30.01.2006

United Rentals special committee reports

United Rentals, Inc. has announced that the company's board has unanimously acted upon the report by the special committee of independent directors, which has been investigating matters relating to its SEC inquiry.

The report included details of a number of sale and leaseback transactions and “trade packages” from the fourth quarter of 2000 through 2002:

•The committee confirmed its preliminary conclusion that there were irregularities with respect to six sale-leaseback transactions, and the board approved the company's plan to restate its results for those transactions.

•The committee also concluded that there were irregularities with respect to some trade packages which involved undisclosed inducements to suppliers. The board decided that disclosure, rather than restatement, for these transactions is appropriate.

Wayland Hicks, chief executive officer, said, "The report by our special committee represents a significant step forward for the company. By its actions today, the board has reaffirmed United Rentals' commitment to the highest standards of conduct in our business, in the interests of our shareholders and for the thousands of dedicated employees who have enabled United Rentals to become the leader in our industry. The misconduct by some of our employees found by the committee is unacceptable. The company remains fully committed to cooperating with the SEC in its inquiry."

Findings of the Special Committee

The special committee's report to the United board included the following findings, and it has decided to take the actions indicated:

Sale and Leaseback Transactions.

The committee reviewed seven sale-leaseback transactions entered into between December 2000 and March 2002. and concluded that the accounting for six of them involved irregularities and that critical information associated with the transactions was concealed from the company's auditors.

The transactions accounted for an additional gross profit of $12.2 million, $20.2 million and $1.0 million in 2000, 2001 and 2002, respectively. The company therefore improperly recognised revenue from these transactions; United expects to restate its results for the periods affected.

Trade Packages.

The committee reviewed a number of "trade package" transactions in which the company sold used equipment to certain suppliers at inflated prices.

In order to induce the suppliers to buy used equipment at such premium prices, commitments or concessions were made by the company to those suppliers.

Total sales of such used equipment generated revenues of $38 million and gross profits of $9 million. The commitments to suppliers were not disclosed to auditors resulting in improperly recognised revenue from the transactions

Employees responsible

Certain former employees, avoided the documentation that would have linked the sales to the inducements. As a result, the true nature of the transactions was concealed, says Unitied.

As a result it is unable to determine how much of the $9 million gross profit was inflated. The company says that, under the circumstances, disclosure rather than a restatement of its results is appropriate.

The committee concluded that, based on the evidence these practices appear to have been directed by the company's two former chief financial officers. Both of whom are no longer with the company after refusing to cooperate with the investigation.

Acquisition Accounting.

With respect to the company's practices in valuing equipment acquired in acquisitions, the committee concluded that some of them were inadequate between 1997 and August 2000.

These included, inconsistent valuation methods, some of which were not provided to or reviewed by the company's auditors, inadequate supervision of personnel, inadequate coordination of outside valuations.

Certain company personnel may also have sought to manipulate opening balance sheet values for equipment acquired in purchase business combinations by causing them to be understated.

Self Insurance discrepancies

The company also expects to restate its results for the years 2000 through 2003 and the first nine months of 2004 to correct the expense associated with its self-insurance reserve.

It estimates that the expense was overstated by $38.5 million and $8.1 million in 2004 and 2003, and understated by $13.3 million in 2002 and by $40.7 million in t2001 and prior years.

Actions Directed by the Board of Directors

Based upon recommendations by the special committee, the board directed a number of actions to address issues identified by the committee.

These include the development and distribution of an acquisition accounting manual; development of a plan to centralise control of document retention; creation of more definitive job descriptions for corporate positions and more specific responsibilities for executives;

Scheduling of regular meetings between the chairman of the Audit Committee, the chief financial officer and the independent auditors;

The issuance of a policy statement clarifying the company's position regarding circumstances, if any, and requisite procedures, where sales to vendors may involve the company's forgoing marketing allowances or agreeing to other vendor incentives;

Issuance of a policy regarding package sales of equipment and sales to vendors;

Evaluation of potential claims against certain former company personnel;

consideration by the Nominating and Corporate Governance Committee of designating a lead independent director and a review of executive employment agreements to standardise agreements with appropriate terms.

In terms of employees conduct in these affairs the board directed the company to remove its corporate controller and principal accounting officer and its vice president - finance from their positions, although there was no finding of intentional wrongdoing on the part of these individuals.

In addition, the company dismissed two employees, while three others are receiving written reprimands.

The committee also considered the actions of the company's chairman and its chief executive officer and did not find wrongdoing on their part.

The special committee is composed of four independent directors assisted by independent counsel who employed independent forensic accountants. It noted that its work and conclusions were limited in some respects by a lack of cooperation from some former company personnel, the condition of the company's historical records and the lapse of time since the transactions occurred.

Vertikal Comment

Essentially what all this means is that “certain” executives conspired to inflate United’s financial performance during the difficult years of 2000, 2001 and to a lesser extent 2002. Without these manipulations United might well have breached its covenants and ran into serious financial difficulties, the results of which it is hard to determine.

The market improved and United saw its results improve before the “transactions” were spotted, the company will now go back and restate its earlier results to reflect the wrongdoings. However the net result of this is that 2000 and 2001 will look much worse than they did at the time while 2003 and 2004 will look rosier.