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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7541
THE HERTZ CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-1938568
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
225 BRAE BOULEVARD, PARK RIDGE, NEW JERSEY 07656-0713
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 201-307-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<C> <C>
6 5/8% JUNIOR SUBORDINATED NEW YORK STOCK EXCHANGE
NOTES DUE JULY 15, 2000
7% JUNIOR SUBORDINATED NEW YORK STOCK EXCHANGE
NOTES DUE JULY 15, 2003
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT PERMITTED BY GENERAL INSTRUCTION J(2) OF FORM 10-K.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT: NONE (ALL OF THE VOTING STOCK OF THE REGISTRANT IS OWNED BY FORD
MOTOR COMPANY).
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK AS OF DECEMBER 31, 1996: COMMON STOCK, $1 PAR VALUE - CLASS A, 200
SHARES; CLASS B, 51 SHARES; AND CLASS C, 490 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE
LIST HEREUNDER THE FOLLOWING DOCUMENTS IF INCORPORATED BY REFERENCE AND THE PART
OF THE FORM 10-K (E.G., PART I, PART II, ETC.) INTO WHICH THE DOCUMENT IS
INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS; (2) ANY PROXY OR
INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED PURSUANT TO RULE 424(b) OR
(c) UNDER THE SECURITIES ACT OF 1933: NONE.
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PART I
ITEM 1. BUSINESS.
GENERAL
The Hertz Corporation (together with its subsidiaries, referred to herein
as "Hertz" or the "Company") is a wholly-owned subsidiary of Ford Motor Company
("Ford"). On February 28, 1997, the Company filed a registration statement with
the Securities and Exchange Commission for a potential public offering (the
"Offering") of less than 20% of the Company's common stock. Immediately
following the Offering, Ford will continue to own a controlling interest in the
Company's common stock.
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.
Certain statements contained in this Report under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" including, without limitation, those concerning (i) the Company's
expansion plans for its various businesses, (ii) the Company's liquidity and
capital expenditures, (iii) the percentage of cars expected to be acquired from
Ford in the future, (iv) the terms upon which cars will be acquired, (v) the
development of the Company's strategic information systems and (vi) 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, economic downturn; competition; the Company's dependence
on air travel; limitations upon the Company's liquidity and capital raising
ability (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations"); increases in the cost of cars and limitations on the
supply of competitively priced cars; Ford's control of the Company; and
seasonality in the Company's businesses.
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 77% 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. Unless the context otherwise requires,
"cars" is used in this Report to refer to cars and light trucks.
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
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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, 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. The
Company estimates that 1995 annual revenues for the U.S. equipment rental market
were $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.
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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 Report.
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.
"Hertz", "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 Report are
the property of their respective holders.
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.
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YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
INDUSTRIAL AND
CONSTRUCTION
CAR RENTAL EQUIPMENT
AND OTHER(A) RENTAL
---------------- ----------------
DOLLARS IN MILLIONS AMOUNT % AMOUNT % TOTAL
------------------- ------ --- ------ --- ------
<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>
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(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).
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YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
U.S.(A) FOREIGN
---------------- ----------------
DOLLARS IN MILLIONS AMOUNT % AMOUNT % TOTAL
------------------- ------ --- ------ --- ------
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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
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(a) Includes interest and goodwill relating to the acquisition of the Company
by UAL and Park Ridge Corporation.
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WORLDWIDE CAR RENTAL
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 84% 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
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 ("Hertz Insurance Replacement Entity"), 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
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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.
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. is generally at
risk with respect to the residual values of its 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%
in terms of revenues.
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
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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.
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's Internet
Website has recently become fully interactive 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.
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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 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.
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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.
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. 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
- - --------------------
PAID BY 1996 1995 1994 1993 1992
- - ------- -------- -------- -------- -------- --------
<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.
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 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
9
<PAGE> 10
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.
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 68% of the cars acquired by the Company for its U.S. car rental
fleet, and approximately 34% 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 Report. 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.
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 Operations -- 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 Report.
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
10
<PAGE> 11
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.
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 Offering, 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 Report. Following
such transfer, the Company may consider opportunities to expand its car leasing
business.
11
<PAGE> 12
INDUSTRIAL AND CONSTRUCTION EQUIPMENT RENTAL OPERATIONS
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 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 or otherwise.
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.
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
12
<PAGE> 13
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.
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 $170 million in
1996, representing 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.
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.
13
<PAGE> 14
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 the residual value of all
the equipment used in its industrial and construction equipment rental
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 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.
14
<PAGE> 15
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 approximately 40 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.
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.
15
<PAGE> 16
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
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 Company's car rental
operations 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.
16
<PAGE> 17
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
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.
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, Inc. and National Car Rental System,
Inc., and in the leisure market, the Company's principal competitor is Alamo
Rent-A-Car, Inc. In Europe, the Company's principal competitors in the car
rental market are Avis Europe plc, Europcar and, operating principally through
licensees, Budget Rent a Car Corporation. 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
Company is currently the dominant participant.
17
<PAGE> 18
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, 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.
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
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.
18
<PAGE> 19
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 underground 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 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
consolidated financial position or results of operations.
19
<PAGE> 20
ITEM 2. 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 Report.
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.
ITEM 3. 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the outstanding common stock of the Company is owned by Ford. As of
December 31, 1996, there is no market for the Company's common stock. However,
as stated above, the Company filed a registration statement with the Securities
and Exchange Commission for a potential public offering of less than 20% of the
Company's common stock.
Dividends on the Company's common stock are paid when declared by the Board
of Directors. The Company paid no cash dividends in 1996 and paid cash dividends
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, which was fully repaid by March 10, 1997.
20
<PAGE> 21
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. At December 31, 1996, approximately $331 million of consolidated
stockholders' equity was free of such limitations.
On February 27, 1997, the Company issued 1,290 shares of its 5.11%
Cumulative Series C Preferred Stock, par value $.01 per share, to Ford in
exchange for U.S. treasury securities having an aggregate fair market value at
that time of $129 million. The Company believes that this transaction was exempt
from registration under Section 4(2) of the Securities Act of 1933 because the
securities were sold to a single sophisticated investor who was purchasing for
investment without a view to further distribution.
21
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA.
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 Report. 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 Report. 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 Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
DOLLARS IN MILLIONS 1996 1995 1994 1993 1992
- - ------------------- -------- -------- -------- -------- --------
<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
======== ======== ======== ======== ========
Ratio of earnings to fixed charges(e)................. 1.7 1.4 1.4 1.3 1.1
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------------------------------
DOLLARS IN MILLIONS 1996 1995 1994 1993 1992
- - ------------------- -------- -------- -------- -------- --------
<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) Earnings have been calculated by adding interest expense and the portion of
rentals estimated to represent the interest factor to income before income
taxes. Fixed charges include interest charges (including capitalized
interest) and the portion of rentals estimated to represent the interest
factor.
23
<PAGE> 24
ITEM 7. 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 "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
Report.
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 Report.
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 Report.
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.
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.
26
<PAGE> 27
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 Report.
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 1995 as compared to 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 Report.
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 Report.
27
<PAGE> 28
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 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
of the Notes to the Company's consolidated financial statements included in this
Report.
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
28
<PAGE> 29
$44 million was long-term. At December 31, 1996, the total amounts outstanding
(in millions of U.S. dollars) under the Australian and Canadian commercial paper
programs were $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. 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, and the revolving loan agreement between
the Company and Ford dated June 8, 1994 was terminated. 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
Offering, 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. 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.
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 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
29
<PAGE> 30
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.
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
DOLLARS IN MILLIONS RECEIVED) REVENUES INTEREST EXPENSE) TAXES (LOSS)
- - ------------------- ------------ -------- ----------------- ------------- ----------
<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>
30
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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 Item 14(a)2 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 March 13, 1997
31
<PAGE> 32
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
DOLLARS IN THOUSANDS 1996 1995
- - -------------------- ---------- ----------
<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.................................... 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.
32
<PAGE> 33
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994
- - -------------------- ---------- ---------- ----------
<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.
33
<PAGE> 34
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
COMMON GAINS
AND ADDITIONAL (LOSSES) FOR TOTAL
PREFERRED CAPITAL RETAINED TRANSLATION AVAILABLE-FOR- STOCKHOLDERS'
DOLLARS IN THOUSANDS STOCK PAID-IN EARNINGS ADJUSTMENT SALE SECURITIES EQUITY
- - -------------------- --------- ---------- -------- ----------- --------------- -------------
<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.
34
<PAGE> 35
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994
- - -------------------- ----------- ----------- -----------
<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.
35
<PAGE> 36
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994
- - -------------------- ----------- --------- ----------
<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.
36
<PAGE> 37
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 (together with its subsidiaries, referred to herein
as "Hertz" or 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.
37
<PAGE> 38
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>
NUMBER OF SHARES
PAR VALUE -------------------------
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.
38
<PAGE> 39
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:
<TABLE>
<S> <C>
Revenue Earning Equipment:
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 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
39
<PAGE> 40
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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.
40
<PAGE> 41
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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.
41
<PAGE> 42
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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%).
42
<PAGE> 43
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- DEBT -- (CONTINUED)
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.
The Company had consolidated unused committed lines of credit subject to
customary terms and conditions, which include unused amounts under the three
facilities indicated above, of approximately $2.4 billion at December 31, 1996.
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 Motor Company.
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 millions of U.S. dollars)
under the Australian and Canadian commercial paper programs were $123 and $19,
respectively.
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
43
<PAGE> 44
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- DEBT -- (CONTINUED)
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.
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.
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.
44
<PAGE> 45
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PURCHASES AND SALES OF OPERATIONS -- (CONTINUED)
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.
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 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
45
<PAGE> 46
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- PENSION AND INCOME SAVINGS PLAN AND POSTRETIREMENT BENEFIT PLANS --
(CONTINUED)
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.
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
------------
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of accumulated benefit obligation --
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
46
<PAGE> 47
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- REVENUE EARNING EQUIPMENT -- (CONTINUED)
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. 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 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 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 car rental business, 7 months; cars used in the car leasing business, 19
months; and equipment used in the industrial and construction 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 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 car rental 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.
47
<PAGE> 48
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- REVENUE EARNING EQUIPMENT -- (CONTINUED)
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.
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.
48
<PAGE> 49
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>
49
<PAGE> 50
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
======= ======= =======
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
</TABLE>
NOTE 10 -- SEGMENT INFORMATION -- (CONTINUED)
<TABLE>
<S> <C> <C> <C>
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
======= ======= =======
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 earning 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
======= ======= =======
</TABLE>
51
<PAGE> 52
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NOTE 10 -- SEGMENT INFORMATION -- (CONTINUED)
YEARS ENDED DECEMBER 31
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
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.
52
<PAGE> 53
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- LITIGATION -- (CONTINUED)
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.
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.
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.
53
<PAGE> 54
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -- (CONTINUED)
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
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
54
<PAGE> 55
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
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 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.
55
<PAGE> 56
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 was fully
repaid by March 10, 1997.
On February 28, 1997, the Company filed a Registration Statement on Form
S-1 in connection with the proposed initial public offering of less than 20% of
the Company's common stock. Immediately following the proposed initial public
offering, Ford will continue to own a controlling interest in the Company's
common stock.
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, subject to a ceiling. 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%.
56
<PAGE> 57
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
DOLLARS IN THOUSANDS YEAR INCOME ADJUSTMENTS OTHER END OF YEAR
- - -------------------- ------------ ---------- ----------- -------- -----------
<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.
57
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted.
58
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(a) 1. Financial Statements:
The Hertz Corporation and Subsidiaries --
Report of Independent Public Accountants............... 31
Consolidated Balance Sheet at December 31, 1996 and 32
1995..................................................
Consolidated Statement of Income for the years ended 33
December 31, 1996, 1995 and 1994......................
Consolidated Statement of Stockholders' Equity for the 34
years ended December 31, 1996, 1995 and 1994..........
Consolidated Statement of Cash Flows for the years 35-36
ended December 31, 1996, 1995 and 1994................
Notes to Consolidated Financial Statements............. 37-56
2. Financial Statement Schedules:
The Hertz Corporation and Subsidiaries --
Schedule II -- Valuation and qualifying accounts for 57
the years ended December 31, 1996, 1995 and 1994......
3. Exhibits:
(3) Articles of Incorporation and By-Laws
(a) Restated Certificate of Incorporation of the Company
(incorporated herein by reference from the Company's report
on Form 8-K dated July 20, 1993)
(b) Certificate of Amendment of Restated Certificate of
Incorporation of the Company filed with the Secretary of
State of Delaware on April 28, 1994 (incorporated
herein by reference from the Company's report on Form
10-K dated March 13, 1995)
(c) Certificate of Amendment of Restated Certificate of
Incorporation of the Company filed with the Secretary of
State of Delaware on December 18, 1995 (incorporated
herein by reference from the Company's report on Form
10-K for the year ended December 31, 1995)
(d) Certificate of Amendment of Restated Certificate of
Incorporation of the Company filed with the Secretary of
State of Delaware on February 27, 1997
(e) By-Laws of the Company adopted by its Board of
Directors on July 19, 1993 (incorporated herein by reference
from the Company's report on Form 8-K dated July 20,
1993)
(4) Instruments defining the rights of security holders,
including indentures
(a) At December 31, 1996, the Company had various
obligations which could be considered as long-term debt,
none of which exceeded 10% of the total assets of the
Company on a consolidated basis. The Company agrees to
furnish to the Commission upon request a copy of any
such instrument defining the rights of the holders of
such long-term debt.
(10) Material Contracts.
(a) Agreement between the Company and Ford (incorporated
herein by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1987 -- File No.
1-7541) (portions of this Exhibit have been omitted and
granted confidential treatment under Rule 24b-2)
</TABLE>
59
<PAGE> 60
<TABLE>
<S> <C> <C>
(b) Agreement between Hertz System, Inc. and Ford
(incorporated herein by reference from the Company's Annual
Report on Form 10-K for the year ended December 31,
1987 -- File No. 1-7541) (portions of this Exhibit have
been omitted and granted confidential treatment under
Rule 24b-2)
(c) Agreement between Hertz System, Inc. and Ford
(incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992 -- File No. 1-7541) (portions of
this Exhibit have been omitted and granted confidential
treatment under Rule 24b-2)
(d) Car Supply Agreement between the Company and Ford
(incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(e) Joint Advertising Agreement between the Company and
Ford (incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1) (The
Company has applied for confidential treatment of
portions of this Exhibit. Accordingly, portions thereof
have been omitted and filed separately.)
(f) Tax-Sharing Agreement between the Company and Ford
(incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(g) The Hertz Corporation Benefit Equalization Plan
(incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(h) The Hertz Corporation Supplemental Retirement and
Savings Plan, as amended (incorporated herein by reference
from the Company's Registration Statement No. 333-22517
on Form S-1)
(i) The Hertz Corporation Executive Incentive Compensation
Plan (incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(j) The Hertz Corporation Long Term Incentive Plan
(incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(k) Form of The Hertz Corporation Special Supplemental
Executive Pension Benefit for Frank A. Olson and William
Sider (incorporated herein by reference from the
Company's Registration Statement No. 333-22517 on Form
S-1)
(l) Employment Agreement between the Company and Frank A.
Olson (incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(m) Employment Agreement between the Company and Craig R.
Koch (incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(n) Employment Agreement between the Company and William
Sider (incorporated herein by reference from the Company's
Annual Report on Form 10-K for the year ended December
31, 1992)
(o) Employment Agreement between Hertz International, Ltd.
and Antoine E. Cau (incorporated herein by reference from
the Company's Registration Statement No. 333-22517 on
Form S-1)
(p) Employment Agreement between the Company and Brian J.
Kennedy (incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(q) Employment Agreement between the Company and Daniel I.
Kaplan (incorporated herein by reference from the Company's
Registration Statement No. 333-22517 on Form S-1)
(12) Computation of Consolidated Ratio of Earnings to Fixed
Charges for each of the five years in the period ended
December 31, 1996
</TABLE>
60
<PAGE> 61
(21) Subsidiaries of the Company (incorporated herein by
reference from the Company's Registration Statement No.
333-22517 on Form S-1)
(23) Consent of Coopers & Lybrand L.L.P.
(27) Consolidated Financial Data Schedule for the year ended
December 31, 1996
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated November 26, 1996
reporting under Items 5 and 7 thereof, instruments defining the rights of
security holders, including indentures, in connection with the Company's
Registration Statement on Form S-3 (File No. 33-54183) relating to Senior Debt
Securities.
Schedules and exhibits not included above have been omitted because the
information required has been included in the financial statements or notes
thereto or are not applicable or not required.
61
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE HERTZ CORPORATION
(Registrant)
By: /s/ WILLIAM SIDER
------------------------------------
WILLIAM SIDER
Executive Vice President and
Chief Financial Officer
March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the indicated capacities, on March 25, 1997.
<TABLE>
<S> <S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ FRANK A. OLSON Chairman of the Board, Chief
--------------------------------------------- Executive Officer and
Frank A. Olson Director
PRINCIPAL FINANCIAL OFFICER:
/s/ WILLIAM SIDER Executive Vice President,
--------------------------------------------- Chief Financial Officer
William Sider and Director
PRINCIPAL ACCOUNTING OFFICER:
/s/ LEO A. MASSAD, JR. Staff Vice President and
--------------------------------------------- Controller
Leo A. Massad, Jr.
/s/ CRAIG R. KOCH President, Chief Operating
--------------------------------------------- Officer and Director
Craig R. Koch
Director
---------------------------------------------
John M. Devine
/s/ PETER J. PESTILLO Director
---------------------------------------------
Peter J. Pestillo
</TABLE>
62
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<S> <C>
(3) Articles of Incorporation and By-Laws
(d) Certificate of Amendment of Restated Certificate of
Incorporation of the Company filed with the Secretary of
State of Delaware on February 27, 1997
(12) Computation of Consolidated Ratio of Earnings to Fixed
Charges for each of the five years in the period ended
December 31, 1996
(23) Consent of Coopers & Lybrand L.L.P.
(27) Consolidated Financial Data Schedule for the year ended
December 31, 1996
</TABLE>
<PAGE> 1
EXHIBIT 3
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
THE HERTZ CORPORATION
THE HERTZ CORPORATION, a Delaware corporation (the "Corporation"), does
hereby certify:
The amendments set forth below to the Corporation's Restated Certificate of
Incorporation, as heretofore amended, were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware:
That the first paragraph of Article FOURTH be and hereby is amended and
restated as follows:
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 7,003,800 shares, consisting
of 4,500,000 shares of 10% Cumulative Series A Preferred Stock, par value
$100 per share ("Series A Preferred Stock"), 2,500,000 shares of Variable
Rate Cumulative Series B Preferred Stock, par value $100 per share
("Series B Preferred Stock"), 2,000 shares of 5.11% Cumulative Series C
Preferred Stock, par value $0.01 per share ("Series C Preferred Stock, and
together with the Series A Preferred Stock and Series B Preferred Stock,
"Preferred Stock"), 200 shares of Class A Common Stock, par value $1.00
per share ("Class A Stock"), 800 shares of Class B Common Stock, par value
$1.00 per share ("Class B Stock") and 800 shares of Class C Common Stock,
par value $1.00 per share ("Class C Stock", and together with the Class A
Stock and Class B Stock, "Common Stock").
That Section 1.1(b) of Article FOURTH be and hereby is amended and restated
as follows:
(b) If an Event of Default (as defined below) shall have occurred and be
continuing, the number of directors constituting the Board of Directors
shall, without further action, be increased as follows:
(i) the holders of shares of Series A Preferred Stock, voting
separately as a class, shall be entitled to elect two additional
directors (the "Series A Directors") at a special meeting of such
holders called by the Secretary of the Corporation in accordance
with a written request of the holders of at least 10% of the
<PAGE> 2
2
outstanding shares of Series A Preferred Stock. Except as set forth
in this Sectioni 1.1(b), each of the Series A Directors shall hold
office until his successor shall be duly elected by the holders of
shares of Series A Preferred Stock, voting separately as a class, at
any annual or other meeting of stockholders of the Corporation held to
elect directors. The right of the holders of the shares of Series A
Preferred Stock to elect the Series A Directors shall continue until
no Event of Default shall be continuing, whether as a result of such
Event of Default being cured or otherwise, whereupon the holders of
shares of Series A Preferred Stock shall be divested of such right,
subject to such right vesting again upon the reoccurrence of an Event
of Default. Upon such divestment, the terms of office of the Series A
Directors shall terminate and the number of the directors of the
Corporation shall be reduced correspondingly. Any Series A Director
may be removed, with or without cause, by the holders of Series A
Preferred Stock or, with cause, by the Board of Directors. Any
vacancy among the Series A Directors may be filled solely by the
holders of shares of Series A Preferred Stock, voting separately as a
class;
(ii) the holders of shares of Series C Preferred Stock, voting
separately as a class, shall be entitled to elect two additional
directors (the "Series C Directors") at a special meeting of such
holders called by the Secretary of the Corporation in accordance with
a written request of the holders of at least 10% of the outstanding
shares of Series C Preferred Stock. Except as set forth in this
Section 1.1(b), each of the Series C Directors shall hold office until
his successor shall be duly elected by the holders of shares of Series
C Preferred Stock, voting separately as a class, at any annual or
other meeting of stockholders of the Corporation held to elect
directors. The right of the holders of the shares of Series C
Preferred Stock to elect the Series C Directors shall continue until
no Event of Default shall be continuing, whether as a result of such
Event of Default being cured or otherwise, whereupon the holders of
shares of Series C Preferred Stock shall be divested of such right,
subject to such right vesting again upon the reoccurrence of an Event
of Default. Upon such divestment, the terms of office of the Series C
Directors shall terminate and the number of the directors of the
Corporation shall be reduced correspondingly. Any Series C Director
may be removed, with or without cause, by the holders of Series C
Preferred Stock or, with cause, by the Board of Directors. Any
vacancy among the Series C Directors may be filled solely by the
holders of shares of Series C Preferred Stock, voting separately as a
class; and
<PAGE> 3
3
(iii) for the purposes of this Certificate of Incorporation, "Event
of Default" shall mean failure to pay the full Redemption Price upon
redemption of Preferred Stock pursuant to Section 1.4 and
"Redemption Price" in respect of the Series A Preferred Stock and
Series B Preferred Stock shall mean an amount per share equal to the
par value thereof plus accrued and unpaid dividends thereon and in
respect of the Series C Preferred Stock shall mean an amount per
share equal to $100,000 plus accrued and unpaid dividends thereon.
That Section 1.2(c) of Article FOURTH be and hereby is amended and restated
as follows:
(c) The holders of shares of Series C Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors out of any
funds legally available for the payment of dividends, cumulative cash
dividends per share of Series C Preferred Stock payable quarterly on March
1, June 1, September 1 and December 1 in each year commencing on June 1,
1997. Dividends with respect to shares of Series C Preferred Stock shall
accrue from the date of issuance of such shares, at the rate of 5.11% per
annum.
That Section 1.2 of Article FOURTH be and hereby is amended by adding the
following new language as Section 1.2(d):
(d) The cumulative cash dividends for any share of Preferred Stock
which remain unpaid at the end of any calendar year shall accrue
additional cumulative cash dividends for each subsequent calendar year at
the rate established for the accrual of dividends on such share of
Preferred Stock during such subsequent year pursuant to Section 1.2(a),
1.2(b) or 1.2(c) above. Except as set forth in this Section 1.2, no other
dividends shall accrue, cumulate, be declared or paid with respect to
shares of Preferred Stock. For the purposes of this Section 1.2,
"Adjusted Rate" for any calendar year shall mean an annual dividend rate
equal to 105% of the current dividend rate at January 1 of such year for
comparable securities, as determined by an investment banking firm
approved by the holders of a majority of the outstanding Class A Stock,
voting separately as a class, and by the holders of a majority of the
outstanding Preferred Stock, voting together as a single class (with each
such share of Preferred Stock entitled to one vote). All dividends
provided for by this Section 1.2 in respect of the Series A Preferred
Stock and Series B Preferred Stock shall accrue based on the actual number
of days in a year of 365 or 366 days, as the case may be, and in respect
of the Series C Preferred Stock shall accrue based on the number of days
in a year of 360 days with twelve 30-day months.
<PAGE> 4
4
That Section 1.4 of Article FOURTH be and hereby is amended and restated as
follows:
Each of the Series A Preferred Stock and Series B Preferred Stock is
redeemable at the option of the Corporation, in whole at any time, or in
part from time to time, on not less than 10 days' notice, at an amount per
share equal to the Redemption Price. The Series C Preferred Stock is
redeemable at the option of the Corporation, in whole at any time, or in
part from time to time, on not less that two days' notice, at an amount
per share equal to the Redemption Price. On and after the later of the
redemption date established pursuant to the notice set forth above and the
date on which funds are made available for such redemption, dividends will
cease to accumulate on shares of Preferred Stock called for Redemption.
The Board of Directors may cause the transfer books of the Corporation to
be closed as to the shares of Preferred Stock to be redeemed and such
shares shall be canceled and not reissued and the authorized capital
correspondingly reduced.
<PAGE> 5
5
IN WITNESS WHEREOF, THE HERTZ CORPORATION has caused this Certificate to be
signed and attested by its duly authorized officers, this 27th day of February,
1997.
/s/ William Sider
----------------------
Name: William Sider
Title: Executive Vice
President and Chief
Financial Officer
ATTEST:
/s/ Paul M. Tschirhart
- - ---------------------------------
Name: Paul M. Tschirhart
Title: Assistant Secretary
<PAGE> 1
EXHIBIT 12
THE HERTZ CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before income taxes................ $256,569 $172,344 $162,831 $102,450 $ 31,769
Interest expense.......................... 309,249 323,871 284,438 256,718 310,481
Portion of rent estimated to represent the
interest factor......................... 69,188 75,874 88,219 76,298 86,079
-------- -------- -------- -------- --------
Earnings before income taxes and fixed
charges................................. $635,006 $572,089 $535,488 $435,466 $428,329
======== ======== ======== ======== ========
Interest expense (including capitalized
interest)............................... $309,843 $325,021 $284,855 $256,866 $310,538
Portion of rent estimated to represent the
interest factor......................... 69,188 75,874 88,219 76,298 86,079
-------- -------- -------- -------- --------
Fixed charges............................. $379,031 $400,895 $373,074 $333,164 $396,617
======== ======== ======== ======== ========
Ratio of earnings to fixed charges........ 1.7 1.4 1.4 1.3 1.1
======== ======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of The Hertz Corporation on Form S-3 (File No. 33-54183) of our report dated
January 24, 1997, except for Note 14, as to which the date is March 13, 1997, on
our audits of the consolidated financial statements and financial statement
schedule of The Hertz Corporation as of December 31, 1996 and 1995, and for each
of the three years ended December 31, 1996, which report is included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
March 25, 1997
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