<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE HERTZ CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7514
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
13-1938568
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
225 BRAE BOULEVARD
PARK RIDGE, NEW JERSEY 07656-0713
(201) 307-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WILLIAM SIDER
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
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)
-------------------------
COPIES TO:
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DAVID J. SORKIN, ESQ. ARBIE R. THALACKER, ESQ.
SIMPSON THACHER & BARTLETT SHEARMAN & STERLING
425 LEXINGTON AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017-3954 NEW YORK, NEW YORK 10022-6069
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes 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 of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, please check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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Class A Common Stock, par
value $0.01 per share....... $ $100,000,000 $30,304
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(1) Includes shares of Class A Common Stock which the Underwriters have the
option to purchase to cover over-allotments, if any. The shares of Class A
Common Stock are not being registered for the purpose of sales outside the
United States.
(2) Estimated solely for the purpose of calculating the registration fee.
-------------------------
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the Registration Statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
PROSPECTUS
Subject to Completion
Dated February 28, 1997
Shares
[HERTZ LOGO]
THE HERTZ CORPORATION
Class A Common Stock
(par value $0.01 per share)
All of the Class A Common Stock offered hereby is being offered by The Hertz
Corporation (the "Company"), which is a wholly-owned subsidiary of Ford Motor
Company ("Ford"). Upon completion of the Offerings, Ford will beneficially own
% of the outstanding Class A Common Stock ( % if the Underwriters'
over-allotment options are exercised in full) and 100% of the outstanding shares
of Class B Common Stock of the Company (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 Offerings, the outstanding shares of Class A Common Stock
to be offered in the Offerings 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 the Company ( % and %, respectively, if the Underwriters'
over-allotment options are exercised in full). The remainder of the voting power
and economic interest in the Company will be beneficially held by Ford. See
"Risk Factors -- Control by and Relationship with Ford" and "Description of
Capital Stock".
Of the shares of Class A Common Stock offered hereby, shares are
being offered initially in the United States and Canada by the U.S. Underwriters
(the "U.S. Underwriters") and shares are being offered initially outside
the United States and Canada in a concurrent offering by the International
Managers (the "International Managers" and, together with the U.S. Underwriters,
the "Underwriters"). See "Underwriting".
Prior to the Offerings, there has been no public market for the Class A Common
Stock. It is currently anticipated that the initial public offering price will
be between $ and $ per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price of the Class A Common Stock. Application has been made to list
the Class A Common Stock on the New York Stock Exchange under the symbol "HRZ".
Shares of Class A Common Stock are being reserved for sale to certain employees
and retirees of the Company and its affiliates at the initial public offering
price. See "Underwriting". Such employees and retirees are expected to purchase,
in the aggregate, not more than % of the Class A Common Stock offered in the
offerings.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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Per Share $ $ $
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Total (3) $ $ $
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(1) The Company and Ford have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting".
(2) Before deducting expenses of the Offerings payable by the Company estimated
at $ , net of expenses of $ to be reimbursed by the Underwriters.
(3) The Company has granted the Underwriters options to purchase up to an
additional shares of Class A Common Stock, on the same terms as set
forth above, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $ , $ and $ , respectively. See
"Underwriting".
GLOBAL COORDINATOR
J.P. MORGAN & CO.
The shares of Class A Common Stock being offered by this Prospectus are being
offered by the U.S. Underwriters, subject to prior sale, when as and if
delivered to and accepted by the U.S. Underwriters, and subject to approval of
certain legal matters by Shearman & Sterling, counsel for the Underwriters. It
is expected that delivery of the shares of Class A Common Stock will be made
against payment therefor on or about , 1997 at the offices of
J.P. Morgan Securities Inc., 60 Wall Street, New York, New York.
J.P. MORGAN & CO. GOLDMAN, SACHS & CO.
LEHMAN BROTHERS SALOMON BROTHERS INC SMITH BARNEY INC.
, 1997
<PAGE> 3
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE,
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
No person has been authorized to give any information or make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any Underwriter. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Class A Common Stock in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company subsequent to the date hereof.
No action has been or will be taken in any jurisdiction by the Company or any
Underwriter that would permit a public offering of the Class A Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about and to observe any restrictions as to
the offering of the Class A Common Stock and the distribution of this
Prospectus.
TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 4
Risk Factors........................ 12
Special Note Regarding
Forward-Looking Statements........ 17
The Company......................... 18
Use of Proceeds..................... 20
Dividend Policy..................... 20
Capitalization...................... 21
Selected Consolidated Financial Data
of the Company.................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 24
Business............................ 32
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Relationship with Ford.............. 55
Management.......................... 60
Ownership of Common Stock........... 67
Description of Capital Stock........ 67
Shares Available for Future Sale.... 72
Description of Certain
Indebtedness...................... 74
Certain United States Tax
Consequences to Non-United States
Holders........................... 76
Underwriting........................ 79
Legal Matters....................... 82
Experts............................. 82
Available Information............... 82
Index to Financial Statements....... F-1
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"Hertz", Hertz Logo, "HERC", "The Source", "H.I.R.E.", "Hertz #1 Club Gold",
"The Hertz #1 Club", and "Hertz NeverLost" are trademarks or service marks of
the Company. All other trademarks, service marks or brand names appearing in
this Prospectus are the property of their respective holders.
The Company intends to furnish its stockholders with annual reports containing
consolidated financial statements certified by an independent public accounting
firm.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
(i) the "Company" means The Hertz Corporation and its consolidated subsidiaries,
(ii) "Ford" means Ford Motor Company and its consolidated subsidiaries (other
than the Company), (iii) "cars" mean cars and light trucks and (iv) the
information contained in this Prospectus assumes that the Underwriters'
over-allotment options are not exercised. Unless otherwise defined herein,
capitalized terms used in this summary have the respective meanings ascribed to
them elsewhere in this Prospectus.
THE COMPANY
The Company and its affiliates and independent licensees operate what the
Company believes is the largest car rental business in the world based upon
revenues and volume of rental transactions and the largest industrial and
construction equipment rental business in the United States based upon revenues.
The Company's "Hertz" brand name is recognized worldwide as a leader in quality
rental and leasing services and products. The Company, together with its
affiliates and independent licensees, rents and leases cars, rents industrial
and construction equipment and operates its other businesses from approximately
5,500 locations throughout the United States and in approximately 140 foreign
countries and jurisdictions. For the year ended December 31, 1996, the Company
generated record revenues, income before taxes and net income of $3.7 billion,
$256.5 million and $158.6 million, respectively. The Company and its
predecessors have been profitable in every year since 1952, when one of the
Company's predecessors first became a public company.
Car Rental
The Company believes it maintains the largest network of company-owned car
rental locations both in the United States and in Europe, and the largest number
of on-airport car rental locations in the world, enabling the Company to provide
consistent quality, pricing and service worldwide. The Company derives
approximately 85% of its car rental revenues from on-airport locations.
According to information disclosed by the largest 153 U.S airports, the Company
maintained the leading on-airport car rental market share at such airports
during 1996 of over 30% in terms of revenues and has maintained market share at
approximately this level during each of the last five years. This market has
grown at a compounded annual rate of approximately 11% since 1992 to over $6
billion in revenues in 1996, based on information provided by such airports. The
Company also believes it maintained the leading on-airport car rental market
share in Europe during 1996 of approximately 30% in terms of revenues. The
Company has recently begun to provide replacement car rental services from
off-airport locations under the H.I.R.E. brand name ("Hertz Insurance
Replacement Entity"). The Company estimates that total 1996 revenues for the car
rental industry in the United States were in excess of $14 billion, and that
total 1995 revenues for the car rental industry in Europe were in excess of $5
billion.
During 1996, approximately 51% of the Company's worldwide car rental revenues
were generated from business travelers and approximately 49% from leisure
travelers. The Company has a worldwide marketing and sales organization of over
800 people focused on both commercial accounts/group sales and the travel
industry, including travel agents, as well as a comprehensive program of retail
and trade advertising, direct mail and other targeted marketing. At December 31,
1996, the Company's business customers included 357 of the Fortune 500
companies. The Company was named a primary supplier to 149 of the 347 Fortune
500 companies who named a primary/secondary supplier. The Company has received
numerous awards and designations around the world for its car rental business
from independent third parties.
The Company's Hertz #1 Club Gold service provides an expedited rental service to
members at approximately 650 locations worldwide. At December 31, 1996, there
were approximately two million active Hertz #1 Club Gold members who accounted
for approximately 35% of the Company's U.S. car
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rental transactions in 1996. Through its many travel industry relationships with
airlines and hotels, the Company has targeted the most frequent travelers to
become Hertz #1 Club Gold members.
The Company's worldwide car rental operations and certain other activities
generated $3.3 billion in revenue and $165.5 million in income before taxes
during 1996.
Industrial and Construction Equipment Rental
The Company, through its wholly-owned subsidiary, Hertz Equipment Rental
Corporation ("HERC"), believes that it maintains the leading market share in the
U.S. industrial and construction equipment rental market. HERC rents a broad
range of earth moving equipment, materials handling equipment, aerial and
electrical equipment, air compressors, compaction equipment and
construction-related trucks through a network of 120 branch locations. According
to a survey conducted for the Associated Equipment Distributors, an industry
trade association, 1995 annual revenues for the U.S. equipment rental market
were estimated at $15 billion. This market is fragmented with over 7,000
participants and 12,000 locations. According to the Rental Equipment Register,
an industry publication, only 23 of the top 100 equipment rental companies in
the United States had rental revenues in excess of $25 million in 1995.
HERC maintains an established national accounts program with over 1,700
customers who generated 43% of HERC's revenues in 1996. The Company believes
that HERC's fleet is the largest and most modern of its kind in the United
States. As of December 31, 1996, HERC maintained a fleet with an original
investment cost of approximately $908 million and a weighted average age of 19.7
months. HERC generated $392.3 million in revenue and $91.0 million in income
before taxes during 1996.
Strategic Information Systems
Centralized control of major business processes, achieved through the use of the
Company's strategic systems technology, provides the disciplined environment
which enables the Company to deliver consistent quality services at its car
rental and equipment rental operations. The Company maintains real-time
communications with its many locations by means of what it believes is the
largest private data network in the industry. Key components of the Company's
strategic systems include: (i) a global reservations system, which operates
through real-time, on-line centers on five continents, (ii) a yield management
system, which is designed to optimize revenue through controlling,
simultaneously, the availability of various rates as well as the availability of
cars, (iii) a competitive rate detection system, which monitors rate changes and
provides "scouting" routines to identify future rates and (iv) a cost allocation
model, which provides contribution data by location, business segment, car and
equipment category and customer account.
Other
Other activities of the Company include self-insurance operations for both its
car rental and industrial and construction equipment rental businesses, car
leasing operations in certain international markets, the sales of its used cars
and equipment, third party claim management services and telecommunications
services in the United States.
5
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BUSINESS STRATEGY
The Company believes that it is well positioned to capitalize upon the growth
opportunities available in both the global car rental and industrial and
construction equipment rental markets. The Company's strategy for continued
growth is to:
Capitalize on the opportunities presented by the changing ownership in the
domestic car rental industry
For the past several years, the car rental industry has experienced an
environment characterized by low price increases that have not kept pace with
rising fleet costs, resulting in significant operating losses for many
competitors in the industry. Management believes that there will be an increase
in industry profitability, in part as a consequence of the recent change in
ownership of many domestic car rental companies. Management intends to
capitalize on this favorable industry environment by selectively increasing
prices and continuing to improve its low cost structure relative to its
competitors.
Leverage the "Hertz" brand name, recognized worldwide, in existing and new
business ventures
The Company believes that the "Hertz" brand name provides an ideal platform to
expand into new ventures. For example, the Company has re-entered the retail
used car sales market. Once the largest retailer of used cars in the United
States, the Company intends to use its recognized brand name and reputation to
offer quality used cars. Key elements of the Company's retail used car sales
strategy include free initial warranty, no-haggle pricing and providing a
complete maintenance history for each car. The Company has 41 used car sales
locations from coast to coast, substantially all of which were profitable in
1996, with a substantial expansion underway for 1997. In addition, in 1997, the
Company will pilot a new retail used car sales concept under the "Hertz" brand
name offering a larger selection of used cars.
The Company has also entered the estimated $3.5 billion replacement/local car
rental segment in the United States under the H.I.R.E. brand name and in Europe
under the "Hertz" brand name. The H.I.R.E. business unit currently operates at
50 locations in six states with expansion underway. The Company expects that
H.I.R.E. generally will hold its cars for 18 to 24 months, compared with 5 to 12
months for the Company's domestic car rental business, resulting in lower
monthly holding costs. In Europe, the Company currently operates in the
replacement/local car rental market through its existing suburban car rental
locations.
Improve operating efficiency and enhance customer service through the continued
use and refinement of strategic information systems
The Company has invested over $600 million during the past five years in
strategic systems and intends to continue to invest in advanced technology. The
Company's centralized reservations system is integrated with its fleet
management information systems, resulting in improved vehicle utilization. This
system is being upgraded to a state of the art, client-server based reservations
system. In addition, the Company's yield management system employs techniques to
optimize, simultaneously, rental rates and car availability. The Company is in
the process of consolidating various European reservations centers into a single
facility in Ireland, resulting in anticipated cost savings while providing
uniformly high quality service. In its industrial and construction equipment
rental business, the use of its strategic information systems enables the
Company to monitor carefully the utilization of equipment by specific operation.
Through continued investments in these systems, the Company believes it will
expand its market share, increase its profitability and sustain its leadership
position with respect to the quality and breadth of services provided to its
customers.
Maintain consistent quality, pricing and service worldwide through continued
ownership of locations
The Company believes it maintains the largest network of company-owned car
rental locations both in the United States and in Europe. Because of its
extensive ownership base, the Company is capable of capitalizing worldwide on
business from global tourist and travel organizations and multinational
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corporations. The Company believes that its extensive worldwide ownership of its
operations contributes to the consistency of its high-quality service, strict
cost control, fleet utilization, yield management, competitive pricing and
ability to offer one-way rentals through its Rent It Here-Leave It There
program. Under appropriate circumstances, the Company also intends to expand
through joint ventures in emerging markets.
Expand the industrial and construction equipment rental business both in the
United States and abroad
The Company believes that HERC, as the largest nationwide provider of industrial
and construction equipment rental services in the United States, is well
positioned to expand through continued growth of its fleet and the opening and
acquisition of new locations. HERC intends to continue to emphasize profitable
expansion through: (i) continuing to focus on low equipment costs through its
status as one of the largest purchasers of new equipment in the United States,
(ii) improving productivity through use of the Company's strategic information
systems, (iii) expanding its used equipment sales operations available for
buyers seeking to purchase well-maintained, late model equipment at competitive
prices, (iv) diversifying its customer base across industry sectors and (v)
capitalizing on the trend of equipment users toward outsourcing to a single
nationwide provider. In addition, HERC intends to expand in international
markets over the long term by applying its successful U.S. operating philosophy.
Achieve superior performance by direct linkage of management compensation to
operating unit performance
All worldwide car rental and equipment rental operating units are managed under
an individual "profit center" philosophy, whereby profit and loss statements are
generated monthly by city. Management incentives are based primarily upon the
financial results of the specific operation managed. Additional consideration is
given for total operating unit and consolidated corporate financial performance.
This "profit center" management is supported and monitored by division and
corporate level management equipped with sophisticated management information
systems which allow detailed review of each operation and business discipline.
7
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THE OFFERINGS
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CLASS A COMMON STOCK OFFERED(1):
United States Offering.................................... shares
International Offering.................................... shares
Total Offerings........................................ shares
COMMON STOCK OUTSTANDING AFTER THE OFFERINGS(1)(2):
Class A Common Stock...................................... shares
Class B Common Stock...................................... shares
Total Common Stock Outstanding......................... shares
</TABLE>
USE OF PROCEEDS................. The proceeds to the Company from the offering
of the Class A Common Stock in the United
States and Canada (the "U.S. Offering") and
the concurrent offering outside the United
States and Canada (the "International
Offering" and, together with the U.S.
Offering, the "Offerings"), after the
deduction of underwriting discounts and
expenses payable by the Company, are
estimated to be $ million ($ million
if the Underwriters' over-allotment options
are exercised in full), substantially all of
which is expected to be used to reduce
short-term indebtedness of the Company. See
"Use of Proceeds".
DIVIDENDS; VOTING RIGHTS;
CONVERSION...................... The holders of Class A Common Stock and Class
B Common Stock (collectively, "Common Stock")
share ratably on a per share basis in all
dividends and other distributions declared by
the Board of Directors; however, the holders
of Class A Common Stock are entitled to one
vote per share and the holders of Class B
Common Stock are entitled to five votes per
share. See "Description of Capital Stock --
Common Stock -- Voting Rights". Under certain
circumstances, shares of Class B Common Stock
convert or are convertible into an equivalent
number of shares of Class A Common Stock. See
"Relationship with Ford" and "Description of
Capital Stock -- Common Stock -- Conversion".
Certain debt instruments to which the Company
is a party restrict the Company's ability to
pay dividends. See "Dividend Policy".
CONTROLLING STOCKHOLDER......... For information regarding the Company's
controlling stockholder, see "Relationship
with Ford" below.
RISK FACTORS.................... For a discussion of certain considerations
relevant to an investment in the Class A
Common Stock, see "Risk Factors".
PROPOSED NYSE SYMBOL FOR CLASS A
COMMON STOCK.................. HRZ
- -------------------------
(1) Excludes up to shares and shares subject to over-allotment
options granted by the Company to the U.S. Underwriters and the International
Underwriters, respectively. See "Underwriting".
(2) Excludes shares of Class A Common Stock reserved for issuance
pursuant to certain employee benefit plans. See "Management --
".
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CERTAIN ACTIONS TO BE TAKEN PRIOR TO THE OFFERINGS
Certain credit facilities maintained by the Company and a series of debt
securities publicly issued by the Company contain as an event of default Ford's
failure to own, directly or indirectly, 100% of the outstanding voting stock of
the Company. Prior to completion of the Offerings, the Company intends to amend
such credit facilities and the terms of such securities to eliminate such event
of default. See "Description of Certain Indebtedness -- Ford Ownership Event of
Default".
Certain of the Company's airport concession agreements require the consent of
the airport authority in connection with changes in ownership of the Company.
Prior to completion of the Offerings, the Company intends to obtain consents
under, or amend, those concession agreements which require consent for the
transfer of the Class A Common Stock offered hereby. See "Risk Factors --
Control by and Relationship with Ford" and "Description of Capital Stock --
Certain Certificate of Incorporation and By-law Provisions -- Provisions That
May Have an Anti-Takeover Effect".
DIVIDEND POLICY
The Company's Board of Directors currently intends to declare quarterly
dividends on both the Class A Common Stock and Class B Common Stock. It is
expected that the first quarterly dividend payment will be $0. per share (a
rate of $0. annually), with the initial dividend to be declared and paid in the
third quarter of 1997. The declaration and payment of dividends by the Company
are subject to the discretion of its Board of Directors. Any determination as to
the payment of dividends will depend upon, among other things, general business
conditions, the Company's financial results, contractual, legal and regulatory
restrictions regarding the payment of dividends by the Company's subsidiaries,
the credit ratings of the Company and such other factors as the Board of
Directors may consider to be relevant. Certain debt instruments to which the
Company is a party restrict the Company's ability to pay dividends. See
"Dividend Policy".
The Company paid no cash dividends to Ford during 1994 and 1996 and paid a cash
dividend on its common stock to Ford of $25 million in 1995. On February 27,
1997, the Company paid a dividend of $460 million on its common stock to Ford in
the form of an intercompany note. The dividends historically paid by the Company
are not indicative of its future dividend policy.
RELATIONSHIP WITH FORD
Immediately prior to the Offerings, Ford and a Ford subsidiary will be the only
stockholders of the Company. Upon completion of the Offerings, Ford will
beneficially own % of the outstanding Class A Common Stock ( % if the
Underwriters' over-allotment options are exercised in full) and 100% of the
outstanding Class B Common Stock of the Company (which Class B Common Stock is
entitled to five votes per share on any matter submitted to a vote of the
Company's stockholders). Upon completion of the Offerings, the common stock
beneficially owned by Ford will represent in the aggregate % of the combined
voting power of all of the Company's outstanding common stock (or % if the
Underwriters' over-allotment options are exercised in full). Accordingly, Ford
will be able to direct the election of all of the members of the Company's Board
of Directors and exercise a controlling influence over the business and affairs
of the Company. Ford has advised the Company that its current intent is to
continue to hold all of the Common Stock beneficially owned by it following the
Offerings. However, Ford is not subject to any contractual obligation to retain
its controlling interest, except that the Company and Ford have agreed, subject
to certain exceptions, not to sell or otherwise dispose of any shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of J.P. Morgan Securities Inc. See "Risk Factors --
Control by and Relationship with Ford", "-- Possible Future Sales of Common
Stock by Ford", "Relationship with Ford" and "Underwriting". From time to time
the Company and Ford have entered into, and can be expected to continue to enter
into, certain agreements and business transactions in the ordinary course of
their respective businesses, and the Company's Restated Certificate of
Incorporation includes certain provisions relating to the Company's relationship
with Ford. See "Relationship with Ford" and "Description of Capital Stock --
Certain Certificate of Incorporation and By-law Provisions -- Corporate
Opportunities".
9
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SUMMARY CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The summary consolidated income statement data for each of the years in the
three-year period ended December 31, 1996, and consolidated balance sheet data
as of December 31, 1996 and 1995 presented below were derived from the audited
consolidated financial statements of the Company and the related notes thereto
included in this Prospectus. The summary consolidated income statement data for
each of the years in the two-year period ended December 31, 1993 and
consolidated balance sheet data as of December 31, 1994, 1993 and 1992 presented
below were derived from audited consolidated financial statements of the Company
and the related notes thereto not included in this Prospectus. The financial
data presented below and the related notes thereto should be read in conjunction
with the consolidated financial statements of the Company and the related notes
thereto included in this Prospectus.
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994 1993 1992
Dollars in millions, except per share data -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues
Car rental.................................................. $3,161.6 $2,911.7 $2,581.2 $2,177.5 $2,124.1
Industrial and construction equipment rental................ 392.3 332.3 263.1 215.8 208.8
Car leasing................................................. 35.4 35.6 231.4 209.3 241.0
Other (a)................................................... 79.0 121.0 218.7 252.2 242.3
-------- -------- -------- -------- --------
Total revenues.......................................... 3,668.3 3,400.6 3,294.4 2,854.8 2,816.2
-------- -------- -------- -------- --------
Expenses
Direct operating............................................ 1,795.1 1,724.8 1,766.2 1,647.1 1,627.5
Depreciation of revenue earning equipment (b)............... 892.7 803.9 702.7 523.9 496.8
Selling, general and administrative......................... 425.2 392.5 385.5 336.0 353.3
Interest, net of interest income of $10.4, $16.8, $7.2,
$11.3 and $3.6............................................ 298.8 307.1 277.2 245.4 306.9
-------- -------- -------- -------- --------
Total expenses.......................................... 3,411.8 3,228.3 3,131.6 2,752.4 2,784.5
-------- -------- -------- -------- --------
Income before income taxes.................................. 256.5 172.3 162.8 102.4 31.7
Provision for taxes on income (c)........................... 97.9 67.1 71.7 49.0 21.7
-------- -------- -------- -------- --------
Income before cumulative effect of change in accounting
principle................................................. 158.6 105.2 91.1 53.4 10.0
Cumulative effect on prior years of change in method of
accounting for postretirement benefits (d)................ -- -- -- -- (4.3)
-------- -------- -------- -------- --------
Net income.................................................. $ 158.6 $ 105.2 $ 91.1 $ 53.4 $ 5.7
======== ======== ======== ======== ========
Pro forma net income per share (e)..........................
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
AT DECEMBER 31
1996 1995 1994 1993 1992
Dollars in millions -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Revenue earning equipment
Cars.................................................. $4,318.3 $3,627.2 $3,854.4 $2,417.0 $1,871.2
Other equipment....................................... 717.4 543.0 406.0 285.5 251.4
Total assets............................................ 7,649.2 6,656.6 6,520.8 4,688.5 4,222.0
Total debt.............................................. 5,091.8 4,297.5 4,413.9 2,940.5 2,549.9
Stockholders' equity.................................... 989.4 836.3 735.9 616.7 579.5
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED OR AT DECEMBER 31
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Car rental and other operations
Number of owned and licensee locations................ 5,435 5,480 5,498 5,594 5,687
Number of owned locations............................. 2,208 2,171 2,254 2,369 2,487
Peak number of owned and licensee cars operated during
period.............................................. 389,000 376,800 378,700 332,500 323,700
Average number of owned cars operated during period... 283,900 263,600 276,100 236,500 230,300
Number of transactions of owned car rental operations
during period (in thousands)........................ 20,110 18,799 17,811 15,623 14,887
Average revenue per transaction of owned car rental
operations during period (in whole dollars)......... $ 157 $ 155 $ 145 $ 139 $ 143
Equipment rental operations:
Number of locations................................... 120 104 95 85 89
Average cost of rental equipment operated during
period (in millions)................................ $ 822.9 $ 650.4 $ 504.1 $ 428.3 $ 423.2
</TABLE>
10
<PAGE> 11
- -------------------------
(a) Includes fees from licensees (other than expense reimbursement from
licensees), revenue from claim management and telecommunications services and,
prior to 1995, revenues from a car dealership operation in Europe.
(b) For 1996, 1995, 1994, 1993 and 1992 includes net credits of $23.2 million,
$6.4 million, $23.0 million, $28.1 million and $16.9 million, respectively,
primarily from net proceeds received in excess of book value on the disposal of
revenue earning equipment. Effective July 1, 1994, certain estimated useful
lives being used to compute the provision for depreciation of revenue earning
equipment used in the industrial and construction equipment rental business were
increased to reflect changes in the estimated residual values to be realized
upon disposal of the equipment. As a result of this change, depreciation of
revenue earning equipment for the year 1995 and the year 1994 decreased by $12.0
million and $9.6 million, respectively.
(c) Includes credits of $13.9 million, $2.0 million and $9.8 million for the
years 1996, 1993 and 1992, respectively, resulting from adjustments made to tax
accruals in connection with tax audit evaluations and the effects of prior
years' tax-sharing arrangements between the Company and its former parent
companies, UAL Corporation ("UAL") and RCA Corporation ("RCA"). For the year
1995, includes $6.5 million of credits relating to foreign taxes which were
offset against U.S. income tax liabilities. For the year 1993, includes a $1.1
million charge relating to the increase in net deferred tax liabilities as of
January 1, 1993 due to changes in the tax laws enacted in August 1993.
(d) Effective January 1, 1992, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, which requires that postretirement
health care and other non-pension benefits be accrued during the years the
employee renders the necessary service.
(e) Based on shares outstanding after the Offerings. Due to the changes
in the Company's capital structure, historical share and per share data will not
be comparable to, or meaningful in the context of, future periods. See
"Capitalization".
11
<PAGE> 12
RISK FACTORS
The following factors should be carefully considered, together with the
information provided elsewhere in this Prospectus, in evaluating an investment
in the Class A Common Stock offered hereby.
RISK OF ECONOMIC DOWNTURN
The Company's results of operations are affected by certain economic factors,
including the level of economic activity in the markets in which the Company
operates. A decline in economic activity either in the United States or in
international markets may adversely affect the Company. 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 the Company's rental equipment customers operate, and
accordingly a decline in the volume of equipment rental transactions. In the
case of a decline in car and equipment rental activity, the Company may reduce
rental rates to meet competitive pressures, which could adversely affect the
Company's results of operations. A decline in economic activity also may have an
adverse effect on residual values realized on the disposition of the Company's
inventory of cars and equipment. At December 31, 1996, the Company was subject
to residual risk with respect to 17% of all cars in its worldwide car rental and
leasing operations and 100% of the equipment in its industrial and construction
equipment rental operations. In the United States, the Company expects the
percentage of its cars which will be subject to residual risk to increase. See
"Business -- Worldwide Car Rental -- Car Acquisition" and "-- Risks Related to
Decreased Acquisition or Disposition of Cars Through Repurchase Programs".
COMPETITION
The markets in which the Company operates are highly competitive. In addition,
recent changes in ownership of a number of domestic car rental companies could
further intensify competition. The Company believes that price is one of the
primary competitive factors in the car and industrial and construction equipment
rental markets. Although the Company believes that the recent ownership changes
in the industry could improve profitability, competitors of the Company, many of
which have access to substantial capital, may seek to compete aggressively on
the basis of pricing. To the extent that the Company matches competitors'
downward pricing, it could have an adverse impact on the Company's results of
operations. To the extent that the Company is not willing to match competitors'
pricing, it could also have an adverse impact on the Company's results of
operations as the Company may lose market share and major corporate accounts.
DEPENDENCE ON AIR TRAVEL INDUSTRY
The Company estimates that approximately 85% of its worldwide car rental
revenues in 1996 were generated at its airport facilities. 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 the Company's results of
operations. In addition, any event that disrupts or reduces air travel patterns
for a continued period of time could have an adverse effect on the Company's
results of operations. These events could include work stoppages, airline
bankruptcies, military conflicts or terrorist incidents.
LIMITATIONS UPON LIQUIDITY, CAPITAL RAISING AND DIVIDENDS; INTEREST RATE RISK
Potential restraints upon liquidity
The Company satisfies its funding requirements principally through sales of
commercial paper, other short-term borrowings primarily from banks, and the
issuance of long-term debt. At December 31, 1996, commercial paper borrowings
and other short-term indebtedness were $2.5 billion. On February 5, 1997,
Standard & Poor's Ratings Group ("S&P") affirmed the Company's short-term
12
<PAGE> 13
credit rating at A-1 and reduced its long-term credit rating from A to A-. On
February 28, 1997, Moody's Investors Service ("Moody's") confirmed the Company's
short-term and long-term credit ratings at P1 and A3, respectively. A further
downgrade of the Company's credit ratings would likely result in an increase in
the Company's funding costs and could, under certain circumstances, have an
adverse impact on the Company's access to the commercial paper and other debt
markets. In the event that the Company is unable to access the commercial paper
markets or otherwise finance its borrowing needs in the public or private
markets upon acceptable terms, it would seek to satisfy its liquidity
requirements through borrowings under its credit facilities or through financing
secured by the Company's revenue earning equipment. At all times during 1996,
the Company had committed credit facilities representing credit support for 100%
of the Company's commercial paper outstanding. At December 31, 1996, the Company
had the capacity to borrow $2.4 billion under these facilities. The Company
intends to continue to maintain committed credit facilities in an amount equal
to 100% of its anticipated commercial paper outstanding from time to time.
However, there can be no assurance that these committed lines would provide
sufficient liquidity to the Company under all conditions. In such circumstances,
the Company may seek to issue equity securities, although, as discussed below,
the Company may be constrained in its ability to do so.
Impact of Relationship with Ford
Because Ford may choose to maintain its ownership percentage of the Company, the
Company may be constrained in its ability to raise common or preferred equity
capital in the future. In addition, Ford may not be willing to make capital
contributions to the Company in the future. See "Relationship with Ford".
In addition, there can be no assurance that any future downgrading of Ford's
credit ratings would not have an adverse impact on the Company's credit ratings.
Therefore, for so long as Ford maintains a significant interest in the Company,
a deterioration in the financial condition of Ford could have the effect of
increasing the Company's borrowing costs and/or impairing its access to the
capital markets. To the extent the Company does not pass on its increased
borrowing costs to its customers, the Company's profitability, and potentially
its ability to raise capital, could be adversely affected. Also, while no such
agreements or policies are presently contemplated, Ford will have the ability in
the future to enter into agreements or adopt policies which limit the Company's
ability to incur debt. See "Relationship with Ford".
Limitations on Dividends and other Activities
Certain debt instruments to which the Company is a party restrict the Company's
ability to pay dividends and engage in certain other activities. See "Dividend
Policy" and "Description of Certain Indebtedness".
Interest Rate Risk
While the Company has developed an interest rate management policy, including a
target mix for average fixed rate and floating rate indebtedness on a
consolidated basis, an increase in interest rates may have an adverse impact on
the Company's profitability. In addition, an increase in interest rates may
result in a decline in activity in construction and other businesses in which
the Company's equipment rental customers operate, and accordingly a decline in
the volume of industrial and construction equipment rental transactions. The
Company's total outstanding debt of $5.1 billion at December 31, 1996 included
interest rate sensitive debt of $2.1 billion, which had a weighted average
interest rate of 5.34%, and non-interest rate sensitive debt of $3.0 billion
(either by its original terms or through the use of interest rate derivatives)
which had a weighted average fixed interest rate of 7.35%. During the Company's
seasonal borrowing peak in 1996, outstanding interest rate sensitive debt
totalled $2.6 billion, with a weighted average interest rate of 5.21%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
13
<PAGE> 14
INCREASED COST OF CARS
In recent years, the average price of new cars has increased. From time to time,
the automobile manufacturers have sponsored sales incentive programs which have
tended to lower the average cost of cars for fleet purchasers such as the
Company. The Company anticipates that new car prices will continue to increase
and there can be no assurance that sales incentive programs will remain
available, that the Company will be able to effectively control the average cost
of its fleet by purchasing a mix of less expensive cars or, because of
competitive pressures, that the Company will be able to pass on the increased
cost of cars to its rental customers.
RISK OF LIMITED SUPPLY OF COMPETITIVELY-PRICED CARS
The Company historically has purchased most of its cars used in its car rental
operations from Ford, and expects to continue to do so in the future. Under a
ten-year car supply agreement, commencing September 1, 1997, Ford is obligated
to strive to offer car fleet programs to the Company on terms and conditions
that are competitive with terms and conditions for the supply of cars then being
offered by other automobile manufacturers to the Company and other daily car
rental companies. See "Relationship with Ford -- Car Supply Agreement". If,
however, Ford is not able to offer competitive terms and conditions and the
Company is not able to purchase sufficient quantities of cars from other
automobile manufacturers on competitive terms and conditions, then the Company
may be forced to purchase cars at higher prices or on otherwise less competitive
terms, compared with cars purchased by its competitors. Such a situation could
adversely affect the Company's results of operations through increased car
acquisition and depreciation costs if it is unable to pass on these costs to its
customers through higher pricing.
RISK OF LOSS OF FORD ADVERTISING REIMBURSEMENT
If the Company does not purchase a fixed minimum percentage of its U.S. car
rental fleet from Ford, the Company would not be entitled to reimbursement by
Ford of certain of its advertising costs under an advertising agreement with
Ford. The level of these payments by Ford are substantial, and the loss or
interruption of these payments could adversely affect the Company's results of
operations. See "Business -- Worldwide Car Rental -- Marketing, Sales and
Advertising" and "Relationship With Ford -- Joint Advertising Agreement".
RISKS RELATED TO DECREASED ACQUISITION OR DISPOSITION OF CARS THROUGH REPURCHASE
PROGRAMS
At December 31, 1996, 83% of the cars in the Company's car rental fleet were
subject to repurchase by automobile manufacturers under guaranteed repurchase
programs. 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. These repurchase programs limit
the risk to the Company that the market value of a car at the time of its
disposition will be less than its estimated residual value at such time
("residual risk"). For this reason, cars purchased by car rental companies under
repurchase programs are sometimes referred to by industry participants as
"non-risk" 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 "at risk" cars. Repurchase programs enable the Company to
determine its depreciation expense in advance. Depreciation is a significant
cost factor in the Company's operations. The Company expects the percentage of
its 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. The Company believes such terms will encourage the Company
to purchase a larger proportion of cars not subject to repurchase programs.
Accordingly, the Company expects to bear increased risk relating to the residual
market value of its car rental fleet and car depreciation. In addition,
repurchase programs generally provide the Company with flexibility to reduce the
size of its fleet by returning cars sooner and without loss in the event of an
economic downturn. This flexibility will be reduced to the extent the percentage
of non-risk cars in the
14
<PAGE> 15
Company's car rental fleet decreases. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General" and "Business --
Worldwide Car Rental -- Car Acquisition".
Automobile manufacturers also could modify or eliminate their repurchase
programs or change their return policies (which include condition and mileage
requirements for returned cars) to make it disadvantageous to return certain
cars. Any such modification or elimination would expose the Company to the risks
described in the preceding paragraph.
CONTROL BY AND RELATIONSHIP WITH FORD
Ford is currently the beneficial owner of all of the common stock and preferred
stock of the Company. Upon completion of the Offerings, Ford will beneficially
own of the outstanding Class A Common Stock ( % if the Underwriters'
over-allotment options are exercised in full) and 100% of the outstanding Class
B Common Stock which will, in the aggregate, represent approximately % of the
combined voting power of all the outstanding Common Stock (or approximately %
if the Underwriters' over-allotment options are 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 the Common Stock, Ford will be able to
direct the election of all of the members of the Company's Board of Directors
and exercise a controlling influence over the business and affairs of the
Company, including any determinations with respect to mergers or other business
combinations involving the Company, the acquisition or disposition of assets by
the Company, the incurrence of indebtedness by the Company, the issuance of any
additional Common Stock or other equity securities of the Company, the
repurchase or redemption of common stock or preferred stock of the Company and
the payment of dividends with respect to the Common Stock. See "-- Limitations
Upon Liquidity and Capital Raising -- Potential Restraints Upon Liquidity".
Similarly, Ford will have the power to determine matters submitted to a vote of
the Company's stockholders without the consent of the Company's other
stockholders, will have the power to prevent or cause a change in control of the
Company and could take other actions that might be favorable to Ford. In the
foregoing situations or otherwise, various conflicts of interest between the
Company and Ford could arise. Ownership interests of directors or officers of
the Company in common stock of Ford, if any, or service as a director or officer
of both the Company and Ford could create or appear to create potential
conflicts of interest when directors and officers are faced with decisions that
could have different implications for the Company and Ford. The Company's
Restated Certificate of Incorporation will include certain provisions relating
to the allocation of business opportunities that may be suitable for both the
Company and Ford. See "Relationship with Ford" and "Description of Capital Stock
- -- Certain Certificate of Incorporation and By-law Provisions -- Corporate
Opportunities".
Beneficial ownership of at least 80% of the total voting power and value of the
outstanding Common Stock is required in order for Ford to continue to include
the Company in its consolidated group for federal income tax purposes, and
beneficial ownership of at least 80% of the total voting power and 80% of each
class of nonvoting capital stock is required in order for Ford to effect a
tax-free spin-off (as defined under "Description of Capital Stock -- Common
Stock -- Conversion") of the Company or certain other tax-free transactions.
Each member of a consolidated group for federal income tax purposes is jointly
and severally liable for the federal income tax liability of each other member
of the consolidated group. Each member of the Ford controlled group, which
includes Ford, the Company and Ford's 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, the
Company 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. If the Company were no longer to be included in Ford's
consolidated group for federal tax purposes, there is no assurance that the
Company's tax position would 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 being entered into between the Company and Ford, Ford
will effectively control all of the Company's
15
<PAGE> 16
tax decisions. Under the tax-sharing agreement, Ford will have sole authority to
respond to and conduct all tax proceedings (including tax audits) relating to
the Company's federal and combined state returns, to file all such returns on
behalf of the Company and to determine the amount of the Company's liability to
(or entitlement to payment from) Ford under the tax-sharing agreement. See
"Relationship with Ford -- Tax-Sharing Agreement". This arrangement may result
in conflicts of interests between the Company 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 the Company.
Certain of the Company's airport concession agreements require the consent of
the airport authority in connection with transfers of various percentages of the
Company's common stock.
Certain intercompany agreements and arrangements exist between the Company and
Ford. See "Relationship with Ford". There can be no assurance that the products,
services and other benefits Ford provides to or purchases from the Company 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 the
Company could be replicated and sales thereof to Ford replaced. See "-- Risk of
Limited Supply of Competitively-Priced Cars" and "-- Risk of Loss of Ford
Advertising Reimbursement."
LIABILITY AND INSURANCE
The Company's businesses expose it to claims for personal injury, death and
property damage resulting from the use of the cars and equipment rented or sold
by the Company and for workers' compensation claims and other employment-related
claims by the Company's employees. The Company generally self-insures up to $5
million per occurrence in the United States, up to $1.5 million per occurrence
in Europe and lower amounts in certain other foreign countries, and maintains
insurance with unaffiliated carriers in excess of such levels up to $450 million
per occurrence or, in the case of Europe, without limits. There can be no
assurance that the Company will not be exposed to uninsured liability at levels
in excess of historical levels resulting from multiple payouts or otherwise,
that liabilities in respect of existing or future claims will not exceed the
level of the Company's insurance, that the Company will have sufficient capital
available to pay any uninsured claims or that insurance with unaffiliated
carriers will continue to be available to the Company on economically reasonable
terms. See "Business -- Self Insurance" and "-- Legal Proceedings".
SEASONALITY
In the Company's businesses, the second and third quarters of the year have
historically been the strongest quarters of the year. In 1996, these quarters
accounted for approximately 53.7% of overall revenue and 80.9% of income before
income taxes. As a result, any occurrence that disrupts rental activity during
the second or third quarters could have an adverse effect on the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
ENVIRONMENTAL RISKS
The Company is regulated by federal, state, local and foreign environmental laws
and regulations in connection with its 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. A
significant percentage of these tanks are located underground. The Company has
established a compliance program for its tanks to ensure that (i) the tanks are
properly registered with the state in which the tanks are located; and (ii) the
tanks have been either upgraded or replaced to meet federal and state leak
detection and spill, overfill and corrosion protection requirements. However,
there can be no assurance that these tank systems will at all times remain free
from leaks or that the use of these tanks will not result in spills.
The Company has made, and will continue to make, expenditures to comply with
environmental laws and regulations, including, among others, expenditures for
the clean-up of contamination at its owned and leased properties, as well as
contamination at other locations at which the Company's wastes have
16
<PAGE> 17
reportedly been identified. There can be no assurance that compliance with
existing or future environmental legislation and regulations will not require
material expenditures by the Company or otherwise have an adverse effect on the
Company's operations. See "Business -- Governmental Regulation and Environmental
Matters".
FUEL SHORTAGE
The Company's operations, as well as those of its competitors, could be affected
by any limitation in the fuel supply or by any imposition of mandatory
allocation or rationing regulations. In the event of a severe disruption of fuel
supplies resulting from OPEC supply changes, political unrest, war or otherwise,
the operations of all car and equipment rental and leasing companies could be
adversely affected.
POSSIBLE FUTURE SALES OF COMMON STOCK BY FORD
Subject to applicable federal securities laws and the restrictions set forth
below, after completion of the Offerings, Ford may sell any or all of the shares
of the Common Stock beneficially owned by it or distribute any or all of such
shares of Common Stock to its stockholders. Sales or distributions by Ford of
substantial amounts of Common Stock in the public market or to its stockholders,
or the perception that such sales or distribution could occur, could adversely
affect prevailing market prices for the Class A Common Stock. Ford has advised
the Company that its current intent is to continue to hold all of the Common
Stock beneficially owned by it following the Offerings. However, Ford is not
subject to any contractual obligation to retain its controlling interest, except
that Ford and the Company have agreed, subject to certain exceptions, not to
sell or otherwise dispose of any shares of Common Stock for a period of 180 days
after the date of this Prospectus without the prior written consent of J.P.
Morgan Securities Inc. See "Underwriting". 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 the Offerings. Ford
will have registration rights with respect to the shares of the Common Stock
owned by it following the Offerings, which would facilitate any future
disposition. See "-- Control by and Relationship with Ford" above, "Relationship
with Ford -- Corporate Agreement" and "Shares Available for Future Sale".
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's 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 incumbent
management of the Company. See "Description of Capital Stock -- Certain
Certificate of Incorporation and By-law Provisions". Although such provisions do
not have a substantial practical significance to investors while Ford controls
the Company, such provisions could have the effect of depriving stockholders of
an opportunity to sell their shares at a premium over prevailing market prices
should Ford's combined voting power decrease to less than 50%.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" including, without limitation, those concerning (i)
the Company's strategy, (ii) the Company's expansion plans for its various
businesses, (iii) the Company's capital expenditures, (iv) the percentage of
cars expected to be acquired from Ford in the future, (v) the terms upon which
cars will be acquired, (vi) the development of the Company's strategic
information systems and (vii) the effects on the Company of certain legal
proceedings, contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors".
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<PAGE> 18
THE COMPANY
GENERAL
The Company and its affiliates and independent licensees operate what the
Company believes is the largest car rental business in the world based upon
revenues and volume of rental transactions and the largest industrial and
construction equipment rental business in the United States based upon revenues.
The Company's "Hertz" brand name is recognized worldwide as a leader in quality
rental and leasing services and products. The Company, together with its
affiliates and independent licensees, rents and leases cars, rents industrial
and construction equipment and operates its other businesses from approximately
5,500 locations throughout the United States and in approximately 140 foreign
countries and jurisdictions. For the year ended December 31, 1996, the Company
generated record revenues, income before taxes and net income of $3.7 billion,
$256.5 million and $158.6 million, respectively. The Company and its
predecessors have been profitable in every year since 1952, when one of the
Company's predecessors first became a public company.
Car Rental
The Company believes it maintains the largest network of company-owned car
rental locations both in the United States and in Europe, and the largest number
of on-airport car rental locations in the world, enabling the Company to provide
consistent quality, pricing and service worldwide. The Company derives
approximately 85% of its car rental revenues from on-airport locations.
According to information disclosed by the largest 153 U.S airports, the Company
maintained the leading on-airport car rental market share at such airports
during 1996 of over 30% in terms of revenues and has maintained market share at
approximately this level during each of the last five years. This market has
grown at a compounded annual rate of approximately 11% since 1992 to over $6
billion in revenues in 1996, based on information provided by such airports. The
Company also believes it maintained the leading on-airport car rental market
share in Europe during 1996 of approximately 30% in terms of revenues. The
Company has recently begun to provide replacement car rental services from
off-airport locations under the H.I.R.E. brand name. The Company estimates that
total 1996 revenues for the car rental industry in the United States were in
excess of $14 billion, and that total 1995 revenues for the car rental industry
in Europe were in excess of $5 billion.
During 1996, approximately 51% of the Company's worldwide car rental revenues
were generated from business travelers and approximately 49% from leisure
travelers. The Company has a worldwide marketing and sales organization of over
800 people focused on both commercial accounts/group sales and the travel
industry, including travel agents, as well as a comprehensive program of retail
and trade advertising, direct mail and other targeted marketing. At December 31,
1996, the Company's business customers included 357 of the Fortune 500
companies. The Company was named a primary supplier to 149 of the 347 Fortune
500 companies who named a primary/secondary supplier. The Company has received
numerous awards and designations around the world for its car rental business
from independent third parties.
The Company's Hertz #1 Club Gold service provides an expedited rental service to
members at approximately 650 locations worldwide. At December 31, 1996, there
were approximately two million active Hertz #1 Club Gold members who accounted
for approximately 35% of the Company's U.S. car rental transactions in 1996.
Through its many travel industry relationships with airlines and hotels, the
Company has targeted the most frequent travelers to become Hertz #1 Club Gold
members.
The Company's worldwide car rental operations and certain other activities
generated $3.3 billion in revenue and $165.5 million in income before taxes
during 1996.
Industrial and Construction Equipment Rental
The Company, through its wholly-owned subsidiary, HERC, believes that it
maintains the leading market share in the U.S. industrial and construction
equipment rental market. HERC rents a broad
18
<PAGE> 19
range of earth moving equipment, materials handling equipment, aerial and
electrical equipment, air compressors, compaction equipment and
construction-related trucks through a network of 120 branch locations. According
to a survey conducted for the Associated Equipment Distributors, an industry
trade association, 1995 annual revenues for the U.S. equipment rental market
were estimated at $15 billion. This market is fragmented with over 7,000
participants and 12,000 locations. According to the Rental Equipment Register,
an industry publication, only 23 of the top 100 equipment rental companies in
the United States had rental revenues in excess of $25 million in 1995.
HERC maintains an established national accounts program with over 1,700
customers who generated 43% of HERC's revenues in 1996. The Company believes
that HERC's fleet is the largest and most modern of its kind in the United
States. As of December 31, 1996, HERC maintained a fleet with an original
investment cost of approximately $908 million and a weighted average age of 19.7
months. HERC generated $392.3 million in revenue and $91.0 million in income
before taxes during 1996.
Strategic Information Systems
Centralized control of major business processes, achieved through the use of the
Company's strategic systems technology, provides the disciplined environment
which enables the Company to deliver consistent quality services at its car
rental and equipment rental operations. The Company maintains real-time
communications with its many locations by means of what it believes is the
largest private data network in the industry. Key components of the Company's
strategic systems include: (i) a global reservations system, which operates
through real-time, on-line centers on five continents, (ii) a yield management
system, which is designed to optimize revenue through controlling,
simultaneously, the availability of various rates as well as the availability of
cars, (iii) a competitive rate detection system, which monitors rate changes and
provides "scouting" routines to identify future rates and (iv) a cost allocation
model, which provides contribution data by location, business segment, car and
equipment category and customer account.
Other
Other activities of the Company include self-insurance operations for both its
car rental and industrial and construction equipment rental businesses, car
leasing operations in certain international markets, the sales of its used cars
and equipment, third party claim management services and telecommunications
services in the United States.
-------------------------
The Company, which was incorporated in Delaware in 1967, is a successor to
corporations that have been engaged in the automobile and truck leasing and
rental business since 1918. As a result of a series of transactions in 1993 and
1994, the Company became a wholly-owned subsidiary of Ford. Prior to that time
and until 1987, when Ford first acquired an ownership interest in the Company,
the Company had been a subsidiary of UAL Corporation (formerly Allegis
Corporation) ("UAL"), which had acquired the Company's outstanding capital stock
from RCA Corporation ("RCA") in 1985. See Notes 1, 5 and 7 of the Notes to the
Company's consolidated financial statements included in this Prospectus.
The Company's principal executive offices are located at 225 Brae Boulevard,
Park Ridge, New Jersey 07656, and its telephone number is (201) 307-2000.
19
<PAGE> 20
USE OF PROCEEDS
The proceeds to the Company from the Offerings, after the deduction of
underwriting discounts and expenses payable by the Company, are estimated to be
$ million ($ million if the Underwriters' over-allotment options are
exercised in full), substantially all of which is expected to be used to reduce
short-term indebtedness of the Company. The indebtedness to be repaid will be
incurred to repay an intercompany note issued by the Company to Ford in the
amount of $460 million.
DIVIDEND POLICY
The Company's Board of Directors currently intends to declare quarterly
dividends on both the Class A Common Stock and Class B Common Stock. It is
expected that the first quarterly dividend payment will be $0. per share (a
rate of $0. annually), with the initial dividend to be declared and paid in the
third quarter of 1997. The declaration and payment of dividends by the Company
are subject to the discretion of its Board of Directors. Any determination as to
the payment of dividends will depend upon, among other things, general business
conditions, the Company's financial results, contractual, legal and regulatory
restrictions regarding the payment of dividends by the Company's subsidiaries,
the credit ratings of the Company and such other factors as the Board of
Directors may consider to be relevant.
Certain debt instruments under which the Company has issued debt securities
restrict the Company's ability to pay dividends. Such restrictions generally
provide that the Company may not pay dividends, invest in its own shares or
permit investments by certain subsidiaries of the Company ("Restricted
Subsidiaries") in the Company's shares subsequent to a specified date if,
together with total investments by the Company and its 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) a specified dollar amount, (ii) the aggregate net income of the
Company and its Restricted Subsidiaries earned subsequent to such specified date
and (iii) net proceeds received from capital stock issued subsequent to such
specified date. Immediately following the Offerings, the Company will be
permitted to pay $331 million (plus or minus the Company's net earnings or loss,
as the case may be, for the first quarter of 1997) in dividends under the most
restrictive of such covenants. See "Use of Proceeds" and "Capitalization". The
last to mature of the outstanding securities of the Company containing
restrictions on the Company's ability to pay dividends has a final maturity of
November 1, 2009.
The Company paid no cash dividends to Ford during 1994 and 1996 and paid a cash
dividend on its common stock to Ford of $25 million in 1995. On February 27,
1997, the Company paid a dividend of $460 million on its common stock to Ford in
the form of an intercompany note. The dividends historically paid by the Company
are not indicative of its future dividend policy.
20
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December
31, 1996 (i) on an actual basis and (ii) as adjusted to give effect to (a) the
payment by the Company of a dividend of $460 million on its common stock to Ford
in the form of an intercompany note, (b) the borrowing of $ million to
repay the intercompany note to Ford, (c) the reclassification of 741 shares of
common stock, par value $1.00 per share, owned by Ford into shares of
Class B Common Stock, (d) the issuance and sale by the Company of shares
of Class A Common Stock in the Offerings at an assumed initial public offering
price of $ per share (the midpoint of the range set forth on the cover of
this Prospectus), (e) the exchange by the Company of all of its outstanding
Preferred Stock, Series A, and Preferred Stock, Series B, for shares of
Class A Common Stock and (f) assuming an initial public offering price of
$ per share, the receipt of net proceeds of $
from the sale by the Company of shares of Class A Common Stock in the
Offerings and the application of such proceeds as set forth under "Use of
Proceeds". This table should be read in conjunction with the financial
statements and the related notes thereto contained in the Company's consolidated
financial statements included in this Prospectus.
<TABLE>
<CAPTION>
-------------------------
AS OF DECEMBER 31, 1996
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Dollars in thousands
The Company's debt:
Promissory notes, debentures, etc. ....................... $3,517,254 $
Subordinated promissory notes
Senior................................................. 149,828
Junior................................................. 399,756
Debt of the Company's subsidiaries.......................... 1,025,006
---------- ----------
Total Debt................................................ 5,091,844
---------- ----------
Stockholders' Equity:
Common Stock, par value $1.00 per share, shares issued --
200 Class A, 51 Class B and 490 Class C................ 1
Common Stock, par value $0.01 per share, shares issued --
Class A and Class B(1)............................. 0
Preferred Stock --
Series A, 10% cumulative............................... 236,000
Series B, various rates cumulative..................... 249,900
Additional capital paid-in................................ 59,008
Retained earnings......................................... 435,352
Translation adjustment.................................... 9,129
Unrealized holding losses for available-for-sale
securities............................................. (25)
---------- ----------
Total stockholders' equity................................ 989,365
---------- ----------
Total capitalization...................................... $6,081,209 $
========== ==========
</TABLE>
- -------------------------
(1) Excludes shares of Class A Common Stock reserved for issuance pursuant
to certain employee benefit plans. See "Management -- ".
21
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The selected consolidated income statement data for each of the years in the
three-year period ended December 31, 1996, and consolidated balance sheet data
as of December 31, 1996 and 1995 presented below were derived from the audited
consolidated financial statements of the Company and the related notes thereto
included in this Prospectus. The selected consolidated income statement data for
each of the years in the two-year period ended December 31, 1993, and
consolidated balance sheet data as of December 31, 1994, 1993 and 1992 presented
below were derived from audited consolidated financial statements of the Company
and the related notes thereto not included in this Prospectus. The financial
data presented below and the related notes thereto should be read in conjunction
with the consolidated financial statements of the Company and the related notes
thereto included in this Prospectus.
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994 1993 1992
Dollars in millions, except per share data -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues
Car rental.................................................. $3,161.6 $2,911.7 $2,581.2 $2,177.5 $2,124.1
Industrial and construction equipment rental................ 392.3 332.3 263.1 215.8 208.8
Car leasing................................................. 35.4 35.6 231.4 209.3 241.0
Other (a)................................................... 79.0 121.0 218.7 252.2 242.3
-------- -------- -------- -------- --------
Total revenues.......................................... 3,668.3 3,400.6 3,294.4 2,854.8 2,816.2
-------- -------- -------- -------- --------
Expenses
Direct operating............................................ 1,795.1 1,724.8 1,766.2 1,647.1 1,627.5
Depreciation of revenue earning equipment (b)............... 892.7 803.9 702.7 523.9 496.8
Selling, general and administrative......................... 425.2 392.5 385.5 336.0 353.3
Interest, net of interest income of $10.4, $16.8, $7.2,
$11.3
and $3.6.................................................. 298.8 307.1 277.2 245.4 306.9
-------- -------- -------- -------- --------
Total expenses.......................................... 3,411.8 3,228.3 3,131.6 2,752.4 2,784.5
-------- -------- -------- -------- --------
Income before income taxes.................................. 256.5 172.3 162.8 102.4 31.7
Provision for taxes on income (c)........................... 97.9 67.1 71.7 49.0 21.7
-------- -------- -------- -------- --------
Income before cumulative effect of change in accounting
principle................................................. 158.6 105.2 91.1 53.4 10.0
Cumulative effect on prior years of change in method of
accounting for postretirement benefits (d)................ -- -- -- -- (4.3)
-------- -------- -------- -------- --------
Net income.................................................. $ 158.6 $ 105.2 $ 91.1 $ 53.4 $ 5.7
======== ======== ======== ======== ========
Pro forma net income per share (e)..........................
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
AT DECEMBER 31
1996 1995 1994 1993 1992
Dollars in millions -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Revenue earning equipment
Cars.................................................. $4,318.3 $3,627.2 $3,854.4 $2,417.0 $1,871.2
Other equipment....................................... 717.4 543.0 406.0 285.5 251.4
Total assets............................................ 7,649.2 6,656.6 6,520.8 4,688.5 4,222.0
Total debt.............................................. 5,091.8 4,297.5 4,413.9 2,940.5 2,549.9
Stockholders' equity.................................... 989.4 836.3 735.9 616.7 579.5
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS ENDED OR AT DECEMBER 31
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Car rental and other operations
Number of owned and licensee locations.................... 5,435 5,480 5,498 5,594 5,687
Number of owned locations................................. 2,208 2,171 2,254 2,369 2,487
Peak number of owned and licensee cars operated during
period.................................................. 389,000 376,800 378,700 332,500 323,700
Average number of owned cars operated during period....... 283,900 263,600 276,100 236,500 230,300
Number of transactions of owned car rental operations
during period (in thousands)............................ 20,110 18,799 17,811 15,623 14,887
Average revenue per transaction of owned car rental
operations during period (in whole dollars)............. $ 157 $ 155 $ 145 $ 139 $ 143
Equipment rental operations:
Number of locations....................................... 120 104 95 85 89
Average cost of rental equipment operated during period
(in millions)........................................... $ 822.9 $ 650.4 $ 504.1 $ 428.3 $ 423.2
</TABLE>
22
<PAGE> 23
- -------------------------
(a) Includes fees from licensees (other than expense reimbursement from
licensees), revenue from claim management and telecommunications services and,
prior to 1995, revenues from a car dealership operation in Europe.
(b) For 1996, 1995, 1994, 1993 and 1992 includes net credits of $23.2 million,
$6.4 million, $23.0 million, $28.1 million and $16.9 million, respectively,
primarily from net proceeds received in excess of book value on the disposal of
revenue earning equipment. Effective July 1, 1994, certain estimated useful
lives being used to compute the provision for depreciation of revenue earning
equipment used in the industrial and construction equipment rental business were
increased to reflect changes in the estimated residual values to be realized
upon disposal of the equipment. As a result of this change, depreciation of
revenue earning equipment for the year 1995 and the year 1994 decreased by $12.0
million and $9.6 million, respectively.
(c) Includes credits of $13.9 million, $2.0 million and $9.8 million for the
years 1996, 1993 and 1992, respectively, resulting from adjustments made to tax
accruals in connection with tax audit evaluations and the effects of prior
years' tax-sharing arrangements between the Company and its former parent
companies, UAL Corporation ("UAL") and RCA Corporation ("RCA"). For the year
1995, includes $6.5 million of credits relating to foreign taxes which were
offset against U.S. income tax liabilities. For the year 1993, includes a $1.1
million charge relating to the increase in net deferred tax liabilities as of
January 1, 1993 due to changes in the tax laws enacted in August 1993.
(d) Effective January 1, 1992, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, which requires that postretirement
health care and other non-pension benefits be accrued during the years the
employee renders the necessary service.
(e) Based on shares outstanding after the Offerings. Due to the
changes in the Company's capital structure, historical share and per share data
will not be comparable to, or meaningful in the context of, future periods. See
"Capitalization".
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is engaged principally in the business of renting and leasing cars
and renting industrial and construction equipment. The Company's revenues
principally are derived from rental and related charges. Revenues consist of:
- Car rental revenues (revenues from all owned car operations,
including loss or collision damage waivers, liability insurance and
other products)
- Industrial and construction equipment rental revenues
- Car leasing revenues
- Other revenues (fees from the Company's licensees, revenues from the
Company's claim management and telecommunications services and,
prior to 1995, a car dealership operation in Europe)
The Company's expenses consist of:
- Direct operating expenses (primarily wages and related benefits;
concessions and commissions paid to airport authorities, travel
agents and others; and other costs relating to the operation and
rental of the revenue earning equipment, such as maintenance and
reservations)
- Depreciation expense relating to revenue earning equipment
(including net gains or losses on the disposal of such equipment).
Revenue earning equipment includes cars and industrial and
construction equipment.
- Selling, general and administrative expenses (including advertising)
- Interest expense relating primarily to the funding of the
acquisition of revenue earning equipment
The Company's 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 the Company's profitability, depending on the
ability of the Company to adjust pricing for these changes. The Company's
business requires significant expenditures for cars and equipment and the
Company consequently requires substantial liquidity to finance such
expenditures.
At December 31, 1996, 83% of the cars in the Company's car rental fleet were
subject to repurchase by automobile manufacturers under guaranteed repurchase
programs pursuant to which automobile manufacturers agree to repurchase cars,
subject to certain car conditions and mileage requirements, at a specified price
after a minimum period of service. In the United States, the Company expects the
percentage of its car rental fleet subject to repurchase programs to decrease.
See "Risk Factors -- Risk of Economic Downturn" and "-- Risks Related to
Decreased Acquisition of Cars Through Repurchase Programs" and "Business --
Worldwide Car Rental -- Car Acquisition". The Company's industrial and
construction equipment rental fleet is not subject to such guaranteed repurchase
programs.
The following discussion and analysis provides information that management
believes to be relevant to understanding the Company's 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 the Company's consolidated financial statements included in this
Prospectus.
24
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth for each of the years indicated, the percentage
of operating revenues represented by certain items in the Company's consolidated
statement of income:
<TABLE>
<CAPTION>
---------------------------
PERCENTAGE OF REVENUES
YEARS ENDED DECEMBER 31
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Revenues:
Car rental................................................ 86.2% 85.6% 78.4%
Industrial and construction equipment rental.............. 10.7 9.8 8.0
Car leasing............................................... .9 1.0 7.0
Other..................................................... 2.2 3.6 6.6
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Expenses:
Direct operating.......................................... 48.9 50.7 53.6
Depreciation of revenue earning equipment................. 24.3 23.6 21.3
Selling, general and administrative....................... 11.6 11.6 11.7
Interest, net of interest income.......................... 8.2 9.0 8.4
----- ----- -----
93.0 94.9 95.0
----- ----- -----
Income before income taxes.................................. 7.0 5.1 5.0
Provision for taxes on income............................... 2.7 2.0 2.2
----- ----- -----
Net income.................................................. 4.3% 3.1% 2.8%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues
The Company achieved record revenues of $3,668.3 million in 1996, which
increased by 7.9% from $3,400.6 million in 1995.
Revenues from car rental operations of $3,161.6 million in 1996 increased by
8.6% from $2,911.7 million in 1995. This increase resulted primarily from an
increase in the number of transactions both in the United States and
international operations and an increase in prices primarily in the United
States, while prices remained substantially unchanged for the Company's
international operations. These increases were partly offset by a decrease in
revenues due to changes in foreign exchange rates.
Revenues from industrial and construction equipment rental of $392.3 million in
1996 increased by 18.1% from $332.3 million in 1995, primarily due to an
increase in volume resulting from the opening of new locations and an
acquisition in 1996 and increased activity in industrial related markets, both
from new and existing customers.
Revenues from all other sources of $114.4 million in 1996 decreased by 26.9%
from $156.6 million in 1995, primarily due to lower revenues in the Company's
claim administration service operations, a large part of which was sold as of
February 29, 1996.
Expenses
Total expenses of $3,411.8 million in 1996 increased by 5.7% from $3,228.3
million in 1995, although total expenses as a percentage of revenues decreased
to 93.0% in 1996 from 94.9% in 1995.
Direct operating expenses of $1,795.1 million in 1996 increased by 4.1% from
$1,724.8 million in 1995, but were lower in 1996 as a percentage of revenues due
to more efficient fixed cost coverage. Wages and related benefits and
concessions and commissions decreased as a percentage of revenues, partly offset
by increased expenses related to the development of the Company's global
reservations and strategic information systems.
25
<PAGE> 26
Depreciation of revenue earning equipment for the car rental and car leasing
operations of $814.8 million in 1996 increased by 9.2% from $745.9 million in
1995, primarily due to an increase in the number of cars operated and an
increase in the cost of cars acquired in both the United States and
international operations. These increases were partly offset by an improvement
in the net proceeds received in 1996 in excess of book value on the disposal of
the cars (which resulted in a gain of $2.5 million in 1996 as compared to a loss
of $7.5 million in 1995) due to improved market conditions for the sale of used
vehicles.
Depreciation of revenue earning equipment for the industrial and construction
equipment rental operations of $77.9 million in 1996 increased by 34.3% from
$58.0 million in 1995, primarily due to an increase in both the volume and cost
of equipment operated. This increase was partly offset by an improvement in the
net proceeds received in 1996 in excess of book value on the disposal of the
equipment to $20.7 million in 1996 from $13.8 million in 1995 due to an increase
in the volume of equipment sold and improved market conditions for the sale of
used equipment.
In view of the favorable market environment in 1996 and 1995 for the sale of
used equipment in the industrial and construction equipment rental business,
effective January 1, 1997, certain estimated useful lives being used to compute
the provision for depreciation will be increased to reflect the anticipated
changes in the estimated residual values to be realized when the equipment is
sold. This should result in lower annual depreciation charges and lower gains on
the disposal of the used equipment than has been the case in 1996 and 1995.
Selling, general and administrative expenses of $425.2 million in 1996 increased
by 8.3% from $392.5 million in 1995, but remained at 11.6% of revenue. The
increase in 1996 resulted from increases in advertising costs, sales expenses
and general and administrative costs.
Interest expense of $298.8 million in 1996 decreased 2.7% from $307.1 million in
1995, primarily due to lower interest rates in 1996, partially offset by higher
debt levels (which were required to finance growth and, increases in the cost of
cars and industrial and construction equipment), and lower interest income
received in 1996 as compared to 1995. See Note 2 to the Notes to the Company's
consolidated financial statements included in this Prospectus.
The tax provision of $97.9 million in 1996 increased 45.9% from $67.1 million in
1995. The effective tax rate in 1996 was 38.2% as compared to 38.9% in 1995.
This change was primarily due to the higher income before income taxes in 1996,
partly offset by a one-time credit of $13.9 million included in 1996. This
credit resulted from adjustments made to tax accruals in connection with tax
audit evaluations and the effects of prior years' tax sharing arrangements
between the Company and its former parent companies. The tax provision in 1995
included $6.5 million of credits relating to foreign taxes paid which were
offset against U.S. income tax liabilities. Reported tax provisions for each of
the years 1996 and 1995 also include a required tax provision of $5.8 million
resulting from the amortization of intangible assets that is not deductible for
tax purposes. See Notes 1, 8 and 12 of the Notes to the Company's consolidated
financial statements included in this Prospectus.
Net Income
The Company achieved record net income of $158.6 million in 1996 representing an
increase of 50.8% from $105.2 million in 1995. This increase was primarily due
to higher revenues in the U.S. car and industrial and construction equipment
rental operations, the tax credit of $13.9 million included in 1996 referred to
above, decreased expenditures in 1996 as a percentage of revenues particularly
in the U.S. car rental operations, partly offset by increased expenditures in
1996 as a percentage of revenues in the international car rental operations.
26
<PAGE> 27
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenues
The Company achieved record revenues of $3,400.6 million in 1995, which
increased by 3.2% from $3,294.4 million in 1994.
Revenues from car rental operations of $2,911.7 million in 1995 increased by
12.8% from $2,581.2 million in 1994, resulting primarily from increases in the
volume of transactions, higher prices, as well as favorable changes in foreign
exchange rates.
Revenues from industrial and construction equipment rental of $332.3 million in
1995 increased by 26.3% from $263.1 million in 1994, primarily due to an
increase in volume resulting from the opening of new locations and increased
activity in industrial related markets both from new and existing customers.
Revenues from all other sources of $156.6 million in 1995 decreased by 65.2%
from $450.1 million in 1994, primarily due to the sale of the Company's car
leasing and car dealership operations in Europe effective January 1, 1995. See
Note 5 to the Notes to the Company's consolidated financial statements included
in this Prospectus.
Expenses
Total expenses of $3,228.3 million in 1995 increased by 3.1% from $3,131.6
million in 1994. As a percent of revenues total expenses remained substantially
unchanged in 1994.
Direct operating expenses of $1,724.8 million in 1995 decreased by 2.3% from
$1,766.2 million in 1994, and as a percentage of revenues to 50.7% in 1995 from
53.6% in 1994. This improvement was principally due to the sale of the Company's
European car leasing and car dealership operations in 1995 and lower costs in
the U.S. car rental operations for public liability and property damage claims,
partly offset by an increase in all other operating costs resulting from the
increase in the volume of business.
Depreciation of revenue earning equipment for the car rental and car leasing
operations of $745.9 million in 1995 increased by 12.5% from $662.9 million in
1994, primarily due to an increase in the cost of cars and lower net proceeds
received in 1995 in excess of book value on the disposal of the cars (which
resulted in a loss of $7.5 million in 1995 as compared to a gain of $9.8 million
in 1994) due to a weak U.S. market for the sale of used cars in 1995. These
increases were partly offset by lower depreciation due to the sale of the
European car leasing operation in 1995.
Depreciation of revenue earning equipment for the industrial and construction
equipment rental operations of $58.0 million in 1995 increased by 45.7% from
$39.8 million in 1994, primarily due to increases in the volume of equipment
operated and the cost of equipment. These increases were partly offset by a
reduction in depreciation of $12.0 million in 1995 due to changes made effective
July 1, 1994 increasing certain useful lives being used to compute the provision
for depreciation to reflect changes in the estimated residual values to be
realized upon disposal of equipment. Gains on the sale of equipment of $13.8
million in 1995 were substantially unchanged from 1994.
Selling, general and administrative expenses of $392.5 million in 1995 increased
by 1.8% from $385.5 million in 1994, remaining substantially the same as a
percentage of revenues. The increase in 1995 resulted from increases in sales
expense, general and administrative costs and advertising expense. These
increases were also partly caused by changes in foreign exchange rates.
Interest expense of $307.1 million in 1995 increased by 10.8% from $277.2
million in 1994, primarily due to higher interest rates and debt levels which
were required to finance growth and increases in the cost of cars and industrial
and construction equipment, partly offset by higher interest income in 1995
compared to 1994. See Note 2 to the Notes to the Company's consolidated
financial statements included in this Prospectus.
27
<PAGE> 28
The tax provision of $67.1 million in 1995 decreased by 6.4% from $71.7 million
in 1994. The effective tax rate in 1995 was 38.9% as compared to 44.0% in 1994.
These decreases were primarily due to $6.5 million of credits in 1995 relating
to foreign taxes paid which were offset against U.S. income tax liabilities,
partly offset by the provision required in 1995 due to higher income before
income taxes. Reported tax provisions for each of the years 1995 and 1994 also
include a required tax provision of $5.8 million resulting from the amortization
of intangible assets that is not deductible for tax purposes. See Notes 1, 8 and
12 of the Notes to the Company's consolidated financial statements included in
this Prospectus.
Net Income
The Company achieved record net income of $105.2 million in 1995 representing an
increase of 15.5% from $91.1 million in 1994. This increase was primarily due to
lower expenses in 1995 as a percentage of revenues in the international car
rental operations principally as a result of the sale of the Company's European
car leasing and car dealership operations in 1995, and higher revenues in the
U.S. industrial and construction equipment rental operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's domestic and foreign operations are funded by cash provided by
operating activities, and by extensive financing arrangements maintained by the
Company in the United States, Europe, Australia, New Zealand, Canada and Brazil.
The Company's investment grade credit ratings provide it with access to global
capital markets to meet its borrowing needs. On February 5, 1997, S&P affirmed
the Company's short-term credit rating at A-1 and reduced its long-term credit
rating from A to A-. On February 28, 1997, Moody's confirmed the Company's
short-term and long-term credit ratings at P1 and A3, respectively. The
Company's primary use of funds is for the acquisition of revenue earning
equipment which consists mainly of cars and industrial and construction
equipment. For the year ended December 31, 1996, the Company's expenditures for
revenue earning equipment were $8,204 million (partially offset by proceeds from
the sale of such equipment of $6,445 million). For 1997, the Company expects its
expenditures for revenue earning equipment (net of proceeds from the sale of
such equipment) to be higher than they were in 1996. These assets are purchased
by the Company in accordance with the terms of programs negotiated with
automobile and equipment manufacturers. Particularly for rental cars, financing
requirements are highly seasonal, typically reaching an annual peak during the
second and third calendar quarters as fleet levels build up in response to
increased rental demand during that period. The typical low point for cash needs
occurs during the fourth quarter, coinciding with lower levels of fleet and
rental demand. There are well developed methods of disposing of the Company's
used cars and equipment which are capable of accommodating the Company's short
fleet rotation requirements. See "Business -- Worldwide Car Rental -- Used Car
Sales" and "-- Car Acquisition". The Company also makes capital investments for
property and non-revenue earning equipment, although the amount of these
expenditures ($180 million in 1996, and an estimate of up to $250 million in
1997) are substantially lower than the expenditures for revenue earning
equipment. The Company's customer receivables are also liquid with approximately
30 days of total annual sales outstanding.
To finance its domestic requirements, the Company maintains an active commercial
paper program. In July 1996, the seasonal borrowing peak in the 1996 business
cycle, the Company had outstanding $1.9 billion of commercial paper. In January
1996, the seasonal borrowing trough, the outstanding amount was approximately
$900 million.
The Company is active in the U.S. domestic medium-term and long-term debt
markets. In recent years, the Company has issued approximately $300 million to
$400 million annually in investment grade medium-term and long-term debt with
various maturities. The proceeds are used for general corporate purposes and to
reduce short-term borrowings. From time to time, the Company files with the
Securities and Exchange Commission shelf registration statements relating to
debt securities to allow for the
28
<PAGE> 29
issuance of unsecured senior, senior subordinated and junior subordinated debt
securities on terms to be determined at the time the securities are offered for
sale. At December 31, 1996, the Company had available $400 million for issuance
under an effective registration statement. The total amount of medium-term and
long-term debt outstanding as of December 31, 1996 was $2.6 billion with
maturities ranging from 1997 to 2009. This includes $269 million in term loans
from Ford, of which $250 million matures on November 15, 1999 and $19 million
matures on July 1, 1997. See Note 2 to the Notes to the Company's consolidated
financial statements included in this Prospectus.
Borrowing for the Company's international operations consists mainly of loans
obtained from local and international banks. All borrowings by international
operations either are in the international operation's local currency or, if in
non-local currency, are fully hedged to minimize foreign exchange exposure. The
Company guarantees only the borrowings of its subsidiaries in Australia and
Canada, which consist principally of commercial paper denominated in local
currency. At December 31, 1996, the total debt for the foreign operations was
$1,025 million, of which $981 million was short-term (original maturity of less
than one year) and $44 million was long-term. At December 31, 1996, the total
amounts outstanding (in U.S. dollar equivalents) under the Australian and
Canadian commercial paper programs were (in millions) $123 and $19,
respectively.
At December 31, 1996, the Company had committed bank credit facilities totaling
$2.3 billion. Of this amount, $2.1 billion are represented by a combination of
5-year and 364-day global committed credit facilities provided by 31
relationship banks. In addition to direct borrowings by the Company, these
agreements allow any subsidiary of the Company to borrow under the facilities on
the basis of a guarantee by the Company. The 5-year agreements, totalling $1,185
million, currently expire on June 30, 2001, and the 364-day agreements,
totalling $895 million, expire on June 25, 1997. The 5-year agreements have an
evergreen feature which provides for the automatic extension of the expiration
date one year forward unless timely notice is provided by the bank. The 364-day
agreements permit the Company to convert any amount outstanding prior to
expiration into a two-year term loan. See "Description of Certain Indebtedness
- -- Ford Ownership Event of Default". In addition to these bank credit
facilities, in February 1997 Ford extended to the Company a line of credit of
$500 million, expiring June 30, 1999. This line of credit has an evergreen
feature that provides on an annual basis for automatic one-year extensions of
the expiration date, unless timely notice is provided by Ford at least one year
prior to the then scheduled expiration date. Following the Offerings, Ford may
not be willing to extend additional credit to the Company, may change or
terminate existing credit facilities it provides to the Company in accordance
with their terms or may limit the ability of the Company to raise additional
equity capital. See "Risk Factors -- Limitations Upon Liquidity, Capital Raising
and Dividends; Interest Rate Risk -- Impact of Relationship with Ford". The
Company intends to continue to maintain committed credit facilities in an amount
equal to 100% of its anticipated commercial paper outstanding from time to time.
The Company has developed an interest rate risk management policy to protect
itself from fluctuations in interest rates on its short-term debt portfolio and
on its leasing portfolios. The policy is specific as to transaction purpose,
acceptable hedging instruments, approval levels required, counterparty
eligibility and exposure, effectiveness monitoring and documentation standards.
In the United States and Canada, derivatives are used to provide interest rate
protection while accessing short-term funding in the commercial paper markets.
In Australia and New Zealand, where the Company also has leasing businesses,
derivatives are used to effectively match-fund car leases, which have terms from
one to five years, with funding of the same term. As the value of the car on
lease depreciates, the funding supporting the car also decreases. See "Risk
Factors -- Limitations upon Liquidity, Capital Raising and Dividends; Interest
Rate Risk -- Interest Rate Risk".
Interest rate hedges provide the Company with an effective means of minimizing
interest rate risk. The Company has entered into arrangements to manage its
exposure to fluctuations in interest rates. These arrangements consist of
interest-rate swap agreements ("swaps") and forward rate agreements ("FRAs").
The differential paid or received on these agreements is recognized as an
adjustment to interest expense. The purpose and effect of these agreements are
to make the Company less susceptible
29
<PAGE> 30
to changes in interest rates by effectively converting certain variable rate
debt to fixed rate debt. Because of the relationship of current market rates to
historical fixed rates, the effect at December 31, 1996 of the swap and FRA
agreements is to give the Company an overall effective weighted-average rate on
debt of 6.53%, with 41% of debt effectively subject to variable interest rates,
compared to a weighted-average interest rate on debt of 6.48%, with 49% of debt
subject to variable interest rates when not considering the swap and FRA
agreements.
At December 31, 1996, the notional amount of these agreements aggregated $368.4
million of swaps. These notional amounts, however, are not reflective of the
Company's obligations under these agreements because the Company is only
obligated to pay the net amount of the interest rate differential between the
fixed and variable rates specified in the contracts. The Company's exposure to
any credit loss in the event of non-performance by the counterparties is further
mitigated by the fact that all of these financial instruments are with financial
institutions that are rated "A" or better by the major credit rating agencies.
Exposure to individual counterparties is monitored to ensure diversification of
risk. At December 31, 1996, the fair value of all outstanding contracts, which
is representative of the Company's obligations under these contracts, assuming
the contracts were terminated at that date, was approximately a net payable of
$4.0 million. The $368.4 million notional principal matures as follows (in
millions): 1997, $240.7; 1998, $73.3; 1999, $43.4; 2000, $10.7; 2001, $0.2; and
2002, $0.1.
The Company and its subsidiaries have entered into arrangements to manage
exposure to fluctuations in foreign exchange rates for certain foreign currency
loans and selected marketing programs. These arrangements consist of foreign
exchange forward contracts and the purchase of foreign exchange options where
the Company has no risk. At December 31, 1996 the total notional amount of these
instruments was $23.5 million and the fair value of all outstanding contracts,
which is representative of the Company's obligations under these contracts,
assuming the contracts were terminated at that date, was approximately a net
payable of $.1 million.
The Company's 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
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 the Company's operations as a whole.
In 1997, the Company will commence implementing in all of its strategic
information systems a year 2000 date conversion project to address all necessary
code changes, testing and implementation. Project completion is planned for the
middle of 1999 at an estimated total cost of approximately $15 million.
Car rental is a seasonal business, with decreased travel in both the business
and leisure segments in the winter months and heightened activity during the
spring and summer. To accommodate increased demand, the Company increases its
available fleet and staff during the second and third quarters. As business
demand declines, fleet and staff are decreased as well. However, certain
operating expenses, including rent, insurance, and administrative overhead,
remain fixed and cannot be adjusted for seasonal demand. In certain geographic
markets, the impact of seasonality has been reduced by emphasizing leisure or
business travel in the off-seasons.
30
<PAGE> 31
The table below shows capital expenditures (net of proceeds received from the
sale of revenue earning equipment) and financial results by quarter for 1996 and
1995.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Capital Operating
Expenditures Income Income (Loss)
(Net of Sale (Pre-Tax Income Before Net
Proceeds Before Net Income Income
Received) Revenues Interest Expense) Taxes (Loss)
Dollars in millions ------------ -------- ----------------- ------------- ------
<S> <C> <C> <C> <C> <C>
1996
First Quarter.................. $1,028.1 $ 803.1 $ 82.5 $ 15.2 $ 8.8
Second Quarter................. 1,000.1 911.4 144.3 69.3 39.5
Third Quarter.................. 67.1 1,060.0 219.9 138.2 74.2
Fourth Quarter................. (201.6) 893.8 108.7 33.9 36.1
-------- -------- -------- ------ ------
Total Year................ $1,893.7 $3,668.3 $555.4 $256.6 $158.6
======== ======== ======== ====== ======
1995
First Quarter.................. $ 819.1 $ 735.7 $ 69.7 $ (.7) $ (.3)
Second Quarter................. 1,083.1 858.5 115.1 34.5 19.6
Third Quarter.................. (261.1) 989.8 194.1 109.6 65.1
Fourth Quarter................. (405.2) 816.6 100.5 28.9 20.8
-------- -------- -------- ------ ------
Total Year................ $1,235.9 $3,400.6 $479.4 $172.3 $105.2
======== ======== ======== ====== ======
</TABLE>
31
<PAGE> 32
BUSINESS
GENERAL
The Company and its affiliates and independent licensees operate what the
Company believes is the largest car rental business in the world based upon
revenues and volume of rental transactions and the largest industrial and
construction equipment rental business in the United States based upon revenues.
The Company's "Hertz" brand name is recognized worldwide as a leader in quality
rental and leasing services and products. The Company, together with its
affiliates and independent licensees, rents and leases cars, rents industrial
and construction equipment and operates its other businesses from approximately
5,500 locations throughout the United States and in approximately 140 foreign
countries and jurisdictions. For the year ended December 31, 1996, the Company
generated record revenues, income before taxes and net income of $3.7 billion,
$256.5 million and $158.6 million, respectively. The Company and its
predecessors have been profitable in every year since 1952, when one of the
Company's predecessors first became a public company.
Car Rental
The Company believes it maintains the largest network of company-owned car
rental locations both in the United States and in Europe, and the largest number
of on-airport car rental locations in the world, enabling the Company to provide
consistent quality, pricing and service worldwide. The Company derives
approximately 85% of its car rental revenues from on-airport locations.
According to information disclosed by the largest 153 U.S airports, the Company
maintained the leading on-airport car rental market share at such airports
during 1996 of over 30% in terms of revenues and has maintained market share at
approximately this level during each of the last five years. This market has
grown at a compounded annual rate of approximately 11% since 1992 to over $6
billion in revenues in 1996, based on information provided by such airports. The
Company also believes it maintained the leading on-airport car rental market
share in Europe during 1996 of approximately 30% in terms of revenues. The
Company has recently begun to provide replacement car rental services from
off-airport locations under the H.I.R.E. brand name. The Company estimates that
total 1996 revenues for the car rental industry in the United States were in
excess of $14 billion, and that total 1995 revenues for the car rental industry
in Europe were in excess of $5 billion.
During 1996, approximately 51% of the Company's worldwide car rental revenues
were generated from business travelers and approximately 49% from leisure
travelers. The Company has a worldwide marketing and sales organization of over
800 people focused on both commercial accounts/group sales and the travel
industry, including travel agents, as well as a comprehensive program of retail
and trade advertising, direct mail and other targeted marketing. At December 31,
1996, the Company's business customers included 357 of the Fortune 500
companies. The Company was named a primary supplier to 149 of the 347 Fortune
500 companies who named a primary/secondary supplier. The Company has received
numerous awards and designations around the world for its car rental business
from independent third parties.
The Company's Hertz #1 Club Gold service provides an expedited rental service to
members at approximately 650 locations worldwide. At December 31, 1996, there
were approximately two million active Hertz #1 Club Gold members who accounted
for approximately 35% of the Company's U.S. car rental transactions in 1996.
Through its many travel industry relationships with airlines and hotels, the
Company has targeted the most frequent travelers to become Hertz #1 Club Gold
members.
The Company's worldwide car rental operations and certain other activities
generated $3.3 billion in revenue and $165.5 million in income before taxes
during 1996.
Industrial and Construction Equipment Rental
The Company, through its wholly-owned subsidiary, HERC, believes that it
maintains the leading market share in the U.S. industrial and construction
equipment rental market. HERC rents a broad range of earth moving equipment,
materials handling equipment, aerial and electrical equipment, air
32
<PAGE> 33
compressors, compaction equipment and construction-related trucks through a
network of 120 branch locations. According to a survey conducted for the
Associated Equipment Distributors 1995 annual revenues for the U.S. equipment
rental market were estimated at $15 billion. This market is fragmented with over
7,000 participants and 12,000 locations. According to the Rental Equipment
Register, an industry publication, only 23 of the top 100 equipment rental
companies in the United States had rental revenues in excess of $25 million in
1995.
HERC maintains an established national accounts program with over 1,700
customers who generated 43% of HERC's revenues in 1996. The Company believes
that HERC's fleet is the largest and most modern of its kind in the United
States. As of December 31, 1996, HERC maintained a fleet with an original
investment cost of approximately $908 million and a weighted average age of 19.7
months. HERC generated $392.3 million in revenue and $91.0 million in income
before taxes during 1996.
Strategic Information Systems
Centralized control of major business processes, achieved through the use of the
Company's strategic systems technology, provides the disciplined environment
which enables the Company to deliver consistent quality services at its car
rental and equipment rental operations. The Company maintains real-time
communications with its many locations by means of what it believes is the
largest private data network in the industry. Key components of the Company's
strategic systems include: (i) a global reservations system, which operates
through real-time, on-line centers on five continents, (ii) a yield management
system, which is designed to optimize revenue through controlling,
simultaneously, the availability of various rates as well as the availability of
cars, (iii) a competitive rate detection system, which monitors rate changes and
provides "scouting" routines to identify future rates and (iv) a cost allocation
model, which provides contribution data by location, business segment, car and
equipment category and customer account.
Other
Other activities of the Company include self-insurance operations for both its
car rental and industrial and construction equipment rental businesses, car
leasing operations in certain international markets, the sales of its used cars
and equipment, third party claim management services and telecommunications
services in the United States.
BUSINESS STRATEGY
The Company believes that it is well positioned to capitalize upon the growth
opportunities available in both the global car rental and industrial and
construction equipment rental markets. The Company's strategy for continued
growth is to:
Capitalize on the opportunities presented by the changing ownership in the
domestic car rental industry
For the past several years, the car rental industry has experienced an
environment characterized by low price increases that have not kept pace with
rising fleet costs, resulting in significant operating losses for many
competitors in the industry. Management believes that there will be an increase
in industry profitability, in part as a consequence of the recent change in
ownership of many domestic car rental companies. Management intends to
capitalize on this favorable industry environment by selectively increasing
prices and continuing to improve its low cost structure relative to its
competitors.
Leverage the "Hertz" brand name, recognized worldwide, in existing and new
business ventures
The Company believes that the "Hertz" brand name provides an ideal platform to
expand into new ventures. For example, the Company has re-entered the retail
used car sales market. Once the largest retailer of used cars in the United
States, the Company intends to use its recognized brand name and reputation to
offer quality used cars. Key elements of the Company's retail used car sales
strategy include free initial warranty, no-haggle pricing and providing a
complete maintenance history for each
33
<PAGE> 34
car. The Company has 41 used car sales locations from coast to coast,
substantially all of which were profitable in 1996 with a substantial expansion
underway for 1997. In addition, in 1997, the Company will pilot a new retail
used car sales concept under the "Hertz" brand name offering a larger selection
of used cars.
The Company has also entered the estimated $3.5 billion replacement/local car
rental segment in the United States under the H.I.R.E. brand name and in Europe
under the "Hertz" brand name. The H.I.R.E. business unit currently operates at
50 locations in six states with expansion underway. The Company expects that
H.I.R.E. generally will hold its cars for 18 to 24 months, compared with 5 to 12
months for the Company's domestic car rental business, resulting in lower
monthly holding costs. In Europe, the Company currently operates in the
replacement/local car rental market through its existing suburban car rental
locations.
Improve operating efficiency and enhance customer service through the continued
use and refinement of strategic information systems
The Company has invested over $600 million during the past five years in
strategic systems and intends to continue to invest in advanced technology. The
Company's centralized reservations system is integrated with its fleet
management information systems, resulting in improved vehicle utilization. This
system is being upgraded to a state of the art, client-server based reservations
system. In addition, the Company's yield management system employs techniques to
optimize, simultaneously, rental rates and car availability. The Company is in
the process of consolidating various European reservations centers into a single
facility in Ireland, resulting in anticipated cost savings while providing
uniformly high quality service. In its industrial and construction equipment
rental business, the use of its strategic information systems enables the
Company to monitor carefully the utilization of equipment by specific operation.
Through continued investments in these systems, the Company believes it will
expand its market share, increase its profitability and sustain its leadership
position with respect to the quality and breadth of services provided to its
customers.
Maintain consistent quality, pricing and service worldwide through continued
ownership of locations
The Company believes it maintains the largest network of company-owned car
rental locations both in the United States and in Europe. Because of its
extensive ownership base, the Company is capable of capitalizing worldwide on
business from global tourist and travel organizations and multinational
corporations. The Company believes that its extensive worldwide ownership of its
operations contributes to the consistency of its high-quality service, strict
cost control, fleet utilization, yield management, competitive pricing and
ability to offer one-way rentals through its Rent It Here-Leave It There
program. Under appropriate circumstances, the Company also intends to expand
through joint ventures in emerging markets.
Expand the industrial and construction equipment rental business both in the
United States and abroad
The Company believes that HERC, as the largest nationwide provider of industrial
and construction equipment rental services in the United States, is well
positioned to expand through continued growth of its fleet and the opening and
acquisition of new locations. HERC intends to continue to emphasize profitable
expansion through: (i) continuing to focus on low equipment costs through its
status as one of the largest purchasers of new equipment in the United States,
(ii) improving productivity through use of the Company's strategic information
systems, (iii) expanding its used equipment sales operations available for
buyers seeking to purchase well-maintained, late model equipment at competitive
prices, (iv) diversifying its customer base across industry sectors and (v)
capitalizing on the trend of equipment users toward outsourcing to a single
nationwide provider. In addition, HERC intends to expand in international
markets over the long term by applying its successful U.S. operating philosophy.
34
<PAGE> 35
Achieve superior performance by direct linkage of management compensation to
operating unit performance
All worldwide car rental and equipment rental operating units are managed under
an individual "profit center" philosophy, whereby profit and loss statements are
generated monthly by city. Management incentives are based primarily upon the
financial results of the specific operation managed. Additional consideration is
given for total operating unit and consolidated corporate financial performance.
This "profit center" management is supported and monitored by division and
corporate level management equipped with sophisticated management information
systems which allow detailed review of each operation and business discipline.
BUSINESS SEGMENTS
The Company's business consists of two significant segments, car rental and
certain other activities, and the rental of industrial and construction
equipment. Set forth below is certain information with respect to these segments
for the year ended December 31, 1996.
<TABLE>
<CAPTION>
------------------------------------------
YEAR ENDED DECEMBER 31, 1996
INDUSTRIAL
AND
CONSTRUCTION
CAR RENTAL AND EQUIPMENT
OTHER(A) RENTAL
--------------- ------------
AMOUNT % AMOUNT % TOTAL
Dollars in millions ------ - ------ - -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 3,276 89% $ 392 11% $ 3,668
Amortization of intangibles........................ 18 100 -- -- 18
Operating income (pre-tax income before
interest)........................................ 421 76 134 24 555
Income before income taxes......................... 166 65 91 35 257
Revenue earning equipment, net, at end of year..... 4,318 86 718 14 5,036
</TABLE>
- -------------------------
(a) Includes interest and goodwill relating to the acquisition of the Company by
UAL and Park Ridge Corporation.
The Company, together with its affiliates and independent licensees, operates in
approximately 5,500 locations throughout the United States and in approximately
140 foreign countries and jurisdictions. Set forth below is certain information
with respect to the Company's U.S. and foreign operations for the year ended
December 31, 1996 (substantially all of the Company's foreign operations consist
of car rental and leasing operations).
<TABLE>
<CAPTION>
----------------------------------------
YEAR ENDED DECEMBER 31, 1996
U.S.(a) FOREIGN
------------- -------------
AMOUNT % AMOUNT % TOTAL
Dollars in millions ------ - ------ - -----
<S> <C> <C> <C> <C> <C>
Revenue............................................. $ 2,723 74% $ 945 26% $3,668
Amortization of intangibles......................... 17 94 1 6 18
Operating income (pre-tax income before interest)... 451 81 104 19 555
Income before income taxes.......................... 196 76 61 24 257
Revenue earning equipment, net, at end of year...... 3,997 79 1,039 21 5,036
</TABLE>
- -------------------------
(a) Includes interest and goodwill relating to the acquisition of the Company by
UAL and Park Ridge Corporation.
35
<PAGE> 36
WORLDWIDE CAR RENTAL
Industry Overview
The car rental industry provides car rentals to business and individual
customers worldwide. The car rental industry has been significantly influenced
by general economic conditions as well as developments in the travel industry,
particularly air carrier passenger traffic. Historically, the car rental
industry has been highly seasonal. A significant proportion of the industry's
annual profitability has come during the second and third quarters when leisure
and business travel are at their peak. The industry derives the majority of its
revenues from car rentals and ancillary products such as insurance, refueling
charges, inter-city drop-off charges and loss-damage waivers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
United States. The Company believes that total annual U.S. revenues for the car
rental industry were in excess of $14 billion for 1996. The U.S. market includes
five major car rental companies serving primarily airport and near airport
locations (the Company, Avis, Inc. ("Avis"), Budget Rent a Car Corporation
("Budget"), National Car Rental System Inc. ("National") and Alamo Rent-A-Car,
Inc. ("Alamo")), one major company serving non-airport locations (Enterprise
Rent-A-Car Company ("Enterprise")) and numerous smaller companies that operate
predominantly in non-airport locations. The major companies operate to varying
degrees through wholly-owned operations, and most have some franchised
operations.
Set forth below are the on-airport market shares of the major car rental
companies at the largest 153 airports in the United States that report
concessionable revenues (i.e., revenues on which airport authorities assess fees
from car rental companies) for the periods indicated:
<TABLE>
<CAPTION>
------------------------------------------
ELEVEN
MONTHS
ENDED
NOVEMBER 30 YEAR ENDED DECEMBER 31
1996 1995 1994 1993
----------- ----- ----- -----
<S> <C> <C> <C> <C>
Hertz................................... 30.2% 30.4% 30.6% 29.1%
Avis.................................... 23.7 22.6 21.9 23.6
National................................ 16.2 15.3 13.8 13.5
Budget.................................. 11.2 12.6 13.9 14.3
Alamo................................... 10.8 11.1 11.0 9.3
Others.................................. 7.9 8.0 8.8 10.2
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
The Company believes that car rentals at airports account for the largest
portion of car rentals in the United States. According to information disclosed
by major U.S. airports, the U.S. on-airport car rental market for the largest
153 airports has grown at a compounded annual rate of approximately 11% since
1992 to over $6 billion in revenues in 1996. The Company believes that, while
rental patterns vary among individual airports, car renters at major U.S.
airports taken as a whole are generally evenly divided between business
travelers and leisure travelers seeking cars for ground travel to vacation
destinations and for weekend use. In addition, the Company believes that car
renters at non-airport locations are generally local residents requiring a
temporary replacement car for their own car while it is being repaired and, to a
lesser extent, local residents seeking the use of a car for leisure or other
purposes.
Since the late 1980s, car rental companies have acquired cars pursuant to
various fleet repurchase programs established by automobile manufacturers under
which the automobile manufacturers agree to repurchase cars at a specific price
during established repurchase periods, subject to certain vehicle condition and
mileage requirements. Repurchase prices under the 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 capitalization cost less a set
daily depreciation amount. These repurchase programs limit a car rental
company's residual risk with respect to cars purchased under the programs. This
enables car rental companies to determine depreciation expense in advance. The
Company believes that most
36
<PAGE> 37
cars in the fleets of U.S. car rental companies are these "non-risk" cars. See
"Risk Factors -- Risks Related to Decreased Acquisition or Disposition of Cars
Through Repurchase Programs".
The U.S. car rental industry is recovering from a difficult period, which has
been characterized by substantially rising fleet costs and significant pricing
pressure. In the early 1990s, car rental companies benefited from incentives to
purchase cars provided by automobile manufacturers that desired an additional
distribution outlet for their products. Automobile manufacturers pursued this
outlet as a result of overcapacity and decreased new car demand that prevailed
at the time. These incentives allowed car rental companies to expand
significantly the size of their fleets at relatively low cost and with high cash
incentives. However, an oversupply condition was created within the car rental
industry as a result of these increased fleet sizes. This acted to intensify
competition and depress industry-wide pricing. As general economic conditions in
the United States improved during the years 1992 through 1994, fleet costs
significantly increased. Continued competition inhibited corresponding increases
in average daily rental rates, which had an adverse effect on industry-wide
profitability.
The Company believes that, recently, the U.S. car rental industry has
experienced increases in profitability. Average daily rental rates have
increased as oversupply conditions have been reduced.
Significant changes in the ownership of participants in the domestic car rental
industry have occurred over the past year. HFS, Inc. purchased Avis, Republic
Industries acquired Alamo and National and Team Rental Group, Inc. has reached
an agreement to acquire Budget. The Company believes that these companies will
be increasingly focused on profitability, resulting in increased prices in the
United States.
International. The European market represents the majority of the car rental
industry's revenues outside the United States. The three largest European
markets are France, Germany and the United Kingdom. The Company estimates that
the total 1995 revenues for the car rental industry in Europe were in excess of
$5 billion. The European market consists of a number of worldwide and European
participants, including owned and franchised locations of some of the major U.S.
car rental companies and a number of European companies, including Sixt AG
(Budget), Europcar and EuroDollar. Similar to the U.S. market, the European car
rental industry is characterized by intense competition. Pricing pressure
continues to inhibit increases in average daily rental rates. The industry has
experienced significant growth in the leisure sector due to developing airline
deregulation in the Pan-European market. The Company believes that the leisure
market currently represents approximately 45% of the European market based on
revenues. European car rental companies purchase their fleets from a larger
number of automobile manufacturers than in the United States. These
manufacturers have substantial production capacity, resulting in intense
competition and favorable pricing of cars for car rental companies in recent
years.
Other significant international car rental markets in which the Company competes
include Australia, Canada, New Zealand, Puerto Rico and Brazil.
U.S. Operations
Car Rental. The Company provides car rental services throughout the United
States in or around all major U.S. cities and operates a nationwide, toll-free
reservations system. Car rental facilities are operated at all major airports
and in the central business districts and key suburban commercial centers in
major U.S. cities. The Company estimates that airport revenues accounted for
approximately 85% of its car rental revenues in the United States in 1996. The
Company also maintains arrangements with selected hotels and railroad terminals
to facilitate car rentals at such locations.
The Company uses a wide variety of makes and models of cars for daily rental
purposes, nearly all of which are current year or the previous year's models.
The Company rents cars on a daily, weekend, weekly or monthly basis, with rental
charges computed on a limited or unlimited mileage rate, or on a time rate plus
a mileage charge. The Company's rates vary at different locations depending on
local market, competitive and cost factors, and virtually all rentals are made
utilizing rate plans under which the customer is responsible for gasoline used
during the rental. In addition to car rentals and licensee
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fees, the Company generates revenues from providing customers with ancillary
products and services such as Hertz #1 Club Gold, the Company's Rent It
Here-Leave It There program, supplemental equipment (child seats, ski racks and
portable cellular phones), loss or collision damage waiver, liability insurance
and personal effects coverage, Hertz NeverLost and gasoline payment options.
For the year ended December 31, 1996, the Company conducted operations through
approximately 700 owned locations. Company-owned locations are those locations
through which the Company rents cars which it owns, as compared to licensee
locations through which licensees rent cars that they own. The Company believes
that its extensive worldwide ownership of its operations contributes to the
consistency of its high-quality service, strict cost control, fleet utilization,
yield management, competitive pricing and the Company's ability to offer one-way
rentals through its Rent It Here-Leave It There program. However, in certain
smaller domestic markets, the Company has found it more efficient to operate
through licensees. Domestic licensee locations numbered approximately 400 at
December 31, 1996. Together with its licensees, the Company operated a peak
domestic fleet of more than 242,000 cars in 1996. At December 31, 1996, the
Company owned 94% of all the cars in the combined company-owned and licensee
fleet.
The Company has concession agreements at over 200 airports in the United States.
These agreements are entered into with airport authorities, either through
negotiation or a bidding process, for a fixed number of car rental counter
positions. The agreements typically provide for concession payments based upon a
specified percentage of revenue generated at the airport, subject to a minimum
annual fee, and sometimes include fixed rent for terminal counters or other
leased properties and facilities.
The Company maintains automobile maintenance centers at certain airports and in
certain urban and suburban areas, providing maintenance facilities for the
Company's 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.
The Company believes its U.S. operations are supported by competitively superior
information systems and product delivery. The Company's global reservations
system operates through real-time, on-line centers on five continents. Among
other advantages, this advanced reservations system allows customers throughout
the world to book reservations for rentals at any location worldwide. See "--
Strategic Information Systems". An example of the Company's differentiated
product delivery is its Hertz #1 Club Gold canopied service operated at 38
airports in the United States. This service permits members to bypass the rental
counter and proceed directly to a weather-protected canopied area. In addition,
there are over 200 locations with expedited Gold counter service. See "--
Services Provided -- Hertz #1 Club Gold".
H.I.R.E. -- Insurance Replacement. The Company, under the H.I.R.E. brand name,
provides replacement car rental services primarily to local customers in the
United States whose automobiles are out of service, generally due to an
accident, theft or mechanical problem. A high percentage of these rentals are
referrals from insurance companies, which generally pay for all or a significant
portion of the cost of such rentals.
The Company believes that the insurance replacement business, particularly
because of its lower cost base (resulting from the longer average vehicle
holding periods and other factors) and longer average rental transaction
lengths, represents a significant opportunity for the Company without diluting
penetration in its traditional customer base. By leveraging the Company's brand
name and systems, H.I.R.E. is well positioned for expansion. H.I.R.E. commenced
rental operations in July 1995 and currently operates 50 rental locations in six
states, utilizing a total fleet of approximately 2,600 cars. By December 31,
1997, the Company expects that H.I.R.E. will operate through more than 80
locations with approximately 6,000 cars. The Company intends to capitalize on
agreements with major insurance carriers which are in the process of being
negotiated, and its own sales, technology and marketing expertise to increase
its market share.
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H.I.R.E. rents cars on a daily, weekend, weekly or monthly basis and derives
additional revenues from the sale of loss or collision damage waivers and
gasoline payment options. Rates vary at different locations depending on local
market conditions and competitive factors. H.I.R.E.'s operations are subject to
seasonal fluctuation, with greater activity occurring during the summer months
because of heavier driving activity and the winter months because of hazardous
driving conditions. H.I.R.E. generally will hold its cars for 18 to 24 months,
compared with 5 to 12 months for the Company's domestic car rental business,
resulting in lower monthly holding costs. H.I.R.E. operates a fleet of
predominantly "at risk" cars and disposes of these cars through the Company's
retail sales operations and auctions. See "-- Used Car Sales".
International Operations
At December 31, 1996 the Company, together with its affiliates and licensees,
operated in approximately 140 foreign countries and jurisdictions. Outside the
United States, and primarily in Europe, the Company operates through
approximately 1,450 locations owned by the Company and 2,410 licensee locations,
and during 1996, operated a combined peak fleet of approximately 147,000 cars.
In general, international operations are conducted similarly to those of the
Company in the United States. Although the Company has found it more efficient
to conduct a greater proportion of its international operations through
licensees as compared to the Company's U.S. operations, it continues to conduct
its operations primarily through Company-owned locations in the major European
markets. The international car rental operations of the Company that generated
the highest volumes of business in 1996 were those conducted in France, Germany,
the United Kingdom, Italy, Canada, Spain, Australia and Switzerland. In
addition, the Company owns operations in Puerto Rico, St. Thomas, New Zealand,
Brazil, Belgium, Denmark, Luxembourg, The Netherlands, Norway and Portugal. The
Company believes that, as in the United States, it maintains the leading airport
car rental market share in Europe with a 1996 market share of approximately 30%.
As in the United States, the Company offers Hertz #1 Club Gold service at most
major airport locations within Europe, Canada, Australia and New Zealand. The
Company's global reservations system allows customers worldwide to book
reservations in any of the Company's worldwide markets. Additionally, a local or
toll-free telephone number is offered in all major foreign countries which
provides access to the Company's global reservations system.
Services Provided
The Company offers a wide array of services to its customers, subject to varying
conditions, that provide added value to its core service of renting cars. These
services include:
Hertz #1 Club Gold. The Company provides an expedited rental service that
permits members of this service to bypass the rental counter, board the
Company's bus and proceed directly to a weather-protected Hertz #1 Club Gold
canopied area at 38 U.S. airports and Heathrow International Airport in the
United Kingdom. Once at the canopied area the member's name appears in lights on
an electronic sign board which directs the member to his or her car. At over 600
additional locations, expedited Gold counter service is available where canopied
service is not. Since its introduction, Hertz #1 Club Gold has grown to
approximately 650 locations in North America, Europe, Australia and New Zealand.
As a significant source of business, Hertz #1 Club Gold service provides product
differentiation and complements the Company's many other services. At December
31, 1996, there were approximately two million active Hertz #1 Club Gold members
who accounted for approximately 35% of the Company's U.S. car rental
transactions in 1996. Through its many travel industry relationships with
airlines and hotels, the Company has targeted the most frequent travelers to
become Hertz #1 Club Gold members.
The Hertz #1 Club. As a complimentary service, the Company maintains a
computerized profile of customer car rental preferences for its members. By
providing their personal Hertz #1 Club identification numbers at the time of
reservation, customers can save valuable time at the rental counter.
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Global Reservations System. An advanced reservations system allows customers
throughout the world to book reservations worldwide where the Company, its
affiliates or its licensees maintain operations. In the United States and
certain foreign countries, this service is provided toll-free or as a local
call. This system permits travel agents and certain airline reservation agents
to book reservations directly through their systems. The Company expects its
Internet Website to become fully interactive in the near future, allowing
customers to book reservations electronically on their own.
Instant Return. At over 110 of its airport locations in the United States,
Europe and Australia, the Company offers customers instant return service. At
the point where the car is returned, a Company representative meets the customer
at the car, and provides the customer with a final receipt from a hand-held
computer terminal.
Rent It Here-Leave It There. The Company and its licensees offer customers in
most parts of the world the convenience of leaving a rented car at a Company or
licensee location other than the one from which it was rented. Depending upon
rental location and distance driven, a drop-off charge or a special inter-city
rate may be imposed if the car is not returned to the same location from which
it was rented.
Supplemental Equipment. For an additional charge, the Company offers
supplemental equipment to complement the rental car. Available equipment
includes such items as child seats, ski racks and portable cellular phones. In
addition, the Company offers hand control-equipped cars for the physically
challenged at no extra charge.
Optional Services. At the time of rental, subject to applicable local law, the
Company offers renters the opportunity to purchase optional services such as
Loss Damage Waiver (LDW), Collision Damage Waiver (CDW), Liability Insurance
Supplement (LIS) and combined Personal Accident Insurance and Personal Effects
Coverage (PAI and PEC). These optional services, available for an additional
daily fee, provide additional financial protection for renters and their
passengers. LDW and CDW waive the renter's responsibility to the Company for
loss of or damage to the car while on rental. LIS provides primary liability
coverage from an insurance carrier for protection against third party claims, in
most cases, up to a $1 million combined single limit. PAI and PEC provide
coverage from an insurance carrier for loss of or damage to covered personal
effects as well as accidental injury or death benefits to covered persons.
Computerized Driving Directions. At many locations in North America and Europe,
state of the art counter terminals offer computerized driving directions to
hundreds of area destinations. The unit provides written directions in multiple
languages, and also provides a full color map display of the destination area
that includes local streets and address information. Currently, a point-to-point
enhancement is underway.
Hertz NeverLost. For an additional daily charge at select locations in the
United States, the Company offers a state of the art, in-car satellite
navigation system, known as "Hertz NeverLost". This on-board computer provides
real-time turn-by-turn route guidance that displays the exact location of the
car at all times and can calculate the best route to reach any of the thousands
of destinations within its database. Easy to read icons along with voice
instructions direct customers to their destination. Approximately 7,000 cars are
currently equipped with the system.
Emergency Roadside Assistance. The Company maintains a U.S.-based toll-free,
24-hour centralized emergency roadside assistance number staffed with trained
professionals whose primary goal is to get the customer back on the road with as
little inconvenience as possible. Similar services are offered in selected
foreign countries.
Charge Card. In the United States, the Company's charge cards are issued
predominantly to business accounts. The Company provides customers with
individual invoices for each rental or, if preferred, a monthly statement,
providing for payment on receipt. In Europe, the Company's charge cards are
issued to individuals and business accounts. Depending on the country, the
Company's cards may be in the form of a debit, credit or charge card, providing
for payment on receipt or upon extended terms at set
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interest rates. Currently, there are over 3.7 million charge cards issued
worldwide, charges on which accounted for approximately 7% of 1996 sales.
Revenue Management
The Company uses a point-of-sale revenue management program through which
counter sales representatives sell car upgrades, supplemental equipment and
optional services. This program of identifying and satisfying additional
customer requirements enhances the Company's revenues and transaction yields.
The Company's counter agents receive additional compensation for sales of these
services and products.
Customers
To focus its marketing, sales and pricing functions, the Company divides its
customers into two groups, business and leisure. Business customers include
large commercial accounts, small business accounts and government authorities.
In 1996, business customers generated approximately 51% of the Company's U.S.
car rental revenue on 58% of the Company's U.S. car rental transactions. At
December 31, 1996, the Company's business customers included 357 of the Fortune
500 companies. The Company was designated as the exclusive supplier of rental
cars by 18 of the 40 Fortune 500 companies (or 45%) that named sole suppliers
and the primary supplier of rental cars by 149 of the 347 Fortune 500 companies
(or 43%) that named a primary/secondary supplier.
Leisure customers, including wholesale tour customers, represent the balance of
the Company's U.S. car rental revenues and transactions, or approximately 49% of
the Company's U.S. car rental revenue on 42% of the Company's U.S. car rental
transactions. Revenue per transaction is higher for leisure rentals as compared
to business rentals because leisure rentals are generally for longer periods.
The Company's success in the leisure market is the product of its quality of
service and the Company's competitive pricing. A significant number of leisure
customers are the same customers who rent from the Company on business. Over the
last several years, the relative proportion of the Company's revenues from
business and leisure customers has remained stable.
In 1996, the Company's business customers generated approximately 52% of the
Company's international car rental revenues on 60% of the Company's
international car rental transactions. In 1996, the Company's international
leisure customers generated approximately 48% of the Company's international car
rental revenues on 40% of the Company's international car rental transactions.
Marketing, Sales and Advertising
The Company has a worldwide marketing and sales organization of over 800 people
focused on both commercial accounts/group sales and the travel industry,
including travel agents as well as a comprehensive program of retail and trade
advertising, direct mail and other targeted marketing (such as special rental
packages for skiers, golfers, etc.).
The Company's commercial and group sales force has a staff of over 200
throughout the United States to support larger commercial accounts, smaller
corporate affiliations, government and group relationships (such as the American
Automobile Association, the American Association of Retired Persons, the
American Bar Association, the American Medical Association, etc.). In order to
provide targeted sales to the travel industry community, the Company has over 60
sales employees and over 100 independent contractors throughout the United
States, all of whom service travel agents, airlines, tour wholesalers and
related sources of rentals. As a result, the Company has relationships with more
than 35 domestic and international airlines and in excess of 500 tour operators.
In addition, the Company maintains a comprehensive commission program for travel
agents worldwide.
In the United States, the Company markets to leisure customers predominantly
through television and radio media advertising and through newspaper and
magazine print advertising. Print advertising is primarily rate-related,
highlighting leisure destination rates for weekly and weekend rentals.
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The Company conducts an active national and international advertising program,
the cost of which is supported in part by contributions from the Company's
independent licensees. The Company is also a party to a cooperative advertising
agreement with Ford pursuant to which Ford shares some of the cost of certain of
the Company's advertising programs in the United States and abroad that feature
the Ford name or products. See "Relationship with Ford -- Joint Advertising
Agreement". The advertising programs also involve cooperative advertising
arrangements with airlines, hotels and others in the travel industry.
During the five-year period ended December 31, 1996, the Company's total
advertising and related expenditures (almost all of which were related to car
rental operations) and the sources contributing thereto were approximately as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
PAID BY -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Company and Subsidiaries.......... $148,034 $134,487 $133,600 $101,281 $104,757
Ford.................................. 45,459 44,112 41,994 40,259 35,692
Licensees............................. 8,454 8,740 8,800 8,154 7,285
-------- -------- -------- -------- --------
Total............................ $201,947 $187,339 $184,394 $149,694 $147,734
======== ======== ======== ======== ========
</TABLE>
In addition, licensees spend additional amounts for local advertising and sales
promotions that feature the "Hertz" name.
Quality Assurance
The Company believes that quality of service is of critical importance to
customer satisfaction and brand loyalty. Accordingly, the Company places a high
priority on monitoring and evaluating customer satisfaction through a series of
rating systems and management reporting. Customer feedback received through
comment cards, customer letters and telephone calls is reported, coded,
tabulated and evaluated. These reports highlight repetitive problem areas and
help to identify the underlying causes that ultimately result in corrective
actions being taken.
The Company's locations receive periodic, unannounced inspections by an internal
team of experienced service quality auditors. The results of these extensive
examinations are tabulated and quality ratings are assigned. These reports
receive significant management attention.
The Company screens and evaluates telephone calls at each of the Company's
toll-free numbers to monitor the quality of customer service. This information
is utilized to improve the quality at the Company's global reservations centers.
Periodic focus groups are also utilized to determine and track customer
perceptions toward the Company's services and pricing compared with its
competition.
The Company's procedures call for each rental car to undergo a quality control
check prior to each rental. These procedures ensure that customers receive
clean, quality cars that meet the Company's high safety and quality standards.
In independent research conducted for the Company, among U.S. car rental
customers over the last three years, the Company has been ranked best overall
car rental company by a significant margin. In addition, the Company has
received numerous awards and designations from independent third parties. Among
others, the Company received the following awards in each of the last three
years: Conde Nast Traveler -- "Readers' Choice Award"; TTG World Travel Awards
- -- "World's Leading Car Rental Company"; Business Traveler Award -- "Best Car
Rental Company"; TTG Europa Travel Award (International) -- "Top Car Rental
Company"; and Asia Pacific Award (awarded by TTG Asia and PTN Asia) -- "Best Car
Rental Company in Asia Pacific".
Car Acquisition
The Company believes it is the largest single private purchaser of new cars in
the world, acquiring approximately 300,000 cars in the United States and a total
of 500,000 cars worldwide during the
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1996 model year. Consequently, the acquisition and disposition of cars are
important activities for the Company and have a significant impact on
profitability. The Company acquires, subject to availability, a majority of its
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 predetermined percentage
of original car cost and the month in which the car is returned or (ii) the
original capitalization cost less a set daily depreciation amount. These
repurchase programs limit the Company's residual risk with respect to cars
purchased under the programs. For this reason, cars purchased by car rental
companies under repurchase programs are sometimes referred to by industry
participants as "non-risk" 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 "at risk" cars. During 1996, non-risk cars as a
percentage of all cars operated by the Company's U.S. and international
operations were approximately 91% and 85%, respectively. The Company expects the
percentage of "non-risk" cars in its rental fleet to decrease due primarily to
anticipated changes in the terms to be offered by automobile manufacturers under
repurchase programs. The Company believes such terms will encourage the Company
to purchase a larger proportion of "at risk" cars. For a discussion of the risks
associated with this trend, see "Risk Factors -- Risks Related to Decreased
Acquisition or Disposition of Cars Through Repurchase Programs".
The holding period for the Company's rental cars ranges from 5 to 12 months. The
Company's flexibility to adjust the holding period for cars, particularly under
repurchase programs with automobile manufacturers, enables the Company to adjust
its fleet size up or down relatively quickly in response to changing market
conditions. At December 31, 1996, the average age of rental cars in the
Company's fleet was 7 months.
Over the five years ended December 31, 1996, on a weighted average basis,
approximately 66% of the cars acquired by the Company for its U.S. car rental
fleet, and approximately 36% of the cars acquired by the Company for its
international fleet, were manufactured by Ford. During 1996, approximately 64%
of the cars acquired by the Company domestically were manufactured by Ford, 5%
were manufactured by General Motors Corporation, 5% were manufactured by
Chrysler Corporation and the remainder were manufactured by various Japanese,
Korean and European manufacturers. The percentage of Ford cars acquired by the
Company for its U.S. car rental fleet is expected to remain at these or higher
levels in the future. See Note 7 to the Notes to the Company's consolidated
financial statements included in this Prospectus. In its foreign operations, the
Company utilizes cars manufactured abroad by subsidiaries of Ford and by other
manufacturers. In 1996, approximately 28% of the cars acquired by the Company
for its international fleet were manufactured by Ford, which represented the
largest percentage of any automobile manufacturer in that year. Negotiations
with automobile manufacturers include determination of the initial purchase
price of the car and establishment of the payment terms. New car repurchase
programs or residual value guarantees, approval for using the Company's
facilities for warranty repairs, as well as the establishment of cooperative
advertising and promotion programs also are negotiated with the manufacturers.
See "Relationship with Ford -- Car Supply Agreement".
Purchases of cars are financed through funds provided from operations and by
active and ongoing global borrowing programs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources".
Used Car Sales
The Company disposes of "at risk" cars as well as those "non-risk" cars that are
not returned to the manufacturer through auctions, 41 domestic retail car sales
locations and, in Europe, through wholesale operations. Upon the sale of a car,
the difference between the net proceeds from sale and the remaining book value
is recorded as an adjustment to depreciation in the period when sold. See Note 7
of the Notes to the Company's consolidated financial statements included in this
Prospectus.
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In connection with its expectation that the percentage of "at risk" cars in its
rental fleet will increase, the Company expects to expand its domestic retail
network by approximately 44% (or 18 locations) during 1997. The Company also
plans to open up to three large-scale retail sales locations in the fourth
quarter of 1997, at each of which the Company expects to sell 2,500 to 3,500
units annually, compared with the current average individual location volume of
over 400 units per year.
In expanding its retail used car sales operations, the Company intends to
leverage the "Hertz" brand name and its reputation for innovation, customer
service and vehicle maintenance. Key elements of the Company's retail expansion
plan, which the Company has successfully employed in the past, include no-haggle
pricing and providing a complete maintenance history for each car. Specifically
tailored strategic information systems provide for timely and highly centralized
control of car inventories and pricing. Generally, cars sold by the Company
continue to be covered by the manufacturer's warranty. The Company provides a 12
month/12,000 mile powertrain warranty from time of sale for no additional charge
and various comprehensive warranties covering all major components for
additional charges.
Licensees
While the Company believes that its extensive worldwide ownership of its
operations provides an important competitive advantage, the Company has found it
more efficient to operate through licensees in certain markets. As of December
31, 1996, the Company's licensees operated from approximately 3,200 locations
worldwide. The Company believes that its licensee arrangements are important to
the Company's business because they enable the Company to offer expanded
national and international service and a broader Rent It Here-Leave It There
program. The Company's wholly-owned subsidiaries, Hertz System, Inc. ("System")
and Hertz International, Ltd. ("International"), issue licenses under franchise
arrangements to independent licensees and affiliates who are engaged in the car
renting business in the United States and in many foreign countries and
jurisdictions.
Licensees generally pay fees based on the number of cars they operate and/or on
revenues. The operations of all licensees, including the purchase and ownership
of vehicles, are financed independently by the licensee with the Company having
no investment interest in the licensee (except for two foreign licensees) or in
the licensee's fleet. Licensees also share in the cost of the Company's
advertising program, reservations system, sales force and certain other
services. In return, licensees are provided with the use of the "Hertz" brand
name, management and administrative assistance, training, the availability of
the Company's charge cards, The Hertz #1 Club, reservations service, the Rent It
Here-Leave It There program and other services. System, which owns the Company's
service marks and trademarks and certain proprietary know-how used by licensees,
establishes the uniform standards and procedures under which all such licensees
operate.
System licenses ordinarily are limited as to transferability without the
Company's consent and are terminable by the Company only for cause or after a
fixed term. Licensees may generally terminate for any reason on 90 days notice
to System. Initial license fees or the price for the sale to a licensee of a
corporate location may be payable over a term of several years. New licenses
continue to be issued, and, from time to time, licensee businesses are purchased
by the Company.
In 1988, the Company sold its 50% interest in Hertz Penske Truck Leasing, Inc.,
which has been succeeded by Penske Truck Leasing Co., L.P., ("Penske"), and
entered into a license agreement under which Penske has the right, as a licensee
of the Company, to conduct a one-way truck rental business (including trailers)
using the "Hertz" name for a 10 year period ending in 1998. With certain
exclusions the license agreement covers the entire United States.
Car Leasing
Hertz owns 100% of its car leasing operations in Australia, New Zealand and
Brazil. Leases are generally closed-end where the Company is subject to risk
with respect to the market value of cars at the time of disposition.
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Effective January 1, 1995, the Company sold its European car leasing and car
dealership operations to Hertz Leasing International, Inc., an indirect,
wholly-owned subsidiary of Ford ("HLI"), at an amount equal to its book value of
approximately $61 million. As part of the transaction and for additional
consideration payable over five years, Ford received the worldwide rights
(subject to certain existing license rights and excluding Australia, New Zealand
and Brazil) to use and sublicense others to use the Hertz name in the conduct of
car leasing businesses (i.e., rentals having terms of one year or longer). Prior
to completion of the Offerings, Ford will transfer back to the Company, subject
to a transition period of not less than one year, the right to use the "Hertz"
name in the conduct of the car leasing business, but will continue to make
payments in respect of its previous obligation. See Note 5 to the Notes to the
Company's consolidated financial statements included in this Prospectus.
Following such transfer, the Company may consider opportunities to expand its
car leasing business.
INDUSTRIAL AND CONSTRUCTION EQUIPMENT RENTAL OPERATIONS
Industry Overview
Through its wholly-owned subsidiary, HERC, the Company operates what it believes
to be the largest industrial and construction equipment rental business in the
United States. The equipment rental industry serves a wide variety of
industrial, construction and homeowner customers. According to a survey
conducted for the Associated Equipment Distributors, an industry trade
association, 1995 annual revenues for the U.S. equipment rental industry were
estimated at $15 billion.
The equipment rental industry is highly fragmented and consists of a large
number of small, independent businesses serving local markets. The Company
believes that there are over 7,000 equipment rental operators in the United
States with approximately 12,000 locations. According to the Rental Equipment
Register, only 23 of the top 100 equipment rental firms in the United States had
rental revenues in excess of $25 million in 1995. Management believes the
equipment rental industry in the United States offers substantial consolidation
opportunities for large, well-capitalized companies such as HERC. Relative to
small regional competitors, large multi-regional operators such as the Company
benefit from several competitive advantages, including access to capital, the
ability to offer a broad range of modern equipment, purchasing power with
equipment suppliers, sophisticated management information systems, national
brand identity and the ability to service national accounts. In addition,
multi-regional operators are less sensitive to local economic downturns.
Renting has become a more attractive alternative for companies to meet their
equipment needs. Customers are replacing fixed costs inherent in purchasing
equipment with variable costs by renting and achieving greater operating
flexibility and improved productivity of capital. Because of the significant
capital investments required to purchase heavy equipment, the shift to renting
has been particularly pronounced in the heavy equipment categories in which HERC
specializes. Changes under the Tax Reform Act of 1986, such as repeal of the
investment tax credit and the requirement for longer depreciable lives for tax
purposes, have also made renting more attractive to customers.
Products and Services Offered
Industrial and construction equipment rental represents HERC's principal service
offered. HERC rents over 150 types of equipment, major categories of which
include earth moving equipment, materials handling equipment, aerial and
electrical equipment, air compressors, compaction equipment and
construction-related trucks. Earth moving, materials handling and aerial
equipment accounted for 72% of HERC's net fleet investment at December 31, 1996.
HERC's more than 33,000 pieces of rental equipment have a weighted average age
of 19.7 months and an original investment cost of
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<PAGE> 46
approximately $908 million at December 31, 1996. The Company believes that
HERC's fleet is the largest, youngest and best maintained in the industry.
HERC is one of the largest sellers of used industrial and construction equipment
in the United States. It has developed an extensive used equipment sales program
that disposed of equipment having an original cost of over $140 million in 1996.
HERC has a dedicated used equipment sales force and, in addition, has developed
an export market through its overseas contacts. Additionally, HERC has in the
past and may, from time to time in the future, employ a broker network in the
United States to dispose of its used equipment.
HERC's comprehensive line of equipment enables HERC to be a single source for
its customers' equipment needs. Certain customers are beginning, however, to
require a single source not only for equipment rental but also for supplies and
maintenance operations. In response to this trend, HERC anticipates entering the
market for supplies and maintenance operations in 1997 through selected
acquisitions.
The Company believes that HERC's superior customer service differentiates it
from its competitors. HERC also offers the following additional services:
- National network of branches to meet local demand and timely
delivery
- Customer driven performance system to monitor customer service
- Customized management information reports
- 24 hour service for industrial accounts
- Customer safety training programs
- In-house and field maintenance by factory trained mechanics
Facilities
HERC currently operates 120 equipment rental branches ("branches"), 115 of which
are located in the United States across 31 states, and 5 of which are located in
France and Spain.
The following table shows the number of HERC branches over the 5 years ended
December 31, 1996:
<TABLE>
<CAPTION>
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Beginning locations......................................... 104 95 85 89 93
New openings................................................ 17 9 11 -- 2
Locations closed............................................ (1) -- (1) (4) (6)
--- --- -- -- --
Ending locations............................................ 120 104 95 85 89
=== === == == ==
</TABLE>
HERC's rental locations are generally situated in industrial or commercial
zones. The average location is two acres in size and includes a customer service
center, an equipment service area and storage facilities for equipment. The
branches are built or conformed to the specifications of the HERC prototype
branch which stresses efficiency, safety and environmental compliance. Each
branch has stand-alone maintenance and fueling facilities and showrooms. Of the
120 present locations, 89 are leased from third parties and 31 are owned.
Customers
HERC's customers consist predominantly of commercial accounts and represent a
wide variety of industries, such as railroad, automobile manufacturing,
petrochemicals, movie production, ship building and construction. Serving a
number of different industries enables HERC to reduce its dependence on a single
or limited number of customers in the same business. HERC has over 58,000
customers, and in 1996 no single customer of HERC accounted for more than 3% of
its revenues. HERC primarily targets large customers in medium to large
metropolitan markets.
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<PAGE> 47
HERC has sought over the past several years to diversify and stabilize its
revenue mix by reducing the portion of its revenues which are derived from
customers which operate in the more cyclical construction industry. The
following table shows the percentage of HERC revenues derived from different
types of customers in 1996 and 1990:
<TABLE>
<CAPTION>
------------
1996 1990
---- ----
<S> <C> <C>
Construction................................................ 46% 57%
Industrial.................................................. 34 27
Government.................................................. 4 5
Other....................................................... 16 11
--- ---
Total.................................................. 100% 100%
=== ===
</TABLE>
HERC operations in the United States are organized and managed in eight
geographic regions. During each of the five years ended December 31, 1996, no
single geographic region accounted for more than 20% of HERC's revenues. This
geographic diversification means HERC is better positioned to withstand a
regional recession than its local or regional competitors who, the Company
believes, are highly dependent on the economic condition of a single region.
The table below sets forth the percentage of HERC's revenues derived from each
of HERC's operating regions for the year ended December 31, 1996.
<TABLE>
<CAPTION>
----------
REGION PERCENTAGE
------ ----------
<S> <C>
Southeast................................................... 20%
Western..................................................... 14
Northeast................................................... 13
Northwest................................................... 13
Florida..................................................... 12
Southwest................................................... 12
Midwest..................................................... 11
Northcentral................................................ 5
----------
Total..................................................... 100%
==========
</TABLE>
Sales and Marketing
HERC focuses its major sales and marketing strategy on large local and
multi-regional users of industrial and construction equipment. The strategy is
led by a national accounts sales organization consisting of 15 people and is
backed by a field sales force of 340 highly trained sales professionals. Each
branch has its own dedicated sales force.
HERC's national account program began in 1983 and has over 1,700 national
account agreements with major regional and national companies. Revenues from
national accounts have grown at a 25.6% compound annual rate from $11 million in
1984, the first full year of the national accounts program, to an estimated $170
million in 1996, or approximately 43% of HERC's 1996 revenues.
HERC's national sales force effectively emphasizes HERC's strengths such as its
geographically diverse system of branches and the size, consistency and quality
of HERC's fleet. HERC reaches its smaller accounts through a local sales force.
The Company believes that the combination of HERC's professional sales force,
high quality fleet and the ability to transfer equipment from various locations
to satisfy local demands provides a competitive advantage.
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<PAGE> 48
Information Systems
The Company believes that HERC uses the most sophisticated information systems
in the equipment rental industry and that HERC has benefitted substantially from
the Company's investment in strategic information systems used by the car rental
business.
Using techniques substantially the same as those employed in the Company's car
rental operations, HERC uses its information systems, which link its various
rental locations, to enhance profitability by allowing centralized management
control of each piece of equipment in the rental fleet, monitoring demand by
location to assist in maintaining high utilization and managing the acquisition
and disposition of equipment.
Equipment Maintenance
Each HERC facility performs its own preventive maintenance. Centralized computer
programs link all HERC facilities to monitor on-time preventive maintenance as
well as annual American National Standard Institute and Department of
Transportation inspections. This process is designed to ensure peak equipment
performance and availability, and reduces the need for major repairs, resulting
in approximately 99% of HERC's fleet being rented or available for rental at any
time. Other automated programs track mandatory safety and service modifications
and equipment deadlines. HERC has developed comprehensive in-house warranty
programs to repair equipment on behalf of manufacturers and is eligible to
receive reimbursement for such work.
Equipment Acquisition
Equipment purchasing is centralized to leverage and maintain what the Company
believes is the lowest average fleet costs within the equipment rental industry.
The Company believes that HERC is the largest single buyer of industrial and
construction equipment within the equipment rental industry. During 1996, HERC
made $378.4 million of rental equipment acquisitions and other capital
expenditures.
HERC selectively buys its equipment from vendors with reputations for high
product quality, reliability and significant market share. Some of HERC's
leading suppliers include Case Corporation, Lull Industries, Inc, the Gradall
Co., Deere & Company (John Deere equipment), Ingersoll-Rand Company, JLG
Industries, Inc. and Ford.
Centralized purchasing has allowed HERC to standardize its fleet specifications
by model and geographic needs, allowing for economies of scale. HERC has
developed a fully automated fleet planning and purchasing process that
streamlines and expedites fleet orders.
The Company believes that HERC's fleet age is a major competitive advantage and
assures customer satisfaction with equipment as well as lower maintenance costs.
Through aggressive used equipment sales, the Company has been able to maintain
an average fleet age of 19.7 months.
The Company is generally "at risk" with respect to all the equipment used in its
industrial and construction and equipment rental sales operations.
Fleet Disposal
The Company believes that HERC is the largest distributor of used industrial and
construction equipment in the United States and has established itself as a
highly reliable supplier of used equipment. In 1996, HERC disposed of equipment
having an original cost of over $140 million. All used equipment is sold
directly from branch locations.
Pricing for used HERC equipment has been centralized. Relationships with major
equipment brokers and wholesalers allow HERC to trim fleet levels and mix to
improve utilization. HERC publishes The Source magazine two to three times per
year and distributes it nationally to over 40,000 customers and
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<PAGE> 49
prospects. This full color publication advertises price, model, year and
location of used equipment for sale. The Company also prints a Spanish version.
This overall used equipment strategy has allowed HERC to maintain what it
believes to be the youngest fleet in the industry by selling off assets that are
between 24 and 60 months old on average. With a younger fleet, HERC has
significantly reduced its maintenance and repair costs which are largely covered
by manufacturer warranties. The Company has been able to exploit its significant
presence in the U.S. market for sales of used industrial and construction
equipment, to actively manage its fleet size and, in particular, to reduce fleet
levels during typical seasonal downturns.
STRATEGIC INFORMATION SYSTEMS
Centralized control, achieved through the use of the Company's strategic systems
technology, of major business processes such as reservations, rate structures
and fleet control provides the disciplined environment in which the Company can
deliver consistent quality service at its car rental and equipment rental
operations. The Company has over 3,900 MIPS (millions of instructions per
second) of computing power and over four Terabytes (trillion characters) of
online data storage to run its global reservations, point-of-sale,
administrative and financial systems. The Company maintains real-time
communications with its many locations by means of what it believes is the
largest private data network in the industry.
In 1991, the Company began centralizing its worldwide information technology
resources in Oklahoma City, Oklahoma. This project, which is expected to be
completed by 1999, is expected to allow the Company to gain efficiencies in
support and development and to continue improving productivity and cost
effectiveness.
Global Reservations System
The Company's global reservations system operates through real-time, on-line
centers on five continents. Direct access with other computerized reservations
systems allow real-time processing for travel agents and corporate travel
departments. Company rental locations worldwide depend upon the global
reservations system to provide information critical to fleet and personnel
planning, rate management and the timely computerized delivery of reservations.
Customer information captured and made available in the reservations process
support such premium services as Hertz #1 Club Gold.
The Company's reservations system annually handles over forty million incoming
calls, during which customers inquire about locations, rates and availability,
and place or modify reservations. In addition, millions of inquiries and
reservations come to the Company through travel agents and travel industry
partners. The Company maintains and continually monitors quality standards for
accuracy and consistency in the reservations process. Regardless of where in the
world the customer may be, the Company's reservations system is designed to
ensure that availability of cars, rates and personal profile information is
reliably applied and that correct information is delivered at the proper time to
the customer's rental destination.
The Company expects to complete its transition to a state of the art,
client-server based reservations system at its Oklahoma City reservations center
in the second quarter of 1997. This new system is expected to allow for greater
accuracy and speed in processing reservations, thereby improving customer
service. The client-server architecture minimizes the need for additional
computer equipment as the demands of the business grow. Additionally, the design
of the new system is expected to be more flexible, facilitating rapid response
to changing market demands.
The Company also is in the process of consolidating individual European
reservations centers into a single facility in Ireland. As a result, the Company
expects to realize substantial cost savings, while providing uniformly high
service levels. Currently, the European and domestic reservations systems are
linked, providing for global reservation capabilities.
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<PAGE> 50
Yield Management System
Yield management affords the opportunity to achieve greater returns from a fixed
number of assets. The Company's yield management system is designed to optimize
revenue through controlling, simultaneously, the availability of various rates
as well as the availability of cars. The system monitors the flow of demand over
time on a location by location basis, in order to supply a sufficient number of
cars at those times when available rates are high.
Enhancements to the yield management system are produced on an ongoing basis.
The Company is currently developing a car distribution optimization program,
which is expected to be fully integrated with the yield management system, and
anticipates that this program will be made available throughout the Company's
major locations in the United States by 1998. This enhancement is expected to
facilitate the distribution of cars among rental locations within a regional
area to take maximum advantage of demand and price opportunities over a period
of time.
In the Company's European operations, the yield management system is expected to
be introduced with modifications appropriate to those markets.
Competitive Rate Detection
The Company recognizes that it is essential to respond promptly to pricing
changes in the marketplace. The ability to respond rests on the ability to
detect pricing changes when they occur. The Company believes it has the most
sophisticated competitive price detection software in the industry. Developed
internally and using global distribution systems (such as United Airlines'
Apollo system and American Airlines' Sabre system) for its source of
information, competitors' rates are electronically canvassed nightly. "Scouting"
routines are used to identify future rates in the marketplace. If rate changes
are detected, they result in more in-depth canvassing, as appropriate. The
benefit of this system is to provide enhanced awareness of competitive rate
changes far more frequently, and for a greater number of locations and time
periods, than would otherwise be available.
Internationally, canvassing is generally done manually, due to the limited
information available concerning competitors in the global distribution systems.
However, the Company's European operations have in place a reporting system
which, while dependent on manual input, parallels the information available in
the United States.
Cost Allocation Model
The Company's cost allocation model supports the Company's objective that all
segments of its businesses must provide contributions above a strategically set
threshold. Contribution per rental day is determined by location, business
segment and car and equipment category by using data from the financial
management system, the fleet accounting system, the marketing database and the
yield management process. Additional models, based on this core cost allocation
model, allow the sales department to determine the profitability of customer
accounts by rental location.
To support the Company's European operations, a comparable cost allocation model
is used to reflect the individual operating environments of the respective
countries and to manage profitability.
Disaster Recovery; Year 2000 Date Conversion
The Company's systems disaster recovery planning is a comprehensive, ongoing
process which is updated as products are developed, tested and modified.
Disaster recovery for reservations, financial and other strategic systems is
provided at alternative locations serviced by third parties or at Company
maintained facilities.
In 1997, the Company will commence, for all of its systems, a year 2000 date
conversion project to address all necessary code changes, testing and
implementation. Project completion is planned for the middle of 1999 at an
estimated total cost of approximately $15 million. The Company expects its year
50
<PAGE> 51
2000 date conversion project to be completed on a timely basis. However, there
can be no assurance that the systems of other companies on which the Company's
systems rely also will be timely converted or that any such failure to convert
by another company would not have an adverse effect on the Company's systems.
OTHER OPERATIONS OF THE COMPANY
Claim Management
The Company's wholly-owned subsidiary, Hertz Claim Management Corporation,
provides claim administration services to the Company and to numerous 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. Prior to March 1, 1996, the Company, through a
subsidiary, also administered for the Company's operations and others, workers'
compensation and medical, dental and other employee health benefit claims. That
subsidiary, renamed HCM Claim Management Corporation, was sold at a profit to an
investor group during 1996. However, Hertz Claim Management Corporation
continues to administer liability claims for the Company and for outside
clients.
Telecommunications
In 1991, the Company began purchasing and reselling telecommunications services
through its subsidiary, Hertz Technologies, Inc. ("HTI"). HTI takes advantage of
the Company's negotiated rates with its telecommunications carriers to market
custom designed rate packages and services to small and medium size businesses
throughout the United States. Available services include call detail and
management reports, inbound/outbound call packages and travel calling card
services that include voice mail and fax options.
The knowledge of competitive telecommunications services gained from developing
a leading management information system for the car rental industry has resulted
in significant savings to the Company. Due to the nature of the
telecommunications business, there is very little overhead or capital investment
required. Services are sold through independent sales agents and other groups.
HTI provides its services from Oklahoma City, Oklahoma.
SELF INSURANCE
For its domestic operations, the Company is, where permitted by applicable local
law, a qualified self-insurer against liability resulting from accidents under
certificates of self-insurance for financial responsibility in all states where
its cars are registered. The Company also self-insures general public liability
and property damage for all domestic operations. Since July 1, 1987, all claims
have been retained and borne by the Company up to a limit of $5 million for each
occurrence, and the Company has maintained insurance with unaffiliated carriers
in excess of $5 million up to $450 million per occurrence. Hertz Claim
Management Corporation, a wholly-owned subsidiary of the Company, administers
this public liability and property damage program through a network of eight
regional offices throughout the United States.
For its international operations, the Company purchases insurance to comply with
local legal requirements. From January 1, 1993 through December 31, 1996,
vehicle liability insurance purchased locally from unaffiliated carriers by
Company-owned operations in Europe was reinsured by Hertz International RE
Limited, a wholly-owned subsidiary of the Company operating as a reinsurer in
Dublin, Ireland. Hertz International RE Limited is responsible for the first
$1.5 million of motor vehicle liability for each accident during this period,
with excess liability insurance coverage maintained by the Company with
unaffiliated carriers. Effective January 1, 1997, the Company replaced the
unaffiliated carrier that was the fronted insurer for claims up to $1.5 million
by establishing a wholly-owned subsidiary, Probus Insurance Company Europe
Limited ("Probus"), a direct writer domiciled in Dublin, Ireland. Probus now
underwrites the Company's Pan-European motor vehicle liability program (except
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<PAGE> 52
in Switzerland and Denmark) up to $1.5 million per occurrence. Excess coverage
for claims that exceed $1.5 million per occurrence continue to be maintained
with unaffiliated carriers. In the Company's international operations other than
Europe, the Company is self-insured at various amounts up to $100,000 per
occurrence, and maintains excess liability insurance coverage up to $450 million
per occurrence with unaffiliated carriers.
Provisions for public liability and property damage on self-insured domestic
claims and reinsured foreign claims are made by charges to expense based upon
evaluations of estimated ultimate liabilities on reported and unreported claims.
At December 31, 1996, this liability was estimated at $321 million for combined
domestic and foreign operations.
Ordinarily, collision damage costs and the costs of stolen or unaccounted for
cars are carried on a self-insured basis, with such costs being charged to
expense as incurred.
HERC generally requires its customers to provide their own liability insurance
on rented equipment with HERC held harmless under various agreements.
Other types of insurance usually carried by business organizations, such as
workers compensation, (i.e., on a fronted basis up to $5 million per occurrence)
property (including boiler and machinery and business interruption), commercial
crime and fidelity, performance bonds and directors and officer's liability
insurance, are purchased from various insurance companies in amounts deemed
adequate by the Company for the respective hazards. The Company and its
directors and officers participate as additional insureds in certain insurance
policies maintained by Ford. See "Relationship with Ford".
COMPETITION
The markets in which the Company operates are highly competitive. In any given
location, the Company may encounter competition from national, regional and
local companies. In the United States, the Company's principal competitors in
the business car rental market are Avis and National, and in the leisure market,
the Company's principal competitor is Alamo. In Europe, the Company's principal
competitors in the car rental market are Avis, Europcar and, operating
principally through licensees, Budget. The Company competes primarily on the
basis of customer service and price. In addition, the Company believes extensive
worldwide ownership of its operations and its access to the global capital
markets provide it with an advantage over its competitors.
The Company, through H.I.R.E., intends to expand its presence in the insurance
replacement market in the United States where Enterprise Rent-a-Car is currently
the dominant participant.
The Company believes that HERC is the largest equipment rental company in the
United States. HERC's competitors range from large national companies such as
U.S. Rentals, BET Plant Services and Prime Equipment to small regional
businesses. HERC's competitive success is, in part, due to its state of the art
systems for monitoring, controlling and developing its branch network, its
capacity to maintain a comprehensive rental fleet and its established national
accounts program.
The Company believes that price is one of the primary competitive factors in the
car and industrial and construction equipment rental markets. Competitors of the
Company, many of which have access to substantial capital, may seek to compete
aggressively on the basis of pricing. To the extent that the Company matches
downward competitor pricing, it could have an adverse impact on the Company's
results of operations. To the extent that the Company is not willing to match
competitor pricing, it could also have an adverse impact on the Company's
results of operations as the Company may lose market share.
EMPLOYEES
On December 31, 1996, the Company employed approximately 21,000 persons in its
domestic and foreign operations. Labor contracts covering the terms of
employment of approximately 5,400 employees in the United States are presently
in effect under 167 active contracts with local unions,
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<PAGE> 53
affiliated primarily with the International Brotherhood of Teamsters and the
International Association of Machinists (AFL-CIO). Labor contracts which cover
approximately 1,500 of these employees will expire during 1997. Employee
benefits in effect include group life insurance, hospitalization and surgical
insurance, pension plans, and an income savings 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.
The Company has had no material work stoppage as a result of labor problems
during the last 10 years. The Company believes its labor relations to be good.
In addition to the employees referred to above, the Company employs a
substantial number of temporary workers, and engages outside services, as is
customary in the industry principally for the non-revenue movement of the rental
fleet between locations.
LEGAL PROCEEDINGS
In July 1996, the Company was sued in Harris County, Texas District Court in a
purported class action in which the plaintiff alleges that the Company's
practice of providing certain insurance products violates the Texas Insurance
Code because the Company did not obtain approval to sell insurance or obtain
regulatory approval of the premiums it charges. The complaint seeks restitution
of excessive premiums, equitable rescission of all insurance contracts entered
into by the class members, a declaratory judgment that the Company is selling
insurance illegally in Texas and injunctive relief. Currently the action is in
its preliminary stages and the class has not been certified. While it is
possible that the action could result in significant liability to the Company,
the Company does not expect the action to have a material adverse effect on the
Company's consolidated financial position or results of operations. For a
discussion of a related inquiry by the Texas Department of Insurance, see "--
Governmental Regulation and Environmental Matters".
The U.S. Department of Labor has commenced an inquiry into the Company's
classification of certain employees as "exempt" for purposes of federal labor
laws and whether such employees have been improperly denied overtime pay. While
an adverse outcome of the inquiry could have an adverse effect on the Company's
results of operations for the quarter in which it occurs, the Company does not
believe any adverse outcome would have a material adverse effect on the
Company's results of operations for a full year or on the Company's consolidated
financial position.
The Company is involved in a legal proceeding through which the Company is
challenging the legality of a New York City ordinance that would prohibit the
Company's practice of assessing higher rental rates for renters who reside in
certain New York City boroughs. See "-- Government Regulation and Environmental
Matters".
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 the Company and its 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 the Company or the subsidiary 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 the
consolidated financial position or results of operations of the Company.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Throughout the world, the Company is subject to numerous types of governmental
controls, including those relating to price regulation and advertising, currency
controls, labor matters, charge card operations, environmental protection, used
car sales and franchising.
The Company's operations, as well as those of its competitors, could be affected
by any limitation in the fuel supply or by any imposition of mandatory
allocation or rationing regulations. In the event of a severe disruption of fuel
supplies, the operations of all car and industrial and construction equipment
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<PAGE> 54
renting and leasing companies could be adversely affected. Historically, there
has been no disruption of operations resulting from lack of fuel availability.
Since 1992, in the Company's New York region (which includes parts of New Jersey
and Connecticut), the Company has been assessing higher rental rates for renters
who reside in the New York City boroughs of The Bronx, Brooklyn or Queens to
offset costs resulting from a higher incidence of accidents involving renters
residing in such boroughs. The City of New York passed an ordinance prohibiting
such pricing practice. The Company filed suit against The City of New York
claiming that such ordinance was in violation of federal anti-trust laws. The
Company's claim was rejected in U.S. District Court, and the Company appealed to
the U.S. Court of Appeals for the Second Circuit. That Court remanded the
proceeding to the U.S. District Court for trial. Pending the outcome of the
action in the U.S. District Court, the Court has stayed the ordinance,
permitting the Company to continue its pricing practice. If the Company is
ultimately unsuccessful in challenging the ordinance, the Company believes it
could take actions to mitigate the higher costs that would be experienced from
such rentals. Accordingly, the Company believes that an adverse outcome would
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Texas Department of Insurance (the "TDI") is currently reviewing the
Company's practice of offering certain insurance products underwritten by
unaffiliated third parties to car rental customers in Texas. Among other things,
the TDI is considering whether the Company's counter sales representatives in
Texas should be licensed to sell insurance. While the Company does not believe
that the enrollment of customers in such policies requires that representatives
be licensed to sell insurance, the Company is unable to predict what
determination the TDI will make or what action, if any, it will take. The
Company does not believe, however, that the outcome of this matter will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
The environmental legal and regulatory requirements applicable to the Company's
operations pertain to (i) the operation of automobiles, trucks and other
vehicles such as heavy equipment and buses; (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, car wash sludge and waste water. The
Company has made, and will continue to make, expenditures to comply with
environmental laws and regulations.
The use of automobiles and other vehicles is subject to various governmental
requirements designed to limit environmental damage, including that caused by
emissions and noise. Generally, these requirements are met by the manufacturer
except, on occasion, equipment failure requiring repair by the Company. Measures
are being 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.
The Company operates approximately 500 tanks nationwide to store petroleum
products, and the Company believes its 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. The Company has established a compliance program for its tanks to
ensure that (i) the tanks are properly registered with the state in which the
tanks are located; and (ii) the tanks have been either upgraded or replaced to
meet federal and state leak detection and spill, overfill and corrosion
protection requirements. The Company anticipates spending approximately $2.9
million in 1997 and approximately $1 million in 1998 to complete the
registration and upgrade or replacement of such tanks.
The Company is also incurring and providing for expenses for the cleanup of
contamination from fuel discharges at its owned and leased properties, as well
as contamination at other locations at which the Company's wastes have
reportedly been identified. With respect to cleanup expenditures for fuel
discharges at the Company's owned or leased properties, the Company has received
reimbursement, in whole or in part, from certain states that maintain
underground storage tank petroleum cleanup funds. Such funds have been
established to assist tank owners in the payment of cleanup costs associated
with releases from registered tanks. The Company expects to continue to receive
reimbursement for cleanup
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<PAGE> 55
costs incurred due to releases from certain of its tanks. With respect to
off-site locations at which the Company's wastes have reportedly been
identified, the Company has been and continues to be required to contribute to
cleanup costs due to strict joint and several cleanup liability under federal
and state statutes for companies that send wastes to such off-site locations for
disposal. The Company has recovered a substantial amount of such costs incurred
through settlements with its insurance carriers.
Environmental legislation and regulations and related administrative policies
have changed rapidly in recent years. There is a risk that governmental
environmental requirements, or enforcement thereof, may become more stringent in
the future and that the Company 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 the Company may have been released or disposed, and of
which the Company is currently unaware, may in the future become the subject of
cleanup for which the Company may be liable, in whole or part. Accordingly,
while the Company believes that it is in substantial compliance with applicable
requirements of environmental laws, there can be no assurance that the Company's
future environmental liabilities will not be material to the Company's results
of operations or financial condition.
PROPERTIES
As of December 31, 1996, the Company's owned operations were carried on at 2,328
locations worldwide, including rental and sales offices, car sales locations and
service facilities located on or near airports and in central business districts
in major U.S. cities and suburban areas. Most of such premises are leased,
except for 115 that are owned in fee. The Company has various concession
agreements with governmental authorities charged with the operation of airports
under arrangements generally providing for payment of rents and a percentage of
revenues with a guaranteed annual minimum fee. See Note 9 of the Notes to the
Company's consolidated financial statements included in this Prospectus.
The Company has three major facilities in the vicinity of Oklahoma City,
Oklahoma (one of which is operated under a capital lease and two of which are
owned) at which reservations for its worldwide car rental operations are
processed, global strategic information systems are serviced and major domestic
and international accounting functions are performed. The Company maintains its
executive offices in a facility leased from a joint venture, in which the
Company has a 50% interest, in Park Ridge, New Jersey. The Company is exploring
purchasing the remaining 50% equity interest in the joint venture that owns the
facility. The Company does not expect such transaction to have a material
adverse effect on its financial position.
RELATIONSHIP WITH FORD
Immediately prior to the Offerings, Ford and a Ford subsidiary will be the only
stockholders of the Company. Upon completion of the Offerings, Ford will
beneficially own % of the outstanding Class A Common Stock ( % if the
Underwriters' over-allotment options are exercised in full) and 100% of the
outstanding Class B Common Stock of the Company (which Class B Common Stock is
entitled to five votes per share on any matter submitted to a vote of the
Company's stockholders). Upon completion of the Offerings, the common stock
beneficially owned by Ford will represent in the aggregate % of the combined
voting power of all of the Company's outstanding common stock (or % if the
Underwriters' over-allotment options are 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 the Company's common stock, Ford will be able to
direct the election of all of the members of the Company's Board of Directors
and exercise a controlling influence over the business and affairs of the
Company, including any determinations with respect to mergers or other business
combinations involving the Company, the acquisition or disposition of assets by
the Company, the incurrence of indebtedness by the Company, 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 matters submitted to a vote of the Company's
stockholders without the consent of the Company's other stockholders, will have
the power to prevent a change in control of the Company and could take other
actions that might be favorable to Ford. See "Management".
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<PAGE> 56
Ford has advised the Company that its current intent is to continue to hold all
of the common stock beneficially owned by it following the Offerings. However,
Ford is not subject to any contractual obligation to retain its controlling
interest, except that each of the Company and Ford has agreed, subject to
certain exceptions, not to sell or otherwise dispose of any shares of Class A
Common Stock or Class B Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of J.P. Morgan Securities Inc.
As a result, there can be no assurance concerning the period of time during
which Ford will maintain its beneficial ownership of common stock of the Company
owned by it following the Offerings. See "Underwriting".
Beneficial ownership of at least 80% of the total voting power and value of the
outstanding Common Stock is required in order for Ford to include the Company in
its consolidated group for federal income tax purposes, and beneficial ownership
of at least 80% of the total voting power and 80% of each class of nonvoting
capital stock is required in order for Ford to be able to effect a tax-free
spin-off or certain other tax-free transactions.
In addition, by virtue of its controlling beneficial ownership and the terms of
a tax-sharing agreement to be entered into between the Company and Ford, Ford
will effectively control all of the Company's tax decisions, and conflicts of
interest regarding tax matters between the Company and Ford may arise. See "--
Tax-Sharing Agreement".
Certain of the Company's airport concession agreements require the consent of
the airport authority in connection with changes in ownership of the Company.
For a description of certain provisions of the Company's Restated Certificate of
Incorporation concerning the allocation of business opportunities that may be
suitable for both the Company and Ford, See "Description of Capital Stock --
Certain Certificate of Incorporation and By-law Provisions -- Corporate
Opportunities".
Set forth below are descriptions of certain agreements, relationships and
transactions between the Company and Ford.
CAR SUPPLY AGREEMENT
The Company and Ford have entered into a car supply agreement (the "Car Supply
Agreement") having a term of ten years, commencing September 1, 1997 and ending
August 31, 2007. Under the Car Supply Agreement, Ford and the Company have
agreed to negotiate in good faith on an annual basis with respect to the supply
of cars. Ford has agreed to supply to the Company and the Company has agreed to
purchase from Ford, for each car model year during the term of the agreement
(i.e., the 1998 model year through the 2007 model year), (a) the lesser of
150,000 cars or 55% of the Company's fleet requirements for its car rental
business conducted in the United States; (b) 35% of the Company's fleet
requirements for its car rental business conducted in Europe; and (c) 55% of the
Company's fleet requirements for its car rental business conducted other than in
the United States and Europe. For each model year, at least 50% of the cars
supplied by Ford are required to be non-risk cars. The Car Supply Agreement also
provides that, for each model year, Ford must strive to offer car fleet programs
to the Company on terms and conditions that are competitive with terms and
conditions for the supply of cars then being offered by other automobile
manufacturers to the Company and other daily car rental companies. In addition,
for each model year, Ford must supply cars to the Company on terms and
conditions that are no less favorable than those offered by Ford to other daily
car rental companies, excluding franchised Ford vehicle dealers who rent cars.
See "Business -- Worldwide Car Rental -- Car Acquisition".
JOINT ADVERTISING AGREEMENT
The Company and Ford have entered into a joint advertising agreement (the "Joint
Advertising Agreement") having a term of ten years, commencing on September 1,
1997 and ending August 31, 2007. Under the Joint Advertising Agreement, Ford has
agreed to pay to the Company one-half of the
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<PAGE> 57
Company's advertising costs, up to a limit of $39 million for the first year
and, for each year thereafter, a limit equal to the prior year's limit adjusted
for inflation. In addition, if for any year, one-half of the Company's
advertising costs exceed such limit and the Company has purchased from Ford a
percentage of its car fleet requirements for its car rental business conducted
in the United States for the corresponding model year (the "Ford Vehicle Share")
equal to 58% or more, then Ford will pay to the Company additional amounts for
such excess advertising costs. To be eligible for cost reimbursement under the
Joint Advertising Agreement, the advertising must meet certain conditions,
including the condition that it indicates that the Company features Ford
vehicles in a manner and with a prominence that is reasonably satisfactory to
Ford.
The Joint Advertising Agreement further provides that if the Ford Vehicle Share
for any model year is less than 55%, Ford will not be obligated to pay the
Company any amount for its advertising costs for that year, except to the extent
that the Company's failure to achieve a 55% Ford Vehicle Share is attributable
to (a) Ford's failure to supply a sufficient quantity of cars for the Company to
achieve a 55% Ford Vehicle Share or (b) the fact that the terms and conditions
of Ford's car fleet programs offered to the Company were not competitive with
the terms and conditions for the supply of cars offered by other automobile
manufacturers to the Company and other daily car rental companies. In no event,
however, will Ford be required to pay any amount for the Company's advertising
costs for any year if the Ford Vehicle Share for the corresponding model year is
less than 40%.
For information regarding amounts paid by Ford to the Company for its
advertising costs in past years under a similar agreement, see "Business --
Worldwide Car Rental -- Marketing, Sales and Advertising".
CORPORATE AGREEMENT
The Company and Ford intend to enter into a corporate agreement (the "Corporate
Agreement") under which the Company 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 the Company (the "Stock Option"). The Stock Option may be exercised
simultaneously with the issuance of any equity security of the Company (other
than in the Offerings or upon the exercise of the Underwriters' over-allotment
options), 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 the
Company 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 the Company to Common Stock representing less than 45% of the
outstanding shares of Common Stock.
The Corporate Agreement will further provide that, upon the request of Ford, the
Company will use its 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 Ford's 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 and nonvoting capital stock (and any
other securities issued in respect of or in exchange for either) beneficially
owned by it in certain other registrations of common equity securities of the
Company initiated by the Company on its own behalf or on behalf of its other
stockholders. The Company 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
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<PAGE> 58
permitted assigns for the benefit of the Company and related persons; and (ii)
by the Company 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 maintains
beneficial ownership of a majority of the number of outstanding shares of Common
Stock, the Company 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 Internal Revenue Code
of 1986, as amended, or the Employee Retirement Income Security Act of 1974, as
amended; (ii) any provision of Ford's 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.
The Corporate Agreement will provide that the Company will enter into a similar
agreement for the benefit of the Class B Transferee (as defined below), if any.
TAX-SHARING AGREEMENT
The Company is, and after the Offerings will continue to be, included in Ford's
federal consolidated income tax group, and the Company's federal income tax
liability will be included in the consolidated federal income tax liability of
Ford and its subsidiaries. In certain circumstances, certain of the Company's
subsidiaries will also be included with certain Ford subsidiaries in combined,
consolidated or unitary income tax groups for state and local tax purposes. The
Company and Ford intend to enter into a tax-sharing agreement (the "Tax-Sharing
Agreement"). Pursuant to the Tax-Sharing Agreement, the Company and Ford will
make payments between them such that, with respect to any period, the amount of
taxes to be paid by the Company, subject to certain adjustments, will be
determined as though the Company 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 and local income taxes. With respect to foreign tax
credits, the Company's right to reimbursement will be determined based on the
usage of such foreign tax credits by the consolidated group.
In determining the amount of tax-sharing payments under the 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 Ford's
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 the
Company in any and all matters relating to the income, franchise and similar
liabilities of the Company, 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 the Company related to such return.
In general, the Company will be included in Ford's consolidated group for
federal income tax purposes for so long as Ford beneficially owns at least 80%
of the total voting power and value of the outstanding common stock. Each member
of a consolidated group is jointly and severally liable for the federal income
tax liability of each other member of the consolidated group. Accordingly,
although the Tax-Sharing Agreement allocates tax liabilities between the Company
and Ford, during the period in which the Company is included in Ford's
consolidated group, the Company could be liable in the event
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that any federal tax liability is incurred, but not discharged, by any other
member of Ford's consolidated group. See "Risk Factors -- Control by and
Relationship with Ford".
COMMERCIAL PAPER DEALER AGREEMENTS
The Company maintains a Sales Agency Agreement with Ford Financial Services,
Inc., an NASD registered broker-dealer and an indirect, wholly-owned subsidiary
of Ford ("FFS"), whereby FFS acts as the exclusive dealer for the Company's
domestic commercial paper program. The Company pays fees to FFS which range from
.035% to .05% per annum of commercial paper placed depending upon the monthly
average dollar value of the notes outstanding in the portfolio. In 1996, the
Company paid FFS $556,754 of such fees. FFS is under no obligation to purchase
any of the notes for its own account. FFS has acted as the Company's exclusive
commercial paper dealer since October 1994, and the Sales Agency Agreement may
not be amended or terminated without the written consent of both parties. The
Company, through its subsidiary Hertz Australia Pty. Limited ("Hertz
Australia"), has a similar agreement with Ford Credit Australia Limited, also an
indirect, wholly-owned subsidiary of Ford.
CREDIT FACILITY AND LOANS
As discussed under "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources", Ford has extended
to the Company a $500 million committed credit facility under which the Company
may borrow, repay and reborrow amounts from time to time at rates of interest
based on London Interbank Offered Rates. The Company will pay Ford an annual
commitment fee on the undrawn amounts equal to (i) for the period from the date
of the agreement to and including June 30, 1997, the rate of .09% and (ii) for
the period from July 1, 1997 to and including the expiration date of the
facility, a rate to be agreed upon. The credit agreement expires on June 30,
1999, but is automatically extended annually for an additional year unless Ford
gives notice of termination. No amounts are currently outstanding under this
facility.
Ford also has lent to the Company an aggregate of $269 million, of which $250
million matures on November 15, 1999 and $19 million matures on July 1, 1997.
OTHER RELATIONSHIPS AND TRANSACTIONS
The Company and Ford also engage in other arms' length transactions in the
ordinary course of their respective businesses. These include HERC providing
equipment rental services to Ford, the Company providing insurance claim
management services to Ford and the Company providing car rental services to
Ford. In addition, an affiliate of Ford provides equipment resale financing to
HERC's customers and relocation services to employees of the Company.
The Company is named as an additional insured under certain of Ford's insurance
policies for which the Company pays its allocated portion of the premiums.
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MANAGEMENT
The following table sets forth certain information with respect to the executive
officers and directors of the Company, and their ages as of February 3, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
NAME AGE POSITION AND OFFICE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Frank A. Olson 64 Chairman of the Board, Chief Executive Officer and Director
Craig R. Koch 50 President, Chief Operating Officer and Director
Daniel I. Kaplan 54 Executive Vice President
Brian J. Kennedy 55 Executive Vice President, Marketing and Sales
Joseph R. Nothwang 50 Executive Vice President and General Manager,
U.S. Car Rental Division
William Sider 63 Executive Vice President and Chief Financial Officer and
Director
Robert J. Bailey 62 Senior Vice President
Donald F. Steele 58 Senior Vice President, Employee Relations
Paul M. Tschirhart 56 Senior Vice President and General Counsel
Antoine E. Cau 49 Vice President
Leo A. Massad, Jr. 65 Controller
Robert H. Rillings 56 Treasurer
John M. Devine 52 Director
Peter J. Pestillo 58 Director
</TABLE>
All directors are elected annually to serve until the next annual meeting of
stockholders and until their successors have been elected and qualified. Upon
completion of the Offerings, the Company will have a Board of Directors
consisting of the five current members of the Company's Board of Directors
identified above. After completion of the Offerings, the Company anticipates
that the size and composition of the Board of Directors will be changed and will
include three directors who will be officers of the Company, three directors who
will be officers of Ford and two directors who will be persons not associated
with the Company or Ford. Ford will have the ability to change the size and
composition of the Company's Board of Directors and committees of the Board of
Directors. See "Relationship with Ford".
The Company's Board of Directors is expected to appoint directors who are not
affiliated with the Company or Ford to a compensation committee of the Board of
Directors (the "Compensation Committee") and an audit committee of the Board of
Directors (the "Audit Committee") after such directors are elected. Both such
committees will be comprised solely of independent directors. The Compensation
Committee will establish remuneration levels for certain officers of the Company
and perform such functions as may be delegated to it under the Company's
employee benefit programs and executive compensation programs. The Audit
Committee will select and engage, on behalf of the Company, the independent
public accountants to audit the Company's annual financial statements. The Audit
Committee also will review and approve the planned scope of the annual audit.
The Board of Directors may, from time to time, establish certain other
committees to facilitate the management of the Company.
Officers are elected at the organizational meeting of the Board of Directors
held each year for a term of one year, and they are elected to serve until the
next annual meeting.
MR. OLSON has been Chairman of the Board of Directors since June 1980, and a
director of the Company since November 1974. From June 9, 1987 to December 12,
1987 he was Chairman of the Board, President and Chief Executive Officer of UAL
Corporation, Elk Grove, Illinois (the Company's former parent). He is also a
director of Becton, Dickinson and Co., Franklin Lakes, New Jersey; Cooper
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Industries, Inc., Houston, Texas; Unicom Corporation, Chicago, Illinois; and
Fund American Holdings, Inc., Lebanon, New Hampshire.
MR. KOCH was elected President and Chief Operating Officer of the Company on
September 1, 1993. From February 1988 through August 1993 he served as Executive
Vice President and President of North America Car Rental operations of the
Company. He served as President and Chief Operating Officer of the Company from
May 1987 to February 1988. In October 1983 he became Executive Vice President
and General Manager of the Company's Car Rental Division after having served as
Vice President and General Manager since March 1980. He previously served as a
director of the Company from May 1987 to July 1993 and from October 1983 to
September 1985.
MR. KAPLAN was elected Executive Vice President of the Company in May 1987.
Previously, he was Vice President, Materials and Support Services from July 1982
to September 1982 and continued as a Vice President until May 1987. In September
1982, he was elected a director and President of Hertz Equipment Rental
Corporation, a subsidiary of the Company.
MR. KENNEDY was elected Executive Vice President, Marketing and Sales of the
Company in February 1988. From May 1987 through January 1988, he served as
Executive Vice President and General Manager of the Car Rental Division of the
Company, prior to which, from October 1983, he served as Senior Vice President,
Marketing.
MR. NOTHWANG was elected Executive Vice President of the Company and General
Manager
U.S. Car Rental in August 1995. He served as Vice President and General Manager
U.S. Car Rental from September 1993 to August 1995. Previously he served as
Division Vice President, Region Operations since 1985. He has served in various
operating positions since 1976.
MR. SIDER was elected Executive Vice President and Chief Financial Officer of
the Company in February 1988. From June 25, 1987 to December 31, 1987, he served
as Chief Financial Officer of UAL Corporation, Elk Grove, Illinois. From October
1983 to February 1988, he served as Senior Vice President, Finance of the
Company. In April 1981, he was elected Vice President, Finance, and in 1980
served as Vice President and Controller of the Company. He has been a director
of the Company since October 1983.
MR. BAILEY was elected Senior Vice President of the Company in May 1990.
Previously, he served in various functions with the Company since 1956, except
for the years 1966 and 1981.
MR. STEELE was elected Senior Vice President, Employee Relations of the Company
in July 1984. Previously, he served in various functions with the Company since
1972.
MR. TSCHIRHART was elected Senior Vice President and General Counsel of the
Company in October 1986, and also served as Secretary from February 1988 to
November 1992. Previously, he served as Senior Counsel for United Airlines,
Inc., Elk Grove, Illinois, since 1982.
MR. CAU was elected Vice President of the Company and President of Hertz
International, Ltd., a subsidiary of the Company, in April 1990. Previously, he
served in various functions with Hertz International, Ltd. foreign operations
since 1973.
MR. MASSAD was elected Controller of the Company in July 1986. Previously, he
served in various positions with the Company since 1965.
MR. RILLINGS was elected Treasurer of the Company in November 1986. Previously,
he served in various positions with the Company since 1961.
MR. DEVINE was elected a director of the Company and became a member of the
Compensation Committee in August 1996. Mr. Devine was elected Executive Vice
President of Ford in November 1996, and also is Chief Financial Officer of Ford,
a position which he assumed in October 1994. Mr. Devine also is a director of
Associates First Capital Corporation, an affiliate of the Company. From April
1991 until June 1994 he served as Chairman and Chief Executive Officer of First
Nationwide
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Bank, a wholly-owned subsidiary of Ford. Previously, Mr. Devine served in
various positions with Ford since 1967.
MR. PESTILLO was elected a director of the Company in July 1993, and has also
served as Chairman of the Compensation Committee since August 1989. He is
Executive Vice President, Corporate Relations of Ford. He was Vice President,
Corporate Relations and Diversified Businesses of Ford from April 1990 to
January 1993. From January 1986 to April 1990 he was Vice President, Employee
and External Affairs for Ford. He is also a director of Rouge Steel Company.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned and/or paid to the
Company's five most highly compensated executive officers for services rendered
in all capacities to the Company for the fiscal years ended December 31, 1996,
1995 and 1994. Compensation of the executive officers is reviewed and approved
by the Company's Compensation Committee and is determined in part by the
operating performance and the contributions made to the consolidated results of
the Company.
Summary Compensation Table (5)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
ANNUAL COMPENSATION
--------------------------------------
OTHER LONG-TERM
ANNUAL COMPENSATION ALL OTHER
YEAR SALARY(1) BONUS(2) COMPENSATION(3) PAYOUTS(2) COMPENSATION(4)
Dollars in thousands ---- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Frank A. Olson................. 1996 $731 $900 $-- $-- $5
Chairman of the Board and 1995 694 500 -- 645 5
Chief Executive Officer 1994 650 728 -- 680 5
Craig R. Koch.................. 1996 439 475 -- -- 5
President and Chief 1995 424 258 -- 323 5
Operating Officer 1994 400 318 -- 340 5
William Sider.................. 1996 337 280 -- -- 5
Executive Vice President 1995 325 163 -- 194 5
and Chief Financial Officer 1994 305 244 204 5
Antoine E. Cau................. 1996 303 154 80 -- --
Vice President 1995 296 185 82 310 --
1994 255 208 78 326 --
Joseph R. Nothwang............. 1996 241 209 -- -- 5
Executive Vice President 1995 231 106 -- 129 5
1994 215 121 -- 68 5
</TABLE>
- -------------------------
(1) 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.
(2) Includes executive and long-term incentive bonuses earned and paid for the
respective year. Amounts to be paid under the Long-Term Incentive Plan for 1996
performance have not yet been determined.
(3) Includes the following for the years 1996, 1995 and 1994 (in thousands):
$42, $42 and $41 housing allowance; $11, $12 and $11 automobile use; and $27,
$28 and $26 tax equalization payments, respectively.
(4) Represents the amounts contributed by the Company to the Income Savings Plan
for the respective year.
(5) The Company has not granted or issued any stock options or stock
appreciation rights.
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INCENTIVE COMPENSATION PLANS
The Company has an Executive Incentive Compensation Plan for key employees and
certain officers of the Company and its subsidiaries. The grant of awards and
the size thereof depends upon the degree to which each operation's financial
targets (pre-tax income and return on total average equity, each as defined in
the plan) approved by senior officers of the Company and members of the
Company's Compensation Committee, are reached or exceeded. Performance is
measured annually, and the awards are paid in full in the following year, or may
be deferred pursuant to a prior election by a participant, to a period selected
by the participant.
In 1991, the Company established a Long-Term Incentive Plan for certain officers
and other key employees of the Company and its subsidiaries. The grant of awards
and the size thereof will be determined by the achievement of certain
qualitative and quantitative performance targets. A new four year performance
cycle begins on each January 1. Performance generally is measured in four year
periods and awards will be made in cash at the end of each performance period.
The performance factors used include net income of the Company relative to the
net income average for the Dow 30 Industrials, market share and customer
satisfaction. To phase in this plan, transitional grants were made as of January
1, 1991, covering one-year, two-year and three-year performance periods. Target
and maximum award grants in place for 1996 to the Company's five most highly
compensated executive officers are set forth in the table below.
Long-Term Incentive Plans -- Awards
<TABLE>
<CAPTION>
-----------------------------------------------
PERFORMANCE
DOLLARS IN THOUSANDS OR OTHER ESTIMATED FUTURE PAYOUTS UNDER
PERIOD UNTIL NON-STOCK PRICE-BASED PLANS
MATURATION OR ------------------------------
PAYOUT THRESHOLD TARGET MAXIMUM
NAME ------------- --------- ------ -------
<S> <C> <C> <C> <C>
Frank A. Olson....................................... (1) $0 $500 $1,000
Craig R. Koch........................................ (1) 0 250 500
William Sider........................................ (1) 0 150 300
Antoine E. Cau....................................... (1) 0 240 480
Joseph R. Nothwang................................... (1) 0 150 300
</TABLE>
- -------------------------
(1) Awards for 1996 will be determined by 1996 performance versus performance
for the four years ended December 31, 1995 and will be paid in 1997.
Target award grants have also been made for the performance years 1997, 1998 and
1999 versus performance for the previous four years. The amount of the payments
for the performance years subsequent to 1996 can range from zero to twice the
amount of the target. Such target award grants made for the performance years
1997, 1998 and 1999, respectively, to the Company's five most highly compensated
officers are as follows (in thousands): Mr. Olson $500, $500 and $600; Mr. Koch
$300, $300 and $350; Mr. Sider $150, $150 and $180, Mr. Cau $240, $240 and $240;
Mr. Nothwang $200, $200 and $200.
The Company also maintains Field Incentive Compensation Plans for certain
employees of the Company and its subsidiaries. Awards are made and paid annually
based on the achievement of revenue and pre-tax income objectives. Each award is
determined and approved by the Company's Compensation Committee.
INCOME SAVINGS PLAN
The Income Savings Plan of the Company was established effective August 30,
1985. Prior thereto, qualified employees of the Company participated in the RCA
Income Savings Plan ("RCA Plan"). The assets and liabilities maintained under
the RCA Plan attributable to participating employees of the Company were
transferred as of September 1, 1985 to the Company's Income Savings Plan (the
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<PAGE> 64
"Plan"). Under the Plan, the Company continued substantially the same provisions
as provided under the RCA Plan, except for the following: (1) the RCA Stock Fund
as an investment option was discontinued and fund assets were reinvested in
other investment funds as elected by the participants, and (2) the eligibility
requirement for qualified employees hired on or after September 30, 1985 was
changed to two years of service in lieu of the one year of service previously
required. Effective January 1, 1989, the eligibility requirement was again
reduced to one year of service.
The Plan is a defined contribution plan available, as specified in the Plan, to
certain full-time and part-time employees of the Company who have been credited
with the Company for at least 1,000 hours of service during any twelve
consecutive months commencing on the day he/she is credited with his/her first
hour of service (or any anniversary thereof). Employees covered by a collective
bargaining agreement are not eligible unless their collective bargaining
agreement makes the Plan applicable to them.
Prior to July 1, 1987, the Company contributed a fixed percentage (4%) of
eligible employees' base salary to the Plan. Employees could also make their own
before-tax and after-tax contributions of their base salary, subject to
percentage and monetary limitations. Effective July 1, 1987, the Plan was
amended whereby the Company contributes only 66.7% of the first 6% of the
employee's contribution for a maximum match contribution by the Company of 4% of
the employee's base salary. Employee after-tax contributions were eliminated.
Effective January 1, 1988, the Plan was further amended to change the Company's
contribution from 66.7% to 50% of the first 6% of the employee's contribution
for a maximum match contribution by the Company of 3% of the employee's base
salary. Effective July 1, 1991, the Company's contribution was suspended and was
resumed on January 1, 1992.
Employees hired prior to January 1, 1987 become fully vested when contributions
are made. Employees hired on or after January 1, 1987 are immediately fully
vested in the contributions the employee made and become fully vested in the
amount contributed by the Company after the employee completes five years of
service. Each Plan member determines the fund distribution to which
contributions will be applied. The funds include the General Common Stock Fund,
a commingled index fund investing in common stock (shares in medium to
large-size companies chosen for the purpose of approximating the rate of growth
for the S&P 500 Composite Stock Index); the Fixed Income Fund invested in a
managed commingled fund with high quality fixed rate securities, including
guaranteed investment contracts, as well as with insurance companies that
guarantee interest rates at agreed upon levels and a Balanced Fund consisting of
a mix of stocks or bonds ranging from 30% to 70% (stocks are in medium to large-
size companies and bonds are in U.S. Treasury and Agency and highly-rated
corporate issues). The performance of the Balanced Fund is measured against an
index consisting of a 50% weighing of the S&P 500 and a 50% weighing of the
Salomon Broad Bond Investment Grade Bond Index. Plan funds may be invested in
interim investments prior to investments in the General Common Stock Fund, Fixed
Income Fund and the Balanced Fund. Distributions and withdrawals are based on
the unit value of the employee's account as of a specified month end valuation
date and are subject to conditions stated in the Plan.
PENSION PLAN
Effective August 30, 1985, the Company established the Retirement Plan for the
Employees of the Company ("Hertz Plan"). Prior thereto, the Company participated
in the Retirement Plan for the Employees of RCA Corporation and Subsidiary
Companies ("RCA Plan"). The assets and liabilities associated with benefits
accrued by participating employees of the Company as of August 30, 1985 were
retained under the RCA Plan. Benefits accrued by the Company's employees through
August 30, 1985 will be paid under the RCA Plan. The RCA Plan was replaced by a
restated Hertz Plan which continued the RCA Plan for the Company's employees
without interruption.
The Hertz Plan is qualified under the Internal Revenue Code of 1986, as amended,
and is a defined benefit plan for which contributions were made by the employees
up to June 30, 1987 and by the employer.
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Effective July 1, 1987, the Hertz Plan was revised to an "Account Balance
Pension Plan" under which the Company pays the entire cost and employees are no
longer required to contribute. Employees are eligible for participation in the
Hertz Plan on the first day of the month coinciding with or following the date
on which they complete one year of continuous service, as defined by the
Employee Retirement Income Security Act of 1974 ("ERISA"). Employees covered by
a collective bargaining agreement are not eligible unless their union contract
makes the Hertz Plan applicable to them. Effective July 1, 1987, a qualified
employee's cash balance account was credited with an annual cash balance credit
equal to 3% of their pensionable earnings. For each plan year beginning January
1, 1996 and thereafter, a qualified employee's cash balance account shall be
credited with an annual cash balance credit equal to: (a) 3% of his/her
pensionable earnings for that plan year in the case of a qualified employee who
is credited with less than 60 continuous months of service from his/her most
recent date of hire, or (b) 4% of his/her pensionable earnings for that plan
year in the case of a qualified employee who is credited with 60 or more
continuous months of service from his/her most recent date of hire. In the case
of a qualified employee who is first credited with 60 continuous months of
service after January 1 of a plan year, the percentage of his/her pensionable
earnings utilized in determining his/her annual cash balance credit for that
plan year shall be increased to 4% effective as of the first day of the month
coincident with or next following his/her completion of 60 continuous months of
service from his/her most recent date of hire. This benefit is credited with
guaranteed interest rates compounded annually based on rates issued by the
Pension Benefit Guaranty Corporation in effect for the preceding December. In
addition, all qualified employees age 50 or over with 10 or more years of
credited service as of July 1, 1987, will have an additional amount of their
pensionable earnings credited to their cash balance account as follows: 1% for
ages 50 through age 54 as of July 1, 1987, 2% for ages 55 through 59 as of July
1, 1987 and 3% for ages 60 and over as of July 1, 1987.
Officers of the Company and its subsidiaries participate in the Hertz Plan. The
amount of the normal retirement benefit under this plan is determined as a
percentage of final average compensation (highest five consecutive of last ten
years of covered compensation), and based upon years of credited service up to
July 1, 1987 plus the value of their cash balance account accrued after July 1,
1987. The benefits are not offset by Social Security. Compensation covered by
the Hertz Plan means all salary and wages, including overtime and premium pay,
sales commissions and amounts paid under executive and field compensation plans,
but excluding the compensation paid under the Long-Term Incentive Plan. The
Company has instituted non-qualified unfunded pension plans for certain of its
executives to pay those benefits which are excess to those provided under the
qualified plans which include (1) the Benefit Equalization Plan that provides
equalization benefits that cannot be provided under the Hertz Plan due to
limitations imposed by the Internal Revenue Code of 1986, as amended, and (2)
the Supplemental Retirement and Savings Plan that, when combined with the Hertz
Plan, provides a benefit as if the pre-July 1, 1987 benefit formula had remained
in effect until the participants' normal retirement date. Set forth on the next
page is a table indicating annual pension benefits payable under both the Hertz
Plan and the non-qualified Supplemental Retirement and Savings Plan. The table
indicates benefits applicable for participants in specified remuneration and
years of service classifications, based on retirement at age 65, and for life
annuity (other annuity options are available, which would influence the amounts
shown on the following page).
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Pension Plan Table
<TABLE>
<CAPTION>
FINAL --------------------------------------------------------
AVERAGE YEARS OF PARTICIPATION IN PLAN
PENSIONABLE 15 20 25 30 35
COMPENSATION -------- -------- -------- ---------- ----------
<C> <C> <C> <C> <C> <C>
$ 175,000 $ 41,026 $ 54,701 $ 68,376 $ 82,051 $ 95,726
225,000 52,996 70,661 88,326 105,991 123,656
275,000 64,966 86,621 108,276 129,931 151,586
325,000 76,936 102,581 128,226 153,871 179,516
375,000 88,906 118,541 148,176 177,811 207,446
425,000 100,876 134,501 168,126 201,751 235,376
475,000 112,846 150,461 188,076 225,691 263,306
525,000 124,816 166,421 208,026 249,631 291,236
575,000 136,786 182,380 227,976 273,571 319,167
625,000 148,756 198,341 247,927 297,511 347,096
675,000 160,726 214,301 267,876 321,452 375,026
725,000 172,696 230,261 287,826 345,391 402,956
775,000 184,666 246,221 307,776 369,331 430,886
825,000 196,636 262,181 327,726 393,271 458,816
1,000,000 238,531 318,041 397,551 477,061 556,571
1,500,000 358,231 477,641 597,051 716,461 835,871
2,000,000 477,931 637,241 796,551 955,861 1,115,171
2,500,000 597,631 796,841 996,051 1,195,261 1,394,471
</TABLE>
Total credited service with the Company and its subsidiaries for persons named
in the cash compensation table is as follows: Mr. Olson -- 30 years; Mr. Koch --
25 years; Mr. Sider -- 30 years; and Mr. Nothwang -- 20 years. Mr. Cau does not
participate in the Hertz Plan or the RCA Plan.
In addition to the above, the Company maintains a non-qualified plan to provide
a Special Supplemental Executive Pension Benefit (the "SEP Benefit") for Messrs.
Olson and Sider. The SEP is intended to provide any necessary excess benefit to
ensure the designated participants receive an aggregate pension benefit (from
all qualified and non-qualified plans) equal to 50% of the participant's final
average earnings as defined under the Hertz Plan. The projected annual life
annuity SEP Benefit payable at age 65 to Mr. Olson is $137,000 and to Mr. Sider
is $31,000.
COMPENSATION OF DIRECTORS
It is anticipated that directors who do not receive compensation as officers or
employees of the Company or any of its affiliates will be paid an annual board
membership fee of $25,000, an attendance fee of $1,000 for each meeting of the
Board of Directors and an annual membership fee of $5,000 for service on any
committee of the Board of Directors. The Company does not pay any additional
compensation to directors who receive compensation as officers or employees of
the Company or any of its affiliates.
EMPLOYMENT AGREEMENTS
Messrs. Olson, Koch and Sider serve the Company under employment agreements
which currently expire on January 31, 2000, April 30, 2002 and June 30, 1997
respectively. Mr. Cau serves a subsidiary of the Company under an employment
agreement dated January 1, 1990, as amended, that is terminable by either party
under certain circumstances stated therein. The employment agreements do not
provide for any compensatory plan or arrangement upon termination of employment
or change in control, except for the compensation of Mr. Cau. The employment
agreement of Mr. Koch is automatically extended one (1) additional year on May 1
of each year unless not later than December 31st of the preceding year, the
Company or Mr. Koch shall have given notice not to extend the agreement.
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OWNERSHIP OF COMMON STOCK
Ford owns 100% of the common stock of the Company outstanding prior to the
Offerings. Upon completion of the Offerings, Ford will beneficially own %
of the outstanding Class A Common Stock ( % if the Underwriters'
over-allotment options are exercised in full) and 100% of the outstanding Class
B Common Stock and, accordingly, will own Common Stock representing
approximately % of the economic interest in the Company ( % if the
Underwriter's overallotment options are exercised in full) and representing
approximately % of the combined voting power of the Company's outstanding
Common Stock ( % if the Underwriters' over-allotment options are exercised in
full). See "Relationship with Ford".
The principal executive offices of Ford are located at The American Road,
Dearborn, Michigan 48121.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company will consist of (i) shares of
Class A Common Stock and shares of Class B Common Stock and (ii) shares
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"). Of the
shares of Class A Common Stock, shares are being offered in the
Offerings (excluding shares subject to over-allotment options granted by
the Company to the Underwriters), shares will be reserved for issuance upon
conversion of Class B Common Stock into Class A Common Stock and shares
have been reserved for issuance pursuant to certain employee benefit plans. See
"Management -- ". Of the shares of Class B Common Stock,
shares will be outstanding and beneficially owned by Ford as of the
closing date of the Offerings. As of the closing date of the Offerings, there
will be no preferred stock outstanding. A description of the material terms and
provisions of the Company's 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 the capital
stock of the Company is intended as a summary only and is qualified in its
entirety by reference to the form of the Company's 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 the Company 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. 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 Company's Restated Certificate of
Incorporation must be approved by a majority of the combined voting power of all
Class A Common Stock and Class B Common Stock, voting together as a single
class. However, amendments to the Company's Restated Certificate of
Incorporation that would alter or change the powers, preferences or special
rights of the Class A Common Stock or the
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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 the Company's 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.
Dividends
Holders of Class A Common Stock and Class B Common Stock will share ratably in
any dividend declared by the Board of Directors, subject to any preferential
rights of any outstanding Preferred Stock. 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.
The Company 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.
Conversion
Each share of Class B Common Stock is convertible while held by Ford, any of its
subsidiaries or the Class B Transferee (as defined below), 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 Internal Revenue Code of 1986, as amended (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 the Company transferred by Ford or any of its
subsidiaries in a single transaction to one unrelated person (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 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, shares of
Class B Common Stock shall be transferable as Class B Common Stock, subject to
applicable laws; provided, however, that shares of Class B Common Stock shall
automatically convert into shares of Class A Common Stock on the fifth
anniversary of the tax-free spin-off, unless prior to such tax-free spin-off,
Ford or the Class B Transferee, as the case may be, delivers to the Company an
opinion of counsel reasonably satisfactory to the Company (which, in the case of
Ford, shall include Ford's Chief Tax Officer) to the effect that such conversion
would preclude Ford or the Class B Transferee, as the case may be, from
obtaining a favorable ruling from the Internal Revenue Service that the
distribution would be a tax-free spin-off. If such an opinion is received,
approval of such conversion shall be submitted to a vote of the holders of the
Common Stock as soon as practicable after the fifth anniversary of the tax-free
spin-off unless Ford or the Class B Transferee, as the case may be, delivers to
the Company an opinion of counsel reasonably satisfactory to the Company (which,
in the case of Ford, shall include Ford's Chief Tax Officer) prior to such
anniversary that such vote would adversely affect the status of the tax-free
spin-off. 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 consummated. The requirement to
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submit such conversion to a vote of the holders of Common Stock is intended to
ensure tax treatment of the tax-free spin-off is preserved should the Internal
Revenue Service challenge such automatic conversion as violating the 80% vote
requirement. Ford has no current plans with respect to a tax-free spin-off of
the Company.
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 the
Company to less than 20% while still retaining control of more than 55% of the
Company's 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 the
Company 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 the Company. All conversions will be effected on a share-for-share basis.
Other Rights
In the event of any merger or consolidation of the Company 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, regardless of class, 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 the Company, after payment in full
of the amounts required to be paid to holders of Preferred Stock, if any, all
holders of Common Stock, regardless of class, are entitled to share ratably in
any assets available for distribution to holders of shares of Common Stock.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock. However, see
"Relationship with Ford -- Corporate Agreement" with respect to certain rights
of Ford to purchase additional shares of Common Stock.
Upon consummation of the Offerings, all the outstanding shares of Class A Common
Stock and Class B Common Stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
The 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 the Board of Directors of the Company. The Board of Directors is authorized
by the Company's 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 of the
holders of the Common Stock and could have certain anti-takeover effects. The
Company has no present plans to issue any 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 the Company or the removal of existing management.
CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS
Corporate Opportunities
The Company's Restated Certificate of Incorporation will provide that: Ford
shall have no duty to refrain from engaging in the same or similar activities or
lines of business as the Company, and neither
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Ford nor any officer or director thereof (except as provided below) shall be
liable to the Company or its 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 the Company, Ford shall have no duty to communicate or offer such
corporate opportunity to the Company and shall not be liable to the Company or
its stockholders for breach of any fiduciary duty as a stockholder of the
Company 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 the
Company.
In the event that a director or officer of the Company 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 the Company and Ford, such director or
officer of the Company shall have fully satisfied and fulfilled the fiduciary
duty of such director or officer of the Company and its stockholders with
respect to such corporate opportunity if such director or officer acts in a
manner consistent with the following policy:
(i) 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 the Company;
(ii) 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 the Company 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
(iii) a corporate opportunity offered to any person who is an officer of
both the Company and Ford shall belong to the Company 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.
For purposes of the foregoing:
(i) 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
(ii) (A) The term "Company" shall mean the Company and all corporations,
partnerships, joint ventures, associations and other entities in which the
Company beneficially owns (directly or indirectly) fifty percent 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 the Company, defined in accordance with clause (A) of this
section (ii)) in which Ford beneficially owns (directly or indirectly)
fifty percent or more of the outstanding voting stock, voting power,
partnership interests or similar voting interests.
The foregoing provisions of the Company's 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 classes of
outstanding Common Stock and no person who is a director or officer of the
Company is also a director or officer of Ford or any of its subsidiaries (other
than the Company).
In addition to any vote of the stockholders required by the Company's 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 classes of outstanding Common Stock, the affirmative vote of the holders of
more than 80% of the total voting power of all classes 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 the Company), or adopt any
provision adverse to the interests of Ford and its subsidiaries (other than the
Company), 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
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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 the Company's
Restated Certificate of Incorporation.
Provisions That May Have an Anti-Takeover Effect
Certain provisions of the Company's 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 held by
stockholders.
The Company's Restated Certificate of Incorporation will provide that, subject
to any rights of holders of Preferred Stock to elect additional directors under
specified circumstances, the number of directors of the Company will be fixed by
the By-laws. The By-laws will 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 the Company would have if there were no vacancies
on the Company's Board of Directors, but shall consist of not more than twelve
nor less than three directors. In addition, the Restated Certificate of
Incorporation and By-laws will provide that, subject to any rights of holders of
Preferred Stock, and unless the Company's 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.
The Company's By-laws will 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 the Company not less than 60 nor more than 90 days prior
to the anniversary of the previous year's 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. The Company's Restated Certificate of Incorporation and
By-laws will also provide that special meetings of stockholders may be called
only by certain specified officers of the Company 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, the Company's Restated
Certificate of Incorporation will provide 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 continues to beneficially own 50% or more of the total voting power
of all classes of 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.
The Company's Restated Certificate of Incorporation will also provide that the
affirmative vote of the holders of at least 75% of the total voting power of all
classes of outstanding Common Stock, voting together as a single class, 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 the Company's Board of Directors or by
the affirmative vote of the holders of at least 75% of the total voting power of
all classes of outstanding Common Stock, voting together as a single class.
In addition to the foregoing, certain of the Company's airport concession
agreements require the consent of the airport authority in connection with
transfers of varying percentages of the Company's common stock. See
"Relationship with Ford".
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SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation subject to Section 203 of the Delaware
General Corporation Law (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 (i) 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, (ii) 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 (iii) 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. 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 the outstanding voting
stock of the Company for more than a three-year period, Ford and its
subsidiaries are not themselves restricted from engaging in a business
combination with the Company pursuant to Section 203 of the Delaware Law.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Restated Certificate of Incorporation provides that no director of
the Company shall be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its 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 the rights of the Company and
its stockholders (through stockholders' derivative suits on behalf of the
Company) 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 First Chicago
Trust Company of New York.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have shares of
Class A Common Stock issued and outstanding ( if the Underwriters'
over-allotment options are 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 the Offerings will be freely tradeable without restrictions or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares purchased by an "affiliate" of the
Company (as that term is defined in Rule 144 adopted under the Securities Act
("Rule 144")), which will be subject to the resale limitations of Rule 144. All
of the outstanding shares of Class B Common Stock are beneficially owned by Ford
and have not been registered under the Securities Act and may not be sold in the
absence of an effective registration
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statement under the Securities Act other than in accordance with Rule 144 or
another exemption from registration. Ford has certain rights to require the
Company to effect registration of shares of Common Stock owned by Ford, which
rights may be assigned. See "Relationship with Ford -- Corporate Agreement".
In general, under Rule 144 as currently in effect, 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 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 the Company 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 ("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 quoted on an automated quotation system. The shares of Class B
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.
Prior to the Offerings, there has been no market for the Class A Common Stock,
and no prediction can be made as to the effect, if any, that market sales of
outstanding shares of Class B Common Stock, 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, sales of substantial amounts of Class B Common
Stock beneficially owned by Ford in the public market, or the perception that
such sales could occur, could adversely affect prevailing market prices for the
Class A Common Stock offered in the Offerings.
Although Ford in the future may effect or direct sales or other dispositions of
Common Stock that would reduce its beneficial ownership interest in the Company,
Ford has advised the Company that its current intent is to continue to hold all
of the Common Stock beneficially owned by it following the Offerings. However,
Ford is not subject to any contractual obligation to retain its controlling
interest except that Ford and the Company have agreed, subject to certain
exceptions, not to sell or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of J.P. Morgan Securities Inc. 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 the Offerings. See
"Underwriting". Beneficial ownership of at least 80% of the total voting power
and value of the outstanding Common Stock is required in order for Ford to
continue to include the Company in its consolidated group for federal income tax
purposes, and beneficial ownership of at least 80% of the total voting power and
80% of each class of nonvoting capital stock is required in order for Ford to be
able to effect a tax-free spin-off or certain other tax-free transactions. See
"Relationship with Ford".
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DESCRIPTION OF CERTAIN INDEBTEDNESS
GENERAL
In connection with the funding of its operations, the Company and certain of its
foreign subsidiaries from time to time issue publicly and privately held debt
securities (the "Debt Securities"). At December 31, 1996, the Company and its
subsidiaries had an aggregate of $5.1 billion in Debt Securities outstanding.
MATURITIES AND INTEREST RATES
The Debt Securities have maturities ranging from 1997 to 2009 with interest
rates ranging from 2.0% to 12% (excluding immaterial borrowings by the Company's
operation in Brazil, which accrue interest at higher rates due to the high
inflationary environment in that country). Certain Debt Securities issued by the
Company are redeemable at the option of the holders, including $100 million of
Debt Securities due 2009, which are redeemable in 1999, and $150 million of Debt
Securities due 2006, which are redeemable in 2002. If such Debt Securities are
redeemed, the last to mature of the Debt Securities would mature in 2005. See
Note 2 of the Notes to the Company's consolidated financial statements included
in this Prospectus.
COVENANTS
Certain debt instruments under which the Company has issued Debt Securities or
guarantees contain the following restrictive covenants:
Limitations on Mergers
The Company may not, subject to certain exceptions, consolidate with, merge
into, or sell, convey or transfer its properties and assets substantially as an
entirety to another person, if, as a result thereof, any property owned by the
Company or certain subsidiaries of the Company ("Restricted Subsidiaries")
immediately prior thereto would become subject to any security interest, unless
certain publicly held Debt Securities issued by the Company are secured equally
and ratably with (or prior to) the debt secured by such security interest.
Limitations on Certain Loans and Advances
The Company may not, and may not permit any Restricted Subsidiary to, make any
loan or advance to any person owning more than 50% of the outstanding voting
stock of the Company or to any affiliate of such person (other than the Company
or a Restricted Subsidiary) if the aggregate outstanding amount of senior
indebtedness of the Company and its Restricted Subsidiaries exceeds 400% of the
consolidated net worth and subordinated indebtedness of the Company and its
Restricted Subsidiaries.
Limitations on Secured Debt
Subject to certain exceptions, including those set forth below, the Company 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 certain Debt Securities
then outstanding and any other indebtedness of or guaranteed by the Company 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; provided,
however, that the foregoing prohibition shall not be applicable to (i) any
security interest in favor of the Company or a Restricted Subsidiary; (ii)
certain pre-existing security interests; (iii) security interests existing on
property at the time it is acquired by the Company or a Restricted Subsidiary,
provided, such security interest is limited
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<PAGE> 75
to all or part of the property so acquired; (iv)(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 the Company 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 the Company 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 the Company or any Restricted Subsidiary which was a Restricted
Subsidiary prior to such transaction; and (v) security interests on certain
business equipment.
Notwithstanding the foregoing provisions, the Company 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 the Company and
its 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 the Company and its
Restricted Subsidiaries.
Limitations on Sale and Leaseback Transactions
The Company may not, and may not permit any Restricted Subsidiary to, engage in
any sale and leaseback transaction unless (i) the Company 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) the Company 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 the Board of Directors) to the repayment of senior
indebtedness of the Company or of any Restricted Subsidiary (other than senior
indebtedness owed to the Company or any Restricted Subsidiary) then prepayable.
Limitations on Dividends
The Company may not pay dividends, invest in its own shares or permit
investments by its Restricted Subsidiaries in the Company's shares subsequent to
a specified date if, together with total investments by the Company and its
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) a specified dollar amount, (ii) the aggregate
net income of the Company and its Restricted Subsidiaries earned subsequent to
such specified date and (iii) net proceeds received from capital stock issued
subsequent to such specified date. Immediately following the Offerings, the
Company will be permitted to pay $331 million (plus or minus the Company's net
earnings or loss, as the case may be, for the first quarter of 1997) in
dividends under the most restrictive of such covenants. See "Use of Proceeds"
and "Capitalization".
The last to mature of the outstanding securities of the Company containing any
of the foregoing restrictions listed above have a final maturity of November 1,
2009.
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FORD OWNERSHIP EVENT OF DEFAULT
The Company's global credit facilities, under which $2.1 billion in loans is
available from 31 banks, include as an event of default Ford's failure to own,
directly or indirectly, 100% of the outstanding voting stock of the Company.
Prior to completion of the Offerings, the Company intends to amend such credit
facilities to eliminate such event of default and, in lieu thereof, provide that
if Ford ceases to own, directly or indirectly, capital stock of the Company
having at least 51% of the total voting power of all capital stock of the
Company outstanding, then: (i) certain borrowing rates and, in respect of
certain of the credit facilities, the facility fees will be determined by a
pricing matrix based on the Company's credit ratings, (ii) if the Company's
long-term credit rating declines below A- by S&P and A3 by Moody's then the
Company will be required to maintain a minimum consolidated net worth of $500
million and (iii) if the Company's credit rating declines below BBB+ by S&P and
Baa1 by Moody's, then the Company cannot allow its consolidated senior
debt-to-equity ratio to exceed 8.5 to 1.
In addition, a series of the Company's publicly-issued debt securities contains
the Ford ownership event of default described above. Prior to completion of the
Offerings, the Company intends to solicit the consent of the bondholders to
eliminate such event of default.
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain U.S. federal income and estate
tax consequences of the ownership and disposition of Class A Common Stock by a
Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any person who is, for
U.S. federal income tax purposes, a foreign corporation, a non-resident alien
individual, a foreign partnership or a foreign estate or trust. This discussion
does not address all aspects of U.S. federal income and estate taxes and does
not deal with foreign, state and local consequences that may be relevant to such
Non-U.S. Holders in light of their personal circumstances. Furthermore, this
discussion is based on provisions of the Internal Revenue Code of 1986, as
amended, existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change (possibly with retroactive effect). EACH
PROSPECTIVE PURCHASER OF CLASS A COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF CLASS A COMMON STOCK AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR
OTHER TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Class A Common Stock generally will be
subject to withholding of U.S. federal income tax either at a rate of 30% of the
gross amount of the dividends or at such lower rate as may be specified by an
applicable income tax treaty. However, dividends that are effectively connected
with the conduct of a 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,
but instead are subject to U.S. federal income tax on a net income basis at
applicable graduated individual or corporate rates. Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, 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.
Under current law, dividends paid to an address outside the United States are
presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding discussed above and,
under the current interpretation of United States Treasury regulations, for
purposes of determining the applicability of a tax treaty rate. Under proposed
United States Treasury regulations not currently in effect, however, a Non-U.S.
Holder of Class A Common Stock who wishes to claim the benefit of an applicable
treaty rate (and avoid backup withholding, as discussed
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below) would be required to satisfy applicable certification and other
requirements. Currently, certain certification and disclosure requirements must
be complied with in order to be exempt from withholding under the effectively
connected income exemption discussed above.
A Non-U.S. Holder of 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 (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax with
respect to gain recognized on a sale or other disposition of Class A Common
Stock unless (i) the gain is effectively connected with a trade or business of
the Non-U.S. Holder in the United States, and, where a tax treaty applies, is
attributable to a U.S. permanent establishment of the Non-U.S. Holder, (ii) in
the case of a Non-U.S. Holder who is an individual and holds the Class A Common
Stock as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to
certain provisions of the Code applicable to U.S. expatriates or (iv) the
Company is or has been a "U.S. real property holding corporation" for U.S.
federal income tax purposes. The Company believes it is not and does not
anticipate becoming a "U.S. real property holding corporation" for U.S. federal
income tax purposes.
An individual Non-U.S. Holder described in clause (i) above, will, unless an
applicable treaty provides otherwise, be taxed 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 clause (ii) above, will be subject to a flat 30%
tax on the gain derived from the sale, which may be offset by certain U.S.
source capital losses.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i) above,
it will be taxed on its gain under regular graduated U.S. federal income tax
rates and may be subject to an additional branch profits tax at a 30% rate,
unless it qualifies for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Class A Common Stock owned or treated as owned by an individual Non-U.S. Holder
at the time of death will be included in such holder's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise, and therefore may be subject to U.S. federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS 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.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to a Non-U.S. Holder at an address outside the United
States (unless the payer has knowledge that the payee is a U.S. person). Under
proposed United States Treasury regulations not currently in effect, however, a
Non-U.S. Holder will be subject to backup withholding unless applicable
certification requirements are met.
Payment of the proceeds of a sale of Class A Common Stock by or through a U.S.
office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner provides the payer with its name and
address and certifies under penalties of perjury that it is a Non-U.S. Holder,
or otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Class A Common Stock by or through a foreign office of a foreign broker. If,
however, such broker is, for U.S. federal income tax purposes a U.S. person, a
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controlled foreign corporation, or a foreign person that derives 50% or more of
its gross income for a certain period from the conduct of a trade or business in
the United States, such payments will be subject to information reporting, but
not backup withholding, unless (1) such broker has documentary evidence in its
records that the beneficial owner is a Non-U.S. Holder and certain other
conditions are met, or (2) the beneficial owner otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against such holder's U.S. federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.
The backup withholding and information reporting rules are under review by the
Treasury Department and their application to the Class A Common Stock could be
changed by future regulations. Non-U.S. Holders should consult their tax
advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom, the procedure for
obtaining such an exemption, if available, and the possible application of the
proposed United States Treasury regulations addressing the withholding and the
information reporting rules.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement"), the
U.S. Underwriters named below, for whom J.P. Morgan Securities Inc., Goldman,
Sachs & Co., Lehman Brothers Inc., Salomon Brothers Inc and Smith Barney Inc.
are acting as representatives (the "U.S. Representatives"), have severally
agreed to purchase, and the Company has agreed to sell to them, and the
International Managers named below, for whom J.P. Morgan Securities Ltd.,
Goldman Sachs International, Lehman Brothers International (Europe), Salomon
Brothers International Limited and Smith Barney Inc. are acting as
representatives (the "International Representatives"), have severally agreed to
purchase and the Company has agreed to sell to them, the respective number of
shares of Class A Common Stock set forth opposite their names below. The U.S.
Underwriters and the International Managers are collectively referred to as the
"Underwriters". Under the terms and conditions of the Underwriting Agreement,
the Underwriters are obligated to take and pay for all such shares of Class A
Common Stock, if any are taken. Under certain circumstances, the commitments of
nondefaulting Underwriters may be increased as set forth in the Underwriting
Agreement.
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
U.S. UNDERWRITERS ----------------
<S> <C>
J.P. Morgan Securities Inc. ................................
Goldman, Sachs & Co. .......................................
Lehman Brothers Inc. .......................................
Salomon Brothers Inc........................................
Smith Barney Inc. ..........................................
Subtotal..................................................
<CAPTION>
----------------
NUMBER OF SHARES
INTERNATIONAL MANAGERS ----------------
<S> <C>
J.P. Morgan Securities Ltd. ................................
Goldman Sachs International.................................
Lehman Brothers International (Europe)......................
Salomon Brothers International Limited......................
Smith Barney Inc............................................
Subtotal..................................................
Total..................................................
</TABLE>
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The U.S. Underwriters and the International Managers have entered into an
Agreement Between Syndicates (the "Agreement Between Syndicates") which provides
for the coordination of their activities. Pursuant to the Agreement Between
Syndicates, sales may be made between the U.S. Underwriters and the
International Managers of such number of shares as they may mutually agree. The
price of any shares so sold shall be the offering price, less such amount as may
be mutually agreed upon by the U.S. Representatives and the International
Representatives, but not exceeding the selling concession to dealers applicable
to such shares. To the extent there are sales between the U.S. Underwriters and
the International Managers pursuant to the Agreement Between Syndicates, the
number of shares initially available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount appearing on the
cover page of this Prospectus with respect to the Offerings. Neither the U.S.
Underwriters nor the International Managers are obligated to purchase from the
other any unsold shares. The Underwriters have agreed to reimburse the Company
for certain expenses in the amount of $ .
Pursuant to the Agreement Between Syndicates, each U.S. Underwriter has
represented and agreed that (i) it is not purchasing any Class A Common Stock
for the account of anyone other than a United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any Class A Common Stock or distribute any prospectus relating to the Offerings
outside the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement Between Syndicates, each
International Manager has represented and agreed that (i) it is not purchasing
Class A Common Stock for the account of any United States or Canadian Person and
(ii) it has not offered or sold, and will not offer or sell, directly or
indirectly, any Class A Common Stock or distribute any prospectus relating to
the Offerings within the United States or Canada or to any United States or
Canadian Person. The foregoing limitations do not apply to certain transactions
specified in the Agreement Between Syndicates, including stabilization
transactions and transactions between the U.S. Underwriters and the
International Managers pursuant to the Agreement Between Syndicates. As used
herein, "United States or Canadian Person" means any individual who is a
national or a resident of the United States or Canada or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or any political subdivision thereof (other than
a branch located outside the United States or Canada), and includes any United
States or Canadian branch of a person who is otherwise not a United States or
Canadian Person.
Pursuant to the Agreement Between Syndicates, each U.S. Underwriter has
represented that it has not offered or sold, and agreed not to offer or sell,
any Class A Common Stock, directly or indirectly, in Canada in contravention of
the securities laws of Canada or any province or territory thereof and has
represented that any offer of Class A Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchased from it any
of the Class A Common Stock in Canada or to, or for the benefit of, any resident
of Canada in contravention of the securities laws of Canada or any province or
territory thereof and that any offer of Class A Common Stock in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus in
the province or territory of Canada in which such offer is made, and that such
dealer will deliver to any other dealer to whom it sells any of such Class A
Common Stock a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement Between Syndicates, each International Manager has
also represented and agreed that (i) it has not offered or sold and prior to the
expiration of the period six months from the closing date for the issuance of
the Class A Common Stock, will not offer or sell any Class A Common Stock to
persons in the United Kingdom, except to those persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for purpose of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Class A Common Stock in, from or
otherwise
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involving the United Kingdom and (iii) it has only issued and passed on and will
only issue and pass on in the United Kingdom any document received by it in
connection with the issue of the Class A Common Stock to a person who is of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom the document may
otherwise lawfully be issued or passed on.
The Underwriters propose initially to offer the Class A Common Stock directly to
the public at the price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the initial
public offering of the Class A Common Stock, the public offering price and such
concession may be changed.
The Company has granted to the U.S. Underwriters an option expiring at the close
of business on the 30th day after the date of this Prospectus, to purchase up to
additional shares of Class A Common Stock at the initial public offering
price, less the underwriting discount. The U.S. Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any. If the U.S.
Underwriters exercise their option, each U.S. Underwriter will have a firm
commitment, subject to certain conditions, to purchase approximately the same
number of option shares as the number of shares of Class A Common Stock to be
purchased by that U.S. Underwriter shown in the foregoing table bears to the
total number of shares of Class A Common Stock initially offered by the U.S.
Underwriters hereby.
The Company and Ford have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company and Ford have agreed that during the period beginning from the date
of this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus they will (i) not offer, sell, contract to sell or
otherwise dispose of any securities of the Company which are substantially
similar to the Class A Common Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, Class A Common Stock or any such substantially similar
securities or (ii) enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of Class A Common Stock or any securities substantially similar to the
Class A Common Stock (other than (i) 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 and (ii) the issuance
of Common Stock in connection with the transactions described in this
Prospectus), without the prior written consent of J.P. Morgan Securities Inc.
The Underwriters have reserved for sale, at the initial public offering price,
shares of the Class A Common Stock for certain employees and retirees of the
Company and its affiliates in the United States and, subject to local laws,
internationally, who have expressed an interest in purchasing such shares of
Class A Common Stock in the Offerings. Such employees and retirees are expected
to purchase, in the aggregate, not more than % of the Class A Common Stock
offered in the Offerings. The number of shares available for sale to the general
public in the Offerings will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered to the
general public on the same basis as other shares offered hereby.
Application has been made to list the Class A Common Stock on the New York Stock
Exchange under the trading symbol "HRZ". In order to meet the requirements for
listing the Class A Common Stock on the New York Stock Exchange, the
Underwriters have undertaken to sell lots of 100 or more shares of Class A
Common Stock to a minimum of 2,000 beneficial owners.
Prior to the Offerings, there has been no public market for the Class A Common
Stock. The initial public offering price for the shares of Class A Common Stock
offered hereby will be determined by agreement among the Company and the
Underwriters. Among the factors considered in making such determination will be
the history of and the prospects for the industry in which the Company competes,
81
<PAGE> 82
an assessment of the Company's management, the present operations of the
Company, the historical results of operations of the Company and the trend of
its revenues and earnings, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of the Offerings and the
prices of similar securities of generally comparable companies. There can be no
assurance that an active trading market will develop for the Class A Common
Stock or that the Class A Common Stock will trade in the public market
subsequent to the Offerings at or above the initial public offering price.
The Underwriters have advised the Company that they do not expect that sales to
accounts over which they exercise discretionary authority will exceed 5% of the
shares offered hereby.
From time to time in the ordinary course of their respective businesses, certain
of the Underwriters and their affiliates have engaged in and may in the future
engage in commercial and/or investment banking transactions with the Company and
its affiliates.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon for
the Company by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York and for the Underwriters by
Shearman & Sterling, New York, New York. Simpson Thacher & Bartlett and Shearman
& Sterling have in the past provided, and may continue to provide, legal
services to Ford and its affiliates.
EXPERTS
The Consolidated Balance Sheet of the Company as of December 31, 1996 and 1995
and the Consolidated Statements of Income and Retained Earnings and Cash Flows
for each of the three years in the period ended December 31, 1996 included in
this Prospectus, have been included herein in reliance on the report of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") 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 offered hereby. 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
Commission. For further information with respect to the Company and the Class A
Common Stock offered hereby, reference is made 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. The Registration Statement can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any portion of the Registration
Statement can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Registration Statement is publicly available through the
Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov.
82
<PAGE> 83
Application has been made to list the Class A Common Stock on the New York Stock
Exchange (the "NYSE") under the symbol "HRZ". In addition, certain debt
securities of the Company are listed for trading on the NYSE. Copies of the
Registration Statement and reports and other information are available for
inspection and copying at the office of the NYSE at 20 Broad Street, New York,
New York 10005.
The Company is currently subject to abbreviated informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
accordance with General Instruction J(1)(a) and (b) to Form 10-K and in
accordance therewith files reports and other information with the Commission.
Such reports and other information can be inspected and copied at the offices of
the Commission set forth above. Copies of such material can be obtained from the
Public Reference Section of the Commission at the address set forth above at
prescribed rates. In addition, such material is publicly available through the
Commission's site on the Internet located at the address set forth above. As a
result of the Offerings, the Company will become subject to the full
informational requirements of the Exchange Act. The Company will fulfill its
obligations with respect to such requirements by filing periodic reports and
other information with the Commission. The Company intends to furnish its
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.
83
<PAGE> 84
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
The Hertz Corporation and Subsidiaries
Report of Independent Accountants......................... F-2
Consolidated Balance Sheet at December 31, 1996 and
1995................................................... F-3
Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994....................... F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994........... F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-6
Notes to Consolidated Financial Statements................ F-8
Schedule II -- Valuation and Qualifying Accounts for the
years ended December 31, 1996, 1995 and 1994........... F-30
</TABLE>
F-1
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
To The Hertz Corporation:
We have audited the accompanying consolidated balance sheet of The Hertz
Corporation (a wholly-owned subsidiary of Ford Motor Company) and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows and the financial statement schedule
listed in F-1 for each of the three years ended December 31, 1996. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Hertz
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
January 24, 1997, except for Note 14,
as to which the date is February 28, 1997
F-2
<PAGE> 86
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
------------------------
DECEMBER 31
1996 1995
Dollars in thousands ---------- ----------
<S> <C> <C>
ASSETS
Cash and equivalents (Note 13).............................. $ 179,311 $ 137,257
Receivables, less allowance for doubtful accounts of $12,268
(1995 -- $7,985) (Schedule II)............................ 798,686 789,801
Due from affiliates (Notes 5 and 7)......................... 456,025 407,442
Inventories, at lower of cost or market..................... 20,220 17,930
Prepaid expenses and other assets (Note 4).................. 80,530 83,345
Revenue earning equipment, at cost (Note 7):
Cars...................................................... 4,698,656 3,951,351
Less accumulated depreciation.......................... (380,391) (324,193)
Other equipment........................................... 908,106 705,084
Less accumulated depreciation.......................... (190,677) (162,073)
---------- ----------
Total revenue earning equipment...................... 5,035,694 4,170,169
---------- ----------
Property and equipment, at cost:
Land, buildings and leasehold improvements................ 515,063 473,930
Service equipment......................................... 554,134 507,640
---------- ----------
1,069,197 981,570
Less accumulated depreciation.......................... (526,466) (485,680)
---------- ----------
Total property and equipment......................... 542,731 495,890
---------- ----------
Franchises, concessions, contract costs and leaseholds, net
of amortization........................................... 10,117 7,722
Cost in excess of net assets of purchased businesses, net of
amortization (Note 5)..................................... 525,853 547,074
---------- ----------
Total assets......................................... $7,649,167 $6,656,630
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (Note 7)................................... $ 468,817 $ 585,663
Accrued salaries and other compensation..................... 171,508 142,096
Other accrued liabilities................................... 384,191 330,923
Accrued taxes............................................... 105,524 74,714
Debt (Notes 2 and 13)....................................... 5,091,844 4,297,484
Public liability and property damage (Schedule II).......... 321,118 311,669
Deferred taxes on income (Note 8)........................... 116,800 77,800
Commitments and contingencies (Notes 9, 11 and 13)
Stockholders' equity (Notes 1 and 2):
Preferred stock --
Series A, 10% cumulative............................... 236,000 236,000
Series B, various rates cumulative..................... 249,900 249,900
Common stock, par value $1 per share, shares issued -- 200
Class A, 51 Class B and 490 Class C.................... 1 1
Additional capital paid-in................................ 59,008 59,008
Retained earnings......................................... 435,352 276,733
Translation adjustment (Note 3)........................... 9,129 14,539
Unrealized holding gains (losses) for available-for-sale
securities (Note 4).................................... (25) 100
---------- ----------
Total stockholders' equity........................... 989,365 836,281
---------- ----------
Total liabilities and stockholders' equity........... $7,649,167 $6,656,630
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 87
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
Dollars in thousands ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Car rental.......................................... $3,161,605 $2,911,703 $2,581,157
Industrial and construction equipment rental........ 392,322 332,328 263,154
Car leasing (Note 5)................................ 35,407 35,548 231,372
Other (Note 5)...................................... 79,049 121,009 218,718
---------- ---------- ----------
Total revenues................................... 3,668,383 3,400,588 3,294,401
---------- ---------- ----------
Expenses:
Direct operating.................................... 1,795,157 1,724,791 1,766,228
Depreciation of revenue earning equipment (Note
7)............................................... 892,678 803,862 702,644
Selling, general and administrative................. 425,179 392,518 385,470
Interest, net of interest income of $10,449, $16,798
and $7,210 (Note 2).............................. 298,800 307,073 277,228
---------- ---------- ----------
Total expenses................................... 3,411,814 3,228,244 3,131,570
---------- ---------- ----------
Income before income taxes............................ 256,569 172,344 162,831
Provision for taxes on income (Note 8)................ 97,950 67,138 71,749
---------- ---------- ----------
Net income............................................ $ 158,619 $ 105,206 $ 91,082
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 88
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
UNREALIZED
COMMON HOLDING GAINS
AND ADDITIONAL (LOSSES) FOR TOTAL
PREFERRED CAPITAL RETAINED TRANSLATION AVAILABLE-FOR- STOCKHOLDERS'
STOCK PAID-IN EARNINGS ADJUSTMENT SALE SECURITIES EQUITY
Dollars in thousands --------- ---------- -------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993......................... $ 439,901 $100,099 $105,445 $(28,749) $ -- $ 616,696
Net Income..................... 91,082 91,082
Translation adjustment changes
during the year.............. 23,478 23,478
Redemption of preferred
stock........................ (104,000) (104,000)
Redemption of common and
preferred stock in excess of
par value and related
expenses..................... (41,091) (41,091)
Stock issued in exchange for
subordinated promissory
note......................... 150,000 150,000
Unrealized holding losses for
available-for-sale
securities................... (222) (222)
--------- -------- -------- -------- ----- ---------
Balances at December 31,
1994......................... 485,901 59,008 196,527 (5,271) (222) 735,943
Net Income..................... 105,206 105,206
Cash dividend on common stock
paid to Ford Motor Company... (25,000) (25,000)
Translation adjustment changes
during the year.............. 19,810 19,810
Unrealized holding gains for
available-for-sale securities
during the year.............. 322 322
--------- -------- -------- -------- ----- ---------
Balances at December 31,
1995......................... 485,901 59,008 276,733 14,539 100 836,281
Net Income..................... 158,619 158,619
Translation adjustment changes
during the year.............. (5,410) (5,410)
Unrealized holding losses for
available-for-sale securities
during the year.............. (125) (125)
--------- -------- -------- -------- ----- ---------
Balances at December 31,
1996......................... $ 485,901 $ 59,008 $435,352 $ 9,129 $ (25) $ 989,365
========= ======== ======== ======== ===== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 89
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
Dollars in thousands ----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 158,619 $ 105,206 $ 91,082
Non-cash expenses:
Depreciation of revenue earning equipment....... 892,678 803,862 702,644
Depreciation of property and equipment.......... 82,457 79,696 68,646
Amortization of intangibles..................... 18,232 19,978 19,401
Provision for public liability and property
damage........................................ 133,417 134,926 159,049
Provision for losses for doubtful accounts...... 9,912 4,926 6,813
Write-off of interest on Park Ridge Limited
Partnership promissory note................... -- -- 8,586
Deferred income taxes........................... 39,000 28,500 4,700
Other........................................... (3,060) -- --
Revenue earning equipment expenditures............. (8,204,179) (7,255,250) (6,873,281)
Proceeds from sales of revenue earning equipment... 6,445,337 6,163,455 4,747,409
Changes in assets and liabilities, net of effects
from sale in 1996 of certain claim
administration service operations, and in 1995
of the European car leasing and car dealership
operations --
Receivables................................... (20,482) (180,613) (181,439)
Due from affiliates........................... (48,583) (35,843) (43,087)
Inventories and prepaid expenses and other
assets..................................... (1,325) (1,422) 30,463
Accounts payable.............................. (117,767) 311,498 70,001
Accrued liabilities........................... 85,192 9,785 74,633
Accrued taxes................................. 30,316 6,067 6,656
Payments of public liability and property damage
claims and expenses............................. (123,928) (127,814) (118,380)
----------- ----------- -----------
Net cash flows (used for) provided by operating
activities.................................... $ (624,164) $ 66,957 $(1,226,104)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 90
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
Dollars in thousands ----------- --------- ----------
<S> <C> <C> <C>
Cash flows from investment activities:
Property and equipment expenditures.................. $ (179,802) $(178,279) $ (150,569)
Proceeds from sales of property and equipment........ 44,950 34,148 35,839
Available-for-sale securities --
Purchases......................................... (6,219) (6,375) (8,145)
Sales............................................. 6,422 6,625 5,221
Proceeds from sale in 1996 of certain claim
administration service operations and in 1995 of
the European car leasing and car dealership
operations, net of cash and equivalents........... 15,346 56,560 --
Purchases of various operations (see supplemental
disclosures below)................................ (6,054) -- (2,044)
----------- --------- ----------
Net cash flows used for investing activities.... (125,357) (87,321) (119,698)
----------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............. 304,604 329,157 719,289
Repayment of long-term debt.......................... (205,276) (340,442) (207,195)
Short-term borrowings:
Proceeds.......................................... 1,379,740 984,870 736,430
Repayments........................................ (1,180,063) (945,283) (614,439)
Ninety day term or less, net...................... 492,526 54,487 864,816
Cash dividend on common stock paid to Ford Motor
Company........................................... -- (25,000) --
Payment for the redemption of common and preferred
stock and related expenses........................ -- -- (145,091)
----------- --------- ----------
Net cash flows provided from financing
activities................................... 791,531 57,789 1,353,810
----------- --------- ----------
Effect of foreign exchange rate changes on cash........ 44 83 3,184
----------- --------- ----------
Net increase in cash and equivalents during the
period............................................... 42,054 37,508 11,192
Cash and equivalents at beginning of year.............. 137,257 99,749 88,557
----------- --------- ----------
Cash and equivalents at end of year.................... $ 179,311 $ 137,257 $ 99,749
=========== ========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for --
Interest (net of amounts capitalized)............. $ 300,120 $ 313,139 $ 257,652
Income taxes...................................... 38,899 33,775 36,341
</TABLE>
In connection with acquisitions made during the years 1996 and 1994,
liabilities assumed were $36 million and $27 million, respectively.
The accompanying notes are an integral part of this statement.
F-7
<PAGE> 91
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger, Change in Ownership and Capitalization
The Hertz Corporation (the "Company"), which was incorporated in Delaware in
1967, is a successor to corporations which were engaged in the automobile and
truck leasing and rental business since 1918. UAL Corporation ("UAL") (formerly
Allegis Corporation) purchased all of the Company's outstanding capital stock
from RCA Corporation ("RCA") on August 30, 1985. Park Ridge Corporation ("Park
Ridge"), which was 80%-owned by Ford Motor Company ("Ford"), purchased all of
the Company's outstanding capital stock from UAL on December 30, 1987. By 1989,
Ford reduced its ownership interest in Park Ridge to 49%. On July 19, 1993, Park
Ridge (which had no material assets other than the Company) was merged with and
into the Company, with the prior stockholders of Park Ridge becoming the
stockholders of the Company. The merger has been recorded as a "pooling of
interests".
In March 1994, Ford acquired the Company's common stock owned by Commerzbank
Aktiengesellschaft. On April 29, 1994, the Company redeemed its preferred and
common stock owned by AB Volvo for $145 million, borrowing the funds from Ford
to pay for the redemption, and Ford purchased all of the common stock of the
Company owned by Park Ridge Limited Partnership ("Partnership"). This resulted
in the Company becoming a wholly-owned subsidiary of Ford. In addition, the $150
million subordinated promissory note of the Company held by Ford Motor Credit
Company, a wholly-owned subsidiary of Ford ("FMCC"), was exchanged for $150
million of the Series B Preferred Stock of the Company, and a promissory note in
the amount of $18.5 million, owed by the Partnership to the Company was assumed
by Ford ("Ford Note"). In connection with these transactions, notes payable were
increased by $145 million, the Series A Preferred Stock was reduced by $104
million, and additional capital paid-in was reduced by $41 million; interest
expense was increased by $8.6 million and provision for taxes was decreased by
$3.0 million; and subordinated promissory notes were reduced by $150 million and
Series B Preferred Stock was increased by $150 million. The Ford Note was repaid
in 1996.
As of December 31, 1996, 100% of the Common Stock of the Company was owned by
Ford and 100% of the outstanding Preferred Stock was owned by FMCC.
F-8
<PAGE> 92
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The capital stock of the Company authorized, issued and outstanding as of
December 31, 1996, 1995 and 1994 is set forth below.
<TABLE>
<CAPTION>
--------------------------------------
PAR VALUE NUMBER OF SHARES
PER ISSUED AND
SHARE AUTHORIZED OUTSTANDING
--------- ---------- -----------
<S> <C> <C> <C>
Series A Preferred Stock:
Balance December 31, 1993................................ $100 4,500,000 3,400,000
Redemption in 1994....................................... -- (1,040,000)
--------- ----------
Balance December 31, 1994, 1995 and 1996................. $100 4,500,000 2,360,000
==== ========= ==========
Series B Preferred Stock
Balance December 31, 1993................................ $100 1,000,000 999,000
Issued in exchange for subordinated promissory note in
1994.................................................. 100 1,500,000 1,500,000
--------- ----------
Balance December 31, 1994, 1995 and 1996................. $100 2,500,000 2,499,000
==== ========= ==========
Class A Common Stock
Balance December 31, 1993, 1994, 1995 and 1996........... $ 1 200 200
==== ========= ==========
Class B Common Stock
Balance December 31, 1993................................ $ 1 800 311
Redemption in 1994....................................... -- (260)
--------- ----------
Balance December 31, 1994, 1995 and 1996................. $ 1 800 51
==== ========= ==========
Class C Common Stock
Balance December 31, 1993, 1994, 1995 and 1996........... $ 1 800 490
==== ========= ==========
</TABLE>
The holders of Series A Preferred Stock and Series B Preferred Stock are
entitled, when, as and if declared by the Board of Directors of the Company, to
cumulative annual dividends, but payable only out of funds legally available
therefor, compounded annually (if in arrears). The annual dividend rate through
December 31, 1998 is 10% for the Series A Preferred Stock and at various rates
which average 4.5% for the Series B Preferred Stock. Commencing January 1, 1999
the annual dividend rates for the Series A Preferred Stock and Series B
Preferred Stock are subject to adjustment and are reset on an annual basis. The
Series A Preferred Stock and the Series B Preferred Stock are redeemable by
their terms at the option of the Company at any time, and do not have any voting
rights, except that the holders of the Series A Preferred Stock shall have the
right to elect two directors in the event of default, and the holders of the
Series B Preferred Stock will be granted voting rights in the event of
significant and continuing net operating losses.
The holders of the Class A Common Stock and Class B Common Stock have one vote
per share and no special preferences. The holders of the Class C Common Stock
have one vote per share and have the right to designate three directors, until
such time as fewer than 40 shares thereof (adjusted for stock splits and the
like) shall be outstanding, provided, however, that the Class C Common Stock
shall in any event have 40% of the general voting power and the right to elect
not less than 40% of the members of such Board of Directors, until such time as
fewer than 40 shares thereof (as so adjusted) shall be outstanding. The Class C
Common Stock is convertible into Class B Common Stock on a share for share basis
at any time at the holder's option. Under certain circumstances, shares of Class
B Common Stock convert or are convertible into an equivalent number of shares of
Class A Common Stock.
F-9
<PAGE> 93
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of The Hertz
Corporation and its domestic and foreign subsidiaries. All significant
intercompany transactions are eliminated.
Consolidated Statement of Cash Flows
For purposes of this statement, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. See Merger, Change of Ownership and Capitalization for noncash
investing and financing activities.
Depreciable Assets
The provisions for depreciation and amortization are computed on a straight-line
basis over the estimated useful lives of the respective assets, as follows:
Revenue Earning Equipment:
<TABLE>
<CAPTION>
--------------
<S> <C>
Cars........................................................ 3 to 6 years
Other equipment............................................. 3 to 11 years
Buildings................................................... 20 to 50 years
Leasehold improvements...................................... Term of lease
Service cars and service equipment.......................... 3 to 25 years
Franchises, concessions, contract costs and leaseholds...... 10 to 40 years
Cost in excess of net assets of purchased businesses........ 10 to 40 years
</TABLE>
Hertz follows the practice of charging maintenance and repairs, including the
cost of minor replacements, to maintenance expense accounts. Costs of major
replacements of units of property are charged to property and equipment accounts
and depreciated on the basis indicated above. Gains and losses on dispositions
of property and equipment are included in income as realized. Upon disposal of
revenue earning equipment, depreciation expense is adjusted for the difference
between the net proceeds from sale and the remaining book value.
Environmental Conservation
The use of automobiles and other cars is subject to various governmental
controls designed to limit environmental damage, including that caused by
emissions and noise. Generally, these controls are met by the manufacturer,
except in the case of occasional equipment failure requiring repair by Hertz. To
comply with environmental regulations, measures are being taken at certain
locations to reduce the loss of vapor during the fueling process and to maintain
and replace underground fuel storage tanks. Hertz is also incurring and
providing for expenses for the cleanup of fuel discharges and other alleged
violations of environmental laws arising from the disposition of waste products.
Hertz does not believe that it will be required to make any material capital
expenditures for environmental control facilities or to make any other material
expenditures to meet the requirements of governmental authorities in this area.
Liabilities for these expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
Public Liability and Property Damage
Provisions for public liability and property damage on self-insured domestic
claims and reinsured foreign claims are made by charges to expense based upon
evaluations of estimated ultimate liabilities
F-10
<PAGE> 94
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
on reported and unreported claims. For its domestic operations, the Company is,
where permitted by applicable local law, a qualified self-insurer against
liability resulting from accidents under certificates of self-insurance for
financial responsibility in all states wherein its vehicles are registered. The
Company also self-insures general public liability and property damage for all
domestic operations. Since July 1, 1987, all claims have been retained and borne
by the Company up to a limit of $5 million for each occurrence, and the Company
has maintained insurance with unaffiliated carriers in excess of $5 million up
to $450 million per occurrence.
For its foreign operations, the Company purchases insurance to comply with local
legal requirements. From January 1, 1993 through December 31, 1996, vehicle
liability insurance purchased locally from unaffiliated carriers by Company
owned operations in Europe was reinsured by Hertz International RE Limited, a
wholly-owned subsidiary of the Company operating as a reinsurer in Dublin,
Ireland. Hertz International RE Limited effectively responded to the first $1.5
million of motor vehicle liability for each accident during this period, with
excess liability insurance coverage maintained by the Company with unaffiliated
carriers. Effective January 1, 1997, the Company replaced an unaffiliated
carrier that was the fronted insurer for claims up to $1.5 million per
occurrence by establishing a wholly-owned subsidiary, Probus Insurance Company
Europe Limited ("Probus"), a direct writer domiciled in Dublin, Ireland. Probus
now underwrites the Company's European vehicle liability program (except in
Switzerland and Denmark) up to $1.5 million per occurrence. Excess coverage for
claims that exceed $1.5 million continues to be maintained with unaffiliated
carriers. In the Company's foreign operations other than Europe, the Company is
self insured at various amounts up to $100,000 per occurrence, and maintains
excess liability insurance coverage up to $450 million per occurrence with
unaffiliated carriers.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the rate of
exchange in effect on the balance sheet date; income and expenses are translated
at the average rate of exchange prevailing during the year. The related
translation adjustments are reflected in the stockholders' equity section of the
consolidated balance sheet. Foreign currency gains and losses resulting from
transactions are included in earnings.
Income Taxes
Effective April 30, 1994, the Company and its domestic subsidiaries are filing
consolidated Federal income tax returns with Ford. The Company and its domestic
subsidiaries filed consolidated Federal income tax returns after December 31,
1987; prior thereto, from September 1, 1985 to December 31, 1987 they were
included in the consolidated Federal income tax return of UAL, and prior thereto
in the consolidated Federal income tax return of RCA. The Company provides for
current and deferred taxes as if it filed a separate consolidated tax return
with its domestic subsidiaries, except that under a tax sharing arrangement with
Ford, the Company's right to reimbursement for foreign tax credits is determined
based on the usage of such foreign tax credits by the consolidated group. By
virtue of its controlling beneficial ownership of the Company, Ford effectively
controls all of the Company's tax decisions. The Company and its subsidiaries
account for investment tax credits under the flow-through method. As of December
31, 1996, U.S. income taxes have not been provided on $209 million in
undistributed earnings of subsidiaries that have been or are intended to be
permanently reinvested outside the United States or are expected to be remitted
free of taxes.
F-11
<PAGE> 95
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Advertising
Hertz is a party to a cooperative advertising agreement with Ford pursuant to
which Ford participates in some of the cost of certain of Hertz' advertising
programs in the United States and abroad which feature the Ford name or
products. The amounts contributed by Ford for the years ended December 31, 1996,
1995 and 1994 were (in millions) $45.4, $44.1 and $42.0, respectively. This
program is expected to continue in the future. The Company incurred advertising
expense for the years ended December 31, 1996, 1995 and 1994 of (in millions)
$148.0, $134.5 and $133.6, respectively.
Pension and Income Saving Plans
Qualified domestic employees, after completion of specified periods of service,
are eligible to participate in the Retirement Plan for the Employees of The
Hertz Corporation ("Hertz Retirement Plan") and in the Income Savings Plan of
The Hertz Corporation ("Hertz Income Savings Plan"). Payments are made to
pension plans of others pursuant to various collective bargaining agreements.
Under the Hertz Retirement Plan, the Company pays the entire cost and employees
are not required to contribute. For each plan year beginning January 1, 1996 and
thereafter, a qualified employee's cash balance account is credited with an
annual cash balance credit equal to: (a) 3% of his/her pensionable earnings for
that plan year in the case of a qualified employee who is credited with less
than 60 continuous months of service from his/her most recent date of hire, or
(b) 4% of his/her pensionable earnings for that plan year in the case of a
qualified employee who is credited with 60 or more continuous months of service
from his/her most recent date of hire. In the case of a qualified employee who
is first credited with 60 continuous months of service after January 1 of a plan
year, the percentage of his/her pensionable earnings utilized in determining
his/her annual cash balance credit for that plan year shall be increased to 4%
effective as of the first day of the month coincident with or next following
his/her completion of 60 continuous months of service from his/her most recent
date of hire. This benefit is credited with guaranteed interest rates compounded
annually based on rates issued by the Pension Benefit Guaranty Corporation in
effect for the preceding December. In addition, all qualified employees age 50
or over with 10 or more years of credited service as of July 1, 1987, will have
an additional amount of their pensionable earnings credited to their account.
Hertz' funding policy is to contribute at least the minimum amount required by
the Employee Retirement Income Security Act of 1974.
Under the Hertz Income Savings Plan, the Company contributes 50% of the first 6%
of the employee's contribution for a maximum match contribution by the Company
of 3% of the employee's base salary.
Most of the Company's foreign subsidiaries have defined benefit retirement plans
or are required to participate in government plans. These plans are all funded,
except in Germany, where an unfunded liability is recorded. In certain
countries, when the subsidiaries make the required funding payments, they have
no further obligations under such plans.
Impairment of Long-Lived Assets and Certain Identifiable Intangibles
The Company evaluates the carrying value of goodwill for potential impairment on
an ongoing basis. Such evaluations compare operating income before amortization
of goodwill to the amortization recorded for the operations to which the
goodwill relates. The Company also considers projected future operating results,
trends and other circumstances in making such estimates and evaluations. In
addition, the Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable.
F-12
<PAGE> 96
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates and Assumptions
Use of estimates and assumptions as determined by management is required in the
preparation of consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those estimates
and assumptions. Certain amounts for prior periods have been reclassified to
conform with 1996 presentations.
NOTE 2 -- DEBT
Debt of the Company and its subsidiaries (in thousands of dollars) consists of
the following:
<TABLE>
<CAPTION>
-----------------------
DECEMBER 31
1996 1995
---------- ----------
<S> <C> <C>
Notes payable, including commercial paper, average interest
rate: 1996, 5.6%; 1995, 5.8%.............................. $1,498,002 $1,036,413
Promissory notes, average interest rate: 1996, 7.3%; 1995,
7.6% (effective average interest rate: 1996, 7.4%; 1995,
7.7%); net of unamortized discount: 1996, $3,602; 1995,
$3,019; due 1997 to 2005.................................. 1,941,398 1,694,641
Property and equipment lease obligations, average interest
rate: 1996, 7.5%; 1995, 7.9%; due 1997 to 1998............ 2,554 3,602
Medium-term notes, average interest rate: 1996, 9.3%; 1995,
9.4%; due 1997............................................ 75,300 119,175
Senior subordinated promissory notes, average interest rate:
1996, 9.7%; 1995, 9.5% (effective average interest rate:
1996, 9.8%; 1995, 9.6%); net of unamortized discount:
1996, $172; 1995, $313; due 1997 to 1998.................. 149,828 249,687
Junior subordinated promissory notes, average interest rate
6.9%; net of unamortized discount: 1996, $244; 1995, $286;
due 2000 to 2003.......................................... 399,756 399,714
Subsidiaries' debt:
Short-term borrowings --
Banks, average interest rate: 1996, 5.1%; 1995, 6.0%,
in foreign currencies................................. 782,765 684,634
Commercial paper, average interest rate: 1996, 6.2%;
1995, 5.8%, in foreign currencies..................... 141,805 11,357
Others, average interest rate: 1996, 2.7%; 1995, 3.7%,
in foreign currencies................................. 56,518 51,200
Other borrowings, average interest rate: 1996, 7.4%; 1995,
7.0%; in foreign currencies............................ 43,918 47,061
---------- ----------
Total....................................................... $5,091,844 $4,297,484
========== ==========
</TABLE>
The aggregate amounts of maturities of debt, in millions, are as follows: 1997,
$2,718.9 (including $2,478.9 of commercial paper, demand and other short-term
borrowings); 1998, $374.5; 1999, $451.1; 2000, $249.8; 2001, $398.9; after 2001,
$898.6. Included in these maturities at the earliest possible redemption date
are the following promissory notes of the Company which have put options that
can be exercised by the holders of such notes as follows: $5 million at 9.3% due
in 2005, that can be redeemed at the option of the holders in 1997; $25 million
at 9% due in 2000, that can be redeemed at the option of the holders in 1997,
1998 or 1999; $100 million at 9% due 2009, that can be redeemed at the option of
the holders in 1999; and $150 million at 6.3% due 2006, that can be redeemed at
the option of the holders in 2002.
F-13
<PAGE> 97
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- DEBT -- (CONTINUED)
The Company and its subsidiaries have entered into arrangements to manage
exposures to fluctuations in interest rates. See Note 13 -- Financial
Instruments.
During the year ended December 31, 1996, short-term borrowings, in millions,
were as follows: maximum amounts outstanding $2,129.2 commercial paper, $838.1
banks and $137.2 other; monthly average amounts outstanding $1,615.9 commercial
paper (weighted average interest rate 5.6%), $754.2 banks (weighted average
interest rate 5.3%) and $91.1 other (weighted average interest rate 2.5%).
During the year ended December 31, 1995, short-term borrowings, in millions,
were as follows: maximum amounts outstanding $1,853.8 commercial paper, $1,083.5
banks and $193.5 other; monthly average amounts outstanding $1,292.6 commercial
paper (weighted average interest rate 6.1%), $828.2 banks (weighted average
interest rate 6.4%) and $108.6 other (weighted average interest rate 4.3%).
During the year ended December 31, 1994, short-term borrowings, in millions,
were as follows: maximum amounts outstanding $1,021.3 commercial paper, $1,247.6
banks and $194.1 other; monthly average amounts outstanding $659.9 commercial
paper (weighted average interest rate 4.9%), $975.5 banks (weighted average
interest rate 5.8%) and $95.5 other (weighted average interest rate 5.3%).
The net amortized discount charged to interest expense for the years ended
December 31, 1996, 1995 and 1994 relating to debt and other liabilities, in
millions, was $.9, $.9, and $1.3, respectively. In addition, interest expense,
in millions, for the years 1995, and 1994 was reduced by $1.3 and $1.6,
respectively, of interest income, relating to refunds of prior years' state,
local and federal income taxes.
In 1996, the Company renewed the following two committed bank facilities with a
group of thirty-one commercial banks, which will be utilized to support
commercial paper and other short-term borrowings in the aggregate amount of
$2.08 billion: (i) five year credit agreement for $1.185 billion is committed
until June 30, 2001. The termination date is automatically extended for an
additional one-year period each June 30, unless the bank gives notice to the
contrary. A facility fee of .09% per annum is payable on the entire commitment
amount; and (ii) 364-day credit agreement for $895 million, renewed in June
1996, is committed through June 25, 1997. A facility fee of .0625% per annum is
payable on the entire commitment amount.
The Company also entered into a revolving loan agreement with Ford on June 8,
1994 under which the Company could borrow from Ford from time to time up to $250
million outstanding. See Note 14 -- Subsequent Events. Obligations of the
Company under this agreement would rank pari passu with the Company's senior
debt securities. A commitment fee of .09% per annum is payable on the unused
available credit. In addition, at December 31, 1996, the Company and a
subsidiary had $269 million of outstanding loans from Ford.
At December 31, 1996, the three credit facilities described above provided for
borrowings of $2.3 billion, all of which was available for borrowing.
The Company maintains a Sales Agency Agreement with Ford Financial Services,
Inc., an NASD registered broker-dealer and an indirect, wholly-owned subsidiary
of Ford ("FFS"), whereby FFS acts as the exclusive dealer for the Company's
domestic commercial paper program. The Company pays fees to FFS which range from
.035% to .05% per annum of commercial paper placed depending upon the monthly
average dollar value of the notes outstanding in the portfolio. In 1996, the
Company paid FFS $556,754 of such fees. FFS is under no obligation to purchase
any of the notes for its own account. FFS has acted as the Company's exclusive
commercial paper dealer since October 1994, and the Sales Agency Agreement may
not be amended or terminated without the written consent of both parties. The
F-14
<PAGE> 98
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- DEBT -- (CONTINUED)
Company, through its subsidiary Hertz Australia Pty. Limited ("Hertz
Australia"), has a similar agreement with Ford Credit Australia Limited, also an
indirect, wholly-owned subsidiary of Ford Motor Company.
The terms of the Company's loan agreements limit the payment of cash dividends.
At December 31, 1996, approximately $331 million of consolidated stockholders'
equity was free of such limitations.
NOTE 3 -- FOREIGN CURRENCY
Foreign currency exchange gains and losses included in net income were net gains
of $3.4 million, $2.0 million and $1.2 million for the years ended December 31,
1996, 1995 and 1994, respectively.
NOTE 4 -- AVAILABLE-FOR-SALE SECURITIES
As of December 31, 1996, Prepaid Expenses and Other Assets in the consolidated
balance sheet include available-for-sale securities at fair value (in thousands)
of $5,405 (cost $5,432). The fair value is calculated using information provided
by outside quotation services. These securities include various governmental and
corporate debt obligations, with the following maturity dates (in thousands):
fair value $113 (cost $116) in 1997; fair value $4,373 (cost $4,376) 1998
through 2002; fair value $899 (cost $929) 2003 through 2012; $20 fair value
(cost $11) after 2012. For the year ended December 31, 1996, proceeds of $6.4
million from the sale of available-for-sale securities were received, and a
gross realized gain of $105,813 and gross realized loss of $134,474 were
included in earnings. Actual cost was used in computing the realized gain and
loss on the sale. For the year ended December 31, 1996, unrealized holding
losses and unrealized holding gains, net of taxes, included in Stockholders'
Equity were $62,000 and $37,000, respectively.
NOTE 5 -- PURCHASES AND SALES OF OPERATIONS
In June 1996, the Company acquired all of the capital stock of a foreign
licensee car rental and leasing operation and the assets of a domestic car
rental operation. In February 1996, the Company acquired the assets of a
domestic construction equipment rental operation. The costs related to these
acquisitions exceeded the net assets acquired by $6.1 million.
In May 1996, the Company sold certain of its claim administration service
operations effective February 29, 1996, which included the administration of
workers' compensation claims and other related services, and health related
benefit claims. The net proceeds from the sale approximated $15.3 million, which
exceeded its book value by approximately $3 million. The total assets of these
operations at February 29, 1996 were $15.5 million and revenues for the year
ended December 31, 1995 were $31.0 million, with negligible net income.
Therefore, the Company believes that this transaction will not have a material
effect on its financial position or results of operations.
F-15
<PAGE> 99
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PURCHASES AND SALES OF OPERATIONS -- (CONTINUED)
On July 31, 1994, Axus, S.A., a car leasing company of the Company which
operates in various countries in Europe, acquired an additional interest in
Locaplan S.A., a car leasing operation in France, increasing its ownership from
50% to 100%. The cost relating to this acquisition approximated $2.3 million,
which exceeded the net assets acquired by approximately $2.2 million. Commencing
in August 1994, the accounts of this operation have been included in the
consolidated financial statements of the Company, which did not have a material
effect on the Company's consolidated financial position or results of
operations. These operations were sold by the Company effective January 1, 1995
to Hertz Leasing International, Inc. ("HLI"), at an amount equal to its book
value of approximately $61 million. HLI is an indirect, wholly-owned subsidiary
of Ford. For additional consideration payable over five years, except for
Australia, New Zealand and Brazil, Ford has received the worldwide rights
(subject to certain existing license rights) to use and sublicense others to use
the "Hertz" name in the conduct of car leasing businesses -- $9.3 million was
received in each of the years 1996 and 1995. The unaudited total assets as of
December 31, 1994 and unaudited total revenues and net income for the year ended
December 31, 1994 of the Company's European car leasing and car dealership
operations were (in millions) $482, $295 and $6, respectively. This transaction
did not have a material effect on the Company's financial position or results of
operations. See Note 14 -- Subsequent Event.
At December 31, 1996, a foreign subsidiary of the Company had $10.9 million of
loans receivable including related interest from foreign subsidiaries of HLI,
which mature in 1997.
In connection with the acquisition of the Company by Park Ridge in December 1987
and UAL in August 1985, the excess of the purchase price over the consolidated
equity of the Company at the time of these purchases was $658.3 million. These
costs are being amortized by the Company over 40 years. The unamortized amount
of such costs at December 31, 1996 was $501.3 million.
NOTE 6 -- PENSION AND INCOME SAVINGS PLAN AND POSTRETIREMENT BENEFIT PLANS
The following tables set forth the funded status and the net periodic pension
cost of the Hertz Retirement Plan covering its domestic ("U.S.") employees and
the retirement plans for foreign
F-16
<PAGE> 100
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- PENSION AND INCOME SAVINGS PLAN AND POSTRETIREMENT BENEFIT PLANS --
(CONTINUED)
operations ("Non-U.S.") and amounts included in the consolidated balance sheet
and statement of income (in millions of dollars):
<TABLE>
<CAPTION>
-----------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
U.S. NON-U.S. U.S. NON-U.S.
------- -------- ------ --------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligation --
Vested................................................ $ (73.7) $(34.1) $(62.6) $(27.9)
Nonvested............................................. (8.9) (4.8) (8.4) (3.7)
------- ------ ------ ------
Total.............................................. $ (82.6) $(38.9) $(71.0) $(31.6)
======= ====== ====== ======
Actuarial present value of projected benefit
obligation............................................ $(111.4) $(49.3) $(98.9) $(37.3)
Plan assets at fair value............................... 101.1 32.5 90.4 25.5
------- ------ ------ ------
Projected benefit obligation in excess of plan assets... (10.3) (16.8) (8.5) (11.8)
Unrecognized net (gain) loss............................ (20.0) 9.9 (14.2) 5.0
Prior service cost not yet recognized in net periodic
pension cost.......................................... -- -- .2 --
Remaining unrecognized net obligation................... 1.0 -- 1.3 --
------- ------ ------ ------
Pension liability included in the balance sheet......... $ (29.3) $ (6.9) $(21.2) $ (6.8)
======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------------------ ------------------ -----------------
U.S. NON-U.S. U.S. NON-U.S. U.S. NON-U.S.
------ -------- ------ -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during
the period............................ $ 8.0 $ 4.0 $ 5.3 $ 2.2 $ 6.4 2.3
Interest cost on projected benefit
obligation............................ 7.0 2.3 6.1 2.1 7.2 1.5
Return on assets:
Actual (gain) loss.................... (14.1) (1.9) (21.3) (1.5) .7 (1.5)
Deferred gain (loss).................. 7.5 -- 15.4 -- (6.1) --
Net amortization and deferral........... .8 -- .2 .1 1.8 .1
------ ----- ------ ----- ----- -----
Net periodic pension cost included in
the income statement.................. $ 9.2 $ 4.4 $ 5.7 $ 2.9 $10.0 $ 2.4
====== ===== ====== ===== ===== =====
</TABLE>
Significant assumptions used for the U.S. plan were as follows: weighted average
discount rate of 7.25% at December 31, 1996, 7.0% during 1996 (8.25% during 1995
and 7% during 1994); 5.5% rate of increase in future compensation levels (5.1%
for 1995 and 5.5% for 1994); and expected long-term rate of return on assets of
9%. Assumptions used for the Non-U.S. plans vary by country and are made in
accordance with local conditions, but do not vary materially from those used in
the U.S. plan. Plan assets consist principally of investments in stocks,
government bonds and other fixed income securities.
The provisions charged to income for the years ended December 31, 1996, 1995 and
1994 for all other pension plans were approximately (in millions) $6.7, $6.1 and
$6.0, respectively.
The provisions charged to income for the years ended December 31, 1996, 1995 and
1994 for the Hertz Income Savings Plan were approximately (in millions) $3.8,
$3.4 and $3.0, respectively.
F-17
<PAGE> 101
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- PENSION AND INCOME SAVINGS PLAN AND POSTRETIREMENT BENEFIT PLANS --
(CONTINUED)
The estimated cost for postretirement health care and life insurance benefits is
accrued on an actuarially determined basis. The following sets forth the plans'
status, reconciled with the amounts included in the consolidated balance sheet
and statement of income (in millions):
<TABLE>
<CAPTION>
------------
DECEMBER 31
ACTUARIAL PRESENT VALUE OF ACCUMULATED BENEFIT OBLIGATION -- 1996 1995
- ------------------------------------------------------------ ---- ----
<S> <C> <C>
Retirees.................................................... $1.8 $1.7
Active employees eligible to retire....................... 2.0 3.0
Other active employees.................................... 4.3 3.5
---- ----
Total accumulated benefit obligation...................... 8.1 8.2
Unrecognized net gain..................................... 1.0 .3
---- ----
Accrued liability included in the balance sheet........... $9.1 $8.5
==== ====
</TABLE>
<TABLE>
<CAPTION>
--------------------
YEARS ENDED
DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Benefits attributed to employees' service................... $.3 $ .2 $ .2
Interest on accumulated benefit obligation.................. .5 .5 .4
Amortization of net gain.................................... -- (.1) (.3)
--- ---- ----
Net periodic postretirement benefit cost............... $.8 $ .6 $ .3
=== ==== ====
</TABLE>
The significant assumptions used for the postretirement benefit plans were as
follows: weighted average discount rate of 7.5% at December 31, 1996, 7.25%
during 1996 (8.75% in 1995 and 7.5% in 1994), 5.5% rate of increase in future
compensation levels (5.3% in 1995 and 5.5% in 1994), 7.5% weighted average
health care cost trend rate through 2001 (8.3% in 1995 and 9% in 1994), and 6.7%
weighted average trend rate in ten years (7.5% in 1995 and 8% in 1994). Changing
the assumed health care cost trend rates by one percentage point in each year
would change the accumulated postretirement benefit obligation as of December
31, 1996 by approximately $555,000, and the aggregate service and interest cost
components of net periodic postretirement benefit cost for 1996 by approximately
$90,000.
NOTE 7 -- REVENUE EARNING EQUIPMENT
Revenue earning equipment is used in the rental of cars and industrial and
construction equipment and the leasing of cars under closed-end leases where the
disposition of the cars upon termination of the lease is for the account of
Hertz. Revenue is recorded as earned under the terms of the rental or leasing
contract. Revenue on open contracts is accrued to the balance sheet date based
on the terms in the contracts. Expenses are recorded as incurred. Over the three
years ended December 31, 1996, on a weighted average basis, approximately 66% of
the cars acquired by the Company for its U.S. rental car fleet, and
approximately 33% of the cars acquired by the Company for its international
fleet, were manufactured by Ford. During 1996, approximately 64% of the cars
required by the Company domestically were manufactured by Ford. The percentage
of Ford cars acquired by the Company for its U.S. rental car fleet is expected
to remain at these or higher levels in the future. In 1996, approximately 28% of
the cars acquired by the Company for its international fleet were manufactured
by Ford, which represented the largest percentage of any automobile manufacturer
in that year.
Under operating leases, aggregate minimum future rentals for cars leased at
December 31, 1996 are receivable approximately as follows (in millions): $25 in
1997, $15 in 1998, $6 in 1999, and $1 in
F-18
<PAGE> 102
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- REVENUE EARNING EQUIPMENT -- (CONTINUED)
2000. Cars under lease at December 31, 1996 which are owned by Hertz amounted to
$95 million, net of accumulated depreciation of $25 million.
The average holding periods of cars and other revenue earning equipment are as
follows: cars used in the car rental business, 5 to 12 months; cars used in the
car leasing business, 36 months; and equipment used in the industrial and
construction equipment rental business, 24 to 60 months. At December 31, 1996,
the average ages of owned cars and other revenue earning equipment are as
follows: cars used in the rent a car business, 7 months; cars used in the car
leasing business, 19 months; and equipment used in the industrial and
construction equipments rental business, 19.7 months. At December 31, 1996, the
Company was subject to residual risk with respect to 17% of all cars in its
worldwide car rental and leasing operations and 100% of the equipment in the
industrial and construction equipment rental business.
Depreciation of revenue earning equipment includes the following (in thousands
of dollars):
<TABLE>
<CAPTION>
--------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Depreciation of revenue earning equipment.................. $904,504 $753,999 $651,413
Adjustment of depreciation upon disposal of the
equipment............................................. (23,221) (6,356) (22,983)
Rents paid for vehicles leased............................. 11,395 56,219 74,214
-------- -------- --------
Total................................................. $892,678 $803,862 $702,644
======== ======== ========
</TABLE>
Effective July 1, 1994, certain lives being used to compute the provision for
depreciation of revenue earning equipment used in the Company's industrial and
construction equipment rental business were increased to reflect changes in the
estimated residual values to be realized when the equipment is sold. As a result
of this change, depreciation of revenue earning equipment for the years 1995 and
1994 were decreased by $12.0 million and $9.6 million, respectively.
The adjustment of depreciation upon disposal of revenue earning equipment for
the years ended December 31, 1996, 1995, and 1994 included (in millions) net
gains of $20.7, $13.8 and $13.2, respectively, on the sale of industrial and
construction equipment, net gains of $2.5, net losses of $7.5 and net gains of
$9.8, respectively, on the sale of cars used in the rent a car and car leasing
operations.
In view of the favorable market conditions in 1995 and 1996 for the sale of used
equipment in the industrial and construction equipment rental business,
effective January 1, 1997, certain estimated useful lives being used to compute
the provision for depreciation will be increased to reflect the anticipated
changes in the estimated residual values to be realized when the equipment is
sold. This should result in lower annual depreciation charges and lower gains on
the disposal of the used equipment than has been the case in 1996 and 1995.
As of December 31, 1996 and 1995, Ford owed the Company and its subsidiaries
$445.1 million and $358.6 million, respectively, in connection with various car
repurchase and warranty programs. As of December 31, 1996 and 1995, the Company
and its subsidiaries owed Ford $26.6 million and $9.4 million, respectively
(which amounts are included in Accounts Payable in the consolidated balance
sheet) in connection with cars purchased. These transactions were made and are
being paid in the ordinary course of business.
During the year ended December 31, 1996, the Company purchased Ford cars at a
cost of approximately $4.3 billion, and sold these cars to Ford or its
affiliates under various repurchase programs for approximately $3.2 billion.
F-19
<PAGE> 103
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- TAXES ON INCOME
The provision for taxes on income consists of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Current:
Federal................................................... $31,360 $ 10,381 $38,797
Foreign................................................... 18,832 29,422 20,016
State and local........................................... 8,758.. (1,165) 8,236
------- -------- -------
Total current........................................ 58,950 38,638 67,049
------- -------- -------
Deferred:
Federal................................................... 23,772 35,577 2,027
Foreign................................................... 6,228 (11,577) (127)
State and local........................................... 9,000 4,500 2,800
------- -------- -------
Total deferred....................................... 39,000 28,500 4,700
------- -------- -------
Total provision...................................... $97,950 $ 67,138 $71,749
======= ======== =======
</TABLE>
The principal items in the deferred tax provision (benefit) are as follows (in
thousands of dollars):
<TABLE>
<S> <C> <C> <C>
Difference between tax and book depreciation................ $ 64,176 $ 34,790 $ 9,234
Accrued and prepaid expense deducted for tax purposes when
paid or incurred.......................................... (39,427) 13,671 (14,517)
Tax operating loss utilized (carryforwards)................. (7,217) 1,507 (2,636)
Federal alternative minimum tax credit utilized
(carryforwards)........................................... 10,217 (10,217) 1,072
Foreign tax credit utilized (carryforwards)................. 11,251 (11,251) --
Investment tax credit utilized.............................. -- -- 11,547
-------- -------- --------
Total deferred provision............................... $ 39,000 $ 28,500 $ 4,700
======== ======== ========
</TABLE>
The principal items in the deferred tax liability at December 31, 1996 and 1995
are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Difference between tax and book depreciation................ $ 309,368 $ 245,192
Accrued and prepaid expense deducted for tax purposes when
paid or incurred.......................................... (148,526) (109,099)
Tax operating loss carryforwards............................ (12,626) (5,409)
Foreign tax credit carryforwards............................ -- (11,251)
Federal alternative minimum tax credit carryforwards........ (31,416) (41,633)
--------- ---------
Total.................................................. $ 116,800 $ 77,800
========= =========
</TABLE>
The tax operating loss carryforwards at December 31, 1996 of $12.6 million
relate to certain foreign operations and have the following expiration dates (in
millions): $1.0 in 2001, $.2 in 2002, $.2 in 2006, and $11.2 with no expiration
dates. It is anticipated that such operations will become profitable in the
future and the carryforwards will be fully utilized.
As of December 31, 1996, the alternative minimum tax credit carryforwards of
$31.4 million (which have no expiration date) will be utilized upon reversal of
timing differences and against future taxable income.
F-20
<PAGE> 104
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- TAXES ON INCOME -- (CONTINUED)
The principal items accounting for the difference in taxes on income computed at
the U.S. statutory rate of 35% and as recorded are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Computed tax at statutory rate.............................. $ 89,799 $60,320 $56,991
State and local income taxes, net of Federal income tax
benefit................................................... 11,543 2,168 7,173
Tax effect on the amortization of the cost in excess of the
Company's net assets acquired by Park Ridge and UAL....... 5,762 5,764 5,760
Adjustments made to tax accruals in connection with tax
audit evaluations and the effects of prior years' tax
sharing arrangements between companies, UAL and RCA....... (13,945) -- (1,511)
Income taxes on foreign earnings at effective rates
different from the U.S. statutory rate, including the
anticipated realization of certain foreign tax benefits
and the effect of subsidiaries' gains and losses and
exchange adjustments with no tax effect................... 5,937 (3,890) 1,987
All other items, net, none of which exceeded 5% of computed
tax....................................................... (1,146) 2,776 1,349
-------- ------- -------
Total provision........................................ $ 97,950 $67,138 $71,749
======== ======= =======
</TABLE>
NOTE 9 -- LEASE AND CONCESSION AGREEMENTS
Hertz has various concession agreements which provide for payment of rents and a
percentage of revenue with a guaranteed minimum and real estate leases under
which the following amounts were expensed (in thousands of dollars):
<TABLE>
<CAPTION>
------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Rents...................................................... $ 47,328 $ 49,903 $ 50,066
Concession fees:
Minimum fixed obligations................................ 123,014 121,632 114,920
Additional amounts, based on revenues.................... 131,904 121,461 107,685
-------- -------- --------
Total................................................. $302,246 $292,996 $272,671
======== ======== ========
</TABLE>
As of December 31, 1996, minimum obligations under existing agreements referred
to above are approximately as follows (in thousands of dollars):
<TABLE>
<CAPTION>
----------------------
RENTS CONCESSIONS
-------- -----------
<S> <C> <C>
Years ended December 31,
1997...................................................... $ 41,492 $90,128
1998...................................................... 36,638 66,049
1999...................................................... 30,726 45,970
2000...................................................... 26,363 29,577
2001...................................................... 23,178 13,187
Years after 2001............................................ 130,531 46,242
</TABLE>
F-21
<PAGE> 105
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- LEASE AND CONCESSION AGREEMENTS -- (CONTINUED)
In addition to the above, Hertz has various leases on cars and office and
computer equipment under which the following amounts were expensed (in thousands
of dollars):
<TABLE>
<CAPTION>
---------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cars........................................................ $11,395 $56,219 $74,214
Office and computer equipment............................... 21,772 23,965 23,679
------- ------- -------
Total.................................................. $33,167 $80,184 $97,893
======= ======= =======
</TABLE>
As of December 31, 1996, minimum obligations under existing agreements referred
to above that have a maturity of more than one year are as follows (in
thousands): office and computer equipment 1997, $8,279; 1998, $4,784; 1999,
$1,514; 2000, $66; 2001, $8.
NOTE 10 -- SEGMENT INFORMATION
The Company's business consists of two significant segments: Rental and leasing
of automobiles and certain other activities ("car rental"); and rental of
industrial, construction and materials handling equipment ("industrial and
construction equipment rental"). The contributions of these segments to other
financial data are summarized as follows (in millions of dollars):
<TABLE>
<CAPTION>
-----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues
Car rental................................................ $ 3,276 $ 3,068 $ 3,031
Industrial and construction equipment rental.............. 392 333 263
------- ------- -------
Total................................................... $ 3,668 $ 3,401 $ 3,294
======= ======= =======
Depreciation of revenue earning equipment
Car rental................................................ $ 815 $ 746 $ 663
Industrial and construction equipment rental.............. 78 58 40
------- ------- -------
Total................................................... $ 893 $ 804 $ 703
======= ======= =======
Depreciation of property and equipment
Car rental................................................ $ 71 $ 71 $ 61
Industrial and construction equipment rental.............. 11 9 8
------- ------- -------
Total................................................... $ 82 $ 80 $ 69
======= ======= =======
Amortization of intangibles
Car rental................................................ $ 18 $ 20 $ 19
Industrial and construction equipment rental.............. -- -- --
------- ------- -------
Total................................................... $ 18 $ 20 $ 19
======= ======= =======
Operating income (pre-tax income before interest)
Car rental................................................ $ 421 $ 356 $ 353
Industrial and construction equipment rental.............. 134 123 87
------- ------- -------
Total................................................... $ 555 $ 479 $ 440
======= ======= =======
Income before income taxes
Car rental................................................ $ 166 $ 87 $ 107
Industrial and construction equipment rental.............. 91 85 56
------- ------- -------
Total................................................... $ 257 $ 172 $ 163
======= ======= =======
Total assets at end of year
Car rental................................................ $ 6,779 $ 5,993 $ 6,023
Industrial and construction equipment rental.............. 870 664 498
------- ------- -------
Total................................................... $ 7,649 $ 6,657 $ 6,521
======= ======= =======
</TABLE>
F-22
<PAGE> 106
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
NOTE 10 -- SEGMENT INFORMATION -- (CONTINUED)
Revenue earning equipment, net, at end of year
Car rental................................................ $ 4,318 $ 3,627 $ 3,854
Industrial and construction equipment rental.............. 718 543 406
------- ------- -------
Total................................................... $ 5,036 $ 4,170 $ 4,260
======= ======= =======
Revenue earning equipment and property and equipment
Car rental
Expenditures............................................ $ 8,006 $ 7,144 $ 6,789
Proceeds from sale...................................... (6,386) (6,122) (4,718)
------- ------- -------
Net expenditures...................................... $ 1,620 $ 1,022 $ 2,071
======= ======= =======
Industrial and construction equipment rental
Expenditures............................................ $ 378 $ 290 $ 235
Proceeds from sale...................................... (104) (76) (65)
------- ------- -------
Net expenditures...................................... $ 274 $ 214 $ 170
======= ======= =======
</TABLE>
The Company operates in the United States and in foreign countries. The
operations within major geographic areas are summarized as follows (in millions
of dollars):
<TABLE>
<CAPTION>
-----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues
United States............................................. $ 2,723 $ 2,510 $ 2,258
Foreign operations (substantially Europe)................. 945 891 1,036
------- ------- -------
Total................................................... $ 3,668 $ 3,401 $ 3,294
======= ======= =======
Depreciation of revenue earnings equipment
United States............................................. $ 789 $ 717 $ 540
Foreign operations (substantially Europe)................. 104 87 163
------- ------- -------
Total................................................... $ 893 $ 804 $ 703
======= ======= =======
Depreciation of property and equipment
United States............................................. $ 63 $ 60 $ 51
Foreign operations (substantially Europe)................. 19 20 18
------- ------- -------
Total................................................... $ 82 $ 80 $ 69
======= ======= =======
Amortization of intangibles
United States............................................. $ 17 $ 19 $ 18
Foreign operations (substantially Europe)................. 1 1 1
------- ------- -------
Total................................................... $ 18 $ 20 $ 19
======= ======= =======
Operating income (pre-tax income before interest)
United States............................................. $ 451 $ 357 $ 315
Foreign operations (substantially Europe)................. 104 122 125
------- ------- -------
Total................................................... $ 555 $ 479 $ 440
======= ======= =======
Income before income taxes
United States............................................. $ 196 $ 98 $ 94
Foreign operations (substantially Europe)................. 61 74 69
------- ------- -------
Total................................................... $ 257 $ 172 $ 163
======= ======= =======
Total assets at end of year
United States............................................. $ 5,805 $ 4,971 $ 4,762
Foreign operations (substantially Europe)................. 1,844 1,686 1,759
------- ------- -------
Total................................................... $ 7,649 $ 6,657 $ 6,521
======= ======= =======
Revenue earning equipment, net, at end of year
United States............................................. $ 3,997 $ 3,240 $ 3,119
Foreign operations (substantially Europe)................. 1,039 930 1,141
------- ------- -------
Total................................................... $ 5,036 $ 4,170 $ 4,260
======= ======= =======
</TABLE>
F-23
<PAGE> 107
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
NOTE 10 -- SEGMENT INFORMATION -- (CONTINUED)
Revenue earning equipment and property and equipment
United States.............................................
Expenditures............................................ $ 6,011 $ 5,413 $ 5,226
Proceeds from sale...................................... (4,360) (4,452) (3,405)
------- ------- -------
Net expenditures...................................... $ 1,651 $ 961 $ 1,821
======= ======= =======
Foreign operations (substantially Europe)
Expenditures............................................ $ 2,373 $ 2,021 $ 1,798
Proceeds from sale...................................... (2,130) (1,746) (1,378)
------- ------- -------
Net expenditures...................................... $ 243 $ 275 $ 420
======= ======= =======
</TABLE>
NOTE 11 -- LITIGATION
In July 1996, the Company was sued in Harris County, Texas District Court in a
purported class action in which this plaintiff alleges that the Company's
practice of providing certain insurance products violates the Texas Insurance
Code because the Company did not obtain approval to sell insurance or obtain
regulatory approval of the premiums it charges. The complaint seeks restitution
of excessive premiums, equitable rescission of all insurance contracts entered
into by the class members, a declaratory judgment that the Company is selling
insurance illegally in Texas and injunctive relief. While it is possible that
the action could result in significant liability to the Company, the Company
does not expect the action to have a material adverse effect on the Company's
consolidated financial position or results of operations.
The U.S. Department of Labor has commenced an inquiry into the Company's
classification of certain employees as "exempt" for purposes of federal labor
laws and whether such employees have been improperly denied overtime pay. While
an adverse outcome of the inquiry could have an adverse effect on the Company's
results of operations for the quarter in which it occurs, the Company does not
believe that an adverse outcome would have a material adverse effect on the
Company's results of operations for a full year, or on the Company's
consolidated financial position.
Since 1992, in the Company's New York region (which includes parts of New Jersey
and Connecticut), the Company has been assessing higher rental rates for renters
who reside in the New York City boroughs of The Bronx, Brooklyn or Queens to
offer costs resulting from a higher incidence of accidents involving renters
residing in such boroughs. The City of New York passed an ordinance prohibiting
such pricing practice. The Company filed suit against The City of New York
claiming that such ordinance was in violation of federal anti-trust laws. The
Company's claim was rejected in U.S. District Court, and the Company appealed to
the U.S. Court of Appeals for the Second Circuit. That Court remanded the
proceeding to the U.S. District Court for trial. Pending the outcome of the
action in the U.S. District Court, the Court has stayed the ordinance,
permitting the Company to continue its pricing practice. If the Company is
ultimately unsuccessful in challenging the ordinance, the Company believes it
could take actions to mitigate the higher costs that would be experienced from
such rentals. Accordingly, the Company believes that an adverse outcome would
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
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 the Company and its 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 the Company or the subsidiary involved. Although the amount of
liability with respect to these matters cannot be ascertained, potential
F-24
<PAGE> 108
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- LITIGATION -- (CONTINUED)
liability in excess of related accruals is not expected to materially affect the
consolidated financial position or results of operations of the Company.
NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of the quarterly operating results during 1996 and 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------------
OPERATING INCOME INCOME (LOSS)
(PRETAX INCOME BEFORE INCOME NET INCOME
REVENUES BEFORE INTEREST) TAXES (LOSS)
-------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
1996
First quarter......................... $ 803,142 $ 82,487 $ 15,172 $ 8,788
Second quarter........................ 911,401 144,260 69,284 39,545
Third quarter......................... 1,060,028 219,943 138,249 74,208
Fourth quarter........................ 893,812 108,679 33,864 36,078
---------- -------- -------- --------
Total Year......................... $3,668,383 $555,369 $256,569 $158,619
========== ======== ======== ========
1995
First quarter......................... $ 735,679 $ 69,705 $ (646) $ (365)
Second quarter........................ 858,555 115,089 34,515 19,637
Third quarter......................... 989,756 194,070 109,584 65,092
Fourth quarter........................ 816,598 100,553 28,891 20,842
---------- -------- -------- --------
Total Year......................... $3,400,588 $479,417 $172,344 $105,206
========== ======== ======== ========
</TABLE>
- -------------------------
The tax provision in the fourth quarter of 1996 includes credits of $13.9
million resulting from adjustments made to tax accruals in connection with tax
audit evaluations and the effects of prior years' tax sharing arrangements
between the Company and its former parent companies, UAL and RCA.
Effective July 1, 1994, certain lives being used to compute the provision for
depreciation of revenue earning equipment used in the industrial and
construction equipment rental business were increased to reflect changes in the
estimated residual values to be realized when the equipment is sold. As a result
of this change, pre-tax income before interest includes credit adjustments of
$10.8 million in the first quarter of 1995 and $1.2 million in the second
quarter of 1995 as a result of decreasing depreciation of revenue earning
equipment.
The tax provision in the fourth quarter of 1995 includes $6.5 million of credits
relating to foreign taxes paid which were offset against U.S. income tax
liabilities.
NOTE 13 -- FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and trade receivables. The
Company places its cash equivalents with financial institutions and limits the
amount of credit exposure to any one financial institution. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base, and their dispersion
across different businesses and geographic areas. All borrowings by foreign
operations are either in the foreign operation's local
F-25
<PAGE> 109
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
currency or, if in non-local currency, on a fully hedged basis to minimize
foreign exchange exposure. As of December 31, 1996, the Company had no
significant concentration of credit risk.
Cash and Equivalents
Fair value approximates cost indicated on the balance sheet at December 31,
1996, because of the short-term maturity of these instruments.
Debt
Fair value is estimated based on quoted market rates as well as borrowing rates
currently available to the Company for loans with similar terms and average
maturities. Carrying value was used as fair value for borrowings with an initial
maturity of 92 days or less. The fair value of all debt at December 31, 1996
approximated $5.12 billion compared to carrying value of $5.09 billion.
Public Liability and Property Damage
Provisions for public liability and property damage on self-insured domestic
claims and reinsured foreign claims are made by charges to expense based upon
evaluations of estimated ultimate liabilities on reported and unreported claims.
These liabilities are anticipated to be paid in the future which range between
one and five years. The fair value of these liabilities at December 31, 1996
approximates $290 million compared to carrying value of $321 million. The fair
value was estimated using a 6.9% interest rate, which represents the long-term
borrowing rate available to the Company at December 31, 1996.
Financial Instruments
The Company and its subsidiaries have entered into arrangements to manage
exposure to fluctuations in interest rates. These arrangements consist of
interest-rate swap agreements ("swaps") and forward rate agreements ("FRAs").
The differential paid or received on these agreements is recognized as an
adjustment to interest expense. These agreements are not entered into for
trading purposes. The effect of these agreements is to make the Company less
susceptible to changes in interest rates by effectively converting certain
variable rate debt to fixed rate debt. Because of the relationship of current
market rates to historical fixed rates, the effect at December 31, 1996 of the
swap and FRA agreements is to give the Company an overall effective
weighted-average rate on debt of 6.53%, with 41% of debt effectively subject to
variable interest rates, compared to a weighted-average interest rate on debt of
6.48%, with 49% of debt subject to variable interest rates when not considering
the swap and FRA agreements. At December 31, 1996, these agreements expressed in
notional amounts aggregated $368.4 million swaps. Notional amounts are not
reflective of the Company's obligations under these agreements because the
Company is only obligated to pay the net amount of interest rate differential
between the fixed and variable rates specified in the contracts. The Company's
exposure to any credit loss in the event of non-performance by the
counterparties is further mitigated by the fact that all of these financial
instruments are with significant financial institutions that are rated "A" or
better by the major credit rating agencies. At December 31, 1996, the fair value
of all outstanding contracts, which is representative of the Company's
obligations under these contracts, assuming the contracts were terminated at
that date, was approximately a net payable of $4.0 million.
The Company and its subsidiaries have entered into arrangements to manage
exposure to fluctuations in foreign exchange rates for certain foreign currency
loans and selected marketing programs. These arrangements consist of foreign
exchange forward contracts and the purchase of foreign exchange
F-26
<PAGE> 110
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
options. At December 31, 1996 the total notional amount of these instruments was
$23.5 million and the fair value of all outstanding contracts, which is
representative of the Company's obligations under these contracts, assuming the
contracts were terminated at that date, was approximately a net payable of $.1
million.
The fair value of the interest rate and foreign currency instruments were
estimated using market prices provided by financial institutions. The following
is the estimated fair value and notional amount of the outstanding instruments
at December 31, 1996 and their maturity dates (in millions):
<TABLE>
<CAPTION>
---------------------------------
FAIR NOTIONAL
MATURITY VALUE(a) AMOUNT(b)
-------- -------- ---------
<S> <C> <C> <C>
Interest Rate Instruments
1997 $240.7
- - Assets.................................................... $ --
- - Liabilities............................................... .5
1998 73.3
- - Assets.................................................... --
- - Liabilities............................................... 1.0
1999 43.4
- - Assets.................................................... (.1)
- - Liabilities............................................... 2.2
2000 10.7
- - Assets.................................................... --
- - Liabilities............................................... .2
2001 .2
- - Assets.................................................... --
- - Liabilities............................................... --
2002 .1
- - Assets.................................................... --
- - Liabilities............................................... --
----- ------
Total.................................................. $(4.0) $368.4
===== ======
Foreign Currency Instruments(c)
1997 $ 16.8
- - Assets.................................................... $ --
- - Liabilities............................................... .1
1998 6.7
- - Assets.................................................... --
- - Liabilities............................................... --
----- ------
Total.................................................. $ (.1) $ 23.5
===== ======
</TABLE>
- -------------------------
(a) Fair value is representative of the Company's obligation under the
contracts, assuming the contracts were terminated at December 31, 1996.
(b) The notional amount represents the contract amount and does not represent
the amount at risk.
(c) As of December 31, 1996, no one currency represented the majority of the
outstanding foreign currency instruments, except for the option to sell pound
sterling and buy U.S. dollars in the notional amount of $12.0 million.
F-27
<PAGE> 111
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- SUBSEQUENT EVENTS
In February 1997, Ford extended to the Company a line of credit of $500 million,
expiring June 30, 1999. This line of credit has an evergreen feature that
provides on an annual basis for automatic one-year extensions of the expiration
date, unless timely notice is provided by Ford at least one year prior to the
then scheduled expiration date. At that time, the revolving loan agreement
between the Company and Ford dated June 8, 1994 was terminated.
On February 27, 1997, the Company issued to Ford 1,290 shares of its 5.11%
Cumulative Series C Preferred Stock having an aggregate liquidation preference
of $129 million for a purchase price equal to the aggregate liquidation
preference.
On February 27, 1997, the Company paid a dividend of $460 million on its common
stock to Ford in the form of a 5.475% promissory note, which matures on or
before March 31, 1997.
On February 28, 1997, the Company filed a Registration Statement on Form S-1 in
connection with the proposed initial public offering of the Company's Class A
Common Stock (the "Offering").
The Company and Ford have entered into a Car Supply Agreement which will
commence on September 1, 1997 for a period of ten years. Under the Car Supply
Agreement, Ford and the Company have agreed to negotiate in good faith on an
annual basis with respect to the supply of cars. Ford has agreed to supply to
the Company and the Company has agreed to purchase from Ford, for each car model
year during the term of the agreement (i.e., the 1998 model year through the
2007 model year), (a) the lesser of 150,000 cars or 55% of the Company's fleet
requirements for its car rental business conducted in the United States; (b) 35%
of the Company's fleet requirements for its car rental business conducted in
Europe; and (c) 55% of the Company's fleet requirements for its car rental
business conducted other than in the United States and Europe. For each model
year, at least 50% of the cars supplied by Ford are required to be non-risk
cars. The Car Supply Agreement also provides that, for each model year, Ford
must strive to offer car fleet programs to the Company on terms and conditions
that are competitive with terms and conditions for the supply of cars then being
offered by other automobile manufacturers to the Company and other daily car
rental companies. In addition, for each model year, Ford must supply cars to the
Company on terms and conditions that are no less favorable than those offered by
Ford to other daily car rental companies, excluding franchised Ford vehicle
dealers who rent cars.
The Company and Ford have entered into a Joint Advertising Agreement which will
commence on September 1, 1997 for a period of ten years. Under the Joint
Advertising Agreement, Ford has agreed to pay to the Company one-half of the
Company's advertising costs, up to a limit of $39 million for the first year
and, for each year thereafter, a limit equal to the prior year's limit adjusted
for inflation. In addition, if for any year, one-half of the Company's
advertising costs exceed such limit and the Company has purchased from Ford a
percentage of its car fleet requirements for its car rental business conducted
in the United States for the corresponding model year (the "Ford Vehicle Share")
equal to 58% or more, then Ford will pay to the Company additional amounts for
such excess advertising costs. To be eligible for cost reimbursement under the
Joint Advertising Agreement, the advertising must meet certain conditions,
including the condition that it indicates that the Company features Ford
vehicles in a manner and with a prominence that is reasonably satisfactory to
Ford. The Joint Advertising Agreement further provides that if the Ford Vehicle
Share for any model year is less than 55%, Ford will not be obligated to pay the
Company any amount for its advertising costs for that year, except to the extent
that the Company's failure to achieve a 55% Ford Vehicle Share is attributable
to (a) Ford's failure to supply a sufficient quantity of cars for the Company to
achieve a 55% Ford Vehicle Share or (b) the fact that the terms and conditions
of Ford's car fleet programs offered to the Company were not competitive with
the terms and conditions for the supply of cars offered by other automobile
F-28
<PAGE> 112
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- SUBSEQUENT EVENTS -- (CONTINUED)
manufacturers to the Company and other daily car rental companies. In no event,
however, will Ford be required to pay any amount for the Company's advertising
costs for any year if the Ford Vehicle Share for the corresponding model year is
less than 40%.
F-29
<PAGE> 113
SCHEDULE II
THE HERTZ CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
--------------------------------------------------------------------
ADDITIONS DEDUCTIONS
BALANCE AT ---------- ----------------------
BEGINNING OF CHARGED TO TRANSLATION BALANCE AT
YEAR INCOME ADJUSTMENTS OTHER END OF YEAR
------------ ---------- ----------- ----- -----------
Dollars in thousands
<S> <C> <C> <C> <C> <C>
1996
Allowance for doubtful accounts... $ 7,985 $ 9,912 $ 59 $ 5,570(a) $ 12,268
======== ======== ===== ======== ========
Public liability and property
damage.......................... $311,669 $133,417 $ 40 $123,928(b) $321,118
======== ======== ===== ======== ========
1995
Allowance for doubtful accounts... $ 10,026 $ 4,926 $(319) $ 7,286(a) $ 7,985
======== ======== ===== ======== ========
Public liability and property
damage.......................... $304,328 $134,926 $(229) $127,814(b) $311,669
======== ======== ===== ======== ========
1994
Allowance for doubtful accounts... $ 6,862 $ 6,813 $(521) $ 4,170(a) $ 10,026
======== ======== ===== ======== ========
Public liability and property
damage.......................... $264,158 $159,049 $ 403 $118,476(b) $304,328
======== ======== ===== ======== ========
</TABLE>
- -------------------------
(a) Amounts written off, net of recoveries. The year 1995 includes $2 million,
which represents the balance at December 31, 1994 relating to the European Car
Leasing and Car Dealership operations sold by the Company effective January 1,
1995.
(b) Payments of claims and expenses.
F-30
<PAGE> 114
HERTZ LOGO
<PAGE> 115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $30,304
NASD fee.................................................... *
NYSE listing fee............................................ *
Blue Sky fees and expenses.................................. 15,000
Printing expenses........................................... *
Legal fees and expenses..................................... 600,000
Accounting fees............................................. 50,000
Miscellaneous............................................... *
-------
Total.................................................. $ *
=======
</TABLE>
* To be filed by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, and, for criminal
proceedings, had no reasonable cause to believe his or her conduct was illegal.
A Delaware corporation may indemnify officers and directors against expenses
(including attorneys' fees) in connection with the defense or settlement of an
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such officer or director actually and reasonably incurred.
In accordance with the Delaware Law, the Restated Certificate of Incorporation
of the Company contains a provision to limit the personal liability of the
directors of the Company for violations of their fiduciary duty. This provision
eliminates each director's liability to the Company or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions or (iv)
for any transaction from which a director derived an improper personal benefit.
The effect of this provision is to eliminate the personal liability of directors
for monetary damages for actions involving a breach of their fiduciary duty of
care, including any such actions involving gross negligence.
Pursuant to underwriting agreements filed as exhibits to registration statements
relating to underwritten offerings of securities, the underwriters parties
thereto have agreed to indemnify each officer and director of the Company and
each person, if any, who controls the Company within the meaning of the
Securities Act of 1933, against certain liabilities, including liabilities under
said Act.
II-1
<PAGE> 116
The directors and officers of the Company are covered by directors' and
officers' insurance policies relating to Ford Motor Company and its
subsidiaries.
The Restated Certificate of Incorporation of the Company provides for
indemnification of the officers and directors of the Company to the full extent
permitted by applicable law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the past three years, the Company has not sold any unregistered
securities required to be described pursuant to this item.
II-2
<PAGE> 117
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C> <C>
1 -- Form of U.S. Underwriting Agreement**
3(a) -- Form of Restated Certificate of Incorporation of the
Company**
3(b) -- Form of Restated By-laws of the Company**
4(a) -- Specimen Certificate of Class A Common Stock of the
Company**
4(b) -- Indenture dated as of April 1, 1986 between the Company and
The Chase Manhattan Bank (formerly known as Chemical Bank),
as successor by merger to Manufacturers Hanover Trust
Company, as Trustee (incorporated herein by reference from
the Company's Registration Statement No. 33-4725 on Form
S-3)***
4(c) -- First Supplemental Indenture dated as of April 2, 1990
between the Company and The Chase Manhattan Bank (formerly
known as Chemical Bank), as successor by merger to
Manufacturers Hanover Trust Company, as Trustee*
4(d) -- Indenture dated as of June 1, 1989 between the Company and
The Bank of New York, as Trustee (incorporated herein by
reference from the Company's Registration Statement No.
33-293919 on Form S-3)***
4(e) -- Form of Indenture dated as of July 1, 1993 between the
Company and Citibank, N.A., as Trustee (incorporated herein
by reference from the Company's Registration Statement No.
33-62902 on Form S-3)***
4(f) -- Form of Indenture dated as of December 2, 1994 between the
Company and First Union National Bank (formerly known as
First Fidelity Bank, National Association), as Trustee
(incorporated herein by reference from the Company's
Registration Statement No. 33-54183 on Form S-3)***
5(a) -- Opinion and Consent of Simpson Thacher & Bartlett regarding
the legality of the Class A Common Stock*
10(a) -- Form of Corporate Agreement between the Company and Ford**
10(b) -- Car Supply Agreement between the Company and Ford*
10(c) -- Joint Advertising Agreement between the Company and Ford**+
10(d) -- Form of Tax-Sharing Agreement between the Company and Ford**
10(e) -- The Hertz Corporation Benefit Equalization Plan*
10(f) -- The Hertz Corporation Supplemental Retirement and Savings
Plan, as amended*
10(g) -- The Hertz Corporation Executive Incentive Compensation Plan*
10(h) -- The Hertz Corporation Long Term Incentive Plan*
10(i) -- Form of The Hertz Corporation Special Supplemental Executive
Pension Benefit for Frank A. Olson and William Sider*
10(j) -- Employment Agreement between the Company and Frank A.
Olson**
10(k) -- Employment Agreement between the Company and Craig R. Koch**
10(l) -- Employment Agreement between the Company and William Sider**
10(m) -- Employment Agreement between Hertz International, Ltd. and
Antoine E. Cau**
10(n) -- Employment Agreement between the Company and Brian J.
Kennedy**
10(o) -- Employment Agreement between the Company and Daniel I.
Kaplan**
21 -- Subsidiaries of the Company*
23(a) -- Consent of Coopers & Lybrand L.L.P.*
23(b) -- Consent of Simpson Thacher & Bartlett (included in Exhibit
5(a))*
24 -- Power of Attorney (contained on signature page)*
27 -- Financial Data Schedule*
</TABLE>
- -------------------------
* Filed herewith.
** To be filed by amendment.
*** Incorporated by reference.
+ The Company has applied for confidential treatment of portions of this
Exhibit. Accordingly, portions thereof have been omitted and filed
separately.
II-3
<PAGE> 118
FINANCIAL STATEMENT SCHEDULES
All applicable financial statement schedule disclosure requirements are set
forth in the notes to the Company's consolidated financial statements.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes that:
1. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-4
<PAGE> 119
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Borough of Park Ridge, State of
New Jersey, on the 28th day of February, 1997.
THE HERTZ CORPORATION
By: /s/ WILLIAM SIDER
------------------------------------
Title: Executive Vice President
and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being an
officer or director, or both, of THE HERTZ CORPORATION, a Delaware corporation
(the "Company"), do hereby make, constitute and appoint Frank A. Olson, William
Sider and Robert H. Rillings, and each of them attorneys-in-fact and agents of
the undersigned with full power and authority of substitution and
resubstitution, in any and all capacities, to execute for and on behalf of the
undersigned a Registration Statement on Form S-1 relating to the shares of Class
A Common Stock of the Company, and any and all pre-effective and post-effective
amendments or supplements to the foregoing Registration Statement and any other
documents and instruments incidental thereto, including any Registration
Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, and with each exchange on which any class of securities of the
Company is registered, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
that said attorneys-in-fact and agents, and each of them, deem advisable or
necessary to enable the Company to effectuate the intents and purposes hereof,
and the undersigned hereby fully ratify and confirm all that said
attorneys-in-fact and agents, or any of them, or their respective substitutes,
if any, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ FRANK A. OLSON Chairman of the Board, Chief February 28, 1997
- ------------------------------------------ Executive Officer and Director
(Frank A. Olson) (Principal Executive Director)
/s/ CRAIG R. KOCH President, Chief Operating Officer February 28, 1997
- ------------------------------------------ and Director
(Craig R. Koch)
/s/ WILLIAM SIDER Executive Vice President, Chief February 28, 1997
- ------------------------------------------ Financial Officer and Director
(William Sider) (Principal Financial Officer)
/s/ LEO A. MASSAD, JR. Controller (Principal Accounting February 28, 1997
- ------------------------------------------ Officer)
(Leo A. Massad, Jr.)
/s/ JOHN M. DEVINE Director February 28, 1997
- ------------------------------------------
(John M. Devine)
/s/ PETER J. PESTILLO Director February 28, 1997
- ------------------------------------------
(Peter J. Pestillo)
</TABLE>
II-5
<PAGE> 120
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C> <C>
1 -- Form of U.S. Underwriting Agreement**
3(a) -- Form of Restated Certificate of Incorporation of the
Company**
3(b) -- Form of Restated By-laws of the Company**
4(a) -- Specimen Certificate of Class A Common Stock of the
Company**
4(b) -- Indenture dated as of April 1, 1986 between the Company and
The Chase Manhattan Bank (formerly known as Chemical Bank),
as successor by merger to Manufacturers Hanover Trust
Company, as Trustee (incorporated herein by reference from
the Company's Registration Statement No. 33-4725 on Form
S-3)***
4(c) -- First Supplemental Indenture dated as of April 2, 1990
between the Company and The Chase Manhattan Bank (formerly
known as Chemical Bank), as successor by merger to
Manufacturers Hanover Trust Company, as Trustee*
4(d) -- Indenture dated as of June 1, 1989 between the Company and
The Bank of New York, as Trustee (incorporated herein by
reference from the Company's Registration Statement No.
33-293919 on Form S-3)***
4(e) -- Form of Indenture dated as of July 1, 1993 between the
Company and Citibank, N.A., as Trustee (incorporated herein
by reference from the Company's Registration Statement No.
33-62902 on Form S-3)***
4(f) -- Form of Indenture dated as of December 2, 1994 between the
Company and First Union National Bank (formerly known as
First Fidelity Bank, National Association), as Trustee
(incorporated herein by reference from the Company's
Registration Statement No. 33-54183 on Form S-3)***
5(a) -- Opinion and Consent of Simpson Thacher & Bartlett regarding
the legality of the Class A Common Stock*
10(a) -- Form of Corporate Agreement between the Company and Ford**
10(b) -- Car Supply Agreement between the Company and Ford*
10(c) -- Joint Advertising Agreement between the Company and Ford**+
10(d) -- Form of Tax-Sharing Agreement between the Company and Ford**
10(e) -- The Hertz Corporation Benefit Equalization Plan*
10(f) -- The Hertz Corporation Supplemental Retirement and Savings
Plan, as amended*
10(g) -- The Hertz Corporation Executive Incentive Compensation Plan*
10(h) -- The Hertz Corporation Long Term Incentive Plan*
10(i) -- Form of The Hertz Corporation Special Supplemental Executive
Pension Benefit for Frank A. Olson and William Sider*
10(j) -- Employment Agreement between the Company and Frank A.
Olson**
10(k) -- Employment Agreement between the Company and Craig R. Koch**
10(l) -- Employment Agreement between the Company and William Sider**
10(m) -- Employment Agreement between Hertz International, Ltd. and
Antoine E. Cau**
10(n) -- Employment Agreement between the Company and Brian J.
Kennedy**
10(o) -- Employment Agreement between the Company and Daniel I.
Kaplan**
21 -- Subsidiaries of the Company*
23(a) -- Consent of Coopers & Lybrand L.L.P.*
23(b) -- Consent of Simpson Thacher & Bartlett (included in Exhibit
5(a))*
24 -- Power of Attorney (contained on signature page)*
27 -- Financial Data Schedule*
</TABLE>
- -------------------------
* Filed herewith.
** To be filed by amendment.
*** Incorporated by reference.
+ The Company has applied for confidential treatment of portions of this
Exhibit. Accordingly, portions thereof have been omitted and filed
separately.
<PAGE> 1
EXHIBIT 4(c)
================================================================================
THE HERTZ CORPORATION
and
MANUFACTURERS HANOVER TRUST COMPANY
Trustee
--------------
Senior Debt Securities
--------------
First Supplemental Indenture
--------------
Dated as of April 2, 1990
Supplementing the Indenture
Dated as of April 1, 1986
--------------
================================================================================
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE dated as of April 2, 1990,
between The Hertz Corporation, a corporation duly organized and
existing under the laws of the State of Delaware (herein called
the "Company"), having its principal office at 225 Brae
Boulevard, Park Ridge, New Jersey 07656-0713, and Manufacturers
Hanover Trust Company, a corporation duly organized and existing
under the laws of the State of New York, as Trustee (herein
called the "Trustee").
RECITALS
The Company and the Trustee are parties to an Indenture dated as of
April 1, 1986 (the "Indenture"), relating to the issuance from time to time by
the Company of its Securities. Capitalized terms used herein, not otherwise
defined, shall have the same meanings assigned thereto in the Indenture.
The Company has requested the Trustee to join with it in the
execution and delivery of this first supplemental indenture (the "First
Supplemental Indenture") in order to supplement and amend the Indenture, by
amending and adding certain provisions thereof, to permit the Company to
require, if it shall so elect, that Registered Securities (as defined herein)
of any series be issued, in whole or in part, in the form of one or more Global
Securities (as defined herein).
Section 901 of the Indenture provides that a supplemental indenture
may be entered into by the Company and the Trustee, without the consent of any
Holders of the Securities, to make any provisions with respect to matters or
questions arising under the Indenture, provided such action shall not adversely
affect the interests of the Holders of Outstanding Securities of any series in
any material respect.
The Company has determined that this First Supplemental Indenture
complies with said Section 901 and does not require the consent of any Holders
of Outstanding Securities.
At the request of the Trustee, the Company has furnished the Trustee
with an Opinion of Counsel complying with the requirements of Sections 102 and
903 of the
<PAGE> 3
Indenture, stating, among other things, that the execution of this First
Supplemental Indenture is permitted by the Indenture, and an Officers'
Certificate complying with the requirements of Section 102 of the Indenture.
All things necessary to make this First Supplemental Indenture a
valid agreement of the Company and the Trustee, in accordance with the terms of
the Indenture, and a valid amendment of and supplement to the Indenture have
been done.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities or of a series thereof,
as follows:
I. AMENDMENTS TO THE INDENTURE
A. Section 101 of the Indenture is amended to add new definitions
thereto in the appropriate alphabetical sequence, as follows:
"'Depositary' means, unless otherwise specified by the Company
pursuant to either Section 301 or Section 312, with respect to the
Securities of any series issuable or issued in whole or in part as one or
more Global Securities, The Depository Trust Company, New York, New York,
or any successor thereto registered as a clearing agency under the
Securities and Exchange Act of 1934, as amended, and any other applicable
statute or regulation.
"'Global Security' means, unless otherwise specified by the Company
pursuant to either Section 301 or Section 312, with respect to any series
of Securities issued hereunder, a certificate representing a Registered
Security which is executed by the Company and authenticated and delivered
by the Trustee to the Depositary or pursuant to the Depositary's
instruction, all in accordance with this Indenture and an indenture
supplemental hereto, if any, or a Board Resolution and pursuant to a
Company Order, which shall be registered in the name of the Depositary or
its nominee and which
<PAGE> 4
shall represent, and shall be denominated in an amount equal to the
aggregate principal amount of, all the Outstanding Securities of such
series or any portion thereof, in either case having the same terms,
including, without limitation, the same original issue date, date or dates
on which principal is due, and interest rate or method of determining
interest. The term "global form" or "global registered form" when used in
this Indenture shall include Global Securities.
"'Registered Security' means any Security (including, without
limitation, any Security in global registered form) which is registered in
the Security Register."
B. Article Two of the Indenture is amended to add a new Section 203,
which reads in its entirety as follows:
"Section 203. Securities in Global Form. If Securities of a series
are issuable in global form, as specified as contemplated by Section 301,
then, such Security shall represent such of the Outstanding Securities of
such series as shall be specified therein and may provide that it shall
represent the aggregate amount of Outstanding Securities from time to time
endorsed thereon and that the aggregate amount of Outstanding Securities
represented thereby may from time to time be reduced to reflect exchanges.
Any endorsement of a Security in global form to reflect the amount, or any
increase or decrease in the amount, of Outstanding Securities represented
thereby shall be made by the Trustee in such manner and upon instructions
given by such Person or Persons as shall be specified therein or in the
Company Order to be delivered to the Trustee pursuant to Section 303 or
Section 304. Subject to the provisions of Section 303 and, if applicable,
Section 304, the Trustee shall deliver and redeliver any Security in global
form in the manner and upon written instructions given by the Person or
Persons specified therein or in the applicable Company Order. If a Company
Order pursuant to Section 303 or Section 304 has been, or simultaneously
is, delivered, any instructions by the Company with respect to endorsement
or delivery or redelivery of a Security in global form shall be in writing
but need not comply with Section 102 and need not be accompanied by an
Opinion of Counsel.
<PAGE> 5
"The provisions of the last sentence of Section 303 shall apply to any
Security represented by a Security in global form if such Security was
never issued and sold by the Company and the Company delivers to the
Trustee the Security in global form together with written instructions
(which need not comply with Section 102 and need not be accompanied by an
Opinion of Counsel) with regard to the reduction in the principal amount of
Securities represented thereby, together with the written statement
contemplated by the last sentence of Section 303.
"Notwithstanding the provisions of Section 307, unless otherwise
specified as contemplated by Section 301, payment of principal of and any
premium and any interest on any Security in global form shall be made to
the Person or Persons specified therein.
"Notwithstanding the provisions of Section 308 and except as provided
in the preceding paragraph, the Company, the Trustee and any agent of the
Company and the Trustee shall treat a Person as the Holder of such
principal amount of Outstanding Securities represented by a Global Security
as shall be specified in a written statement of the Holder of such Global
Security which is produced to the Trustee by such Person."
C. (i) Section 301 of the Indenture is amended to (a) add Section
312 to the sections referred to in the parenthetical exception to subparagraph
(2) of the second paragraph of Section 301, (b) redesignate subparagraph (13)
as subparagraph (14) and (c) add a new subparagraph (13), which subparagraph
reads in its entirety as follows:
"(13) whether the Securities of the series shall be issued in whole or
in part in the form of a Global Security or Securities; the terms and
conditions, if any, upon which such Global Security or Securities may be
exchanged in whole or in part for other individual Securities, and the
Depositary for such Global Security or Securities; and"
(ii) a new paragraph is added to the end of Section 301 of the
Indenture, which paragraph reads in its entirety as follows:
"If all the Securities of any one series are not to be issued at one
time, (i) the Trustee shall be
<PAGE> 6
entitled to assume that, at the time of the issuance of such Securities,
the terms of such Securities do not violate any applicable law or agreement
then binding on the Company, and (ii) it shall not be necessary to deliver
a Board Resolution, an executed supplemental indenture, if any, an
Officer's Certificate or an Opinion of Counsel at the time of issuance of
each Security, but such Board Resolution, supplemental indenture, if any,
Officer's Certificate and Opinion of Counsel shall be delivered at or prior
to the time of issuance of the first Security of such series and the
Trustee may conclusively rely on such documents as to the matters covered
thereby until revoked by superseding comparable documents delivered to it."
D. The last paragraph of Section 303 of the Indenture is amended to
add a new sentence at the end of such paragraph, which sentence reads in its
entirety as follows:
"Notwithstanding the foregoing, if any Security shall have been duly
authenticated and delivered hereunder but never issued and sold by the
Company, and the Company shall deliver such Security to the Trustee for
cancelation as provided in Section 309 together with a written statement
(which need not comply with Section 102 and need not be accompanied by an
Opinion of Counsel) stating that such Security has never been issued and
sold by the Company, for all purposes of this Indenture such Security shall
be deemed never to have been authenticated and delivered hereunder and
shall never be entitled to the benefits of this Indenture."
E. Each of the second paragraph and the third paragraph of Section
305 of the Indenture is amended to add the words "Subject to Section 312,"
before the first word of the first sentence of each such paragraph.
F. A new paragraph is added at the end of Section 307 of the
Indenture, which paragraph reads in its entirety as follows:
"None of the Company, the Trustee, any Paying Agent, any Authenticating
Agent or the Security Registrar will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
any beneficial ownership interest in a Global Security or any other
Security issued in global
<PAGE> 7
form or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interest."
G. Article Three of the Indenture is amended to add a new Section
312, which Section reads in its entirety as follows:
"Section 312. Certain Provisions Relating to Global Securities. If
the Company shall establish pursuant to subparagraph (13) of Section 301
that the Registered Securities of a particular series are to be issued in
whole or in part in the form of one or more Global Securities, then the
Company shall execute and the Trustee shall, in accordance with Section 303
and the Company Order delivered to the Trustee thereunder with respect to
such series, authenticate and deliver such Global Security or Securities,
which (i) shall represent and shall be denominated in an aggregate amount
equal to the aggregate principal amount of the Outstanding Securities of
such series to be represented by such Global Security or Securities, (ii)
shall be registered in the name of the Depositary for such Global Security
or Securities or its nominee, (iii) shall be delivered by the Trustee to
such Depositary or pursuant to such Depositary's instruction and (iv)
unless otherwise specified by the Company pursuant to Section 301, shall
bear a legend substantially to the following effect: 'Unless and until it
is exchanged in whole or in part for the individual Securities represented
hereby, this Global Security may not be transferred except as a whole by
the Depositary to a nominee of the Depositary or by a nominee of the
Depositary or by the Depositary or any such nominee to a successor
Depositary or a nominee of such successor Depositary.'
"Notwithstanding any other provision of Section 203, of Section 305 or
of this Section 312, subject to the provisions of the following paragraph,
unless otherwise specified by the Company pursuant to Section 301 or
unless the terms of a Global Security expressly permit such Global Security
to be exchanged in whole or in part for individual Securities, a Global
Security may be transferred, in whole but not in part in the manner
provided in Section 305, only to a nominee of the Depositary for such
Global Security, or to the Depositary, or to a successor Depositary for
<PAGE> 8
such Global Security selected or approved by the Company, or to a nominee
of such successor Depositary.
"If at any time the Depositary for the Global Securities of a series
notifies the Company that it is unwilling or unable to continue as
Depositary for the Global Securities of such series or if at any time the
Depositary for the Global Securities of such series shall no longer be
eligible or in good standing under the Securities Exchange Act of 1934, as
amended, or any other applicable statute or regulation, the Company shall
appoint a successor Depositary with respect to such Global Security. If a
successor Depositary for the Global Securities of such series is not
appointed by the Company within 90 days after the Company receives such
notice or becomes aware of such ineligibility, the Company's election
pursuant to Section 301 shall no longer be effective with respect to the
Global Securities of such series and the Company will execute, and the
Trustee, upon receipt of a Company Order for the authentication and
delivery of individual Securities of such series of like tenor and terms in
definitive form in an aggregate principal amount equal to the principal
amount of the Global Security or Global Securities of such series in
exchange for such Global Security or Global Securities.
"The Company may at any time and in its sole discretion determine that
the Securities of any series issued or issuable in the form of one or more
Global Securities shall no longer be represented by such Global Security or
Securities. In such event the Company will execute, and the Trustee, upon
receipt of a Company Request for the authentication and delivery of
individual Securities of such series in exchange in whole or in part for
such Global Security, will authenticate and deliver individual Securities
of such series of like tenor and terms in definitive form in an aggregate
principal amount equal to the principal amount of such Global Security or
Securities of such series in exchange for such Global Security or
Securities.
"If specified by the Company pursuant to Section 301 with respect to
a series of Securities issued or issuable in the form of one or more
Global Securities, the Depositary for any such Global Security may at its
option surrender such Global Security in exchange in whole or in part for
individual Securities
<PAGE> 9
of such series of like tenor and terms in definitive form on such terms as
are acceptable to the Company and such Depositary. Thereupon the Company
shall execute, and the Trustee shall authenticate and deliver, without
service charge, (A) to each Person specified by such Depositary a new
Security or Securities of the same series of like tenor and terms and of
any authorized denomination as requested by such Person in aggregate
principal amount equal to and in exchange for such Person's beneficial
interest in the Global Security; and (B) to such Depositary a new
Global Security of like tenor and terms and in an authorized denomination
equal to the difference, if any, between the principal amount of the
surrendered Global Security and the aggregate principal amount of
Securities delivered to Holders of such new Security or Securities.
"In any exchange provided for in any of the preceding three
paragraphs, the Company will execute and the Trustee will authenticate and
deliver individual Securities in definitive registered form in authorized
denominations. Upon the exchange of the entire principal amount of a
Global Security for individual Securities, such Global Security shall be
canceled by the Trustee. Securities issued in exchange for a Global
Security pursuant to this Section shall be registered in such names and in
such authorized denominations as the Depositary for such Global Security,
pursuant to instructions from its direct or indirect participants or
otherwise, shall instruct the Trustee or the Security Registrar. Provided
that the Company and the Trustee or the Security Registrar have so agreed,
the Trustee shall deliver such Registered Securities to the persons in
whose names the Registered Securities are registered.
"Notwithstanding the provisions of Section 203 and of Article XIII,
with respect to any Global Security, nothing herein shall prevent the
Company, the Trustee, or any agent of the Company or the Trustee, from
giving effect to any written certification, proxy or other authorization
furnished by a Depositary or impair, as between a Depositary and holders
for beneficial interests in any Global Security, the operation of customary
practices governing the exercise of the rights of the Depositary as Holder
of such Global Security."
<PAGE> 10
II. GENERAL PROVISIONS
A. The recital contained herein shall be taken as the statements of
the Company, and the Trustee assumes no responsibility for the correctness of
same. The Trustee makes no representation as to the validity of this First
Supplemental Indenture. The Indenture, as supplemented and amended by this
First Supplemental Indenture, is in all respects hereby adopted, ratified and
confirmed.
B. This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
C. This First Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, and their corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
THE HERTZ CORPORATION,
by /s/ Robert H. Rillings
---------------------------
Name: Robert H. Rillings
Title: Treasurer
[SEAL]
Attest:
- -----------------------
<PAGE> 11
MANUFACTURERS HANOVER TRUST
COMPANY,
as Trustee,
by /s/ T. C. Monahan
Name: T.C. Monahan
Title: Asst. Vice President
[SEAL]
Attest:
/s/Carolyn P. Baxter
<PAGE> 12
STATE OF NEW JERSEY )
: ss.:
COUNTY OF BERGEN )
On this 2nd day of April, 1990, before me personally came Robert H.
Rillings, to me known, who, being by me duly sworn, did depose and say that
he resides at Washington Township, N.J.; that he is Treasurer of The
Hertz Corporation, one of the corporations described in and which executed
the foregoing instrument; that he knows the seal of said corporation; that
it was so affixed by order of the Board of Directors of said corporation,
and that he signed his name thereto by like authority.
/s/ Barbara Kellermueller
Notary Public
BARBARA KELLERMUELLER
A NOTARY PUBLIC OF NEW JERSEY
MY COMMISSION EXPIRES NOV. 17, 1990
<PAGE> 13
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this 2nd day of April, 1990, before me personally came T.C.
Monahan , to me known, who, being by me duly sworn, did depose and say
that he resides at 207-12 42nd Ave. Bayside, NY 11361; that he is ASST.
VICE PRESIDENT of Manufacturers Hanover Trust Company, the bank
described in and which executed the above instrument; that he knows the
seal of said corporation; that the seal affixed to said instrument is such
corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation, and that he signed his name thereto by like
authority.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
/s/ James Foley
Notary Public
JAMES FOLEY
Notary Public, State of New York
No. 31-6348400
Qualified in New York County
Commission Expires August 31, 1990
<PAGE> 1
EXHIBIT 5(A)
SIMPSON THACHER & BARTLETT
425 Lexington Avenue
New York, NY 10017
Tel: (212) 455-2000
Fax: (212) 455-2502
February 28, 1997
The Hertz Corporation
225 Brae Boulevard
Park Ridge, New Jersey 07656
Dear Sirs:
We have acted as special counsel to The Hertz Corporation, a Delaware
corporation (the "Company"), in connection with the proposed sale of shares of
Class A Common Stock, par value $0.01 per share, of the Company (the "Shares"),
as described in the Registration Statement on Form S-1 (the "Registration
Statement") filed by the Company with the Securities and Exchange Commission
under the Securities Act of 1933 (the "Securities Act"). The Shares are to be
purchased by certain underwriters and offered for sale to the public (the
"Offering") pursuant to the terms of an Underwriting Agreement (the
"Underwriting Agreement"), the form of which will be filed as an exhibit to the
Registration Statement.
We have examined, and have relied upon as to matters of fact, such
documents, corporate records and other instruments as we have deemed necessary
for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that the Shares to be sold
by the Company (including Shares, if any, registered in a registration statement
relating to the Offering filed by the Company pursuant to Rule 462(b) under the
Securities Act), upon the approval and effectiveness in accordance with the
Delaware General Corporation Law of an amendment to the Company's Certificate of
Incorporation providing for a sufficient number of authorized but unissued
Shares, will be duly authorized by the Company and, upon payment and delivery in
accordance with the Underwriting Agreement, will be validly issued, fully paid
and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5(a) to the
Registration Statement and to the reference to this firm under the heading
"LEGAL MATTERS" in the Registration Statement. We hereby also consent to the
incorporation by reference of this opinion and consent in a registration
statement, if any, relating to the Offering filed by the Company pursuant to
Rule 462(b) under the Securities Act.
Very truly yours,
/s/ SIMPSON THACHER & BARTLETT
--------------------------------------
SIMPSON THACHER & BARTLETT
<PAGE> 1
EXHIBIT 10(b)
FEBRUARY 20, 1997
FORD/HERTZ FRAMEWORK SUPPLY AGREEMENT
AGREEMENT OBJECTIVE - Ford agrees to provide vehicles to Hertz for use in its
daily rental business and Hertz agrees to acquire such vehicles. Ford and Hertz
agree to negotiate in good faith on an annual basis to provide and acquire
vehicles at an adequate volume and with the best possible terms and conditions.
TERM OF CONTRACT - September 1, 1997 to August 31, 2007 (10 years).
FORD VOLUME COMMITMENT - Ford agrees to provide for Hertz acquisition the lesser
of 150,000 units or 55% of Hertz' U.S. domestic fleet annually for use in its
daily rental business. Ford will make its best efforts to supply 35% of Hertz
European fleet and 55% of Hertz fleet requirements in its other non-U.S.
operations. A minimum of 50% of all such vehicles shall be non-risk units
(repurchase).
HERTZ VOLUME COMMITMENT - Hertz agrees to acquire from Ford the lesser of
150,000 units or 55% of its U.S. domestic fleet annually for use in its daily
rental business. Hertz also agrees to acquire 35% of its European fleet from
Ford and 55% of its fleet for other non-U.S. operations from Ford. A minimum
of 50% of all such vehicles shall be non-risk units (repurchase).
COMPETITIVE SUPPLY - Ford will strive to develop fleet offerings for use in the
daily rental business that shall be competitive with those similar offerings by
other automotive manufacturers, as to terms and conditions. In addition, Ford
will make available to Hertz, Ford vehicles on terms that are no less favorable
than Ford makes available to other daily rental companies, excluding franchised
Ford and Lincoln-Mercury Dealers.
/s/ R. L. Rewey /s/ F. A. Olson
- ------------------------------------- --------------------------------------
Mr. R. L. Rewey Mr. F. A. Olson
Group V.P., Marketing and Sales Chairman of the Board
Operations The Hertz Corporation
Ford Motor Company
<PAGE> 1
EXHIBIT 10(e)
THE HERTZ CORPORATION
BENEFIT EQUALIZATION PLAN
The Hertz Corporation, with its principal office at 225 Brae Boulevard, Park
Ridge, New Jersey, by action of its Board of Directors, adopted, effective
January 1, 1996, a Benefit Equalization Plan (the "Plan") to provide a select
group of management and highly compensated employees a program supplementing
benefits payable to them under The Hertz Corporation Account Balance Defined
Benefit Pension Plan (the "Retirement Plan"). This Plan provides equalization
benefits that cannot be provided under the tax qualified Retirement Plan
because of limitations imposed by Section 415 and Section 401(a)(17) of the
Internal Revenue Code.
ARTICLE 1. DEFINITIONS
Capitalized words and phrases used herein, but which are not defined herein,
shall have the same meaning ascribed to them in the Retirement Plan. In
addition, the following definitions shall apply for purposes of this Plan:
1.1 Committee - The Pension and Welfare Plans Administration Committee
appointed by the Board under Article 4.
1.2 Company - The Hertz Corporation.
1.3 Employee - An employee of the Company.
1.4 Equalization
Benefit - The benefit payable to a Participant pursuant to this
Plan.
1
<PAGE> 2
1.5 Limitations - Limitations on benefits and compensation imposed on
the tax qualified Retirement Plan by Section 415 and
Section 401(a)(17) of the Internal Revenue Code.
1.6 Participant - An Employee who meets the participation requirements of
Article 2.
1.7 Retirement Plan - The Retirement Plan for the Employees of The Hertz
Corporation (renamed and amended effective as of
January 1, 1987 as The Hertz Corporation Account
Balance Defined Benefit Pension Plan), as amended
from time to time.
1.8 SEP - Supplemental Executive Pension, adopted by the Company
effective January 1, 1992, as amended from time to
time.
1.9 SERP - Supplemental Retirement and Savings Plan of The Hertz
Corporation, adopted by the Company effective
July 1, 1987, as amended from time to time.
ARTICLE 2. PARTICIPATION IN THE PLAN
An Employee shall become a Participant if, on or after January 1, 1996, his or
her Retirement Plan benefits are restricted by the Limitations; provided,
however that; a) such Employee does not participate in the SEP or SERP; and b)
the Committee does not determine that such Employee is excluded as a member of
a "select group of management or highly compensated employees".
2
<PAGE> 3
ARTICLE 3. EQUALIZATION BENEFITS
3.1 A Participant's Equalization Benefit shall be equal to the difference
between the amount that would have been credited to his or her Cash
Balance Account under the Retirement Plan without regard to the
Limitations and the amount actually credited to his or her Cash Balance
Account.
3.2 Subject to Section 3.3, Equalization Benefits shall be payable under the
same forms of payment and terms and conditions (including the designation
of any Beneficiary upon death) as benefits are payable under the
Retirement Plan and shall commence as of the Participant's Annuity
Starting Date.
3.3 The Participant shall make a separate election as to the form of payment of
Equalization Benefits among such forms which are available under the
Retirement Plan. Such election shall be made in accordance with such rules
and procedures as established by the Committee; provided, however, that
unless such election is made prior to the last day of the calendar year
which is at least 12 months prior to the Participant's Annuity Starting
Date, the Participant's Equalization Benefit under this Plan shall
automatically be paid in the form of a lump sum distribution as soon as
practicable after such Annuity Starting Date. Notwithstanding anything in
this Plan or the Retirement Plan to the contrary, in the event of the
Participant's death, the Participant's Equalization Benefit under this Plan
shall automatically be paid to the Participant's Beneficiary in the form of
a lump sum distribution as soon as practicable after the Participant's
death.
3
<PAGE> 4
ARTICLE 4. ADMINISTRATION
The Plan shall be administered and interpreted by the Committee composed of the
same people who constitute the Pension and Welfare Plans Administration
Committee under the Retirement Plan. The Committee is authorized from time to
time to establish such rules and regulations as it may deem appropriate for the
proper administration of the Plan, and to make such determinations under, and
such interpretations of, and to take such steps in connection with, the Plan as
it may deem necessary or advisable. Each determination, interpretation, or
other action by the Committee shall be in its sole discretion and shall be
final, binding and conclusive for all purposes and upon all persons.
ARTICLE 5. FUNDING
The benefits payable under this Plan shall constitute an unfunded obligation
and an unsecured promise of the Company. The Plan constitutes a mere promise
by the Company to make Equalization Benefit payments in the future. Payments
shall be made, when due, from the general funds of the Company. Anything in
this Article 5 to the contrary notwithstanding, the Company may establish a
grantor trust (or other investment or holding vehicle) to assist it in meeting
its obligations under the Plan and may provide for such investments in
connection therewith, including the purchase of insurance or annuity contracts,
as it may deem desirable; provided that any such investments shall be subject
to the claims of the Company's general creditors. No person eligible for a
benefit under this Plan shall have any right, title, or interest in any assets
held to assist the Company to pay Equalization Benefits.
4
<PAGE> 5
ARTICLE 6 - AMENDMENT AND TERMINATION
6.1 While the Company intends to maintain this Plan in conjunction with the
Retirement Plan for so long as desirable, the Company reserves the right
to amend or to terminate this Plan by action of its Board, in its sole
discretion, for whatever reason it may deem appropriate. No amendment to
the Plan, however, shall reduce the Equalization Benefits accrued as of
the effective date of such amendment.
6.2 In the event the Company terminates the Plan, a Participant's
Equalization Benefit shall be the amount determined under Section 3.1 as
of the date of such termination.
ARTICLE 7 - GENERAL PROVISIONS
7.1 Except as may be required by law, no benefit payable under the Plan is
subject in any manner to anticipation, assignment, garnishment, or pledge;
and any attempt to anticipate, assign, garnish or pledge the same shall be
void. No such benefits will in any manner be liable for or subject to the
debts, liabilities, engagement, or torts of any Participant or other
person entitled to receive the same, and if such person is adjudicated
bankrupt or attempts to anticipate, assign, or pledge any such benefits,
the Committee shall have the authority to cause the same or any part
thereof to be held or applied to or for the benefit of such Participant,
his spouse, children or other dependents, or any of them, in such manner
and in such proportion as the Committee may deem proper.
7.2 To the extent permitted by law, the Company shall indemnify the members
of the Committee from all claims for liability, loss or damage (including
payment of expenses in connection the defense against such claim) arising
from any act or failure to act which constitutes a breach of such
individual's responsibilities under any applicable law. This shall not
include actions
5
<PAGE> 6
which may be held to include criminal liability under applicable
law. The provisions of this Section 7.2 shall survive termination of the
Plan.
7.3 If a Participant or Beneficiary entitled to receive any Equalization
Benefits is a minor or is deemed by the Committee or is adjudged to be
legally incapable of giving valid receipt and discharge for such
benefits, payment of Equalization Benefits will be made to the duly
appointed legal guardian or representative of such minor incompetent or to
such other legally appointed person as the Committees may designate. Such
payment shall, to the extent made, be deemed a complete discharge of any
liability for such payment under the Plan.
7.4 The Company shall have the right to deduct from any Equalization Benefits
payments any taxes required to be withheld with respect to such payments.
7.5 Nothing contained in the Plan shall be construed as a contract of
employment between the Company and any participant, or as a right of any
Participant to be continued in the employment of the Company, or as a
limitation on the right of the Company to terminate the employment of any
of its employees, with or without cause, and with or without notice, at
any time, at the option of the Company.
7.6 Any masculine personal pronoun shall be considered to mean also the
corresponding female or neuter personal pronoun, as the context requires.
7.7 The provisions of this Plan shall be construed in accordance with the
laws of the State of Delaware.
6
<PAGE> 1
EXHIBIT 10(f)
111687
THE HERTZ CORPORATION
SUPPLEMENTAL RETIREMENT AND SAVINGS PLAN
The Hertz Corporation, with its principal office at 660 Madison Avenue, New
York, New York, by action of its Board of Directors, hereby adopts, effective as
of July 1, 1987, a supplemental retirement and savings plan (the "Plan") to
provide a select group of management and highly compensated employees a program
supplementing benefits payable to them under (1) the Retirement Plan for the
Employees of the Hertz Corporation (renamed the Hertz Corporation Account
Balance Defined Benefit Plan) and (2) The Hertz Corporation Income Savings Plan.
Article 1. Definitions
Words and phrases defined in the Retirement Plan and the Savings Plan shall
have the same meaning when used in the Plan unless expressly provided to the
contrary herein. In addition, the following definitions shall apply for
purposes of this Plan:
Committee - the committee appointed by the Board under Article 5.
Company - The Hertz Corporation.
Deferred Earnings - an amount equal to 90% of the compensation deferred by
an Employee for a Plan Year under the Hertz Executive Deferred Compensation
Plan.
Employee - an employee of the Company.
Participant - A participant in this Plan.
1
<PAGE> 2
Retirement Plan - The Retirement Plan for the Employees of the Hertz
Corporation (renamed and amended effective as of January 1, 1987 as The Hertz
Corporation Account Balance Defined Benefit Pension Plan).
Savings Plan - The Hertz Corporation Income Savings Plan.
Supplemental Savings Account - an account maintained on the books and
records of the Company for each Participant reflecting amounts credited under
Section 4.2, as adjusted under Section 4.4
Valuation Date - the last business day of each calendar month.
Article 2. Participation in the Plan
2.1 Subject to Section 2.2, Employees who on June 30, 1987 (a) actively
participated in the Retirement Plan by contributing to it and (b) held the
office of Staff or Division Vice President or above shall be Participants,
provided each is among a group deemed by the Department of Labor to be a select
group of management or highly compensated employees.
2.2 Subject to Section 2.3, prior to any Employee becoming a
Participant, the Company shall request a ruling from the Department of Labor
that the Employees who satisfy the requirements of Section 2.1 are a select
group of management or highly compensated employees, thereby exempting the Plan
from Parts 2 and 3 and Section 403 of Title I of ERISA. Upon the Department of
Labor's ruling that coverage of all (or some) of those Employees (the "Included
Employees") under the Plan will allow the Plan to continue to be exempt from
Parts 2 and 3 and Section 403 of Title I of ERISA, the Included Employees shall
become Participants as of July 1, 1987.
2
<PAGE> 3
2.3 An Employee who (a) participates in the Executive Deferred
Compensation Plan as of June 30, 1987 and (b) satisfies the requirements of
clauses (a) and (b) of Section 2.1 shall participate in the Plan as of July 1,
1987, without the necessity of a ruling from the Department of Labor.
Article 3. Supplemental Retirement Benefits
3.1 A Participant's supplemental retirement benefit under the Plan shall
be equal to the excess, if any, of (a) over (b).
(a) The nonforfeitable benefit the Participant would receive based on
the benefit accrual and vesting provisions of the Retirement Plan
in effect on June 30, 1987:
(1) as if the Participant continued to make required
contributions to the Retirement Plan after June 30, 1987 (as
if there were no amendments to the Retirement Plan after
June 30, 1987),
(2) taking into account in computing his benefit under the terms
of the Retirement Plan in effect on June 30, 1987 the total
of his Earnings and Deferred Earnings (instead of only
Earnings) and his service for the entire period he is
employed by an Affiliated Company (including the period
before the Participant's employer became an Affiliated
Company). In determining Earnings and Deferred Earnings, a
Participant's compensation history for the entire period
that he is employed by an Affiliated Company shall be
considered, and
3
<PAGE> 4
(3) computed without regard to the limitations of Section 415
or the Internal Revenue Code and the limitation on the
amount of compensation that may be taken into account
under Section 401(a)(17) of the Internal Revenue Code;
(b) the aggregate benefit the Participant is actually entitled to
receive under the Retirement Plan and under any other defined
benefit plan qualified under section 401(a) of the Internal
Revenue Code and maintained by an Affiliated Company (including
the portion of the benefit attributable to service before the
Affiliated Company became such).
For purposes of this Section 3.1, if any of the benefits described in
paragraphs (a) or (b) are not in the form of an annuity for the life of the
Participant with a five year period certain feature commencing on the first day
of the month after the Participant attains age 65, the benefit shall be
converted to the actuarial equivalent of that form.
3.2 Benefits shall be payable under the Plan under the same terms and
conditions (including the designation of any Beneficiary upon death) as
benefits are actually payable under the Retirement Plan. Any election of an
option, or failure to elect an option, under the Retirement Plan shall be an
election, or failure to make an election, of an option under this Plan.
3.3 No deferred compensation equalization benefit shall be paid under any
deferred compensation plan to Participants in this Plan.
4
<PAGE> 5
Article 4. Supplemental Savings Plan Benefit
4.1 For any Plan Year, if the amount a Participant has elected to
contribute to the Savings Plan as Before Tax Savings Contributions and After Tax
Savings Contributions would cause the amounts credited to him under the Savings
Plan to exceed the maximum annual addition under Section 415(c) of the Internal
Revenue Code or would result in a violation of the limitation of Section 415(e)
of the Internal Revenue Code, the amount set forth in Section 4.2 shall be
credited to his Supplemental Benefits Account. For purposes of this Section
4.1, to the extent amounts credited to a Participant's accounts under the
Savings Plan must be reduced to comply with Section 415 of the Internal Revenue
Code, the amount of Employer Matching Contributions that would be credited to
him shall be reduced before reducing the amounts of his After Tax Savings
Contributions and Before Tax Savings Contributions.
4.2 For any Plan Year that a Participant is covered by Section 4.1, his
Supplemental Savings Account shall be credited with an amount equal to 66-2/3%
of the excess, if any, of (a) the amount (not in excess of 6% of his
Compensation) he contributed to the Savings Plan as Before Tax Savings
Contributions and After Tax Savings Contributions for that Plan Year over (b)
the amount of Employer Matching Contributions actually credited to him under the
Savings Plan for that Plan Year.
4.3 The amounts credited under Section 4.2 for a Plan Year shall be
credited to a Participant's Supplemental Savings Account in monthly installments
over the Plan Year.
4.4 As of each Valuation Date, the credit balance in a Participant's
Supplement Savings Account shall be adjusted (before any amounts are
5
<PAGE> 6
credited under Sections 4.2 since the previous Valuation Date) in proportion to
the net change in value in the Fixed Income Fund or the General Common Stock
Fund under the Savings Plan, depending on the Participant's investment
election as of that Valuation Date under the Savings Plan. If as of a
Valuation Date, a Participant has elected to have his accounts under the
Savings Plan invested 50% in each of the Fixed Income Fund and General Common
Stock Fund, 50% of the credit balance in his Supplemental Savings Account will
be adjusted in proportion to the net change in value of each of those funds
since the previous Valuation Date.
4.5 As soon as practicable after a Participant's Termination of
Employment, he shall receive distribution of the credit balance (as of the
Valuation Date immediately preceding distribution) in his Supplemental Savings
Account as a single cash payment. If the Participant dies before he receives
this distribution, it shall be paid in a single cash payment to his Beneficiary
under the savings Plan.
Article 5. Administration
The Plan shall be administered by the Committee composed of the same people
who administer the Retirement Plan, and the Plan shall be administered and
interpreted in a manner which is as consistent with the interpretations of the
Retirement Plan and Savings Plan as the context reasonably permits.
Article 6. Funding
The Plan shall be unfunded. Neither the Company nor the Committee shall
segregate any assets in connection with the Plan. Neither the
6
<PAGE> 7
Company nor the Committee shall be deemed to be a trustee of any amounts to be
paid under the Plan. Any liability to any person with respect to benefits
payable under the Plan shall be based solely upon such contractual obligations
of the Company, if any, as may be created by the Plan. Such liability, if any,
shall be a claim against the general assets of the Company and shall become a
claim only if the Company fails to make a payment due under the Plan. No such
liability, or claim, shall be deemed to be secured by any pledge or any other
encumbrance or specific property of the Company or held in trust affording
protection against creditors of the Company.
Article 7. Amendment and Termination
7.1 Subject to Section 7.2, while the Company intends to maintain this
Plan in conjunction with the Retirement Plan and the Savings Plan for so long as
desirable, the Company reserves the right to amend or to terminate this Plan by
action of its Board of Directors, in its sole discretion, for whatever reason it
may deem appropriate.
7.2 Upon a change in control (as defined below) the Plan may not be
amended or terminated, except that the provisions of Article 4 may be amended,
if necessary, to maintain the qualified status of the Savings Plan
under Section 401(a) of the Internal Revenue Code or to conform to any
amendments to the Savings Plan. For purposes of this Section 7.2, a "change in
control" shall mean the occurrence of any one of the following events:
(a) the time at which 25 percent or more of the combined voting power
of the then outstanding voting stock of the Company
7
<PAGE> 8
becomes ultimately beneficially owned, directly or indirectly, by
one or more "persons" (as that term is defined in Section 3 of
the Securities Exchange Act of 1934) other than Allegis
Corporation, any successor to it by merger, consolidation or sale
of assets and any affiliate or subsidiary of Allegis Corporation
or its successor ("Allegis");
(b) the time at which (i) more than 10 percent, but less than 25
percent, of the combined voting power of the then outstanding
voting stock of the Company becomes ultimately beneficially
owned, directly or indirectly, by one or more "persons" other
than Allegis and (ii) there has occurred a change in a majority
of the members of the Board of Directors of the Company during
the one year period following the occurrence of the event
described in clause (i) above; or
(c) a merger or consolidation of the Company with or into any other
corporation (other than Allegis or a corporation owned more than
25 percent by Allegis) or the acquisition of all or
substantially all of the assets and business of the Company by
any corporation (other than Allegis or a corporation owned more
than 25 percent by Allegis); in each case, other than a
transaction solely for the purpose of recapitalizing the
Company's capital stock,
provided, however, that, with respect to clauses (a) and (b) above, any change
in ownership of the outstanding voting stock of the Company which
8
<PAGE> 9
results in a group (the "Employee Group") consisting of any of one or more
employees of the Company or an employee stock ownership plan (as defined in
Section 407(d)(6) of the Employee Retirement Income Security Act of 1974 as
amended) owning, directly or indirectly, more than 10 percent of the combined
voting power of the Company shall not be considered a change in control; and
with respect to clause (c) above, any merger or consolidation of the Company
into or the sale of all or substantially all of the assets or business of the
Company to any corporation, the combined voting power of which is owned more
than 10 percent directly or indirectly by the Employee Group, shall not be
considered a change in control.
7.3 In the event the Company terminates the Plan, a Participant's
supplemental retirement benefit under Section 3.1 shall be determined (a) as if
he ceased being an Employee (or an employee of an Affiliated Company) at the
time of such termination, on the basis of the Participant's service, Earnings
and Deferred Earnings determined as of the date of such termination, and (b) on
the basis of the aggregate benefits the Participant is actually entitled to
receive under the Retirement Plan and under any other defined benefit plan
maintained by an Affiliated Company. Accordingly, after the termination of this
Plan, the amount of a Participant's supplemental retirement benefit under
Section 3.1 will decrease to the extent that his actual benefit under the
Retirement Plan (and any other defined benefit plan maintained by an Affiliated
Company) increases as the result of service and earnings after the termination.
9
<PAGE> 10
Article 8. General Provisions
8.1 Except as may be required by law, no benefit payable under the Plan
is subject in any manner to anticipation, assignment, garnishment, or pledge;
and any attempt to anticipate, assign, garnish or pledge the same shall be void.
No such benefits will in any manner be liable for or subject to the debts,
liabilities, engagement, or torts of any Participant or other person entitled to
receive the same, and if such person is adjudicated bankrupt or attempts to
anticipate, assign, or pledge any such benefits, the Committee shall have the
authority to cause the same or any part thereof to be held or applied to or for
the benefit of such Participant, his spouse, children or other dependents, or
any of them, in such manner and in such proportion as the Committee may deem
proper.
8.2 Notwithstanding anything in this Plan to the contrary if the
Committee determines that a Participant while an Employee of the Company has,
without the consent of the Committee, engaged in any activity or occupation
which is adverse to or in competition with the Company, after notice by
registered mail directed to the Participant's last known address, the Committee
may suspend his benefit under this Plan. The suspension shall continue until
removed by notice from the Committee. After the suspension has continued for
one year, the Committee shall cancel the Participant's (or his Beneficiary's)
benefit under this Plan. The action by the Committee shall be final and
conclusive.
8.3. Nothing contained in the Plan shall be construed as a contract of
employment between the Company and any Participant, or as a right of any
Participant to be continued in the employment of the Company, or as a limitation
on the right of the Company to terminate the employment of or
10
<PAGE> 11
discharge any of its employees, with or without cause, and with or without
notice, at any time, at the option of the Company.
8.4 Any masculine personal pronoun shall be considered to mean also the
corresponding female or neuter personal pronoun, as the context requires.
8.5 The provisions of this Plan shall be construed in accordance with the
laws of the State of New York.
Dated:
THE HERTZ CORPORATION
by_________________________
11
<PAGE> 12
2/3/88
THE HERTZ CORPORATION
SUPPLEMENTAL RETIREMENT AND SAVINGS PLAN
AMENDED SECTION 4.2
For any Plan Year that a Participant is covered by Section 4.1, his
Supplemental Savings Account shall be credited with an amount equal to 50% of
the excess, if any, of (a) the amount (not in excess of 6% of his Compensation)
he contributed to the Savings Plan as Before Tax Savings Contributions and
After Tax Savings Contributions for that Plan Year over (b) the amount of
Employer Matching Contributions actually credited to him under the Savings Plan
for that Plan Year.
<PAGE> 13
Effective: 7/6/95
THE HERTZ CORPORATION
SUPPLEMENTAL RETIREMENT AND SAVINGS PLAN
AMENDED SECTION 3.2
Benefits can be payable under the Plan under the same terms and conditions
(including the designation of any Beneficiary upon death) as benefits are
payable under the Retirement Plan. Any election of an option under the
Retirement Plan shall not be binding under this Plan. The Participant shall
make a separate election as to the manner of payment of benefits payable under
this Plan in the manner and form provided by the Committee.
<PAGE> 1
EXHIBIT 10(g)
THE HERTZ CORPORATION
EXECUTIVE INCENTIVE COMPENSATION PLAN
PURPOSE
The Hertz Corporation's Executive Incentive Compensation Plan (herein after
referred to as the EICP) is intended to reward executives and key managers
whose performance can materially influence the annual growth and profitability
of the corporation.
ADMINISTRATION
The EICP will be administered by senior officers of The Hertz Corporation,
("Hertz"), in accordance with the terms and conditions of the EICP. The
Chairman of the Board, and Chief Executive Officer of Hertz (the "Hertz CEO"),
subject to the review and approval of the Hertz Corporation Compensation
Committee; shall be authorized to interpret the EICP following such rules and
regulations as Hertz may from time to time adopt. Performance criteria, award
opportunities and payments are subject to the review and approval of the Hertz
Corporation Compensation Committee.
PARTICIPATION
Participation, which will be designated by Hertz, is restricted to two employee
groups of Hertz and its operating units: Executive and Key Management.
Designation as a participant in the EICP for any year shall not be construed as
conferring any right to continued employment with Hertz or to continued
participation in EICP in any subsequent year.
AWARD OPPORTUNITIES
Hertz will approve a target incentive award opportunity for each participant
which shall be expressed as a percentage of the participant's annual salary
during the EICP year. No participant may receive an award payment in any year
which exceeds twice his target award opportunity.
PLAN PROVISIONS
Participants will be measured on either Hertz' results or a combination of
Business Unit and Hertz' results, depending on their area of responsibility.
<PAGE> 2
PLAN PROVISIONS (Cont'd)
The Business Units will be established as follows:
A. Domestic Rent A Car Division
B. Worldwide Rent A Car
C. Hertz Equipment Rental Corporation
D. Hertz Claim Management Corporation
E. Hertz Europe, Ltd.
AWARD DETERMINATIONS
Each year the Senior Officers of Hertz will establish measurement criteria for
Hertz and each operating business unit based upon the approved Business Plan.
Note: When a contingency has been approved as part of the Business Plan, the
Pre-Tax Business Plan without the contingency will prevail, up to 100% of the
Target Award. Awards can not exceed 100% of the Target Award unless this is
accomplished using the Business Plan with the contingency included.
At year end, based on actual operating results versus the established
measurement criteria, Hertz will determine the award payment in accordance with
the attached Appendices.
GENERAL FUND
EICP participants may be eligible for an award from the General Fund. The
General Fund shall be made up of an amount up to .25% of the actual pre tax
income of Hertz.
Eligibility for a General Fund Award is limited to EICP participants who have
achieved outstanding accomplishments under difficult or unusual conditions.
The General Fund will not be used to supplement earned formula awards.
Distribution of all, any or none of the General Fund shall be at the discretion
of the Hertz Chief Executive Officer, subject to the review and approval of The
Hertz Corporation Compensation Committee.
AWARD PAYMENTS
All approved EICP Awards will be paid in full, in cash, after applicable tax
withholding, no later than March 31st of the following year.
-2-
<PAGE> 3
RIGHTS TO AWARD PAYMENTS
To be entitled to EICP award payments with respect to any year, a participant
must have been a full time employee of Hertz, or any of its operating units,
for the entire EICP year, or for such portion of the year which shall remain
following Hertz's notification of participation in the EICP with respect for
such year. To be eligible for an award a participant must have at least 3
months active service in the EICP during the EICP year. An exception may be
made for employees who transfer into an eligible position from a previously
bonusable position. A participant who retires, dies or becomes disabled during
the EICP year or if a participant's employment is terminated due to a layoff
resulting from a permanent reduction in force, organization realignment,
discontinuance of an operation, sale of an operation to another company, lack
of work or a location closing, prior to the end of the EICP year, the
participant, or his beneficiary or estate, shall receive a prorated EICP
payment at the time of regular award distribution. Participants who resign, or
who are terminated for cause, prior to the distribution of award payments will
not be eligible for an award. Time out on a leave of absence will not affect
the bonus payment unless it is in excess of sixty days. The first sixty days
of a leave of absence will be a grace period; time out in excess of sixty days
will be prorated in accordance with EICP Provisions.
DEFERRAL OF AWARD PAYMENTS
With Hertz' approval, participants will be offered the opportunity of
irrevocably deferring the receipt of award payments they may earn with respect
to any year during which they were an EICP participant. Such elections to
defer receipt of award payments must be made prior to the commencement of
service for the EICP year. All deferred awards will be reflected on Hertz's
books as general and unsecured obligations of Hertz, and no trust in favor of
any participant shall be implied. Hertz shall determine the appropriate rate
of interest which shall be credited annually to deferred awards.
AWARD LIMITATION
The maximum amount that may be awarded to all participants assigned to a
particular business unit, based upon that business unit's performance, may not
exceed 3% of the pre-tax income of the business unit.
The maximum amount that may be awarded to all participants of the Corporation
may not exceed the greater of (a) 6% of the pre-tax income of the Corporation
or (b) the aggregate amount of the business unit awards.
EFFECTIVE DATE AND TERM
The EICP is effective January 1, 1995 and shall continue until such time as it
shall be amended, suspended or terminated by Hertz.
Hertz reserves the right to modify or suspend in whole or in part, any or all
provisions of the EICP.
-3-
<PAGE> 4
APPENDIX I
THE HERTZ CORPORATION
I. OBJECTIVES
Those participants measured on the results of The Hertz Corporation are
eligible to earn Awards based on the achievement of the following
objectives weighted as indicated.
The Hertz Corporation Pre Tax Income 60%
The Hertz Corporation Return on Equity 40%
II. AMOUNT OF BONUS AWARD
The Award is based on performance against assigned objectives. Deviation
from the objectives will result in payment of 0% to 200% of the Target
Award based on the following scale:
<TABLE>
<CAPTION>
Total % of Total % of Total % of
Award Target Award Target Award Target
Points Award Points Award Points Award
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Below 70 0 96 90 123 146
70 25 97 92.5 124 148
71 27.5 98 95 125 150
72 30 99 97.5 126 152
73 32.5 100 100 127 154
74 35 101 102 128 156
75 37.5 102 104 129 158
76 40 103 106 130 160
77 42.5 104 108 131 162
78 45 105 110 132 164
79 47.5 106 112 133 166
80 50 107 114 134 168
81 52.5 108 116 135 170
82 55 109 118 136 172
83 57.5 110 120 137 174
84 60 111 122 138 176
85 62.5 112 124 139 178
86 65 113 126 140 180
87 67.5 114 128 141 182
88 70 115 130 142 184
89 72.5 116 132 143 186
90 75 117 134 144 188
91 77.5 118 136 145 190
92 80 119 138 146 192
93 82.5 120 140 147 194
94 85 121 142 148 196
95 87.5 122 144 149 198
150 and above 200
</TABLE>
Award points will be rounded to the nearest whole number.
-4-
<PAGE> 5
III. AWARD EXAMPLE
<TABLE>
<CAPTION>
Percentage Points
Objective Results Achievement Wtg Achieved
--------- -------- ----------- ---- --------
<S> <C> <C> <C> <C> <C>
Pre Tax Income 110,000,000 117,150,000 106.50 60% 63.90
Return on Equity 19.5 20.6 105.64 40% 42.26
Total Points 106.16
</TABLE>
In the preceding example 106.16 award points results in an award equal to
112% of the Target Award.
EXAMPLE
-------
Base Salary $45,000
Target Award (5.0%) $ 2,250
Actual Award $ 2,520 (112% of Target)
All calculations for illustrative purposes only.
-5-
<PAGE> 6
APPENDIX II
BUSINESS UNIT
I. OBJECTIVES
Those participants measured on the results of a Business Unit are eligible
to earn separate awards as follows:
BUSINESS UNIT
60% of the Target Award will be based on the achievement of the following
Business Unit objectives:
- Pre Tax Income 60%
- Return on Equity 40%
THE HERTZ CORPORATION PERFORMANCE
40% of the Target Award will be based on the achievement of the following
Hertz Corporation objectives:
- Pre Tax Income60%
- Return on Equity40%
II. AMOUNT OF BONUS AWARD
Each award amount is based on performance against assigned objectives.
Deviation from the objectives will result in payment of 0% to 200% of the
Target Award based on the following scale:
<TABLE>
<CAPTION>
Total % of Total % of Total % of
Award Target Award Target Award Target
Points Award Points Award Points Award
- -------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Below 70 0 96 90 123 146
70 25 97 92.5 124 148
71 27.5 98 95 125 150
72 30 99 97.5 126 152
73 32.5 100 100 127 154
74 35 101 102 128 156
75 37.5 102 104 129 158
76 40 103 106 130 160
77 42.5 104 108 131 162
78 45 105 110 132 164
79 47.5 106 112 133 166
80 50 107 114 134 168
81 52.5 108 116 135 170
82 55 109 118 136 172
83 57.5 110 120 137 174
84 60 111 122 138 176
85 62.5 112 124 139 178
86 65 113 126 140 180
87 67.5 114 128 141 182
88 70 115 130 142 184
89 72.5 116 132 143 186
90 75 117 134 144 188
91 77.5 118 136 145 190
92 80 119 138 146 192
93 82.5 120 140 147 194
94 85 121 142 148 196
95 87.5 122 144 149 198
150 and above 200
</TABLE>
Award points will be rounded to the nearest whole number.
-6-
<PAGE> 7
III. AWARD EXAMPLE
A) BUSINESS UNIT
<TABLE>
<CAPTION>
Percentage Points
Objective Results Achievement Wtg Achieved
---------------- ---------- ---------- ----------- --- --------
<S> <C> <C> <C> <C> <C>
Pre Tax Income 65,000,000 66,924,000 102.96 60% 61.78
Return on Equity 15.10 16.21 107.35 40% 42.94
------
Total 104.72
</TABLE>
In the preceding example 104.72 award points results in an award equal to
110% of the Division Target Award.
B) CORPORATE PERFORMANCE
<TABLE>
<CAPTION>
Percentage Points
Objective Results Achievement Wtg Achieved
---------------- ----------- ----------- ----------- --- --------
<S> <C> <C> <C> <C> <C>
Pre Tax Income 110,000,000 117,150,000 106.50 60% 63.90
Return on Equity 19.5 20.6 105.64 40% 42.22
------
Total 106.16
</TABLE>
In the preceding example 106.16 award points results in an award equal to
112% of the Target Award.
EXAMPLE
<TABLE>
<S> <C>
Base Salary $45,000
Target Award (5.0%) 2,250
</TABLE>
<TABLE>
<CAPTION>
Target Award Actual Award
-------------- ----------------------
<S> <C> <C>
Rent A Car 1,350 1,485 (110% of Target)
Corporate 900 1,008 (112% of Target)
Total 2,250 2,493
</TABLE>
All calculations for illustrative purposes only.
-7-
<PAGE> 1
EXHIBIT 10(h)
THE HERTZ CORPORATION
LONG-TERM INCENTIVE PLAN
Purpose
The purpose of the Hertz Long-Term Incentive Plan ("Plan") is to provide a
financial incentive for certain key employees to achieve objectives for
specified categories of performance that are of major importance to the
company's long-term success.
Administration of the Plan
The Plan is administered by the Compensation Committee ("Committee") consisting
of at least two Directors of The Hertz Corporation who are not employed by
Hertz or other persons designated by The Hertz Corporation's Board of Directors
who are not eligible to participate in the Plan. The Committee will determine
the performance categories to be measured, establish target levels against
which performance in each category will be measured, approve aggregate and
individual target awards, evaluate performance against the target levels,
approve final individual awards, interpret the provisions of the Plan, and
establish such rules and procedures as may be necessary to implement and
administer the Plan.
Eligibility
Officers and other key employees of Hertz, as recommended by management and
approved by the Committee, are eligible to participate in the Plan.
New participants are eligible for grants (target awards) made on or after the
first day of the calendar year after such participant first becomes eligible.
No adjustment will be made to the outstanding grants of persons promoted to a
higher level position during a performance period. Such promotions would be
considered in determining the size of target awards for future performance
periods.
Performance Periods
Performance periods generally will cover four years. The initial four-year
performance period will begin as of January 1, 1991 and end on December 31,
1994. A new four-year performance period will begin on January 1 of each year
after 1991.
To "phase in" the Plan, transitional grants also will be made as of January 1,
1991 covering one year, two year and three year performance periods. Final
awards will be made as soon as practicable (but no later than 180 days) after
the end of each performance period.
<PAGE> 2
- 2 -
Target Award Grants
Dollar values for target awards will be established consistent with competitive
long-term incentive and total compensation values. Aggregate target values
would be set to provide competitive compensation for 100% achievement of the
performance target for each performance category. Individual target awards
will be based on each participant's performance and expected contribution to
the company's success. Each participant will be advised of the dollar value of
the target award granted to him/her, the performance categories and the target
levels of performance established for each category for the performance period.
Performance Categories and Performance Targets
Awards under the Plan will be based on achievement of quantitative and
qualitative performance targets for the categories of Hertz Performance shown
below with their respective weights:
Performance Categories Weight
---------------------- ------
Net Income - compound annual percent improvement 50%
relative to net income averaged for the Dow 30 Industrials.
Market Share - achievement of (a) targeted U.S. 25%
Rent-A-Car market share at the top 20 airports, and (b)
targeted market share gap between Hertz and the
leading competitor at the top 20 airports.
Customer Satisfaction - achievement of targeted levels 25%
using standard Hertz measures of customer satisfaction.
Net Income - For each performance period, Hertz' average annual percentage
change in net income will be compared with the annual percentage change for the
Dow 30 Industrials. To emphasize consistent, long-term growth, results will be
weighted as shown below for the initial four-year performance period.
Weight
------
Average change for the 1990 - 1994 period 35%
Average change for the 1991 - 1994 period 25%
Average change for the 1992 - 1994 period 20%
Average change for the 1993 - 1994 period 20%
----
100%
<PAGE> 3
- 3 -
Market Share and Customer Satisfaction - The Committee will evaluate
performance in relation to targets established for market share, market share
gap, and customer satisfaction to determine the percentage achievement for each
year and the total performance period based on quantitative data and other
factors it considers to be relevant.
Performance targets may be adjusted by the Committee during a performance
period considering factors it deems relevant to maintain the incentive value of
the Plan.
Determination of Final Awards
Final awards will be made in cash after the end of each performance period.
The cash award will be based on the performance achieved against the target for
each performance category and other factors deemed relevant by the Committee.
The awards for each performance category can range from 0 to 200% of the target
for that category. In each case, performance results and award entitlement in
each category stand alone and the sum of awards generated in each category will
determine the final award paid to each participant.
Transitional Grants
In addition to the initial grant covering a four-year (1991-1994) performance
period, three additional transitional grants would be made as follows:
Target Value as Percent
Performance Period Of Four-Year Grant
---------------------------------------- -----------------------
One-Year (1991 Over 1990) 25%
Two-Years (1992 & 1991 Over 1990) 50
Three-Years (1993, 1992, 1991 Over 1990) 75
The same performance criteria will be measured to establish any award earned
under the Plan during this transitional period, however, the following weights
will be applied for these years:
1991 - To be evaluated vs. 1990, with 1990 weighted @ 100% for 1992
Award.
1992 - To be evaluated vs. 1991, and 1990, with 1991 weighted @ 50% and
1990 weighted @ 50%.
1993 - To be evaluated vs. 1992, 1991 and 1990 with 1992 weighted @ 30%,
1991 weighted @ 30% and 1990 weighted @ 40%.
<PAGE> 4
- 4 -
Termination of Employment
If a participant's employment is terminated for any reason except
company-approved retirement, disability, or death prior to the end of a
performance period, all rights to receive a final award for such period being
completed in that year would cease subject to waiver by the Committee.
In the event of company-approved retirement, disability, or death the right to
receive a final award would remain in effect until the completion of the
performance period ending in the year this occurs; provided, however, that in
the event of competitive employment (subject to waiver by the Committee),
failure to cooperate with the company, or conduct inimical to the best interest
of the company, all rights to receive a final award would cease.
<PAGE> 1
EXHIBIT 10(i)
THE HERTZ CORPORATION
April 15, 1994
The Hertz Corporation
225 Brae Boulevard
Park Ridge, NJ 07656
Re: SPECIAL SUPPLEMENTAL EXECUTIVE PENSION BENEFIT
Dear _______________:
This letter agreement confirms the understanding reached between you and The
Hertz Corporation (the "Company") regarding the terms and conditions of the
special supplemental executive pension benefit arrangement for you that has
been approved and adopted by the Board of Directors of the Company, effective
as of January 1, 1992, which are as follows:
1. Amount of Supplemental Executive Pension Benefit
Payable on Retirement on or after Age 65
Subject to the terms and conditions of this agreement, if you remain
employed by the Company until your 65th birthday, you shall become eligible
to receive an additional annual supplemental executive pension benefit
("SEP Benefit") in the form of a single life annuity (subject to the
limited 10-year period certain provisions set forth in Paragraph 3 below),
payable in equal monthly installments commencing on the first of the month
coincident with or next following the effective date of your retirement as
an employee in the Company on or after your 65th birthday and continuing
thereafter until your death. This SEP benefit shall be equal to the excess
of (a) over (b), where:
(a) is the annual benefit that, when expressed in the form of a single
life annuity (subject to the limited 10-year-period certain provisions
set forth in Paragraph 3 below), is equal to 50% of your Final Average
Earnings, determined in accordance with the definition of "Earnings"
and "Final Average Earnings" in Paragraphs A.3 and A.4 of Schedule A
of The Hertz Corporation Account Balance Defined Benefit Pension Plan
(the "Basic Plan") as in effect on December 31, 1987 (and as
thereafter amended from time to time during your employment), applied
in each case;
-- without regard to Sections 401(a)(17) and 415 of the Internal
Revenue Code of 1986, as amended from time to time, and
<PAGE> 2
-- by including any salary or bonus compensation amounts (if
any) deferred by you pursuant to The Hertz Corporation Executive
Deferred Compensation Plan based on the year in which such
amounts are earned (but excluding any interest or other earnings
credited under such plan with respect to such deferred amounts);
and
(b) is the sum of your accrued annual pension benefits, expressed in the
form of a single life annuity (with no death benefits) calculated as
commencing on the first of the month coincident with or next
following the effective date of your retirement on or after your 65th
birthday (without any change in otherwise pensionable compensation or
earnings), under:
-- the Basic Plan;
-- any predecessor plan of the Basic Plan (excluding the Retirement
Plan for Employees of the RCA Corporation and Subsidiary
Companies);
-- The Hertz Corporation Supplemental Retirement Savings Plan
(the "Basic SERP"); and
-- any other Company sponsored employee pension or retirement plan,
program or arrangement now or hereinafter in effect (excluding
Social Security benefits and any deferred or equity/incentive
compensation arrangements and excluding this Agreement).
In the event of your retirement from active employment with the Company as
of a date more than one month after your 65th Birthday, the annuity benefit
payable hereunder shall be redetermined in accordance with clauses (a) and
(b) above as of the last day of the last month of your employment
but shall not be less than the annual benefit determined under this
Paragraph of you 65th birthday frozen as of that date and actuarially
adjusted to reflect such delayed retirement (and your resulting reduced
life expectancy), based on the actuarial tables and factors used under
the Basic Plan.
2. Amounts Payable Upon Termination of Employment Prior
to Age 65 Due to Disability, Early Retirement or Otherwise
(a) Amounts Payable Upon Termination of Employment Due to Disability.
In the event of termination of your employment with the Company prior
to attaining your 65th Birthday due to Disability (as defined
below), you shall be entitled to a reduced SEP Benefit determined by
calculating the amount payable under Paragraph 1 as of the effective
date of your termination as if you had attained age 65 (based on your
actual service and compensation as of the actual termination date),
reducing the amount determined under Paragraph 1(a) above by 0.333%
<PAGE> 3
April 15, 1994
Page 3
for each full month by which the date of termination due to Disability
precedes your 65th birthday.
For purposes of this Agreement, "Disability: shall mean total and
permanent disability as defined under the Company's Long-Term
Disability Plan, as determined by an independent physician selected by
the Company and reasonably acceptable to you (or your legal
representative), provided that you do not return to work on
substantially a full-time basis within 30 days after written notice
from the Company of an intent to terminate your employment due to
Disability.
(b) Amounts Payable on Early Retirement. In the event of termination of
your employment with the Company after attaining your 60th birthday
and prior to attaining your 65th birthday due to Early Retirement (as
defined below), you shall be entitled to a SEP Benefit determined by
calculating the amount payable under Paragraph 1 as of the effective
date of your termination as if you had attained age 65 (based on your
actual service and compensation as of the actual termination date).
For purposes of this Agreement, "Early Retirement" shall mean your
retirement as an employee of the Company on such date after attaining
your 60th birthday and prior to attaining your 65th birthday as may be
mutually agreed upon by you and the Company.
(c) Other Termination of Employment Prior to Age 65. In the event of a
voluntary or involuntary termination of your employment (with or
without cause) prior to your 65th birthday by the Company or by you,
in either case for any reason other than due to Disability, due to
Early Retirement, or due to a death covered by Paragraph 3 below, you
shall not be entitled to any SEP Benefit payments hereunder.
3. Amounts payable in Event of Death
(a) Death While Still in Service. In the event of your death prior to
January 1, 2002 while still in service with the Company, your
surviving spouse (if any) (or your estate if there is no surviving
spouse at the time of your death) shall be entitled to receive monthly
death benefit payments under this Agreement commencing on the first of
the month next following your death until (and including) January 1,
2002 equal to the monthly benefit that you would have received under
this Agreement:
-- If you were age 65 or older at your death, calculated as if you
had retired on the day immediately preceding the date of your
death, and
-- If you had not yet attained age 65 at your death, calculated as if
your employment had been terminated due to Disability on the day
immediately preceding the date of your death.
<PAGE> 4
April 15, 1994
Page 4
In addition, after such January 1, 2002 date, your surviving spouse
(in any) at the time of your death if still living on January 1, 2002
(but not your estate) shall be entitled, until such spouse's death to
a continued monthly benefit equal to 50% of the monthly benefit
payable prior to January 1, 2002.
(b) Death After Retirement, Early Retirement or Termination Due to
Disability. In the event of your death prior to January 1, 2002
after retiring form active service with the Company on or after age
65 (under Paragraph 1 above) or a termination of your employment due
to Disability (under Paragraph 2(a) above) or due to Early Retirement
(under Paragraph 2(b) above); (i) your surviving spouse (if any) (or
your estate if there is no surviving spouse at the time of your
death) shall be entitled to receive monthly death benefit payments
under this agreement commencing on the first of the month next
following your death until (and including) January 1, 2002 equal to
the monthly benefit that you were receiving under this Agreement at
the time of your death, unless, (ii) in lieu of such benefit, you
elect at the time of your retirement or termination (in a written
notification filed with the Company) to have the Company instead pay
a death benefit, to your surviving spouse only, equal to 50% of the
monthly death benefit otherwise payable hereunder, with such monthly
death benefit being payable for the life of the surviving spouse only.
If you make such an election and you are not survived by your spouse
at the time of your death, such election will be treated as void and
your estate shall be entitled to whatever death benefit (if any) would
have otherwise been payable hereunder if no such election had been
made.
4. Non-Compete, Non-Solicit and Confidentially Provisions
Payment of the SEP benefits provided for hereunder shall be subject to your
compliance with whatever non-compete, employee and customer
non-solicitation and business information confidentiality requirements are
otherwise applicable to you.
5. Unfunded Status of SEP Benefit
The SEP benefit provided hereunder is intended to constitute an "unfunded"
deferred pension benefit arrangement, and no provisions contained in this
Agreement shall give you any rights with respect to such benefit that are
greater than those of a general creditor.
6. Impact on Employment Rights
Neither this Agreement nor any action taken pursuant to such Agreement
shall be construed as:
<PAGE> 5
April 15, 1994
Page 5
-- giving you any right to be retained in the employ of the Company;
-- affecting any existing rights of the Company to terminate your
employment with or without cause, or
-- interfering with any other rights created under any other program,
agreement or arrangement.
7. Taxes
Anything in this Agreement to the contrary notwithstanding, all payments
required to be made by the Company hereunder to you shall be
subject to withholding of such amounts relating to Federal, state and
local taxes as the Company may reasonably determine it should withhold
pursuant to any applicable law or regulation.
8. Disputes: Enforcement of Rights
All reasonable legal and other fees and expenses incurred by you in
connection with any disputed claim regarding any right or benefit provided
for in this Agreement shall be paid by the Company, to the extent permitted
by law, provided that you are successful in whole or in part as to such
disputed claim as the result of litigation, arbitration or settlement.
9. Assignability, Binding Nature
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, heirs and assigns.
None of your rights or obligations under this Agreement may be assigned or
transferred by you other than your rights to benefits hereunder, which may
be transferred only by will or operation of law, subject in each case to
the limitations of this Agreement.
No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company, except pursuant to a merger or
consolidation in which the Company is not the continuing entity, or the
sale or liquidation of all or substantially all of the assets of the
Company, provided that the assignee or transferee is the successor to all
or substantially all of the assets of the Company and such assignee or
transferee assumes the liabilities, obligations and duties of the Company,
as contained in this Agreement, either contractually or as a matter of law.
10. Entire Agreement; Amendment of Waiver
This Agreement, subject to the terms of any other Company pension plan(s),
program(s) and arrangement(s) if and to the extent such terms are in
writing and, under Paragraphs
<PAGE> 6
April 15, 1994
Page 6
1 and 2 above, are expressly incorporated herein by reference, contains the
entire agreement between the parties hereto concerning the special
supplemental executive pension benefit provided hereunder, and supersedes
all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Company and you with
respect thereto.
No provision in this Agreement may be amended or waived unless such
amendment or waiver is agreed to in writing and signed by you and a duly
authorized officer of the Company. No waiver by either party hereto or any
breach by the other party or any condition or provision of this Agreement
to be performed by the other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent
time.
II. Other Provisions
(a) In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable, in whole or in part, for
any reason, the remaining provisions of this Agreement shall be
unaffected thereby and shall remain in full force and effect to the
fullest extent permitted by law.
(b) This Agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the State of Delaware, without reference
to conflict of law principles.
(c) Any notice given to either party to this Agreement shall be in writing
and shall be deemed to have been given when delivered personally or
sent by certified or registered mail, postage prepaid, return receipt
requested, in each case duly addressed to the party concerned at such
party's principal current mailing address.
(d) The paragraph headings contained in this Agreement are for convenience
only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
THE HERTZ CORPORATION
By:__________________________
S. W. Staebler
Secretary
AGREED:
_________________________________
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE HERTZ CORPORATION*
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
STATE OR SUBSIDIARIES
JURISDICTION OF NATURE OF PRINCIPAL ------------------------
NAME OF SUBSIDIARY INCORPORATION BUSINESS CONDUCTED UNITED STATES FOREIGN
------------------ --------------- ------------------- ------------- -------
<S> <C> <C> <C> <C>
Hertz International, Ltd....... Delaware Through its 1 53
subsidiaries, rents and
leases vehicles, and
rents industrial and
construction equipment.
Also issues licenses
for the renting and
leasing of vehicles
Hertz Equipment Rental
Corporation.................. Delaware Renting industrial and -- --
construction equipment
Hertz International RE
Limited...................... Ireland Reinsurer -- 1
</TABLE>
- -------------------------
* Certain subsidiaries have been omitted, as they do not in the aggregate
constitute a significant subsidiary.
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333 ) of our report dated January 24, 1997, except for Note 14, as
to which the date is February 28, 1997, on our audits of the consolidated
financial statements and financial statement schedule of The Hertz Corporation.
We also consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
February 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,411
<SECURITIES> 173,900
<RECEIVABLES> 810,954
<ALLOWANCES> (12,268)
<INVENTORY> 20,220
<CURRENT-ASSETS> 0
<PP&E> 6,675,959
<DEPRECIATION> (1,097,534)
<TOTAL-ASSETS> 7,649,167
<CURRENT-LIABILITIES> 0
<BONDS> 5,091,844
0
485,900
<COMMON> 1
<OTHER-SE> 503,464
<TOTAL-LIABILITY-AND-EQUITY> 7,649,167
<SALES> 0
<TOTAL-REVENUES> 3,668,383
<CGS> 0
<TOTAL-COSTS> 3,103,102
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,912
<INTEREST-EXPENSE> 298,800
<INCOME-PRETAX> 256,569
<INCOME-TAX> 97,950
<INCOME-CONTINUING> 158,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 158,619
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
