As filed with the Securities and Exchange Commission on August 29, 2005
Registration No. 333-125764
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT
NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter)
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Delaware
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7514
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13-1938568
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(State of Incorporation)
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(Primary Standard Industrial
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(I.R.S. Employer Identification No.)
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Classification Code Number)
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225 Brae Boulevard
Park Ridge, New Jersey 07656-0713
(201) 307-2000
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Harold E. Rolfe, Esq.
Senior Vice President, General
Counsel and Secretary
The Hertz Corporation
225 Brae Boulevard
Park Ridge, New Jersey 07656-0713
(201) 307-2000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With copies to:
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Alan D. Schnitzer, Esq.
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Lisa L. Jacobs, Esq.
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Simpson Thacher & Bartlett LLP
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Shearman & Sterling LLP
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425 Lexington Avenue
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599 Lexington Avenue
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New York, New York 10017-3954
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New York, New York 10022-6069
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(212) 455-2000
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(212) 848-4000
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Approximate date of commencement of proposed sale to the public:
As soon as practicable
after this Registration Statement is declared effective.
If any of the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the following box.
o
If this form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
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_________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following
box.
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Aggregate
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Amount of
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Title of Each Class of Securities to be Registered
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Offering Price(1)(2)
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Registration Fee
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Class A common stock, par value
$0.01 per share(3)
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Equity Units(4)
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$100,000,000
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$11,770(7)
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Purchase contracts(5)
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Senior notes due 2015(6)
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Total
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$100,000,000
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$11,770(7)
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(1)
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Estimated solely for the purpose of calculating the registration fee under
Rule 457(o) of the Securities Act of 1933, as amended (the Securities Act).
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(2)
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Exclusive of accrued interest, if any.
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(3)
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In addition to the offering of Class A common stock, also includes the shares
of Class A common stock that may be issued to holders of the Equity Units upon
settlement or termination of the Equity Units. The actual number of shares of
Class A common stock will not be determined until the date of settlement or
termination of the related purchase contracts.
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(4)
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Each Equity Unit will consist of a purchase contract,
described under note (5)
below, and a 1/40, or 2.5%, undivided beneficial ownership interest in a $1,000
principal amount senior note, described under note (6) below.
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(5)
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The purchase contracts are offered as a component of the Equity Units for no
additional consideration.
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(6)
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The senior notes are offered as a component of the Equity Units for no
additional consideration.
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(7)
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Previously paid.
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The registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
Explanatory Note
This Registration Statement contains a prospectus relating to an offering of shares of our Class A
common stock, together with separate prospectus pages relating to a concurrent offering of our
Equity Units. The complete prospectus for the offering of Class A common stock follows
immediately. Following the Class A common stock prospectus are alternate pages for the prospectus
for the Equity Units offering, including:
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the front and back cover pages;
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pages for the Prospectus summary section describing the offering of Equity Units;
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pages containing risk factors applicable only to the offering of Equity Units;
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pages containing a description of the Equity Units;
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pages containing descriptions of the senior notes and purchase contracts
that constitute the Equity Units;
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pages describing U.S. federal income tax consequences of holding the Equity Units;
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pages describing ERISA considerations associated with holding the Equity Units; and
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pages comprising the section entitled Underwriting relating to the
offering of the Equity Units.
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The complete prospectus for each of the Class A common stock offering and Equity Units offering
will be filed with the Securities and Exchange Commission in accordance with Rule 424 under the
Securities Act of 1933.
The information in this preliminary prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an
offer to buy these securities in any jurisdiction where an offer or sale is not permitted.
Subject to completion, dated , 2005
Preliminary Prospectus
Shares
We are offering to sell shares of Class A common stock. This is the initial
public offering of our shares of Class A common stock.
Prior to this offering, there has been no public market for the Class A common stock. It is
currently estimated that the initial public offering price per share will be between $ and $ . We
will apply to list the Class A common stock on the New York Stock Exchange under the symbol HTZ.
We are an indirect wholly owned subsidiary of Ford Motor Company. Upon completion of this
offering, Ford Motor Company will indirectly beneficially own % of the outstanding Class A
common stock ( % if the underwriters over-allotment option is exercised in full) and 100% of
the outstanding shares of our Class B common stock (which has five votes per share), a class of
common stock separate from the Class A common stock (which has one vote per share). Following the
offering, the outstanding shares of Class A common stock to be offered will represent % of the
combined voting power of all classes of voting stock and % of the economic interest (or
rights of holders of common equity to participate in distributions in respect of the common equity)
in us ( % and %, respectively, if the underwriters over-allotment option is exercised in
full). The remainder of the voting power and economic interest in us will be beneficially held by
Ford Motor Company. See Risk factorsRisks related to our businessFord controls us and may
have conflicts of interest with us or you in the future and Description of capital stock.
The underwriters have reserved for sale, at the initial public offering price, shares of Class A
common stock for certain of our employees and retirees and employees of our affiliates and
licensees. Such persons are expected to purchase, in the aggregate, not more than % of the
shares of Class A common stock offered in the offering.
Concurrently with this offering, we are offering, by means of a separate prospectus, $
of our % Equity Units. Each Equity Unit will have a stated amount of $25 and will
initially consist of a contract to purchase shares of our Class A common stock and an interest in a
% senior note which initially matures on November 16, 2015, subject to adjustment, issued by
us. The offering of Equity Units is contingent upon the completion of this offering.
Investing in our Class A common stock involves risks. See Risk factors beginning on page 13.
Neither the Securities and Exchange Commission nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds to us, before expenses
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$
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$
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To the extent the underwriters sell more than shares of our Class A common stock, the
underwriters have an option to purchase up to an additional shares of our Class A common
stock from us at the initial public offering price less the underwriting discounts and commissions.
We intend to use our net proceeds from any shares sold pursuant to this option to pay an
additional dividend to Ford.
The underwriters expect to deliver the shares to purchasers on or about , 2005.
Joint Book-Running Managers
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JPMorgan
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Citigroup
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Goldman, Sachs & Co.
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, 2005
You should rely only on information contained in this prospectus. Neither we, Ford Motor
Company nor the underwriters have authorized anyone to provide you with different information. We
are not making an offer of these securities in any state where the offer is not permitted. You
should not assume that the information contained in this prospectus is accurate as of any date
other than the date on the front of this prospectus.
Table of Contents
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Page
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1
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13
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25
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102
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136
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136
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F-1
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Hertz, Hertz Equipment Rental, HERC, Hertz #1 Club Gold, Hertz #1 Club and Hertz
NeverLost are our trademarks or service marks. All other trademarks, service marks or brand names
appearing in this prospectus are the property of their respective holders.
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Prospectus summary
This summary highlights selected information contained in this prospectus, but it may not
contain all of the information that may be important to you. You should read this entire
prospectus carefully, including the Risk factors section and the financial statements and notes
related thereto, which are included in this prospectus.
Unless the context otherwise requires, (i) references in this prospectus to the issuer, the
company, we, our and us mean The Hertz Corporation and its consolidated subsidiaries and its
predecessors, (ii) HERC means Hertz Equipment Rental Corporation, our wholly owned subsidiary,
and our various other wholly owned international subsidiaries that conduct our industrial,
construction and material handling equipment rental business, (iii) Ford means Ford Motor Company
and its consolidated subsidiaries (other than us), including Ford Holdings LLC, (iv) cars means
cars and light trucks (including sport utility vehicles and, in Europe, light commercial vehicles)
and (v) equipment means industrial, construction and material handling equipment.
Our company
We and our independent licensees and associates represent what we believe is the largest
worldwide general use car rental brand and one of the largest equipment rental businesses in North
America, both based upon revenues. Our Hertz brand name is recognized worldwide as a leader in
quality rental services and products. We and our independent licensees and associates currently
accept reservations for the rental of cars at approximately 7,400 locations in over 150 countries.
We also rent equipment from over 340 branches in North America, France and Spain. We have been in
the car rental business since 1918 and in the equipment rental business for over 40 years.
Currently, we are an indirect wholly owned subsidiary of Ford. Our significant segments consist of
our car rental and equipment rental businesses.
For the six months ended June 30, 2005, we generated revenues, income before income taxes and
minority interest and net income of $3.5 billion, $190.0 million and $120.1 million, respectively.
For the year ended December 31, 2004, we generated revenues, income before income taxes and
minority interest and net income of $6.7 billion, $502.6 million and $365.5 million, respectively.
Our business is highly seasonal with the second and third quarters of the year having historically
been stronger than the first and fourth quarters.
Car rental
We maintain a substantial network of company-operated car rental locations both in the United
States and internationally, and what we believe to be the largest number of company-operated
on-airport car rental locations in the world, enabling us to provide consistent quality and service
worldwide. For the year ended December 31, 2004, we derived approximately 74% of our worldwide car
rental revenues from on-airport locations. Our licensees and associates also operate rental
locations in over 140 countries, including most of the countries in which we have company-operated
rental locations.
Our worldwide car rental operations generated $2.9 billion and $5.5 billion in revenues and $133.4
million and $437.6 million in income before income taxes and minority interest during the six
months ended June 30, 2005 and the year ended December 31, 2004, respectively.
1
Equipment rental
HERC currently operates what we believe to be the third largest equipment rental business in North
America and the fourth largest general equipment rental business in each of France and Spain, based
upon revenues. HERC rents a broad range of earthmoving equipment, material handling equipment,
aerial and electrical equipment, air compressors, pumps, small tools, compaction equipment and
construction-related trucks. HERC also derives revenue from the sale of new equipment and
consumables.
Our worldwide equipment rental operations generated $630.2 million and $1.2 billion in revenues and
$71.9 million and $87.8 million in income before income taxes during the six months ended June 30,
2005 and the year ended December 31, 2004, respectively.
Strengths
Premier brand
The Hertz brand is one of the most recognized brands in the world. In 2004, it was listed in
Business Week
s 100 Most Valuable Global Brands the only travel company brand to appear on the
list. The Hertz brand has appeared on this list every year since the lists inception in 2001.
Moreover, our customer surveys indicate that in the United States, Hertz is the car rental brand
most associated with the highest quality service. This is consistent with numerous published
best-in-class car rental awards that we have won, both in the United States and internationally,
over many years.
We have sought to support our reputation for quality and customer service in car rental through a
variety of innovative service offerings, such as our customer loyalty program (Hertz #1 Club), our
global expedited rental program (Hertz #1 Club Gold), our one-way rental program
(Rent-it-Here/Leave-it-There), our national-scale luxury rental program (Prestige Collection) and
our in-car navigational services (Hertz NeverLost). In 2004, participants in our Hertz #1 Club
Gold program accounted for approximately 41% of our car rental transactions worldwide.
Similarly, we have positioned HERC as a leader in equipment rental through the development of an
extensive national account program with leading construction and industrial companies, a
substantial investment in sales force automation and the operation of a diverse fleet consisting of
what we believe are comparatively young units of rental equipment.
We believe that our premier brand and management of our business in support of the brand have
allowed us to create and maintain a loyal customer base and often command premium pricing in car
and equipment rental. These strengths in turn have helped us to earn a pre-tax profit in every
year since our incorporation in 1967.
Leading market positions
In the United States, we maintain the overall leading market share of airport car rentals where we
have company-operated locations. We had approximately a 30% market share in 2004, by revenues, at
the 180 largest U.S. airports where we operate, over nine percentage points of share higher than
that of the closest competing brand. We also believe that we have the largest airport market
share, by revenues on a collective basis, at the 68 major airports in Europe where we have
company-operated locations and which provide data regarding car rental concessionaire activity. We
are actively expanding in the U.S. off-airport car rental market, and we believe that we already
hold the second largest share in this growing market. HERC is, by revenues, the third
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largest equipment rental company in North America. Additionally, we believe HERC is the fourth
largest general equipment rental company in each of France and Spain. Our leading market positions
allow us to have first choice of car rental facilities at many airports and to spread our fixed
costs in both car and equipment rental across a larger base.
Global footprint and business mix
We and our independent licensees and associates accept car rental reservations for approximately
7,400 locations in more than 150 countries. We are the only car rental company that has an
extensive network of company-operated car rental locations both in the United States and in all the
major markets of Europe. We also have a company-operated car rental presence in Canada, Australia,
New Zealand, Brazil, Puerto Rico and the U.S. Virgin Islands. Because of our extensive worldwide
presence, we are capable of capitalizing on business from global tourist and travel organizations
and multinational corporations. We believe that our extensive worldwide ownership of our
operations (including a 95% company-owned fleet in the United States) gives us an advantage in the
areas of service consistency, strategic pricing, cost control, fleet utilization and yield
management.
In addition to our global footprint, our mix of business segments (car and equipment rental), car
rental markets served (airport and off-airport) and customers (business and leisure in car rental,
and construction, industrial and government in equipment rental) adds stability to our business.
Proprietary strategic information systems and centralized administration
We conducted almost 30 million rental transactions in 2004 across our two business segments. We
utilize information technology comprehensively in the areas of reservations, fleet and rate
management, customer relations, sales and marketing, as well as all aspects of billing, finance,
accounting and other reporting systems. We have made substantial investments in our proprietary
information systems to permit us to conduct our business efficiently and effectively. We believe
that our significant investment in technology enhances our ability to offer innovative services.
Our use of technology has helped us to concentrate our reservations, customer relations,
information systems, billing, collection and accounting functions for the United States and Europe,
along with certain administrative functions for our other corporate operations, at centers in
Oklahoma and Ireland. This centralization, which we believe is unique in the car and equipment
rental industries, permits us to provide superior end-to-end service to customers, spread
administrative costs over a larger base and maintain a high level of control over our
geographically dispersed operations.
Travel industry partnerships
We have established business partnerships with over 60 airlines, railroads and hotel chains
worldwide, as well as with American Express and leading traditional and on-line travel agencies,
such as Expedia and, in Europe, Opodo. These partnerships include such features as promotion of
each others products, reservation transfer programs and discounts for each others customers. In
some cases, we have exclusive relationships with our partners. For example, we are the exclusive
car rental partner for the American Automobile Association (AAA), North Americas largest motoring
and leisure travel organization, as well as for a number of key motor clubs in Europe and
Australia. In Europe, we have also been the sole rental car marketing partner of Air France since
1989 and the sole rental car business partner of Ryanair, a leading European low cost carrier,
since 1998. We believe that our global network of business partnerships is
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unmatched by any of our competitors. Our business partnerships generate significant car rental
revenue and expand our customer base.
Depth of management team
We have an experienced management team with extensive knowledge of the car and equipment rental
industries. We have employed our ten most senior members of management for an average of 26 years.
Our regional and country managers also have a great deal of experience, having been employed by us
for an average of 19 years and having been in their current positions for an average of seven
years. Our management team has a strong track record of maintaining pre-tax profitability through
economic cycles and successful and disciplined execution of our business strategy.
Flexible business model
While our businesses are capital-intensive, most of that capital is invested in revenue-earning
cars and equipment. Most of our cars are subject to repurchase arrangements with their
manufacturers, and well organized, liquid markets exist for any used cars that are not subject to
repurchase arrangements, as well as for used equipment. We believe
these repurchase agreements and markets would permit us to rapidly
decrease or increase our fleet size if necessary. Our collective bargaining agreements and
other labor arrangements in North America and, except as limited by law, in Europe permit us
to rapidly reduce the size of our workforce if conditions warrant that action. Moreover, a
significant portion of our debt obligations are short-term. As a consequence, we can adjust
substantial portions of our cost structure in reaction to external
events much more quickly than companies in industries characterized by large investments in illiquid fixed assets or rigid
labor arrangements, including many other types of travel service providers.
Strategy
Our strategy in both the global car rental and equipment rental markets is as follows.
Maintain and strengthen our premier car rental brand and differentiated product offering
The Hertz brand is recognized for its superior customer service and a differentiated, premium
product. We intend to maintain our position as a premier company through an intense focus on
service, quality and product innovation. In the past we have been the first in the car rental
market to offer such innovations as our customer loyalty program (Hertz #1 Club), our global
expedited rental program (Hertz #1 Club Gold), our national-scale premium rental program (Prestige
Collection) and our in-car navigational services (Hertz NeverLost). We believe that continuing to
invest consistently in our core business activities, particularly in the areas of brand,
facilities, technology and training, will help us maintain our premium product and pricing.
Continue the disciplined pursuit of off-airport growth opportunities
We intend to expand our presence in the off-airport portion of the car rental market in the United
States and internationally. Our plan in the United States, where we believe the off-airport rental
market is nearly as large as the airport rental market, is to increase our share of insurance
replacement rentals through the establishment of a national footprint, as well as to increase our
share of other off-airport business and leisure rentals. By leveraging our existing operations, we
believe we will increase our penetration of this market and generate attractive margins over time.
Internationally, our objective is to increase our penetration of the replacement market by focused
sales efforts and a modest expansion of our off-airport network. We believe that a larger
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presence in off-airport car rental will increase the stability, across both seasons and economic
cycles, of our financial performance and diversify our revenue base.
Capitalize on emerging trends and underserved markets in the European car rental business
We believe that the European market presents airport rental growth opportunities resulting from the
growth of European air travel due in large part to the emergence and increasing penetration of high
volume, low cost air carriers and the increasing use of the Internet throughout the continent. We
intend to take advantage of these market changes in part through the business partnerships we
maintain with travel providers in Europe, including Air France, Ryanair, American Express Travel,
Carlson Wagonlit, Expedia and Opodo. Beyond airport rentals, our other anticipated growth areas in
Europe include light commercial vehicle rentals and special fleet rentals, as well as rental
programs for the intra-European and long-haul leisure markets. We also intend to continue to
develop business opportunities with other key intermediaries in non travel-related markets such as
automobile clubs, road-side assistance providers, leasing companies and car manufacturers.
Continue to gain share in the fragmented North American equipment rental market
We believe that our diverse and comparatively young rental fleet, emphasis on customer service,
large national account base and prominent brand name will position us to continue gaining market
share in the fragmented North American equipment rental market. After several years of declining
nonresidential construction markets, an ongoing recovery that began in 2004 is leading to improved
industry pricing and volume in North America.
We are capitalizing on these improving markets by expanding our equipment rental footprint with the
planned addition of 7 to 9 new locations in North America in 2005. These additional locations
would bring our total North American equipment rental location count
to over 265 by the end of the
year. We also intend to continue to increase our presence in the specialty equipment and general
rental markets by offering more pumps, power generation and small equipment and renovating
locations to facilitate walk-in business. We believe that our expansion plans, coupled with our
emphasis on a high quality, well-maintained fleet, will continue to drive our growth in the
equipment rental business.
5
The offering
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Class A common stock offered by us
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shares
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Common stock to be outstanding immediately
after this offering:
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Class A common stock
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shares
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Class B common stock
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shares
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Total common stock outstanding
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shares
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Common stock to be held by Ford
immediately after this offering:
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Class A common stock
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shares
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Class B common stock
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shares
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Total number of shares of
common stock
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shares
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Percentage of the combined voting power of
all of our outstanding common stock to be
held by Ford immediately after this
offering
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%
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Over-allotment option
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shares of Class A common
stock to be offered by us if
the underwriters exercise the
over-allotment option in full
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Use of proceeds
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The proceeds to us from the
offering, after the deduction
of underwriting discounts,
commissions and expenses
payable by us, are estimated
to be $($
if the
underwriters over-allotment
option is exercised in full).
Substantially all of the
proceeds from this offering
and from the offering of
Equity Units are expected to
be used to repay the
subordinated promissory notes
that we issued to Ford on
each of June 10, 2005 and
, 2005 in the
amounts of $1,185.0 million
and $ ,
respectively, which we refer
to collectively as the
Intercompany Notes and pay
an additional dividend to
Ford. See Use of proceeds.
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Equity Units Offering
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Concurrently with this
offering, we are also
offering, by means of a
separate prospectus, $
of our Equity
Units which are units
comprised of senior notes
issued by us and a forward
contract obligating holders to purchase a
number of shares of our Class A common
stock. While this
offering is not contingent on
the offering of Equity Units,
the
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6
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offering of Equity Units
is contingent upon the
completion of this offering.
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Voting rights
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The holders of our Class A
common stock and Class B
common stock will be entitled
to share equally on a per
share basis in all dividends
and other distributions
declared by our Board of
Directors. However, the
holders of our Class A common
stock are entitled to one
vote per share and the
holders of our Class B common
stock are entitled to five
votes per share. Under
certain circumstances, shares
of our Class B common stock
can be converted into an
equivalent number of shares
of our Class A common stock.
See Relationship with Ford
and Description of capital
stockCommon stockVoting
rights.
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Dividend policy
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Our Board of Directors
currently intends to declare
quarterly dividends on our
common stock. It is expected
that the first quarterly
dividend payment will be $
per share (an indicated
rate of $ per share
annually), with the initial
dividend to be declared and
paid in
2005. The declaration and
payment of dividends are
subject to the discretion of
our Board of Directors. Any
determination as to the
payment of dividends will
depend upon, among other
things, general business
conditions, our financial
results, contractual, legal
and regulatory restrictions
regarding the payment of
dividends by us and our
subsidiaries, our credit
ratings and such other
factors as the Board of
Directors may consider to be
relevant.
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We did not pay any dividends
during the part of the year
2005 ended June 9, 2005 or
the years ended December 31,
2004, 2003 or 2002. On June
10, 2005 and ,
2005, we paid dividends of
$1,185.0 million and $
, respectively, on
our common stock to Ford in
the form of the Intercompany
Notes. We intend to pay
additional dividends to Ford
out of the proceeds of shares
sold pursuant to the
over-allotment option for
this offering and out of the
proceeds of Equity Units sold
pursuant to the
over-allotment option for the
Equity Units offering. To the extent that the
over-allotment option for
this offering is not
subscribed for in full, we
intend to pay a dividend to
Ford in the form of Class A
common stock.
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7
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Certain debt and other
instruments to which we are a
party restrict our ability to
pay dividends. See Dividend
policy.
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Controlling stockholder
|
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Currently, Ford indirectly
owns all of our common stock.
For information regarding
the relationship between us
and Ford, see Relationship
with Ford.
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Risk factors
|
|
For a discussion of certain
considerations relevant to an
investment in our Class A
common stock, see Risk
factors.
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Proposed New York Stock Exchange symbol
for our Class A common stock
|
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HTZ
|
Unless otherwise indicated, all information throughout this prospectus assumes the over-allotment
option in this offering has not been exercised and that we issue additional
shares of Class A common stock to Ford pursuant to a stock dividend that we will declare prior to
the consummation of this offering (the terms of which will require us to issue to Ford, shortly
after the expiration of the over-allotment option, a number of shares equal to
(which is the maximum number of shares subject to the over-allotment option) minus the actual
number of shares the underwriters purchase from us pursuant to the over-allotment option). This
information excludes shares of Class A common stock issuable upon the exercise
of stock options that have been reserved for issuance pursuant to employee benefit plans, as well
as shares of Class A common stock that we will be required to issue to settle the purchase
contracts included in our Equity Units.
8
Relationship with Ford
Currently, Ford, through its wholly owned subsidiary Ford Holdings LLC, is our only
stockholder. Upon completion of this offering, Ford will beneficially own % of the outstanding
Class A common stock ( % if the underwriters over-allotment option is exercised in full) and
100% of the outstanding Class B common stock (which Class B common stock is entitled to five votes
per share on any matter submitted to a vote of our stockholders). Upon completion of this
offering, the common stock beneficially owned by Ford will represent in the aggregate % of the
combined voting power of all of our outstanding common stock (or % if the underwriters
over-allotment option is exercised in full). For as long as Ford continues to beneficially own
(directly or indirectly) shares of common stock representing more than 50% of the combined voting
power of our outstanding common stock, Ford will be able to direct the election of all of the
members of our Board of Directors and exercise a controlling influence over our business and
affairs, including any determinations with respect to mergers or other business combinations
involving us, the acquisition or disposition of assets by us, the incurrence of indebtedness by us,
the issuance of any additional common stock or other equity securities, the repurchase or
redemption of common stock or preferred stock and the payment of dividends. Similarly, Ford will
have the power to determine or significantly influence the outcome of matters submitted to a vote
of our stockholders, including the power to prevent an acquisition or any other change in control
of us and could take other actions that might be favorable to Ford. See Description of capital
stock.
Ford has indicated to us that it expects, subject to market conditions, to completely divest its
ownership in us. Ford is not subject to any obligation, contractual or otherwise, to retain its
controlling interest in us, except that we and Ford, our directors, executive officers and certain
other employees have agreed, subject to certain exceptions and limitations, not to offer, sell,
contract to sell, pledge or otherwise dispose of any shares of Class A common stock or Class B
common stock or any of our securities which are substantially similar to shares of our common stock
for a period of 180 days after the date of this prospectus without the prior written consent of the
joint book-running managers, subject to certain limitations and limited extensions. As a result,
there can be no assurance concerning the period of time during which Ford will maintain its
beneficial ownership of our common stock owned by it following this offering. See Underwriting.
Ford will also have an option available to it to purchase additional shares of Class B common stock
and/or nonvoting capital stock to maintain its then-existing percentage of the total voting power
and value of us. Additionally, with respect to shares of nonvoting capital stock, Ford will have
an option to purchase such additional shares so as to maintain ownership of 80% of each outstanding
class of such stock.
For a description of certain provisions of our Restated Certificate of Incorporation concerning the
allocation of business opportunities that may be suitable for both us and Ford, see Description of
capital stockCertain certificate of incorporation and by-law provisionsCorporate opportunities.
Our principal executive offices are located at 225 Brae Boulevard, Park Ridge, New Jersey
07656. Our main telephone number is (201) 307-2000. Our principal U.S. website is
www.hertz.com
. Information contained on our website or that can be accessed through our website is
not incorporated by reference in this prospectus.
9
Summary consolidated financial data
The following table presents summary consolidated financial information and other data for our
business. The summary consolidated statement of operations data presented below for the years
ended December 31, 2003, 2002, 2001 and 2000 and the six months ended June 30, 2004, have been
restated. For a discussion of the restatement, see note (a) below and note 1A to the notes to our
audited consolidated financial statements and our unaudited condensed consolidated financial
statements included in this prospectus. The summary condensed consolidated statement of operations
data for the six months ended June 30, 2005 and June 30, 2004 (as restated) and the condensed
consolidated balance sheet data as of June 30, 2005 presented below were derived from our unaudited
condensed consolidated financial statements and the related notes thereto included in this
prospectus. The summary consolidated statement of operations data for each of the years in the
three-year period ended December 31, 2004 and the consolidated balance sheet data at December 31,
2004 and 2003 presented below were derived from our audited consolidated financial statements and
the related notes thereto included in this prospectus. The operating results for the six months
ended June 30, 2005 and June 30, 2004 include all adjustments (consisting only of normal recurring
adjustments) that we consider necessary for a fair statement of the results for such interim
periods. The interim results are not necessarily an indication of the results for the full year.
You should read the following information in conjunction with the section of this prospectus
entitled Managements discussion and analysis of financial condition and results of operations,
our unaudited condensed consolidated financial statements and our audited consolidated financial
statements and related notes beginning on page F-1 of this prospectus.
10
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Six Months
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Ended, or as of June 30,
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Year Ended, or as of December 31,
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2004 (a)
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2003 (a)
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2002 (a)
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2001 (a)
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2000 (a)
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2005
|
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Restated
|
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2004
|
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Restated
|
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Restated
|
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Restated
|
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|
Restated
|
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(Dollars in millions)
|
Statement of Operations
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Revenues
|
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|
|
|
|
|
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Car rental
|
|
$
|
2,824.5
|
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|
$
|
2,551.9
|
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|
$
|
5,430.8
|
|
|
$
|
4,819.3
|
|
|
$
|
4,537.6
|
|
|
$
|
4,366.6
|
|
|
$
|
4,553.9
|
|
Equipment rental
|
|
|
630.1
|
|
|
|
522.3
|
|
|
|
1,162.0
|
|
|
|
1,037.8
|
|
|
|
1,018.7
|
|
|
|
1,128.7
|
|
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|
1,106.3
|
|
Other (b)
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|
48.3
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|
|
38.2
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|
|
|
83.2
|
|
|
|
76.6
|
|
|
|
82.1
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|
|
|
101.6
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|
|
|
137.5
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,502.9
|
|
|
|
3,112.4
|
|
|
|
6,676.0
|
|
|
|
5,933.7
|
|
|
|
5,638.4
|
|
|
|
5,596.9
|
|
|
|
5,797.7
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|
|
|
|
|
|
|
|
|
|
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|
|
Expenses
|
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|
|
|
|
|
|
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|
|
|
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|
Direct operating
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|
2,025.5
|
|
|
|
1,781.8
|
|
|
|
3,734.4
|
|
|
|
3,316.1
|
|
|
|
3,093.0
|
|
|
|
3,248.0
|
|
|
|
3,019.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of revenue
earning equipment (c)
|
|
|
756.4
|
|
|
|
713.8
|
|
|
|
1,463.3
|
|
|
|
1,523.4
|
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|
|
1,499.5
|
|
|
|
1,462.3
|
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|
1,323.5
|
|
Selling, general and
administrative
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|
318.9
|
|
|
|
292.4
|
|
|
|
591.3
|
|
|
|
501.7
|
|
|
|
463.1
|
|
|
|
479.2
|
|
|
|
459.3
|
|
Interest, net of interest
income (d)
|
|
|
212.0
|
|
|
|
182.7
|
|
|
|
384.4
|
|
|
|
355.0
|
|
|
|
366.4
|
|
|
|
404.7
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|
|
414.8
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|
|
|
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|
|
|
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|
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Total expenses
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|
3,312.9
|
|
|
|
2,970.7
|
|
|
|
6,173.4
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|
|
5,696.2
|
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|
|
5,422.0
|
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|
|
5,594.2
|
|
|
|
5,216.8
|
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|
|
|
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|
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|
|
|
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|
|
|
|
|
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Income before income taxes
and minority interest
|
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|
190.0
|
|
|
|
141.7
|
|
|
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502.6
|
|
|
|
237.5
|
|
|
|
216.4
|
|
|
|
2.7
|
|
|
|
580.9
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(Provision) benefit for taxes
on income (e)
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|
(64.9
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)
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(49.5
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)
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|
(133.9
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)
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|
(78.9
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)
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|
(72.4
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)
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20.6
|
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|
|
(222.5
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)
|
Minority interest
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|
(5.0
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)
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(3.2
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)
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Income before cumulative
effect of change in
accounting principle
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120.1
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|
|
|
92.2
|
|
|
|
365.5
|
|
|
|
158.6
|
|
|
|
144.0
|
|
|
|
23.3
|
|
|
|
358.4
|
|
Cumulative effect of change
in accounting principle (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(294.0
|
)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
120.1
|
|
|
$
|
92.2
|
|
|
$
|
365.5
|
|
|
$
|
158.6
|
|
|
$
|
(150.0
|
)
|
|
$
|
23.3
|
|
|
$
|
358.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue earning equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cars
|
|
$
|
9,271.5
|
|
|
$
|
8,476.6
|
|
|
$
|
7,597.2
|
|
|
$
|
6,462.0
|
|
|
$
|
5,998.3
|
|
|
$
|
5,220.4
|
|
|
$
|
5,186.2
|
|
Other equipment
|
|
|
1,893.8
|
|
|
|
1,465.7
|
|
|
|
1,525.7
|
|
|
|
1,331.3
|
|
|
|
1,427.6
|
|
|
|
1,631.3
|
|
|
|
1,736.3
|
|
Total assets
|
|
|
15,752.0
|
|
|
|
14,691.5
|
|
|
|
14,096.4
|
|
|
|
12,579.0
|
|
|
|
11,128.9
|
|
|
|
10,158.4
|
|
|
|
10,620.0
|
|
Total debt
|
|
|
10,760.1
|
|
|
|
9,200.5
|
|
|
|
8,428.0
|
|
|
|
7,627.9
|
|
|
|
7,043.2
|
|
|
|
6,314.0
|
|
|
|
6,676.0
|
|
Stockholders
equity (g)
|
|
|
1,499.1
|
|
|
|
2,285.4
|
|
|
|
2,670.2
|
|
|
|
2,225.4
|
|
|
|
1,921.9
|
|
|
|
1,984.4
|
|
|
|
1,984.1
|
|
|
|
Selected Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Car Rental Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of owned
cars operated during period
|
|
|
426,100
|
|
|
|
393,500
|
|
|
|
413,000
|
|
|
|
373,500
|
|
|
|
369,500
|
|
|
|
373,800
|
|
|
|
359,300
|
|
Transaction days (in
thousands)
|
|
|
58,431
|
|
|
|
54,352
|
|
|
|
115,246
|
|
|
|
102,281
|
|
|
|
99,240
|
|
|
|
104,015
|
|
|
|
103,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Rental Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average acquisition cost of
rental equipment operated
during period
|
|
$
|
2,460.6
|
|
|
$
|
2,212.1
|
|
|
$
|
2,305.7
|
|
|
$
|
2,281.8
|
|
|
$
|
2,327.6
|
|
|
$
|
2,381.4
|
|
|
$
|
2,157.4
|
|
|
|
|
|
|
|
(a)
|
|
We have restated our previously issued consolidated statements of operations for the
quarters ended March 31, 2004 and June 30, 2004 and the years ended December 31, 2003, 2002,
2001 and 2000. We will be restating our previously issued consolidated statement of
operations for the quarter ended September 30, 2004. An explanation of the Restatement
appears in note 1A to the notes to our audited consolidated financial statements and our
unaudited condensed consolidated financial statements included in this prospectus. The
Restatement resulted in previously reported revenues and expenses being increased by equal
amounts with no change in our previously reported income before income taxes and minority
interest and net income (loss).
|
|
|
|
(b)
|
|
Includes fees and expense reimbursements from licensees and revenues from car leasing
operations, telecommunications services through 2001 and claim management services. Certain
foreign car leasing operations were transferred to an affiliated company on August 31, 2000.
|
11
|
(c)
|
|
For the six months ended June 30, 2005 and 2004 and the years ended December 31, 2004, 2003,
2002, 2001, and 2000, depreciation of revenue earning equipment includes net gains of $41.2
million, $25.4 million, $57.2 million, a net loss of $0.8 million, a net gain of $10.8 million, a net
loss of $1.6 million and a net gain of $54.5 million, respectively, from the disposal of
revenue earning equipment.
|
|
(d)
|
|
For the six months ended June 30, 2005 and 2004 and the years ended December 31, 2004, 2003,
2002, 2001 and 2000, interest income was $16.9 million, $9.0 million, $23.7 million, $17.9
million, $10.3 million, $9.0 million and $13.5 million, respectively.
|
|
|
(e)
|
|
Includes benefits of $46.6 million for the year ended December 31, 2004 relating to net
adjustments to federal and foreign tax accruals and includes benefits of $30.2 million for the
year ended December 31, 2001 from certain foreign tax credits.
|
|
(f)
|
|
Cumulative effect of change in accounting principle represents a non-cash charge for the year
ended December 31, 2002, related to impairment of goodwill in our equipment rental business,
recognized in accordance with the adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets.
|
|
|
(g)
|
|
Includes the declaration and payment on June 10, 2005 of
a dividend totaling $1.2 billion on our outstanding common stock
to Ford in the form of an Intercompany Note.
|
|
12
Risk factors
Before you invest in our Class A common stock you should carefully consider the following
risks, as well as other information set forth in this prospectus. If any of the following risks
actually occurs, our business, financial condition or results of operations may suffer. As a
result, the trading price of our Class A common stock could decline, and you could lose all or part
of your investment. In addition to the risks described below, we may encounter risks that are not
currently known to us, which may also impair our business operations and your investment in our
Class A common stock
.
Risks related to our business
An economic downturn could result in a decline in business and leisure travel and
non-residential capital investment, which could harm our business.
Our results of operations are affected by many economic factors, including the level of economic
activity in the markets in which we operate. A decline in economic activity either in the United
States or in international markets may have a material adverse effect on us. In the car rental
business, a decline in economic activity typically results in a decline in both business and
leisure travel and, accordingly, a decline in the volume of car rental transactions. In the
equipment rental business, a decline in economic activity typically results in a decline in
activity in construction and other businesses in which our equipment rental customers operate and,
therefore, results in a decline in the volume of equipment rental transactions. In the case of a
decline in car or equipment rental activity, we may reduce rental rates to meet competitive
pressures, which could have a material adverse effect on our results of operations. A decline in
economic activity also may have a material adverse effect on residual values realized on the
disposition of our revenue earning cars and/or equipment.
We face intense competition that may lead to downward pricing, or an inability to increase prices,
which could have a material adverse impact on our results of operations.
The markets in which we operate are highly competitive. See BusinessWorldwide car
rentalCompetition and BusinessEquipment rentalCompetition. We believe that price is one of
the primary competitive factors in the car and equipment rental markets. Our competitors, some of
whom may have access to substantial capital, may seek to compete aggressively on the basis of
pricing. To the extent that we match competitors downward pricing, it could have a material
adverse impact on our results of operations. To the extent that we do not match or remain within a
reasonable competitive margin of our competitors pricing, it could also have a material adverse
impact on our results of operations, as we may lose rental volume. The Internet has increased
pricing transparency among rental car companies by enabling cost conscious customers, including
business travelers, to more easily obtain the lowest rates available from rental car companies for
any given trip. This transparency may increase the prevalence and intensity of price competition
in the future. For the year ended December 31, 2004, and the
first six months of 2005, major U.S. car
rental brands experienced downward pressure on pricing, as measured through time and mileage rates
they charged.
Our car rental business is dependent on the air travel industry, and disruptions in air travel
patterns could harm our business.
We estimate that approximately 74% of our worldwide car rental revenues in 2004 were generated at
our airport rental locations. Significant airfare increases (e.g., due to an increase in fuel
costs) could result in reduced air travel and have a material adverse effect on our results of
operations. In addition, any event that disrupts or reduces business or leisure air travel could
have a material adverse effect on our results of
13
operations. In particular, certain U.S. airlines have recently experienced economic distress,
including the recent bankruptcy proceedings of US Airways Group, Inc. and United Air Lines, Inc.
Any further deterioration in the economic condition of U.S. and international airlines could
exacerbate reductions in air travel. Other events that impact air travel could include work
stoppages, military conflicts, terrorist incidents, epidemic diseases or the response of
governments to any of these events. For example, shortly before the September 11, 2001 terrorist
attacks, we estimated that we would earn pre-tax income of approximately $250 million in 2001; by
contrast, our actual pre-tax income for 2001 was only $3 million, and we continued to feel the
adverse effects of the attacks well into the following year. On a smaller scale, the 2003 outbreak
of Severe Acute Respiratory Syndrome, or SARS, in the Toronto, Canada area and parts of Asia,
significantly reduced our 2003 results of operations in Canada.
Our business is highly seasonal, and a disruption in rental activity during our peak season could
materially adversely affect our results of operations.
In our businesses, the second and third quarters of the year have historically been our strongest
quarters due to the increased level of leisure travel and construction activity. In 2004, the
second and third quarters accounted for approximately 25% and 28% of overall revenue and 29% and
50% of income before income taxes and minority interest, respectively. Any occurrence that
disrupts rental activity during the second or third quarters could have a disproportionately
material adverse effect on our results of operations. See Managements discussion and analysis of
financial condition and results of operationsLiquidity and capital resources.
We may not be successful in our business strategy to expand into the off-airport rental market,
including marketing to replacement renters and insurance companies that reimburse or pay for such
rentals.
We have been increasing our presence in the off-airport car rental market in the United States. We
currently intend to add more off-airport locations in 2005 and subsequent years. In order to
increase revenues at our new off-airport locations, we will need to successfully market to
insurance companies and other companies that provide rental referrals to those needing cars while
their vehicles are being repaired or are temporarily unavailable for other reasons, as well as to
the renters themselves. To do so we believe that we will need to serve the market areas covered by
nearly all national and regional insurance companies of significant size, which we believe could
involve as many as 2,000 locations. We incur minimal non-fleet costs in opening our new
off-airport locations, but new off-airport locations, once opened, take time to generate their full
potential revenues. As a result, revenues at new locations do not initially cover their start-up
costs and often do not, for some time, cover the costs of their ongoing operation. See
BusinessWorldwide car rentalOperations. The results of the strategy and the success of our
implementation of this strategy will not be known for a number of years. If we are unable to
implement our strategy to expand our off-airport network successfully, properly react to changes in
market conditions or successfully market to replacement renters and the insurance companies
covering the cost of their rentals, our financial condition, results of operations and cash flows
could be materially adversely affected.
Our access to the debt markets has been impaired and may be further impaired by downgrades in our
debt ratings. Without adequate access to the debt markets, we may not have sufficient liquidity to
operate our business.
We satisfy our funding requirements principally through the issuance of medium and long-term debt,
the sale of commercial paper and other short-term borrowings primarily from banks. As of June 30,
2005, our commercial paper borrowings and other short-term indebtedness were $4.1 billion. At
various times during April 2005 and the following four months, each of the major rating agencies
placed our debt
14
ratings under review or reduced its outlook or debt ratings with respect to us. See Managements
discussion and analysis of financial condition and results of operationsLiquidity and capital
resourcesDebt ratings. In most cases, the actions with respect to us were taken in conjunction
with actions with respect to the debt ratings of Ford. On April 20, 2005, Ford announced that it
was evaluating its long-term strategic options for its investment in us. Since that date, our
ability to sell unsecured commercial paper has been adversely affected. Our ability to sell
commercial paper was impacted by the Ford announcement as well as
recent downgrades of Fords and our debt ratings. Any further downgrade of our debt ratings may increase our borrowing costs and
further impact our ability to sell commercial paper and otherwise access capital markets.
On May 26, 2005, we entered into a short-term senior credit facility, referred to as the Interim
Credit Facility, with an aggregate availability of up to $3.0 billion with the joint book-running
managers of this offering and/or their affiliates. As of June 30, 2005, we had outstanding
borrowings of approximately $1.0 billion and C$575.0 million under the Interim Credit Facility.
The Interim Credit Facility will mature on November 23, 2005. We are required to prepay loans and
permanently reduce commitments under the Interim Credit Facility under certain circumstances,
including at the time Ford controls less than 25% of us or any other person or group has equal or
greater control of us than Ford.
To the extent that we are unable to access the commercial paper market or otherwise finance our
borrowing needs in the public or private markets upon acceptable terms, including to pay back all
or a portion of the Interim Credit Facility or any other indebtedness, we would seek to satisfy our
liquidity requirements through borrowings under our credit facilities, arranging new facilities or
through the issuance of additional asset backed securities. We cannot assure you that our existing
credit facilities will provide sufficient liquidity to us under all conditions. Even if the
existing facilities provide us with sufficient liquidity, our costs of capital would likely
increase as a result of their utilization. To the extent we do not pass on our increased borrowing
costs to our customers, our profitability, and potentially our ability to raise capital, could be
materially adversely affected. In such circumstances, we might seek to issue equity securities,
although our ability to do so could be constrained by market conditions and/or other reasons,
including a lock-up agreement related to this offering, or Fords possible desire not to be diluted
as long as it controls us.
Any deterioration in Fords financial condition could adversely affect our access to the credit
markets.
Ford
Motor Companys debt rating is currently rated below investment grade by Standard & Poors Rating Services,
a division of McGraw-Hill Companies, Inc., or S&P, and Moodys Investors Service, Inc., or
Moodys. Other debt rating agencies also have recently downgraded their ratings of Ford. We
cannot assure you that any future downgrading of Fords debt ratings would not have an adverse
impact on our debt ratings. Therefore, for so long as Ford maintains a significant interest in us,
a deterioration in the financial condition of Ford could have the effect of increasing our
borrowing costs and/or impairing our access to the capital markets. To the extent we do not pass
on our increased borrowing costs to our customers, our profitability, and potentially our ability
to raise capital, could be materially adversely affected. Also, so long as Ford maintains a
significant interest in us, Ford will have the ability to enter into agreements or adopt policies
that limit our ability to incur debt, issue equity securities and meet our liquidity needs. See
Relationship with Ford.
15
We are subject to risks from increases in interest rates, which will increase our borrowing costs
and may also lead to a decline in equipment rental demand.
An increase in interest rates and related interest expense may have a material adverse impact on
our profitability. In addition, an increase in interest rates may result in a decline in activity
in construction and other businesses in which our equipment rental customers operate and,
accordingly a decline in the volume of equipment rental transactions. Our total outstanding debt
of $10.8 billion as of June 30, 2005 included interest rate sensitive debt of $5.8 billion (either
by its original terms or through the use of interest rate derivatives), which had a weighted
average interest rate of 4.1% per annum, and non-interest rate sensitive debt of $5.0 billion,
which had a weighted average fixed interest rate of 6.4% per annum. During our seasonal borrowing
peak in 2004, outstanding interest rate sensitive debt totaled $4.9 billion, with a weighted
average interest rate of 2.4% per annum. See Managements discussion and analysis of financial
condition and results of operationsLiquidity and capital resources.
We face risks of increased costs of cars and equipment and of decreased profitability, including as
a result of limited supplies of competitively priced cars or equipment.
We believe we are one of the largest private sector purchasers of new cars in the world for our
rental fleet, and during 2004, our approximate average holding period for a rental car was 11
months in the United States and eight months in our international car rental operations. In recent
years, the average cost of new cars has increased. We expect increases in car costs and modest
increases in equipment costs in the near term. We expect a significant increase in car costs for
the 2006 model year, which will adversely affect our results of operations beginning in the fourth
quarter of 2005.
Historically, we have purchased more of the cars we rent from Ford than from any other automobile
manufacturer. Under a master supply and advertising agreement, or the Master Supply and
Advertising Agreement, Ford has agreed to develop fleet
offerings in the United States that are generally competitive with
terms and conditions of similar offerings by other automobile manufacturers. The Master Supply and
Advertising Agreement expires in 2010. See Relationship with FordMaster Supply and Advertising
Agreement. We cannot assure you that we will be able to extend the Master Supply and Advertising
Agreement beyond its current term. In the future, we expect to buy a smaller proportion of our car
rental fleet from Ford than we have in the past. If Ford does not offer us competitive terms and
conditions, and we are not able to purchase sufficient quantities of cars from other automobile
manufacturers on competitive terms and conditions, then we may be forced to purchase cars at higher
prices, or on terms less competitive, than for cars purchased by our competitors.
To date we have not entered into any long-term car supply arrangements with other manufacturers.
In addition, certain automobile manufacturers, including Ford, have adopted strategies to
de-emphasize sales to the rental car industry which they view as less profitable due to historic
sales incentive and other discount programs that tended to lower the average cost of cars for fleet
purchasers such as us. Reduced or limited supplies of equipment together with increased prices are
risks that we also face in our equipment rental business. We cannot assure you that we will be
able to pass on increased costs of cars or equipment to our rental customers. Failure to pass on
significant cost increases to our customers would have a material adverse impact on our results of
operations and financial condition.
We face risks related to decreased acquisition or disposition of cars through repurchase programs.
During 2004, 81% of the cars purchased for our U.S. and international car rental fleet were subject
to repurchase by automobile manufacturers under contractual guaranteed repurchase programs. Under
these
16
programs, automobile manufacturers agree to repurchase cars at a specified price during a
specified time period, typically subject to certain car condition and mileage requirements. These
repurchase programs limit the risk to us that the market value of a car at the time of its disposition will be less
than its estimated residual value at such time. We refer to this risk as residual risk. For these
reasons, cars purchased by car rental companies under repurchase programs are sometimes referred to
by industry participants as non-risk, buy-back or program cars.
Conversely, those cars not purchased under repurchase programs for which the car rental company is
exposed to residual risk are sometimes referred to as risk cars. Repurchase programs enable us
to determine our depreciation expense in advance. Depreciation is a significant cost factor in our
operations. We expect the percentage of our car rental fleet subject to repurchase programs to
decrease due primarily to anticipated changes in the terms to be offered by automobile
manufacturers under repurchase programs and because we expect car manufacturers to offer fewer
program cars to us as part of their announced efforts to de-emphasize sales to rental car
companies. Accordingly, we expect to bear increased risk relating to the residual market value of
our car rental fleet and car depreciation.
In addition, repurchase programs generally provide us with flexibility to reduce the size of our
fleet by returning cars sooner than originally expected without risk of loss in the event of an
economic downturn or to respond to changes in demand. This flexibility will be reduced to the
extent the percentage of non-risk cars in our car rental fleet decreases. See Managements
discussion and analysis of financial condition and results of operationsOverview and
BusinessWorldwide car rentalFleet.
Automobile manufacturers could modify or eliminate their repurchase programs or change their return
policies (which include condition and mileage requirements for returned cars) from one program year
to another to make it disadvantageous to acquire certain cars. Any such modification or
elimination would expose us to the risks described in the preceding paragraphs.
We could be harmed by a decline in the results of operations or financial conditions of the
manufacturers of our cars, particularly if they are unable to repurchase program cars from us.
A severe or persistent decline in the results of operations or financial condition of a
manufacturer of cars that we own could reduce the cars residual values, particularly to the extent
that the manufacturer unexpectedly announced the eventual elimination of its models or nameplates
or ceased manufacturing them altogether. Such a reduction could cause us to sustain a loss on the
ultimate sale of those cars or require us to depreciate those cars on a more rapid basis while we
own them. In addition, if a decline in results or conditions were so severe as to cause a
manufacturer to default on an obligation to repurchase program cars we own, we would have to find
an alternate method of disposition of those cars, which could significantly increase our expenses
and decrease our proceeds on sales. Any such default might also leave us with a substantial unpaid
claim against the manufacturer with respect to program cars that were sold and returned to the car
manufacturer but not paid for. A decline in the economic and business prospects of manufacturers,
including any economic distress impacting the suppliers of automobile components to manufacturers,
could also cause them to raise the prices we pay for cars or reduce their supply to us.
Manufacturer safety recalls could create risks to our business.
Our cars may be subject to safety recalls by their manufacturers. Under certain circumstances, the
recalls may cause us to attempt to retrieve cars from renters or to decline to re-rent returned
cars until we can arrange for the steps described in the recalls to be taken. If a large number of
cars are the subject of simultaneous recalls, or if needed replacement parts are not in adequate
supply, we may not be able to re-rent recalled cars for a significant period of time. We could
also face liability claims if recalls affect cars
17
that we have already sold. Depending on the
severity of the recall, it could materially adversely affect our
revenues, create customer service problems, reduce the residual value of the cars involved and harm
our general reputation.
We face risks arising from our heavy reliance on communications networks and centralized
information systems.
We rely heavily on information systems to accept reservations, process rental and sales
transactions, manage our fleets of cars and equipment, account for our activities and otherwise
conduct our business. We have centralized our information systems in two facilities in Oklahoma
City, Oklahoma, and we rely on communications services providers to link our systems with the
business locations these systems serve. A failure of a major system, or a major disruption of
communications between the system and the locations it serves, could cause a loss of reservations,
interfere with our ability to manage our fleet, slow rental and sales processes and otherwise
materially adversely affect our ability to manage our business effectively. Our systems designs,
business continuity plans and insurance programs are designed to mitigate such a risk, not to
eliminate it. In addition, because our systems contain information about millions of individuals
and businesses, our failure to maintain the security of the data we hold, whether the result of our
own error or the malfeasance of others, could harm our reputation or give rise to legal liabilities
leading to lower revenues, increased costs and other material adverse effects on our results of
operations.
Claims that the software products and information systems that we rely on are infringing on the
intellectual property rights of others could increase our expenses or inhibit us from offering
certain services, which could adversely affect our results of operations.
A number of entities, including some of our competitors, have sought, or may in the future obtain,
patents and other intellectual property rights that cover or affect software products and other
components of information systems that we rely on to operate our business. For example, Enterprise
Rent-A-Car Company, or Enterprise, has asserted that certain systems we use to conduct insurance
replacement rentals would infringe on patent rights it would obtain if it were granted certain
patents for which it has applied.
Litigation may be necessary to determine the validity and scope of third-party rights or to defend
against claims of infringement. If a court determines that one or more of the software products or
other components of information systems we use infringe on intellectual property owned by others or
we agree to settle such a dispute, we may be liable for money damages. In addition, we may be
required to cease using those products and components unless we obtain licenses from the owners of
the intellectual property, redesign those products and components in such a way as to avoid
infringement or cease altogether the use of those products and components. Each of these
alternatives could increase our expenses materially or impact the marketability of our services.
Any litigation, regardless of the outcome, could result in substantial costs and diversion of
resources and could have a material adverse effect on our business. In addition, a third party
intellectual property owner might not allow us to use its intellectual property at any price, or on
terms acceptable to us, which could materially affect our competitive position and our results of
operations. For example, if Enterprise were to obtain the patent rights referred to above and
after that pursue and prevail on claims of infringement similar to those it has previously
asserted, it could have a material adverse effect on our ability to grow our insurance replacement
business and, in turn, our off-airport business.
18
The concentration of our reservations, accounting and information technology functions at a limited
number of facilities in Oklahoma, Alabama and Ireland creates risks for us.
We have concentrated our reservations functions for the United States in two facilities, one in
Oklahoma City, Oklahoma, and one in Saraland (Mobile County), Alabama, and we have concentrated our
accounting functions for the United States in two facilities in Oklahoma City. Similarly, we have
concentrated reservations and accounting functions for our European operations in a single facility
near Dublin, Ireland. In addition, our major information systems are centralized in two of our
facilities in Oklahoma City. A disruption of normal business at any of our principal facilities in
Oklahoma City, Saraland or Dublin, whether as the result of localized conditions (such as a fire or
explosion) or as the result of events or circumstances of broader geographic impact (such as an
earthquake, storm, flood, epidemic, strike, act of war, civil unrest or terrorist act), could
materially adversely affect our business by disrupting normal reservations, customer service,
accounting and systems activities. Our systems designs, business continuity plans and insurance
programs are designed to mitigate those risks, not to eliminate them, and this is particularly true
with respect to events of broad geographic impact.
Ford controls us and may have conflicts of interest with us or you in the future.
Immediately prior to this offering, Ford, through a subsidiary, is our only stockholder. Upon
completion of this offering, Ford will beneficially own % of our outstanding Class A common
stock ( % if the underwriters over-allotment option is exercised in full) and 100% of our
outstanding Class B common stock (which Class B common stock is entitled to five votes per share on
any matter submitted to a vote of our stockholders). Upon completion of this offering, the common
stock beneficially owned by Ford will represent in the aggregate % of the combined voting power
of all of our outstanding common stock (or % if the underwriters over-allotment option is
exercised in full). For as long as Ford continues to beneficially own shares of common stock
representing more than 50% of the combined voting power of our common stock, Ford will be able to
direct the election of all of the members of our Board of Directors and exercise a controlling
influence over our business and affairs, including any determinations with respect to mergers or
other business combinations involving us, the acquisition or disposition of assets by us, the
incurrence of indebtedness by us, the issuance of any additional common stock or other equity
securities, the repurchase or redemption of common stock or preferred stock and the payment of
dividends. Similarly, Ford will have the power to determine or significantly influence the outcome
of matters submitted to a vote of our stockholders, including the power to prevent an acquisition
or any other change in control of us and could take other actions that might be favorable to Ford.
See Description of capital stock and Relationship with Ford.
In addition, so long as we are entitled to do so (which under current rules means that so long as
Ford continues to own in the aggregate more than 50% of the combined voting power of all of our
outstanding common stock), we intend to use the controlled company exception under the New York
Stock Exchange rules. This exception eliminates the requirements that such a controlled company
have a majority of independent directors on its board of directors and that it has compensation and
nominating and corporate governance committees composed entirely of independent directors. As a
result, you will not have the same protections afforded to stockholders of non-controlled companies
that are subject to all of the corporate governance requirements of the New York Stock Exchange.
Ford will also have an option available to it to purchase additional shares of Class B common stock
and/or nonvoting capital stock to maintain its then-existing percentage of the total voting power
and value of us. Additionally, with respect to shares of nonvoting capital stock, Ford will have
an option to purchase such additional shares so as to maintain ownership of 80% of each outstanding
class of such stock.
19
Beneficial ownership of at least 80% of the total voting power and 80% of each class of nonvoting
capital stock, if any, is required in order for Ford to effect a tax-free spin-off of us (as
discussed under Description of capital stockCommon stockConversion) or certain other tax-free
transactions.
Each member of a consolidated group for federal income tax purposes is severally liable for the
federal income tax liability of each other member of the consolidated group. Each member of the
Ford controlled group, which currently includes Ford, us and Fords other subsidiaries, is also
jointly and severally liable for pension and benefit funding and termination liabilities of other
group members, as well as certain benefit plan taxes. Accordingly, we could be liable under such
provisions in the event any such liability is incurred, and not discharged, by any other member of
the Ford consolidated or controlled group for any period during which we were included in the Ford
consolidated or controlled group. After this offering, we will no longer be included in Fords
consolidated group for federal tax purposes, and there is no assurance that our tax position will
not be less favorable than it is at present. See Relationship with Ford.
In addition, by virtue of its controlling beneficial ownership and the terms of a tax-sharing
agreement between us and Ford, Ford effectively controls all of our tax decisions for periods
ending on or prior to the date of this offering. Under the tax-sharing agreement, Ford has sole
authority to respond to and conduct all tax proceedings (including tax audits) relating to our
federal and combined state returns, to file all such returns on behalf of us and to determine the
amount of our liability to (or entitlement to payment from) Ford under the tax-sharing agreement.
See Relationship with FordTax-Sharing Agreement. This arrangement may result in conflicts of
interests between us and Ford. For example, under the tax-sharing agreement, Ford may choose to
contest, compromise or settle any adjustment or deficiency proposed by the relevant taxing
authority in a manner that may be beneficial to Ford and detrimental
to us. Although Ford does not plan or intend to effectuate a spin-off
of our stock to Ford stockholders, the tax-sharing
agreement, which we and Ford will amend in connection with this offering, will provide that
in the event that Ford effectuates a spin-off of our common stock that it owns and such spin-off is
not tax-free pursuant to Section 355 of the Internal Revenue Code of 1986, as amended, or the
Code, we will generally be responsible for any taxes
incurred by Ford or its stockholders if such
taxes result from certain of our actions or omissions. If the taxes incurred by Ford or its
stockholders do not result from certain of our actions or omissions, and do not result from certain
of Fords actions or omissions, then we generally will be responsible for a percentage of such
taxes equal to the quotient of the fair market value of our issued
and outstanding common stock, divided
by the sum of the fair market value of our issued and outstanding
common stock and the fair market value
of Fords issued and outstanding common stock.
For a description of certain provisions of the Restated Certificate of Incorporation concerning the
allocation of business opportunities that may be suitable for both us and Ford, see Description of
capital stockCertain certificate of incorporation and by-law provisionsCorporate opportunities.
We face risks related to Fords change in ownership of us.
Certain of our airport concession agreements require the consent of the airport authority in
connection with changes in ownership of us. We will seek those consents in connection with this
offering except where not obtaining them will not, in our view, have a material adverse effect on
our consolidated financial position or results of operations. In the event that Ford seeks to sell
any of our common stock that it owns following this offering, additional consents will be required.
Certain of our credit facilities impose consolidated net worth tests on us if Ford ceases to own
at least 51% of the voting control of all of our capital stock then outstanding as described under
Restrictive covenantsMinimum consolidated net worth and maximum consolidated senior debt to
consolidated net worth ratio.
20
Certain intercompany agreements and arrangements exist between Ford and us. See Relationship with
Ford. We cannot assure you that the products, services and other benefits Ford provides to or
purchases from us under such agreements will continue to be provided or purchased, and if not,
whether, or on what terms, such products, services or other benefits provided to us could be
replicated and sales thereof to Ford replaced. During 2004, approximately 41% of the cars acquired
by us domestically were manufactured by Ford and its subsidiaries. See We face risks of
increased costs of cars and equipment and of decreased profitability, including as a result of
limited supplies of competitively priced cars or equipment.
We face risks related to liabilities and insurance.
Our businesses expose us to claims for personal injury, death and property damage resulting from
the use of the cars and equipment rented or sold by us and for workers compensation claims and
other employment-related claims by our employees. Currently, we generally self-insure up to $10
million per occurrence in the United States and Europe for vehicle and general liability exposures
and maintain insurance with unaffiliated carriers in excess of such levels up to $185 million per
occurrence, or in the case of equipment rental in Europe and international operations outside of
Europe, in such amounts as we deem adequate given the risks. We cannot assure you that we will not
be exposed to uninsured liability at levels in excess of our historical levels resulting from
multiple payouts or otherwise, that liabilities in respect of existing or future claims will not
exceed the level of our insurance, that we will have sufficient capital available to pay any
uninsured claims or that insurance with unaffiliated carriers will continue to be available to us
on economically reasonable terms or at all. See BusinessRisk management and BusinessLegal
proceedings. In addition, we are currently insured for certain liabilities under insurance
policies maintained by Ford. We cannot assure you that such insurance coverage will continue to be
provided by Ford after this offering, and if it is not, whether, or on what terms, such insurance
coverage will be replaced. To the extent Ford terminates our coverage under an insurance policy,
we may be uninsured for liabilities incurred but not reported pursuant to such policy.
Environmental regulations could subject us to liability for fines or damages.
We are regulated by federal, state, local and foreign environmental laws and regulations in
connection with our operations, including, among other things, with respect to the ownership and
operation of tanks for the storage of petroleum products, such as gasoline, diesel fuel and motor
and waste oils. We have established a compliance program for our tanks that is intended to ensure
that the tanks are properly registered with the state or other jurisdiction in which the tanks are
located and have been either replaced or upgraded to meet applicable leak detection and spill,
overfill and corrosion protection requirements. However, we cannot assure you that these tank
systems will at all times remain free from undetected leaks or that the use of these tanks will not
result in significant spills.
We have made, and will continue to make, expenditures to comply with environmental laws and
regulations, including, among others, expenditures for the cleanup of contamination at our owned
and leased properties, as well as contamination at other locations at which our wastes have
reportedly been identified. We cannot assure you that compliance with existing or future
environmental legislation and regulations will not require material expenditures by us or otherwise
have a material adverse effect on our consolidated financial position, results of operations or
cash flow. See BusinessGovernmental regulation and environmental matters and BusinessLegal
proceedings.
21
Changes in the U.S. and foreign legal and regulatory environment that impact our operations,
including laws and regulations relating to the insurance products we sell, customer privacy, data
security and insurance rates, could disrupt our business, increase our expenses or otherwise could
have a material adverse effect on our results of operations.
We are subject to a wide variety of laws and regulations in the United States and the other
countries and jurisdictions in which we operate, and changes in the level of government regulation
of our business have the potential to materially alter our business practices or our profitability.
Depending on the jurisdiction, those changes may come about through new legislation, the issuance
of new laws and regulations or changes in the interpretation of existing laws and regulations by a
court, regulatory body or governmental official. Sometimes those changes may have not just
prospective but also retroactive effect, which is particularly true when a change is made through
reinterpretation of laws or regulations that have been in effect for some time. Moreover, changes
in regulation that may seem neutral on their face may have either more or less impact on us than on
our competitors, depending on the circumstances.
The optional liability insurance policies and products providing insurance coverage in our domestic
car rental operations are conducted pursuant to limited licenses or exemptions under state laws
governing the licensing of insurance producers. In our international car rental operations, our
offering of optional products providing insurance coverage historically has not been regulated.
Any changes in U.S. or foreign law that change our operating requirements with respect to insurance
could increase our costs of compliance or make it uneconomical to offer such products, which would
lead to a reduction in revenue. For instance, in the countries of the European Union and
Australia, the regulatory environment for insurance intermediaries is rapidly evolving, and we
cannot assure you either that we will be able to continue offering such coverage without
substantial changes in our offering process or in the terms of the coverage or that such changes,
if required, would not render uneconomic our continued offering of the coverage. Due to a change
in law in Australia, we have suspended sales of certain insurance products there; we are currently
exploring ways to resume offering those products. See BusinessRisk management for further
discussion regarding how changes in the regulation of insurance intermediaries may affect us
internationally.
Laws in many countries and jurisdictions limit the types of information we may collect about
individuals with whom we deal or propose to deal, as well as how we collect, retain and use the
information that we are permitted to collect. In addition, the centralized nature of our
information systems requires the routine flow of information about customers and potential
customers across national borders, particularly into the United States. If this flow of
information were to become illegal, or subject to onerous restrictions, our ability to serve our
customers could be seriously impaired for an extended period of time. Other changes in the
regulation of customer privacy and data security could likewise have a material adverse effect on
our business. Privacy and data security are rapidly evolving areas of regulation, and additional
regulation in those areas, some of it potentially difficult for us to accommodate, is frequently
proposed and occasionally adopted. Thus, changes in the worldwide legal and regulatory environment
in the areas of customer privacy, data security and cross-border data flows could have a material
adverse effect on our business, primarily through the impairment of our marketing and transaction
processing activities.
Further, the substantive regulation of the rates we charge car renters, either through direct price
regulation or a requirement that we disregard a customers source market (location or place of
residence) for rate purposes, could reduce our revenues or increase our expenses. We set rates
based on a variety of factors including the sources of rental reservations geographically and by
the means through which the reservations were made, all of which are in response to various market
factors and costs. The European Commission is currently considering a directive that could
eventually require us to disregard the country of residence of European Union residents for rate
purposes, and bills have been introduced into the New York State legislature that similarly would
prevent us from charging higher rates to renters residing in
22
certain boroughs of New York City. The adoption of any of these measures could have a material
adverse impact on our revenues and results of operations.
Risks related to this offering
There is no existing market for our Class A common stock, and we do not know if one will
develop to provide you with adequate liquidity.
Currently there is no public market for our Class A common stock. We cannot predict the extent to
which investor interest in us will lead to the development of a trading market on the New York
Stock Exchange or otherwise or how liquid that market might become. The initial public offering
price for the shares will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the open market following
this offering.
Future dispositions of common stock by Ford, us or others may depress the market price of our Class
A common stock.
Subject to applicable federal securities laws and the restrictions set forth below, after
completion of this offering, Ford may dispose of any or all of the shares of the common stock
beneficially owned by it. Dispositions by Ford of substantial amounts of common stock in the
public market or to its stockholders, or the perception that such dispositions could occur, could
adversely affect prevailing market prices for our Class A common stock. Ford is not subject to any
obligation, contractual or otherwise, to retain or dispose of its controlling interest, except that
we and Ford, our directors, executive officers and certain other employees have agreed, subject to
certain exceptions, not to offer, sell, contract to sell, pledge or otherwise dispose of any shares
of common stock or any of our securities which are substantially similar to shares of our common
stock for a period of 180 days after the date of this prospectus without the prior written consent
of the joint book-running managers, subject to certain limitations and limited extensions. See
Underwriting. As a result, we cannot predict the period of time during which Ford will maintain
its beneficial ownership of common stock owned by it following this offering. Ford has indicated
that it expects, subject to market conditions, to completely divest its ownership in us. As a
result, subject to the lock-up arrangements described above, Ford could dispose of all or a
substantial portion of the remaining interest in our common stock in the near future. See Shares
eligible for future sale. Ford will have registration rights with respect to the shares of the
common stock owned by it following this offering, which would facilitate any future disposition.
See Risks related to our businessFord controls us and may have conflicts of interest with us
or you in the future, Relationship with FordCorporate Agreement and Shares eligible for future
sale.
The market price of our Class A common stock could decline as a result of dispositions by Ford or
any future issuances by us of a large number of shares of common stock in the market after the
offering or the perception that such dispositions could occur. These dispositions, or the
possibility that these dispositions may occur, also might make it more difficult for us to sell
equity securities in the future at a time and at a price that we deem appropriate.
After this offering, we will have approximately shares of Class A common stock and
shares of Class B common stock outstanding. Of those shares, the approximately
shares of Class A common stock sold in this offering (assuming no exercise of the
over-allotment option) will be freely tradable. The approximately shares of Class A
common stock that are held by Ford, and any shares of Class A common stock into which shares of
Class B common stock are converted at Fords option, will be eligible for resale from time to time
after the expiration of the 180-day lock-up period, subject to contractual restrictions and
restrictions under the Securities Act of 1933, as amended, or the Securities Act. These shares
may be sold subject to the volume, manner of sale and other conditions of
23
Rule 144 or pursuant to a registered public offering. In addition, the purchase contracts included
in the Equity Units being offered concurrently with this offering will require us to issue up to
shares of our Class A common stock between the third and fourth anniversaries of the
consummation of this offering (or sooner if holders exercise their rights to settle early) subject
to certain conditions. We expect that shares of Class A common stock issued upon settlement of the
purchase contracts relating to the Equity Units will be freely tradable upon issuance.
The market price of our Class A common stock may be volatile, which could cause the value of your
investment to decline.
Securities markets worldwide, and especially equity markets, experience significant price and
volume fluctuations. This market volatility, as well as general economic conditions, could reduce
the market price of our Class A common stock in spite of our operating performance. In addition,
our operating results could be below the expectations of public market analysts and investors, and
in response, the market price of our Class A common stock could decrease significantly. You may be
unable to sell your shares of Class A common stock at or above the initial public offering price.
Provisions in our amended and restated certificate of incorporation and bylaws may discourage a
takeover attempt.
Certain provisions of our restated certificate of incorporation and by-laws may render more
difficult, or have the effect of discouraging, unsolicited takeover bids from third parties or the
removal of our incumbent management. See Description of capital stockCertain certificate of
incorporation and by-law provisions. Although such provisions do not have a substantial practical
significance to investors while Ford controls us, such provisions could have the effect of
depriving stockholders of an opportunity to sell their shares at a premium over prevailing market
prices should Fords combined voting power decrease to less than 50%.
24
Special note regarding forward-looking statements
Certain statements contained in this prospectus are forward looking statements. These
statements give our current expectations or forecasts of future events and our future performance
and do not relate directly to historical or current events or our historical or current
performance. Most of these statements contain words that identify them as forward-looking, such as
anticipate, estimate, expect, project, intend, plan, believe or other words that
relate to future events, as opposed to past or current events.
Forward-looking statements are based on the then-current expectations, forecasts and assumptions of
our management and involve risks and uncertainties, some of which are outside of our control that
could cause actual outcomes and results to differ materially from current expectations. For some
of the factors that could cause such differences, see Risk factors.
We cannot assure you that the assumptions made in preparing any of the forward-looking statements
will prove accurate or that any projections will be realized. It is expected that there will be
differences between projected and actual results.
These forward-looking statements speak only as of the date of this prospectus, and we do not
undertake any obligation to update or revise publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. We caution prospective purchasers not to
place undue reliance on the forward-looking statements. All forward-looking statements
attributable to us are expressly qualified in their entirety by the cautionary statements contained
herein.
25
Use of proceeds
The proceeds to us from the offering, after the deduction of underwriting discounts,
commissions and expenses payable by us, are estimated to be $ ($ if the underwriters over-allotment option is exercised in full). We expect to use substantially
all of these proceeds, as well as the proceeds from the offering of Equity Units, to repay the
Intercompany Notes issued by us to Ford in the aggregate amount of $ . The
Intercompany Notes each mature on June 10, 2010 and may be prepaid at any time. The Intercompany
Note issued on June 10, 2005 has a per annum interest rate equal to three-month LIBOR plus a spread
of 200 basis points and the Intercompany Note issued on , 2005 has a per annum
interest rate equal to three-month LIBOR plus a spread of basis points. See Relationship
with FordIntercompany Notes. In addition, we intend to use the proceeds from any shares sold
pursuant to the over-allotment option for this offering and from any Equity Units sold pursuant to
the over-allotment option for the Equity Unit offering, less underwriting discounts, to pay
additional dividends of up to $ and $ , respectively, to Ford that will
be declared prior to the consummation of this offering and that will be limited to net proceeds we
actually receive from the sale of such shares and Equity Units. This offering of our Class A
common stock is not conditioned on the consummation of the concurrent offering of our Equity Units.
Dividend policy
Our Board of Directors currently intends to declare quarterly dividends on both our Class A
common stock and Class B common stock. It is expected that the first quarterly dividend payment
will be $ per share (an indicated rate of $ per share annually), with the initial
dividend to be declared and paid in 2005. The declaration and payment of dividends are subject to the discretion of our Board of Directors. Any determination as to the
payment of dividends will depend upon, among other things, general business conditions, our
financial results, contractual, legal and regulatory restrictions regarding the payment of
dividends by us and our subsidiaries, our credit ratings and such other factors as the Board of
Directors may consider to be relevant.
Certain debt and other instruments under which we have issued, or may in the future issue, debt
securities restrict our ability to pay dividends. Such restrictions generally provide that we may
not pay dividends, purchase, redeem or invest in our shares or permit purchases, redemptions or
investments by Restricted Subsidiaries, as such term is defined in the applicable debt instruments,
in our shares subsequent to a specified date if, together with total investments by us and our
Restricted Subsidiaries in subsidiaries that are not Restricted Subsidiaries made subsequent to
such specified date, the aggregate of any such dividends or investments exceeds the sum of (i)
$185,000,000, plus (or minus in the case of a deficit) (ii) the consolidated net income (or net
loss) of us and our Restricted Subsidiaries earned subsequent to December 31, 1985, plus (iii) the
aggregate net proceeds received from capital stock, including rights or warrants to purchase
capital stock and indebtedness converted into capital stock, issued subsequent to December 31,
1985. After giving effect to this offering, the concurrent offering of Equity Units and related
use of proceeds together with the contemporaneous transactions described under Capitalization,
approximately $ of consolidated stockholders equity is expected to be free of
such limitations. The Interim Credit Facility and the purchase contract agreement related to the
Equity Units contain additional restrictions on our ability to pay dividends. See Description of
indebtednessRestrictive covenants, Description of indebtednessSenior credit facilities and
Description of Equity Units.
We did not pay any dividends during the part of the year 2005 ended June 9, 2005 or the years ended
December 31, 2004, 2003 or 2002. On June 10, 2005 and , 2005, we paid dividends of
$1,185.0 million and $ , respectively, on our common stock to Ford in the form of
the Intercompany Notes. We intend to pay additional dividends to Ford
26
out of the proceeds of shares sold pursuant to the over-allotment option for this offering and out of the proceeds of Equity Units sold pursuant to
the over-allotment option for the Equity Units offering. To the extent that the over-allotment
option for this offering is not subscribed for in full, we intend to pay a dividend to Ford in the
form of Class A common stock.
We previously announced a plan to commence paying semi-annual dividends to Ford in June 2005. That
plan was based on the assumption that Ford would continue to own 100% of our outstanding capital
stock. As a result of this offering, the dividend policy set forth above will supersede that plan.
27
Capitalization
The following table sets forth our capitalization as of June 30, 2005:
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on an actual basis;
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on an as adjusted pre-offering basis, after giving effect to our issuance of the second
Intercompany Note on , 2005 as a dividend to Ford and the issuance of the
Cumulative Preferred Stock to Ford as described below; and
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on an as adjusted post-offering basis, after giving effect to the items just described,
plus this offering, the offering of Equity Units, the repayment of the Intercompany Notes
with the proceeds of those offerings and the redemption of the Cumulative Preferred Stock
from Ford described below.
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You should read the information in this table in conjunction with our audited consolidated
financial statements and our unaudited condensed consolidated financial statements and the notes to
those statements included in this prospectus and Use of proceeds, Dividend policy, Selected
historical financial data, and Managements discussion and analysis of financial condition and
results of operations.
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As of June 30, 2005
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|
|
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As adjusted
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As adjusted
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Actual
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pre-offerings
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post-offerings
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(Unaudited)
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(Dollars in thousands)
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Cash, cash equivalents and short-term investments (1)
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$
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1,000,349
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$
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$
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Debt:
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Notes payable, including commercial paper
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$
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1,483,075
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$
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$
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Interim Credit Facility (2)
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1,459,521
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Intercompany Notes (3)
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1,185,000
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Promissory senior notes (including current portion)
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5,198,142
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Senior Notes due 2015(4)
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Foreign subsidiaries debt:
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Short-term borrowings:
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Banks
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869,186
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Commercial Paper
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317,500
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Other borrowings
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247,654
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Total debt
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10,760,078
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Stockholders equity:
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Actual and as adjusted pre-offering: common stock,
par value $0.01 per share; 3,000 shares authorized,
100 shares issued; as adjusted post-offering: Class
A common stock and Class B common stock, each par
value $0.01 per share; shares authorized,
shares of Class A common stock and shares
of Class B common stock issued (5)
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Cumulative Preferred Stock (6)
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Additional capital paid-in (6)
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983,132
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Retained earnings (3)
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414,292
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28
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As of June 30, 2005
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As adjusted
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As adjusted
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Actual
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pre-offerings
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post-offerings
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(Unaudited)
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(Dollars in thousands)
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Accumulated other comprehensive income
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101,714
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Total stockholders equity (7)
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1,499,138
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Total capitalization
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$
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12,259,216
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$
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|
$
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(1)
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As of June 30, 2005, our cash and equivalents totaled $703.9 million and our short-term
investments totaled $296.4 million.
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(2)
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On May 26, 2005, we entered into the Interim Credit Facility with an aggregate availability
of up to $3.0 billion with the joint book-running managers of this offering and/or their
affiliates. The Interim Credit Facility will mature on November 23, 2005. See Managements
discussion and analysis of financial condition and results of operationsLiquidity and capital
resourcesCredit facilities. Amounts include borrowings by our Canadian subsidiary that have
been fully and unconditionally guaranteed by The Hertz Corporation.
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(3)
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On June 10, 2005 and , 2005, we paid dividends of $1,185.0 million and $ , respectively, on our common stock to Ford in the form of the Intercompany Notes.
We intend to repay the Intercompany Notes with the proceeds of this offering.
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(4)
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The senior notes are being issued as a component of the Equity Units being offered.
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(5)
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In connection with this offering, we will undertake a change to our capital structure so that
all of the shares of common stock outstanding prior to this offering will be changed into and
reclassified to shares of Class A common stock and shares of
Class B common stock, all to be held by Ford, to be outstanding after this offering. Amounts
do not include the Class A common stock issuable upon settlement of the purchase contracts
included in the Equity Units being offered concurrently with this offering.
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(6)
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On , 2005, we issued to Ford shares of our Cumulative Preferred
Stock, $0.01 par value per share, for $ . Our Cumulative Preferred Stock has a
liquidation preference amount of $1,000,000 per share, accrues dividends at a rate of %
per annum on the liquidation preference amount and is redeemable at our option in whole at any
time or in part from time to time at a price equal to the liquidation preference amount plus
accrued and unpaid dividends. Simultaneous with this offering, we will be redeeming these
shares of Cumulative Preferred Stock from Ford for $ plus accrued and unpaid
dividends, with cash on hand.
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(7)
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Reflects an adjustment of $ representing the present value of the contract
adjustment payments payable in connection with the purchase contracts included in the Equity
Units being offered.
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29
Selected historical financial data
The following table presents selected consolidated financial information and other data for
our business. The selected consolidated statement of operations data presented below for the years
ended December 31, 2003, 2002, 2001 and 2000 and the six months ended June 30, 2004 have been
restated. For a discussion of the Restatement, see note (a) below and note 1A to the notes to our
audited consolidated financial statements and our unaudited condensed consolidated financial
statements included in this prospectus. The selected condensed consolidated statement of
operations data for the six months ended June 30, 2005 and June 30, 2004 (as restated) and the
condensed consolidated balance sheet data as of June 30, 2005 presented below were derived from our
unaudited condensed consolidated financial statements and the related notes thereto included in
this prospectus. The selected consolidated statement of operations data for each of the years in
the three-year period ended December 31, 2004 and the consolidated balance sheet data at December
31, 2004 and 2003 presented below were derived from our audited consolidated financial statements
and the related notes thereto included in this prospectus. The operating results for the six
months ended June 30, 2005 and June 30, 2004 include all adjustments (consisting only of normal
recurring adjustments) that we consider necessary for a fair statement of the results for such
interim periods. The interim results are not necessarily an indication of the results for the full
year.
You should read the following information in conjunction with the section of this prospectus
entitled Managements discussion and analysis of financial condition and results of operations,
our unaudited condensed consolidated financial statements and our audited consolidated financial
statements and related notes beginning on page F-1 of this prospectus.
30
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Six Months
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Ended, or as of June 30,
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Year Ended, or as of December 31,
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2004 (a)
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2003 (a)
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2002 (a)
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2001 (a)
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2000 (a)
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2005
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Restated
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2004
|
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Restated
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Restated
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Restated
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Restated
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(Dollars in millions, unless otherwise noted)
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Statement of Operations
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Revenues
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Car rental
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$
|
2,824.5
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|
$
|
2,551.9
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|
$
|
5,430.8
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|
|
$
|
4,819.3
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|
|
$
|
4,537.6
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|
$
|
4,366.6
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|
|
$
|
4,553.9
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|
Equipment rental
|
|
|
630.1
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|
|
|
522.3
|
|
|
|
1,162.0
|
|
|
|
1,037.8
|
|
|
|
1,018.7
|
|
|
|
1,128.7
|
|
|
|
1,106.3
|
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Other (b)
|
|
|
48.3
|
|
|
|
38.2
|
|
|
|
83.2
|
|
|
|
76.6
|
|
|
|
82.1
|
|
|
|
101.6
|
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|
|
137.5
|
|
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|
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|
|
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|
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Total revenues
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|
3,502.9
|
|
|
|
3,112.4
|
|
|
|
6,676.0
|
|
|
|
5,933.7
|
|
|
|
5,638.4
|
|
|
|
5,596.9
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|
|
|
5,797.7
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Expenses
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Direct operating
|
|
|
2,025.5
|
|
|
|
1,781.8
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|
|
|
3,734.4
|
|
|
|
3,316.1
|
|
|
|
3,093.0
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|
|
|
3,248.0
|
|
|
|
3,019.2
|
|
Depreciation of revenue earning
equipment (c)
|
|
|
756.4
|
|
|
|
713.8
|
|
|
|
1,463.3
|
|
|
|
1,523.4
|
|
|
|
1,499.5
|
|
|
|
1,462.3
|
|
|
|
1,323.5
|
|
Selling, general and administrative
|
|
|
318.9
|
|
|
|
292.4
|
|
|
|
591.3
|
|
|
|
501.7
|
|
|
|
463.1
|
|
|
|
479.2
|
|
|
|
459.3
|
|
Interest, net of interest income (d)
|
|
|
212.0
|
|
|
|
182.7
|
|
|
|
384.4
|
|
|
|
355.0
|
|
|
|
366.4
|
|
|
|
404.7
|
|
|
|
414.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,312.9
|
|
|
|
2,970.7
|
|
|
|
6,173.4
|
|
|
|
5,696.2
|
|
|
|
5,422.0
|
|
|
|
5,594.2
|
|
|
|
5,216.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority
interest
|
|
|
190.0
|
|
|
|
141.7
|
|
|
|
502.6
|
|
|
|
237.5
|
|
|
|
216.4
|
|
|
|
2.7
|
|
|
|
580.9
|
|
(Provision) benefit for taxes on income (e)
|
|
|
(64.9
|
)
|
|
|
(49.5
|
)
|
|
|
(133.9
|
)
|
|
|
(78.9
|
)
|
|
|
(72.4
|
)
|
|
|
20.6
|
|
|
|
(222.5
|
)
|
Minority interest
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change
in accounting principle
|
|
|
120.1
|
|
|
|
92.2
|
|
|
|
365.5
|
|
|
|
158.6
|
|
|
|
144.0
|
|
|
|
23.3
|
|
|
|
358.4
|
|
Cumulative effect of change in accounting
principle (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(294.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
120.1
|
|
|
$
|
92.2
|
|
|
$
|
365.5
|
|
|
$
|
158.6
|
|
|
$
|
(150.0
|
)
|
|
$
|
23.3
|
|
|
$
|
358.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share (in
dollars) (g)
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue earning equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cars
|
|
$
|
9,271.5
|
|
|
$
|
8,476.6
|
|
|
$
|
7,597.2
|
|
|
$
|
6,462.0
|
|
|
$
|
5,998.3
|
|
|
$
|
5,220.4
|
|
|
$
|
5,186.2
|
|
Other equipment
|
|
|
1,893.8
|
|
|
|
1,465.7
|
|
|
|
1,525.7
|
|
|
|
1,331.3
|
|
|
|
1,427.6
|
|
|
|
1,631.3
|
|
|
|
1,736.3
|
|
Total assets
|
|
|
15,752.0
|
|
|
|
14,691.5
|
|
|
|
14,096.4
|
|
|
|
12,579.0
|
|
|
|
11,128.9
|
|
|
|
10,158.4
|
|
|
|
10,620.0
|
|
Total debt
|
|
|
10,760.1
|
|
|
|
9,200.5
|
|
|
|
8,428.0
|
|
|
|
7,627.9
|
|
|
|
7,043.2
|
|
|
|
6,314.0
|
|
|
|
6,676.0
|
|
Stockholders
equity (h)
|
|
|
1,499.1
|
|
|
|
2,285.4
|
|
|
|
2,670.2
|
|
|
|
2,225.4
|
|
|
|
1,921.9
|
|
|
|
1,984.4
|
|
|
|
1,984.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Car Rental Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of owned cars operated
during period
|
|
|
426,100
|
|
|
|
393,500
|
|
|
|
413,000
|
|
|
|
373,500
|
|
|
|
369,500
|
|
|
|
373,800
|
|
|
|
359,300
|
|
Transaction days (in thousands)
|
|
|
58,431
|
|
|
|
54,352
|
|
|
|
115,246
|
|
|
|
102,281
|
|
|
|
99,240
|
|
|
|
104,015
|
|
|
|
103,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Rental Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average acquisition cost of rental
equipment operated during period
|
|
$
|
2,460.6
|
|
|
$
|
2,212.1
|
|
|
$
|
2,305.7
|
|
|
$
|
2,281.8
|
|
|
$
|
2,327.6
|
|
|
$
|
2,381.4
|
|
|
$
|
2,157.4
|
|
|
|
|
|
|
(a)
|
|
We have restated our previously issued consolidated statements of operations for the
quarters ended March 31, 2004 and June 30, 2004 and the years ended December 31, 2003, 2002,
2001 and 2000. We will be restating our previously issued consolidated statement of
operations for the quarter ended September 30, 2004. An explanation of the Restatement
appears in note 1A to the notes to our audited consolidated financial statements and our
unaudited condensed consolidated financial statements included in this prospectus. The
Restatement resulted in previously reported revenues and expenses being increased by equal
amounts with no change in our previously reported income before income taxes and minority
interest and net income (loss).
|
|
|
(b)
|
|
Includes fees and expense reimbursements from licensees and revenues from car leasing
operations, telecommunications services through 2001 and claim management services. Certain
foreign car leasing operations were transferred to an affiliated company on August 31, 2000.
|
|
|
|
(c)
|
|
For the six months ended June 30, 2005 and 2004 and the years ended December 31, 2004, 2003,
2002, 2001 and 2000, depreciation of revenue earning equipment includes net gains of $41.2
million, $25.4 million, $57.2 million, a net loss of $0.8 million, a net gain of $10.8
million, a net loss of $1.6 million and a net gain of $54.5 million, respectively, from the
disposal of revenue earning equipment.
|
|
31
|
|
|
|
(d)
|
|
For the six months ended June 30, 2005 and 2004 and the years ended December 31, 2004, 2003,
2002, 2001 and 2000, interest income was $16.9 million, $9.0 million, $23.7 million, $17.9
million, $10.3 million, $9.0 million and $13.5 million, respectively.
|
|
|
(e)
|
|
Includes benefits of $46.6 million for the year ended December 31, 2004 relating to net
adjustments to Federal and foreign tax accruals and includes benefits of $30.2 million for the
year ended December 31, 2001 from certain foreign tax credits.
|
|
(f)
|
|
Cumulative effect of change in accounting principle represents a non-cash charge for the year
ended December 31, 2002, related to impairment of goodwill in our equipment rental business,
recognized in accordance with the adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets.
|
|
(g)
|
|
Pro forma amounts are computed based on shares of Class A common stock and
shares of Class B common stock outstanding after this offering applied to our
historical net income (loss). Due to the changes in our capital structure, historical share
and per share data will not be comparable to, or meaningful in the context of, future periods.
See Capitalization.
|
|
|
(h)
|
|
Includes the declaration and payment on June 10, 2005 of a dividend totaling $1.2 billion on our outstanding common stock
to Ford in the form of an Intercompany Note.
|
|
32
Managements discussion and analysis of
financial condition and results of operations
The statements in the discussion and analysis regarding industry outlook, our expectations
regarding the performance of our business and the other non-historical statements in the discussion
and analysis are forward-looking statements. These forward-looking statements are subject to
numerous risks and uncertainties, including, but not limited to, the risks and uncertainties
described in Risk factors. Our actual results may differ materially from those contained in or
implied by any forward-looking statements. You should read the following discussion together with
the sections entitled Risk factors, Special note regarding forward-looking statements,
Selected historical financial data and our unaudited condensed consolidated and audited
consolidated financial statements and related notes included in this prospectus
.
Restatement of consolidated statements of operations
We have restated our previously issued consolidated statements of operations for the years
ended December 31, 2003 and 2002 and the quarters ended March 31, 2004 and June 30, 2004, and we
will be restating our quarterly statement of operations for the quarter ended September 30, 2004.
The Restatement was reported in our Annual Report on Form 10-K for the year ended December 31,
2004, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, our Quarterly Report
on Form 10-Q for the quarter ended June 30, 2005, as well as in this prospectus. The Restatement
will also be reported in our Quarterly Report on Form 10-Q for the quarter ended September 30,
2005. The restated amounts for the quarters ended March 31, 2004, June 30, 2004 and September 30,
2004 and for all quarters of 2003 are presented in note 13 to the notes to our audited consolidated
financial statements included in this prospectus. The Restatement also affects periods prior to
2002. The Restatement corrected certain of our historical accounting policies to conform with
generally accepted accounting principles, or GAAP.
Before the Restatement, our consolidated statements of operations reflected historical accounting
policies, under which (1) amounts charged by us to our car rental customers to reimburse us for
certain operating expenses (principally concession fees incurred for the privilege of operating at
airports and certain other locations and vehicle licensing fees) were netted against related
operating expenses, (2) amounts charged by us to our car rental and equipment rental customers for
fueling of vehicles and equipment were netted against related operating expenses, (3) costs
incurred in connection with the sale of consumables and dealer inventory from our equipment rental
business were netted against revenues and (4) other immaterial items of revenues and expenses were
presented on a net basis.
We have determined that the historical accounting policies described above were not in accordance
with the Financial Accounting Standards Board Emerging Issues Task Force, or EITF, Issue No.
99-19, Reporting Revenue Gross as a Principal versus Net as an Agent and EITF Issue No. 01-14,
Income Statement Characterization of Reimbursement Received for Out-of-Pocket Expenses Incurred.
EITF No. 99-19 and No. 01-14 employ multi-factor tests to determine whether amounts charged to
customers in respect of certain expenses incurred should be included in revenues or netted against
such expenses. Accordingly, we restated our previously issued consolidated statements of
operations to reclassify revenues and expenses in accordance with GAAP, with particular regard to
the requirements of EITF No. 99-19 and No. 01-14.
In view of this error in the application of GAAP, we determined that, as of December 31, 2004, a
material weakness existed in our internal control over financial reporting with respect to the
selection and application of GAAP to our financial statements. We considered the impact of the
material weakness as
33
of December 31, 2004 and June 30, 2005, and determined that the magnitude of any actual or
potential misstatement in our financial statements was limited to an increase by identical amounts
in revenue and expense in the relevant statements of operations, with no changes to income before
income taxes or net income (loss) and no effect on consolidated balance sheets or consolidated
statements of cash flows. Since December 31, 2004, we have taken a series of steps designed to
improve the control processes regarding the selection and application of GAAP and preparation and
review of the consolidated financial statements. Specifically, key personnel involved in our
financial reporting processes have enhanced the process through which authoritative guidance will
be monitored on a regular basis. On-going reviews of authoritative guidance will be conducted in
order to ensure that new guidance is being complied with in the preparation of the financial
statements, related disclosures and periodic filings with the Securities and Exchange Commission,
or SEC. Additionally, when we became aware of the misapplication of EITF No. 99-19 and No.
01-14, our management reviewed all applicable authoritative guidance issued since 1999 in relation
to all consolidated financial statements which had been filed with the SEC. Our management
believes that the corrective actions which have been implemented address the identified
deficiencies in our disclosure controls and procedures. Our management will continue to apply
these process improvements to our disclosure controls and procedures.
As a result of the Restatement, total revenues and total expenses in the previously issued
consolidated statements of operations have each been increased by $725.8 million and $670.3 million
for the years ended December 31, 2003 and 2002, respectively and by $386.7 million for the six
months ended June 30, 2004. Because previously reported revenues and expenses for each of the
affected periods were increased by equal amounts, the Restatement has not resulted in a change in
our previously reported income (loss) before income taxes and minority interest, income (loss)
before cumulative effect of change in accounting principle or net income (loss), nor has it changed
our liquidity or financial condition. The Restatement had no effect on our consolidated balance
sheets or consolidated statements of cash flows.
A summary of the effects of the Restatement on the previously issued consolidated statements of
operations is as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
Year Ended December 31, 2003
|
|
|
Year Ended December 31, 2002
|
|
|
|
As Previously
|
|
|
|
|
|
|
As Previously
|
|
|
As
|
|
|
As Previously
|
|
|
As
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Car rental
|
|
$
|
2,240,400
|
|
|
$
|
2,551,919
|
|
|
$
|
4,239,244
|
|
|
$
|
4,819,255
|
|
|
$
|
4,005,620
|
|
|
$
|
4,537,607
|
|
Equipment rental
|
|
|
453,423
|
|
|
|
522,257
|
|
|
|
904,582
|
|
|
|
1,037,754
|
|
|
|
892,646
|
|
|
|
1,018,759
|
|
Other
|
|
|
31,861
|
|
|
|
38,190
|
|
|
|
64,103
|
|
|
|
76,661
|
|
|
|
69,873
|
|
|
|
82,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,725,684
|
|
|
|
3,112,366
|
|
|
|
5,207,929
|
|
|
|
5,933,670
|
|
|
|
4,968,139
|
|
|
|
5,638,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
|
|
|
1,398,343
|
|
|
|
1,781,829
|
|
|
|
2,596,727
|
|
|
|
3,316,101
|
|
|
|
2,428,820
|
|
|
|
3,093,024
|
|
Depreciation of revenue earning equipment
|
|
|
713,742
|
|
|
|
713,742
|
|
|
|
1,523,391
|
|
|
|
1,523,391
|
|
|
|
1,499,568
|
|
|
|
1,499,568
|
|
Selling, general and administrative
|
|
|
289,173
|
|
|
|
292,369
|
|
|
|
495,276
|
|
|
|
501,643
|
|
|
|
456,986
|
|
|
|
463,085
|
|
Interest, net of interest income
|
|
|
182,706
|
|
|
|
182,706
|
|
|
|
355,043
|
|
|
|
355,043
|
|
|
|
366,371
|
|
|
|
366,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,583,964
|
|
|
|
2,970,646
|
|
|
|
4,970,437
|
|
|
|
5,696,178
|
|
|
|
4,751,745
|
|
|
|
5,422,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
141,720
|
|
|
|
141,720
|
|
|
|
237,492
|
|
|
|
237,492
|
|
|
|
216,394
|
|
|
|
216,394
|
|
Provision for taxes on income
|
|
|
(49,537
|
)
|
|
|
(49,537
|
)
|
|
|
(78,877
|
)
|
|
|
(78,877
|
)
|
|
|
(72,346
|
)
|
|
|
(72,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change
in accounting principle
|
|
|
92,183
|
|
|
|
92,183
|
|
|
|
158,615
|
|
|
|
158,615
|
|
|
|
144,048
|
|
|
|
144,048
|
|
Cumulative effect of change in accounting
principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(294,000
|
)
|
|
|
(294,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
92,183
|
|
|
$
|
92,183
|
|
|
$
|
158,615
|
|
|
$
|
158,615
|
|
|
$
|
(149,952
|
)
|
|
$
|
(149,952
|
)
|
|
|
|
|
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All prior period amounts included in this prospectus affected by the Restatement are presented
on a restated basis.
34
Overview
We are engaged principally in the businesses of renting cars and renting equipment.
Our revenues principally are derived from rental and related charges and consist of:
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Car rental revenues (revenues from all company-operated car rental operations,
including charges to customers for the reimbursement of costs incurred relating to
airport concession fees and vehicle license fees, the fueling of vehicles and the
sale of loss or collision damage waivers, liability insurance coverage and other
products);
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Equipment rental revenues (revenues from all company-operated equipment rental
operations, including amounts charged to customers for the fueling and delivery of
equipment and sale of loss damage waivers); and
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Other revenues (fees and certain cost reimbursements from our licensees and
revenues from our claim management services).
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Our equipment rental business also derives revenues from the sale of new equipment and consumables.
Our expenses consist of:
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Direct operating expenses (primarily wages and related benefits; commissions and
concession fees paid to airport authorities, travel agents and others; facility,
self-insurance and reservations costs; the cost of new equipment and consumables
purchased for resale; and other costs relating to the operation and rental of the
revenue earning equipment, such as damage, maintenance and fuel costs);
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Depreciation expense relating to revenue earning equipment (including net gains
or losses on the disposal of such equipment). Revenue earning equipment includes
cars and equipment;
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Selling, general and administrative expenses (including advertising); and
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Interest expense relating primarily to the funding of the acquisition of revenue
earning equipment.
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The car and equipment rental industries are significantly influenced by general economic
conditions. The car rental industry is also significantly influenced by developments in the travel
industry, and, particularly in, airline passenger traffic. Our profitability is primarily a
function of the volume and pricing of rental transactions and the utilization of cars and
equipment. Significant changes in the purchase price of cars and equipment or interest rates can
also have a significant effect on our profitability depending on our ability to adjust pricing for
these changes. We expect increases in car costs and modest increases in equipment costs in the
near term. We expect a significant increase in car costs for the 2006 model year, which will
adversely affect our results of operations beginning in the fourth quarter of 2005 because we do
not expect rental price increases in the near term to offset these car cost increases.
Our business requires significant expenditures for cars and equipment, and consequently we require
substantial liquidity to finance such expenditures.
Car rental and equipment rental operations are seasonal businesses, with decreased levels of
business in the winter months and heightened activity during the spring and summer. To accommodate
increased demand, we increase our available fleet and staff during the second and third quarters.
As business demand declines, fleet and staff are decreased accordingly. However, certain operating
expenses, including minimum concession fees, rent, insurance, and administrative overhead, remain
fixed and cannot be adjusted for seasonal demand.
35
In the United States, industry revenues from airport rentals have only recently returned to levels
seen before the 2001 recession and the September 11, 2001 terrorist attacks. During the first half
of 2005, the major U.S. car rental brands have reported that pricing for rental cars, as measured
by rental rates charged, declined slightly, while our pricing essentially remained equal to our
pricing in the same period last year. Industry pricing performance is consistent with the downward
pressure on pricing for the major U.S. car rental brands in the first
half of 2005. Also,
we believe most European car rental companies pricing moved downward in 2004. During the first
half of 2005, we experienced strong transaction day growth in our European operations, but our
rental car pricing was below the pricing during the same period last year.
In each of the years ended December 31, 2003 and 2004, we increased the number of our staffed
off-airport rental locations in the United States by approximately 200, to over 1,200 off-airport
locations as of December 31, 2004. As of June 30, 2005, we had 1,329 off-airport locations. We
intend to add more off-airport locations in the United States in the remainder of 2005 and in
subsequent years. Accordingly, we expect the percentage of our overall U.S. rental revenues and
transactions represented by our off-airport operations to grow. When we open a new off-airport
location, we incur a number of costs, including those relating to site selection, lease
negotiation, recruitment of employees, selection and development of managers, initial sales
activities and integration of our systems with those of the companies who will reimburse the
locations replacement renters for their rentals. New off-airport locations, once opened, take
time to generate their full potential revenues, and as a result revenues at new locations do not
initially cover their start-up costs and often do not, for some time, cover the costs of their
ongoing operation.
From 2001 to 2003, the industrial and construction equipment rental industry experienced downward
pricing, measured by the per-period rates charged by rental companies. For the year ended December
31, 2004 and the first half of 2005, we believe industry pricing, measured in the same way, has
improved in North America but has continued to decline in France and Spain, albeit at a reduced
rate. HERC has also experienced higher equipment rental volumes worldwide for the year ended
December 31, 2004 and the first half of 2005. HERC slightly contracted its North American network
of industrial and construction equipment rental locations during the 2001 to 2003 downturn in
construction activities. In 2005, we currently expect that HERC will add 7 to 9 new locations in
major markets across the United States. In this expansion, we expect that HERC will incur non-fleet
start-up costs of approximately $900,000 per location and additional fleet acquisition costs over
an initial twelve-month period of approximately $4.9 million per location.
We expect moderate demand in the car rental business and continued strong demand in the industrial
and construction equipment rental business during the remainder of 2005. We anticipate our full
year 2005 income before income taxes and minority interest will be similar to 2004 levels.
The following discussion and analysis provides information that management believes to be relevant
to understanding our consolidated financial condition and results of operations. This discussion
should be read in conjunction with the financial statements and the related notes thereto contained
in our audited consolidated financial statements and unaudited condensed consolidated financial
statements included in this prospectus.
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are based upon
our audited consolidated financial statements and our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts in the consolidated financial statements and
accompanying notes.
36
We believe the following critical accounting policies affect the more significant judgments and
estimates used in the preparation of our financial statements and changes in these judgments and
estimates may impact future results of operations and financial condition. For additional
discussion of our accounting policies, see note 1 to the notes to our audited consolidated
financial statements included in this prospectus.
Revenue earning equipment
Our principal assets are revenue earning equipment, or REE, which represents 71% of total assets
as of June 30, 2005. REE consists of vehicles utilized in car rental operations and equipment
utilized in equipment rental operations. During 2004, 81% of the vehicles purchased for our U.S.
and international car rental fleet were subject to repurchase by automobile manufacturers under
contractual guaranteed repurchase programs, subject to certain manufacturers car condition and
mileage requirements, at a specific price during a specified time period. These programs limit our
residual risk with respect to vehicles purchased under the programs. For all other vehicles, as
well as equipment acquired by our equipment rental business, we use historical experience and
monitor market conditions to set depreciation rates. When REE is acquired, we estimate the period
that we will hold the asset. Depreciation is recorded on a straight-line basis over the estimated
holding period, with the objective of minimizing gain or loss on the disposition of the REE. Upon
disposal of the REE, depreciation expense is adjusted for the difference between the net proceeds
received and the remaining book value. As market conditions change, we adjust our depreciation
rates prospectively, over the remaining holding period, to reflect these changes in market
conditions.
Public liability and property damage
The obligation for public liability and property damage, or PL/PD, on self-insured U.S. and
international vehicles and equipment represents an estimate for both reported accident claims not
yet paid, and claims incurred but not yet reported. The related liabilities are recorded on a
non-discounted basis. Reserve requirements are based on actuarial evaluations of historical
accident claim experience and trends, as well as future projections of ultimate losses, expenses,
premiums and administrative costs. The adequacy of the liability is regularly monitored based on
evolving accident claim history. If our estimates change or if actual results differ from these
assumptions, the amount of the recorded liability is adjusted to
reflect these results.
Pensions
Our employee pension costs and obligations are dependent on our assumptions used by actuaries in
calculating such amounts. These assumptions include discount rates, salary growth, long-term
return on plan assets, retirement rates, mortality rates and other factors. Actual results that
differ from our assumptions are accumulated and amortized over future periods and, therefore,
generally affect our recognized expense and recorded obligation in such future periods. While we
believe that the assumptions used are appropriate, significant differences in actual experience or
significant changes in assumptions would affect our pension costs and obligations. See note 6 to
the notes to our audited consolidated financial statements included in this prospectus.
37
Goodwill
We review goodwill for impairment whenever events or changes in circumstances indicate that the
carrying amount of the goodwill may not be recoverable, and also review goodwill annually in
accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and
Other Intangible Assets. Our annual review is conducted in the second quarter of each year.
Under SFAS No. 142, goodwill impairment is deemed to exist if the carrying value of goodwill
exceeds its fair value. In addition, SFAS No. 142 requires that goodwill be tested at least
annually using a two-step process. The first step is to identify any potential impairment by
comparing the carrying value of the reporting unit to its fair value. If a potential impairment is
identified, the second step is to compare the implied fair value of goodwill with its carrying
amount to measure the impairment loss. We estimate the fair value of our reporting units using a
discounted cash flow methodology. A significant decline in the projected cash flows used to
determine fair value could result in a goodwill impairment charge. See note 2 to the notes to our
audited consolidated financial statements included in this prospectus.
Results of operations
The following table sets forth for each of the periods indicated, the percentage of operating
revenues represented by certain items in our consolidated statement of operations:
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Percentage of Revenues
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Six Months Ended
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Year Ended
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June 30,
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December 31,
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2004
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2003
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2002
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2005
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Restated
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2004
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Restated
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Restated
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Revenues:
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Car rental
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80.6
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%
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82.0
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%
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81.3
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%
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81.2
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%
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80.5
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%
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Equipment rental
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18.0
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16.8
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17.4
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17.5
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18.1
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Other
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1.4
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1.2
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1.3
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1.3
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1.4
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100.0
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100.0
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100.0
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100.0
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100.0
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Expenses:
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Direct operating
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57.8
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57.2
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55.9
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55.9
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54.9
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Depreciation of revenue earning equipment
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21.6
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22.9
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21.9
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25.7
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26.6
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Selling, general and administrative
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9.1
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9.4
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8.9
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8.4
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8.2
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Interest, net of interest income
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6.1
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5.9
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5.8
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6.0
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6.5
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94.6
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95.4
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92.5
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96.0
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96.2
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Income before income taxes and minority interest
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5.4
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4.6
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7.5
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4.0
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3.8
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Provision for taxes on income
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(1.9
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(1.6
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(2.0
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)
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(1.3
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(1.3
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Minority interest
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(0.1
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Net income
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3.4
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%
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3.0
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%
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5.5
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%
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2.7
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%
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2.5
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%
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Six months ended June 30, 2005 compared with six months ended June 30, 2004
Revenues
. Total revenues for the six months ended June 30, 2005 of $3,502.9 million increased by
12.5% from $3,112.4 million for the six months ended June 30, 2004. Revenues from car rental
operations of $2,824.5 million for the six months ended June 30, 2005 increased by $272.6 million,
or 10.7%, from $2,551.9 million for the six months ended June 30, 2004. The increase was primarily
the result of a 7.5% increase in car rental volume worldwide and the effects of foreign currency
translation of approximately $37.3 million, partly offset by a 1.1% decrease in pricing worldwide.
Revenues from equipment rental operations of $630.1 million for the six months ended June 30, 2005
increased by $107.8 million, or 20.6%, from $522.3 million for the six months ended June 30, 2004.
The increase was due to improved pricing in the United States, higher worldwide rental volume, and
the effects of foreign currency translation of approximately $9.3 million.
38
Revenues from all other sources of $48.3 million for the six months ended June 30, 2005 increased
by $10.1 million, or 26.4%, from $38.2 million for the six months ended June 30, 2004, primarily
due to the increase in car rental licensee revenue and the effects of foreign currency translation.
Expenses.
Total expenses of $3,312.9 million for the six months ended June 30, 2005 increased by
11.5% from $2,970.6 million for the six months ended June 30, 2004, and total expenses as a
percentage of revenues decreased to 94.6% for the six months ended June 30, 2005 compared with
95.4% for the six months ended June 30, 2004.
Direct operating expenses of $2,025.5 million for the six months ended June 30, 2005 increased by
13.7% from $1,781.8 million for the six months ended June 30, 2004. The increase was primarily the
result of increases in wages and benefits, facility expenses, gasoline costs and concession fees in
car rental operations, the effects of foreign currency translation and $7.0 million received in
2004 regarding insurance claims made by us relating to the terrorist attacks of September 11, 2001.
Depreciation of revenue earning equipment for car rental operations of $649.7 million for the six
months ended June 30, 2005 increased by 7.7% from $603.4 million for the six months ended June 30,
2004. The increase was primarily due to the increase in the average number of vehicles worldwide
and the effects of foreign currency translation. This increase was partly offset by higher net
proceeds received in excess of book value on the disposal of used vehicles and a $10.1 million
reduction in depreciation for domestic car rental operations resulting from a decrease in
depreciation rates to reflect changes in the estimated residual values of vehicles. Depreciation
of revenue earning equipment for equipment rental operations of $106.7 million for the six months
ended June 30, 2005 decreased by 3.3% from $110.3 million for the six months ended June 30, 2004
due to higher net proceeds received in excess of book value on the disposal of used equipment in
the United States, and the effects of changes in depreciation rates of equipment.
Selling, general and administrative expenses of $318.9 million for the six months ended June 30,
2005 increased by 9.1% from $292.4 million for the six months ended June 30, 2004. The increase
was primarily due to increases in administrative and sales promotion expenses and the effects of
foreign currency translation.
Interest expense, net of interest income, of $212.0 million for the six months ended June 30, 2005
increased by 16.1% from $182.7 million for the six months ended June 30, 2004, primarily due to
increases in the weighted average debt outstanding, the weighted average interest rate and the
effects of foreign currency translation, partly offset by an increase in interest income.
The provision for taxes on income of $64.9 million for the six months ended June 30, 2005 increased
by 31.1% from $49.5 million for the six months ended June 30, 2004, primarily due to an increase in
pre-tax income for the six months ended June 30, 2005. The effective tax rate for the six months
ended June 30, 2005 was 34.2% as compared to 35.0% in six months ended June 30, 2004. See Note 5
to the Notes to our condensed consolidated financial statements included in this prospectus.
Minority interest of $5.0 million for the six months ended June 30, 2005 represents the minority
interests share (35%) of Navigation Solutions LLCs net income for the six months ended June 30,
2005. See Note 1 to the Notes to our condensed consolidated financial statements included in this
prospectus.
Net Income.
We had net income of $120.1 million for the six months ended June 30, 2005,
representing an increase of $27.9 million, or 30.3% from $92.2 million for the six months ended
June 30, 2004. The increase in net income was primarily due to higher rental volume in our
worldwide car rental business and improved results in our North American equipment rental operations, partly offset by lower pricing
in our worldwide car rental business, as well as the net effect of other contributing factors noted
above.
39
Year ended December 31, 2004 compared with year ended December 31, 2003
Revenues.
Total revenues of $6,676.0 million for the year ended December 31, 2004 increased by
12.5% from $5,933.7 million for the year ended December 31, 2003.
Revenues from car rental operations of $5,430.8 million for the year ended December 31, 2004
increased by 12.7% from $4,819.3 million for the year ended December 31, 2003. This increase of
$611.5 million was primarily the result of higher car rental volumes worldwide and the effects of
foreign currency translation of approximately $143.6 million, partly offset by a 2.6% decrease in
time and mileage rates worldwide. The impact of changes in exchange rates on net income was
mitigated by the fact that not only foreign revenues but also most foreign expenses were incurred
in local currencies.
Revenues from equipment rental operations of $1,162.0 million for the year ended December 31, 2004
increased by 12.0% from $1,037.8 million for the year ended December 31, 2003. This $124.2 million
increase was principally due to improved pricing in the United States, higher equipment rental
volumes worldwide and the effects of foreign currency translation of approximately $22.1 million.
Revenues from all other sources of $83.2 million for the year ended December 31, 2004 increased by
8.5% from $76.6 million for the year ended December 31, 2003, due to an increase in licensee
revenues.
Expenses.
Total expenses of $6,173.4 million for the year ended December 31, 2004 increased by
8.4% from $5,696.2 million for the year ended December 31, 2003, and total expenses as a percentage
of revenues decreased to 92.5% for the year ended December 31, 2004 compared to 96.0% for the year
ended December 31, 2003.
Direct operating expenses of $3,734.4 million for the year ended December 31, 2004 increased by
12.6% from $3,316.1 million for the year ended December 31, 2003. The increase was primarily the
result of the effects of foreign currency translation, increases in wages and benefits,
commissions, concession fees, facility expense, vehicle damage expense and gasoline costs in car
rental operations. The increase was partly offset by favorable credit and collection and PL/PD
claims experience. Current period expenses were further reduced by $7.0 million received for the
year ended December 31, 2004 for claims made by us on our insurance policies for business
interruption losses resulting from the terrorist attacks of September 11, 2001 and a final gain of
$7.5 million for the year ended December 31, 2004 from the condemnation of a car rental and support
facility in Florida. (An initial gain of $8.0 million related to the condemnation was recorded for
the year ended December 31, 2003.)
Depreciation of revenue earning equipment for car rental operations of $1,228.6 million for the
year ended December 31, 2004 decreased by 2.4% from $1,258.3 million for the year ended December
31, 2003. The decrease was primarily due to the decrease in the United States average cost per
vehicle and higher net proceeds received in excess of book value on the disposal of used vehicles
worldwide, partly offset by the effects of foreign currency translation, an increase in the average
number of vehicles operated worldwide and a one-time refund of $7.8 million for the year ended
December 31, 2003. The refund resulted from a special transitional credit for car rental companies
instituted by the Australian Taxation Office for Goods and Services Tax. Taxes paid were
previously included in the capitalized cost
40
of the vehicles in our Australian car rental fleet. Depreciation of revenue earning equipment for equipment rental operations of $234.7 million for the
year ended December 31, 2004 decreased by 11.5% from $265.1 million for the year ended December 31,
2003, primarily due to higher net proceeds received in excess of book value on the disposal of used
equipment in the United States.
Selling, general and administrative expenses of $591.3 million for the year ended December 31, 2004
increased by 17.9% from $501.7 million for the year ended December 31, 2003. The increase was
principally due to the effects of foreign currency translation and increases in administrative and
advertising expenses. The increase in administrative expenses was attributable to increases in
salaries and in incentive compensation expense relating to the improvement in earnings for the year
ended December 31, 2004. The increase in advertising was due to expanded media advertising,
primarily in television.
Interest expense, net of interest income, of $384.4 million for the year ended December 31, 2004
increased 8.3% from $355.0 million for the year ended December 31, 2003, primarily due to an
increase in average debt outstanding and foreign currency translation, partly offset by a decrease
in the weighted average interest rate and higher interest income.
The provision for taxes on income of $133.9 million for the year ended December 31, 2004 increased
69.7% from $78.9 million for the year ended December 31, 2003. The increase in the provision for
taxes on income was primarily the result of an increase in pre-tax income for the year ended
December 31, 2004, partly offset by net favorable tax adjustments totaling $46.6 million,
principally relating to the evaluation of certain federal and foreign tax accruals and foreign tax
credits. The effect of the net tax adjustments caused a decrease in the effective tax rate from
35.9% to 26.6% as compared to 33.2% for the year ended December 31, 2003. See notes 1 and 9 to the
notes to our audited consolidated financial statements included in this prospectus.
On July 1, 2004, we increased our joint venture ownership interest in Navigation Solutions from 40%
to 65%. Minority interest of $3.2 million for the year ended December 31, 2004 represents the
minority interests share (35%) of Navigation Solutions net income for the period July 1, 2004
through December 31, 2004. See note 5 to the notes to our audited consolidated financial
statements included in this prospectus.
Income before cumulative effect of change in accounting principle.
We had income before cumulative
effect of change in accounting principle of $365.5 million for the year ended December 31, 2004,
representing an increase of $206.9 million from $158.6 million for the year ended December 31,
2003. The increase reflects higher rental volume in our worldwide car and equipment rental
businesses, lower fleet costs, higher proceeds received in excess of book value on the disposal of
used vehicles and equipment and net favorable tax adjustments, partly offset by lower pricing in
our worldwide car rental business, as well as the net effect of other contributing factors noted
above.
Year ended December 31, 2003 compared with year ended December 31, 2002
Revenues.
Total revenues of $5,933.7 million for the year ended December 31, 2003 increased by
5.2% from $5,638.4 million for the year ended December 31, 2002.
Revenues from car rental operations of $4,819.3 million for the year ended December 31, 2003
increased by 6.2% from $4,537.6 million for the year ended December 31, 2002. This increase of
$281.7 million was primarily the result of the effects of foreign currency translation of
approximately $197.7 million and higher rental volume worldwide, partly offset by a 1.5% decrease
in time and mileage rates. The impact of changes in exchange rates on net income was mitigated by
the fact that not only foreign revenues but also most foreign expenses were incurred in local
currencies.
41
Revenues from equipment rental operations of $1,037.8 million for the year ended December 31, 2003
increased by 1.9% from $1,018.7 million for the year ended December 31, 2002. This $19.1 million
increase was principally due to the effects of foreign currency translation, mostly offset by a
decrease in rental volume in the United States which was the result of depressed capital spending for new
non-residential construction and its impact on the equipment rental industry.
Revenues from all other sources of $76.6 million for the year ended December 31, 2003 decreased by
6.6% from $82.1 million for the year ended December 31, 2002, due to a decrease in license and
management fees earned from Axus International, Inc., or Axus. Axus was a wholly owned vehicle
leasing subsidiary of Ford Motor Credit Company, or Ford Credit, to which we had licensed the
Hertz name and provided management services prior to the completion of the sale of Axus by Ford
Credit and termination of the Hertz license in the quarter ended March 31, 2003.
Expenses.
Total expenses of $5,696.2 million for the year ended December 31, 2003 increased by
5.1% from $5,422.0 million for the year ended December 31, 2002, and total expenses as a percentage
of revenues remained relatively constant at 96.0% for the year ended December 31, 2003 compared to
96.2% for the year ended December 31, 2002.
Direct operating expenses of $3,316.1 million for the year ended December 31, 2003 increased by
7.2% from $3,093.0 million for the year ended December 31, 2002. The increase was primarily the
result of the effects of foreign currency translation, increases in wages and benefits, self
insurance, concession fees, facility expense and gasoline costs in car rental operations, partly
offset by an initial gain of $8.0 million from the condemnation of a car rental and support
facility in Florida.
Depreciation of revenue earning equipment for car rental operations of $1,258.3 million for the
year ended December 31, 2003 increased by 2.4% from $1,228.5 million for the year ended December
31, 2002. The increase was due to the effects of foreign currency translation. This increase was
partly offset by a one-time refund of $7.8 million which resulted from a special transitional
credit for rental car companies instituted by the Australian Taxation Office for Goods and Services
Tax. Taxes paid were previously included in the capitalized cost of the vehicles in our Australian
car rental fleet. Depreciation of revenue earning equipment for equipment rental operations of
$265.1 million for the year ended December 31, 2003 decreased by 2.2% from $271.0 million for the
year ended December 31, 2002 due to a decrease in the size of the equipment rental fleet partly
offset by lower net proceeds received in excess of book value on the disposal of equipment in the
United States.
Selling, general and administrative expenses of $501.7 million for the year ended December 31, 2003
increased by 8.3% from $463.1 million for the year ended December 31, 2002. The increase was
principally due to the effects of foreign currency translation and increases in administrative and
sales promotion expenses. Administrative expenses for the year ended December 31, 2003 included
$6.0 million of stock-based employee compensation expense which resulted from the adoption of the
fair value recognition provisions of SFAS No. 123, effective January 1, 2003. See notes 1 and 7 to
the notes to our audited consolidated financial statements included in this prospectus.
Interest expense, net of interest income, of $355.0 million for the year ended December 31, 2003
decreased 3.1% from $366.4 million for the year ended December 31, 2002, primarily due to a
decrease in the weighted-average interest rate and an increase in interest income for the year
ended December 31, 2003, partly offset by higher average debt levels.
The tax provision of $78.9 million for the year ended December 31, 2003 increased 9.0% from $72.4
million for the year ended December 31, 2002. The effective tax rate for the year ended December
31, 2003 was 33.2% as compared to 33.4% for the year ended December 31, 2002. The increase in the
tax
42
provision was primarily the result of higher income before income taxes for the year ended
December 31, 2003. See notes 1 and 9 to the notes to our audited consolidated financial statements
included in this prospectus.
Income before cumulative effect of change in accounting principle.
We had income before cumulative
effect of change in accounting principle of $158.6 million for the year ended December 31, 2003,
representing an increase of $14.6 million from $144.0 million for the year ended December 31, 2002.
The increase reflects improved car rental volume worldwide partly offset by lower pricing in our
U.S. car rental business and the impact of the Iraqi conflict and SARS had on the travel industry
for the year ended December 31, 2003 as well as the net effect of other contributing factors noted
above.
Cumulative effect of change in accounting principle.
We recorded a non-cash charge of $294.0
million to adjust goodwill upon the adoption of SFAS No. 142, effective January 1, 2002. The
charge related to the equipment rental segment. The goodwill write-off was the result of a
reduction in projected cash flows used to determine fair value due to the unfavorable economic
conditions as of the date of adoption, which reduced demand for equipment in North America. See
notes 1 and 2 to the notes to our audited consolidated financial statements included in this
prospectus.
Liquidity and capital resources
As of
June 30, 2005, we had cash and equivalents of $703.9 million, an increase of $23.0
million from December 31, 2004. As of June 30, 2005, cash and equivalents includes $7.4 million of
restricted cash to be used for the purchase of revenue earning vehicles or for the repayment of
outstanding indebtedness under our Asset Backed Securitization, or ABS, program. As of December
31, 2004, we had cash and cash equivalents of $680.9 million, an increase of $70.9 million from
December 31, 2003, which includes $2.9 million of restricted cash to be used for the purchase of
revenue earning vehicles or for the repayment of outstanding indebtedness under the ABS program.
As of December 31, 2003, we had cash and equivalents of $610.0 million, an increase of $8.7 million
from December 31, 2002. In addition, we have made short-term investments with a related party
investment fund that pools and invests excess cash balances of certain Ford subsidiaries to
maximize returns. These short-term investments totaled $296.4 million as of June 30, 2005, $557.0
million as of December 31, 2004 and $500.1 million as of December 31, 2003. These funds are held
until they are required for operating purposes or used to reduce indebtedness.
Our domestic and foreign operations are funded by cash provided by operating activities and by
extensive financing arrangements maintained by us in the United States, Europe, Australia, New
Zealand, Canada and Brazil. Net cash provided by operating activities
during the six months ended
June 30, 2005 was $1,665.5 million, an increase of $3.0 million from the six months ended June 30,
2004, primarily due to timing differences in the receipts and payments of receivables, amounts due
from affiliates and accounts payable. Net cash provided by operating activities was $2,251.4
million for the year ended December 31, 2004, an increase of $352.1 million from the year ended
December 31, 2003, primarily due to the increase in net income. Net cash provided by operating
activities was $1,899.3 million for the year ended December 31, 2003, an increase of $21.8 million
from the year ended December 31, 2002, primarily due to an increase in net income. Revenue earning
equipment expenditures and proceeds from the disposal of such equipment have been reclassified from
operating activities to investing activities for all periods presented in our consolidated
statement of cash flows.
Our primary use of cash in investing activities is for the acquisition of revenue earning
equipment, which consists of cars and equipment. Net cash used in investing activities during the
six months ended June 30, 2005 was $2,924.8 million, a decrease of $125.3 million from the six
months ended June 30, 2004. The decrease is primarily due to the net increase in the proceeds from
sales of short-term investments,
43
partly offset by net revenue earning equipment expenditures. Net
cash used in investing activities was $2,843.0 million for the year ended December 31, 2004, an
increase of $612.4 million from the year ended December 31, 2003. Net cash used in investing
activities was $2,230.6 million for the year ended December 31, 2003, an increase of $167.1 million
from the year ended December 31, 2002. The increases during 2004 and 2003 were primarily due to an increase in net expenditures for
revenue earning equipment. For the six months ended June 30, 2005, our expenditures for revenue
earning equipment were $7,640.6 million, partially offset by proceeds from the disposal of such
equipment of $4,611.7 million. For the year ended December 31, 2004, our expenditures for revenue
earning equipment were $11,310.0 million, partially offset by proceeds from the disposal of such
equipment of $8,740.9 million. For the year ended December 31, 2003, our expenditures for revenue
earning equipment were $9,436.6 million, partially offset by proceeds from the disposal of such
equipment of $7,874.4 million. These assets are purchased by us in accordance with the terms of
programs negotiated with car and equipment manufacturers.
For the six months ended June 30, 2005, our capital expenditures for property and non-revenue
earning equipment were $186.8 million. For the year ended December 31, 2004, our capital
expenditures for property and non-revenue earning equipment were $286.4 million. For the year
ended December 31, 2003, our capital expenditures for property and non-revenue earning equipment
were $226.7 million. For the year ending December 31, 2005, we anticipate a slightly increased
level of net expenditures for revenue earning equipment and property and equipment compared to the
year 2004.
Car rental and equipment rental operations are seasonal businesses with decreased levels of
business in the winter months and heightened activity during the spring and summer. This is
particularly true of our on-airport car rental operations and equipment rental operations. To
accommodate this increased demand, we maintain a larger fleet by holding vehicles and equipment and
purchasing additional fleet which increases our financing requirements in the second and third
quarter. These seasonal financing needs are funded by increasing the utilization of our commercial
paper programs and our bank credit facilities. As business demand moderates during the winter, we
reduce our fleet accordingly and dispose of vehicles and equipment. The disposal proceeds are used
to reduce short-term debt.
Financing
To finance our domestic operations, we maintain active unsecured and asset backed commercial paper
programs. We are also active in the domestic unsecured medium-term and long-term debt markets and
the domestic asset backed medium-term debt market, and maintain credit facilities described under
Credit facilities below.
During 2002, we established the ABS program for our domestic car rental fleet to reduce our
borrowing costs and enhance our financing resources. All debt issued under the ABS program is
collateralized by the assets of the special purpose financing entities, consisting of revenue
earning vehicles used by us in our car rental business, restricted cash and certain receivables
related to the revenue earning vehicles. The ABS program provided for the initial issuance of
asset backed commercial paper (up to $1.0 billion) and the subsequent issuance of asset backed
medium-term notes. These notes are issued by wholly owned and consolidated special purpose
financing entities and are included in Debt in our consolidated balance sheet. As of June 30,
2005, $849.5 million of asset backed commercial paper and $600.0 million of asset backed
medium-term notes were outstanding. As of December 31, 2004, $297.6 million of asset backed
commercial paper and $600.0 million of asset backed medium-term notes were outstanding.
The asset backed commercial paper notes have ratings of A-1 by S&P, Prime-1 by Moodys and F1 by
Fitch Ratings, or Fitch. Under certain conditions, the commercial paper notes may be repaid by
draws under a related bank liquidity facility ($814.0 million), which expires in June 2006 or a
related letter of credit issued under a letter of credit facility ($215.0 million), which expires
in June 2007.
44
On September 30, 2003, we issued $500.0 million of 4.7% Senior Promissory Notes, or the 4.7%
Notes, due on October 2, 2006. On June 3, 2004, we issued $600.0 million of 6.35% Senior
Promissory Notes, or the 6.35% Notes, due on June 15, 2010. Effective September 30, 2003 and June 3, 2004,
we entered into interest rate swap agreements relating to the 4.7% Notes and 6.35% Notes,
respectively. Under these agreements, we pay interest at a variable rate in exchange for fixed
rate receipts, effectively transforming the 4.7% Notes and the 6.35% Notes to floating rate
obligations with effective interest rates as of June 30, 2005 of 5.25% and 5.24%, respectively.
See note 7 to the notes to our unaudited condensed consolidated financial statements and note 3 to
the notes to our audited consolidated financial statements included in this prospectus.
On March 31, 2004, we issued $600.0 million of asset backed medium-term notes, or the Medium-Term
Notes, under the ABS program. Of the $600.0 million of the Medium-Term Notes, $500.0 million has
fixed interest rates ranging from 2.4% to 3.2% and maturities ranging from 2007 to 2009 and the
remaining $100.0 million has a variable interest rate based on the one-month LIBOR rate plus nine
basis points (3.4% as of June 30, 2005) and matures in 2007. Payments of principal and interest
relating to the Medium-Term Notes are insured to the extent provided in a note guaranty insurance
policy issued by MBIA Insurance Corporation. The Medium-Term Notes have ratings of AAA by S&P, Aaa
by Moodys and AAA by Fitch.
On July 2, 2004, we established a Euro Medium-Term Program under which we and/or Hertz Finance
Centre plc, or HFC, a wholly owned subsidiary of ours, can issue up to
650.0 million in
medium-term notes, or the Euro Notes. On July 16, 2004, HFC issued
200.0 million of Euro Notes
under this program. These Euro Notes are fully guaranteed by us, mature in July 2007 and have a
variable interest rate based on the three-month EURIBOR rate plus 110 basis points. As of June 30,
2005, the interest rate on the Euro Notes was 3.24%.
On August 5, 2004, we issued $500.0 million of promissory notes consisting of $250.0 million of
floating rate notes at the three-month LIBOR rate plus 120 basis points due on August 5, 2008, and
$250.0 million 6.90% senior fixed rate notes due on August 15, 2014. As of June 30, 2005, the
interest rate on the $250.0 million floating rate notes was 4.42%.
As the need arises, it is our intention to issue unsecured senior, senior subordinated, junior
subordinated or asset backed securities on terms to be determined at the time the securities are
offered for sale. The total amount of unsecured medium-term and long-term debt outstanding as of
June 30, 2005 and December 31, 2004 was $5.4 billion
and $6.0 billion, respectively, excluding the
Intercompany Note payable to Ford of $1,185.0 million discussed below, having fixed and floating
rates ranging from 2.38% to 9.28% as of June 30, 2005, and having maturities ranging from 2005 to
2028. From time to time, we file with the SEC shelf registration statements to allow for the
issuance of such unsecured senior, senior subordinated and junior subordinated debt securities on
terms to be determined at the time such securities are offered for sale. As of June 30, 2005, we
had $1.9 billion available for issuance under effective registration statements, so long as the
SECs conditions for issuance are satisfied. Among those conditions is one that, at the time of
issuance, the securities being issued are placed in a generic rating category signifying investment
grade by at least one nationally recognized statistical rating organization (such as S&P, Moodys,
Fitch and Dominion Bond Rating Service, or DBRS). See Debt ratings.
Borrowing for our international operations also consists of loans obtained from local and
international banks, and commercial paper programs established in Ireland, Canada, the Netherlands,
Belgium and Australia. We guarantee only the commercial paper borrowings of our subsidiaries in
Ireland, Canada,
45
the Netherlands and Belgium, and we guarantee commercial paper and short-term bank
loans of our subsidiary in Australia. All borrowings by international operations are either in the
international operations local currency or, if in non-local currency, hedged to minimize foreign
exchange exposure. As of June 30, 2005, total debt for the foreign operations was $1,896.7
million, of which $1,649.1 million was short-term (original maturity of less than one year) and
$247.6 million was long-term. As of June 30, 2005, the total amounts outstanding under the commercial paper programs in Ireland, Canada, the
Netherlands and Belgium were $243.5 million, $31.0 million, $27.2 million and $15.8 million,
respectively. As of December 31, 2004, total debt for the foreign operations was $1,733.7 million,
of which $1,455.3 million was short-term and $278.4 million was long-term. As of December 31,
2004, the total amounts outstanding under the commercial paper programs in Ireland, Canada, the
Netherlands and Belgium were $384.5 million, $320.9 million, $54.3 million and $28.0 million,
respectively.
On each of June 10, 2005 and , 2005, we issued Intercompany Notes to Ford in the
amounts of $1,185.0 million and $ , respectively, as dividends on all of our then
outstanding common stock. The Intercompany Notes are subordinated in right of payment to all of
our existing and future senior indebtedness. The Intercompany Notes each mature on June 10, 2010,
but may be prepaid in whole at any time or in part from time to time. Interest on each of the
Intercompany Notes will be payable in cash quarterly or on or before the maturity date of the
Intercompany Notes, subject to certain limitations on payment contained in the Interim Credit
Facility. The Intercompany Note issued on June 10, 2005 has a per annum interest rate equal to
three-month LIBOR plus a spread of 200 basis points and the Intercompany Note issued on , 2005 has a per annum interest rate equal to three-month LIBOR plus a spread of basis points. As of June 30, 2005 the interest rate on the Intercompany Note issued on June 10, 2005 was
5.4%. We intend to repay the Intercompany Notes with the proceeds of this offering and the
concurrent offering of Equity Units.
On April 20, 2005, Ford first announced that it was evaluating its long-term strategic options for
its investment in us. Since the announcement by Ford, our ability to sell unsecured commercial
paper has been adversely affected. Our ability to sell unsecured commercial paper may have been
impacted by the announcement by Ford or by the recent developments, described under Debt ratings
below, regarding Fords and our debt ratings.
Credit facilities
As of June 30, 2005, we had committed credit facilities totaling $2.8 billion.
A portion of our committed credit facilities are represented by a combination of multi-year,
364-day global and other committed credit facilities provided by 20 participating banks which as of
June 30, 2005 totaled $1.3 billion in commitments. In addition to direct borrowings by us, the
multi-year and 364-day global facilities allow certain of our subsidiaries to borrow on the basis
of a guarantee by us.
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The multi-year facilities were renegotiated effective July 1, 2005 and as of June 30,
2005 totaled $952.5 million in commitments with expirations as follows: $35.0 million on
June 30, 2006, $108.0 million on June 30, 2007, $102.0 million on June 30, 2008, $81.0
million on June 30, 2009 and $626.5 million on June 30, 2010. The multi-year facilities
that expire in 2010 have an evergreen feature, which provides for the automatic extension
of the expiration date one year forward unless the bank provides timely notice.
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During 2005, the 364-day global committed credit facilities, which totaled $94.0 million
as of June 16, 2005, were renegotiated and currently expire on June 15, 2006. Under the
terms of the 364-day facilities, we are permitted to convert any amount outstanding prior
to expiration into a two-year loan.
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The other committed facilities totaled $178.9 million as of June 30, 2005 and expire at
various times during 2005 and 2006.
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Some of our committed credit facilities are represented by facilities that support our ABS program,
which as of June 30, 2005 totaled $1.0 billion:
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Effective September 18, 2002, as part of the ABS program, we transferred a portion of
the 364-day global committed credit facilities to the ABS program. As part of the
agreement to transfer these commitments, we have waived the right to transfer them back to
the 364-day global committed credit facilities without the consent of the participating
banks. As of June 30, 2005, $814.0 million was committed under this facility which expires
in June 2006.
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In addition to the transfer of the 364-day commitments, we raised committed credit
support through an ABS letter of credit from banks that participate in our multi-year
global committed credit facilities, which totaled $215.0 million as of June 30, 2005 and
expires in June 2007. In exchange for this credit support, we agreed to reduce the banks
multi-year facility commitment by one half of the amount of their ABS letter of credit
participation.
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In addition to these committed credit facilities, in February 1997, Ford extended to us a line of
credit of $500.0 million, which currently expires June 30, 2007. This line of credit has an
evergreen feature that provides on an annual basis for automatic one-year extensions of the
expiration date, unless notice is provided by Ford at least one year prior to the then scheduled
expiration date. The line of credit automatically terminates, however, at any time Ford ceases to
own, directly or indirectly, our capital stock having more than 50% of the total voting power of
all our capital stock outstanding and all loans and accrued interest under this facility would
become immediately due and payable. Our obligations under this agreement would rank pari passu
with our senior debt securities. A quarterly commitment fee of 0.2% is payable to Ford on the
average daily unused available credit. On May 2, 2005, we borrowed $250.0 million under this line
of credit, which we repaid on May 31, 2005 with borrowings under the Interim Credit Facility
described below.
On May 26, 2005, we entered into the Interim Credit Facility with an aggregate availability of up
to $3.0 billion with the joint book-running managers of this offering and/or their affiliates as
the arrangers and initial lenders, JPMorgan Chase Bank, N.A. as the U.S. administrative agent and
JPMorgan Chase Bank, N.A., Toronto Branch as the Canadian administrative agent. The Interim Credit
Facility, as amended July 5, 2005, provides a term facility of up to $1,650.0 million and a
revolving credit facility of up to $700.0 million available to The Hertz Corporation and a term
facility of up to $350.0 million and a revolving credit facility of up to $300.0 million available
to our Canadian subsidiary, Hertz Canada Limited, guaranteed by The Hertz Corporation, with
unutilized capacity under the Canadian tranches available to be borrowed by The Hertz Corporation.
Amounts under the term facilities are available to be borrowed from May 26, 2005 to July 26, 2005
and were fully drawn. Amounts under the revolving facilities are available to be borrowed
throughout the term of the Interim Credit Facility. The Interim Credit Facility matures on
November 23, 2005. We may elect a combination of per annum interest rates on the Interim Credit
Facility including the federal funds rate plus 0.50%, JPMorgan Chase Bank, N.A.s prime rate, LIBOR
and, for loans made to Hertz Canada Limited, a Canadian base rate or Canadian prime rate, plus, in
each case, a margin based on our then-current S&P and Moodys debt ratings. We are also required
to pay to the lenders a quarterly facility fee equal to a rate per annum of 0.175% of the total
amount of the Interim Credit Facility (such rate based upon our current S&P and Moodys debt
ratings). As of June 30, 2005, we had outstanding borrowings of approximately $1.0 billion and
C$575.0 million under the Interim Credit Facility.
47
We are required to prepay loans and permanently reduce commitments under the Interim Credit
Facility under certain limited circumstances, including certain issuances of securities (not
including this offering), certain sales of assets and when Ford controls less than 25% of us or any
other person or group has equal or greater control of us than Ford. Effective July 26, 2005,
$1,825.0 million of the Interim Credit Facility commitments provided by the three initial external financial institutions were syndicated and
allocated to eight additional external financial institutions. The Interim Credit Facility has
terms, including restrictive covenants, substantially similar to the terms of our other current
committed credit facilities. In addition, the Interim Credit Facility contains restrictions on the
payment of any indebtedness to, or investments other than in the ordinary course of business in,
Ford, other than as noted above, and our ability to pay future dividends, other than the dividend
to Ford of the Intercompany Notes or additional stock, payments pursuant to certain stock option
plans or other benefit plans, or any dividend in connection with this offering or the concurrent
offering of Equity Units. We have used and continue to use the amounts borrowed under the Interim
Credit Facility to refinance existing, short-term indebtedness and for general corporate purposes.
We intend to repay the Interim Credit Facility from the proceeds received from a combination of
issuances of additional asset backed securities under our ABS program, accessing the commercial
paper market and issuing unsecured senior debt securities.
We maintain agreements with Ford Financial Services, Inc., or FFS, a NASD registered
broker/dealer and an indirect wholly owned subsidiary of Ford, whereby FFS acts as a sales agent
for our secured and unsecured domestic commercial paper programs. We pay fees to FFS, which range
from 0.03% to 0.05% per annum of commercial paper placed depending upon the monthly average dollar
value of the notes outstanding in the portfolios. For the six months ended June 30, 2005, we paid
fees to FFS of $74,096. For the year ended December 31, 2004, we paid FFS $89,148 of such fees.
FFS is under no obligation to purchase any of the notes for its own account. On July 13, 2005, we
entered into a letter agreement with FFS which amended the agreements to provide that they will
automatically terminate at any time Ford ceases to own shares having more than 50% of the total
voting power of all of our outstanding capital stock. Through our subsidiary Hertz Australia Pty.
Limited, we also have a similar agreement with Ford Credit Australia Limited, also an indirect
wholly owned subsidiary of Ford. Hertz Australia Pty. Limited no longer maintains an active
commercial paper program.
Contractual obligations
As of December 31, 2004, our contractual cash obligations were as follows:
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Payments Due by Period
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Less than 1
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More than
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Contractual Obligations
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Total
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Year
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1-3 Years
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3-5 Years
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5 Years
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(Dollars in millions)
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Debt(1)
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$
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8,435.8
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$
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3,054.3
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$
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1,795.7
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$
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1,185.6
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$
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2,400.2
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Operating leases and
concession agreements(2)
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1,270.2
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259.7
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389.0
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198.2
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423.3
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Purchase obligations(3)
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Ford and subsidiaries
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2,757.2
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2,757.2
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All others
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3,704.1
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3,668.3
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35.8
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Total purchase obligations
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6,461.3
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6,425.5
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35.8
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Total
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$
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16,167.3
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$
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9,739.5
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$
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2,220.5
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$
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1,383.8
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$
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2,823.5
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(1)
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Amounts represent debt obligations included in Debt in our consolidated balance sheet
and include $2,444.1 million of commercial paper and other short-term borrowings, excluding
obligations for interest and estimated payments under interest rate swap agreements. See note
3 to the notes to our audited consolidated financial statements included in this prospectus.
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(2)
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Includes obligations under various concession agreements, which provide for payment of rents
and a percentage of revenue with a guaranteed minimum, and lease agreements for real estate,
revenue earning equipment and office and computer equipment. Such obligations are reflected
to the extent of their minimum non-cancelable terms. See note 10 to the notes to our audited
consolidated financial statements included in this prospectus.
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(3)
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Purchase obligations represent agreements to purchase goods or services that are legally
binding on us and that specify all significant terms, including fixed or minimum quantities;
fixed, minimum or variable price provisions; and the approximate timing of the transaction.
Only the minimum non-cancelable portion of purchase agreements and related cancellation
penalties are included as obligations. In the case of contracts, which state minimum
quantities of goods or services, amounts reflect only the stipulated minimums; all other
contracts reflect estimated amounts. Of the total purchase obligations as of December 31,
2004, $6,288.9 million represent fleet purchases where contracts have been signed or are
pending with committed orders under the terms of such arrangements. We do not regard our
employment relationships with our employees as agreements to purchase services for these
purposes.
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Other than our entry into the Interim Credit Facility and issuance of the Intercompany Note on
June 10, 2005, we are not aware of any material changes outside the ordinary course of our business
in the contractual obligations set forth on the table above as of June 30, 2005. See
Capitalization for a discussion of these contractual obligations and the effects of this offering
and the offering of Equity Units.
Debt ratings
Our short and long-term debt is rated by four of the nationally-recognized statistical rating
organizations: Fitch; Moodys; S&P; and DBRS. Debt ratings reflect an assessment by the rating
agencies of the credit risk associated with particular securities issued by us. Lower ratings
generally result in higher borrowing costs and reduced access to capital markets. Long- and
short-term debt ratings of BBB- and F3 or higher by Fitch, Baa3 and Prime-3 or higher by Moodys,
BBB- and A3 or higher by S&P, and BBB and R-2 or higher by DBRS are considered investment grade.
However, debt ratings are not recommendations to buy, sell, or hold securities and are subject to
revision or withdrawal at any time by the assigning rating agency. Each rating agency may have
different criteria in evaluating the risk associated to a company, and therefore ratings should be
evaluated independently for each rating agency.
In April 2005 and the four following months, our debt ratings or outlook were downgraded by all
four rating agencies, generally in conjunction with downgrades of Ford and Ford Credit. Our
current ratings are as follows:
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Debt Ratings
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Long-Term
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Short-Term
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Outlook/Trend
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Moodys
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Baa3
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Prime-3
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Developing outlook
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S&P
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BBB-
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A3
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CreditWatch developing
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Fitch
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BBB-
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F2
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Rating watch evolving
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DBRS
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BBB
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R-2 (middle)(1)
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Under review developing
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(1)
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Relates to commercial paper of Hertz Canada Limited, one of our wholly owned subsidiaries.
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Other factors
Foreign currency.
Our decision to withdraw earnings or investments from foreign countries is, in
some cases, influenced by exchange controls and the utilization of foreign tax credits, and may
also be affected by fluctuations in exchange rates for foreign currencies and by revaluation of
such currencies in relation
49
to the U.S. dollar by the governments involved. Foreign operations
have been financed to a substantial extent through loans from local lending sources in the currency
of the countries in which such operations are conducted. Car rental operations in foreign
countries are, from time to time, subject to governmental regulations imposing varying degrees of currency restrictions. Currency restrictions and other
regulations historically have not had a material impact on our operations as a whole.
Ford ownership.
Prior to this offering by virtue of its 100% ownership interest in us, Ford has
the right to make any changes that it deems appropriate in our assets, corporate structure,
capitalization, operations, properties and policies (including dividend policies). On April 20,
2005, Ford announced that it will consider options regarding its future ownership of us, which
includes this offering and the concurrent offering of Equity Units.
Capital expenditures
The table below shows revenue earning equipment and property and equipment capital expenditures and
related disposal proceeds received by quarter for 2005, 2004 and 2003.
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Revenue Earning Equipment
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Property and Equipment
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Capital
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Disposal
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Capital
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Disposal
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Net Capital
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Expenditures
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Proceeds
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Expenditures
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Proceeds
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Expenditures
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(Dollars in millions)
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2005
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|
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First Quarter
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$
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3,600.2
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|
|
$
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(2,307.4
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)
|
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$
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81.3
|
|
|
$
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(9.0
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)
|
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$
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1,365.1
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Second Quarter
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|
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4,040.4
|
|
|
|
(2,304.3
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)
|
|
|
105.5
|
|
|
|
(21.3
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)
|
|
|
1,820.3
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Total
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$
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7,640.6
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|
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$
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(4,611.7
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)
|
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$
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186.8
|
|
|
$
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(30.3
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)
|
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$
|
3,185.4
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
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|
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2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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First Quarter
|
|
$
|
2,916.1
|
|
|
$
|
(1,860.7
|
)
|
|
$
|
61.2
|
|
|
$
|
(11.7
|
)
|
|
$
|
1,104.9
|
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Second Quarter
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|
|
3,804.1
|
|
|
|
(1,921.2
|
)
|
|
|
82.8
|
|
|
|
(20.9
|
)
|
|
|
1,944.8
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Third Quarter
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|
|
2,179.0
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|
|
|
(2,321.8
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)
|
|
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74.6
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|
|
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(19.4
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)
|
|
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(87.6
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)
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Fourth Quarter
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|
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2,410.9
|
|
|
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(2,637.2
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)
|
|
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67.8
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|
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(7.3
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)
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|
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(165.8
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)
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|
|
|
|
|
|
|
|
|
|
|
|
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Total Year
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$
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11,310.1
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|
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$
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(8,740.9
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)
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$
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286.4
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|
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$
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(59.3
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)
|
|
$
|
2,796.3
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
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|
$
|
2,951.4
|
|
|
$
|
(2,557.3
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)
|
|
$
|
51.3
|
|
|
$
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(9.0
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)
|
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$
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436.4
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Second Quarter
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|
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2,338.3
|
|
|
|
(1,153.7
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)
|
|
|
56.6
|
|
|
|
(23.6
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)
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|
|
1,217.6
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Third Quarter
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|
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1,611.5
|
|
|
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(1,656.2
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)
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|
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54.4
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|
|
|
(13.1
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)
|
|
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(3.4
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)
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Fourth Quarter
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2,535.4
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|
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(2,507.2
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)
|
|
|
64.4
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|
|
|
(8.9
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)
|
|
|
83.7
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Year
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$
|
9,436.6
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$
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(7,874.4
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)
|
|
$
|
226.7
|
|
|
$
|
(54.6
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)
|
|
$
|
1,734.3
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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For the year ending December 31, 2005, we anticipate a level of net expenditures for revenue
earning equipment and property and equipment slightly higher than our net expenditures in 2004.
These anticipated capital expenditures reflect expected increases in the prices of 2006 model year
vehicles to be acquired beginning in the fourth quarter of 2005, together with capital expenditures
relating to the planned expansion of off-airport and HERC locations.
Off-balance sheet commitments
As of June 30, 2005, December 31, 2004 and December 31, 2003, the following guarantees were
issued and outstanding:
50
Indemnifications
In the ordinary course of business, we execute contracts involving indemnifications standard in the
relevant industry and indemnifications specific to a transaction such as the sale of a business.
These indemnifications might include claims against any of the following: environmental and tax
matters; intellectual property rights; governmental regulations and employment-related matters;
customer, supplier and other commercial contractual relationships; and financial matters.
Performance under these indemnities would generally be triggered by a breach of terms of the contract or by a third party
claim. We regularly evaluate the probability of having to incur costs associated with these
indemnifications and have accrued for expected losses that are probable and estimable. The types
of indemnifications for which payments are possible include the following.
Environmental.
We have indemnified various parties for the costs associated with remediating
numerous hazardous substance storage, recycling or disposal sites in many states and, in some
instances, for natural resource damages. The amount of any such expenses or related natural
resource damages for which we may be held responsible could be substantial. The probable losses
that we expect to incur for such matters have been accrued, and those losses are reflected in our
consolidated financial statements. As of June 30, 2005, December 31, 2004 and December 31, 2003,
the aggregate amounts accrued for environmental liabilities reflected in our consolidated balance
sheet in Accrued liabilities were $5.2 million, $5.4 million and $5.9 million, respectively. The
accrual represents the estimated cost to study potential environmental issues at sites deemed to
require investigation or clean-up activities, and the estimated cost to implement remediation
actions, including on-going maintenance, as required. Cost estimates are developed by site.
Initial cost estimates are based on historical experience at similar sites and are refined over
time on the basis of in-depth studies of the site. For many sites, the remediation costs and other
damages for which we ultimately may be responsible cannot be reasonably estimated because of
uncertainties with respect to factors such as our connection to the site, the materials there, the
involvement of other potentially responsible parties, the application of laws and other standards
or regulations, site conditions, and the nature and scope of investigations, studies, and
remediation to be undertaken (including the technologies to be required and the extent, duration,
and success of remediation).
Tax.
We provide various tax-related indemnifications as part of the transactions giving rise to
the indemnification obligations. The indemnified party typically is protected from certain events
that result in a tax treatment different from that originally anticipated. In some cases, a
payment under a tax indemnification may be offset in whole or in part by refunds from the
applicable governmental taxing authority. We are party to a number of tax indemnifications, and
many of these indemnities do not limit potential payment; therefore, we are unable to estimate a
maximum amount of potential future payments that could result from claims made under these
indemnities.
Risk management
For a discussion of additional risks arising from our operations, including vehicle liability,
general liability and property damage insurable risks, see Business-Risk management.
Market risks
We are exposed to a variety of market risks, including the effects of changes in interest
rates and foreign currency exchange rates. We manage our exposure to these market risks through
our regular operating and financing activities and, when deemed appropriate, through the use of
derivative financial instruments. Derivative financial instruments are viewed as risk management
tools and are not used for speculative or trading purposes. In addition, derivative financial
instruments are entered into with a diversified group of major financial institutions in order to
manage our exposure to counterparty nonperformance on such instruments. For more information on
these exposures see note 14 to the notes to our audited consolidated financial statements included
in this prospectus.
51
Interest rate risk
From time to time, we enter into interest rate swap agreements to manage interest rate risk.
Effective September 30, 2003, we entered into interest rate swap agreements relating to the
issuance of our 4.7% Notes due October 2, 2006. Effective June 3, 2004, we entered into interest
rate swap agreements relating to the issuance of our 6.35% Notes due June 15, 2010. Under these
agreements, we pay interest at a variable rate in exchange for fixed rate receipts, effectively
transforming these notes to floating rate obligations. See note 3 to the notes to our audited
consolidated financial statements included in this prospectus. We have assessed our exposure to
changes in interest rates by analyzing the sensitivity to our earnings assuming various changes in
market interest rates. Assuming a hypothetical increase of one percentage point in interest rates
on the existing debt portfolio as of December 31, 2004, net of interest income on investments, our
net income would decline by approximately $15.8 million over a 12-month period.
Foreign currency risk
We manage our foreign currency risk primarily by incurring operating and financing expenses in the
local currency in the countries in which we operate, including making fleet and equipment purchases
and borrowing for working capital needs. Also, we have purchased foreign exchange options to
manage exposure to fluctuations in foreign exchange rates for selected marketing programs. The
effect of exchange rate changes on these financial instruments would not materially affect our
consolidated financial position, results of operations or cash flows. Our risks with respect to
currency option contracts are limited to the premium paid for the right to exercise the option and
the future performance of the options counterparty. Premiums paid for options outstanding as of
December 31, 2004, were approximately $0.7 million, and we limit counterparties to financial
institutions that have strong credit ratings.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain
of our foreign subsidiaries by entering into foreign currency forward contracts at the time of the
loans. The forward rate is reflected in the intercompany loan rate to the foreign subsidiaries,
and as a result, the forward contracts have no impact on earnings.
Inflation
The increased acquisition cost of vehicles is the primary inflationary factor affecting us.
Many of our other operating expenses are also expected to increase with inflation, including health
care costs. Management does not expect that the effect of inflation on our overall operating costs
will be greater for us than for our competitors.
Employee retirement benefits
Pension
We sponsor defined benefit pension plans worldwide. Pension obligations give rise to significant
expenses that are dependent on assumptions discussed in note 6 of the notes to our audited
consolidated financial statements included in this prospectus. Based on present assumptions, 2005
worldwide pre-tax pension expense is expected to be approximately $38.3 million, which is an
increase of $7.6 million from 2004 primarily attributable to the decrease in the discount rate in
the United States from 6.25% to 5.75% and in the United Kingdom from 5.50% to 5.25%, a pension
settlement loss of $1.1 million relating to the Supplemental Executive Retirement Plan, as well as
the effects of foreign currency translation.
52
The funded status (i.e., the amount by which the present value of projected benefit obligations
exceeded the market value of pension plan assets) of our U.S. qualified plan, in which most
domestic employees participate, improved as of December 31, 2004, compared with December 31, 2003.
The primary factors that contributed to the improvement in the funded status was a discretionary
contribution by us of $48.0 million and an increase in the actual return on plan assets, partly
offset by a decrease in the discount rate.
Included in our stockholders equity was a $15.1 million adjustment, net of tax, for worldwide
minimum pension liability as of December 31, 2004. The increase of $4.0 million in the pension
adjustment from the prior year is primarily attributable to unfunded plans in the United States and
Germany and decreases in the discount rates as of December 31, 2004 used to calculate the present
value of benefit obligations, in each case compared with the prior year.
We review our pension assumptions regularly and from time to time make contributions beyond those
legally required. For example, discretionary contributions of $48.0 million and $54.0 million were
made to the U.S. qualified plan for the years ended December 31, 2004 and 2003, respectively.
After giving effect to these contributions, based on current interest rates and on our return
assumptions and assuming no additional contributions, we do not expect to be required to pay any
variable-rate premiums to the Pension Benefit Guaranty Corporation before 2010.
We participate in various multiemployer pension plans administrated by labor unions representing
some of our employees. We make periodic contributions to these plans to allow them to meet their
pension benefit obligations to their participants. In the event that we withdrew from
participation in one of these plans, then applicable law could require us to make an additional
lump-sum contribution to the plan, and we would have to reflect that on our balance sheet. Our
withdrawal liability for any multiemployer plan would depend on the extent of the plans funding of
vested benefits. We currently do not expect to incur any withdrawal liability in the near future.
However, in the ordinary course of our renegotiation of collective bargaining agreements with labor
unions that maintain these plans, we could decide to discontinue participation in a plan, and in
that event we could face a withdrawal liability. Some multiemployer plans, including one in which we
participate, are reported to have significant underfunded liabilities. Such underfunding could
increase the size of our potential withdrawal liability.
Other postretirement benefits
We provide limited postretirement health care and life insurance for employees of our domestic
operations with hire dates prior to January 1, 1990. There are no plan assets associated with this
plan. We provide for these postretirement costs through monthly accruals. The net periodic
postretirement benefit cost for the year ended December 31, 2004 was $1.6 million and the
accumulated benefit obligation as of December 31, 2004 was $17.3 million compared to postretirement
benefit cost of $1.3 million and an accumulated benefit obligation of $14.1 million as of December
31, 2003. The increase in cost and the accumulated benefit obligation was primarily attributable
to the decrease in the discount rate from 6.25% as of December 31, 2003 to 5.75% as of December 31,
2004 and higher than expected medical cost increases.
53
Recent accounting pronouncements
In January 2003, the Financial Accounting Standards Board, or FASB, issued Interpretation
No. 46, or FIN 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51, which expands upon and strengthens existing accounting guidance
concerning when a company should include in its financial statements the assets, liabilities and
activities of another entity. Prior to the issuance of FIN 46, a company generally included
another entity in its consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 now requires a Variable Interest Entity, or VIE, as defined in FIN 46, to be consolidated by a company if that company is the primary
beneficiary. The primary beneficiary is the entity subject to a majority of the risk of loss from
the VIEs activities or entitled to receive a majority of the VIEs residual returns, or both. FIN
46 also requires disclosures about VIEs that a company is not required to consolidate but in which
it has a significant variable interest. We adopted FIN 46 as of July 1, 2003 and the Revised
Interpretation, FIN 46-R, as of December 15, 2003. The adoption of FIN 46 and FIN 46-R did not
affect our financial position, results of operations or cash flows.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132, as revised, improves financial
statement disclosures for defined benefit plans. The change replaces existing SFAS No. 132
disclosure requirements for pensions and other postretirement benefits and revises employers
disclosures about pension plans and other postretirement benefit plans. It does not change the
measurement of recognition of those plans required by SFAS No. 87, Employers Accounting for
Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and SFAS No. 132, as revised, retains the disclosure
requirements contained in the original SFAS No. 132, but requires additional disclosures about the
plan assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans. SFAS No. 132, as revised, was effective for
annual and interim periods with fiscal years ending after December 15, 2003. See note 6 to the
notes to our audited consolidated financial statements included in this prospectus.
In December 2004, the FASB revised SFAS No. 123, or SFAS No. 123R, Accounting for Stock-Based
Compensation. SFAS No. 123R establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, particularly transactions in which
an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a
public entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is to be recognized over
the period during which the employee is required to provide service in exchange for the award.
Changes in fair value during the requisite service period are to be recognized as compensation cost
over that period. The provisions of SFAS No. 123R are effective for financial statements issued
for the first annual reporting period beginning after June 15, 2005. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107, or SAB No. 107, regarding the SEC staffs interpretation of
SFAS No. 123R. SAB No. 107 provides the SEC staffs views regarding interactions between SFAS No.
123R and certain SEC rules and regulations and provides interpretations of the valuation of
share-based payments for public companies. As we are currently accounting for employee stock-based
compensation awards in accordance with SFAS No. 123, adoption of SFAS No. 123R is not expected to
have a significant effect on our financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3. Previously, APB No. 20, Accounting
Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements required
the inclusion of the cumulative effect of changes in accounting principle in net income of the
period of the change. SFAS No. 154 requires companies to recognize changes in accounting principle,
including changes required by a new accounting pronouncement when the pronouncement does not
include specific transition provisions, retrospectively to prior periods financial statements.
SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. We are required to adopt the provisions of SFAS No. 154, as
applicable, beginning in fiscal year 2006.
54
Business
Our company
We and our independent licensees and associates represent what we believe is the largest
worldwide general use car rental brand and one of the largest equipment rental businesses in North
America, both based upon revenues. Our Hertz brand name is recognized worldwide as a leader in
quality rental services and products. We and our independent licensees and associates currently
accept reservations for the rental of cars at approximately 7,400 locations in over 150 countries.
We also rent equipment from over 340 branches in North America, France and Spain. We have been in
the car rental business since 1918 and in the equipment rental business for over 40 years.
Currently, we are an indirect wholly owned subsidiary of Ford.
For the six months ended June 30, 2005, we generated revenues, income before income taxes and
minority interest and net income of $3.5 billion, $190.0 million and $120.1 million, respectively.
For the year ended December 31, 2004, we generated revenues, income before income taxes and
minority interest and net income of $6.7 billion, $502.6 million and $365.5 million, respectively.
Our business is highly seasonal with the second and third quarters of the year having historically
been stronger than the first and fourth quarters.
Our business consists of two significant segments, car rental and equipment rental. We also
operate a third-party claim management service. See note 9 to the notes to our unaudited condensed
consolidated financial statements and note 11 to the notes to our audited consolidated financial
statements included in this prospectus.
Car rental
We maintain a substantial network of company-operated car rental locations both in the United
States and internationally, and what we believe to be the largest number of company-operated
on-airport car rental locations in the world, enabling us to provide consistent quality and service
worldwide. For the year ended December 31, 2004, we derived approximately 74% of our worldwide car
rental revenues from on-airport locations. Our licensees and associates also operate rental
locations in over 140 countries, including most of the countries in which we have company-operated
rental locations.
Our worldwide car rental operations generated $2.9 billion and $5.5 billion in revenues and $133.4
million and $437.6 million in income before income taxes and minority interest during the six
months ended June 30, 2005 and the year ended December 31, 2004, respectively.
Equipment rental
HERC currently operates what we believe to be the third largest equipment rental business in North
America and the fourth largest general equipment rental business in each of France and Spain, each
based upon revenues. HERC rents a broad range of earthmoving equipment, material handling
equipment, aerial and electrical equipment, air compressors, pumps, small tools, compaction
equipment and construction-related trucks. HERC also derives revenue from the sale of new
equipment and consumables.
Our worldwide equipment rental operations generated $630.2 million and $1.2 billion in revenues and
$71.9 million and $87.8 million in income before income taxes during the six months ended June 30,
2005 and the year ended December 31, 2004, respectively.
55
Corporate history
We are a successor to corporations that have been engaged in the automobile and truck rental and
leasing business since 1918 and the equipment rental business since 1965. We were incorporated in
Delaware in 1967. Ford first acquired an ownership interest in us in 1987. Previously, we were a
subsidiary of UAL Corporation (formerly Allegis Corporation), which had acquired our outstanding
capital stock from RCA Corporation in 1985.
We became a wholly owned subsidiary of Ford as a result of a series of transactions in 1993 and
1994. We continued as a wholly owned subsidiary of Ford until April 1997. In 1997, we completed a
public offering of approximately 50.6% of a class of our common stock, which represented
approximately 19.1% of the economic interest in us, and listed that class of common stock for
trading on the New York Stock Exchange. In March 2001, Ford FSG, Inc., or FSG, an indirect
wholly owned subsidiary of Ford that then owned an approximate 81.5% economic interest in us,
acquired all of our outstanding common stock that it did not already own for $35.50 per share, or
approximately $735 million. As a result of FSGs acquisition, our common stock ceased to be traded
on the New York Stock Exchange. However, because certain of our debt securities were sold through
public offerings, we continue to file periodic reports under the Securities Exchange Act of 1934,
or the Exchange Act. In 2003, FSG was dissolved, and the shares of our common stock owned by FSG
were distributed to Ford and Ford Holdings LLC. In February 2004, Ford Holdings LLC became the
sole owner of all of our common stock.
Strengths
Premier brand
The Hertz brand is one of the most recognized brands in the world. In 2005, it was listed in
Business Week
s 100 Most Valuable Global Brands the only travel company brand to appear on the
list. The Hertz brand has appeared on this list every year since the lists inception in 2001.
Moreover, our customer surveys indicate that in the United States, Hertz is the car rental brand
most associated with the highest quality service. This is consistent with numerous published
best-in-class car rental awards that we have won, both in the United States and internationally,
over many years.
We have sought to support our reputation for quality and customer service in car rental through a
variety of innovative service offerings, such as our customer loyalty program (Hertz #1 Club), our
global expedited rental program (Hertz #1 Club Gold), our one-way rental program
(Rent-it-Here/Leave-it-There), our national-scale luxury rental program (Prestige Collection) and
our in-car navigational services (Hertz NeverLost). In 2004, participants in our Hertz #1 Club
Gold program accounted for approximately 41% of our car rental transactions worldwide.
Similarly, we have positioned HERC as a leader in equipment rental through the development of an
extensive national account program with leading construction and industrial companies, a
substantial investment in sales force automation and the operation of a diverse fleet consisting of
what we believe are comparatively young units of rental equipment.
We believe that our premier brand and management of our business in support of the brand have
allowed us to create and maintain a loyal customer base and often command premium pricing in car
and equipment rental. These strengths in turn have helped us to earn a pre-tax profit in every
year since our incorporation in 1967.
56
Leading market positions
In the United States, we maintain the overall leading market share of airport rentals where we have
company-operated locations. We had approximately a 30% market share in 2004, by revenues, at the
180 largest U.S. airports where we operate, over nine percentage points of share higher than that
of the closest competing brand. We also believe that we have the largest airport market share, by
revenues on a collective basis, at the 68 major airports in Europe where we have company-operated
locations and which provide data regarding car rental concessionaire activity. We are actively
expanding in the U.S. off-airport car rental market, and we believe that we already hold the second
largest share in this growing market. HERC is, by revenues, the third largest equipment rental
company in North America. Additionally, we believe HERC is the fourth largest general equipment
rental company in each of France and Spain. Our leading market positions allow us to have first
choice of car rental facilities at many airports and to spread our fixed costs in both car and
equipment rental across a larger base.
Global footprint and business mix
We and our independent licensees and associates accept car rental reservations for approximately
7,400 locations in more than 150 countries. We are the only car rental company that has an
extensive network of company-operated car rental locations both in the United States and in all the
major markets of Europe. We also have a company-operated car rental presence in Canada, Australia,
New Zealand, Brazil, Puerto Rico and the U.S. Virgin Islands. Because of our extensive worldwide
presence, we are capable of capitalizing on business from global tourist and travel organizations
and multinational corporations. We believe that our extensive worldwide ownership of our
operations (including a 95% company-owned fleet in the United States) gives us an advantage in the
areas of service consistency, strategic pricing, cost control, fleet utilization and yield
management.
In addition to our global footprint, our mix of business segments (car and equipment rental), car
rental markets served (airport and off-airport) and customers (business and leisure in car rental,
and construction, industrial and government in equipment rental) adds stability to our business.
Proprietary strategic information systems and centralized administration
We conducted almost 30 million rental transactions in 2004 across our two business segments. We
utilize information technology comprehensively in the areas of reservations, fleet and rate
management, customer relations, sales and marketing, as well as all aspects of billing, finance,
accounting and other reporting systems. We have made substantial investments in our proprietary
information systems to permit us to conduct our business efficiently and effectively. We believe
that our significant investment in technology enhances our ability to offer innovative services.
Our use of technology has helped us to concentrate our reservations, customer relations,
information systems, billing, collection and accounting functions for the United States and Europe,
along with certain administrative functions for our other corporate operations, at centers in
Oklahoma and Ireland. This centralization, which we believe is unique in the car and equipment
rental industries, permits us to provide superior end-to-end service to customers, spread
administrative costs over a larger base and maintain a high level of control over our
geographically dispersed operations.
Travel industry partnerships
We have established business partnerships with over 60 airlines, railroads and hotel chains
worldwide, as well as with American Express and leading traditional and on-line travel agencies,
such as Expedia and, in Europe, Opodo. These partnerships include such features as promotion of
each others products, reservation transfer programs and discounts for each others customers. In
some cases, we have exclusive relationships with our partners. For example, we are the exclusive
car rental partner for the American
57
Automobile Association (AAA), North Americas largest motoring and leisure travel organization, as
well as for a number of key motor clubs in Europe and Australia. In Europe, we have also been the
sole rental car marketing partner of Air France since 1989 and the sole rental car business partner
of Ryanair, a leading European low cost carrier, since 1998. We believe that our global network of
business partnerships is unmatched by any of our competitors. Our business partnerships generate
significant car rental revenue and expand our customer base.
Depth of management team
We have an experienced management team with extensive knowledge of the car and equipment rental
industries. We have employed our ten most senior members of management for an average of 26 years.
Our regional and country managers also have a great deal of experience, having been employed by us
for an average of 19 years and having been in their current positions for an average of seven
years. Our management team has a strong track record of maintaining pre-tax profitability through
economic cycles and successful and disciplined execution of our business strategy.
Flexible business model
While our businesses are capital-intensive, most of that capital is invested in revenue-earning
cars and equipment. Most of our cars are subject to repurchase arrangements with their
manufacturers, and well organized, liquid markets exist for any used cars that are not subject to
repurchase arrangements, as well as for used equipment. We believe these repurchase agreements and markets would permit us to rapidly decrease or increase our fleet size if necessary.
Our collective bargaining agreements and
other labor arrangements in North America and, except as limited by law, in Europe also permit us
to rapidly reduce the size of our workforce if conditions warrant that action. Moreover, a
significant portion of our debt obligations are short-term. As a consequence, we can adjust
substantial portions of our cost structure in reaction to external events much more quickly than
companies in industries characterized by large investments in illiquid fixed assets or rigid
labor arrangements, including many other types of travel service providers.
Strategy
Our strategy in both the global car rental and equipment rental markets is as follows.
Maintain and strengthen our premier car rental brand and differentiated product offering
The Hertz brand is recognized for its superior customer service and a differentiated, premium
product. We intend to maintain our position as a premier company through an intense focus on
service quality and product innovation. In the past we have been the first in the car rental
market to offer such innovations as our customer loyalty program (Hertz #1 Club), our global
expedited rental program (Hertz #1 Club Gold), our national-scale premium rental program (Prestige
Collection) and our in-car navigational services (Hertz NeverLost). We believe that continuing to
invest consistently in our core business activities, particularly in the areas of brand,
facilities, technology and training, will help us maintain our premium product and pricing.
Continue the disciplined pursuit of off-airport growth opportunities
We intend to expand our presence in the off-airport portion of the car rental market in the United
States and internationally. Our plan in the United States, where we believe the off-airport rental
market is nearly as large as the airport rental market, is to increase our penetration of insurance
replacement rentals through the establishment of a national footprint, as well as to increase our
share of other off-airport business and leisure rentals. By leveraging our existing operations, we
believe we will increase our penetration of this market and generate attractive margins over time.
Internationally, our objective is to
58
increase our penetration of the replacement market by focused sales efforts and a modest expansion
of our off-airport network. We believe that a larger presence in off-airport rental will increase
the stability, across both seasons and economic cycles, of our financial performance and diversify
our revenue base.
Capitalize on emerging trends and underserved markets in the European car rental business
We believe that the European market presents airport rental growth opportunities resulting from the
growth of European air travel due in large part to the emergence and increasing penetration of high
volume, low cost air carriers and the increasing use of the Internet throughout the continent. We
intend to take advantage of these market changes in part through the business partnerships we
maintain with travel providers in Europe, including Air France, Ryanair, American Express Travel,
Carlson Wagonlit, Expedia and Opodo. Beyond airport rentals, our other anticipated growth areas in
Europe include light commercial vehicle rentals and special fleet rentals, as well as rental
programs for the intra-European and long-haul leisure markets. We also intend to continue to
develop business opportunities with other key intermediaries in non travel-related markets such as
automobile clubs, road-side assistance providers, leasing companies and car manufacturers.
Continue to gain share in the fragmented North American equipment rental market
We believe that our diverse and comparatively young rental fleet, emphasis on customer service,
large national account base and prominent brand name will position us to continue gaining market
share in the fragmented North American equipment rental market. After several years of declining
nonresidential construction markets, an ongoing recovery that began in 2004 is leading to improved
industry pricing and volume in North America.
We are capitalizing on these improving markets by expanding our equipment rental footprint with the
planned addition of 7 to 9 new locations in North America in 2005. These additional locations
would bring our total North American equipment rental location count
to over 265 by the end of the
year. We also intend to continue to increase our presence in the specialty equipment and general
rental markets by offering more pumps, power generation and small equipment and renovating
locations to facilitate walk-in business. We believe that our expansion plans, coupled with our
emphasis on a high quality, well-maintained fleet, will continue to drive our growth in the
equipment rental business.
Business segments
Our business consists of two significant segments: car rental and equipment rental. In
addition, corporate and other includes general corporate expenses, as well as other business
activities, such as claim management services. Set forth below are charts showing revenues and
operating income (loss), by segment, and revenues by geographic area, all for the year ended
December 31, 2004, and revenue earning equipment at cost, net, as of December 31, 2004 (the
majority of our international operations are in Europe).
59
|
|
|
(1)
|
|
Operating income (loss) represents pre-tax income (loss) before interest expense and
minority interest. The above chart excludes an operating loss of $15.5 million attributable
to our Corporate and Other activities.
|
For further information on our business segments, including financial information for the six
months ended June 30, 2005 and the year ended December 31, 2004, see note 9 to the notes to our
unaudited condensed consolidated financial statements and note 11 to the notes to our audited
consolidated financial statements included in this prospectus.
Worldwide car rental
Industry overview
The principal business of the car rental industry is to rent cars to individuals needing them for
short-term business or leisure use. The industry is significantly influenced by general economic
conditions as well as developments in the travel industry and particularly in airline passenger
traffic. Historically, the car rental industry has also been highly seasonal, with many industry
participants annual profitability being linked to activities in the second and third quarters when
leisure and business travel peak. The industry derives the majority of its revenues from car
rentals and the sale of ancillary products such as loss or
60
damage waivers, fueling charges and rental-related insurance. The car rental industry is most
developed in the United States and Europe, but it exists in some form in many other countries in
the world.
Market data indicates that total annual U.S. rental revenues for the car rental industry exceeded
$17 billion in 2004, with rentals by airline travelers taking place at or near airports, or
airport rentals, constituting a slightly larger portion of the market than rentals taking place
at central business district and suburban locations, or off-airport rentals. We believe that in
recent years, industry revenues from off-airport rentals have grown faster than revenues from
airport rentals, with U.S. airport rental revenues only recently returning to levels seen before
the 2001 recession and the September 11, 2001 terrorist attacks.
After the United States, Western Europe is the region where the car rental industry generates the
most revenue. Within Europe the largest markets are Germany, France and the United Kingdom. Based
on market data, we estimate that total rental revenues for the car rental industry in Europe in
2003, the most recent year for which this information is available, exceeded $10 billion in the
nine countries (France, Germany, Italy, the United Kingdom, Spain, the Netherlands, Switzerland,
Belgium and Luxembourg) where we have company-operated rental locations and $2 billion in eight
other countries (Greece, Ireland, Portugal, Sweden, Norway, Denmark, Austria and Finland) where our
brand is present through our licensees.
In addition to Europe, we have company-operated rental locations in Australia, Canada, New Zealand,
Puerto Rico, Brazil and the U.S. Virgin Islands. The structure of those markets is generally
similar to that of the United States or Europe.
Car rental companies often acquire cars pursuant to fleet repurchase programs established by
automobile manufacturers. Under these programs, the manufacturers agree to repurchase cars at a
specified price during established repurchase periods, subject to certain car condition and mileage
requirements. Repurchase prices under repurchase programs are based on either (i) a predetermined
percentage of original car cost and the month in which the car is returned or (ii) the original
capitalized cost less a set daily depreciation amount. Repurchase programs limit rental companies
residual risk with respect to cars purchased under the programs and allow them to determine
depreciation expense in advance. With the exception of Enterprise we believe that most cars in the
fleets of the principal car rental industry participants in the United States and Europe, have been
purchased under repurchase programs. We borrow extensively to obtain the capital we need to
purchase cars.
Competition among car rental industry participants is intense and frequently takes the form of
price competition. In the year ended December 31, 2004 and the first six months of 2005, most
major U.S. and European car rental brands have experienced downward pressure on pricing, as
measured by the time and mileage rates they charge.
Operations
We rent a wide variety of makes and models of cars, nearly all of which are the current or previous
years models. We generally accept reservations only for a class of vehicles, although we accept
reservations for specific makes and models of luxury vehicles in our Prestige Collection luxury
rental program. We rent cars on a daily, weekend, weekly, monthly or multi-month basis, with
rental charges computed on a limited or unlimited mileage rate, or on a time rate plus a mileage
charge. Our rates vary at different locations depending on local market conditions and other
competitive and cost factors. While cars are usually returned to the locations from which they are
rented, we also allow one-way rentals from and to certain locations. In addition to car rentals
and licensee fees, we generate revenues from reimbursements by customers of airport concession fees
and vehicle licensing costs; fueling charges; and charges for ancillary customer products and
services such as supplemental equipment (child seats and ski racks), loss
or collision damage waiver, theft protection, liability and personal accident/effects insurance
coverage, Hertz NeverLost navigation systems and satellite radios.
61
Our company-operated rental locations are those through which we, or an agent of ours, rent cars
that we own. We have company-operated rental locations both in the United States and
internationally. The international car rental operations that generated the highest volumes of
business from our company-operated locations for the year ended December 31, 2004 were, in
descending order of revenues, those conducted in France, Germany, Italy, the United Kingdom,
Australia, Canada and Spain.
As of
June 30, 2005, we had over 1,750 staffed rental locations in the United States, of which
approximately one-quarter were airport locations and three-quarters were off-airport locations, and
we regularly rented cars from over 850 other locations that were not staffed. As of June 30, 2005,
we had over 900 staffed rental locations internationally, of which approximately one-fifth were
airport locations and four-fifths were off-airport locations, and we regularly rented cars from
over 75 other locations that were not staffed. We believe that our extensive U.S. and
international network of company-operated locations contributes to the consistency of our service,
cost control, fleet utilization, yield management, competitive pricing and ability to offer one-way
rentals.
In order to operate airport rental locations, we have obtained concession or similar leasing,
licensing or permitting agreements or arrangements, or concessions, granting us the right to
conduct a car rental business at all major, and many other, airports with regularly scheduled
passenger service in each country where we have company-operated rental locations, except for
airports where our licensees operate rental locations and Orlando International Airport in Orlando,
Florida. Our concessions were obtained from the airports operators, which are typically
governmental bodies or authorities, following either negotiation or bidding for the right to
operate a car rental business there. The terms of an airport concession typically require us to
pay the airports operator concession fees based upon a specified percentage of the revenue we
generate at the airport, subject to a minimum annual fee. Under some concessions, we must also pay
fixed rent for terminal counters or other leased properties and facilities. Some concessions are
for a fixed length of time, while others create operating rights and payment obligations that, as a
formal matter, are terminable at any time.
The terms of our concessions typically do not forbid, and in a few instances actually require, us
to seek reimbursement from customers of concession fees we pay; however, in certain jurisdictions
the law limits or forbids our doing so. Where we are required or permitted to seek such
reimbursement, it is our general practice to do so. The number of car rental concessions available
at airports varies considerably, but except at small, regional airports, it is rarely less than
four. At Orlando International Airport, where we do not have a car rental concession, we operate
an airport rental location at a facility located near the airports premises and pick up and drop
off our customers at the airport under a permit from the airports operator. Certain of our
concession agreements require the consent of the airports operator in connection with changes in
ownership of us, including this offering and the concurrent offering of Equity Units. See
Relationship with Ford.
In the United States, we had an almost 30% market share, by revenues in 2004, at the 180 largest
airports where we operated, over nine percentage points of share higher than that of the closest
competing brand. Out of approximately 150 major airports in the European countries in which we had
company-operated rental locations in 2004, 68 provided us data regarding car rental concessionaire
activity. Based upon this data, we believe that we were the largest airport car rental company,
measured by aggregate airport rental revenues in 2004, at those 68 airports, taken together. For a
further description of our competitors, market share and competitive position see Competition
below.
62
At our major airport rental locations, as well as at some smaller airport and off-airport
locations, customers participating in our Hertz #1 Club Gold program are able to rent vehicles in
an expedited manner. In the United States, participants in Hertz #1 Club Gold often bypass the
rental counter entirely and proceed directly to their vehicles upon arrival at our facility. In
2004, rentals by Hertz #1 Club Gold members accounted for approximately 41% of our worldwide rental
transactions. We believe the Hertz #1 Club Gold program provides a significant competitive
advantage to us, particularly among frequent travelers, and we have, through travel industry
relationships, targeted such travelers for participation in the program.
In addition to our airport locations, we operate off-airport locations offering car rental services
to a variety of customers. Our off-airport rental customers include people wishing to rent cars
closer to home for business or leisure purposes, as well as those needing to travel to or from
airports. Our off-airport customers also include people who have been referred by, or whose rental
costs are being wholly or partially reimbursed by, insurance companies following accidents in which
their cars were damaged, those expecting to lease cars that are not yet available from their
leasing companies and those needing cars while theirs are being repaired or are temporarily
unavailable for other reasons; we sometimes call these customers replacement renters. At many of
our off-airport locations we will provide pick-up and delivery services in connection with rentals.
When compared to our airport rental locations, an off-airport rental location typically deals with
more types of customers, uses smaller rental facilities with fewer employees, conducts pick-up and
delivery services and deals with replacement renters using specialized systems and processes. In
addition, on average, off-airport locations generate fewer transactions per period than airport
locations. At the same time, though, our airport and off-airport rental locations employ common
car fleets, are supervised by common country, regional and local area management, use many common
systems and rely on common maintenance and administrative centers. Moreover, airport and
off-airport locations, outside the area of replacement rentals, are supported by a common
commercial sales force, benefit from many common marketing activities and have many of the same
customers. As a consequence, we regard both types of locations as aspects of a single, unitary,
car rental business.
We believe that an expanded presence in the off-airport portion of the rental market can provide us
several benefits. First, it can provide customers utilizing air transportation a more convenient
network of rental locations to facilitate their travel to and from airports. Second, it can give
us a more balanced revenue profile by reducing our reliance on airport rental volume and the
attendant risk from external events that may disrupt air travel. Third, replacement rental volume
is far less seasonal than that of other business and leisure rentals, which permits efficiencies in
both fleet and manpower planning. Finally, cross selling opportunities exist for us to promote
off-airport rentals among frequent airport Hertz #1 Club renters and, conversely, to promote
airport rentals to off-airport renters. In view of those benefits, along with our belief that our
market share for off-airport rentals is generally smaller than our market share for airport
rentals, we have been seeking to expand our participation in the off-airport rental market, both in
the United States and internationally.
Over the two year period ended December 31, 2004, we increased the number of our staffed
off-airport rental locations in the United States by approximately 50% to over 1,200 locations. We
currently intend to add more U.S. off-airport locations in 2005 and subsequent years until we find
that we, together with our licensees, can serve market areas covered by nearly all national
insurance companies and regional insurance companies of significant size, which we believe could
eventually involve as many as 2,000 locations. In the United States during 2004, approximately
one-third of our rental revenues at off-airport locations were related to replacement rentals.
After we increase our market presence as discussed above, the proportion of replacement rental
revenues would be expected to increase. As we move forward, our selection of areas in which to
expand our U.S. off-airport presence will be based upon a combination of
63
factors, including the concentration of target insurance company policy holders, car dealerships,
auto body shops and other clusters of retail and commercial activity. We also intend to increase
the number of our staffed off-airport rental locations internationally on the basis of similar
criteria, although on a percentage basis we expect the increases to be considerably smaller.
In addition to renting cars, in Germany we also rent trucks of 8 tons and over, including truck
tractors. Our truck rental fleet in Germany consists of over 2,500 vehicles, all of which have
been purchased under repurchase programs similar to those under which we purchase program cars. We
believe we are a market leader in truck rental in Germany. Also, we are engaged in a car leasing
business in Brazil. Our truck rental activities in Germany and our car leasing activities in
Brazil are treated as part of our international car rental business in our consolidated financial
statements.
Customers
In almost all cases, when we rent a car, we rent it directly to an individual who is identified in
a written rental agreement that we prepare. Except when we are accommodating someone with a
disability, the individual to whom we rent a car is required to have a valid drivers license and
meet other rental criteria (including minimum age and creditworthiness requirements) that vary on
the basis of location and type of rental. Our rental agreements permit only the individual renting
the car, people signing additional authorized operator forms and certain defined categories of
other individuals (such as fellow employees, garage attendants and in some cases spouses or
domestic partners) to operate the car.
Customers rent cars from us for many reasons. Customers who rent from us for business purposes
include those who require cars in connection with the commercial activities of companies and
individuals or the activities of governments and other organizations. We also include replacement
renters in the category of business renters. Most business renters rent cars from us on terms that
we have negotiated with their employers or other entities with which they are associated. Those
terms may differ substantially from the terms on which we rent cars to the general public. We have
negotiated arrangements relating to car rental with many large businesses, governments and other
organizations, including more than half of the Fortune 500 companies.
Our insurance replacement rental business principally involves our rental of cars to individuals
who are referred, and whose rental charges are wholly or partially paid or reimbursed, by insurance
companies. In order to obtain these renters, we must establish agreements with the referring
insurers establishing the relevant rental terms, including the arrangements made for billing and
payment. In the United States, we have identified approximately 170 insurance companies, ranging
from local or regional carriers to large, national companies, as our target insurance replacement
market. While we believe that many of these companies are receptive to our replacement rental
offerings, our share of this market, as a percentage of estimated rental revenue volume in 2004,
has only been approximately 6%. We believe that gaps in the geographic coverage of our U.S.
off-airport locations, as well as exclusive dealing arrangements that certain insurers have entered
into with Enterprise, have limited our growth, particularly with national-scale companies. With
the expected closing of many geographic coverage gaps in 2005, we believe our share of the U.S.
insurance replacement market, both with national insurance companies and generally, will grow. We
already are an approved supplier of replacement rental services for seven of the ten largest
national insurance companies in the United States, based on their estimated car rental needs.
Customers who rent from us for leisure purposes include not only individual travelers booking
vacation travel rentals with us but also people whose rentals have been arranged through tour
operators. Leisure rentals, taken as a whole, are longer in duration and generate more revenue per
transaction than do business rentals, although some types of business rentals, such as rentals to
replace temporarily unavailable cars, have a long average duration. Business rentals and leisure
rentals have different
64
characteristics and place different types of demands on our operations. We believe that
maintaining an appropriate balance between business and leisure rentals is important to the
profitability of our business and the consistency of our operations.
We conduct active sales and marketing programs to attract and retain customers. Our commercial
sales force calls on companies and other organizations whose employees and associates need to rent
cars for business purposes, as well as on membership associations, tour operators, travel companies
and other groups whose members, participants and customers rent cars for either business or leisure
purposes. A specialized sales force calls on companies with replacement rental needs, including
insurance and leasing companies and car dealers. We also advertise our car rental offerings
through a variety of traditional media, such as television and newspapers, direct mail and the
Internet. In addition to advertising, we also conduct a variety of other forms of marketing and
promotion, including travel industry business partnerships and press and public relations
activities. For a discussion of our business partnerships, see StrengthsTravel industry
partnerships.
With rare exceptions, individuals renting cars from us are personally obligated to pay all amounts
due under their rental agreements. They typically pay us with a charge, credit or debit card
issued by a third party, although certain customers use a Hertz charge account that we have
established for them, usually as part of an agreement between us and their employer. All amounts
charged to Hertz charge accounts established in the United States, and approximately 96% of amounts
charged to Hertz charge accounts established by our international subsidiaries, are billed directly
to a company or other organization or are guaranteed by a company. The remainder of the amounts
charged to Hertz charge accounts established by our international subsidiaries are billed to
individual account holders whose obligations are not guaranteed by the holders employer or any
other organization associated with the account holder. We also issue rental vouchers and
certificates that may be used to pay rental charges for mostly prepaid and tour-related rentals.
In addition, when the law requires us to do so, we will rent on a cash basis.
In the United States for the year ended December 31, 2004, 87% of our car rental revenues came from
customers who paid us with third-party charge, credit or debit cards, while 7% came from customers
using Hertz charge accounts, 2% from cash transactions and 4% from customers using rental vouchers
or another method of payment. In our international operations for the year ended December 31,
2004, 49% of our car rental revenues came from customers who paid us with third-party charge,
credit or debit cards, while 47% came from customers using Hertz charge accounts and 4% came from
customers who paid using cash, rental vouchers or another method of payment. For the year ended
December 31, 2004, we had a bad debt expense of 0.1% of car rental revenues for our U.S. operations
and 0.2% of car rental revenues for our international operations.
Mix of Business
We believe it is useful for an understanding of our business to know the proportion of our car
rental revenues or transactions that came from a particular type of customer (business or leisure)
or arose at a particular type of rental location (airport or off-airport). The table below sets
forth, for the year ended December 31, 2004, the percentages of rental revenues and rental
transactions derived in our U.S. and international operations from business and leisure rentals and
from airport and off-airport rentals.
65
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U.S.
|
|
International
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Type of Rental
|
|
Revenues
|
|
Transactions
|
|
Revenues
|
|
Transactions
|
By Customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
47
|
%
|
|
|
50
|
%
|
|
|
46
|
%
|
|
|
51
|
%
|
Leisure
|
|
|
53
|
|
|
|
50
|
|
|
|
54
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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By Location:
|
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|
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|
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|
Airport
|
|
|
81
|
%
|
|
|
82
|
%
|
|
|
56
|
%
|
|
|
57
|
%
|
Off-airport
|
|
|
19
|
|
|
|
18
|
|
|
|
44
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reservations
Customers may make reservations for the rental of cars from us and our licensees and associates
worldwide through travel agents and third-party travel websites, many of which in turn utilize
computerized reservations systems, also known as global distribution systems, or GDSs, operated
by third parties to make the reservations with us. There are currently four principal GDSs, and we
have contracts with all of them providing that we will process reservation requests made through
the GDSs. Historically, GDSs were owned and operated by airlines and were subject to extensive
regulation along with their airline owners. In recent years, however, airlines have greatly
reduced their ownership interests in GDSs and the level of regulation to which GDSs are subject has
substantially decreased. One of the four principal GDSs is now owned by Cendant Corporation, which
also owns car rental companies that compete with us.
In major countries, including the United States and all other countries with company-operated
locations, customers may also reserve cars for rental from us and our licensees worldwide through
local, national or toll-free telephone calls to our reservations centers, directly through our
rental locations or, in the case of replacement rentals, through proprietary automated systems
serving the insurance industry. Additionally, we accept reservations for rentals from us and our
licensees worldwide through our websites. Our websites, which also allow customers to enroll in
loyalty programs, obtain copies of bills for past transactions and obtain information about our
rental offerings, have grown significantly in importance as a reservations channel in recent years.
Third-party travel websites have also grown in importance to us as a reservations channel.
For the year ended December 31, 2004, approximately 37% of the worldwide reservations we accepted
came through travel agents using GDSs, while 37% came through phone calls to our reservations
centers, 18% through our websites, 6% through third-party websites and 2% through local booking
sources.
Fleet
We believe we are one of the largest private sector purchasers of new cars in the world. During
2004, we operated a peak rental fleet in the United States of approximately 300,000 cars and a
combined peak rental fleet in our international operations of approximately 160,000 cars, in each
case exclusive of our licensees fleets. During the year 2004, our approximate average holding
period for a rental car was 11 months in the United States and eight months in our international
operations.
We acquire, subject to availability, a majority of our cars pursuant to various fleet repurchase
programs established by automobile manufacturers. Under these programs, automobile manufacturers
agree to repurchase cars at a specified price during established repurchase periods, subject to
certain car condition and mileage requirements. Repurchase prices under the repurchase programs
are based on either (i) a
66
predetermined percentage of original car cost and the month in which the car is returned or (ii)
the original capitalized cost less a set daily depreciation amount. These repurchase programs
limit our residual risk with respect to cars purchased under the programs. For these reasons, cars
purchased by car rental companies under repurchase programs are sometimes referred to by industry
participants as non-risk, buy-back or program cars. Conversely, those cars not purchased
under repurchase programs for which the car rental company is exposed to residual risk are
sometimes referred to as risk cars. During 2004, program cars as a percentage of all cars
purchased by our U.S. operations and international operations were approximately 85% and 74%,
respectively.
Over the five years ended December 31, 2004, approximately 55% of the cars acquired by us for our
U.S. car rental fleet, and approximately 29% of the cars acquired by us for our international
fleet, were manufactured by Ford and its subsidiaries. During 2004, approximately 41% of the cars
acquired by us domestically were manufactured by Ford and its subsidiaries and approximately 32% of
the cars acquired by us for our international fleet were manufactured by Ford and its subsidiaries,
which represented the largest percentage of any automobile manufacturer in that year. The
percentage of the fleet which we purchase from Ford may decline as a
result of recent changes to the vehicle supply arrangements between us. See note 12
to the notes to our condensed consolidated financial statements included in this prospectus and
Relationship with Ford.
Purchases of cars are financed through funds provided from operations and by active and ongoing
global borrowing programs. See Managements discussion and analysis of financial condition and
results of operationsLiquidity and capital resources.
We maintain automobile maintenance centers at certain airports and in certain urban and off-airport
areas, providing maintenance facilities for our rental fleet. Many of these facilities, which
include sophisticated car diagnostic and repair equipment, are accepted by automobile manufacturers
as eligible to perform and receive reimbursement for warranty work. Collision damage and major
repairs are generally performed by independent contractors.
We dispose of risk cars, as well as program cars that have for any reason become ineligible for
manufacturer repurchase, through a variety of disposition channels, including auctions, brokered
sales, sales to wholesalers and, to a lesser extent and primarily in the United States, sales at
retail through a network of 36 company-operated car sales locations dedicated exclusively to the
sale of used cars from our rental fleet. During the year ended December 31, 2004, we sold
approximately 71% of our cars that were not repurchased by manufacturers at auction, while 23% were
sold at retail and 6% through other channels.
Licensees
We believe that our extensive worldwide ownership of rental operations contributes to the
consistency of our high-quality service, cost control, fleet utilization, yield management,
competitive pricing and our ability to offer one-way rentals. However, in certain predominantly
smaller U.S. and international markets, we have found it more efficient to utilize independent
licensees, which rent cars that they own. Our licensees operate locations in over 140 countries,
including most of the countries where we have company-operated locations. As of December 31, 2004,
we owned 95% of all the cars in the combined company-owned and licensee-owned fleets in the United
States.
We believe that our licensee arrangements are important to our business because they enable us to
offer expanded national and international service and a broader one-way rental program. Licenses
are issued principally by our wholly owned subsidiaries, Hertz System, Inc., or System, and Hertz
International,
Ltd. under franchise arrangements to independent licensees and affiliates who are engaged in the
car rental business in the United States and in many foreign countries.
67
Licensees generally pay fees based on a percentage of their revenues or the number of cars they
operate. The operations of all licensees, including the purchase and ownership of vehicles, are
financed independently by the licensees, and we do not have any investment interest in the
licensees or their fleets. System licensees share in the cost of our U.S. advertising program,
reservations system, sales force and certain other services. Our European and other international
licensees also share in the cost of our reservations system, sales force and certain other
services. In return, licensees are provided the use of the Hertz brand name, management and
administrative assistance and training, reservations through our reservations channels, the Hertz
#1 Club program, our one-way rental program and other services. In addition to car rental, certain
licensees outside the United States engage in car leasing, chauffeur-driven rentals and renting
camper vans under the Hertz name.
System licensees ordinarily are limited as to transferability without our consent and are
terminable by us only for cause or after a fixed term. Licensees in the United States may
generally terminate for any reason on 90 days notice. In Europe and certain other international
jurisdictions, licensees typically do not have early termination rights. Initial license fees or
the price for the sale to a licensee of a company-owned location may be payable over a term of
several years. We continue to issue new licenses and, from time to time, to purchase licensee
businesses.
Competition
In the United States, our principal car rental industry competitors are Cendant Corporation, or
Cendant, which operates the Avis and Budget brands, Vanguard Car Rental USA Group, or
Vanguard, which operates the National Car Rental and Alamo brands, Dollar Thrifty Automotive
Group, Inc., or DTG, which operates the Dollar and Thrifty brands, and Enterprise, which
operates the Enterprise brand.
The following table lists our market share, and the market shares of our principal competitors and
their licensees, at the 180 largest U.S. airports at which we have company-operated locations,
determined on the basis of revenue reported to the airports operators on which concession or
off-airport permit fees are determined for the indicated years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand Name
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
Hertz
|
|
|
29.6
|
%
|
|
|
29.0
|
%
|
|
|
29.2
|
%
|
|
|
29.5
|
%
|
|
|
28.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avis
|
|
|
20.2
|
|
|
|
21.2
|
|
|
|
22.3
|
|
|
|
21.6
|
|
|
|
22.3
|
|
Budget
|
|
|
10.2
|
|
|
|
10.4
|
|
|
|
10.8
|
|
|
|
11.8
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cendant Brands(1)
|
|
|
30.4
|
|
|
|
31.6
|
|
|
|
33.1
|
|
|
|
33.4
|
|
|
|
34.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National/Alamo
(Vanguard
Brands)(2)
|
|
|
19.8
|
|
|
|
20.8
|
|
|
|
21.8
|
|
|
|
25.4
|
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
7.7
|
|
|
|
7.4
|
|
|
|
7.2
|
|
|
|
7.1
|
|
|
|
6.9
|
|
Thrifty
|
|
|
4.5
|
|
|
|
4.4
|
|
|
|
3.2
|
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DTG Brands
|
|
|
12.2
|
|
|
|
11.8
|
|
|
|
10.4
|
|
|
|
8.9
|
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
|
|
|
6.0
|
|
|
|
5.0
|
|
|
|
3.9
|
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2.0
|
|
|
|
1.8
|
|
|
|
1.6
|
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Cendant acquired all of the outstanding shares of Avis Group Holdings, Inc. on March 1,
2001 and acquired substantially all of the domestic assets of the vehicle rental business of
Budget Group, Inc. on November 22, 2002.
|
|
(2)
|
|
National and Alamo have been owned by Vanguard since October 2003.
|
68
The off-airport rental market has historically been dominated by Enterprise. We now have a
significant presence in the off-airport market, and Cendants brands also are present. Many
smaller companies also operate in the airport and off-airport rental markets.
In Europe, in addition to us, the principal pan-European participants in the car rental industry
are Avis Europe plc (which is not an affiliate of Cendant but is operating under a license from
Cendant), which operates the Avis and Budget brands, and Europcar, a subsidiary of Volkswagen
AG, which operates the Europcar brand. In certain European countries, there are also other
companies and brands with substantial market shares, including Sixt AG (operating the Sixt brand)
in Germany, Vanguard (operating both the National Car Rental and Alamo brands) in the United
Kingdom and Germany, and through franchises in Spain, Italy and France, and Enterprise (operating
the Enterprise brand) in the United Kingdom, Ireland and Germany. In every European country,
there are also national, regional or other, smaller companies operating in the airport and
off-airport rentals markets. Apart from Enterprise-branded operations, all of which Enterprise
owns, the other major car rental brands are present in European car rental markets through a
combination of company-operated and franchisee- or licensee-operated locations.
Competition among car rental industry participants is intense and frequently takes the form of
price competition. For the year ended December 31, 2004 and the first six months of 2005, most
U.S. and European car rental companies have experienced downward pressure on pricing, as measured
by the time and mileage rates they charged.
Our competitors, some of which may have access to substantial capital, may seek to compete
aggressively on the basis of pricing. To the extent that we match downward competitor pricing, it
could have an adverse impact on our results of operations. To the extent that we are not willing
to match or remain within a reasonable competitive margin of our competitors pricing, it could
also have an adverse impact on our results of operations as we may lose market share. As a result
of increased use of the Internet as a travel distribution channel, pricing transparency is
continually increasing. See Risk factorsRisks related to our businessWe face intense
competition that may lead to downward pricing, which could have a material adverse impact on our
results of operations. We believe, however, that the prominence and service reputation of the
Hertz brand and our extensive worldwide ownership of car rental operations provide us with a
competitive advantage.
Equipment rental
Industry overview
We, through HERC, operate an equipment rental business in the United States, Canada, France and
Spain. It is difficult for us to estimate the size of the equipment rental market in any of those
countries. Market data indicate that equipment rental in North America generates revenues of
approximately $25.0 billion annually, but the part of the rental industry dealing with equipment of
the type HERC rents is considerably smaller than that. Other market data indicate that the
equipment rental industries in France and Spain generate roughly $4.0 billion and $2.0 billion in
annual revenues, respectively, although the portions of those markets in which HERC competes are
smaller.
69
In each of the four countries where HERC operates, the equipment rental industry is highly
fragmented, with large numbers of companies operating on a regional or local scale. The number of
industry participants operating on a national scale is, however, much smaller. HERC is one of the
principal national-scale industry participants in each of the four countries where it operates.
HERC operations in North America represented 88% of our worldwide equipment rental revenues in
2004. We believe HERC is the third largest equipment rental company in North America.
Additionally, we believe HERC is the fourth largest general equipment rental company in both France
and Spain, in each case based on revenues. HERC has operated in the United States for over 40
years.
Operations
HERCs principal business is the rental of equipment. HERC offers a broad range of equipment for
rental; major categories include earthmoving equipment, material handling equipment, aerial and
electrical equipment, air compressors, pumps, small tools, compaction equipment and
construction-related trucks.
HERCs comprehensive line of equipment enables it to supply equipment to a wide range of customers
from local contractors to large industrial plants. Also, larger companies, particularly those with
industrial plant operations, now require single source vendors, not only for equipment rental, but
also for management of their total equipment needs. These arrangements may include maintenance of
the tools and equipment they own, supplies and rental tools for their labor force and custom
management reports. HERC supports this through its dedicated in-plant operations, tool trailers
and plant management systems.
As of
June 30, 2005, HERC operated 344 equipment rental branches, of
which 232 were in 40 states
within the United States, 31 were in Canada, 70 were in France and 11 were in Spain. HERC
generated same store, year over year revenue growth for each of the last eight quarters. HERCs
rental locations generally are situated in industrial or commercial zones. A growing number of
locations have highway or major thoroughfare visibility. The typical location is approximately
three acres in size, though smaller in Europe, and includes a customer service center, an equipment
service area and storage facilities for equipment. The branches are built or conform to the
specifications of the HERC prototype branch, which stresses efficiency, safety and environmental
compliance. Most branches have stand-alone maintenance and fueling facilities and showrooms.
HERC slightly contracted its North American network of equipment rental locations during the 2001
to 2003 downturn in construction activities. In the last six months of 2005, we expect HERC will
add 4 to 6 new locations in major markets across the United States. In this expansion, we expect
HERC will incur non-fleet start-up costs of approximately $900,000 per location and additional
fleet acquisition costs over an initial twelve-month period of approximately $4.9 million per
location.
Starting in 2004, HERC began to broaden its equipment line in the United States to include
equipment with an acquisition cost of under $10,000 per unit, ranging from air compressors and
generators down to small tools and accessories, in order to supply customers who are local
contractors with a greater proportion of their overall equipment rental needs. As of June 30,
2005, these activities, referred to as general rental activities, were conducted at over 30% of
HERCs U.S. rental locations. Before it begins to conduct general rental activities at a location,
HERC typically renovates the location to make it more appealing to walk-in customers and adds staff
and equipment in anticipation of subsequent demand.
HERCs operations generated revenues of $630.2 million and $1,162.0 million, respectively, for the
six months ended June 30, 2005, and for the year ended December 31, 2004.
70
Customers
HERCs customers consist predominantly of commercial accounts and represent a wide variety of
industries, such as construction, petrochemical, automobile manufacturing, railroad, power
generation and shipbuilding. Serving a number of different industries enables HERC to reduce its
dependence on a single or limited number of customers in the same business and somewhat reduces the
seasonality of HERCs revenues and its dependence on construction cycles. HERC primarily targets
customers in medium to large metropolitan markets. For the year ended December 31, 2004, no
customer of HERC accounted for more than 1.5% of its revenues. Of HERCs 2004 revenues, roughly
half were derived from customers operating in the construction industry, while the remaining
revenues were derived from rentals to industrial, governmental and other types of customers.
Unlike in our car rental business, where we enter into rental agreements with the people who will
operate the cars being rented, HERC ordinarily enters into a rental agreement with the legal entity
typically a company, governmental body or other organization
seeking to rent a piece of HERCs
equipment. Moreover, unlike in our car rental business, where our cars are normally picked up and
dropped off by customers at our rental locations, HERC delivers much of its rental equipment to its
customers job sites and retrieves the equipment from the job sites when the rentals conclude.
Finally, unlike in our car rental business, HERC extends many of its customers credit terms to pay
for rentals. Thus, for the year ended December 31, 2004, 91% of HERCs revenues came from
customers who were invoiced by HERC for rental charges, while 4% came from customers paying with
third-party charge, credit or debit cards and 5% came from customers who paid with cash or used
another method of payment. For the year ended December 31, 2004, HERC had bad debt expense of 0.6%
of its revenues.
Fleet
HERC acquires its equipment from a variety of manufacturers. The equipment is typically new at the
time of acquisition and is not subject to any repurchase program. The per-unit acquisition costs
of units of rental equipment in HERCs fleet vary from over $200,000 to under $100. As of December
31, 2004, the average per-unit acquisition cost (excluding small equipment purchased for less than
$5,000 per unit) for HERCs fleet in North America was $33,000. As of June 30, 2005, the average
age of HERCs rental fleet in North America was 29 months. We believe that this fleet is
significantly younger than that of any of HERCs principal competitors in North America. A younger
fleet gives HERC a competitive advantage in North America by providing the latest technology,
safety features and operator use enhancements. Having a younger fleet also reduces maintenance
expenses, which generally escalate as equipment ages. As of June 30, 2005, the average age of
HERCs rental fleet in Europe was 36 months, which we believe is roughly comparable to the average
ages of the fleets of HERCs principal European competitors.
HERC disposes of its used equipment through a variety of channels, including negotiated sales to
customers and other third parties, sales to wholesalers, brokered sales and auctions. Ancillary to
its rental business, HERC is also a dealer of certain brands of new equipment in the United States
and Canada, and sells consumables such as gloves and masks at many of its rental locations.
Competition
HERCs competitors in the equipment rental industry range from other large national companies to
small regional and local businesses. In each of the four countries where HERC operates, the
equipment rental industry is highly fragmented, with large numbers of companies operating on a
regional or local scale. The number of industry participants operating on a national scale is,
however, much smaller. HERC is one of the principal national-scale industry participants in each
of the four countries where it operates. In
71
North America, the other principal national-scale industry participants are United Rentals, Inc.
and RSC Equipment Rental, a division of the Atlas Copco Group. A number of individual Caterpillar
dealers also participate in the North American equipment rental market. In France, the other
principal national-scale industry participants are Loxam, Kiloutou and Laho, while in Spain, the
other principal national-scale industry participants are GAM, Euroloc and Vilatel.
Competition in the equipment rental industry is intense, and it often takes the form of price
competition. HERCs competitors, some of which may have access to substantial capital, may seek to
compete aggressively on the basis of pricing. To the extent that HERC matches downward competitor
pricing, it could have an adverse impact on our results of operations. To the extent that HERC is
not willing to match competitor pricing, it could also have an adverse impact on our results of
operations due to lower rental volume. The industry experienced a number of years of downward
pricing, measured by the per-period rates charged by rental companies, starting in 2001. During
the year 2004 and the first six months of 2005, we believe industry pricing, measured in the same
way, improved in North America but continued to decline in France and Spain, albeit at a reduced
rate. In addition, we expect most industry participants to experience modest increases in
equipment costs in the next twelve months. We believe that HERCs competitive success has been
primarily the product of its 40 years of experience in the equipment rental industry, its systems
and procedures for monitoring, controlling and developing its branch network, its capacity to
maintain a comprehensive rental fleet and its established national accounts program.
Other operations
Our wholly owned subsidiary, Hertz Claim Management Corporation, or HCM, provides claim
administration services to us and, to a lesser extent, to outside customers. These services
include investigating, evaluating, negotiating and disposing of a wide variety of claims, including
third party, first party, bodily injury, property damage, general liability and product liability,
but not the underwriting of risks. HCM conducts business at nine regional offices in the United
States. Separate subsidiaries of ours conduct similar operations in eight countries in Europe.
Seasonality
Car rental and equipment rental are seasonal businesses, with decreased levels of business in
the winter months and heightened activity during the spring and summer. To accommodate increased
demand, we increase our available fleet and staff during the second and third quarters. As
business demand declines, fleet and staff are decreased accordingly. However, certain operating
expenses, including minimum concession fees, rent, insurance and administrative overhead, remain
fixed and cannot be adjusted for seasonal demand. See Risk factorsRisks related to our
businessOur business is highly seasonal, and a disruption in rental activity during our peak
season could materially adversely affect our results of operations. The following tables set
forth this seasonal effect by providing quarterly revenues and income (loss) before income taxes
and minority interest for each of the quarters in the year ended December 31, 2004 and the quarters
ended March 31, 2005 and June 30, 2005.
72
Employees
As of June 30, 2005, we employed approximately 32,900 persons, consisting of 23,300 persons in
our U.S. operations and 9,600 persons in our international operations. Labor contracts covering
the terms of employment of approximately 7,750 employees in the United States are presently in
effect under 146 active contracts with local unions, affiliated primarily with the International
Brotherhood of Teamsters and the International Association of Machinists (AFL-CIO). Labor
contracts covering approximately 830 of these employees will expire during the remainder of 2005.
We may be unable to negotiate new labor contracts on terms advantageous to us or without labor
interruptions. Employee benefits in effect include group life insurance, hospitalization and
surgical insurance, pension plans and a defined contribution plan. Overseas employees are covered
by a wide variety of union contracts and governmental regulations affecting, among other things,
compensation, job retention rights and pensions. We have had no material work stoppage as a result
of labor problems during the last 10 years. We believe our labor relations to be good.
In addition to the employees referred to above, we employ a substantial number of temporary
workers, and engage outside services, as is customary in the industry, principally for the
non-revenue movement of the rental fleet between locations.
73
Three types of generally insurable risks arise in our operations:
|
|
|
legal liability arising from the operation of our vehicles (vehicle liability);
|
|
|
|
|
legal liability to members of the public from causes other than the operation of
our vehicles (general liability); and
|
|
|
|
|
risk of property damage.
|
In addition, we offer optional liability insurance and other products providing insurance coverage,
which create additional risk exposures for us. Our risk of property damage is also increased when
we waive the provisions in our rental contracts that hold a renter responsible for damage or loss
under an optional loss or damage waiver that we offer. We bear these and other risks, except to
the extent the risks are transferred through insurance or contracts.
In many cases we self-insure our risks or reinsure risks through a wholly owned insurance
subsidiary. We mitigate our exposure to large liability losses by maintaining excess insurance
coverage, subject to deductibles, through unaffiliated carriers with respect to our domestic
operations and our car rental operations in Europe. For our international operations outside
Europe and for HERCs operations in Europe, we maintain some liability insurance coverage with
unaffiliated carriers. We also maintain property insurance with unaffiliated insurance carriers
domestically and in Europe, subject to deductibles.
Third-party liability
In our domestic operations, we are required by applicable financial responsibility laws to maintain
insurance against legal liability for bodily injury (including death) or property damage to third
parties arising from the operation of our vehicles (sometimes called vehicle liability) in
stipulated amounts. In most places, we satisfy those requirements by qualifying as a self-insurer,
a process that typically involves governmental filings and demonstration of financial
responsibility, which sometimes requires the posting of a bond or other security. In the remaining
places, we obtain an insurance policy from an unaffiliated insurance carrier and indemnify the
carrier for any amounts paid under the policy. As a result of such arrangements, we bear economic
responsibility for domestic vehicle liability, except to the extent we successfully transfer such
liability to others through insurance or contractual arrangements.
For our car rental operations in Europe, we have established two wholly owned insurance
subsidiaries, Probus Insurance Company Europe Limited, or Probus, a direct writer of insurance
domiciled in Ireland, and Hertz International RE Limited, or HIRE, a reinsurer organized in
Ireland. In most European countries with company-operated locations, we purchase from Probus the
vehicle liability insurance required by law, and Probus reinsures the risks under such insurance
with HIRE. In the remaining countries in Europe with company-operated locations, we obtain the
coverage from unaffiliated insurance carriers, which reinsure their risks with HIRE. Thus, as with
our domestic operations, we bear economic responsibility for vehicle liability in our European car
rental operations, except to the extent that we transfer such liability to others through insurance
or contractual arrangements. For our international operations outside Europe and for HERCs
operations in Europe, we maintain some form of vehicle liability insurance coverage. The nature of
such coverage, and our economic responsibility for covered losses, varies considerably. In all
cases, though, we believe the amounts and nature of the coverage we obtain is adequate in light of
the respective potential hazards.
Both domestically and in our international operations, from time to time in the course of our
business we become legally responsible to members of the public for bodily injury (including death)
or property damage arising from causes other than the operation of our vehicles (sometimes known as
general
liability). As with vehicle liability, we bear economic responsibility for general liability
losses, except to the extent we transfer such losses to others through insurance or contractual
arrangements.
74
To mitigate our exposure to large vehicle and general liability losses domestically and in our car
rental operations in Europe, we maintain excess insurance coverage with unaffiliated insurance
carriers against such losses to the extent they exceed $10 million per occurrence (for occurrences
domestically before December 15, 2002, and in Europe before December 15, 2003, to the extent such
losses exceeded $5 million per occurrence). The coverage provided under such excess insurance
policies is limited to $185 million for the current policy year ending December 14, 2005 (for
occurrences between December 15, 2003 and December 14, 2004, $150 million; for occurrences between
December 15, 2002 and December 14, 2003, $675 million; and for occurrences between December 15,
2001 and December 14, 2002, $725 million). For our international operations outside Europe and for
HERCs operations in Europe, we also maintain liability insurance coverage with unaffiliated
carriers in such amounts as we deem adequate in light of the respective potential hazards, where
such insurance is obtainable on commercially reasonable terms.
Our domestic rental contracts, both for car rental and for equipment rental, typically provide that
the renter will indemnify us for liability arising from the operation of the rented vehicle or
equipment (for car rentals in certain places, though, only to the extent such liability exceeds the
amount stipulated in the applicable financial responsibility law). In addition, many of HERCs
domestic rental contracts require the renter to maintain liability insurance under which HERC is
entitled to coverage. While such provisions are sometimes effective to transfer liability to
renters, their value to us, particularly in cases of large losses, may be limited. The rental
contracts used in our international operations sometimes contain provisions relating to insurance
or indemnity, but they are typically more limited than those employed in our domestic operations.
In our domestic car rental operations, we offer an optional liability insurance product, Liability
Insurance Supplement, or LIS, that provides vehicle liability insurance coverage substantially
higher than state minimum levels to the renter and other authorized operators of a rented vehicle.
LIS coverage is provided under excess liability insurance policies issued by an unaffiliated
insurance carrier, the risks under which are reinsured with a subsidiary of ours. As a consequence
of those reinsurance arrangements, rental customers purchases of LIS do not reduce our economic
exposure to vehicle liability. Instead, our exposure to vehicle liability is potentially increased
when LIS is purchased, because insured renters and other operators may have vehicle liability
imposed on them in circumstances and in amounts where the applicable rental agreement or applicable
law would not, absent the arrangements just described, impose vehicle liability on us.
In both our domestic car rental operations and our company-operated international car rental
operations in many countries, we offer an optional product or products providing insurance
coverage, or PAI/PEC coverage, to the renter and the renters immediate family members traveling
with the renter for accidental death or accidental medical expenses arising during the rental
period or for damage or loss of their property during the rental period. PAI/PEC coverage is
provided under insurance policies issued by unaffiliated carriers or, in some parts of Europe, by
Probus, and the risks under such policies either are reinsured with HIRE or another subsidiary of
ours or are the subject of indemnification arrangements between us and the carriers. Rental
customers purchases of PAI/PEC coverage create additional risk exposures for us, since we would
not typically be liable for the risks insured by PAI/PEC coverage if that coverage had not been
purchased.
Our offering of LIS and PAI/PEC coverage in our domestic car rental operations is conducted
pursuant to limited licenses or exemptions under state laws governing the licensing of insurance
producers. In our international car rental operations, our offering of PAI/PEC coverage
historically has not been regulated;
75
however, in the countries of the European Union and Australia, the regulatory environment for
insurance intermediaries is rapidly evolving, and we cannot assure you either that we will be able
to continue offering PAI/PEC coverage without substantial changes in its offering process or in the
terms of the coverage or that such changes, if required, would not render uneconomic our continued
offering of the coverage. Due to a change in law in Australia, we have suspended the sales of
certain insurance products there; we are currently exploring ways to resume offering those
products.
Provisions on our books for self-insured vehicle and other liability losses are made by charges to
expense based upon evaluations of estimated ultimate liabilities on reported and unreported claims.
As of June 30, 2005 and December 31, 2004, this liability was estimated at $355.3 million and
$391.7 million, respectively, for our combined domestic and international operations.
Damage to our property
We bear the risk of damage to our property, unless such risk is transferred through insurance or
contractual arrangements.
To mitigate our risk of large, single-site property damage losses domestically and in Europe, we
maintain property insurance with unaffiliated insurance carriers, generally with a per-occurrence
deductible of $3.0 million domestically and $2.5 million in Europe. For our international
operations outside Europe, we also maintain property insurance coverage with unaffiliated carriers
in such amounts as we deem adequate in light of the respective hazards, where such insurance is
available on commercially reasonable terms.
Our rental contracts typically provide that the renter is, subject to certain exceptions,
responsible for damage to or loss (including loss through theft) of rented vehicles or equipment.
We generally offer an optional rental product, known in various countries as loss damage waiver,
collision damage waiver, theft protection or accident excess reduction, under which we waive or
limit our right to make a claim for such damage or loss. This product is not regulated as
insurance, but it is subject to specific laws in roughly half of the domestic jurisdictions where
we operate.
Collision damage costs and the costs of stolen or unaccounted-for vehicles and equipment, along
with other damage to our property, are charged to expense as incurred.
Other risks
To manage other risks associated with our businesses, or to comply with applicable law, we purchase
other types of insurance carried by business organizations, such as workers compensation and
employers liability (for which we, through contracts with insurers domestically, bear the risk of
the first $5 million of loss from any occurrence), commercial crime and fidelity, performance bonds
and directors and officers liability insurance, from unaffiliated insurance companies in amounts
deemed by us to be adequate in light of the respective hazards, where such coverage is obtainable
on commercially reasonable terms. In certain cases, such insurance is obtained under policies
procured by Ford.
Governmental regulation and environmental matters
Throughout the world, we are subject to numerous types of governmental controls, including
those relating to prices and advertising, privacy and data protection, currency controls, labor
matters, charge card operations, insurance, environmental protection, used car sales and licensing.
76
Environmental
The environmental legal and regulatory requirements applicable to our operations pertain to (i) the
operation and maintenance of cars, trucks and other vehicles, such as heavy equipment, buses and
vans; (ii) the ownership and operation of tanks for the storage of petroleum products, including
gasoline, diesel fuel and used oil; and (iii) the generation, storage, transportation and disposal
of waste materials, including used oil, vehicle wash sludge and waste water. We have made, and
will continue to make, expenditures to comply with applicable environmental laws and regulations.
The use of cars and other vehicles is subject to various governmental requirements designed to
limit environmental damage, including those caused by emissions and noise. Generally, these
requirements are met by the manufacturer, except in the case of occasional equipment failure
requiring repair by us. Measures are taken at certain locations in states that require the
installation of Stage II Vapor Recovery equipment to reduce the loss of vapor during the fueling
process.
We operate approximately 400 underground tanks and 1,700 aboveground tanks in the United States and
Canada to store petroleum products, and we believe our tanks are maintained in material compliance
with environmental regulations, including federal and state financial responsibility requirements
for corrective action and third-party claims due to releases. Our compliance program for our tanks
is intended to ensure that (i) the tanks are properly registered with the state or other
jurisdiction in which the tanks are located and (ii) the tanks have been either replaced or
upgraded to meet applicable leak detection and spill, overfill and corrosion protection
requirements.
We are also incurring and providing for expenses for the investigation and cleanup of contamination
from the discharge of petroleum substances at our owned and leased properties, as well as
contamination at other locations at which our wastes have reportedly been identified. The amount
of any such expenses or related natural resource damages for which we may be held responsible could
be substantial. The probable losses that we expect to incur for such matters have been accrued,
and those losses are reflected in our consolidated financial statements. As of June 30, 2005,
December 31, 2004 and December 31, 2003, the aggregate amounts accrued for environmental
liabilities reflected in our consolidated balance sheet in Accrued liabilities were $5.2 million,
$5.4 million and $5.9 million, respectively. The accrual represents the estimated cost to study
potential environmental issues at sites deemed to require investigation or clean-up activities, and
the estimated cost to implement remediation actions, including on-going maintenance, as required.
Cost estimates are developed by site. Initial cost estimates are based on historical experience at
similar sites and are refined over time on the basis of in-depth studies of the site. For many
sites, the remediation costs and other damages for which we ultimately may be responsible cannot be
reasonably estimated because of uncertainties with respect to factors such as our connection to the
site, the materials there, the involvement of other potentially responsible parties, the
application of laws and other standards or regulations, site conditions, and the nature and scope
of investigations, studies, and remediation to be undertaken (including the technologies to be
required and the extent, duration, and success of remediation).
With respect to cleanup expenditures for the discharge of petroleum substances at our owned or
leased properties, we have received reimbursement, in whole or in part, from certain states that
maintain underground storage tank petroleum cleanup reimbursement funds. Such funds have been
established to assist tank owners in the payment of cleanup costs associated with releases from
registered tanks. With respect to off-site locations at which our wastes have reportedly been
identified, we have been and continue to be required to contribute to cleanup costs due to strict
joint and several cleanup liability imposed by the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 and comparable state superfund statutes.
77
Environmental legislation and regulations and related administrative policies have changed rapidly
in recent years, both in the United States and in other countries. There is a risk that
governmental environmental requirements, or enforcement thereof, may become more stringent in the
future and that we may be subject to legal proceedings brought by government agencies or private
parties with respect to environmental matters. In addition, with respect to cleanup of
contamination, additional locations at which wastes generated by us may have been released or
disposed, and of which we are currently unaware, may in the future become the subject of cleanup
for which we may be liable, in whole or part. Further, at airport-leased properties, we may be
subject to environmental requirements imposed by airports that are more restrictive than those
obligations imposed by environmental regulatory agencies. Accordingly, while we believe that we
are in substantial compliance with applicable requirements of environmental laws, there can be no
assurance that our future environmental liabilities will not be material to our consolidated
financial position, results of operations or cash flows.
Dealings with renters
In the United States, car and equipment rental transactions are generally subject to Article 2A of
the Uniform Commercial Code, which governs leases of tangible personal property. Car rental is
also specifically regulated in more than half of the states of the United States. The subjects of
state regulation include the methods by which we advertise, quote and charge prices, the
consequences of failing to honor reservations, the terms on which we deal with vehicle loss or
damage (including the protections we provide to renters purchasing loss or damage waivers) and the
terms and method of sale of the optional insurance coverage that we offer. Some states (including
California, New York, Nevada and Illinois) regulate the price at which we may sell loss or damage
waivers, and many state insurance regulators have authority over the prices and terms of the
optional insurance coverage we offer. See Risk management for further discussion regarding the
loss or damage waivers and optional insurance coverage that we offer renters. Internationally,
regulatory regimes vary greatly by jurisdiction, but they do not generally prevent us from dealing
with customers in a manner similar to that employed in the United States.
Both in the United States and internationally, we are subject to increasing regulation relating to
customer privacy and data protection. In general, we are limited in the uses to which we may put
data that we collect about renters, including the circumstances in which we may communicate with
them. In addition, we are generally obligated to take reasonable steps to protect customer data
while it is in our possession. Our failure to do so could subject us to substantial legal
liability or seriously damage our reputation.
Changes in regulation
Changes in government regulation of our business have the potential to alter our business
practices, or our profitability, materially. Depending on the jurisdiction, those changes may come
about through new legislation, the issuance of new regulations or changes in the interpretation of
existing laws and regulations by a court, regulatory body or governmental official. Sometimes
those changes may have not just prospective but also retroactive effect; this is particularly true
when a change is made through reinterpretation of laws or regulations that have been in effect for
some time. Moreover, changes in regulation that may seem neutral on their face may have either
more or less impact on us than on our competitors, depending on the circumstances. Recent or
potential changes in law or regulation that affect us relate to insurance intermediaries, customer
privacy and data security and rate regulation, each as described under Risk factorsRisks related
to our businessChanges in the U.S. and foreign legal and regulatory environment that impact our
operations, including laws and regulations relating to the insurance products we sell, customer
privacy, data security and insurance rates, could disrupt our business, increase our expenses or
otherwise materially adversely affect our results of operations.
78
In addition, our operations, as well as those of our competitors, also could be affected by
any limitation in the fuel supply or by any imposition of mandatory allocation or rationing
regulations. We are not aware of any current proposal to impose such a regime in the United States
or internationally. Such a regime could, however, be quickly imposed if there were a serious
disruption in supply for any reason, including an act of war, terrorist incident or other problem
affecting petroleum supply, refining, distribution or pricing.
Properties
We operate car rental locations at or near airports and in central business districts and
suburban areas of major cities in North America (the United States, including Puerto Rico and the
U.S. Virgin Islands, and Canada), Europe (France, Germany, Italy, the United Kingdom, Spain, the
Netherlands, Switzerland, Belgium and Luxembourg), the Pacific (Australia and New Zealand) and
Brazil, as well as retail used car sales locations in the United States and France. We operate
equipment rental locations in North America (the United States and Canada) and Europe (France and
Spain). We also operate headquarters, sales offices and service facilities in the foregoing
countries in support of our car rental and equipment rental businesses, as well as small car rental
sales offices and service facilities in a select number of other countries in Europe and Asia.
Of such locations, fewer than 10% are owned by us. The remaining locations are leased or operated
under concessions from governmental authorities and private entities. Those leases and concession
agreements typically require the payment of minimum rents or minimum concession fees and often also
require us to pay or reimburse operating expenses; to pay additional rent, or concession fees above
guaranteed minimums, based on a percentage of revenues or sales arising at the relevant premises;
or to do both. See note 10 to the notes to our audited consolidated financial statements included
in this prospectus.
We own four major facilities in the vicinity of Oklahoma City, Oklahoma at which reservations for
our car rental operations are processed, global information systems are serviced and major domestic
and international accounting functions are performed. We also have an owned reservation and
financial center near Dublin, Ireland, at which we have centralized our European car rental
reservation and customer relations and accounting functions, and we lease a reservation center in
Saraland (Mobile County), Alabama to supplement the capacity of our Oklahoma City car rental
reservation center. We maintain our executive offices in an owned facility in Park Ridge, New
Jersey, and lease a European headquarters office near London, England.
Legal proceedings
On August 1, 2002,
Jennifer Myers, an individual and on behalf of all others similarly
situated, v. The Hertz Corporation
was filed in the United States District Court for the Eastern
District of New York. The complaint alleges a nationwide opt-in collective action on behalf of
all Senior Station Managers, Station Managers and B Station Managers employed by us throughout
the United States, contesting their exempt classification and seeking payment of overtime
compensation under the federal Fair Labor Standards Act and seeks attorneys fees and costs. The
complaint also contains a subclass for all such managers employed in New York for alleged
violations of state labor laws. Plaintiffs have not yet been permitted to obtain a nationwide
opt-in, as discovery has been thus far limited to the location where the plaintiffs are employed
in an effort by the court to determine the viability of a nationwide action. Our motion for
summary judgment was denied in March 2005, and further motion practice with respect to class
certification has now commenced.
79
On August 28, 2003,
Naomi R. Henderson, individually and on behalf of all others similarly
situated, v. The Hertz Corporation
was commenced in the Superior Court of New Jersey, Essex County.
Henderson
purported to be a class action on behalf of all persons who purchased optional insurance
products in the State of New Jersey or in other states from or through us at times that we did not
have licenses to sell such insurance. The plaintiff sought unspecified compensatory damages,
punitive damages, attorneys fees, interest and costs and an order declaring such sales of
insurance to be illegal, thereby voiding or making voidable the relevant contracts. In January
2004, our motion to dismiss was granted and an order of dismissal was thereafter entered. The
plaintiff has appealed the dismissal, and that appeal has now been briefed, argued and submitted to
the Superior Court of New Jersey, Appellate Division for a decision.
On December 22, 2003,
Stephen Moore, on behalf of himself and all others similarly situated, v. The
Hertz Corporation
was commenced in the Circuit Court of the Thirteenth Judicial Circuit of the
State of Florida, in and for Hillsborough County.
Moore
purported to be a class action on behalf
of persons who rented vehicles from us in Florida and were allegedly overcharged for the recovery
of a tire and battery solid waste management fee and the recovery of registration fees for the
issuance of Florida license plates. Similar lawsuits were separately commenced by the same
plaintiff against Avis Rent A Car System Inc. and Budget Rent A Car System, Inc. In February 2004,
the plaintiff filed an amended class action complaint which alleged that, in addition to the
initial causes of action, we deceptively collected an improper federal excise tax on frequent
flyer mileage awards to class members. The plaintiff sought unspecified damages for the alleged
improper and wrongful acts, attorneys fees, costs and injunctive relief. We answered the amended
complaint and discovery commenced. In January 2005, we filed a motion for summary judgment and the
plaintiff filed a revised motion for class certification. In June 2005, our motion for summary
judgment was granted and the plaintiffs revised motion for class certification was denied. A
final judgment was thereafter entered. In July 2005, the plaintiff filed a notice of appeal.
On March 15, 2004,
Jose M. Gomez, individually and on behalf of all other similarly situated
persons, v. The Hertz Corporation
was commenced in the 214
th
Judicial District Court of
Nueces County, Texas.
Gomez
purports to be a class action filed alternatively on behalf of all
persons who were charged a Fuel and Service Charge, or FSC, by us or all Texas residents who were
charged a FSC by us. The complaint alleged that the FSC is an unlawful penalty and that,
therefore, it is void and unenforceable. The plaintiff seeks compensatory damages, with the return
of all FSC paid or the difference between the FSC and our actual costs, disgorgement of unearned
profits, attorneys fees and costs. In response to various motions by us, the plaintiff has filed
two amended complaints which scaled back the putative class from a nationwide class to a class of
all Texas residents who were charged a FSC by us or by our Corpus Christi licensee. A new cause of
action was also added for conversion for which the plaintiff is seeking punitive damages. After
some limited discovery, we filed a motion for summary judgment in December 2004. That motion was
denied in January 2005. More extensive discovery will now commence.
On November 18, 2004,
Keith Kochner, individually and on behalf of all similarly situated persons,
v. The Hertz Corporation
was commenced in the District Court in and for Tulsa County, State of
Oklahoma. As with the
Gomez
case
, Kochner
purports to be a class action, this time on behalf of
Oklahoma residents who rented from us and incurred our FSC. The petition alleged that the
imposition of the FSC is a breach of contract and amounts to an unconscionable penalty or
liquidated damages in violation of Article 2A of the Oklahoma Uniform Commercial Code. The
plaintiff seeks compensatory damages, with the return of all FSC paid or the difference between the
FSC and our actual costs, disgorgement of unearned profits, attorneys fees and costs. In March
2005, the trial court granted our motion to dismiss the action but also granted the plaintiff the
right to replead. In April 2005, the plaintiff filed an amended class action petition, newly
alleging that our FSC violates the Oklahoma Consumer Protection Act and that we have
been unjustly enriched, and again alleging that our FSC is unconscionable under Article 2A of the
Oklahoma Uniform Commercial Code. In May 2005, we filed a motion to dismiss the amended class
action petition.
80
On June 29, 2005,
Rene Potkay and Sylvia W. Thompson on behalf of themselves and all others
similarly situated, v. The Hertz Corporation
was commenced in the Circuit Court of the Twentieth
Judicial Circuit in and for Lee County, Florida.
Potkay
purports to be a class action on behalf of
all consumers who rented a vehicle from us in Florida and all consumers whose rental of a vehicle
from us was initiated outside of Florida but who resided in Florida at the time of the rental who
were allegedly charged a rate which is higher than the rate quoted at the time of reservation. The
complaint alleges that our invoicing actions constitute a breach of contract and violate the
Florida Deceptive and Unfair Trade Practices Act. The plaintiffs are seeking unspecified monetary
damages, costs and disbursements, including reasonable attorneys fees and an injunction requiring
us to cease our current methods of unfair competition and to modify our invoicing practices so as
not to be unfair or fraudulent. We have not yet answered the complaint.
In addition, we are currently a defendant in numerous actions and have received numerous claims on
which actions have not yet been commenced for bodily injury, including death, and property damage,
referred to as PL/PD, arising from the operation of motor vehicles and equipment rented from us
and our licensees. In the aggregate, we can be expected to expend material sums to defend and
settle PL/PD actions and claims or to pay judgments resulting from them.
Among the PL/PD pending actions against us are a total of 134 actions filed in Mississippi and
Texas on behalf of 4,927 plaintiffs seeking damages for silicosis, which the plaintiffs allegedly
sustained from the use of equipment (primarily air compressors) rented from HERC. The complaints
name HERC as one of approximately 88 co-defendants (including the manufacturers of the equipment
allegedly rented from HERC). PL/PD claims and actions are provided for within our PL/PD program.
In February 2005, the Hazardous Materials Division of the San Diego Department of Environmental
Health, or the Department, indicated in writing that it was preparing to bring an administrative
action against us due to an alleged noncompliance related to secondary containment testing for
certain underground storage tanks located at one of our facilities. The Department verbally
proposed a monetary penalty of approximately $113,000. We have responded to the Department in an
effort to commence settlement discussions concerning the alleged violations.
We believe that we have meritorious defenses in the foregoing matters and will defend ourselves
vigorously.
In addition to the foregoing, various legal actions, claims and governmental inquiries and
proceedings are pending or may be instituted or asserted in the future against us and our
subsidiaries. Litigation is subject to many uncertainties, and the outcome of the individual
litigated matters is not predictable with assurance. It is possible that certain of the actions,
claims, inquiries or proceedings, including those discussed above, could be decided unfavorably to
us or any of our subsidiaries involved. Although the amount of liability with respect to these
matters cannot be ascertained, potential liability in excess of related accruals is not expected to
materially affect our consolidated financial position, results of operations or cash flows.
81
Management
Set forth below are the names, ages and number of years employed by our company as of June 30,
2005 and current positions of our executive officers and current and proposed directors. Upon the
closing of this offering, we expect to appoint additional directors to our Board of Directors. See
Composition of the Board of Directors after this offering below.
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Number of
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years
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employed
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Name
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Age
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by us
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Position
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Craig R. Koch
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58
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34
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Chairman of the Board and Chief
Executive Officer and Director
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Paul J. Siracusa
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60
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36
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Executive Vice President and Chief
Financial Officer and Director
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Joseph R. Nothwang
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58
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29
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Executive Vice President and President,
Vehicle Rental and Leasing, The Americas
and Pacific
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Brian J. Kennedy
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63
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21
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Executive Vice President, Sales
& Marketing
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Gerald A. Plescia
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49
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25
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Executive Vice President and President,
HERC
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Michel Taride
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49
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19
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Executive Vice President and President,
Hertz Europe Limited
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Harold E. Rolfe
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47
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6
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Senior Vice President, General
Counsel & Secretary
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Irwin Pollack
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49
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26
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Senior Vice President, Employee Relations
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Charles L. Shafer
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61
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39
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Senior Vice President, Quality
Assurance & Administration
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Claude B. Burgess III
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50
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25
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Senior Vice President,
Technology & e-Business
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Richard J. Foti
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59
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26
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Controller
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Robert H. Rillings
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64
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43
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Treasurer
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Donat R. Leclair
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53
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-
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Director
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Greg C. Smith
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53
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-
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Director
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Michael E. Bannister
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55
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-
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Director
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82
Mr. Koch was elected Chairman of the Board and Chief Executive Officer on January 1, 2004. From
January 2000 until December 31, 2003 he served as President and Chief Executive Officer. From
August 1993 until December 1999 he served as President and Chief Operating Officer. From February
1988 until August 1993 he served as Executive Vice President and President of North America Car
Rental Operations. From May 1987 to February 1988 he served as a President and Chief Operating
Officer. From October 1983 until May 1987 he served as Executive Vice President and General
Manager of our Car Rental Division. From March 1980 until October 1983 he served as Vice President
and General Manager. Mr. Koch has been a director on our Board of Directors since June 1994 and
previously served as a director from May 1987 to July 1993 and from October 1983 to September 1985.
Mr. Siracusa has served as Executive Vice President and Chief Financial Officer since August 1997.
From January 1996 to August 1997 he served as Vice President, Finance and Chief Financial Officer,
Hertz International Ltd., based in England. He served as Staff Vice President and Controller
Worldwide Rent A Car from August 1994 until December 1995 and has served in various other financial
positions with us since 1969. Mr. Siracusa has been a director on our Board of Directors since
January 2004.
Mr. Nothwang has served as Executive Vice President and President of Vehicle Rental and Leasing,
The Americas and Pacific, since January 2000. From September 1995 until December 1999 he was
Executive Vice President and General Manager, U.S. Car Rental Operations. From August 1993 until
August 1995 he was Vice President and General Manager U.S. Car Rental Operations. Prior to that he
was Division Vice President, Region Operations since 1985. He served in various other operating
positions with us between 1976 and 1985.
Mr. Kennedy has served as Executive Vice President, Sales & Marketing since February 1988. From
May 1987 through January 1988 he served as Executive Vice President and General Manager of our Car
Rental Division, prior to which, from October 1983, he served as Senior Vice President, Marketing.
Mr. Plescia has served as Executive Vice President and President, HERC since July 1997. From
September 1991 until June 1997 he served as Division Vice President, Field Operations, HERC and has
served in various other operations and financial positions with us since 1979.
Mr. Taride has served as Executive Vice President and President, Hertz Europe Limited since January
2004. From January 2003 until December 2003 he served as Vice President and President, Hertz
Europe Limited. From April 2000 until December 2002 he served as Vice President and General
Manager, Rent A Car, Hertz Europe Limited. Form July 1998 to March 2000, he was General Manager,
Rent A Car France and HERC Europe. Previously, he served in various other operating positions in
Europe from 1985 to 1998.
Mr. Rolfe has served as Senior Vice President and General Counsel since October 1998 and as
Secretary since May 1999. Previously he served as Vice President and General Counsel, Corporate
Property Investors, New York, New York from June 1991 until September 1998.
Mr. Pollack has served as Senior Vice President, Employee Relations since January 2005. From July
1999 until December 2004 Mr. Pollack served as Division Vice President, Employee Relations, Vehicle
Rental and Leasing, The Americas and Pacific. He served in various other Employee Relations
positions with us from 1978 to 1999.
83
Mr. Shafer has served as Senior Vice President, Quality Assurance & Administration, since January
2003. From February 1998 until December 2002 he had served as Vice President and President, Hertz
Europe
Limited. From January 1991 until January 1998 he was Division Vice President, Western Region Rent
A Car Operations. He served in various other operating positions with us from 1966 to 1990.
Mr. Burgess has served as Senior Vice President, Technology and e-Business since February 2003.
From March 2000 until January 2003 he served as Vice President, Technology and e-Business. From
May 1997 until February 2000 he served as Staff Vice President, Acquisitions and Diversified
Businesses. Prior to that he served as Division Vice President, Florida Rent A Car Operations from
September 1993 until May 1997. He served in various other operating positions, both domestically
and internationally, from 1979 to 1997.
Mr. Foti has served as Controller since July 1997. Previously he served as Staff Vice President,
Internal Audit from February 1990 until June 1997. Previously he served in various other financial
positions with us since 1978.
Mr. Rillings has served as Treasurer since November 1986. Previously he served in various other
positions with us since 1961.
Mr. Leclair has served as Executive Vice President and Chief Financial Officer, Ford Motor Company
since August 2003. Mr. Leclair has been employed by Ford or its subsidiaries in one or more
additional capacities during the past five years.
Mr. Smith has served as Executive Vice President, Ford Motor Company (President, The Americas)
since April 2004. Mr. Smith has been employed by Ford or its subsidiaries in one or more
additional capacities during the past five years.
Mr. Bannister has served as Group Vice President, Ford Motor Company (Chairman and Chief Executive
Officer, Ford Motor Credit Company) since April 2004. Mr. Bannister has been employed by Ford or
its subsidiaries in one or more additional capacities during the past five years.
Composition of the Board of Directors after this offering
All directors are elected annually to serve until the next annual meeting of stockholders and
until their successors have been elected and qualified. Prior to the consummation of this
offering, we intend to restructure our Board of Directors. Our Board of Directors will consist of
directors. We intend to appoint additional directors subject to the consummation of this
offering. Each of these directors has consented to so serve. We anticipate that ,
and will be independent as determined by our Board of Directors under the
applicable securities law requirements and listing standards. Ford will have the ability to change
the size and composition of our Board of Directors and committees of the Board of Directors. See
Relationship with Ford.
So long as we are entitled to do so, we intend to use the controlled company exception under the
New York Stock Exchange rules, which eliminates the requirements that a company has a majority of
independent directors on its board of directors and that has compensation and nominating and
corporate governance committees composed entirely of independent directors.
Committees of the Board of Directors
The standing committees of our Board of Directors will consist of an audit committee and a
compensation committee.
84
Audit committee
The audit committee will consist of the following three independent directors:
, and , and we anticipate that will be
designated by our Board of Directors as the audit committee financial expert. The audit committee
will operate according to the audit committee charter to be duly adopted by our Board of Directors.
Upon completion of this offering, among other functions, the principal duties and responsibilities
of our audit committee will be as follows:
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to monitor our financial reporting process and internal control system;
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to appoint and, if necessary, replace our independent registered public accountants
from time to time, determine their compensation and other terms of engagement and
oversee their work;
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to oversee the performance of our internal audit function;
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to establish procedures for the receipt, retention and treatment of complaints
regarding accounting, internal accounting controls, or auditing matters and the
confidential anonymous submission by employees of concerns regarding questionable
accounting or auditing matters; and
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to oversee our compliance with legal, ethical and regulatory matters.
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The audit committee will be required to report regularly to our Board of Directors to discuss any
issues that arise with respect to the quality or integrity of our financial statements, the
effectiveness of our internal control over financial reporting, our compliance with legal or
regulatory requirements, the performance and independence of our independent registered public
accountants, and the performance of the internal audit function.
We have adopted written Standards of Business Conduct that apply to all our employees, including
our Chief Executive Officer, Chief Financial Officer and Controller. In connection with this
offering, our Board of Directors will formally approve the Standards of Business Conduct and apply
it to all of our directors, officers and employees. The Standards of Business Conduct will be
posted on our website. We will also post any amendments to the Standards of Business Conduct, and
any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock
Exchange, on our website.
Compensation committee
The compensation committee will consist of the following directors:
. The compensation committee will operate according to the compensation committee charter to be
duly adopted by our Board of Directors.
Upon completion of this offering, among other functions, the principal duties and responsibilities
of the compensation committee will be as follows:
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provide oversight on the development and implementation of the compensation
policies, strategies, plans and programs for our key employees and outside directors
and disclosure relating to these matters; and
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85
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to review and approve the compensation of our chief executive officer and our other
executive officers.
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Director compensation
We do not currently pay any compensation to any of our directors. In conjunction with this
offering, we will be adding independent directors to our Board of Directors and plan to pay our
independent directors an annual cash retainer of $
. We also plan to pay a fee for acting as
committee chair or presiding director and we may grant stock options to independent directors.
Executive compensation
We have established executive compensation plans that link compensation with the performance
of our company. We will periodically review our executive compensation programs to ensure that
they are competitive. We are in the process of evaluating our employment compensation and stock
option plans and intend to amend our existing plans and/or establish new plans in connection with
this offering.
Summary compensation table
The following table shows the compensation of our Chief Executive Officer and four other most
highly compensated executive officers based on salary, whom we refer to as the named executive
officers for the years indicated.
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Long-Term Compensation
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Annual Compensation (1)
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Awards
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Payouts
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Restricted
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Securities
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Other Annual
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Stock
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Underlying
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LTIP
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All Other
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Name and Principal
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Salary
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Bonus
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Compensation
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Award(s)
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Options
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Payouts
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Compensation
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Position
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Year
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($) (2)
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($) (3)
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($) (4)(5)
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($) (6)
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# (7)
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($) (8)
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($) (9)
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Craig R. Koch
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2004
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910,000
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2,202,200
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104,754
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161,000
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1,600,000
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6,500
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Chairman of
the Board and CEO
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2003
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893,846
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946,400
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109,911
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161,000
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578,400
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6,000
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2002
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850,000
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1,602,250
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97,085
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161,000
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900,000
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5,500
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Joseph R. Nothwang
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2004
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515,000
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845,115
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103,000
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800,000
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6,500
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Executive Vice President
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2003
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502,308
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392,430
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6,000
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103,000
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289,200
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6,000
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2002
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485,000
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760,601
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9,211
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103,000
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500,000
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5,500
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Paul J. Siracusa
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2004
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454,231
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804,650
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2,100
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64,000
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600,000
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6,500
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Executive Vice President and
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2003
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444,519
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323,960
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1,800
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64,000
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192,800
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6,000
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Chief Financial Officer
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2002
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420,000
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554,190
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3,150
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64,000
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360,000
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5,500
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Michel Taride
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2004
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475,254
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757,460
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163,930
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52,000
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240,000
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Executive Vice President
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2003
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410,000
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367,032
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225,001
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52,000
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57,840
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2002
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314,190
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226,914
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102,051
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12,000
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60,000
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Gerald Plescia
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2004
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373,077
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613,613
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45,000
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400,000
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6,500
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Executive Vice President
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2003
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365,000
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148,044
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4,287
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45,000
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115,680
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6,000
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2002
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341,923
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268,330
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2,391
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45,000
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240,000
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5,500
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(1)
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Mr. Tarides annual compensation is paid in pounds sterling which have been converted at an
average exchange rate for each year (2002 £1.00 =
$1.5033; 2003 £1.00 = $1.6400; 2004
£1.00 = $1.8279).
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(2)
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Amounts included consist of salary payments for the respective year and amounts deferred
pursuant to section 401(k) of the Internal Revenue Code of 1986, as amended, or the Code.
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(3)
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Includes bonuses earned for the respective year and paid in the subsequent year.
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86
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(4)
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For 2002, 2003 and 2004, amounts paid to Mr. Koch include personal use of our aircraft in the
amounts of $73,365, $94,438 and $92,473, respectively, and tax gross-up payments related to
personal use of our aircraft in the amounts of $8,189, $15,473 and $9,531, respectively. For
information regarding our security policy and executive use of our aircraft, See Security
policy and valuing the use of our aircraft.
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(5)
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Country club memberships were reimbursed to Mr. Koch ($13,031 in 2002) and Mr. Nothwang
($5,650 in 2002 and $6,000 in 2003). Amounts reimbursed for financial advice under a
financial assistance program for 2002, 2003 and 2004 were as follows: Mr. Koch $2,500, $0,
$2,750; Mr. Nothwang $3,561, $0, $0; Mr. Siracusa $3,150, $1,800, $2,100; and Mr. Plescia
- $2,391, $4,287, $0. Amounts paid to Mr. Taride include $33,824 in housing allowances,
$39,159 for housing benefits, $25,189 for tax gross-up payments related to housing benefits
and $3,879 in fuel allowances for 2002; $118,080 for tax equalization, $62,059 for housing
benefits, $40,631 for tax gross-up payments related to housing benefits and $4,231 in fuel
allowances for 2003; $43,870 for tax equalization, $68,418 for housing benefits, $46,926 for
tax gross-up payments related to housing benefits and $4,716 in fuel allowances for 2004.
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(6)
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We did not grant or issue any restricted stock during the years covered by this table.
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(7)
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See Stock options.
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(8)
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Includes long term incentive bonuses earned for the respective year and paid in the
subsequent year.
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(9)
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Represents the amounts contributed by us to the Income Savings Plan for the respective year.
Mr. Taride does not participate in this plan.
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Security policy and valuing the use of our aircraft
We own an aircraft for the purpose of encouraging and facilitating business travel by senior
executives, primarily Mr. Koch, generally for travel in the United States and, less frequently,
internationally. The pilots who fly our aircraft are our salaried employees. Our security policy
calls for Mr. Koch to use our aircraft for most domestic travel and, where feasible and advisable,
certain international travel. We believe that this policy provides several business benefits to
us. Our policy is intended to ensure the personal safety of Mr. Koch, who maintains a significant
public role as the leader of our company. In addition, our policy is intended to facilitate Mr.
Kochs availability and to maximize his time available for company business. The methodology that
we use to value personal use of our aircraft as a perquisite calculates the incremental cost to us
of providing the benefits based on the actual cost of fuel, crew expenses, on-board catering and
other, small variable costs. Because our aircraft is used primarily for business travel, this
valuation methodology excludes the fixed costs which do not change based on usage, such as pilots
salaries, the purchase cost of the aircraft and fixed maintenance costs.
Stock options
The Ford
Motor Company 1998 Long-Term Incentive Plan, or the 1998 Plan, allows grants of stock
options and other rights relating to Fords common stock. In general, whether exercising stock
options is
87
profitable depends on the relationship between Fords common stock market price and the
options exercise price, as well as on the grantees investment decisions. Options that are in
the money on a given date can become out of the money if the price changes on the stock market.
For these reasons, we believe that placing a current value on outstanding options is highly
speculative and may not represent the true benefit, if any, that may be realized by the grantee.
We also maintain the Hertz Long-Term Equity Compensation Plan, or the 1997 Plan pursuant to which
certain of our employees hold options to purchase shares of common stock of Ford. The 1997 Plan is
administered by our board of directors, and no new grants have been made under this plan since Ford
acquired all of our outstanding common stock in 2001. Our board of directors may allow cashless
option exercises permitted under applicable laws and regulations. The number of shares issued or
reserved pursuant to outstanding awards granted under this plan is subject to adjustment on account
of certain corporate events. Our board of directors may amend, alter or discontinue this plan in
any respect at any
time, but no amendment may diminish any of the rights of a participant under any awards previously
granted, without his or her written consent.
The following two tables give more information on Ford stock options granted to our named executive
officers under the 1997 Plan and the 1998 Plan. Options granted in the last fiscal year were
granted under the Ford Motor Company 1998 Long-Term Incentive Plan.
Option Grants in Last Fiscal Year(1)
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Individual Grants
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Number of
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% of Total
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Securities
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Options
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Underlying
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Granted to
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Exercise or
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Grant Date
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Options
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Employees in
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Base Price
|
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Expiration
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Present
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Name
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Granted (#)
|
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Fiscal Year (3)
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($/Sh)
|
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Date(4)
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Value(2)(4)
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Craig R. Koch
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161,000
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10.8
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%
|
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13.26
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3/11/14
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$
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743,820
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Joseph R. Nothwang
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103,000
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6.9
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%
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13.26
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3/11/14
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475,860
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Paul J. Siracusa
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64,000
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4.3
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%
|
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13.26
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3/11/14
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295,680
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Michel Taride
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52,000
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3.5
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%
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13.26
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3/11/14
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240,240
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Gerald Plescia
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45,000
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3.0
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%
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13.26
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3/11/14
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207,900
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(1)
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The exercise price of the stock options is the average of the high and low selling prices of
Fords common stock on the New York Stock Exchange on the grant date. In general, 33% of a
stock option grant can be exercised one year after the grant date, 66% after two years, and
100% after three years. Any unexercised options expire after ten years.
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If a grantee retires, becomes disabled, or dies, his or her options continue to be exercisable
up to the normal expiration date. In most other instances of employment termination, all
options generally end upon termination of employment or are exercisable for a specified period.
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Options are subject to certain conditions, including not engaging in competitive activity.
Options generally cannot be transferred except through inheritance.
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(2)
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These values were determined using the Black-Scholes methodology and the assumptions
described in note 7 to the notes to our audited consolidated financial statements included in
this prospectus. The ultimate value of the options, if any, will depend on the future value
of the Ford common stock and the grantees investment decisions, neither of which can be
accurately predicted.
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(3)
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Represents percentage of options granted (1,490,500) to all of Hertz participating employees
for the year ended December 31, 2004.
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(4)
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Under the 1998 Plan, once we cease to be a subsidiary of Ford, these options will expire on
the fifth anniversary of our ceasing to be a subsidiary. The expiration date and grant date
present value shown above have been determined without regard to this.
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88
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
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Number of Securities
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Underlying Unexercised
|
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Value of Unexercised In-
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Options at FY-End
|
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the-Money Options at
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Shares
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(#)
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FY-End($)(1)
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Acquired on
|
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Value Realized
|
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Exercisable/
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Exercisable/
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Name
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Exercise(#)
|
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($)
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Unexercisable
|
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Unexercisable
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Craig R. Koch
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640,866/323,610
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376,692/986,978
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Joseph R. Nothwang
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443,507/207,030
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240,989/631,421
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Paul J. Siracusa
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282,063/128,640
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149,741/392,339
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Michel Taride
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67,375/90,920
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121,664/318,776
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Gerald Plescia
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188,989/90,450
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105,287/275,864
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(1)
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These year-end values represent the difference between the fair market value of Ford common
stock subject to options (based on the Ford common stocks closing price of $14.64 on the New
York Stock Exchange on December 31, 2004) and the exercise prices of the options.
In-the-money means that the fair market value of the stock is greater than the options
exercise price on the valuation date.
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Long-term incentive plan awards
In 1991, we established an Executive Long-Term Incentive Plan for certain officers and other key
employees. The grant of awards and the size are determined by the achievement of certain
qualitative and quantitative performance targets. A new five year performance cycle begins on each
January 1. Performance for a specific year generally is measured against performance for the prior
four year period and awards will be made in cash for performance years ending in 2005 and 2006 at
the end of each performance period. The measurement criteria used for the performance year 2004
included our net income relative to the net income average for the S&P 500 and market share.
Long-Term Incentive Plan Awards in Last Fiscal Year
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Performance
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Number of
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or Other
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Shares, Units
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Period Until
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Estimated Future Payouts under
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or Other
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Maturation
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Non-Stock Price-Based Plans
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Name
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Rights(#)
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or Payout (1)
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Threshold
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Target
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Maximum
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Craig R. Koch
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$
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0
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$
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800,000
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$
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1,600,000
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Joseph R. Nothwang
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0
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400,000
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800,000
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Paul J. Siracusa
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0
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300,000
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600,000
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Michel Taride
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0
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120,000
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240,000
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Gerald Plescia
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0
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200,000
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400,000
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(1)
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Target and maximum award grants in place for performance year 2004 are included in the above
table for the named executive officers. Payouts for performance year 2004 are included in the
Summary compensation table.
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Target award grants have also been made for the performance years 2005, 2006 and 2007 versus
performance for the previous four year periods, respectively. The amount of the payments for the
performance years subsequent to 2004 can range from zero to two times the amount of the target.
Such target award grants made for performance years 2005, 2006 and 2007, respectively, to the named
executive officers are as follows: Mr. Koch $800,000, $800,000, and $800,000; Mr. Nothwang -
$400,000, $400,000 and $400,000; Mr. Siracusa $300,000,
$300,000 and $300,000; Mr. Taride
$180,000, $240,000 and $240,000 and Mr. Plescia $200,000, $200,000 and $200,000.
89
Employment agreement
Mr. Koch currently serves us under an employment agreement which expires on April 30, 2010.
The employment agreement is automatically extended for one additional year on May 1 of each year
unless, not later than December 31st of the preceding year, we or Mr. Koch shall have given notice
not to extend the agreement.
Under the employment agreement, Mr. Koch is currently employed as our Chairman and Chief Executive
Officer, and the employment agreement provides that we have the absolute right to change Mr. Kochs
duties and position at any time.
The employment agreement also provides that Mr. Koch shall receive a base salary as reviewed and
increased by us from time to time, subject to the condition that once increased, the base salary
cannot be reduced below such increased amount for the remainder of the term of Mr. Kochs
employment agreement. In addition, the employment agreement provides that Mr. Koch shall be
entitled to participate in our incentive compensation plan, retirement, savings and stock option
plans and fringe benefits or perquisites policy in effect from time to time.
The employment agreement allows us to terminate Mr. Kochs employment before the expiration of
the agreements term for cause (a narrowly defined list of bad acts set forth in the agreement)
or due to his disability (as defined below), or upon his death. Upon a termination of Mr. Kochs
employment for cause, he would be paid his accrued annual base salary through the date of
termination and all other obligations we have under the employment agreement will cease.
If Mr. Koch becomes disabled from full-time employment for six consecutive months, and he shall not
have returned to full-time performance of his duties within 30 days after written notice of
termination, he may be terminated for disability. During such period of absence, he would receive
his annual base salary, incentive compensation and participate in retirement, savings and stock
option plans. Thereafter, he would participate in retirement, savings and stock option plans in
accordance with our disability insurance plans and policies. If Mr. Koch dies, all compensation and
benefits then accrued shall be paid to his estate or designated beneficiaries.
The employment agreement does not allow us or Mr. Koch to terminate the employment agreement for
any reason other than as described above. However, a separate change in control agreement,
discussed below, does provide for certain compensation in the event of certain terminations of
employment following a change in control of us.
Under the employment agreement, Mr. Koch has also agreed, during and after the term of his
employment, not to disclose any secret or confidential information relating to us, Ford or any
subsidiaries or affiliates of us or Ford.
Change in control and non-compete agreements
We and Ford have entered into agreements with each of the named executive officers which provide
for certain compensation and benefits upon certain terminations of employment following a change
in control of us, as described below, and provide for certain non-compete and non-solicitation
terms that the executives have agreed to for our benefit. Each of the agreements only applies to a
change in control which occurs within three years of the effective date of each agreement.
However, if prior to either the occurrence of a change in control or the expiration of each
agreement, a public offering of our shares occurs, then the terms of each agreement shall continue
to apply for an initial period of two years following the date of the public offering; if no change
in control occurs during this initial period, each agreement will be automatically extended each
year for additional one-year periods, unless we or the executive give 180 days written notice that
the terms will not be extended. A change in control means the direct or indirect acquisition by
any person or group within a 24-month period of our securities entitling such person or group to
exercise 50% or more of the combined voting power of our securities, the transfer by sale, merger
or otherwise of all or substantially all of our business or assets to any person or group within a
24-month period or the adoption of a plan of liquidation or dissolution applicable to us. However,
a change in control will not occur as a result of a public offering of our shares, a spin-off of us
by Ford, any acquisition or transfer of us to Ford or any affiliate of Ford or a management buy-out
where the executive has contributed at least 1% of the purchase price from his own funds and
immediately following such a purchase, the executive and our other senior managers as a group,
separate and apart from any other financing parties involved in such a purchase, have a
non-forfeitable ownership interest in us of at least 25% of our outstanding equity interests.
90
Each change in control agreement provides that the executive will be entitled to the severance
benefits described below if we terminate the executives employment following a change in control
for any reason other than death, long-term disability or cause, or if the executive terminates
the executives employment for good reason. Cause under the agreements consists of (i) an act
of dishonesty or knowing or willful breach of fiduciary duty intended to result in the executives
enrichment or gain at the expense of us or any of our affiliates, (ii) the commission of a felony
involving moral turpitude or unlawful, dishonest or unethical conduct damaging to our reputation or
image or improper and unacceptable conduct, (iii) material violation of our standards of business
conduct that warrants termination, (iv) refusal to comply with the lawful directions of the
executives superiors, (v) a deliberate, willful or intentional act that causes us substantial
harm, loss or injury or (vi) material failure or inability to perform duties in a satisfactory and
competent manner or to achieve reasonable profit or performance goals or objectives following
warning and a reasonable opportunity to cure; provided, however, that no such failure or inability
may be deemed to occur if the executive performs the duties he is reasonably expected to perform to
achieve such goals or objectives. Good reason under the agreements consists of (i) the
occurrence, without the executives written consent, during the two year period after a change in
control of a reduction in the executives annual base salary, (ii) our failure to pay the executive
any portion of the executives aggregate compensation, including annual bonus, long-term incentive
and any portion of his compensation deferred under any plan, agreement or arrangement with us
within 30 days, (iii) failure by us to afford the executive annual bonus and long-term cash
incentive compensation target opportunities with a value that in the aggregate, is at least equal
to 80% of the aggregate value of annual bonus and long-term cash incentive compensation target
opportunities made available to the executive immediately prior to a change in control, (iv)
certain changes in the executives principal work location, (v) a material diminution in the
executives title or responsibilities, (vi) changes or terminations, in the aggregate materially
adverse to the executive, in or of the terms of the health, life insurance and disability insurance
benefits provided by us to the executive (or, in the case of health benefits, to the executives
dependents) from those in effect immediately prior to the change in control or (vii) an adverse
change or termination, as to the executive, of the terms of, or of the executives participation
in, any retirement plan provided by us in which the executive participates or would, upon normal
retirement, be entitled to participate or (viii) the failure of a successor to us to assume our
obligations under the agreements.
Under the terms of each change in control agreement, the severance benefits we would be obligated
to pay or provide upon termination of the executives employment in the manner described are as
follows:
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a lump sum cash payment reflecting accrued but unpaid compensation equal to the sum of
(i) the executives annual base salary earned but not paid
through the date of termination,
the amount of such salary attributable to vacation earned but not taken and unreimbursed
expenses incurred by the executive through the date of termination, and (ii) (x)
one-twelfth of the average of the annual bonuses payable to the executive, including any
amounts deferred at the election of the executive, with respect to the three calendar years
preceding the change in control, or (y) in the event the executive has not been eligible to
earn an annual bonus from us in his position as a senior executive officer for three full
calendar years preceding the change in control, one-twelfth of 100% of the target annual
bonus the executive is eligible to earn in respect of the fiscal year in which the change
in control occurs, or if no target annual bonus has yet been established for such fiscal
year, 100% of the target annual bonus for the prior fiscal year (z) in each case multiplied
by the number of full and partial months from the beginning of the calendar year during
which the termination occurs;
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91
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a lump sum cash payment equal to a multiple, as set forth below for each executive, of
the sum of (i) the executives annual base salary in effect immediately prior to the date
of termination and
(ii) (x) the average of the annual bonuses payable to the executive, including any amounts
deferred at the election of the executive, with respect to the three calendar years
preceding the change in control or (y) in the event the executive has not been eligible to
earn an annual bonus from us in his position as a senior executive officer for three full
calendar years preceding the change in control, 100% of the target annual bonus the
executive is eligible to earn in respect of the fiscal year in which the change in control
occurs, or if no target annual bonus has yet been established for such fiscal year, 100% of
the target annual bonus for the prior fiscal year;
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receipt of future payouts in accordance with any Long Term Incentive Plan in which the
executive participated immediately prior to the date of termination, based on the
performance results at the end of each performance period in respect of which there was a
Long Term Incentive Plan grant in place for the executive as of the date of termination, as
if the executive had retired in a company-approved retirement;
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(i) maintenance, without any change in terms that is adverse to the executive, of any
retirement plan of, or provided by us in which the executive, immediately prior to the date
of termination, participated or would, upon normal retirement (as such term is defined in
the applicable retirement plan), be entitled to participate, and (ii) credit of an
additional number of years, as set forth below, to the executives years of age and Years
of Service for all purposes under our SERP II (which is described below under
Retirement Plans);
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continuation of (i) all health benefits with respect to the executive (and, to the
extent applicable, the executives dependents) for an additional period of years, as set
forth below, following the date of termination (with health benefits thereafter being
available, but at the executives expense, until the earlier of (x) the date the executive
becomes reemployed and is (along with the executives applicable dependents) covered,
without qualification for preexisting conditions, under another employers health plan and
(y) the date on which the executive and the executives spouse become eligible for coverage
under any other comprehensive health benefit plan including Medicare), and (ii) all life
insurance benefits, until the expiration of a set number of years, as set forth below, from
the date of termination, provided, that any coverage for life insurance benefits shall
cease on the date the executive becomes reemployed and receives at least an equal amount of
life insurance coverage under another employers benefit plan;
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participation in our postretirement assigned car benefit plan following termination
without change to the terms and conditions of our postretirement assigned car benefit plan
that is adverse to the executive; and
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within the twelve months following the termination date, outplacement assistance up to
maximum of $25,000 paid directly to an outplacement service provider.
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For the purposes of the provisions above, the multiples and number of years for the following
executives are: Mr. Koch, three times and three years; Mr. Nothwang, Mr. Siracusa, Mr. Taride and
Mr. Plescia two and a half times and two and a half years. In addition, under the terms of each
agreement, in the event that the compensation provided for in the agreement or in any other plan or
arrangement covering the named executive is subject to excise tax imposed by Section 4999 of the
Code, or any interests or penalties thereon, the executive will be entitled to receive a gross-up
payment in an amount such that after payment by the executive of all taxes on the gross-up payment,
the executive shall retain a portion of the gross-up payment equal to the excise tax. However, to
the extent compensation under the agreement does not exceed 110% of the specified statutory
threshold amount giving rise to excise tax, then no additional payment will be paid and the
compensation will be reduced below such statutory threshold.
92
In addition, in the event of a change in control, any outstanding Ford options to purchase common
stock issued under Fords 1990 Long-Term Incentive Plan, Fords 1998 Long-Term Incentive Plan and
our Long-Term Equity Compensation Plan are intended to be treated under such plans as continuing in
effect until the earlier of five years after the date of termination or the expiration date of the
applicable stock option, subject to certain conditions. However, any outstanding options granted
to an executive on or after March 10, 2000 shall become immediately vested upon a termination of
the executives employment by reason of a change in control.
Under the non-competition terms of each agreement, each named executive has agreed that while
employed by us and for a period of one year following termination of employment due to a
resignation, other than for a good reason under the agreement, or for cause, the executive will not
directly or indirectly work, invest in or associate with any competing enterprise, consisting of
any entity that engages in the car or equipment rental business, subject to limited exceptions. In
addition, pursuant to each agreement, for a period of two years after an executives termination,
each executive has agreed not to solicit any of our or our affiliates employees.
In addition, Hertz Europe Limited and Mr. Taride have entered into a Non-Compete Agreement which
provides that for the twelve months after leaving employment with us, Mr. Taride will not (i)
compete with us in the countries in which we operated or actively made arrangements to plan to
operate during the twelve months preceding such termination of employment or (ii) solicit or entice
away any key employees from us. Hertz Europe Limited would be required to give Mr. Taride twelve
months notice to terminate his employment for any reason other than misconduct.
Retirement plans
Our retirement plan for U.S. employees, The Hertz Corporation Account Balance Defined Benefit
Pension Plan, or the Hertz Retirement Plan, was established on August 30, 1985. Previously, our
employees participated in the retirement plan for the employees of RCA Corporation, or the RCA
Plan.
The Hertz Retirement Plan is tax-qualified. Contributions were made by the employees and by us up
to June 30, 1987. Effective July 1, 1987, we pay the entire cost.
The benefit an employee receives under the Hertz Retirement Plan is based on a combination of the
following factors:
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a percentage of final average compensation (using the highest five consecutive
of the last ten years of covered compensation);
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years of credited service up to July 1, 1987; and
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the accrued value of a cash account after July 1, 1987 which gets credited each
year at a predetermined percentage of compensation.
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Compensation for these purposes includes salary or wages, bonuses, commissions, premium rate pay
and vacation pay.
We also have non-qualified pension plans for certain of our executives, including the named
executive officers, which provides benefits in excess of the qualified plans which include (1) the
Benefit Equalization Plan, or BEP, that provides equalization benefits that cannot be provided
under the Hertz Retirement Plan due to limitations imposed by the Code and (2) the Supplemental
Retirement and
93
Savings Plan, or SERP, and Supplemental Executive Retirement Plan, or SERP II,
that, when combined with the Hertz Retirement Plan, provides a benefit generally similar to those
that would have been provided if the pre-July 1, 1987 benefit formula had remained in effect until
the employees normal
retirement date. As a result of a prior change in our corporate ownership which triggered a change
in control provision, the SERP may not be amended or terminated, except if necessary to maintain
the qualified status of The Hertz Corporation Income Savings Plan under Section 401(a) of the Code.
Benefits payable under the plans are not reduced for Social Security or other offsets.
The following table shows the annual pension benefits payable under the Hertz Retirement Plan, or
BEP, SERP and SERP II including amounts attributable to employee contributions from the RCA plan.
The table indicates benefits for employees at various rates of final average compensation and years
of service, based on retirement at age 65.
Pension Plan Table
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Final
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Years of Credited Service
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Average
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Compensation
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20
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25
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30
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35
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40
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$
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200,000
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$
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62,800
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$
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78,500
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$
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94,200
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$
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110,000
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$
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125,700
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400,000
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126,800
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158,500
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190,200
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222,000
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253,700
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600,000
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190,800
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238,500
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286,200
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334,000
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381,700
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800,000
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254,800
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318,500
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382,200
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446,000
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509,700
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1,000,000
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318,800
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398,500
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478,200
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558,000
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637,700
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1,200,000
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382,800
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478,500
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574,200
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670,000
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765,700
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1,400,000
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446,800
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558,500
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670,200
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782,000
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893,700
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1,600,000
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510,800
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638,500
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766,200
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894,000
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1,021,700
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1,800,000
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574,800
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718,500
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862,200
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1,006,000
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1,149,700
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2,000,000
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638,800
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798,500
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958,200
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1,118,000
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1,277,700
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Pension benefits are annual lifetime benefits with five years of payments guaranteed.
Qualified pension and SERP benefits are computed by averaging the employees highest five
consecutive years of compensation in the ten years immediately before retirement. SERP II benefits
are computed by averaging the employees highest five years of compensation (not necessarily
consecutive) in the ten years immediately before retirement.
As of December 31, 2004, the total credited years of service under the plans for each of the named
executive officers were as follows: Mr. Koch, 31 years; Mr. Nothwang, 28 years; Mr. Siracusa, 32
years and Mr. Plescia, 18 years.
In addition, under a predecessor RCA Corporation executive deferred compensation plan, Mr. Koch is
eligible to receive a supplemental retirement benefit of approximately $4.4 million payable in 180
monthly installments commencing November 2011. In the event Mr. Koch dies prior to the
commencement of this benefit, a portion of such amount will be paid to Mr. Kochs beneficiary in
120 monthly installments.
Mr. Taride participates in the two plans applicable to certain of our employees in Europe, the
Hertz (UK) 1972 Pension Plan and the Hertz (UK) Supplementary Unapproved Pension Scheme. These two
plans are generally similar defined benefit plans that provide for, in the case of Mr. Taride,
1/30
th
of his final salary
94
for each year of service in the plans subject to a maximum of
two-thirds of his final salary at the time of
his retirement. Under these plans, Mr. Taride has a right to retire at age 60. As of December 31,
2004, Mr. Taride had total credited years of service under these plans of 5 years.
We also have a postretirement assigned car benefit plan available to our officers at the level of
senior vice president and above. Participation in the plan requires participation in the
demonstration vehicle evaluation program as an active employee, a minimum of 20 years service with
us and retirement at the age of 58 or above. Under the program we provide the participant with a
car from our fleet and insure the car on the participants behalf. The benefit is only available
for a maximum of 15 years postretirement or until the participant reaches the age of 80, whichever
is greater. Upon the death of the participant the vehicle then assigned to the participant will
pass to the participants surviving spouse.
Income Savings Plan
Our Income Savings Plan, or the Hertz Savings Plan, was established on August 30, 1985. Prior to
that date, qualified employees participated in the RCA Income Savings Plan. The assets and
liabilities maintained under that plan were transferred as of September 1, 1985 to the Hertz
Savings Plan.
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The Hertz Savings Plan is a defined contribution plan and is available to certain full-time and
part-time employees who have been credited with at least 1,000 hours of service during any calendar
year. Employees covered by a collective bargaining agreement are not eligible unless their
collective bargaining agreement makes the Hertz Savings Plan applicable to them.
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Effective June 3, 2002, eligible employees may generally elect to contribute 1% to 30% of their
annual eligible pretax compensation. Contributions are subject to certain limitations by Internal
Revenue regulations. We contribute 50% of the first 6% of the employees contribution for a
maximum matched contribution of 3% of the employees eligible compensation.
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Our employees are immediately fully vested in their contributions and related earnings. Effective
January 1, 2002, our contributions made to employees after that date become fully vested after the
employee completes three or more years of service. Prior to January 1, 2002, employees became
fully vested in the amount contributed by us and related earnings after completing five years of
service.
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Each plan member determines to which fund, or funds, their contributions will be applied. The
funds include a variety of equity and fixed income funds.
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95
Ownership of common stock
Ford Holdings LLC, a wholly owned subsidiary of Ford, currently owns shares of Class A
common stock and shares of Class B common stock, 100% of our common stock. Upon completion
of this offering, Ford will indirectly beneficially own % of the outstanding Class A common
stock ( % if the underwriters exercise their option to purchase additional shares) and 100% of
the outstanding Class B common stock and, accordingly, will own common stock representing
approximately % of the economic interest in us and representing approximately % of the
combined voting power of our outstanding common stock. See Relationship with Ford.
The principal executive offices of Ford are located at One American Road, Dearborn, Michigan 48121.
96
Relationship with Ford
Immediately prior to this offering, Ford through its wholly owned subsidiary, Ford Holdings
LLC, is our only stockholder. Upon completion of this offering, Ford will beneficially own
% of the outstanding Class A common stock ( % if the underwriters over-allotment option is
exercised in full) and % of the outstanding Class B common stock (which Class B common stock
is entitled to five votes per share on any matter submitted to a vote of our stockholders). Upon
completion of this offering, the common stock beneficially owned by Ford will represent in the
aggregate % of the combined voting power of all of our outstanding common stock (or % if the
underwriters over-allotment option is exercised in full). For as long as Ford continues to
beneficially own shares of common stock representing more than 50% of the combined voting power of
our common stock, Ford will be able to direct the election of all of the members of our Board of
Directors and exercise a controlling influence over our business and affairs, including any
determinations with respect to mergers or other business combinations involving us, the acquisition
or disposition of assets by us, the incurrence of indebtedness by us, the issuance of any
additional common stock or other equity securities, the repurchase or redemption of common stock or
preferred stock and the payment of dividends. Similarly, Ford will have the power to determine or
significantly influence the outcome of matters submitted to a vote of our stockholders, will have
the power to prevent a change in control of us and could take other actions that might be favorable
to Ford. See Description of capital stock.
Ford has indicated to us that it expects, subject to market conditions, to completely divest its
ownership in us. Ford is not subject to any obligation, contractual or otherwise, to retain its
controlling interest in us, except that we and Ford, our directors, executive officers and certain
other employees have agreed, subject to certain exceptions, not to offer, sell, contract to sell,
pledge or otherwise dispose of any shares of common stock or any of our securities which are
substantially similar to shares of common stock for a period of 180 days after the date of this
prospectus without the prior written consent of the joint book-running managers, subject to certain
limitations and limited extensions. As a result, there can be no assurance concerning the period
of time during which Ford will maintain its beneficial ownership of our common stock owned by it
following this offering. See Underwriting.
Beneficial ownership of at least 80% of the total voting power and 80% of the total number of
shares of each class of nonvoting capital stock, if any, is required in order for Ford to be able
to effect a tax-free spin-off or certain other tax-free transactions with respect to us.
Ford will also have an option available to it to purchase additional shares of Class B common stock
and/or nonvoting capital stock to maintain its then-existing percentage of the total voting power
and value of us. Additionally, with respect to shares of nonvoting capital stock, Ford will have
an option to purchase such additional shares so as to maintain ownership of 80% of each outstanding
class of such stock.
Certain of our airport concession agreements require the consent of the airport authority in
connection with changes in ownership of us. We will seek those consents in connection with this
offering except where not obtaining them will not, in our view, have a material adverse effect on
our consolidated financial position or results of operations. In the event that Ford seeks to
dispose of any of its common stock following this offering, additional consents will be required.
For a description of certain provisions of the Restated Certificate of Incorporation concerning the
allocation of business opportunities that may be suitable for both us and Ford, See Description of
capital stockCertain certificate of incorporation and by-law provisionsCorporate opportunities.
Certain of our credit facilities impose consolidated net worth tests on us if Ford ceases to own at
least 51% of the voting control of all of our capital stock then outstanding as described under
Restrictive covenantsMinimum consolidated net worth and maximum consolidated senior debt to
consolidated net worth ratio.
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Set forth below are descriptions of certain agreements, relationships and transactions between us
and Ford.
Master Supply and Advertising Agreement
On July 5, 2005, we, one of our wholly owned subsidiaries and Ford signed a Master Supply and
Advertising Agreement, effective July 5, 2005 and expiring August 31, 2010, that covers the 2005
through 2010 vehicle model years. This agreement replaces and supersedes the joint advertising and
vehicle supply agreements that would have expired August 31, 2007.
The terms of the Master Supply and Advertising Agreement only apply to our fleet requirements and
advertising in the United States and to Ford, Lincoln or Mercury brand vehicles, or Ford
Vehicles, and include Fords agreement to pay to us one-half of our advertising costs each year
subject to a minimum purchase obligation by us and the number of Ford Vehicles acquired. Under the
Master Supply and Advertising Agreement, Ford has agreed to supply to us and we have agreed to
purchase from Ford, during each of the 2005 through 2010 vehicle model years, a specific number of
Ford Vehicles. To be eligible for cost reimbursement under the Master Supply and Advertising
Agreement, the advertising must meet certain conditions, including the condition that we feature
Ford Vehicles in a manner and with a prominence that is reasonably satisfactory to Ford. It
further provides that the amounts Ford will be obligated to pay to us for our advertising costs
will be increased or reduced according to the number of Ford Vehicles acquired by us in any model
year, provided Ford will not be required to pay any amount for our advertising costs for any year
if the number of Ford Vehicles acquired in the corresponding model year is less than a specified
minimum except to the extent that our failure to acquire the specified minimum number of Ford
Vehicles is attributable to the availability of Ford Vehicles or Ford vehicle production is
disrupted for reasons beyond the control of Ford.
We anticipate that the advertising contributions payable by Ford beginning with the 2005 vehicle
model year will be less than the advertising contributions we received from Ford for the 2004 model
year. We do not expect that the reductions in Fords advertising contributions will have a
material adverse effect on our results of operations.
Under the terms of the Master Supply and Advertising Agreement we will be able to enter into
vehicle advertising and supply agreements with other automobile manufacturers in the United States
and in other countries, and we intend to explore those opportunities. However, we cannot assure
you that we will be able to obtain advertising contributions from other automobile manufacturers
that will mitigate the anticipated reduction in Fords advertising contributions.
Corporate Agreement
The Corporate Agreement will provide that we will grant to Ford a continuing option,
assignable to any of its subsidiaries, to purchase, under certain circumstances, additional shares
of Class B common stock or shares of nonvoting capital stock of us, referred to as the Stock
Option. The Stock Option may be exercised simultaneously with the issuance of any equity security
by us (other than in this offering or upon the exercise of the underwriters over-allotment
option), with respect to Class B common stock, only to the extent necessary to maintain its
then-existing percentage of the total voting power and value of us and, with respect to shares of
nonvoting capital stock, to the extent necessary to own 80% of each outstanding class of such
stock. The purchase price of the shares of Class B common stock purchased upon any exercise of the
Stock Option, subject to certain exceptions, will be based on the market price of the Class A
common stock, and the purchase price of nonvoting capital stock will be the price at which such
stock may be purchased by third parties. The Stock Option expires in the event that Ford reduces
its
beneficial ownership of common stock in us to less than 20% of the value of the total outstanding
shares of common stock.
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The Corporate Agreement will also provide that, upon the request of Ford, we will use our best
efforts to effect the registration under the applicable federal and state securities laws of any of
the shares of common stock and nonvoting capital stock (and any other securities issued in respect
of or in exchange for either) beneficially owned by Ford for sale in accordance with Fords
intended method of disposition thereof, and will take such other actions as may be necessary to
permit the sale thereof in other jurisdictions, subject to certain specified limitations. Ford
will also have the right which, subject to certain limitations, it may exercise at any time and
from time to time, to include the shares of common stock beneficially owned by it in certain other
registrations of our common equity securities initiated by us or on our behalf or on behalf of our
other stockholders. We will agree to pay all out-of-pocket costs and expenses in connection with
each such registration that Ford requests or in which Ford participates. Subject to certain
limitations specified in the Corporate Agreement, such registration rights will be assignable by
Ford and its assigns. The Corporate Agreement will contain indemnification and contribution
provisions (i) by Ford and its permitted assigns for the benefit of us and related persons and (ii)
by us for the benefit of Ford and the other persons entitled to effect registrations of common
stock (and other securities) pursuant to its terms and related persons.
The Corporate Agreement will also provide that for so long as Ford (directly or indirectly) owns
shares of capital stock having more than 50% of the total voting power of all capital stock
outstanding of us, we may not take any action or enter into any commitment or agreement which may
reasonably be anticipated to result, with or without notice and with or without lapse of time, or
otherwise, in a contravention (or an event of default) by Ford of: (i) any provision of applicable
law or regulation, including but not limited to provisions pertaining to the Code or the Employee
Retirement Income Security Act of 1974, as amended; (ii) any provision of Fords certificate of
incorporation or by-laws; (iii) any credit agreement or other material instrument binding upon Ford
or its assets or (iv) any judgment, order or decree of any governmental body, agency or court
having jurisdiction over Ford or its assets.
In addition, pursuant to the Corporate Agreement, we have entered into a merger agreement with two
wholly-owned, newly created subsidiaries, The Hertz Holdings Corporation and Hertz Merger
Subsidiary, Inc., and with Ford in order to provide that upon the satisfaction of certain
conditions and in connection with a tax-free spin-off, Ford may elect to cause us to implement a
holding company structure pursuant to Section 251(g) of the Delaware General Corporation Law
without a stockholder vote, all as described under Description of capital stockMerger
agreement.
Tax-Sharing Agreement
Prior to this offering, we have been included in Fords federal consolidated income tax group,
and our federal income tax liability has been included in the consolidated federal income tax
liability of Ford and its subsidiaries. In certain circumstances, certain of our subsidiaries have
been included with certain Ford subsidiaries in combined, consolidated or unitary income tax groups
for state and local tax purposes. We and Ford have entered into a tax-sharing agreement, or the
Tax-Sharing Agreement, which we and Ford will amend in connection with this offering. Pursuant
to the amended Tax-Sharing Agreement, we and Ford will make payments to each other such that, with
respect to any period ending on or prior to the date of this offering, the amount of taxes to be
paid by us, or the amount of tax benefit to be refunded to us by Ford, subject to certain
adjustments, will be determined as though we were to file separate federal, state and local income
tax returns (including, except as provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of Ford arising from an audit or otherwise) as the common
parent of an affiliated group of corporations filing combined, consolidated or unitary (as
applicable) federal, state and local returns rather than a consolidated subsidiary of Ford with
respect to federal, state
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and local income taxes. Moreover, with respect to periods beginning after the date of this
offering (or beginning on or prior to and ending after such date), Ford will pay us for the unused
net operating losses of such hypothetical affiliated group with us as the common parent for periods
ending on or prior to the date of this offering. With respect to foreign tax credits, our right to
reimbursement will be determined based on the usage of such foreign tax credits by the Ford
consolidated group. To the extent that we are allocated any tax assets of the Ford consolidated
group that exceed the amounts reflected on our balance sheet as of the date of this offering, we
will make a payment to Ford in an amount equal to the tax benefit of such excess.
In determining the amount of tax-sharing payments under the amended Tax-Sharing Agreement, Ford
will prepare or cause to be prepared pro forma returns with respect to federal and applicable state
and local income taxes that reflect the same positions and elections used by Ford in preparing the
returns for Fords consolidated group and other applicable groups. Ford will continue to have all
the rights of a parent of a consolidated group (and similar rights provided for by applicable state
and local law with respect to a parent of a combined, consolidated or unitary group), will be the
sole and exclusive agent for us in any and all matters relating to the income, franchise and
similar liabilities of us, will have sole and exclusive responsibility for the preparation and
filing of consolidated federal and consolidated or combined state and local income tax returns (or
amended returns), and will have the power, in its sole discretion, to contest or compromise any
asserted tax adjustment or deficiency and to file, litigate or compromise any claim for refund on
behalf of us related to such return.
Each member of a consolidated group is severally liable for the federal income tax liability of
each other member of the consolidated group. Accordingly, although the amended Tax-Sharing
Agreement will allocate tax liabilities between us and Ford, for any period during which we were
included in Fords consolidated group, we could be liable for tax liabilities not allocated to us
under the Tax-Sharing Agreement in the event that any federal tax liability is not discharged by
any other member of Fords consolidated group. See Risk factorsRisks related to our
businessFord controls us and may have conflicts of interest with us or you in the future.
We will not be included in Fords federal consolidated income tax group after this offering.
Pursuant to the amended Tax-Sharing Agreement, we will agree that, until Ford and its affiliates
own 50% or less of the total combined voting power of our outstanding capital stock, we (i) will not knowingly
take or fail to take any action that could reasonably be expected to preclude Fords ability to
effectuate a tax-free spin-off of our common stock that it owns pursuant to Section 355 of the Code
and (ii) will not issue any of our stock (or instruments convertible, exercisable or exchangeable
into any of our stock) in an acquisition or offering if, immediately after such issuance, Ford
would, or would reasonably be expected to, not own the requisite amount of our stock that is
necessary to effectuate such a tax-free spin-off. Pursuant to the amended Tax-Sharing Agreement,
in the event that Ford effectuates a spin-off of our stock that it owns, we will agree that, during
the two year period following such spin-off, we will not, without the consent of Ford, take certain
actions without first obtaining a tax opinion or ruling that such actions will not result in
increased taxes for Ford or its stockholders as a result of the failure of Fords spin-off of our
stock to be tax-free pursuant to Section 355 of the Code. In the event that Ford effectuates a
spin-off of our common stock that it owns and such spin-off is not tax-free pursuant to Section 355
of the Code, the taxes incurred by Ford or its stockholders will generally be borne by Ford if the taxes result from
certain actions or omissions of Ford, and will generally be borne by us if the taxes result from
certain of our actions or omissions. If the taxes incurred by Ford or
its stockholders
do not result from certain actions or omissions of Ford, and do not result from certain of our
actions or omissions, then we will generally be responsible for a percentage of such taxes equal
to the quotient of the fair market value of our issued and
outstanding common stock, divided by the sum of
the fair market value of our issued and outstanding common stock and the fair market value of Fords
issued and outstanding common stock.
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Commercial paper dealer agreements
We maintain agreements with Ford Financial Services, Inc., or FFS, a NASD registered
broker/dealer and an indirect wholly owned subsidiary of Ford, whereby FFS acts as a sales agent
for our secured and unsecured domestic commercial paper programs. We pay fees to FFS, which range
from 0.03% to 0.05% per annum of commercial paper placed depending upon the monthly average dollar
value of the notes outstanding in the portfolios. For the six months ended June 30, 2005, we paid
fees to FFS of $74,096. For the year ended December 31, 2004, we paid FFS $89,148 of such fees.
FFS is under no obligation to purchase any of the notes for its own account. On July 13, 2005, we
entered into a letter agreement with FFS which amended the agreements to provide that they will
automatically terminate at any time Ford ceases to own shares having more than 50% of the total
voting power of all of our outstanding capital stock. Through our subsidiary Hertz Australia Pty.
Limited, we also have a similar agreement with Ford Credit Australia Limited, also an indirect
wholly owned subsidiary of Ford. Hertz Australia Pty. Limited no longer maintains an active
commercial paper program.
Line of credit
Ford has extended to us a $500.0 million line of credit, which currently expires June 30,
2007. This line of credit has an evergreen feature that provides on an annual basis for automatic
one year extensions of the expiration date, unless notice is provided by Ford at least one year
prior to the then scheduled expiration date. The line of credit automatically terminates however,
at any time Ford ceases to own, directly or indirectly, shares of our capital stock having more
than 50% of the total voting power of all capital stock outstanding of us. Our obligations under
this line of credit rank pari passu with our senior unsecured debt securities. A commitment fee of
0.2% per annum is payable on the unused available credit. On May 2, 2005, we borrowed $250.0
million under the line of credit which we repaid on May 31, 2005 with borrowings under our Interim
Credit Facility.
Intercompany Notes
On each of June 10, 2005 and , 2005, we issued Intercompany Notes to Ford in the
amounts of $1,185.0 million and $ , respectively, as dividends on all of our then
outstanding common stock. The Intercompany Notes are subordinated in right of payment to all of
our existing and future senior indebtedness. The Intercompany Notes each mature on June 10, 2010,
but may be prepaid in whole at any time or in part from time to time. Interest on each of the
Intercompany Notes will be payable in cash quarterly or on or before the maturity date of the
Intercompany Notes, subject to certain limitations on payment contained in the Interim Credit
Facility. The Intercompany Note issued on June 10, 2005 has a per annum interest rate equal to
three-month LIBOR plus a spread of 200 basis points and the Intercompany Note issued on
, 2005 has a per annum interest rate equal to three-month LIBOR plus a spread of basis
points. We intend to repay the Intercompany Notes with the proceeds of this offering and the
offering of the Equity Units.
Other relationships and transactions
We and Ford also engage in other transactions in the ordinary course of our respective
businesses. These transactions include HERCs providing equipment rental services to Ford, our
providing insurance claim management services to Ford and our providing car rental services to
Ford. We are named as an
additional insured under certain of Fords insurance policies for which
we pay our allocated portion of the premiums.
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Description of indebtedness
In connection with the funding of our domestic operations, we maintain committed credit
facilities, unsecured and asset backed medium-term and long-term debt and active unsecured and
asset backed commercial paper programs. For additional information regarding our indebtedness, see
Managements discussion and analysis of financial condition and results of operationsLiquidity
and capital resources, note 7 to the notes to our unaudited condensed consolidated financial
statements, and note 3 to the notes to our audited consolidated financial statements included in
this prospectus.
Senior credit facilities
As of June 30, 2005, we had committed credit facilities totaling $2.8 billion.
A portion of our committed credit facilities are represented by a combination of multi-year,
364-day global and other committed credit facilities provided by 20 participating banks, which as
of June 30, 2005 totaled $1.3 billion in commitments. In addition to direct borrowings by us, the
multi-year and 364-day global facilities allow certain of our subsidiaries to borrow on the basis
of a guarantee by us.
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The multi-year facilities were renegotiated effective July 1, 2005 and as of June 30,
2005 totaled $952.5 million in commitments with expirations as follows: $35.0 million on
June 30, 2006, $108.0 million on June 30, 2007, $102.0 million on June 30, 2008, $81.0
million on June 30, 2009 and $626.5 million on June 30, 2010. The multi-year facilities
that expire in 2010 have an evergreen feature, which provides for the automatic extension
of the expiration date one year forward unless the bank provides timely notice.
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During 2005, the 364-day global committed credit facilities, which totaled $94.0 million
as of June 16, 2005, were renegotiated and currently expire on June 15, 2006. Under the
terms of the 364-day facilities, we are permitted to convert any amount outstanding prior
to expiration into a two-year loan.
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The other committed facilities totaled $178.9 million as of June 30, 2005 and expire at
various times during 2005 and 2006.
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Some of our committed credit facilities are represented by facilities that support our ABS program,
which as of June 30, 2005 totaled $1.0 billion:
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Effective September 18, 2002, as part of the ABS program, we transferred a portion of
the 364-day global committed credit facilities to the ABS program. As part of the
agreement to transfer these commitments, we have waived the right to transfer them back to
the 364-day global committed credit facilities without the consent of the participating
banks. As of June 30, 2005, $814.0 million was committed under this facility which expires
in June 2006.
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In addition to the transfer of the 364-day commitments, we raised committed credit
support through an ABS letter of credit from banks that participate in our multi-year
global committed credit facilities, which totaled $215.0 million as of June 30, 2005 and
expires in June 2007. In exchange for this credit support, we agreed to reduce the banks
multi-year facility commitment by one half of the amount of their ABS letter of credit
participation.
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In addition to these committed credit facilities, in February 1997, Ford extended to us a line of
credit of $500.0 million, which currently expires June 30, 2007. This line of credit has an
evergreen feature that
provides on an annual basis for automatic one-year extensions of the expiration date, unless notice
is provided by Ford at least one year prior to the then scheduled expiration date. The line of
credit automatically terminates however, at any time Ford ceases to own, directly or indirectly,
our capital stock having more than 50% of the total voting power of all our capital stock
outstanding and all loans and accrued interest under this facility would become immediately due and
payable. Our obligations under this agreement would rank pari passu with our senior debt
securities. A quarterly commitment fee of 0.2% is payable to Ford on the average daily unused
available credit. On May 2, 2005, we borrowed $250.0 million under this line of credit, which we
repaid on May 31, 2005 with borrowings under the Interim Credit Facility discussed below.
On May 26, 2005, we entered into the Interim Credit Facility with an aggregate availability of up
to $3.0 billion with the joint book-running managers of this offering and/or their affiliates as
the arrangers and initial lenders, JPMorgan Chase Bank, N.A. as the U.S. administrative agent and
JPMorgan Chase Bank, N.A., Toronto Branch as the Canadian administrative agent. The Interim Credit
Facility, as amended on July 5, 2005, provides a term facility of up to $1,650.0 million and a
revolving credit facility of up to $700.0 million available to The Hertz Corporation and a term
facility of up to $350.0 million and a revolving credit facility of up to $300.0 million available
to our Canadian subsidiary, Hertz Canada Limited, guaranteed by The Hertz Corporation, with
unutilized capacity under the Canadian tranches available to be borrowed by The Hertz Corporation.
Amounts under the term facilities are available to be borrowed from May 26, 2005 to July 26, 2005
and were fully drawn. Amounts under the revolving facilities are available to be borrowed
throughout the term of the Interim Credit Facility. The Interim Credit Facility matures on
November 23, 2005. We may elect a combination of per annum interest rates on the Interim Credit
Facility including the federal funds rate plus 0.50%, JPMorgan Chase Bank, N.A.s prime rate, LIBOR
and, for loans made to Hertz Canada Limited, a Canadian base rate or Canadian prime rate, plus, in
each case, a margin based on our then-current S&P and Moodys debt ratings. We are also required
to pay to the lenders a quarterly facility fee equal to a rate per annum of 0.175% of the total
amount of the Interim Credit Facility (such rate based upon our current S&P and Moodys debt
ratings). As of June 30, 2005, we had outstanding borrowings of approximately $1.0 billion and
C$575.0 million under the Interim Credit Facility.
We are required to prepay loans and permanently reduce commitments under the Interim Credit
Facility under certain limited circumstances, including certain issuances of securities (not
including this offering), certain sales of assets and when Ford controls less than 25% of us or any
other person or group has equal or greater control of us than Ford. Effective July 26, 2005,
$1,825.0 million of the Interim Credit Facility commitments provided by the three initial external
financial institutions were syndicated and allocated to eight additional external financial
institutions. The Interim Credit Facility has terms, including restrictive covenants,
substantially similar to the terms of our other current committed credit facilities. In addition,
the Interim Credit Facility contains restrictions on the payment of any indebtedness to, or
investments other than in the ordinary course of business in, Ford, other than as noted above, and
our ability to pay future dividends, other than the dividend to Ford of the Intercompany Notes or
additional stock, payments pursuant to certain stock option plans or other benefit plans, or any
dividend in connection with this offering or the concurrent offering of Equity Units. We have used
and continue to use the amounts borrowed under the Interim Credit Facility to refinance existing,
short-term indebtedness and for general corporate purposes. We intend to repay the Interim Credit
Facility from the proceeds received from a combination of issuances of additional asset backed
securities under our ABS program, accessing the commercial paper market and issuing unsecured
senior debt securities.
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Senior notes
As of June 30, 2005, we had outstanding approximately $4.6 billion aggregate principal amount
of senior debt securities issued under, and subject to the terms of, the senior indentures
described below under
Restrictive covenants. The senior debt securities are unsecured obligations, having fixed and
floating interest rates ranging from 4.4% to 9.3% as of June 30, 2005, and having maturities
ranging from July 2005 to January 2028.
Intercompany Notes
On each of June 10, 2005 and , 2005, we issued Intercompany Notes to Ford in the
amounts of $1,185.0 million and
$ , respectively, as dividends on all of our then
outstanding common stock. The Intercompany Notes are subordinated in right of payment to all of
our existing and future senior indebtedness. The Intercompany Notes each mature on June 10, 2010,
but may be prepaid in whole at any time or in part from time to time. Interest on each of the
Intercompany Notes will be payable in cash quarterly or on or before the maturity date of the
Intercompany Notes, subject to certain limitations on payment contained in the Interim Credit
Facility. The Intercompany Note issued on June 10, 2005 has a per annum interest rate equal to
three-month LIBOR plus a spread of 200 basis points and the Intercompany Note issued on
, 2005 has a per annum interest rate equal to three-month LIBOR plus a spread of basis
points. We intend to repay the Intercompany Notes with the proceeds of this offering and the
concurrent offering of the Equity Units.
Asset backed securitization program
During 2002, we established an ABS program to reduce borrowing costs and enhance financing
resources for our domestic car rental fleet. All debt issued under the ABS program is
collateralized by the assets of the special purpose entities consisting of revenue earning vehicles
used by us in our car rental business, restricted cash and certain receivables related to revenue
earning vehicles. The ABS program provided for the initial issuance of asset backed commercial
paper (up to $1.0 billion) and the subsequent issuance of asset backed medium-term notes.
On March 31, 2004 we issued $600.0 million of asset backed Medium-Term Notes under the ABS program.
Of the $600.0 million of the Medium-Term Notes, $500.0 million has fixed interest rates ranging
from 2.4% to 3.2% and maturities ranging from 2007 to 2009 and the remaining $100.0 million has a
variable interest rate based on the one-month LIBOR rate plus nine basis points (3.4% as of June
30, 2005) and matures in 2007. As of June 30, 2005, $600.0 million aggregate principal amount of
Medium-Term Notes was outstanding. Payments of principal and interest relating to the Medium-Term
Notes are insured to the extent provided in a note guaranty insurance policy issued by MBIA
Insurance Corporation.
As of June 30, 2005, $849.5 million of asset backed commercial paper was outstanding under the ABS
program. The average interest rate as of June 30, 2005 was 3.2%. The collateralized commercial
paper has a maximum term of 58 days when issued. As of June 30, 2005, the outstanding commercial
paper and Medium-Term Notes were collateralized by $1,431.1 million net book value of revenue
earning vehicles, $49.0 million of receivables and $7.4 million of restricted cash. The restricted
cash is to be used for the purchase of revenue earning vehicles or for the repayment of outstanding
indebtedness under the ABS program. Restricted cash is included in Cash and equivalents in the
consolidated balance sheet.
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Debt of foreign operations
Borrowing for our international operations also consists of loans obtained from local and
international banks and commercial paper programs established in Ireland, Canada, the Netherlands,
Belgium and Australia. We guarantee only the commercial paper borrowings of our subsidiaries in
Ireland, Canada, the Netherlands and Belgium, and guarantee commercial paper and short-term bank
loans of our subsidiary in Australia. All borrowings by international operations either are in the
international
operations local currency or, if in non-local currency, hedged to minimize foreign exchange
exposure. As of June 30, 2005, total debt for the foreign operations was $1,896.7 million, of
which $1,649.1 million was short-term (original maturity of less than one year) and $247.6 million
was long-term. As of June 30, 2005 total amounts outstanding under the commercial paper programs
in Ireland, Canada, the Netherlands and Belgium were $243.5 million, $31.0 million, $27.2 million
and $15.8 million, respectively.
Euro medium-term note program
On July 2, 2004, we established a Euro Medium-Term Note Program under which we and/or HFC can
issue up to 650.0 million in Euro Notes. On July 16,
2004, HFC issued 200.0 million of
Euro Notes under this program. The Euro Notes are fully guaranteed by us, mature in July 2007, and
have a variable interest rate based on the three-month EURIBOR rate plus 110 basis points. As of
June 30, 2005, the interest rate on the Euro Notes was 3.24%.
Restrictive covenants
We have issued senior debt securities, including the senior debt securities described under
Senior notes above, (i) under an indenture, dated April 1, 1986, as amended and supplemented,
between us and JPMorgan Chase Bank, N.A., as trustee, which we refer to as the 1986 Senior
Indenture (approximately $205 million outstanding as of June 30, 2005), (ii) under an indenture,
dated December 1, 1994, between us and Wachovia Corporate Trust, as trustee, which we refer to as
the 1994 Senior Indenture (approximately $2.0 billion outstanding as of June 30, 2005), and (iii)
under an indenture, dated as of March 16, 2001, between us and The Bank of New York, as trustee,
which we refer to as the 2001 Senior Indenture (approximately $2.4 billion outstanding as of June
30, 2005). Collectively, we refer to the 1986 Senior Indenture, the 1994 Senior Indenture
and the 2001 Senior Indenture as the Senior Indentures. We may in the future issue additional
senior debt securities under the 2001 Senior Indenture. We may in the future issue senior
subordinated debt securities under an indenture, dated as of June 1, 1989, between us and The Bank
of New York, as trustee, which we refer to as the Senior Subordinated Indenture. We may in the
future issue junior subordinated debt securities under an indenture, dated as of July 1, 1993,
between us and Citibank, N.A., as trustee, which we refer to as the Junior Subordinated Indenture.
Collectively, we refer to the Senior Subordinated Indenture and the Junior Subordinated Indenture
as the Subordinated Indentures.
We are subject to the following restrictive covenants, each of which appears in one or more of the
Senior Indentures, the Subordinated Indentures, our global committed credit facilities and the
fiscal agency agreement under which notes have been and may in the future be issued under the Euro
Medium-Term Note Program. In addition, we will be subject to certain restrictive covenants under
our Interim Credit Facility discussed above under Senior credit facilities.
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Limitations on dividends
Our ability to pay dividends is restricted. Such restriction provides that we may not pay
dividends, purchase, redeem or invest in our own shares or permit purchases, redemptions or
investments by Restricted Subsidiaries, as defined below, in our shares subsequent to December 31,
1985 if, together with total investments by us and our Restricted Subsidiaries in subsidiaries that
are not Restricted Subsidiaries made subsequent to such specified date, the aggregate of any such
dividends or investments exceeds the sum of (i) $185,000,000, plus (or minus in the case of a
deficit) (ii) the consolidated net income (or net loss) of us and our Restricted Subsidiaries
earned subsequent to December 31, 1985, plus (iii) the aggregate net proceeds received from capital
stock, including rights or warrants to purchase capital stock and indebtedness converted into
capital stock, issued subsequent to December 31, 1985. We have identified certain subsidiaries as
Restricted Subsidiaries. In addition, our Board of Directors can,
after the date of an indenture, designate additional subsidiaries as Restricted Subsidiaries.
Under certain circumstances Restricted Subsidiaries may be redesignated as unrestricted.
Notwithstanding the limitations above, we are permitted to pay any management, administrative,
general overhead or similar charge to any of our controlling stockholders or other affiliates, or
pay to any member of the same consolidated group for tax purposes any amounts in lieu of taxes.
After giving effect to this offering, the concurrent offering of Equity Units and related use of
proceeds together with the contemporaneous transactions described under Capitalization,
approximately $ of consolidated stockholders equity is expected to be free of
such limitations. The Interim Credit Facility contains additional restrictions on our ability to
pay dividends. See Description of indebtednessSenior credit facilities.
Limitations on mergers
We may not, subject to certain exceptions, consolidate with, merge into, or sell, convey or
transfer our properties and assets substantially as an entirety to another person, if, as a result
thereof, any property owned by us or a Restricted Subsidiary, immediately prior thereto would
become subject to any security interest, unless the applicable debt securities issued by us under
the applicable indenture are secured equally and ratably with (or prior to) the debt secured by
such security interest.
Limitations on certain loans and advances
We may not, and may not permit any Restricted Subsidiary to, make or permit to exist any loan or
advance to any person owning more than 50% of the outstanding voting stock of us or to any
affiliate of such person (other than us or a Restricted Subsidiary) if the aggregate outstanding
amount of senior indebtedness of us and our Restricted Subsidiaries exceeds 400% of the
consolidated net worth and subordinated indebtedness of us and our Restricted Subsidiaries.
Limitations on secured debt
Subject to certain exceptions, including those set forth below, we may not create, incur, assume or
guarantee, and may not cause, suffer or permit a Restricted Subsidiary to create, incur, assume or
guarantee, any secured indebtedness without making effective provisions whereby the debt securities
then outstanding issued under the applicable indentures and any other indebtedness of or guaranteed
by us or such Restricted Subsidiary then entitled thereto, subject to applicable priorities of
payment, shall be secured by the security interest securing such secured indebtedness equally and
ratably with any and all other obligations and indebtedness thereby secured (subject, however, to
applicable priorities of payment) so long as such secured indebtedness remains outstanding.
However, the foregoing prohibition will not be applicable to:
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(i)
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any security interest in favor of us or a Restricted Subsidiary;
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(ii)
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certain pre-existing security interests;
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(iii)
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security interests existing on property at the time it is acquired by us or
a Restricted Subsidiary, provided, such security interest is limited to all or part of
the property so acquired;
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(iv)
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(a) any security interest existing on the property of or on the outstanding
shares or indebtedness of a corporation at the time such corporation shall become a
Restricted Subsidiary or (b) subject to the provisions referred to above under
Limitations on mergers, any security interest on property of a corporation existing
at the time such corporation is merged into or consolidated with us or a Restricted
Subsidiary or at the time
of a sale, lease or other disposition of the properties of a corporation as an
entirety or substantially as an entirety to us or a Restricted Subsidiary (provided,
in each such case, that such security interest does not extend to any property owned
prior to such transaction by us or any Restricted Subsidiary which was a Restricted
Subsidiary prior to such transaction);
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(v)
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mechanics, materialmens, carriers or other like liens arising in the
ordinary course of business;
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(vi)
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certain tax liens or assessments, and certain judgment liens;
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(vii)
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certain security interests in favor of the United States of America or any
state or any agency of the United States of America;
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(viii)
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security interests on certain business equipment;
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(ix)
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in the case of property (other than rental equipment) acquired after certain
dates by us or a Restricted Subsidiary, any security interest which secures an amount
not in excess of the lesser of the purchase price or fair value of such property at
the time of acquisition, provided that such security interest is limited to the
property so acquired;
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(x)
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security interests on properties financed through tax-exempt municipal
obligations, provided that the security interest is limited to the property so
financed; and
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(xi)
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any refunding, renewal, extension or placement (or successive refundings,
renewals, extensions or replacements), in whole or in part, of any security interest
referred to in the preceding clauses (i) through (x), provided that the principal
amount of indebtedness secured in such refunding, renewal, extension or replacement
does not exceed that secured at the time by such security interest and that such
refunding, renewal, extension or replacement is limited to all or part of the same
property subject to the security interest being refunded, renewed, extended or
replaced.
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Notwithstanding the foregoing provisions, we and any one or more Restricted Subsidiaries may issue,
assume or guarantee secured indebtedness which would otherwise be subject to the foregoing
restrictions in an aggregate amount which, together with all other secured indebtedness of us and
our Restricted Subsidiaries which would otherwise be subject to the foregoing restrictions (not
including indebtedness permitted to be secured as described under Limitations on secured debt
above), and the aggregate value of the sale and leaseback transactions in existence at such time
(not including sale and leaseback transactions the proceeds of which have been or will be applied
in accordance with clause (ii) under Limitations on sale and leaseback transactions below), do
not at the time of incurrence exceed 10% of the consolidated net worth and subordinated
indebtedness of us and our Restricted Subsidiaries.
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Limitations on sale and leaseback transactions
We may not, and may not permit any Restricted Subsidiary to, engage in any sale and leaseback
transaction unless (i) we or such Restricted Subsidiary would be entitled, without reference to the
provisions described under Limitations on secured debt above, to incur secured indebtedness in
an amount equal to the amount realized or to be realized upon the sale or transfer involved in such
sale and leaseback transaction, secured by a security interest on the property to be leased without
equally and ratably securing certain outstanding debt securities as provided under Limitations on
secured debt or (ii) we or a Restricted Subsidiary apply, within 120 days after such sale or
transfer, an amount equal to
the fair value of the property so leased (as determined by our Board of Directors) to the repayment
of senior indebtedness of us or of any Restricted Subsidiary (other than senior indebtedness owed
to us or any Restricted Subsidiary) then prepayable.
Minimum consolidated net worth and maximum consolidated senior debt to consolidated net worth ratio
Based on the terms of our global committed credit facilities, if Ford ceases to own at least 51% of
the voting control of all of our capital stock then outstanding and (i) our senior debt credit
ratings are below A- by S&P and A-3 by Moodys, we must maintain a minimum consolidated net worth
of $500.0 million and (ii) our senior debt credit ratings are below BBB+ by S&P and Baa1 by
Moodys, our consolidated senior debt to consolidated net worth ratio must not exceed 8.5 to 1.
Other restrictive covenants applicable to certain of our subsidiaries
Under the fiscal agency agreement under which notes have been and may in the future be issued under
the Euro Medium-Term Note Program, HFC is subject to limitations on secured debt, limitations on
sale and leaseback transactions, and limitations on mergers, all of which are comparable to those
to which we are subject, except that references to Restricted Subsidiaries which appear in the
descriptions of the corresponding limitations on us are not applicable to the limitations on HFC.
Under a base indenture, dated as of September 18, 2002, as amended, under which rental car asset
backed notes have been and may in the future be issued under the ABS program, our subsidiary Hertz
Vehicle Financing LLC is subject to numerous restrictive covenants, including restrictive covenants
with respect to liens, indebtedness, benefit plans, consolidations and mergers, disposition of
assets, acquisition of assets, distributions, payment of wages or salaries, loans, investments,
agreements and the types of business it may conduct. Our subsidiary, Hertz Fleet Funding LLC is
subject to comparable restrictive covenants under a liquidity agreement, dated as of September 18,
2002, as amended, under which it may issue asset backed commercial paper under the ABS program.
Certain of the individual credit facilities which have been extended to our international
subsidiaries impose restrictive covenants and/or requirements with respect to ownership or
financial ratios on those subsidiaries.
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Description of capital stock
The following is a description of the material provisions of our capital stock, as well as
other material terms of our amended and restated certificate of incorporation and bylaws, as they
will be in effect as of the consummation of the offering. We refer you to a form of our amended
and restated certificate of incorporation, as amended, and to a form of our amended and restated
bylaws, copies of which have been filed as exhibits to the registration statement of which this
prospectus forms a part.
General
Our
authorized capital stock consists of (i) shares of Class A common
stock, par value $0.01 per share, and shares of Class B common stock, par value
$0.01 per share, and (ii) shares of preferred stock, par value $0.01 per
share. Of the shares of Class A common stock, shares
are being offered in this offering (excluding shares subject to the
underwriters option to purchase additional shares), shares will be reserved
for issuance upon conversion of Class B common stock into
Class A common stock,
shares issuable upon the exercise of stock options have been reserved for issuance pursuant to
employee benefit plans and shares will be reserved for issuance upon
settlement of the purchase contracts included in the Equity Units being offered concurrently with
this offering. See Management. Of the shares of Class B common stock,
shares will be outstanding and indirectly beneficially owned by Ford as of the closing
date of the offering. As of the closing date of the offering, there will be no preferred stock
outstanding. We will issue all shares of our capital stock in uncertificated form unless our board
of directors determines that any particular series will be issued in certificated form. A
description of the material terms and provisions of our restated certificate of incorporation
affecting the relative rights of the Class A common stock, the Class B common stock and the
preferred stock is set forth below. The following description of our capital stock is intended as
a summary only and is qualified in its entirety by reference to the form of our restated
certificate of incorporation filed with the registration statement of which this prospectus forms a
part and to Delaware corporate law.
Common stock
Voting rights
The holders of Class A common stock and Class B common stock generally have identical rights except
that holders of Class A common stock are entitled to one vote per share. Holders of Class B common
stock are entitled to five votes per share on all matters to be voted on by stockholders, subject
to the right of Ford or the Class B Transferee (as defined below), as the case may be, to reduce
from time to time the number of votes per share of Class B common stock by written notice to us
specifying the reduced number of votes per share. Holders of shares of Class A common stock and
Class B common stock are not entitled to cumulate their votes in the election of directors.
Accordingly, the holders of more than 50% of the voting rights attaching to our common stock can,
if they choose to do so, elect all the directors.
Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the
case of election of directors, by a plurality) of the votes entitled to be cast by all shares of
Class A common stock and Class B common stock present in person or represented by proxy, voting
together as a single class, subject to any voting rights granted to holders of any preferred stock.
Except as otherwise provided by law, and subject to any voting rights granted to holders of any
outstanding preferred stock, amendments to the restated certificate of incorporation and certain
reorganization, consolidation or merger transaction must be approved by a majority of the combined
voting power of all Class A common stock and Class B
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common stock, voting together as a single class. However, amendments to our restated certificate
of incorporation that would alter or change the powers, preferences or special rights of the Class
A common stock or the Class B common stock so as to affect them adversely also must be approved by
a majority of the votes entitled to be cast by the holders of the shares affected by the amendment,
voting as a separate class. Notwithstanding the foregoing, any amendment to our restated
certificate of incorporation to increase or decrease the authorized shares of any class shall be
approved upon the affirmative vote of the holders of a majority of the common stock, voting
together as a single class. In addition, as described under Certain certificate of incorporation
and by-law provisionsCorporate opportunities, until the time that Ford ceases to own beneficially
common stock representing at least 20% of the total voting power of all outstanding common stock,
the affirmative vote of the holders of more than 80% of the total voting power of outstanding
common stock shall be required to alter, amend or repeal in a manner adverse to the interests of
Ford and its subsidiaries (other than us), or adopt any provision adverse to the interests of Ford
and its subsidiaries (other than us), and inconsistent with, the corporate opportunity provisions
set forth in our rested certificate of incorporation. Also, as described under Certain
certificate of incorporation and by-law provisionsProvisions that may have an anti-takeover
effect, the affirmative vote of the holders of at least 75% of the total voting power of all
outstanding common stock is required to amend, repeal or adopt any provision inconsistent with
certain anti-takeover provisions of the restated certificate of incorporation and to alter, amend
or repeal the by-laws (in addition to our Board of Directors right to alter, amend or repeal the
by-laws).
Dividends
Holders of Class A common stock and Class B common stock will be entitled to share equally on a per
share basis in all dividends if, as and when dividends are declared from time to time by our Board
of Directors out of funds legally available for that purpose, after payment of dividends required
to be paid on outstanding preferred stock, as described below, if any. Dividends consisting of
shares of Class A common stock and Class B common stock may be paid only as follows: (i) shares of
Class A common stock may be paid only to holders of shares of Class A common stock, and shares of
Class B common stock may be paid only to holders of Class B common stock; and (ii) shares shall be
paid proportionally with respect to each outstanding share of Class A and Class B common stock.
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Our dividend policy following this offering is described under Dividend policy.
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We may not subdivide or combine shares of either class of common stock without at the same time
proportionally subdividing or combining shares of the other class.
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Conversion
Each share of Class B common stock is convertible while held by Ford, any of its subsidiaries or
the Class B Transferee, if any, at the option of the holder thereof into one share of Class A
common stock. Following the occurrence of a distribution, if any, of shares of Class B common
stock to stockholders of Ford in a transaction intended to be tax-free under section 355 of the
Code, a tax-free spin-off, shares of Class B common stock shall not be convertible into shares of
Class A common stock at the option of the holder thereof.
Except as provided below, any shares of Class B common stock transferred to a person other than
Ford or any of its subsidiaries or the Class B Transferee or any of its subsidiaries shall
automatically convert to shares of Class A common stock upon such disposition. Shares of Class B
common stock representing more than a 50% economic interest in us transferred by Ford or any of its
subsidiaries in a single transaction to one unrelated person, referred to as the Class B
Transferee, shall not automatically convert to shares of Class A common stock upon such
disposition. Any shares of Class B common stock
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retained by Ford or any of its subsidiaries following any such disposition to the Class B
Transferee shall automatically convert to shares of Class A common stock upon such disposition.
Shares of Class B common stock transferred to stockholders of Ford or stockholders of the Class B
Transferee as a distribution intended to be a tax-free spin-off shall not convert to shares of
Class A common stock upon the occurrence of a tax-free spin-off. Following a tax-free spin-off, we
can initiate a conversion of shares of Class B common stock into shares of Class A common stock, at
any time, provided that we have received an opinion of counsel or a favorable private letter ruling
from the Internal Revenue Service, in either case satisfactory to Ford in its sole and absolute
discretion, which shall be exercised in good faith solely to preserve the tax-free status of the
spin-off (and in determining whether an opinion or ruling is satisfactory, Ford may consider, among
other factors, the appropriateness of any underlying assumptions and representations if used as a
basis for the opinion or ruling and Ford may determine that no opinion or ruling would be
acceptable to Ford), to the effect that such conversion will not affect the tax-free treatment of
the spin-off. If such an opinion or ruling is received, approval of such conversion may be
submitted to a vote of the holders of our common stock. Approval of such conversion will require
the affirmative vote of the holders of a majority of the shares of both the Class A common stock
and Class B common stock present and voting, voting together as a single class, with each share
entitled to one vote for such purpose. No assurance can be given that such conversion would be
initiated or consummated. Although Ford has no current plans with respect to a tax-free spin-off
of us, it will have the flexibility to effect a tax-free spin-off of us in the future.
All shares of Class B common stock shall automatically convert into Class A common stock if a
tax-free spin-off has not occurred and the number of outstanding shares of Class B common stock
beneficially owned by Ford or the Class B Transferee, as the case may be, falls below 20% of the
aggregate number of outstanding shares of common stock. This will prevent Ford or the Class B
Transferee, as the case may be, from decreasing its economic interest in us to less than 20% while
still retaining control of more than 55% of our voting power. Automatic conversion of the Class B
common stock into Class A common stock if a tax-free spin-off has not occurred and Ford or the
Class B Transferee, as the case may be, decreases its economic interest in us to less than 20% is
intended to ensure that Ford or the Class B Transferee, as the case may be, retains voting control
by virtue of its ownership of Class B common stock only if it has a significant economic interest
in us.
The Class B common stock shall only be convertible into Class A common stock, as contemplated above
or otherwise, on a share-for-share basis.
Other rights
In the event of any merger or consolidation of us with or into another company in connection with
which shares of common stock are converted into or exchangeable for shares of stock, other
securities or property (including cash), all holders of common stock will be entitled to receive
the same kind and amount of shares of stock and other securities and property (including cash).
On liquidation, dissolution or winding up of us, after payment in full of the amounts required to
be paid to holders of preferred stock, if any, all holders of common stock are entitled to share
equally on a per share basis in any assets available for distribution to holders of shares of
common stock.
No shares of common stock are subject to redemption or have preemptive rights to purchase
additional shares of common stock.
Upon consummation of the offering, all the outstanding shares of Class A common stock will be
legally issued, fully paid and nonassessable.
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Preferred stock
Our preferred stock is issuable from time to time in one or more series and with such
designations and preferences for each series as shall be stated in the resolutions providing for
the designation and issue of each such series adopted by our Board of Directors. The Board of
Directors is authorized by our restated certificate of incorporation to determine, among other
things, the voting, dividend, redemption, conversion and liquidation powers, rights and preferences
and the limitations thereon pertaining to such series. The Board of Directors, without stockholder
approval, may issue preferred stock with voting and other rights that could adversely affect the
voting power and other rights of the holders of the common stock and could have certain
anti-takeover effects. On , 2005, we issued to Ford shares of our
Cumulative Preferred Stock, $0.01 par value per share. Our Cumulative Preferred Stock has a
liquidation preference amount of $1,000,000 per share, accrues dividends at a rate of % per
annum on the liquidation preference amount and is redeemable at our option in whole at any time or
in part from time to time at a price equal to the liquidation preference amount plus accrued and
unpaid dividends. Simultaneous with this offering, we will be redeeming these shares of Cumulative
Preferred Stock from Ford, including accrued and unpaid dividends, with cash on hand.
We have no present plans to issue any other shares of preferred stock. The ability of the Board of
Directors to issue preferred stock without stockholder approval could have the effect of delaying,
deferring or preventing a change in control of us or the removal of existing management.
Merger agreement
Pursuant to the Corporate Agreement with Ford, The Hertz Corporation has entered into a merger
agreement with two wholly owned, newly created subsidiaries, The Hertz Holdings Corporation,
referred to as Holdings, and Hertz Merger Subsidiary, Inc., and with Ford in order to provide
that upon the satisfaction of certain conditions and in connection with a tax-free spin-off, Ford
may elect to cause us to implement a holding company structure. Pursuant to the merger agreement,
Holdings would become the holding company for us. The holding company organizational structure
would be effected through a merger conducted pursuant to Section 251(g) of the Delaware General
Corporation Law, which provides for the formation of a holding company structure without a vote of
the stockholders of the corporation in the position of The Hertz Corporation.
Pursuant to the merger agreement, each share of Class A common stock and each share of Class B
common stock of The Hertz Corporation would be converted into one share of Class A common stock of
Holdings and one share of Class B common stock of Holdings, respectively. As a result, each
stockholder of The Hertz Corporation would become a holder of the common stock of Holdings,
evidencing the same proportional interests and having the same designations, rights, powers and
preferences and qualifications, limitations and restrictions as those securities that the
stockholder held in The Hertz Corporation. In the merger, Hertz Merger Subsidiary, Inc. would
merge with and into The Hertz Corporation, with The Hertz Corporation continuing as the surviving
corporation and a wholly owned subsidiary of Holdings. In accordance with Section 251(g) of the
Delaware General Corporation Law, the provisions of the certificate of incorporation, including,
without limitation, those relating to the authorized capital stock and the bylaws of Holdings would
be identical to those of The Hertz Corporation prior to the merger. The directors and the
executive officers of Holdings would be the same individuals who were directors or executive
officers of The Hertz Corporation immediately prior to the merger.
After the merger, the Class A common stock of Holdings would be listed and traded on the New York
Stock Exchange under the symbol HTZ without interruption. In addition, Holdings would be able to succeed as
registrant under the Securities Act and Exchange Act after the merger to the registration status of
The Hertz
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Corporation immediately prior to the merger. We believe that under current law, the merger would
constitute a tax-free transaction to stockholders for federal income tax purposes.
In connection with the merger, Holdings would adopt and assume all of our rights and obligations as
(i) the primary obligor under our employment, severance, change of control or other agreements
maintained by us with employees, officers, directors and independent contractors and (ii) the
primary sponsor and/or plan administrator of each of our employee pension and welfare plans
maintained by us immediately prior to the merger, in each case as our officers and the officers of
Holdings may mutually determine is necessary or desirable. Holdings would also assume as obligor
the outstanding debt and credit facilities of The Hertz Corporation immediately prior to the
merger, with The Hertz Corporation continuing on as a co-obligor.
The merger agreement will be entered into among all the parties in connection with the consummation
of this offering. However, the merger will only occur pursuant to the merger agreement upon Fords
election to proceed with the merger and distribution of the stock of Holdings and the satisfaction
of certain conditions, including that (i) the merger shall
qualify as a reorganization within the meaning of Section 368(a)
of the Code and/or a transaction described in Section 351 of the Code, (ii) the consummation of the merger and the transactions
contemplated by the merger agreement shall not be prohibited or illegal under any applicable law,
court order or similar restraint, and (iii) there will not have been any change in law, regulation
or interpretation (formal or informal) or any order, statute, rule, regulation, executive order,
injunction, stay, decree, judgment or restraining order, in any event enacted, entered,
promulgated, made public or enforced by any court or governmental or regulatory authority or
instrumentality, such that we or our stockholders would be materially and adversely effected if the
merger were to proceed. The parties to the merger agreement have agreed that we would be
materially and adversely affected if Holdings were not able to succeed to our registration and
other regulatory status under the Securities Act, the Exchange Act or any other applicable
securities laws and regulations.
Certain certificate of incorporation and by-law provisions
Corporate opportunities
Our restated certificate of incorporation provides that Ford shall have no duty to refrain from
engaging in the same or similar activities or lines of business as us, and neither Ford nor any
officer or director thereof (except as provided below) shall be liable to us or our stockholders
for breach of any fiduciary duty by reason of any such activities of Ford. In the event that Ford
acquires knowledge of a potential transaction or matter which may be a corporate opportunity for
both Ford and us, Ford shall have no duty to communicate or offer such corporate opportunity to us
and shall not be liable to us or our stockholders for breach of any fiduciary duty as our
stockholder by reason of the fact that Ford pursues or acquires such corporate opportunity for
itself, directs such corporate opportunity to another person, or does not communicate information
regarding such corporate opportunity to us.
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In the event that a director or officer of us who is also a director or officer of Ford acquires
knowledge of a potential transaction or matter which may be a corporate opportunity for both us and
director or officer and our stockholders with respect to such corporate opportunity if such
director or officer acts in a manner consistent with the following policy:
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(i)
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a corporate opportunity offered to any person who is an officer of the company,
and who is also a director but not an officer of Ford, shall belong to us;
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(ii)
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a corporate opportunity offered to any person who is a director but not an
officer of the company, and who is also a director or officer of Ford, shall belong to
us if such
opportunity is expressly offered to such person in writing solely in his or her
capacity as a director of the company, and otherwise shall belong to Ford; and
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(iii)
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a corporate opportunity offered to any person who is an officer of both the
company and Ford shall belong to us if such opportunity is expressly offered to such
person in writing solely in his or her capacity as an officer of the company, and
otherwise shall belong to Ford.
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For purposes of the foregoing:
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(i)
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A director of the company who is Chairman of the Board of Directors of the
company or of a committee thereof shall not be deemed to be an officer of the company
by reason of holding such position (without regard to whether such position is deemed
an officer of the company under the by-laws of the company), unless such person is a
full-time employee of the company; and
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(ii)
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(A) The term company shall mean us and all corporations, partnerships, joint
ventures, associations and other entities in which we beneficially own (directly or
indirectly) 50% or more of the outstanding voting stock, voting power, partnership
interests or similar voting interests, and (B) the term Ford shall mean Ford and all
corporations, partnerships, joint ventures, associations and other entities (other than
us, defined in accordance with clause (A) of this section (ii)) in which Ford
beneficially owns (directly or indirectly) 50% or more of the outstanding voting stock,
voting power, partnership interests or similar voting interests.
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The foregoing provisions of our restated certificate of incorporation shall expire on the date that
Ford ceases to own beneficially common stock representing at least 20% of the total voting power of
all outstanding common stock and no person who is a director or officer of us is also a director or
officer of Ford or any of its subsidiaries (other than us).
In addition to any vote of the stockholders required by our restated certificate of incorporation,
until the time that Ford ceases to own beneficially common stock representing at least 20% of the
total voting power of all outstanding common stock, the affirmative vote of the holders of more
than 80% of the total voting power of outstanding common stock shall be required to alter, amend or
repeal in a manner adverse to the interests of Ford and its subsidiaries (other than us), or adopt
any provision adverse to the interests of Ford and its subsidiaries (other than us), and
inconsistent with, the corporate opportunity provisions described above. Accordingly, so long as
Ford beneficially owns common stock representing at least 20% of the total voting power of all
classes of outstanding common stock, it can prevent any such alteration, amendment, repeal or
adoption.
Any person purchasing or otherwise acquiring common stock will be deemed to have notice of, and to
have consented to, the foregoing provisions of our restated certificate of incorporation.
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Provisions that may have an anti-takeover effect
Certain provisions of our restated certificate of incorporation and by-laws summarized below may be
deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover
attempt that a stockholder might consider to be in its best interest, including attempts that might
result in a premium being paid over the market price for the shares of common stock held by
stockholders. In addition, these provisions may adversely affect the prevailing market price of
the shares of Class A common stock.
Our restated certificate of incorporation provides that, subject to any rights of holders of
preferred stock to elect additional directors under specified circumstances, the number of our
directors will be not more than twelve nor less than three, with the exact number to be fixed from
time to time as provided in the by-laws. The by-laws provide that, subject to any rights of
holders of preferred stock to elect directors under specified circumstances, the number of
directors will be fixed from time to time exclusively by resolution of the Board of Directors
adopted by the vote of directors constituting a majority of the total number of directors that we
would have if there were no vacancies on our Board of Directors. In addition, the restated
certificate of incorporation and by-laws provide that, subject to any rights of holders of
preferred stock, and unless our Board of Directors otherwise determines, any vacancies will be
filled by the affirmative vote of a majority of the remaining members of the Board of Directors,
though less than a quorum, or by a sole remaining director; except as otherwise provided by law,
any such vacancy may not be filled by the stockholders.
Our by-laws provide for an advance notice procedure for the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors as well as for other
stockholder proposals to be considered at annual meetings of stockholders. In general, notice of
intent to nominate a director or raise matters at such meetings will have to be received in writing
by us not less than 60 nor more than 90 days prior to the anniversary of the previous years annual
meeting of stockholders, and must contain certain information concerning the person to be nominated
or the matters to be brought before the meeting and concerning the stockholder submitting the
proposal. Our restated certificate of incorporation and by-laws also provide that special meetings
of stockholders may be called only by certain specified officers of us or by any such officer at
the request in writing of the Board of Directors; special meetings of stockholders cannot be called
by stockholders. In addition, our restated certificate of incorporation provides that any action
required or permitted to be taken by stockholders may be effected by written consent; provided,
however, that on and after the date on which neither Ford nor the Class B Transferee does not
continue to beneficially own 50% or more of the total voting power of all outstanding common stock,
any action required or permitted to be taken by stockholders may be effected only at a duly called
annual or special meeting of stockholders and may not be effected by a written consent by
stockholders in lieu of such a meeting.
Our restated certificate of incorporation also provides that the affirmative vote of the holders of
at least 75% of the total voting power of all outstanding common stock is required to amend, repeal
or adopt any provision inconsistent with the foregoing provisions of the restated certificate of
incorporation. The restated certificate of incorporation and by-laws will further provide that the
by-laws may be altered, amended or repealed by our Board of Directors or by the affirmative vote of
the holders of at least 75% of the total voting power of all outstanding common stock.
In addition to the foregoing, certain of our airport concession agreements require the consent of
the airport authority in connection with transfers of varying percentages of our common stock. See
Relationship with Ford.
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Section 203 of the Delaware General Corporation Law
We are a Delaware corporation subject to Section 203 of the Delaware General Corporation Law, or
the Delaware Law. Section 203 provides that, subject to certain exceptions specified therein, a
corporation shall not engage in any business combination with any interested stockholder for a
three-year period following the time that such stockholder becomes an interested stockholder
unless:
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prior to such time, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder becoming an
interested stockholder;
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upon consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced (excluding
certain shares); or
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on or subsequent to such time, the business combination is approved by the board of
directors of the corporation and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. Except as
specified in Section 203 of the Delaware Law, an interested stockholder is defined to
include (x) any person that is the owner of 15% or more of the outstanding voting stock
of the corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, at any time
within three years immediately prior to the relevant date and (y) the affiliates and
associates of any such person.
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Under certain circumstances, Section 203 of the Delaware Law makes it more difficult for an
interested stockholder to effect various business combinations with a corporation for a
three-year period, although the stockholders may elect to exclude a corporation from the
restrictions imposed thereunder. By virtue of its ownership of 15% or more of our outstanding
voting stock for more than a three-year period, Ford and its subsidiaries are not themselves
restricted from engaging in a business combination with us pursuant to Section 203 of the Delaware
Law.
Limitations on directors liability
Our restated certificate of incorporation provides that none of our directors shall be liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the directors duty of loyalty to us or our stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases
or (iv) for any transaction from which the director derived an improper personal benefit. The
effect of these provisions will be to eliminate our rights and the rights of our stockholders
(through stockholders derivative suits on behalf of us) to recover monetary damages against a
director for breach of fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above.
Transfer agent and registrar
The
transfer agent and registrar for the common stock will be Computershare Investor Services, LLC.
Listing
We intend to apply for listing on the New York Stock Exchange under the symbol HTZ.
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Description of the Equity Units
Summary
Concurrently with this offering, we are offering, by means of a separate prospectus, $
of our % Equity Units. The Equity Units will be issued in the form of Corporate
Units. Each Corporate Unit initially will consist of:
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a contract to purchase shares of our Class A common stock, which we refer to as the
stock purchase contracts; and
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a 1/40, or 2.5%, undivided beneficial ownership interest in $1,000 principal amount
of our % senior notes, which initially mature on November 16, 2015, subject to
adjustment, which we refer to as the notes.
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The stock purchase contract that is a component of an Equity Unit requires the holder to purchase,
and us to sell, for $25, on a purchase contract settlement date (scheduled to occur on November 16,
2008, subject to deferral for up to four quarterly periods until November 16, 2009 if remarketing
attempts are not successful), which we refer to as the purchase contract settlement date, a number
of newly issued shares of our Class A common stock equal to a settlement rate based on the average
trading price of our Class A common stock at November 16, 2008. We will also pay quarterly
contract adjustment payments on each stock purchase contract at an annual rate of % of
the stated amount of $25 per Equity Unit.
Subject to the terms of the remarketing agreement, the remarketing agents agree to use their
commercially reasonable efforts to sell the notes underlying the Corporate Units at a price that
results in proceeds of at least 100.5% of the aggregate principal amount of the notes, which amount
will include a remarketing fee payable to the remarketing agents.
Upon a failed final remarketing, holders of all notes will have the right to put their notes to us
at a put price equal to $1,000 per senior note ($25 per applicable ownership interest) plus accrued
and unpaid interest. Holders of notes underlying any Corporate Unit will have a right to put their
notes to us on the purchase contract settlement date after a failed final remarketing and will be
deemed to have exercised such put right unless they settle the related purchase contracts with
separate cash. Holders of notes that are not part of a Corporate Unit may exercise their put right
upon a failed final remarketing by providing written notice within 20 business days after the
failed final remarketing, and the put price will be paid to such holders on the 23rd business day
after the failed final remarketing.
The stock purchase contracts
Each
purchase contract underlying a Corporate Unit or Treasury Unit, see
Creation of Treasury Units, will obligate the holder
of the purchase contract to purchase, and us to sell, on the purchase contract settlement date, for
an amount in cash equal to the stated amount of the Corporate Unit or Treasury Unit, a number of
newly issued shares of our Class A common stock equal to the settlement rate. If the initial
remarketing attempt is not successful, then the purchase contract settlement date will be deferred
for up to four quarterly periods, and the remarketing agents will attempt to remarket the notes on
subsequent remarketing dates. The settlement rate for a deferred purchase contract settlement date
will be the same rate as would have been used for the initial purchase contract settlement date.
The settlement rate, subject to anti-dilution adjustments, will be calculated as described below:
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if the applicable market value of our Class A common stock is equal to or greater than $
, which we refer to as the threshold appreciation price, the settlement rate will be
shares of
our Class A common stock, which is the number of shares of our Class A common stock equal to
$25 divided by the threshold appreciation price;
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if the applicable market value of our Class A common stock is less than the threshold
appreciation price but greater than $
, which we refer to as the reference price, the
settlement rate will be a number of shares of our Class A common stock equal to $25 divided
by the applicable market value; and
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if the applicable market value of our Class A common stock is less than or equal to the
reference price, the settlement rate will be shares of our Class A common stock,
which is the number of shares of our Class A common stock equal to $25 divided by the
reference price.
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The applicable market value means the average of the closing price per share of our Class A
common stock on each of the 20 consecutive trading days ending on the third trading day immediately
preceding November 16, 2008 (regardless of whether the purchase contract settlement date is
deferred beyond November 16, 2008), subject to anti-dilution adjustments. The reference price will
be equal to the initial public offering price of our Class A common stock. The threshold
appreciation price represents a % appreciation over the reference price.
On the purchase contract settlement date, unless:
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a holder of Corporate Units or Treasury Units has settled the related purchase contracts
prior to the purchase contract settlement date through the early delivery of cash to the
purchase contract agent;
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a holder of Corporate Units that include applicable ownership interests in notes has
settled the related purchase contracts with separate cash on the fifth business day
immediately preceding a purchase contract settlement date; or
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a termination event has occurred,
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then, the settlement of the stock purchase contracts will occur as follows:
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in the case of Corporate Units where the treasury portfolio has replaced the notes
underlying the Corporate Units because of a tax event redemption, proceeds equal to the
stated amount of $25 per Corporate Unit when paid at maturity of the appropriate applicable
ownership interests of the treasury portfolio will automatically be applied to satisfy in
full the holders obligation to purchase common stock under the related purchase contracts;
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in the case of Corporate Units where there has been a successful remarketing of the
notes on the remarketing date, the portion of the proceeds from the remarketing equal to
the principal amount of the notes remarketed will automatically be applied to satisfy in
full the holders obligation to purchase shares of our Class A common stock under the
related purchase contracts;
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in the case of Corporate Units where there has been a failed final remarketing of the
notes, holders of all Corporate Units will be deemed to have automatically exercised their
right to put their notes to us on the purchase contract settlement date at a put price
equal to $1,000 per senior note ($25 per applicable ownership interest) plus accrued and
unpaid interest in satisfaction of such holders obligations to us under the related
purchase contracts, thereby satisfying such obligations in full, unless, prior to 11:00
a.m., New York City time, on the second business day immediately preceding the purchase
contract settlement date, such holder provides a written notice of an intention to settle
the related purchase contract with separate cash and on or prior to the business day
immediately preceding the purchase contract settlement date delivers to the collateral
agent the purchase price in cash; and
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in the case of Treasury Units, the principal amount of the related treasury securities,
when paid at maturity, will automatically be applied to satisfy in full the holders
obligation to purchase common stock under the related purchase contracts.
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The common stock will then be issued and delivered to the holder or the holders designee, upon
presentation and surrender of the certificate evidencing the Corporate Units or Treasury Units and
payment by the holder of any transfer or similar taxes payable in connection with the issuance of
the Class A common stock to any person other than the holder.
The notes that are components of the Corporate Units will be pledged to us to secure the holders
obligations to purchase our Class A common stock from us under the stock purchase contracts.
The stock purchase contracts and the obligations of both us and the holders of the Equity Units
under the stock purchase contracts automatically terminate without any further action upon certain
events relating to our bankruptcy, insolvency or reorganization.
Early settlement of stock purchase contracts
Holders of Equity Units may elect to settle the stock purchase contracts early by delivering
$25 in cash at any time on or prior to the fifth business day immediately preceding the purchase
contract settlement date in the case of Corporate Units or any time through the second business day
immediately preceding a remarketing date using cash. Optional early settlement of the stock
purchase contracts results in the issuance of a number of shares of our Class A common stock equal
to the minimum settlement rate, which is the same number that would be issued on the purchase
contract settlement date if the applicable market value was equal to or greater than the threshold
appreciation price of $ , regardless of the actual market value of our Class A common
stock at the time of the optional early settlement.
If we are involved in a merger in which at least 30% of the consideration for our Class A Common
Stock consists of cash or cash equivalents, then each holder of an Equity Unit will have the right
to settle the component stock purchase contract at the settlement rate in effect immediately before
the closing of the cash merger, based on the applicable market value of our Class A Common Stock as
if the closing date of the merger was the purchase contract settlement date, by delivering $25 in
cash. We refer to this as cash merger early settlement. If a holder elects cash merger early
settlement, we will deliver to such holder on the cash merger early settlement date the kind and
amount of securities, cash or other property that such holder would have been entitled to receive
in the cash merger if it had settled the stock purchase contract immediately before the cash
merger.
Following either optional early settlement or cash merger early settlement, the Equity Units of
which the settled stock purchase contracts were a component will be cancelled and the related note
or treasury security will be released to the holder and then will be separately transferable. Both
optional early settlement and cash merger early settlement are subject to the condition that if
required under the U.S. federal securities laws, we have a registration statement under the
Securities Act of 1933 in effect and a prospectus available covering the Class A common stock
deliverable upon settlement of a stock purchase contract. We will agree to use our commercially
reasonable efforts to have a registration statement in effect and to provide a prospectus covering
such Class A common stock and other securities, if any, if so required by the U.S. federal
securities laws.
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Remarketing
Unless a tax event redemption date has occurred or will occur prior to the applicable
remarketing date, to provide holders of Corporate Units with the proceeds necessary to be applied
in the settlement of their
purchase contract obligations, the notes underlying the Corporate Units will be sold in a
remarketing, unless a holder elects not to participate in the remarketing. The cash proceeds from
the remarketing will be used to satisfy the holders obligations to purchase shares of our Class A
common stock on the purchase contract settlement date and any remaining proceeds will be remitted
to the holders. Holders of notes held separately, and not as part of Corporate Units, may elect to
participate in the remarketing as described below.
We have appointed J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Goldman, Sachs &
Co. as remarketing agents and will enter into a remarketing agreement with them, which provides
that we may substitute any remarketing agent at least 30 calendar days prior to any remarketing
date. Subject to the terms of the remarketing agreement, the remarketing agents agree to use their
commercially reasonable efforts to sell the notes underlying the Corporate Units at a price that
results in proceeds of at least 100.5% if the aggregate principal amount of the notes, including a
remarketing fee to be paid to the remarketing agents. To obtain that price, the remarketing agent
may reset the interest rate, on a floating or fixed interest rate basis, on the notes as described
below. The initial remarketing date will be the third business day immediately preceding
November 16, 2008. If this remarketing is successful, settlement will occur on the purchase
contract settlement date of November 16, 2008 (or, if such date is not a business day, settlement
will occur on the following business day).
In connection with any remarketing of the notes, the remarketing agents may reset the interest rate
on the notes on a floating or fixed interest rate basis, as instructed by us. The interest rate on
the notes will be reset in the remarketing to whatever interest rate is necessary to induce
purchasers to purchase all the notes remarketed for at least 100.5% of the aggregate principal
amount of such notes.
In connection with any remarketing, we may elect, in our sole discretion, to change the stated
maturity of the notes to any date not earlier than the second anniversary of the purchase contract
settlement date and not later than the tenth anniversary of the purchase contract settlement date
and to specify a date, not earlier than the second anniversary of the purchase contract settlement
date, on and after which the notes will be redeemable at our option. In addition, we may also
elect to change the interest payment dates and may add any additional financial covenants as we may
determine. Any such election would take effect, upon a successful remarketing, on the purchase
contract settlement date.
If the remarketing agents cannot remarket the notes on a remarketing date prior to the final
scheduled remarketing date at a price that results in proceeds equal to at least 100.5% of the
aggregate principal amount of the notes, then:
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the interest rate on the notes will not be reset;
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the remarketing agents will thereafter attempt to establish a new reset rate meeting the
requirements described above and remarket the notes on subsequent remarketing dates, which
will be the third business day immediately preceding February 16, 2009, May 16, 2009,
August 16, 2009 and November 16, 2009;
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the proceeds received upon maturity of the treasury securities pledged as collateral for
any Treasury Units will be used to settle the applicable purchase contracts, and any
remaining cash proceeds will be remitted to the holders of the Treasury Units, and any cash
pledged by holders of Corporate Units choosing not to participate in the remarketing will
also be used to settle the applicable purchase contracts and the purchase contract
settlement date will not be further deferred with respect to these purchase contracts,
regardless of whether the remarketing attempt at that time is successful; and
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the purchase contract settlement date for all remaining purchase contract will be
deferred until the next remarketing settlement date.
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Any subsequent remarketing of the notes will settle (if successful) on the corresponding purchase
contract settlement date. Such remarketings will be subject to the conditions and procedures
described above and holders will have the right to elect not to participate in any subsequent
remarketings.
If the remarketing agents are unable to remarket the notes for settlement on or before the third
business day immediately preceding November 16, 2009, a failed final remarketing will be deemed
to have occurred. In that case:
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The interest rate on the notes will not be reset and the notes will continue to bear
cash distributions at the initial rate of % per year, payable quarterly in arrears.
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Holders of all notes will have the right to put their notes to us at a put price equal
to $1,000 per senior note ($25 per applicable ownership interest) plus accrued and unpaid
interest.
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Holders of Corporate Units will be deemed to have automatically exercised this put right
with respect to the notes underlying such Corporate Units unless, prior to 11:00 a.m., New
York City time, on the second business day immediately preceding the purchase contract
settlement date, such holder provides a written notice of an intention to settle the
related purchase contract with separate cash and on or prior to the business day
immediately preceding the purchase contract settlement date delivers to the collateral
agent the purchase price in cash. Unless a Corporate Unit holder has settled the related
purchase contracts with separate cash on or prior to the purchase contract settlement date,
such holder will be deemed to have elected to apply a portion of the proceeds of the put
price equal to the principal amount of the notes underlying such Corporate Units against
such holders obligations to us under the related purchase contracts, thereby satisfying
such obligations in full, and we will deliver to such holder our Class A common stock
pursuant to the related purchase contracts.
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Creation of Treasury Units
Unless the treasury portfolio has replaced the notes underlying the Corporate Units as a
result of a tax event redemption prior to the purchase contract settlement date, each holder of
Corporate Units will have the right, at any time on or prior to the applicable remarketing
settlement date, except in connection with a remarketing, to substitute for the related notes held
by the collateral agent, zero-coupon treasury securities that mature on the applicable settlement
date, each of which we refer to as a treasury security, in a total principal amount at maturity
equal to the aggregate principal amount of the notes underlying the applicable ownership interests
in notes for which substitution is being made, thereby creating Treasury Units. The treasury
security that underlies the Treasury Units will be pledged to us to secure the holders obligations
under the stock purchase contract. Holders of Treasury Units may recreate Corporate Units at any
time on or prior to the seventh business day preceding the purchase contract settlement date by
substituting notes having a principal amount equal to the aggregate principal amount at stated
maturity of the treasury securities for which substitution is being made. The components of the
Corporate Units and the Treasury Units are not separately transferable while a part of the unit.
Stock purchase contracts are never transferable except as part of a Corporate Unit or Treasury
Unit. Notes are not transferable except as part of a Corporate Unit unless they are separated from
the Corporate Unit, either through collateral substitution and creation of a Treasury Unit or
following settlement of the stock purchase contracts. Treasury securities that are a component of
a Treasury Unit are not transferable except as part of such Treasury Unit.
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Notes
Initially, interest on the notes will be payable quarterly at the annual rate of %
of the principal amount of the notes, to, but excluding the purchase contract settlement date.
Holders of Corporate Units will receive their pro rata share of interest payments on the notes
underlying their Corporate Units.
The initial maturity date of the notes will be November 16, 2015. In connection with any
remarketing of the notes, we may elect, in our sole discretion, to change the stated maturity of
the notes to any date not earlier than the second anniversary of the purchase contract settlement
date and not later than the tenth anniversary of the purchase contract settlement date.
Additionally, in connection with any remarketing, we may elect to add optional redemption
provisions to the terms of the notes, provided that the notes will not be redeemable at our option
prior to the second anniversary of the purchase contract settlement date. We may also elect to
change the interest payment dates and may add any additional financial covenants as we may
determine. Any such election would take effect, upon a successful remarketing, on the purchase
contract settlement date. If no successful remarketing of the notes occurs, the maturity date of
the notes will remain November 16, 2015.
In connection with the remarketing of the notes, the remarketing agents may reset the interest rate
on the notes on a floating or fixed interest rate basis, as instructed by us. The interest rate on
the notes will be reset in the remarketing to whatever interest rate is necessary to induce
purchasers to purchase all the notes remarketed for at least 100.5% of the aggregate principal
amount of such notes. The reset rate will apply to all outstanding notes, whether or not their
holders participated in the remarketing and will become effective on the settlement date of the
remarketing. Following a successful remarketing, from the reset effective date, interest payments
on all notes will be paid in arrears on interest payment dates to be selected by us, which payment
dates may be monthly, quarterly or semi-annual. If no successful remarketing of the notes occurs,
interest payments on all notes will remain payable quarterly in arrears on the original quarterly
interest payment dates.
Upon a failed final remarketing, holders of all notes will have the right to put their notes to us
at a put price equal to $1,000 per senior note ($25 per applicable ownership interest) plus accrued
and unpaid interest. Holders of notes underlying any Corporate Units will have a right to put
their notes to us on the purchase contract settlement date after a failed final remarketing and
will be deemed to have exercised such put right as described under Description of purchase
contracts Remarketing, unless they settle the related purchase contracts with separate cash.
Holders of notes that are not part of a Corporate Unit may exercise their put right upon a failed
final remarketing by providing written notice within 20 business days after the failed final
remarketing, and the put price will be paid to such holder on the 23rd business day after the
failed final remarketing.
The notes are redeemable at our option, in whole but not in part, upon the occurrence and
continuance of certain tax events. If any tax event redemption occurs prior to the earlier of a
successful remarketing or a purchase contract settlement date, the redemption price for the notes
that underlie the Corporate Units will be paid to the collateral agent holding the notes as
security for the obligations of the holders under the purchase contracts, who will apply such
redemption price to purchase a portfolio of U.S. treasury securities. Thereafter, the applicable
ownership interests in such treasury portfolio will replace the notes as a component of the
Corporate Units and will be pledged to us. Holders of notes that do not underlie the Corporate
Units will receive the redemption price in the tax event redemption. If a tax event
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redemption
occurs after the purchase contract settlement date, we may redeem the notes at par plus accrued and
unpaid interest.
The notes will rank on a parity with our other senior debt securities. The indenture under which
the notes will be issued will not limit our ability to issue or incur other unsecured debt or issue
preferred stock.
Listing
The Corporate Units have been approved for listing on the New York Stock Exchange under the
symbol HTZ PrE, subject to official notice of issuance.
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Shares eligible for future sale
Prior to this offering, there has been no market for the Class A common stock, and no
prediction can be made as to the effect, if any, that large numbers of outstanding shares of common
stock beneficially owned by Ford following this offering, or the availability of such shares for
sale, will have on the market price of the Class A common stock prevailing from time to time.
Nevertheless, dispositions of substantial amounts of common stock beneficially owned by Ford in the
public market following this offering, or the perception that such dispositions could occur, could
adversely affect prevailing market prices for the Class A common stock offered in this offering.
These factors also could impair our ability to raise capital through future offerings of shares.
Upon completion of this offering, we will have shares of Class A common stock issued
and outstanding ( if the underwriters over-allotment option is exercised in full)
and shares of Class B common stock issued and outstanding. All of the shares of
Class A common stock to be sold in this offering will be freely tradeable without restrictions or
further registration under the Securities Act, except for any shares purchased by an affiliate of
us (as that term is defined in Rule 144 adopted under the Securities Act, or Rule 144), which
will be subject to the resale limitations of Rule 144. The outstanding shares of
Class A common stock and outstanding shares of Class B common stock that are beneficially
owned by Ford have not been registered under the Securities Act and may not be sold in the absence
of an effective registration statement under the Securities Act other than in accordance with Rule
144 or another exemption from registration. Ford has certain rights to require us to effect
registration of shares of common stock owned by Ford, which rights may be assigned. See
Relationship with FordCorporate Agreement.
The purchase contracts included in the Equity Units being offered concurrently with this offering
will require us to issue up to shares of our Class A common stock between the third and
fourth anniversaries of the consummation of this offering (or sooner if holders exercise their
rights to settle early) subject to certain conditions. We expect that shares of Class A common
stock issued upon settlement of the purchase contracts relating to the Equity Units will be freely
tradable upon issuance.
Rule 144 and Rule 144A
In general, under Rule 144, a person (or persons whose shares are required to be aggregated)
who has beneficially owned shares of common stock for at least one year, including a person who may
be deemed an affiliate, is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of one percent of the total number of shares of the class of stock
sold or the average weekly reported trading volume of the class of stock being sold during the four
calendar weeks preceding such sale. A person who is not deemed an affiliate of us at any time
during the three months preceding a sale and who has beneficially owned shares for at least two
years is entitled to sell such shares under Rule 144 without regard to the volume limitations
described above. As defined in Rule 144, an affiliate of an issuer is a person that directly or
indirectly through the use of one or more intermediaries controls, is controlled by, or is under
common control with, such issuer.
Rule 144A under the Securities Act, or Rule 144A, provides a non-exclusive safe harbor exemption
from the registration requirements of the Securities Act for specified resales of restricted
securities to certain institutional investors. In general, Rule 144A allows unregistered resales
of restricted securities to a qualified institutional buyer, which generally includes an entity,
acting for its own account or for the account of other qualified institutional buyers, that in the
aggregate owns or invests at least $100 million in securities of unaffiliated issuers. Rule 144A
does not extend an exemption to the offer or sale of securities that, when issued, were of the same
class as securities listed on a national securities exchange or
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quoted on an automated quotation system. The shares of our common stock outstanding as of the date
of this prospectus would be eligible for resale under Rule 144A because such shares, when issued,
were not of the same class as any listed or quoted securities. The foregoing summary of Rule 144
and Rule 144A is not intended to be a complete description thereof.
Lock-up agreement
Ford has indicated that it expects, subject to market conditions, to completely divest its
ownership in us. Ford is not subject to any obligation, contractual or otherwise, to retain its
controlling interest, except that we and Ford, our directors, executive officers and certain other
employees have agreed, subject to certain exceptions, not to offer, sell, contract to sell, pledge
or otherwise dispose of any shares of common stock or any of our securities which are substantially
similar to shares of common stock for a period of 180 days after the date of this prospectus
without the prior written consent of the joint book-running managers, subject to certain
limitations and limited extensions. As a result, there can be no assurance concerning the period
of time during which Ford will maintain its beneficial ownership of common stock owned by it
following this offering. See Underwriting.
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Certain United States federal income and
estate tax consequences to non-U.S. holders
The following is a summary of certain U.S. federal income and estate tax consequences of the
purchase, ownership and disposition of our Class A common stock as of the date hereof. Except
where noted, this summary deals only with Class A common stock that is held as a capital asset by a
non-U.S. holder.
A non-U.S. holder, for the purposes of this discussion, means a person (other than a partnership)
that is not for U.S. federal income tax purposes any of the following:
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an individual citizen or resident of the United States;
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a corporation (or any other entity treated as a corporation for U.S. federal income
tax purposes) created or organized in or under the laws of the United States, any state
thereof or the District of Columbia;
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an estate the income of which is subject to U.S. federal income taxation regardless
of its source; or
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a trust if it (1) is subject to the primary supervision of a court within the United
States and one or more U.S. persons have the authority to control all substantial
decisions of the trust or (2) has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.
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This summary is based upon provisions of the Code and regulations, rulings and judicial decisions
as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in
U.S. federal income and estate tax consequences different from those summarized below. This
summary does not address all aspects of U.S. federal income and estate taxes and does not deal with
foreign, state, local or other tax considerations that may be relevant to non-U.S. holders in light
of their personal circumstances. In addition, it does not represent a detailed description of the
U.S. federal income and estate tax consequences applicable to you if you are subject to special
treatment under the U.S. federal income tax laws (including if you are a U.S. expatriate,
controlled foreign corporation, passive foreign investment company, corporation that
accumulates earnings to avoid U.S. federal income tax, pass-through entity or an investor in a
pass-through entity). We cannot assure you that a change in law will not alter significantly the
tax considerations that we describe in this summary.
If a partnership holds our Class A common stock, the tax treatment of a partner will generally
depend upon the status of the partner and the activities of the partnership. If you are a partner
of a partnership holding our Class A common stock, you should consult your tax advisors.
If you are considering the purchase of our Class A common stock, you should consult your own tax
advisers concerning the particular U.S. federal income and estate tax consequences to you of the
ownership of the common stock, as well as the consequences to you arising under the laws of any
other taxing jurisdiction.
Dividends
Dividends paid to a non-U.S. holder of our Class A common stock generally will be subject to
withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. However, dividends that are effectively connected with the conduct
of a
126
trade or business by the non-U.S. holder within the United States (and, where a tax treaty applies,
are attributable to a U.S. permanent establishment of the non-U.S. holder) are not subject to the
withholding tax, provided certain certification and disclosure requirements are satisfied.
Instead, such dividends are subject to U.S. federal income tax on a net income basis in the same
manner as if the non-U.S. holder were a United States person as defined under the Code, unless an
applicable income tax treaty provides otherwise. Any such effectively connected dividends received
by a foreign corporation may be subject to an additional branch profits tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty.
A non-U.S. holder of our Class A common stock who wishes to claim the benefit of an applicable
treaty rate and avoid backup withholding, as discussed below, for dividends will be required to (a)
complete Internal Revenue Service Form W-8BEN (or other applicable form) and certify under penalty
of perjury that such holder is not a United States person as defined under the Code and is eligible
for treaty benefits or (b) if our Class A common stock is held through certain foreign
intermediaries, satisfy the relevant certification requirements of applicable U.S. Treasury
regulations. Special certification and other requirements apply to certain non-U.S. holders that
are pass-through entities rather than corporations or individuals.
A non-U.S. holder of our Class A common stock eligible for a reduced rate of U.S. withholding tax
pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the Internal Revenue Service.
Gain on disposition of Class A common stock
Any gain realized on the disposition of our Class A common stock generally will not be subject
to U.S. federal income tax unless:
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the gain is effectively connected with a trade or business of the non-U.S. holder in
the United States (and, if required by an applicable income tax treaty, is attributable
to a U.S. permanent establishment of the non-U.S. holder);
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the non-U.S. holder is an individual who is present in the United States for 183
days or more in the taxable year of that disposition, and certain other conditions are
met; or
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we are or have been a United States real property holding corporation for U.S.
federal income tax purposes.
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An individual non-U.S. holder described in the first bullet point immediately above will be subject
to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates.
An individual non-U.S. holder described in the second bullet point immediately above will be
subject to a flat 30% tax on the gain derived from the sale, which may be offset by U.S. source
capital losses, even though the individual is not considered a resident of the United States. If a
non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above,
it will be subject to tax on its net gain in the same manner as if it were a United States person
as defined under the Code and, in addition, may be subject to the branch profits tax equal to 30%
of its effectively connected earnings and profits or at such lower rate as may be specified by an
applicable income tax treaty.
We believe we are not and do not anticipate becoming a United States real property holding
corporation for U.S. federal income tax purposes.
127
Federal estate tax
Class A Common stock held by an individual non-U.S. holder at the time of death will be
included in such holders gross estate for U.S. federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
Information reporting and backup withholding
We must report annually to the Internal Revenue Service and to each non-U.S. holder the amount
of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of
whether withholding was required. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in which the non-U.S.
holder resides under the provisions of an applicable income tax treaty.
A non-U.S. holder will be subject to backup withholding for dividends paid to such holder unless
such holder certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not
have actual knowledge or reason to know that such holder is a United States person as defined under
the Code), or such holder otherwise establishes an exemption.
Information reporting and, depending on the circumstances, backup withholding will apply to the
proceeds of a sale of our Class A common stock within the United States or conducted through
certain U.S.-related financial intermediaries, unless the beneficial owner certifies under penalty
of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to
know that the beneficial owner is a United States person as defined under the Code), or such owner
otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit
against a non-U.S. holders U.S. federal income tax liability provided the required information is
furnished to the Internal Revenue Service.
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Underwriting
We are offering the shares of Class A common stock described in this prospectus through a
number of underwriters. J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Goldman,
Sachs & Co. are acting as joint book-running managers of the offering and as representatives of the
underwriters, in the United States and internationally. We and Ford have entered into an
underwriting agreement with the underwriters. Subject to the terms and conditions of the
underwriting agreement we have agreed to sell to the underwriters, and each underwriter has
severally agreed to purchase, at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus, the number of shares of Class A common
stock listed next to its name in the following table:
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Number
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Name
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Shares
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J.P. Morgan Securities Inc.
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Citigroup Global Markets Inc.
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Goldman, Sachs & Co.
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ABN AMRO Rothschild LLC
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Barclays Bank Capital
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Bear, Stearns & Co. Inc.
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BNP Paribas Securities (USA) Inc.
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Calyon Securities (USA) Inc.
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Comerica Securities, Inc.
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Credit Suisse First Boston LLC
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Daiwa Securities America Inc.
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Deutsche Bank Securities
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Dresdner Kleinwort Wasserstein
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Harris Nesbitt Corp.
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HSBC Securities (USA) Inc.
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ING
Financial Markets LLC
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Lehman Brothers Inc.
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Mellon Financial Markets, LLC
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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Mizuho International plc
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Morgan Stanley & Co. Incorporated
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Mitsubishi
Securities International plc
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RBC Capital Markets Corporation
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BNY Capital Markets, Inc.
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Scotia Capital (USA) Inc.
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UBS
Investment Bank
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Wachovia Capital Markets, LLC
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WestLB AG
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Total
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The underwriters are committed to purchase all the Class A common stock offered by us if they
purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may also be increased or the offering may be
terminated.
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The underwriters propose to offer the Class A common shares directly to the public at the initial
public offering price set forth on the cover page of this prospectus and to certain dealers at that
price less a concession not in excess of $ per share. Any such dealers may resell shares to
certain other brokers or dealers at a discount of up to $ per share from the initial public
offering price. After the initial public offering of the shares, the offering price and other
selling terms may be changed by the underwriters. Sales of shares made outside of the United
States may be made by affiliates of the underwriters. The representatives have advised us that the
underwriters do not intend to confirm discretionary sales in excess of 5% of the common stock
offered in this offering.
At our request, the underwriters have reserved up to 5% of the shares of Class A common stock for
sale at the initial public offering price to certain of our
employees, retirees, directors and officers and employees, directors
and officers of
our affiliates and our licensees through a directed share program. The number of shares of Class A
common stock available for sale to the general public in the offering will be reduced by the number
of directed shares purchased by participants in the program. Any directed shares not purchased
will be offered to the general public on the same basis as other shares offered hereby. We have
agreed to indemnify the underwriters against certain liabilities, including liabilities under the
Securities Act, in connection with the sales of the reserved shares. Purchasers in the directed
share program have agreed that, for a period of 25 days from the date of this prospectus (or 180
days if they are officers or directors), they will not, without the prior written consent of the joint
book-running managers, dispose of or hedge any shares of our Class A common stock acquired by them
in this offering.
The underwriters have an option to buy up to additional shares of Class A common stock from
us to cover sales of shares by the underwriters which exceed the number of shares specified in the
table above. The underwriters have 30 days from the date of this prospectus to exercise this
over-allotment option. If any shares are purchased with this over-allotment option, the
underwriters will purchase shares in approximately the same proportion as shown in the table above.
If any additional shares of Class A common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the shares are being offered.
The underwriting fee is equal to the public offering price per share of Class A common stock less
the amount paid by the underwriters to us per share of Class A common stock. The underwriting fee
is $ per share. The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters assuming both no exercise and full exercise of the
underwriters option to purchase additional shares.
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Without
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With full
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over-allotment
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over-allotment
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exercise
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exercise
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Per Share
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$
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$
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Total
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$
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$
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We estimate that the total expenses of this offering, including registration, filing and listing
fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and
commissions, will be approximately $ .
A prospectus in electronic format may be made available by one or more underwriters, or selling
group members, if any, participating in the offering. The underwriters may agree to allocate a
number of shares to underwriters and selling group members for sale to their online brokerage
account holders. Internet distributions will be allocated by the representatives to underwriters
and selling group members that may make Internet distributions on the same basis as other
allocations.
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We, our directors, executive officers, certain other employees and Ford have agreed, without the
prior written consent of the joint book-running managers, not to, for a period of 180 days after
the date of this prospectus, (1) offer, sell, contract to sell, pledge or otherwise dispose of any
shares of our common stock or any of our securities which are substantially similar to shares of
our common stock, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, shares of our common stock or any such
substantially similar securities; or (2) enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of ownership of shares of
our common stock or any securities substantially similar to shares of our common stock, whether any
transaction described above in clauses (1) or (2) above is to be settled by delivery of our common
stock or such other securities, in cash or otherwise. Additionally, we have agreed not to file
with the SEC a registration statement under the Securities Act relating to any shares of our common
stock or securities convertible into or exchangeable or exercisable for any shares of our common
stock during such 180-day restricted period. Notwithstanding the foregoing, if:
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during the last 17 days of the 180-day restricted period, we issue an earnings
release or material news or a material event relating to us occurs; or
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prior to the expiration of the 180-day restricted period, we announce that we will
release earnings results during the 16-day period beginning on the last day of the
180-day period,
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the restrictions described above shall continue to apply until the expiration of the 18-day period
beginning on the issuance of the earnings release or the occurrence of the material news or
material event.
Notwithstanding our lock-up agreement described above, the underwriters have agreed in the
underwriting agreement that we may (i) issue shares of our common stock pursuant to employee stock
option plans existing on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this prospectus, (ii) issue shares of our common stock in
connection with the transactions described in this prospectus, (iii) issue Equity Units in
connection with the concurrent offering thereof. In addition, notwithstanding the lock-up
agreement described above, the underwriters have agreed that our executive officers and directors
may transfer shares of common stock (i) to a spouse, child or other dependent or member of
immediate family or pursuant to a domestic relations order of a court of competent jurisdiction,
provided that each recipient of such securities agrees to be subject to the restrictions set forth
in the lock-up agreement, (ii) to any trust, family partnership or similar entity for the direct or
indirect benefit of the executive officer, provided that the trust, partnership or similar entity
agrees to be bound by the restrictions set forth in the lock-up agreement or (iii) in connection
with the exchange or surrender of shares of common stock by stockholders to us in satisfaction or
payment of the exercise price of stock options or to satisfy any tax withholding obligations of
such stockholder in respect of such option exercise.
We and Ford have agreed to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act.
We will apply to have our Class A common stock approved for listing on the New York Stock Exchange
under the symbol HTZ. In order to meet the requirements for listing the shares of Class A common
stock on that exchange, the underwriters have undertaken to sell lots of 100 or more shares of
Class A common stock to a minimum number of 2,000 beneficial owners.
No action has been or will be taken in any jurisdiction (except the United States) that would
permit a public offering of shares of our Class A common stock, or the possession, circulation or
distribution of this prospectus or any material relating to us or shares of our Class A common
stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of
our Class A common stock included
131
in this offering may not be offered or sold, directly or indirectly, and neither this prospectus or
any other offering material or advertisements in connection with this offering may be distributed
or published, in or from any such country or jurisdiction, except in compliance with any applicable
rules or regulations of any such country or jurisdiction.
In relation to each Member State of the European Economic Area which has implemented the Prospectus
Directive, as defined below each, a Relevant Member State, each underwriter has represented and
agreed that with effect from and including the date on which the Prospectus Directive is
implemented in that Relevant Member State the Relevant Implementation Date it has not made and
will not make an offer of shares to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares of Class A common stock which has been
approved by the competent authority in that Relevant Member State or, where appropriate, approved
in another Relevant Member State and notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive, except that it may, with effect from and
including the Relevant Implementation Date, make an offer of shares to the public in that Relevant
Member State at any time:
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(a)
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to legal entities which are authorised or regulated to operate in the financial
markets or, if not so authorised or regulated, whose corporate purpose is solely to
invest in securities;
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(b)
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to any legal entity which has two or more of (1) an average of at least 250
employees during the last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more than
50,000,000, as shown in
its last annual or consolidated accounts; or
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(c)
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in any other circumstances which do not require the publication by us of a
prospectus pursuant to Article 3 of the Prospectus Directive.
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For the purposes of this provision, the expression an offer of shares to the public in relation
to any Shares in any Relevant Member State means the communication in any form and by any means of
sufficient information on the terms of the offer and the shares of our Class A common stock to be
offered so as to enable an investor to decide to purchase or subscribe for the shares of our Class
A common stock, as the same may be varied in that Member State by any measure implementing the
Prospectus Directive in that Member State. The expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Each underwriter has represented, warranted and agreed that: (i) it has not made or will not make
an offer of shares to the public in the United Kingdom within the meaning of section 102B of the
Financial Services and Markets Act 2000, as amended, or FSMA, except to legal entities which are
authorised or regulated to operate in the financial markets or, if not so authorised or regulated,
whose corporate purpose is solely to invest in securities or otherwise in circumstances which do
not require the publication by the company of a prospectus pursuant to the Prospectus Rules of the
Financial Services Authority; (ii) it has only communicated or caused to be communicated and will
only communicate or cause to be communicated any invitation or inducement to engage in investment
activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue
or sale of any shares of our Class A common stock included in this offering in circumstances in
which section 21(1) of the FSMA does not apply to us; and (iii) it has complied and will comply
with all applicable provisions of the FSMA with respect to anything done by it in relation to the
shares of our common stock in, from or otherwise involving the United Kingdom.
132
The shares of our Class A common stock included in this offering may not be offered or sold by
means of any document other than to persons whose ordinary business is to buy or sell shares or
debentures, whether as principal or agent, or in circumstances which do not constitute an offer to
the public within the
meaning of the Companies Ordinance (Cap. 32) of Hong Kong, and no advertisement, invitation or
document relating to the shares of our Class A common stock may be issued, whether in Hong Kong or
elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the
public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other
than with respect to shares of our Class A common stock which are or are intended to be disposed of
only to persons outside Hong Kong or only to professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore.
Accordingly, this prospectus and any other document or material in connection with the offer or
sale, or invitation or subscription or purchase, of the shares of our Class A common stock may not
be circulated or distributed, nor may the shares of our Class A common stock be offered or sold, or
be made the subject of an invitation for subscription or purchase, whether directly or indirectly,
to persons in Singapore other than under circumstances in which such offer, sale or invitation does
not constitute an offer or sale, or invitation for subscription or purchase, of the shares of our
Class A common stock to the public in Singapore.
The shares of our Class A common stock included in this offering have not been and will not be
registered under the Securities and Exchange Law of Japan, or the Securities and Exchange Law,
and each underwriter has agreed that it will not offer or sell any shares of our Class A common
stock, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which
term as used herein means any person resident in Japan, including any corporation or other entity
organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the Securities and Exchange Law and any other
applicable laws, regulations and ministerial guidelines of Japan.
Certain of the underwriters are not registered as broker-dealers under Section 15 of the Exchange
Act and have agreed that, in connection with this offering, they will not offer or sell any shares of
our Class A common stock in, or to persons who are nationals or residents of, the United States
other than through registered broker-dealers.
In connection with this offering, the underwriters may engage in stabilizing transactions, which
involves making bids for, purchasing and selling shares of Class A common stock in the open market
for the purpose of preventing or retarding a decline in the market price of the Class A common
stock while this offering is in progress. These stabilizing transactions may include making short
sales of the Class A common stock, which involves the sale by the underwriters of a greater number
of shares of Class A common stock than they are required to purchase in this offering, and
purchasing shares of Class A common stock on the open market to cover positions created by short
sales. Short sales may be
133
covered shorts, which are short positions in an amount not greater
than the underwriters over-allotment option referred to above, or may be naked shorts, which are
short positions in excess of that amount. The underwriters may close out any covered short
position either by exercising their over-allotment option, in whole or in part, or by purchasing
shares in the open market. In making this determination, the underwriters will consider, among
other things, the price of shares available for purchase in the open market compared to the price
at which the underwriters may purchase shares through the over-allotment option. A naked short
position is more likely to be created if the underwriters are concerned that there
may be downward pressure on the price of the Class A common stock in the open market that could
adversely affect investors who purchase in this offering. To the extent that the underwriters
create a naked short position, they will purchase shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may
also engage in other activities that stabilize, maintain or otherwise affect the price of the Class
A common stock, including the imposition of penalty bids. This means that if the representatives
of the underwriters purchase Class A common stock in the open market in stabilizing transactions or
to cover short sales, the representatives can require the underwriters that sold those shares as
part of this offering to repay the underwriting discount received by them.
These activities may have the effect of raising or maintaining the market price of the Class A
common stock or preventing or retarding a decline in the market price of the Class A common stock,
and, as a result, the price of the Class A common stock may be higher than the price that otherwise
might exist in the open market. If the underwriters commence these activities, they may
discontinue them at any time. The underwriters may carry out these transactions on the New York
Stock Exchange, in the over-the-counter market or otherwise.
Prior to this offering there has been no public market for our Class A common stock. The initial
public offering price will be determined by negotiations between us and the representatives of the
underwriters. In determining the initial public offering price, we and the representatives of the
underwriters expect to consider a number of factors, including:
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the information set forth in this prospectus and otherwise available to the representatives;
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the history of and prospects for the industries in which we compete;
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an assessment of our management;
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our prospects for future earnings;
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the general condition of the securities markets at the time of this offering;
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the recent market prices of, and demand for, publicly traded common stock of
generally comparable companies; and
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other factors deemed relevant by the underwriters and us.
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Neither we nor the underwriters can assure investors that an active trading market will develop for
our Class A common stock, or that the shares will trade in the public market at or above the
initial public offering price.
134
The joint book-running managers and certain of the other underwriters and their affiliates have
provided in the past to us, Ford and our affiliates and may provide from time to time in the future
certain commercial banking, financial advisory, investment banking and other services for us, Ford
and such affiliates in the ordinary course of their business, for which they have received and may
continue to receive customary fees and commissions. Concurrently with this offering, we are also
offering Equity Units for which the underwriters of this offering are also acting as underwriters
under a separate underwriting agreement.
On May 26, 2005, we entered into the Interim Credit Facility with an aggregate availability of up
to $3.0 billion with the joint book-running managers and/or their affiliates as the arrangers and
initial lenders, JPMorgan Chase Bank, N.A. as the U.S. administrative agent and JPMorgan Chase
Bank, N.A., Toronto Branch as the Canadian administrative agent. The Interim Credit Facility
matures on November 23, 2005 and, under certain circumstances, we may be required to prepay all or
a portion of the amounts outstanding thereunder. For further information, see Managements
discussion and analysis of financial condition and results of operationsLiquidity and capital
resourcesCredit facilities. In addition, from time to time, certain of the underwriters and
their affiliates may effect transactions for their own account or the account of customers, and
hold on behalf of themselves or their customers, long or short positions in our debt or equity
securities or loans, and may do so in the future.
Robert E. Rubin, a member of the Office of the Chairman of Citigroup Inc., the parent company of
Citigroup Global Markets Inc., is a director of Ford Motor Company. Richard A. Manoogian, a
director of JPMorgan Chase & Co., is also a director of Ford Motor Company.
135
Validity of the shares
The validity of the issuance of the shares of Class A common stock to be sold in this offering
will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York and for the
underwriters by Shearman & Sterling LLP, New York, New York.
Shearman & Sterling LLP have in the past provided, and may
continue to provide, legal services to Ford and its subsidiaries.
Independent registered public accounting firm
The consolidated financial statements of us and our subsidiaries as of December 31, 2004 and
2003 and for each of the three years in the period ended December 31, 2004 and the related
financial statement schedule included in this prospectus have been so included in reliance on the
report (which contains an explanatory paragraph relating to the restatement of our financial
statements as described in Note 1A to the financial statements) of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said firm as experts in
auditing and accounting.
With respect to the unaudited financial information of us and our subsidiaries for the six month
period ended June 30, 2005 and 2004 included in this prospectus, PricewaterhouseCoopers LLP
reported that they have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated
August 5, 2005 appearing herein
states that they did not audit and they do not express an opinion on that unaudited financial
information. Accordingly, the degree of reliance on their report on such information should be
restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers
LLP is not subject to the liability provisions of Section 11 of the Securities Act for their report
on the unaudited financial information because that report is not a report or a part of the
registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of
Sections 7 and 11 of the Securities Act.
Where you can find additional information
We have filed with the SEC a Registration Statement on Form S-1 (together with all amendments,
exhibits, schedules and supplements thereto, the Registration Statement), under the Securities Act
and the rules and regulations thereunder, for the registration of the Class A common stock to be
sold in this offering. This prospectus, which forms a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain parts of which have
been omitted as permitted by the rules and regulations of the SEC. For further information with
respect to us and the Class A common stock to be sold in this offering, please refer to the
Registration Statement. Statements contained in this prospectus as to the contents of any contract
or other document referred to herein are not necessarily complete and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is qualified in all
respects by the provisions of such exhibit, to which reference is hereby made. You may read and
copy any document we file at the SECs public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-888-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from the SECs website at
www.sec.gov or from our website at www.hertz.com.
However, neither the information we file with
the SEC nor the information on our website constitutes a part of this prospectus.
We will apply to list the Class A common stock on the New York Stock Exchange under the symbol
HTZ. Copies of the Registration Statement and reports and other information will be available
for inspection and copying at the office of the New York Stock Exchange at 20 Broad Street, New
York New York 10005.
136
We are currently subject to abbreviated informational requirements of the Securities Exchange Act
of 1934, as amended, or the Exchange Act, in accordance with General Instruction I(1)(a) and (b)
to Form 10-K and in accordance therewith file reports and other information with the SEC. Such
reports and other information can be inspected and copied at the offices of the SEC set forth
above. Copies of such material can be obtained from the Public Reference Section of the SEC at the
address set forth above at prescribed rates. In addition, such material is publicly available
through the SECs site on the Internet located at the address set forth above. As a result of the
offering, we will become subject to the full informational requirements of the Exchange Act. We
will fulfill our obligations with respect to such requirements by filing periodic reports and other
information with the SEC.
137
Index to financial statements
|
|
|
|
|
Interim unaudited condensed consolidated financial statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6 16
|
|
|
|
|
|
|
Annual audited consolidated financial statements
|
|
|
|
|
|
|
|
F-17
|
|
|
|
|
F-18
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
|
|
|
F-21 22
|
|
|
|
|
F-23 53
|
|
|
|
|
F-54
|
|
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholder of The Hertz Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of The Hertz Corporation and
its subsidiaries (the Company) as of June 30, 2005, and the related condensed consolidated
statements of operations and of cash flows for the six-month periods ended June 30, 2005 and June 30, 2004. These interim financial statements are the responsibility of the Companys
management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the objective of which
is the expression of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying condensed consolidated interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We previously audited in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet as of December 31, 2004, and the related
consolidated statements of operations, of stockholders equity and of cash flows for the year then
ended (not presented herein), and in our report dated March 21, 2005, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2004 is fairly stated in
all material respects in relation to the consolidated balance sheet from which it has been derived.
As discussed in Note 1A to the condensed consolidated financial statements, the Company has
restated its condensed consolidated statement of operations for the six-month period ended June 30,
2004.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
August 5, 2005
F-2
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents (Notes 3 and 7
|
|
$
|
703,947
|
|
|
$
|
680,866
|
|
Short-term investments (Notes 3 and 11)
|
|
|
296,402
|
|
|
|
556,997
|
|
Receivables, less allowance for
doubtful accounts of $25,763 and $30,447 (Note 7)
|
|
|
1,130,391
|
|
|
|
1,282,290
|
|
Due from affiliates (Note 11)
|
|
|
377,263
|
|
|
|
445,235
|
|
Inventories, at lower of cost or market
|
|
|
94,040
|
|
|
|
83,287
|
|
Prepaid expenses and other assets (Note 7)
|
|
|
161,530
|
|
|
|
144,168
|
|
Revenue earning equipment, at cost (Notes 6, 7 and 11):
|
|
|
|
|
|
|
|
|
Cars
|
|
|
10,073,730
|
|
|
|
8,380,688
|
|
Less accumulated depreciation
|
|
|
(802,210
|
)
|
|
|
(783,499
|
)
|
Other equipment
|
|
|
2,677,373
|
|
|
|
2,378,673
|
|
Less accumulated depreciation
|
|
|
(783,551
|
)
|
|
|
(852,947
|
)
|
|
|
|
|
|
|
|
Total revenue earning equipment
|
|
|
11,165,342
|
|
|
|
9,122,915
|
|
|
|
|
|
|
|
|
Property and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land, buildings and leasehold improvements
|
|
|
1,313,920
|
|
|
|
1,296,196
|
|
Service equipment
|
|
|
1,297,185
|
|
|
|
1,232,739
|
|
|
|
|
|
|
|
|
|
|
|
2,611,105
|
|
|
|
2,528,935
|
|
Less accumulated depreciation
|
|
|
(1,332,978
|
)
|
|
|
(1,292,764
|
)
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
1,278,127
|
|
|
|
1,236,171
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets (Note 4)
|
|
|
544,927
|
|
|
|
544,445
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,751,969
|
|
|
$
|
14,096,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (Note 11)
|
|
$
|
1,301,329
|
|
|
$
|
786,037
|
|
Accrued liabilities (Note 7)
|
|
|
771,550
|
|
|
|
835,680
|
|
Accrued taxes
|
|
|
149,178
|
|
|
|
130,062
|
|
Debt (Notes 7 and 11)
|
|
|
10,760,078
|
|
|
|
8,428,031
|
|
Public liability and property damage
|
|
|
355,318
|
|
|
|
391,696
|
|
Deferred taxes on income
|
|
|
907,400
|
|
|
|
849,700
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,244,853
|
|
|
|
11,421,206
|
|
|
|
|
|
|
|
|
|
Minority interest (Note 1)
|
|
|
7,978
|
|
|
|
4,921
|
|
Stockholders equity (Notes 7 and 11):
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value,
3,000 shares authorized, 100 shares issued
|
|
|
|
|
|
|
|
|
Additional capital paid-in
|
|
|
983,132
|
|
|
|
983,132
|
|
Retained earnings
|
|
|
414,292
|
|
|
|
1,479,217
|
|
Accumulated other comprehensive income (Note 10)
|
|
|
101,714
|
|
|
|
207,898
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,499,138
|
|
|
|
2,670,247
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
15,751,969
|
|
|
$
|
14,096,374
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-3
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands of Dollars)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
Restated
|
Revenues:
|
|
|
|
|
|
|
|
|
Car rental
|
|
$
|
2,824,539
|
|
|
$
|
2,551,919
|
|
Industrial and construction equipment rental
|
|
|
630,094
|
|
|
|
522,257
|
|
Other
|
|
|
48,269
|
|
|
|
38,190
|
|
|
|
|
|
|
|
|
Total revenues (Note 1A)
|
|
|
3,502,902
|
|
|
|
3,112,366
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Direct operating
|
|
|
2,025,483
|
|
|
|
1,781,829
|
|
Depreciation of revenue earning equipment (Note 6)
|
|
|
756,437
|
|
|
|
713,742
|
|
Selling, general and administrative
|
|
|
318,905
|
|
|
|
292,369
|
|
Interest, net of interest income of $16,863 and $9,010 (Note 7)
|
|
|
212,044
|
|
|
|
182,706
|
|
|
|
|
|
|
|
|
Total expenses (Note 1A)
|
|
|
3,312,869
|
|
|
|
2,970,646
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
190,033
|
|
|
|
141,720
|
|
Provision for taxes on income (Note 5)
|
|
|
(64,937
|
)
|
|
|
(49,537
|
)
|
Minority interest (Note 1)
|
|
|
(5,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
120,075
|
|
|
$
|
92,183
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-4
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
120,075
|
|
|
$
|
92,183
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
1,545,470
|
|
|
|
1,570,327
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities (Note 1)
|
|
|
1,665,545
|
|
|
|
1,662,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sales (purchases) of short-term investments, net
|
|
|
260,595
|
|
|
|
(2,324
|
)
|
Revenue earning equipment expenditures
|
|
|
(7,640,642
|
)
|
|
|
(6,720,161
|
)
|
Proceeds from disposal of revenue earning equipment
|
|
|
4,611,722
|
|
|
|
3,781,921
|
|
Property and equipment expenditures
|
|
|
(186,803
|
)
|
|
&nb |