reﬁnancing described above, URI issued $1 bil- lion aggregate principal amount of 61⁄2 percent Senior Notes (the “61⁄2 percent Notes”) which are due Febru- ary 15, 2012. The net proceeds from the sale of the 61⁄2 percent Notes were approximately $985, after deducting offering expenses. The 61⁄2 percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic sub- sidiaries. The 61⁄2 percent 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 percent in 2008 to 100.0 per- cent in 2010 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of public equity offerings to redeem up to an aggregate of 35 percent of the outstanding 61⁄2 per- cent Notes at a redemption price of 106.5 percent. 61 The indenture governing the 61⁄2 percent Notes con- tains certain restrictive covenants, including limita- tions on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other pay- ments, (v) preferred stock of certain subsidiaries, (vi) transactions with afﬁliates, (vii) the disposition 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 described above, the Company amended and restated URI’s senior secured credit facility. The amended and restated facility includes (i) a $650 revolving credit facility, (ii) a $150 institu- tional letter of credit facility and (iii) a $750 term loan. The revolving credit facility, institutional letter of credit facility and term loan are governed by the same credit agreement. URI’s obligations under the credit facility are guaranteed by Holdings and, sub- ject to limited exceptions, URI’s domestic subsidiaries and are secured by liens on substantially all of the assets of URI, Holdings and URI’s domestic sub- sidiaries. Set forth below is certain additional infor- mation concerning the amended and restated facility. Revolving Credit Facility. The revolving credit facility enables URI to borrow up to $650 on a revolving basis and enables certain of the Company’s Canadian subsidiaries to borrow up to $150 (provided that the aggregate borrowings of URI and the Canadian sub- sidiaries may not exceed $650). A portion of the revolving credit facility, up to $250, is available for issuance of letters of credit. The revolving credit facility is scheduled to mature and terminate in February 2009. As of December 31, 2005 and 2004, the outstanding borrowings under this facility were approximately $137 and $133, respectively, and uti- lized letters of credit were $64 and $50, respectively. All outstanding borrowings under the revolving credit facility at December 31, 2005 and December 31, 2004 were Canadian subsidiary borrowings. U.S. dollar borrowings under the revolving credit facility accrue interest, at the option of URI’s Cana- dian subsidiaries, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5 percent and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25 percent. 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 per- cent and (ii) JPMorgan Chase Bank, Toronto Branch’s prime rate) plus a margin of 1.25 percent, or (b) the B/A rate (which is equal to JPMorgan Chase Bank, Toronto Branch’s B/A rate) plus a maximum margin of 2.25 percent. The rate applicable to Canadian bor- rowings outstanding under the revolving credit facility was 5.29 and 4.81 at December 31, 2005 and 2004, respectively. URI is also required to pay the lenders a commitment fee equal to 0.5 percent per annum, payable quar- terly, in respect of undrawn commitments under the revolving credit facility. Institutional Letter of Credit Facility (“ILCF”). The ILCF provides for up to $150 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. Subject to certain condi- tions, all or part of the ILCF may be converted into term loans. The ILCF is scheduled to terminate in February 2011. As of both December 31, 2005 and 2004, the outstanding letters of credit under the ILCF were approximately $150. URI is required to pay a fee which accrues at the rate of 0.1 percent per annum on the amount of the ILCF. In addition, URI is required to pay participation and other fees in respect of letters of credit. For letters of credit obtained under both the ILCF and the revolving credit facility, these fees accrue at the rate of 2.25 per- cent per annum. In May 2005, based on the Com- pany’s ﬁrst quarter 2005 funded debt to cash ﬂow ratio, the participation fee was reduced to 2.0 percent. Term Loan. The term loan was obtained in two draws. An initial draw of $550 was made upon the closing of the credit facility in February 2004 and an addi- tional draw of $200 was made 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 fol- lows: (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 percent of the original aggregate princi- pal amount of the term loan and (ii) URI must repay on each of June 30, 2010, September 30, 2010, December 31, 2010, and at maturity on February 14, 2011 an amount equal to 23.5 percent of the original aggregate principal amount of the term loan. As of December 31, 2005 and 2004, amounts outstanding under the term loan were approximately $737 and $744, respectively. Borrowings under the term loan accrue interest, at URI’s option, at either (a) the ABR rate plus a maxi- mum margin of 1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25 percent. The rate was 6.63 and 4.67 at December 31, 2005 and 2004, respectively. Covenants. Under the agreement governing the New Credit Facility, the Company is required to, among other things, satisfy certain ﬁnancial tests relating to: (a) interest coverage ratio, (b) the ratio of funded debt to cash ﬂow, (c) the ratio of senior secured debt to tangible assets and (d) 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 ter- minate the credit facility and require the Company to 62 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 require the Company to timely ﬁle audited annual and quarterly ﬁnancial statements with the SEC and limit or prohibit, among other things, the Company’s ability to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make invest- ments, create liens, make acquisitions, sell assets and engage in mergers and acquisitions. If at any time an event of default under the New Credit Facility exists, the interest rate applicable to each revolving and term loan will be based on the highest margins above plus 2 percent. Transactions Completed in 2005 Matters Relating to Consent Solicitation: In 2005, the Company successfully solicited consents for amendments to the indentures governing the following securities: • 61⁄2 percent Senior Notes due 2012 • 73⁄4 percent Senior Subordinated Notes due 2013 • 7 percent Senior Subordinated Notes due 2014 • 17⁄ 8 percent Convertible Senior Subordinated Notes due 2023 (“Convertible Notes”) • 61⁄2 percent Convertible Quarterly Income Pre- ferred Securities due 2028 (“QUIPs”) The indentures for these securities require annual and other periodic reports to be ﬁled with the SEC. On September 19, 2005, the Company obtained consents from holders of these securities and entered into supplemental indentures amending the applicable covenants to allow the Company until March 31, 2006 to comply with the requirement to make timely SEC ﬁlings (and waiving related defaults that occurred prior to the effectiveness of the amendments). In addition, the supplemental inden- ture relating to the Convertible Notes changed the conversion rate from 38.9520 to 44.9438 shares of United Rentals common stock for each $1,000 (“one thousand dollars”) principal amount of Convertible Notes. Pursuant to the terms of the consent solicita- tion, the Company paid aggregate consent fees of approximately $34 to holders of its nonconvertible notes and QUIPs. These costs are being amortized through the maturity dates of the nonconvertible notes and QUIPs securities. Amortization expense recorded in 2005 for these costs was $1. In March 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC ﬁlings and extended the Company’s deadline to make SEC ﬁlings until June 29, 2005 for our 2004 Annual Report on Form 10-K and until August 15, 2005 for our ﬁrst quarter 2005 Form 10-Q. In June 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making cer- tain SEC ﬁlings and extended the Company’s deadline to make SEC ﬁlings until December 31, 2005 for our 2004 Annual Report on Form 10-K and for our 2005 Form 10-Qs. Both of these consents were obtained without the payment of any consent fees. In Novem- ber 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC ﬁlings and extended the Company’s deadline to make SEC ﬁlings until March 31, 2006. Consent fees in the amount of $1 were paid to the lenders under the New Credit Facility. On March 31, 2006, the Company obtained its lenders’ consent to an additional amendment to the New Credit Facility that (1) waived the covenant vio- lation from the delay in making certain SEC ﬁlings, (2) extended the Company’s deadline to make its SEC ﬁlings until April 28, 2006 and (3) limited the Com- pany’s ability to borrow under the New Credit Facility to amounts necessary to fund obligations to be paid in the ordinary course during the one-week period following the applicable borrowing until these SEC ﬁlings are made. Accounts Receivable Securitization: On May 31, 2005, we obtained a new $200 accounts receivable securiti- zation facility and terminated our then existing $250 accounts receivable securitization facility. The new facility provides for generally lower borrowing costs than the old facility. In addition, the new facility pro- vides for a substantially longer term, with the sched- uled termination date being May 29, 2009, compared with September 30, 2006 under the old facility. There were no outstanding borrowings under the old facil- ity at the time it was terminated. In connection with terminating the old facility, we incurred a charge of approximately $1, representing the write-off of previ- ously capitalized costs relating to the old facility. The new facility enables one of our subsidiaries to borrow up to $200 against a collateral pool of eligible accounts receivable. Consistent with the old facility, the borrowings under the new facility will be reﬂected as debt on our consolidated balance sheets and the receivables in the collateral pool will be reﬂected as assets on our consolidated balance sheets. However, such assets are only available to satisfy the obligations of the borrower subsidiary, and once the obligations of the borrower subsidiary are satisﬁed, the remaining assets will be available to be divi- dended to the parent. 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 certain conditions, be retained by the borrower, provided that the remaining receivables in the collateral pool are sufﬁcient to secure the then outstanding borrowings; 63 • after expiration or early termination of the facility, no new amounts will be advanced under the facil- ity and collections on the receivables securing the facility will be used to repay the outstanding bor- rowings; and • the facility contains standard termination events including, without limitation, a termination event if (i) the long-term senior secured rating of URI falls below either B+ from Standard & Poor’s Rat- ing Services (“S&P”) or B2 from Moody’s Investors Service (“Moody’s”) or (ii) our New Credit Facility is terminated. At March 31, 2006, the Company’s long-term senior secured debt was rated BB– by S&P and B2 by Moody’s. Outstanding borrowings under the facility generally accrue interest at the commercial paper rate plus a speciﬁed spread not to exceed 1.0 percent. There were no outstanding borrowings under this facility at December 31, 2005. We are also required to pay a commitment fee based on the long-term senior secured ratings of URI. This commitment fee was 0.55 percent at December 31, 2005. Redemption of remaining 103⁄4 Senior Notes: In April 2005, the Company redeemed $12 principal amount of URI’s 103⁄4 Senior Notes due 2008 (the “103⁄4 Notes”). The principal repurchased represented the amounts of the 103⁄4 Notes still outstanding after the 2004 tender offer. In connection with this redemption, the Company incurred charges of approximately $1. These charges were attributed primarily to (i) the redemption for notes redeemed and (ii) the write-off of previously capitalized costs. These charges were recorded in other (income) expense, net. Loan Covenants and Compliance As of December 31, 2005 and 2004, we were in com- pliance with the covenants of the 7 percent Notes and the 61⁄2 percent Notes, as amended, as discussed above, as well as the covenants of our 73⁄4 percent Senior Subordinated Notes due 2013, Convertible Notes due 2023, the QUIPs and the New Credit Facil- ity. As discussed above (see “Transactions Completed in 2005 — Matters Relating to Consent Solicitations”), on September 19, 2005, we amended the indentures governing the above-described securities and our New Credit Facility to allow the Company until March 31, 2006 to comply with the requirement to make timely SEC ﬁlings. As described above, on March 31, 2006 the Company obtained its lenders’ consent to the New Credit Facility that extended the Company’s deadline to make its SEC ﬁlings until April 28, 2006. As of March 31, 2006 we have ﬁled our annual reports on Form 10-K for the years ended December 31, 2004 and 2005; however we have not yet ﬁled any of our quarterly reports on Form 10-Q for the periods ended in 2005. Therefore, as of March 31, 2006, we are in violation of the amendments to our indentures due to not ﬁling our quarterly reports (see “Risk Factors — We will be unable to ﬁle our delinquent quarterly reports on Form 10-Q by the end of the extension period granted by holders of our bonds, which will give our bondholders the right to declare an event of default.”) The Company is currently in compliance with the New Credit Facility, as amended, as of March 31, 2006. However, if the Company were not to ﬁle the required SEC reports by April 28, 2006, the Company would be required to obtain an additional extension or be in immediate default under the New Credit Facility. If the Company’s bondholders declare an event of default under any of the Company’s inden- tures, the waiver of default contained in the March 31, 2006 amendment will nevertheless continue until April 28, 2006. In addition, the amendment to our New Credit Facility limits our ability to make borrow- ings as discussed above. At December 31, 2005 and 2004, we were in full com- pliance with all our ﬁnancial covenants in the New Credit Facility and the indentures governing our notes and convertible securities. We consider our most restrictive covenant to be the Minimum Interest Coverage ratio. The minimum amount permitted under this covenant is as follows: Period Ratio June 30, 2004 through December 31, 2004 . . . . . . . . . . 1.35 to 1.0 January 1, 2005 through December 31, 2005 . . . . . . . . . 1.45 to 1.0 January 1, 2006 and thereafter . . . . . . . . . . . . . . . . . . . 1.65 to 1.0 Our actual minimum interest coverage ratios for the years ended December 31, 2005 and 2004 were 2.22 and 2.06, respectively. Interest Rate Swap and Cap Agreements. As of December 31, 2005 and December 31, 2004, we had swap agreements with an aggregate notional amount of $1.2 billion. The effect of these agreements was to convert $1.2 billion of our ﬁxed rate notes to ﬂoating rate instruments. The ﬁxed rate notes being con- verted consisted of: (i) $445 of our 61⁄2 percent Notes, (ii) $375 of our 73⁄4 percent Senior Subordinated Notes through 2013 and (iii) $375 of our 7 percent Notes. Our swap agreements that convert our ﬁxed rate notes to ﬂoating rate instruments are designated as fair value hedges. Changes in the fair values of our fair value hedges, as well as the offsetting fair value changes in the hedged items, are recorded on the statements of operations. There was no ineffective- ness related to our fair value hedges. As of December 31, 2005 and 2004, we had an unrealized loss of $54 and $31, respectively, based upon the fair value of our fair value hedges. 64 As of December 31, 2005 and 2004, we had interest rate cap agreements that effectively limit the interest rate on $725 of our term loan. Our cap agreements are designated as cash ﬂow hedges. Changes in the fair values of our cash ﬂow hedges are recorded in other comprehensive income and reclassiﬁed into earnings in the same periods during which the hedged transactions affect earnings. There was no ineffectiveness related to our cash ﬂow hedges. As of December 31, 2005 and 2004, we had an unrealized gain of $2 and an unrealized loss of $4, respectively, based upon the fair value of our cash ﬂow hedges. Maturities. Maturities of the Company’s debt for each of the next ﬁve years and thereafter at December 31, 2005 are as follows: 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 25 20 152 535 2,171 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,930 11. Income Taxes The provision for federal, state and provincial income taxes is as follows: Year ended December 31, 2005 2004 2003 2002 Domestic federal: Current . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . $ 5 88 Domestic state: Current . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . Total domestic Foreign federal: Current . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . Foreign provincial: Current . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . 93 2 17 19 112 2 5 7 1 3 4 Total foreign . . . . . . . . . . . . 11 $ — 1 1 2 (12) (10) (9) 2 1 3 — 2 2 5 $ — (46) (46) — (8) (8) (54) 2 1 3 — 2 2 5 $ — (1) (1) 1 — 1 — 2 (2) — — 1 1 1 $123 $ (4) $(49) $ 1 A reconciliation of the provision for income taxes and the amount computed by applying the statutory fed- eral income tax rate of 35 percent to income (loss) before provision for income taxes and cumulative effect of change in accounting principle is as follows: Year ended December 31, 2005 2004 2003 2002 Computed tax at statutory tax rate . . . . . . . . . . . . . . $109 $(31) $(106) $(41) State income taxes, net of federal tax beneﬁt . . . . . . Non-deductible goodwill impairment charges . . . . Other(1) . . . . . . . . . . . . . . . . 12 — 2 (7) (2) 33 1 47 12 1 42 (1) $123 $ (4) $ (49) $ 1 (1) 2003 includes nondeductible executive deferred compensation of $5. The components of deferred income tax assets (liabilities) are as follows: Intangibles . . . . . . . . . . . . . . . . Reserves and allowances . . . . . . Net operating loss and credit carryforwards(1) . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . Total Deferred Income 2005 $ 5 86 189 12 Tax Assets . . . . . . . . . . . . . . . 292 December 31, 2004 $ 41 81 295 9 426 2003 $ 55 77 248 5 385 Property and equipment . . . . . . $(554) $(575) $(548) Total Deferred Income Tax Liabilities . . . . . . . . . . . . (554) (575) $(262) $(149) (548) $(163) (1) Includes valuation allowance related to state net operating loss carryforwards of $8, $8 and $7, respectively. The deferred tax assets and liabilities at December 31, 2004 include the effects of certain reclassiﬁcations related to differences between the income tax provi- sions and tax returns for prior years. These reclassi- ﬁcations had no effect on net income. In addition to the deferred tax liabilities described above, we have reserves for certain tax-related matters resulting from our acquisitions. For ﬁnancial reporting purposes, income before income taxes and cumulative effect of change in accounting principle for our foreign subsidiaries was $34, $20 and $5 for the years ended December 31, 2005, 2004 and 2003, respectively. At December 31, 2005, 2004, and 2003, unremitted earnings (deﬁcit) of foreign subsidiaries were approximately $36, $14 and $(1), respectively. Since it is our intention to indeﬁnitely reinvest these earnings, no United States taxes have been provided for these amounts. Determi- nation of the amount of unrecognized deferred tax liability on these unremitted taxes is not practicable. We have net operating loss carryforwards (“NOL’s”) of $402 for federal income tax purposes that expire through 2024. We have not recorded a valuation allowance against this deferred tax asset because it is deemed more likely than not that such beneﬁt will be realized in the future. 65 12. Subordinated Convertible Debentures The subordinated convertible debentures included in our consolidated balance sheets reﬂect the obligation to our subsidiary that has issued preferred securities. This subsidiary is not consolidated in our ﬁnancial statements because we are not the primary beneﬁ- ciary of the trust. As of December 31, 2005, 2004 and 2003, the aggregate amount of subordinated convert- ible debentures outstanding was $222. In August 1998, a subsidiary trust (the “Trust”) of Holdings issued and sold in a private offering (the “Preferred Securities Offering”) $300 of QUIPs. The Trust used the proceeds from the Preferred Securities Offering to purchase 61⁄2 percent convertible subordi- nated debentures due 2028 (the “Debentures”) which resulted in Holdings receiving all of the net proceeds of the Preferred Securities Offering. Holdings in turn contributed the net proceeds of the Preferred Securi- ties Offering to URI. The QUIPs are non-voting secu- rities, carry a liquidation value of $50 (“ﬁfty dollars”) per security and were convertible into the Company’s common stock at an initial rate of 1.146 shares per security (equivalent to an initial conversion price of $43.63 per share). Holders of the QUIPs are entitled to preferential cumulative cash distributions from the Trust at an annual rate of 61⁄2 percent 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 pay- ments on the Debentures are deferred, so are the payments on the QUIPs. Under this circumstance, 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. Holdings has executed a guarantee with regard to payment of the QUIPs to the extent that the Trust has insufﬁcient funds to make the required payments. 13. Preferred Stock As of December 31, 2005, 2004 and 2003, we have two classes of preferred stock outstanding. In total, we are authorized to issue 5 million shares of pre- ferred stock, $0.01 par value, of which an aggregate of 450,000 have been issued. Series C Preferred and Series D Preferred. There are 300,000 shares of our Series C Preferred outstanding and 150,000 shares of our Series D Preferred out- standing. 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 Preferred include the following (subject to the special provisions described below that will apply in the event of certain Non-Approved Change of Control transactions): (i) each share is entitled to a liquida- tion preference of $1,000 per share; (ii) at the holder’s option, each share of Series C Preferred is convertible into 40 shares of common stock subject 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 conversion price of $30 per share based on the liqui- dation preference); (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 matters (except that the Series C Preferred may vote as a separate 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 spec- iﬁed holders cease to represent, on an as converted basis, at least eight million shares of common stock, and reduction to zero, if such shares of Series C Pre- ferred 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 Preferred, 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 occur- rence of speciﬁed change of control transactions, other than a Non-Approved Change of Control (as deﬁned below), we 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 66 equal to 6.25 percent of the liquidation preference compounded annually from January 1999 in the case of the Series C Preferred, and September 1999 in the case of the Series D Preferred, to the redemption date, (vii) if we issue for cash common stock (or a series of preferred stock convertible into common stock) and the price for the common stock is below the conver- sion price of the Series C Preferred, then we must offer to repurchase a speciﬁed portion of the out- standing Series C Preferred at the price per share set forth in the preceding clause, and (viii) if we issue 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 we must offer to repurchase a speciﬁed portion of the outstanding Series D Pre- ferred at the price per share speciﬁed in the second preceding clause. Special Rights of Series C Preferred and Series D Preferred Upon Non-Approved Change of Control. In general, a Non-Approved Change of Control transac- tion is a change of control transaction that the Board of Directors (the “Board”) has disapproved and which the Board has not facilitated by such actions as weak- ening or eliminating 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 essen- tially the same redemption rights that apply to an Approved Change of Control transaction: (i) the hold- ers 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 percent return on the liquidation preference, 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 Pre- ferred and Series D Preferred would accrue dividends at a maximum annual rate, compounded annually, equal to 18 percent of the liquidation preference. 14. Capital Stock Warrants. As of December 31, 2005, 2004 and 2003, there were outstanding warrants to purchase an aggregate of 5.8, 6.9 and 7.0 million shares of com- mon stock, respectively. The weighted average exer- cise price of the warrants was $12.03, $11.74 and $11.78 per share, as of December 31, 2005, 2004 and 2003, respectively. The warrants may be exercised through 2011 and warrants to purchase 5.8, 6.9 and 7.0 million shares were exercisable as of December 31, 2005, 2004 and 2003, respectively. Common Stock Repurchase Program. 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 of purchases, during the period from May 2000 to May 2003 and up to $200 of additional purchases during the period from May 2003 to March 2005. Pursuant to this pro- gram, the Company (i) during 2001, repurchased and retired 1.4 million shares of common stock at an aggregate cost of approximately $25, (ii) during 2002, repurchased and retired 1.1 million shares of common stock and repurchased 1.5 million shares of our Preferred Securities at an aggregate cost of approximately $65 for all the 2002 repurchases, and (iii) during 2003, repurchased 100,000 shares of our Preferred Securities at an aggregate cost of approximately $4. 2001 Senior Stock Plan. In June 2001, our sharehold- ers 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 common stock that can be issued under the plan is 4 million. The Com- pany records each share that is awarded under this plan at an amount that is not less than 100 percent of the fair market 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, 2005 and 2004, 2.4 and 2.3 million shares, respectively, had been awarded under this plan at a weighted-average price of $21.94 and $21.97 per share, respectively, 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). 67 2001 Stock Plan. In March 2001, we adopted the 2001 Stock Plan. This plan provides for the awarding of common stock and other equity-linked awards to cer- tain employees (other than ofﬁcers and directors) and others who render services to the Company. The max- imum number of shares of common stock that can be issued under the plan is 2 million. The Company records each share that is awarded under this plan at an amount that is not less than 100 percent of the fair market value per share at the date of the award. No shares may be awarded under this plan after March 23, 2011. As of December 31, 2005 and 2004, 1.8 million shares had been awarded under this plan at a weighted-average price of $16.28 and $16.27 per share, respectively, with vesting periods up to three and one-half years. Determinations concerning the persons to receive awards, the form, amount and tim- ing of such awards and terms and provisions of such awards are made by the Board (or a committee appointed by the Board). We recognized compensation expense for the issuance of common shares under the 2001 Senior Stock Plan and the 2001 Stock Plan based on the quoted market price on the date of the grants. Amor- tization 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, 2005, 2004 and 2003 for the awards in these plans was approximately $9, $20 and $26, respectively 1997 Stock Option Plan. Our 1997 Stock Option Plan provides for the granting of options to purchase not more than an aggregate of 5 million shares of com- mon stock. Some or all of such options may be “incen- tive stock options” within the meaning of the Internal Revenue Code. All of our ofﬁcers, directors and employees and other persons who perform services on our behalf are eligible to participate in this plan. Each option granted pursuant to this plan must pro- vide 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 Decem- ber 31, 2005, 2004 and 2003, options to purchase an aggregate of 3.5, 3.8 and 3.9 million shares of common stock, respectively, were outstanding under this plan. The exercise price of each option, the period during which each option may be exercised and other terms and conditions of each option are determined by the Board (or by a committee appointed by the Board). 1998 Stock Option Plan. Our 1998 Stock Option Plan provides for the granting of options to purchase not more than an aggregate of 4.0 million shares of com- mon stock. Some or all of the options issued under the 1998 Stock Option Plan may be “incentive stock options” within the meaning of the Internal Revenue Code. All ofﬁcers, directors and a limited number of key employees of the Company and its subsidiaries 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, 2005, 2004 and 2003, options to purchase an aggregate of 2.0, 2.3 and 2.3 million shares, respec- tively, 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 conditions of each option are determined by the Board (or by a committee appointed by the Board). 1998 Supplemental Stock Option Plan. We adopted a stock option plan pursuant to which options, for up to an aggregate of 5.6 million shares of common stock, may be granted to employees (who are not ofﬁ- cers or directors) and to consultants and independent contractors (who perform services for us or our sub- sidiaries). As of December 31, 2005, 2004 and 2003, options to purchase an aggregate of 3.4, 3.7 and 4.5 million shares of common stock, respectively, were outstanding pursuant to this plan. The exercise price of each option, the period during which each option may be exercised and other terms and conditions of each option are determined by the Board (or by a committee appointed by the Board). 1997 Performance Award Plan. Effective February 20, 1997, U.S. Rentals (an acquired company) adopted the 1997 Performance Award Plan under which stock options and other awards could be granted to key employees and directors at prices and terms established by U.S. Rentals at the date of grant. The options expire in 2007. As a result of our merger with U.S. Rentals, all outstanding options to pur- chase shares of U.S. Rentals common stock became fully vested and were converted into options to pur- chase our common stock. As of December 31, 2005, 2004 and 2003, options to purchase an aggregate of 1.5, 1.5 and 1.5 million shares, respectively, were out- standing pursuant to this plan. A summary of the transactions within the Company’s stock option plans follows: Weighted Average Exercise Shares Price(1) Outstanding at December 31, 2001 . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2002 . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2003 . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding as of December 31, 2004 . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . 16,422,014 722,550 (3,735,666) (812,180) 12,596,718 85,200 (94,446) (324,798) 12,262,674 811,575 (378,597) (1,404,473) 11,291,179 157,500 (63,365) (919,130) Outstanding at December 31, 2005 . . . . . 10,466,184 Exercisable at December 31, 2004 . . . . . . Exercisable at December 31, 2005 . . . . . . 10,931,199 10,272,936 $20.22 11.94 17.32 25.03 20.20 12.31 12.46 23.16 20.05 16.86 14.12 19.14 19.79 18.99 13.14 18.46 $19.93 $19.98 $19.97 68 As of December 31, 2005: 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 – 35.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.01 – 40.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.01 – 45.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.01 – 50.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) In actual dollars, not millions. Amount Outstanding 387,517 2,344,478 1,563,874 4,678,038 655,187 545,690 90,900 185,500 15,000 10,466,184 Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Amount Price(1) Exercisable Weighted Average Exercise Price(1) 5.5 3.3 6.3 3.9 3.3 2.8 2.5 2.1 2.5 4.0 $ 9.69 12.71 17.07 21.67 26.71 31.83 36.03 43.91 46.15 384,933 2,331,728 1,426,126 4,637,872 655,187 545,690 90,900 185,500 15,000 $ 9.69 12.71 16.96 21.68 26.71 31.83 36.03 43.91 46.15 $19.93 10,272,936 $19.97 At December 31, 2005, 2004 and 2003 there were (i) 5.8, 6.9 and 7.0 million shares of common stock reserved for the exercise of warrants, respectively, (ii) 10.5, 11.3 and 12.3 million shares of common stock reserved for issuance pursuant to options granted under our stock option plans, respectively, (iii) 5.1 million shares of common stock reserved for the issuance of outstanding preferred securities of a subsidiary trust, (iv) 17 million shares of common stock reserved for the issuance of Series C and Series D preferred stock and (v) 6.5, 5.6 and 5.8 million shares of common stock reserved for the conversion of convertible debt, respectively. Stockholders’ Rights Plan. We adopted a Stockhold- ers’ Rights Plan on September 28, 2001. This plan, as well as other provisions of our charter and bylaws, may have the effect of deferring hostile takeovers or delaying or preventing changes in control or man- agement of the Company, including transactions in which our shareholders might otherwise receive a premium for their shares over the then current mar- ket prices. The rights expire on September 27, 2011. 15. Accumulated Other Comprehensive Income The following table sets forth the components of the Company’s accumulated other comprehensive income (loss): Foreign Currency Translation Adjustments Derivatives Qualifying as Hedges Accumulated Other Com- prehensive Income/(Loss) Balance at December 31, 2001 . . . . 2002 activity . . . . . . . . . . . Balance at December 31, 2002 . . . . 2003 activity . . . . . . . . . . . Balance at December 31, 2003 . . . . 2004 activity . . . . . . . . . . . Balance at December 31, 2004 . . . . 2005 activity . . . . . . . . . . . Balance at $(22) 4 (18) 40 22 17 39 10 $(7) 1 (6) 6 — (2) (2) 3 $(29) 5 (24) 46 22 15 37 13 December 31, 2005 . . . . $ 49 $ 1 $ 50 69 16. Earnings Per Share Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of com- mon shares outstanding and, if dilutive, the Series C and Series D preferred shares as if converted to common shares since such shares are participating securities. Diluted earnings per share includes the impact of other diluted securities. The diluted share base for years where the numerator represents a loss excludes incremen- tal weighted shares for the below-captioned “Effect of dilutive securities” due to their antidilutive effect. The following table sets forth the computation of basic and diluted earnings per share: Year Ended December 31, 2005 2004 2003 2002 Numerator: Income (loss) before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $187 $(84) $(254) Plus: Liquidation preference in excess of amounts paid for convertible preferred securities . . . . . . . . . . . . . . . . . . . . . . . Convertible debt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QUIPs interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of change in accounting principles, net . . . . — 2 9 — — — — — 1 — — — Income (loss) available to common stockholders . . . . . . . . . . . . $198 $(84) $(253) $(118) 35 — — (288) $(371) Denominator: Weighted-average common shares . . . . . . . . . . . . . . . . . . . . . . Series C preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series D preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denominator for basic earnings per 77,813,488 12,000,000 5,000,000 77,610,726 — — 76,959,151 — — 75,787,693 — — share-weighted-average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,813,488 77,610,726 76,959,151 75,787,693 Effect of dilutive securities: Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QUIPs shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units and phantom shares . . . . . . . . . . . . . . . Denominator for dilutive earnings per share — adjusted 1,286,302 2,850,176 5,842,408 5,077,926 165,908 — — — — — — — — — — — — — — — weighted-average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,036,208 77,610,726 76,959,151 75,787,693 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 . . . . . . . . . . . . $1.97 — $1.97 $1.80 — $1.80 $(1.07) — $(1.07) $(1.07) — $(1.07) $(3.29) — $(3.29) $(3.29) — $(3.29) $(1.08) (3.80) $(4.88) $(1.08) (3.80) $(4.88) 70 17. Commitments and Contingencies SEC Non-Public Fact Finding Inquiry and Special Committee Review As previously announced, on August 25, 2004, the Company received a letter from the SEC in which the SEC referred to an inquiry of the Company. The letter transmitted a subpoena requesting certain of the Company’s documents. The letter and the subpoena referred to an SEC investigation entitled Inthe Matter of United Rentals, Inc. The notice from the SEC states that the inquiry does not mean that the SEC has concluded that the Company or anyone else has broken the law or that the SEC has a negative opinion of any person, entity or security. As previ- ously announced, the inquiry appears to relate to a broad range of our accounting practices and is not conﬁned to a speciﬁc period or the matters discussed in this report. The Company has since received additional document subpoenas from the SEC. As previously announced, in March 2005, the Company’s board of directors formed a Special Committee of independent directors to review matters related to the SEC inquiry. The Spe- cial Committee retained independent counsel. The board of directors received and acted upon ﬁndings of the Special Committee on January 26, 2006. The conclusions and recommendations of the Special Committee are discussed in MD&A, and in Item 1 above and summarized in the Company’s press release and the related current report on Form 8-K, dated January 26, 2006. The Company has provided documents in response to the SEC subpoenas to the SEC or to the Special Committee, which has, in turn, provided documents to the SEC. The Company is cooperating fully with the SEC in complying with the subpoenas. The Company is also responding to the SEC’s informal requests for information. Shareholder Class Action Lawsuits and Derivative Litigation As previously announced, following our public announcement of the SEC inquiry referred to above, three purported class action lawsuits were ﬁled against us in the United States District Court for the District of Connecticut. The plaintiff in each of the lawsuits seeks to sue on behalf of a purported class comprised of purchasers of our securities from Octo- ber 23, 2003 to August 30, 2004. The lawsuits name as the defendants our company, our chairman, our vice chairman and chief executive ofﬁcer, our former president and chief ﬁnancial ofﬁcer, and our former corporate controller. The complaints allege, among other things, that certain of our SEC ﬁlings and other public statements contained false and mislead- ing statements which resulted in damages to the plaintiffs and the members of the purported class when they purchased our securities. On the basis of those allegations, plaintiffs in each action assert claims (a) against all defendants under Section 10 (b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and (b) against one or more of the individual defendants under Section 20 (a) of such Act. The complaints seek unspeciﬁed compensa- tory damages, costs and expenses. On February 1, 2005, the Court entered an order consolidating the three actions. On November 8, 2005, the Court appointed City of Pontiac Policeman’s and Fireman’s Retirement System as lead plaintiff for the purported class. The consolidated action is now entitled Inre United Rentals, Inc. Securities Litigation. The court has directed the parties to submit, by April 17, 2006, a proposed schedule for the ﬁling of a consoli- dated amended complaint and responses to any amended pleading. We intend to defend against these actions vigorously. In January 2005, an alleged shareholder ﬁled an action in Connecticut State Superior Court, Judicial District of Norwalk/Stamford at Stamford, purport- edly suing derivatively on our behalf. The action, entitled Gregory Riegel v. John N. Milne, et al., names as defendants certain of our current and/or former directors and/or ofﬁcers, and us as a nominal defendant. The complaint asserts, among other things, that the defendants breached their ﬁduciary duties to us by causing or allowing us to disseminate misleading and inaccurate information to sharehold- ers and the market and by failing to establish and maintain adequate accounting controls, thus expos- ing us to damages. The complaint seeks unspeciﬁed compensatory damages, costs and expenses against the defendants. The parties to the Riegel action have agreed that the proceedings in this action will be stayed pending the resolution of the anticipated motions to dismiss in the purported shareholder class actions. In November 2004, we received a letter from counsel for an alleged shareholder, raising allegations simi- lar to the ones set forth in the derivative complaint described above and demanding that we take action in response to those allegations against certain of our current and/or former directors and/or ofﬁcers. Fol- lowing receipt of the letter, the board of directors formed a special committee of the board to consider the letter. In August 2005, this alleged shareholder commenced an action in Connecticut State Superior Court, Judicial District of Norwalk/Stamford at Stam- ford, purporting to sue derivatively on our behalf. The action, entitled Nathan Brundridge v. Leon D. Black, et al., names as defendants certain of our cur- rent and/or former directors and/or ofﬁcers, and names us as a nominal defendant. The complaint in this action asserts, among other things, that all of the defendants breached ﬁduciary obligations to us by causing or allowing us to disseminate misleading and inaccurate information to shareholders and the market, and by failing to establish and maintain ade- quate accounting controls, thus exposing us to dam- ages. The complaint in this action also asserts a claim 71 for unjust enrichment against our chairman, our vice chairman and chief executive ofﬁcer, and our former president and chief ﬁnancial ofﬁcer. The complaint seeks unspeciﬁed compensatory damages, equitable relief, costs and expenses against all of the defen- dants. The complaint also seeks an order, in connec- tion with plaintiff’s unjust enrichment claim, directing the defendants against whom that claim is asserted to disgorge certain compensation they received from us with respect to ﬁscal years 2001, 2002 and 2003. The parties have agreed to submit to the court, by April 17, 2006, a proposed schedule for the ﬁling of any amended complaint and responses to the operative complaint in the action. The parties’ agreement further provides that the time by which all defendants must answer, move or otherwise respond to the complaint shall be adjourned pending the par- ties’ submission of the aforementioned schedule. In August 2005, another alleged shareholder ﬁled an action in the United States District Court for the Dis- trict of Connecticut, purporting to sue derivatively on our behalf. The action, entitled Natalie Gordon v. Wayland R. Hicks, et al., names as defendants certain of our current and/or former directors and/or ofﬁ- cers, and names us as a nominal defendant. The com- plaint in this action asserts claims against each of the defendants for breach of ﬁduciary duty, abuse of con- trol, gross mismanagement, waste of corporate assets and unjust enrichment. Each of these claims is premised on, among other things, the theory that the individual defendants caused or permitted us to dis- seminate misleading and inaccurate information to shareholders and to the market, and failed to estab- lish and maintain adequate accounting controls, thus exposing us to damages. The complaint also asserts (a) a claim that a former director breached ﬁduciary obligations by selling shares of our common stock while in possession of material, non-public informa- tion, and (b) a claim against our chairman, our vice chairman and chief executive ofﬁcer, and our former president and chief ﬁnancial ofﬁcer for recovery of certain incentive-based compensation under section 304 of the Sarbanes-Oxley Act. The complaint seeks unspeciﬁed compensatory damages, equitable relief, restitution, costs and expenses against all of the defendants. The complaint also seeks an order declar- ing that the defendants against whom the section 304 claim is directed are liable under the Sarbanes- Oxley Act and directing them to reimburse us for all bonuses or other incentive-based or equity-based com- pensation they received for the ﬁscal years 1999 through 2004. The court has directed the parties to submit, on or before April 17, 2006, a proposed schedule for the ﬁling of any amended complaint and responses to the operative complaint in the action. Pending the submission and approval of the afore- mentioned schedule, the court has adjourned the time by which all defendants must answer, move, or other- wise respond to the complaint in this action. We are also a party to various other litigation mat- ters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and ﬁnancial liabil- ity with respect to such pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our ﬁnancial position, results of operations or cash ﬂows. Indemniﬁcation The Company indemniﬁes its ofﬁcers and directors pursuant to indemniﬁcation agreements and may in addition indemnify these individuals as permitted by Delaware law. Accordingly, in connection with the purported class action lawsuit, three purported shareholder derivative lawsuits and the SEC inquiry and related review of the Special Committee described above, the Company has advanced counsel fees and other reasonable fees and expenses, actually and nec- essarily incurred by the present and former directors and ofﬁcers who are involved, in an aggregate amount of approximately $2.6. Each of the individu- als is required to execute an undertaking to repay such expenses if he or she is ﬁnally found not to be entitled to indemniﬁcation. Operating Leases We lease rental equipment, real estate and certain ofﬁce equipment under operating leases. Certain real estate leases require us to pay maintenance, insurance, taxes and certain other expenses in addition to the stated rental payments. Future mini- mum 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, 2005: 2006 . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . Real Other Rental Estate Equipment Equipment Leases Leases Leases $ 78 73 63 50 36 129 $429 $ 70 38 31 9 — — $148 $30 20 13 9 6 2 $80 As part of certain of our equipment operating leases, we guarantee 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 our monthly operating lease pay- ments. We do not know at this time whether and to what extent the actual residual values may be less than the guaranteed residual values and, accord- ingly, cannot quantify the amount that we may be required to pay under these guarantees. If the actual residual value for all equipment subject to such guar- antees were to be zero, then our maximum potential liability under these guarantees would be approxi- mately $26. This potential liability was not reﬂected on our balance sheet as of December 31, 2005, or any prior date. Rent expense under all non-cancelable real estate, rental equipment and other equipment operating leases totaled $174, $158, $176, and $185 for the years ended December 31, 2005, 2004, 2003, and 2002, respectively. Our real estate leases provide for varying terms, including leases subject to customary escalation clauses, and include 56 leases that are on a month-to-month basis and 43 leases that provide for a remaining term of less than one year and do not pro- vide a renewal option. 72 Restricted Stock Awards We have granted to employees other than executive ofﬁcers and directors approximately 567,000 shares of restricted stock that have not yet vested. The shares vest in 2006, 2007 or 2008 or earlier upon a change in control of the Company, death, disability, retirement or certain terminations of employment, and are subject to forfeiture prior to vesting on cer- tain 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 instru- ment, 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 guaranteed amount is (i) $9.18 per share with respect to approximately 326,000 shares, $17.20 per share with respect to approximately 9,000 shares, and $27.26 per share with respect to approxi- mately 8,000 shares scheduled to vest in 2006 and (ii) $17.20 per share with respect to approximately 167,000 shares scheduled to vest in 2007 and (iii) $19.86 per share with respect to approximately 57,000 shares scheduled to vest in 2008. Employee Beneﬁt Plans We currently sponsor one deﬁned contribution 401(k) retirement plan which is subject to the provisions of ERISA. We also sponsor a deferred proﬁt sharing plan for the beneﬁt of the full-time employees of our Canadian subsidiaries. Under these plans, we match a percentage of the participants’ contributions up to a speciﬁed amount. Company contributions to the plans were $6, $5, $5 and $5 in 2005, 2004, 2003 and 2002, respectively. Environmental Matters The Company and its operations are subject to vari- ous laws and related regulations governing environ- mental 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. We incur ongoing expenses associated with the removal of underground storage tanks and the performance of appropriate remediation at certain of our locations. We believe that such removal and remediation will not have a material adverse effect on our ﬁnancial position, results of operations, or cash ﬂows. 18. Related Party We have from time to time purchased equipment and parts from and sold equipment to Terex Corporation (“Terex”) and expect to do so in 2006. One of our for- mer directors (until June 2005) is chief executive ofﬁ- cer, president and a director of Terex. We purchased approximately $157, $124, $113 and $63 of equip- ment and parts from Terex during 2005, 2004, 2003 and 2002, respectively. The increase from 2002 to 2003 was attributable to Terex’s acquisition of one of the Company’s existing suppliers toward the end of 2002. We also sold approximately $7, $12, $1 and $ — of equipment to Terex during 2005, 2004, 2003 and 2002, respectively. As of December 31, 2005, 2004 and 2003, amounts due to Terex were $10, $11 and $6 and amounts due from Terex were $ — , $1 and $ — respectively. Certain of the minor sale-leaseback transactions that we restated for and that are dis- cussed further in note 3 to our consolidated ﬁnancial statements involved Terex. The accounting for these transactions involved irregularities. 19. Segment Information Our current reportable segments are general rentals, trafﬁc control and trench safety, pump and power. Prior to 2004, we had one reportable segment: gen- eral rentals. In the ﬁrst quarter of 2004, we began reporting information for two reporting segments: general rentals and trafﬁc control. In 2005, there was an additional change in our reporting segments. As a result, we now have three reporting segments: gen- eral rentals, trafﬁc control and trench safety, pump and power. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include con- struction and industrial companies, manufacturers, utilities, municipalities and homeowners. The gen- eral rentals segment operates throughout the United States and Canada and has one location in Mexico. The trafﬁc control segment includes the rental of equipment used in the management of trafﬁc-related services and activities. The trafﬁc control segment’s customers include construction companies involved in infrastructure projects and municipalities. The trafﬁc control segment operates in the United States. The trench safety, pump and power segment includes the rental of specialty construction products and related services. The trench safety, pump and power segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates in the United States and has one location in Canada. These segments align our external segment report- ing to the manner in which management evaluates and allocates resources. We evaluate segment perfor- mance based on segment operating results. The change in segments was attributable to changes in organizational structure. The accounting policies of our segments are the same as those described in the summary of signiﬁcant accounting policies in note 2 to our consolidated ﬁnancial statements. Certain corporate costs, includ- ing those related to selling, ﬁnance, legal, risk man- agement, human resources, corporate management and information technology systems, are deemed to be of an operating nature and are allocated to each of our segments based on the actual amount of costs incurred in the prior year for SG&A and equipment rental revenue generating activities. 73 The following table sets forth ﬁnancial information by segment. Information related to our consolidated bal- ance sheets is presented as of December 31, 2005, 2004 and 2003. Year Ended December 31, 2005 2004 2003 2002 Total revenues General rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trench safety, pump and power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trafﬁc control Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total depreciation and amortization expense General rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trench safety, pump and power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trafﬁc control $3,113 180 270 $3,563 412 20 22 Total depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . $ 454 Segment operating income General rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trench safety, pump and power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trafﬁc control $ 472 48 (20) Segment operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500 Total capital expenditures General rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trench safety, pump and power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trafﬁc control Total capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets General rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trench safety, pump and power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trafﬁc control Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 763 38 22 $ 823 $4,928 116 229 $5,274 $2,709 130 255 $3,094 $ 402 16 27 $ 445 $ 416 31 (52) $ 395 $ 590 35 24 $ 649 $4,619 92 171 $4,882 $2,443 109 330 $2,882 $ 361 15 27 $ 403 $ 234 23 4 $ 261 $ 320 72 20 $ 412 $4,249 71 374 $4,694 $2,375 87 359 $2,821 $ 347 11 27 $ 385 $ 338 22 12 $ 372 $ 495 8 33 $ 536 The following is a reconciliation of segment operating income to total company operating income (loss): Total segment proﬁt Unallocated items: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and asset impairment charges . . . . . . . . . . . . . . . . . . . . . . . 2005 $500 — — Consolidated operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500 Year Ended December 31, 2004 $ 395 (139) 1 $ 257 2003 $ 261 (297) — $ (36) 2002 $ 372 (248) (28) $ 96 74 We operate in the United States, Canada and Mexico. Geographic area information for the years ended Decem- ber 31, 2005, 2004, 2003, and 2002 is as follows, except for balance sheet information which is presented as of December 31, 2005, 2004 and 2003 only: Year ended December 31, 2005 2004 2003 2002 Revenues from external customers Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues from external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental equipment, net Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consolidated rental equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consolidated property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . Goodwill and other intangible assets, net Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consolidated goodwill and other intangible assets, net . . . . . . . . . . . . . $3,235 328 $3,563 $2,037 215 $2,252 $ 419 26 $ 445 $1,214 147 $1,361 $2,844 250 $3,094 $1,916 207 $2,123 $ 373 24 $ 397 $1,188 142 $1,330 $2,684 198 $2,882 $1,906 156 $2,062 $ 389 18 $ 407 $1,359 80 $1,439 $2,659 162 $2,821 20. Quarterly Financial Information (Unaudited) As discussed in the Restatement Note, we have restated our originally reported 2003 results. The 2003 quar- terly information below reﬂects the impact of those restatements. The ﬁrst, second and third quarters of 2004 have been restated for a bonus accrual as well as these matters. First Quarter Second Quarter Third Quarter Fourth Quarter For the year ended December 31, 2005: Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income available to common stockholders per share — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income available to common stockholders per share — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2004: Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) Income (loss) available to common stockholders $732 202 12 $.12 $.11 $ 643 163 — (108) per share — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1.39) Income (loss) available to common stockholders per share — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1.39) For the year ended December 31, 2003: Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) available to common stockholders $609 163 — (3) per share — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(.04) Income (loss) available to common stockholders per share — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(.04) $888 283 50 $.53 $.48 $771 245 — 40 $.42 $.39 $723 222 — 23 $.24 $.24 $980 352 76 $.80 $.71 $858 301 139 (46) $(.58) $(.58) $802 260 — 33 $.36 $.35 Full Year $3,563 1,165 187 $1.97 $1.80 $3,094 959 139 (84) $(1.07) $(1.07) $2,882 782 297 (254) $963 328 49 $.52 $.47 $822 250 — 30 $.32 $.29 $ 748 137 297 (307) $(3.97) $(3.29) $(3.97) $(3.29) 75 united rentals rental locations UNITED STATES Alabama Bessemer GR(2) Birmingham GR Dothan GR Florence GR(2) Madison GR Mobile GR Montgomery GR Oxford GR Alaska Anchorage GR(2) Fairbanks GR Palmer GR Soldotna GR Wasilla GR Arizona Bullhead City GR Cottonwood GR Flagstaff GR(1), TC(1) Fort Mohave TC Kingman GR Lake Havasu City GR Phoenix GR(3), TC(2), TPP(3) Prescott GR(1), TC(1) Show Low GR Tempe GR Tucson GR(1), TC(1), TPP(1) Arkansas Bentonville GR Fayetteville GR Little Rock GR Rogers GR California Antioch GR Arroyo Grande GR Bakersﬁeld GR(2), TPP(1) Baldwin Park GR Buena Park GR Burbank GR(1), TPP(1) Burlingame GR Canoga Park GR Carmichael GR Castro Valley GR Cathedral City GR Chico GR Chula Vista GR Coachella TPP Corona GR Downey GR Dublin GR Elk Grove GR Escondido GR(1), TPP(1) Eureka GR Folsom GR Fontana GR(1), TPP(1) Fremont GR(2) Fresno GR(2), TPP(1) Fullerton GR Gardena GR Gilroy GR Hayward GR(1), TPP(1) Hesperia GR Huntington Beach GR Indio GR Lake Elsinore TC Lakeside GR Lancaster GR Lodi GR Delaware Bear GR Delmar GR Frederica GR Middletown GR Newark GR Florida Bradenton GR Clearwater GR(1), TC(1) Davie GR Deerﬁeld Beach GR Fort Lauderdale TC Fort Myers GR(1), TC(1) Fort Pierce TC Fort Walton Beach GR Gainesville GR Holly Hill GR Homestead GR Jacksonville GR(2), TPP(2) Jupiter TC Lakeland GR Lauderhill TPP Longwood GR Melbourne GR Miami GR(2) Naples GR Orlando GR(3), TC(1), TPP(2) Panama City Beach GR Pensacola GR(1), TPP(1) Pompano Beach TPP Port Saint Lucie GR Tallahassee GR Tampa GR(2), TPP(1) West Palm Beach GR Georgia Acworth GR Atlanta GR Augusta GR Bogart GR Carrollton GR Columbus GR Conyers GR Fairburn TPP Forest Park GR(2), TPP(1) Garden City GR Leesburg GR Macon GR McDonough GR Norcross GR Ringgold GR Sugar Hill GR Villa Rica GR Idaho Boise GR Lewiston GR Illinois Addison GR Bloomington TC Carbon Cliff GR Carbondale TC Champaign GR Chicago GR Fairview Heights TC Machesney Park TC Mokena GR Moline TC Rockford GR Springﬁeld TC Villa Park TC Long Beach GR(2), TPP(1) Los Alamitos GR Madera GR Marysville GR Merced GR Modesto GR(3), TPP(1) Montclair GR Monterey GR Mountain View GR Napa GR(2) Oakland GR Oxnard TC Pico Rivera GR Redding GR Ridgecrest GR Riverside TPP Rocklin GR Sacramento GR(3), TPP(1) Salinas GR San Diego GR San Francisco GR San Jose GR(3), TC(1), TPP(1) San Juan Capistrano GR San Leandro GR San Luis Obispo GR(1), TPP(1) Santa Ana GR Santa Clarita GR Santa Cruz GR Santa Fe Springs GR(1), TC(1) Santa Maria GR Santa Rosa GR(1), TPP(1) South Lake Tahoe GR Stockton GR(2), TC(1) Sunnyvale GR Susanville GR Tracy GR Turlock GR Vacaville GR Van Nuys GR Ventura GR(1), TC(1) Visalia GR Woodland GR Colorado Aurora GR Avon GR Boulder GR Brighton GR Castle Rock GR Colorado Springs GR(1), TC(1), TPP(1) Commerce City GR Denver GR(1), TC(2), TPP(1) Eagle GR Fort Collins GR Grand Junction GR Littleton GR Louisville GR Loveland GR(1), TC(1) Parker GR Pueblo GR Silverthorne GR Connecticut Bloomﬁeld GR Danbury GR(2) Darien GR Fairﬁeld GR Groton GR Manchester GR Milford GR North Stonington GR Old Saybrook GR Plainville GR Stamford GR West Haven TPP Indiana Bloomington GR Edinburgh GR Evansville GR Fort Wayne GR Greenﬁeld GR Indianapolis GR(3), TC(1), TPP(1) Lafayette GR Richmond GR South Bend GR Wanatah TC West Terre Haute GR Iowa Cedar Rapids GR Council Bluffs TPP Des Moines GR Dubuque GR Grimes GR(1), TPP(1) Mason City GR Sioux City GR Waterloo GR Kansas Kansas City TC Salina TC Topeka GR Wichita GR(1), TC(1), TPP(1) Kentucky Georgetown GR Lexington GR Louisville GR(2) Paducah GR Louisiana Baton Rouge TC Gonzales GR(1), TPP(1) Harvey TC Lafayette GR Monroe GR Saint Rose GR Shreveport GR Maine Bangor GR Westbrook GR Maryland Annapolis GR Baltimore GR(2) Beltsville TPP Bladensburg GR Delmar GR Frederick GR(3) Gaithersburg GR Joppa GR Lexington Park GR Pasadena GR Prince Frederick TPP Silver Spring GR Upper Marlboro GR Massachusetts Agawam GR Boston GR(2) Canton GR Everett GR Kingston TPP Ludlow GR Millbury GR Watertown GR West Yarmouth GR Worcester GR(1), TPP(1) Michigan Flint GR Grand Rapids GR Hudsonville GR Portage GR Romulus GR Shelby GR Taylor GR Traverse City GR Minnesota Brainerd GR Hermantown GR Mankato GR Minneapolis TC Rochester GR(1), TC(1) Rogers GR(1), TC(1) Roseville GR Saint Michael GR Savage GR(1), TC(1), TPP(1) Saint Paul GR(1), TC(1) Mississippi Gulfport GR Olive Branch GR Pearl GR Missouri Belton GR Columbia TC Earth City GR Kansas City TPP Liberty GR North Kansas City GR Saint Louis GR(1), TPP(1) Springﬁeld GR St. Joseph TC Strafford TC Weldon Spring GR Montana Billings TC Missoula TC Nebraska Lincoln GR(2) Norfolk GR Omaha GR Papillion GR Nevada Carson City GR Elko GR Gardnerville GR LasVegas GR(1), TPP(2) North Las Vegas TC Reno GR(2), TPP(1) Sparks GR New Hampshire Hudson GR Manchester GR West Lebanon GR New Jersey Bellmawr GR Burlington GR Carlstadt TC Egg Harbor GR(2) 76 League City GR Lubbock GR(1), TC(1) Lufkin GR Manor TC New Braunfels GR Odessa GR Palestine GR Plano GR Rosenberg GR Round Rock GR San Antonio GR(2), TPP(1) Sherman GR Temple GR The Woodlands GR Tyler GR Von Ormy GR Wichita Falls TC Utah Kaysville GR Orem GR Saint George TC Salt Lake City GR(2), TPP(1) Sandy GR Virginia Chantilly GR Charlottesville GR Chesapeake GR(2) Chester GR Fairfax GR(1), TPP(1) Fredericksburg GR Glen Allen GR Hampton GR Herndon GR Richmond GR Roanoke GR Winchester GR Washington Airway Heights GR Auburn GR Bellingham GR Bonney Lake GR Bothell GR Bremerton GR Burlington GR Chehalis GR Covington GR Ellensburg GR Federal Way GR Gig Harbor GR Kirkland GR Longview GR Marysville GR Monroe GR Pasco GR Port Angeles GR Puyallup GR Renton GR Seattle GR(1), TPP(1) Spokane GR(1), TPP(1) Tacoma TPP Tukwila GR Tumwater GR Union Gap GR Vancouver GR Woodinville TPP Elmwood Park GR Piscataway GR Richland TC Ridgeﬁeld Park GR(1), TPP(1) New Mexico Albuquerque GR Farmington GR Las Cruces GR New York Batavia GR Brooklyn GR Carmel GR Clifton Park GR East Syracuse GR Falconer GR Flushing GR Holtsville GR(2) Middletown GR New Windsor GR(2) New York City GR(3) Newburgh GR Peekskill GR Rochester GR(3) Wappingers Falls GR(2) White Plains GR Williamsville GR North Carolina Arden GR Charlotte GR(3), TPP(1) Durham GR Fayetteville GR Garner GR Greensboro GR(2) Indian Trail GR Jacksonville GR Raleigh GR Salisbury GR Wilmington GR Winston Salem GR North Dakota Bismarck GR(1), TC(1) Fargo GR(1), TC(1) Minot GR Ohio Brooklyn Heights TC Cincinnati GR Cleveland GR Columbiana GR Columbus GR(2), TPP(1) East Liverpool GR Independence GR Marietta GR North Olmsted TPP(2) Perrysburg GR Toledo GR Oklahoma Oklahoma City GR Tulsa GR Oregon Bend GR Clackamas GR Corvallis GR Eugene GR Grants Pass GR Gresham GR Hillsboro GR Medford GR(2) Portland GR(3), TC(1), TPP(1) Roseburg GR Salem GR(1), TPP(1) Seaside GR Tigard GR Tualatin GR Pennsylvania Chester TPP Hatﬁeld TC Lebanon GR Mechanicsburg GR(1), TC(1) Middletown GR New Holland TC Oakdale GR(2) Palmyra GR Philadelphia GR(1), TPP(1) Quakertown GR State College GR Watsontown TC Wilkes-Barre GR Windber TC York GR Rhode Island Smithﬁeld GR South Carolina Anderson GR Charleston GR Columbia GR Conway GR Greenville GR North Charleston GR Rock Hill GR Spartanburg GR South Dakota Rapid City GR(1), TC(1) Sioux Falls GR(1), TC(1) Tennessee Franklin GR Kingsport GR Knoxville GR(3) Memphis GR(1), TPP(1) Nashville GR(2) Spring Hill GR Texas Amarillo TC Arlington TPP Austin GR(1), TC(1), TPP(1) Beaumont GR(1), TPP(1) Carrollton GR Cedar Park GR Conroe GR Corpus Christi GR(1), TC(1), TPP(1) Corsicana GR Dallas TPP Denton GR El Paso GR Fort Worth GR(3), TC(1) Gainesville TC Garland TC Greenville GR Houston GR(5), TC(1), TPP(1) Irving GR(2) Katy GR Keller GR(1), TPP(1) La Porte GR Laredo GR West Virginia Nova Scotia Fairmont GR Huntington GR Wisconsin De Pere GR Madison GR Marshﬁeld GR Milwaukee GR(3), TC(1) Wyoming Casper GR Cheyenne TC CANADA Alberta Calgary GR(2) Edmonton GR Fort McMurray GR Lethbridge GR Medicine Hat GR Red Deer GR St. Albert GR British Columbia Abbotsford GR(2), TPP(1) Burnaby GR(2) Campbell River GR Chilliwack GR Fort Saint John GR Genelle GR Kamloops GR Langley GR Maple Ridge GR Nanaimo GR North Vancouver GR Port Coquitlam GR Prince George GR Richmond GR Surrey GR Vancouver GR Victoria GR Whistler GR Whiterock GR Manitoba Flin Flon GR Thompson GR Winnipeg GR New Brunswick Bathurst GR Campbellton GR Edmundston GR Fredericton GR Jacksonville GR Moncton GR Newcastle GR St. John GR St. Stephen GR Newfoundland Arnold’s Cove GR Corner Brook GR Goose Bay GR Grand Falls Windsor GR Mount Pearl GR St. Johns GR Wabush GR Bridgewater GR Dartmouth GR New Glasgow GR Port Hawkesbury GR Sydney GR Truro GR Ontario Barrie GR(2) Belleville GR Bracebridge GR Brampton GR Brantford GR Cambridge GR Cigar Lake GR Collingwood GR Dryden GR Guelph GR Kenora GR Kingston GR Kitchener GR(2) London GR(2) Meaford GR Mississauga GR North Bay GR Oshawa GR(2) Ottawa GR Saint Catherines GR Sarnia GR Scarborough GR Stoney Creek GR(2) Stratford GR Sudbury GR Toronto GR Walkerton GR Waterloo GR Windsor GR Prince Edward Island Charlottetown GR Quebec Chicoutimi GR Longueuil GR Mont Tremblant GR Saint Laurent GR Saint Leonard GR Sept-Iles GR Shawinigan GR Trois-Rivieres GR Vanier GR Saskatchewan Saskatoon GR MEXICO Nuevo Laredo Escobedo GR GR General Rentals Trafﬁc Control TC TPP Trench Safety, Pump and Power 77 corporate information Board of Directors Bradley S. Jacobs Chairman Wayland R. Hicks Vice Chairman and Chief Executive Ofﬁcer Michael S. Gross (2, 3) Lead Director Founding Partner Apollo Management, L.P. Leon D. Black Founding Principal Apollo Management, L.P. Howard L. Clark Jr. (2, 3, 4) Vice Chairman Lehman Brothers Inc. Singleton McAllister (3) Partner Mintz, Levin, Cohen, Ferris, Glovsky and Popeo Brian D. McAuley (1, 2, 3, 4) Partner NH II, LLC John S. McKinney Director Jason Papastavrou, Ph.D (1, 4) Chief Executive Ofﬁcer ARIS Capital Management Mark Suwyn (1, 4) Chairman and Chief Executive Ofﬁcer NewPage Corporation Gerald Tsai Jr. (2, 3) Director Lawrence Wimbush (1) Director Committees of the Board (1) Audit Committee Brian D. McAuley, Chair (2) Compensation Committee Michael S. Gross, Chair (3) Nominating and Corporate Governance Committee Howard L. Clark Jr., Chair (4) Special Committee Brian D. McAuley, Chair Executive Ofﬁcers Wayland R. Hicks Vice Chairman and Chief Executive Ofﬁcer Michael J. Kneeland Executive Vice President Operations Todd G. Helvie Vice President Tax and Business Development Jeffrey M. Johnson Vice President Supply Chain and Fleet Operations Martin E. Welch Executive Vice President and Chief Financial Ofﬁcer Robert P. Krause Vice President Rocky Mountain Region 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 2005 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. High . . . . $21.87 16.14 Low . . . . . 20.21 Close . . . . $21.37 17.12 20.21 $20.99 16.46 19.71 $24.62 17.06 23.39 2004 William F. Locklin Vice President Southwest Region Michael D. MacDonald Senior Vice President Sales and Marketing Elliott S. Mayer Vice President and Treasurer High . . . . $23.35 15.76 Low . . . . . 17.77 Close . . . . $19.94 15.62 17.89 $20.54 13.95 15.89 $19.16 15.09 18.90 Paul McDonnell Vice President Trench Safety, Pump & Power Region Eric D. Mertz Vice President Internal Audit Kenneth B. Mettel Vice President Planning and Analysis James T. Milde Senior Vice President and Chief Information Ofﬁcer Steven E. Nadelman Senior Vice President Field Operations and Corporate Real Estate Kenneth J. Perkins Vice President Southeast Region Craig A. Pintoff Vice President Human Resources Fred L. Ransom Vice President Northeast Region Charles K. Wessendorf Vice President Investor Relations and Corporate Communications Matthew C. Womble Vice President Legal Affairs On March 1, 2006, there were 428 holders of record of our common stock. We believe that the number of beneﬁcial owners is substantially greater than the number of record holders, because a large portion of our common stock is held in broker “street names.” We have not paid dividends on the common stock since the Company’s inception. Under the terms of certain agreements governing our outstanding indebtedness, we are prohibited or restricted from paying dividends on our common stock. We have ﬁled with the SEC the certiﬁcations required by Section 302 of the Sarbanes-Oxley Act as an exhibit to our 2005 Annual Report on Form 10-K. We have also submitted to the NYSE in 2005 the CEO certiﬁcation required by the NYSE corpo- rate governance rules in which our CEO certiﬁed that he was not aware of any violation by the Com- pany of the NYSE’s corporate governance listing requirements other than (i) the Company had not ﬁled its 2004 Annual Report, (ii) the Company had not held an annual meeting in 2005 or ﬁled a proxy statement in 2005 and (iii) the Company had not distributed an annual report to shareholders in 2005. The Company has subsequently ﬁled its 2005 and 2004 Annual Reports on Form 10-K and is in compliance with NYSE listing requirements. Corporate Headquarters United Rentals, Inc. Five Greenwich Ofﬁce Park Greenwich, CT 06831 Phone: (203) 622-3131 Fax: (203) 622-6080 unitedrentals.com Independent Auditors Ernst & Young LLP 5 Times Square New York, NY 10036 (212) 773-3000 78 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 Corporate Vice Presidents Raymond J. Alletto Vice President Risk Management Dale A. Asplund Vice President Operations Services Stephen D. Baird Vice President Corporate Security Kurtis T. Barker Vice President Trafﬁc Control Region Christopher M. Brown Vice President Assistant Controller Troy A. Cooper Vice President and Group Controller Michael G. DeCata Vice President Contractor Supplies Ernest P. Delle Donne Jr. Vice President National Accounts and Government Sales Leroy J. Dieter Jr. Vice President Midwest Region John J. Fahey Vice President Assistant Controller Matthew Flannery Vice President High Reach Region Honey S. Harris Vice President Gulf Region Richard Haselwood Vice President Government Affairs Investor Information 2006 Annual Meeting Shareholder Information For United Rentals investor information, including our quarterly earnings releases, webcasts and Securities Exchange Act reports: Tuesday, June 13, 2006 at 2:00 pm. Delamar Greenwich Harbor Hotel 500 Steamboat Road Greenwich, CT 06830 For shareholder services 24 hours a day: Call toll-free (800) 937-5449 in the United States and Canada, or (718) 921-8200. unitedrentals.com Investment professionals may contact: Charles K. Wessendorf Vice President Investor Relations and Corporate Communications cwessendorf@ur.com (203) 618-7318 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 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 Aerial Lifts Skid-Steers Excavators Air Compressors Pumps Steel Trench Shields Trafﬁc Control Arrow Boards and Barricades Contractor Supplies United Rentals, Inc. Five Greenwich Ofﬁce Park Greenwich, CT 06831 unitedrentals.com

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