<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 28, 1997
THE HERTZ CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-7541 13-1938568
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification No.)
225 BRAE BOULEVARD
PARK RIDGE, NEW JERSEY 07656-0713
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 307-2000
================================================================================
<PAGE> 2
2
ITEM 5. OTHER EVENTS
(a) On February 28, 1997, The Hertz Corporation ("Hertz")
announced that it has filed a registration statement with the Securities and
Exchange Commission for a potential initial public offering ("Offering") of
less than 20% of Hertz' common stock. A copy of the news release dated
February 28, 1997 issued by Hertz is attached as Exhibit 20 hereto and
incorporated by reference herein.
(b) On February 27, 1997, Hertz issued 1,290 shares of its
5.11% Cumulative Series C Preferred Stock, par value $.01 per share, to Ford
Motor Company ("Ford") having an aggregate liquidation preference of $129
million for a purchase price equal to the aggregate liquidation preference, and
Hertz declared and paid a dividend on its common stock to Ford in the form of
a note in the principal amount of $460 million.
Hertz is filing herewith audited consolidated financial
statements of Hertz for each of the years in the three-year period ended
December 31, 1996 and as of December 31, 1996 and 1995 as Exhibit 99.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Exhibits
12 -- Computation of Consolidated Ratio of Earnings to Fixed
Charges for each of the five years in the period ended
December 31, 1996.
20 -- News Release Dated February 28, 1997.
23 -- Consent of Independent Accountants.
27 -- Consolidated Financial Data Schedule for the year ended
December 31, 1996.
99 -- Audited Consolidated Financial Statements of Hertz for each
of the years in the three-year period ended December 31, 1996
and as of December 31, 1996 and 1995.
<PAGE> 3
3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereto duly authorized.
THE HERTZ CORPORATION
By: /s/ Leo A. Massad, Jr.
------------------------------------
Leo A. Massad, Jr.
Staff Vice President and Controller
(Principal Accounting Officer)
Date: February 28, 1997
<PAGE> 4
4
INDEX TO EXHIBITS
EXHIBIT
NUMBER
-------
12 -- Computation of Consolidated Ratio of Earnings to Fixed
Charges for each of the five years in the period ended
December 31, 1996.
20 -- News Release Dated February 28, 1997.
23 -- Consent of Independent Accountants.
27 -- Consolidated Financial Data Schedule for the year ended
December 31, 1996.
99 -- Audited Consolidated Financial Statements of Hertz for each
of the years in the three-year period ended December 31,
1996 and as of December 31, 1996 and 1995.
<PAGE> 1
EXHIBIT 12
THE HERTZ CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands of Dollars Except Ratios)
<TABLE>
<CAPTION>
Unaudited
- - -----------------------------------------------------------------------------------------------------------------------------------
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 of fixed charges 1.7 1.4 1.4 1.3 1.1
======== ======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 20
PRESS INFORMATION
[HERTZ LETTERHEAD]
FOR IMMEDIATE RELEASE CONTACT: JOE RUSSO
THE HERTZ CORPORATION
225 BRAE BLVD.
PARK RIDGE, NJ 07656
(201) 307-2486
CHRIS VINYARD
FORD MOTOR COMPANY
(313) 322-3428
THE HERTZ CORPORATION FILES
FOR AN INITIAL PUBLIC OFFERING
PARK RIDGE, N.J., FEBRUARY 28, 1997 -- The Hertz Corporation, the world's
largest car rental company and largest U.S. industrial and construction
equipment rental and leasing business, announced today that it has filed a
registration statement with the Securities and Exchange Commission for a
potential initial public offering of less than 20 percent of the company's
common stock.
The company, which is a wholly owned subsidiary of Ford Motor Company,
said the planned offering will involve newly issued shares of Hertz.
In addition to its car and equipment rental businesses, Hertz is also
engaged in the retail sale of used cars and equipment, third-party claim
management and telecommunications services.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission, but has not yet become effective.
These securities may not be sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. This news release shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
###
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement of The Hertz Corporation on Form S-3 (File No. 33-54183) and to the
inclusion in this Current Report of Form 8-K of our report dated January 24,
1997 except for Note 14, as to which the date is February 28, 1997, on our
audits of the consolidated financial statements and financial statement schedule
of The Hertz Corporation as of December 31, 1996, 1995 and 1994, and for each of
the three years ended December 31, 1996.
/s/ Coopers & Lybrand L.L.P.
-----------------------------
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
February 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,411
<SECURITIES> 173,900
<RECEIVABLES> 810,954
<ALLOWANCES> (12,268)
<INVENTORY> 20,220
<CURRENT-ASSETS> 0
<PP&E> 6,675,959
<DEPRECIATION> (1,097,534)
<TOTAL-ASSETS> 7,649,167
<CURRENT-LIABILITIES> 0
<BONDS> 5,091,844
0
485,900
<COMMON> 1
<OTHER-SE> 503,464
<TOTAL-LIABILITY-AND-EQUITY> 7,649,167
<SALES> 0
<TOTAL-REVENUES> 3,668,383
<CGS> 0
<TOTAL-COSTS> 3,103,102
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,912
<INTEREST-EXPENSE> 298,800
<INCOME-PRETAX> 256,569
<INCOME-TAX> 97,950
<INCOME-CONTINUING> 158,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 158,619
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
The Hertz Corporation and Subsidiaries
Report of Independent Accountants......................... F-2
Consolidated Balance Sheet at December 31, 1996 and
1995................................................... F-3
Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994....................... F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994........... F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-6
Notes to Consolidated Financial Statements................ F-8
Schedule II -- Valuation and Qualifying Accounts for the
years ended December 31, 1996, 1995 and 1994........... F-30
</TABLE>
F-1
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To The Hertz Corporation:
We have audited the accompanying consolidated balance sheet of The Hertz
Corporation (a wholly-owned subsidiary of Ford Motor Company) and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows and the financial statement schedule
listed in F-1 for each of the three years ended December 31, 1996. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Hertz
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
January 24, 1997, except for Note 14,
as to which the date is February 28, 1997
F-2
<PAGE> 3
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
------------------------
DECEMBER 31
1996 1995
Dollars in thousands ---------- ----------
<S> <C> <C>
ASSETS
Cash and equivalents (Note 13).............................. $ 179,311 $ 137,257
Receivables, less allowance for doubtful accounts of $12,268
(1995 -- $7,985) (Schedule II)............................ 798,686 789,801
Due from affiliates (Notes 5 and 7)......................... 456,025 407,442
Inventories, at lower of cost or market..................... 20,220 17,930
Prepaid expenses and other assets (Note 4).................. 80,530 83,345
Revenue earning equipment, at cost (Note 7):
Cars...................................................... 4,698,656 3,951,351
Less accumulated depreciation.......................... (380,391) (324,193)
Other equipment........................................... 908,106 705,084
Less accumulated depreciation.......................... (190,677) (162,073)
---------- ----------
Total revenue earning equipment...................... 5,035,694 4,170,169
---------- ----------
Property and equipment, at cost:
Land, buildings and leasehold improvements................ 515,063 473,930
Service equipment......................................... 554,134 507,640
---------- ----------
1,069,197 981,570
Less accumulated depreciation.......................... (526,466) (485,680)
---------- ----------
Total property and equipment......................... 542,731 495,890
---------- ----------
Franchises, concessions, contract costs and leaseholds, net
of amortization........................................... 10,117 7,722
Cost in excess of net assets of purchased businesses, net of
amortization (Note 5)..................................... 525,853 547,074
---------- ----------
Total assets......................................... $7,649,167 $6,656,630
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (Note 7)................................... $ 468,817 $ 585,663
Accrued salaries and other compensation..................... 171,508 142,096
Other accrued liabilities................................... 384,191 330,923
Accrued taxes............................................... 105,524 74,714
Debt (Notes 2 and 13)....................................... 5,091,844 4,297,484
Public liability and property damage (Schedule II).......... 321,118 311,669
Deferred taxes on income (Note 8)........................... 116,800 77,800
Commitments and contingencies (Notes 9, 11 and 13)
Stockholders' equity (Notes 1 and 2):
Preferred stock --
Series A, 10% cumulative............................... 236,000 236,000
Series B, various rates cumulative..................... 249,900 249,900
Common stock, par value $1 per share, shares issued -- 200
Class A, 51 Class B and 490 Class C.................... 1 1
Additional capital paid-in................................ 59,008 59,008
Retained earnings......................................... 435,352 276,733
Translation adjustment (Note 3)........................... 9,129 14,539
Unrealized holding gains (losses) for available-for-sale
securities (Note 4).................................... (25) 100
---------- ----------
Total stockholders' equity........................... 989,365 836,281
---------- ----------
Total liabilities and stockholders' equity........... $7,649,167 $6,656,630
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 4
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
Dollars in thousands ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Car rental.......................................... $3,161,605 $2,911,703 $2,581,157
Industrial and construction equipment rental........ 392,322 332,328 263,154
Car leasing (Note 5)................................ 35,407 35,548 231,372
Other (Note 5)...................................... 79,049 121,009 218,718
---------- ---------- ----------
Total revenues................................... 3,668,383 3,400,588 3,294,401
---------- ---------- ----------
Expenses:
Direct operating.................................... 1,795,157 1,724,791 1,766,228
Depreciation of revenue earning equipment (Note
7)............................................... 892,678 803,862 702,644
Selling, general and administrative................. 425,179 392,518 385,470
Interest, net of interest income of $10,449, $16,798
and $7,210 (Note 2).............................. 298,800 307,073 277,228
---------- ---------- ----------
Total expenses................................... 3,411,814 3,228,244 3,131,570
---------- ---------- ----------
Income before income taxes............................ 256,569 172,344 162,831
Provision for taxes on income (Note 8)................ 97,950 67,138 71,749
---------- ---------- ----------
Net income............................................ $ 158,619 $ 105,206 $ 91,082
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 5
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
UNREALIZED
COMMON HOLDING GAINS
AND ADDITIONAL (LOSSES) FOR TOTAL
PREFERRED CAPITAL RETAINED TRANSLATION AVAILABLE-FOR- STOCKHOLDERS'
STOCK PAID-IN EARNINGS ADJUSTMENT SALE SECURITIES EQUITY
Dollars in thousands --------- ---------- -------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993......................... $ 439,901 $100,099 $105,445 $(28,749) $ -- $ 616,696
Net Income..................... 91,082 91,082
Translation adjustment changes
during the year.............. 23,478 23,478
Redemption of preferred
stock........................ (104,000) (104,000)
Redemption of common and
preferred stock in excess of
par value and related
expenses..................... (41,091) (41,091)
Stock issued in exchange for
subordinated promissory
note......................... 150,000 150,000
Unrealized holding losses for
available-for-sale
securities................... (222) (222)
--------- -------- -------- -------- ----- ---------
Balances at December 31,
1994......................... 485,901 59,008 196,527 (5,271) (222) 735,943
Net Income..................... 105,206 105,206
Cash dividend on common stock
paid to Ford Motor Company... (25,000) (25,000)
Translation adjustment changes
during the year.............. 19,810 19,810
Unrealized holding gains for
available-for-sale securities
during the year.............. 322 322
--------- -------- -------- -------- ----- ---------
Balances at December 31,
1995......................... 485,901 59,008 276,733 14,539 100 836,281
Net Income..................... 158,619 158,619
Translation adjustment changes
during the year.............. (5,410) (5,410)
Unrealized holding losses for
available-for-sale securities
during the year.............. (125) (125)
--------- -------- -------- -------- ----- ---------
Balances at December 31,
1996......................... $ 485,901 $ 59,008 $435,352 $ 9,129 $ (25) $ 989,365
========= ======== ======== ======== ===== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 6
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
Dollars in thousands ----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 158,619 $ 105,206 $ 91,082
Non-cash expenses:
Depreciation of revenue earning equipment....... 892,678 803,862 702,644
Depreciation of property and equipment.......... 82,457 79,696 68,646
Amortization of intangibles..................... 18,232 19,978 19,401
Provision for public liability and property
damage........................................ 133,417 134,926 159,049
Provision for losses for doubtful accounts...... 9,912 4,926 6,813
Write-off of interest on Park Ridge Limited
Partnership promissory note................... -- -- 8,586
Deferred income taxes........................... 39,000 28,500 4,700
Other........................................... (3,060) -- --
Revenue earning equipment expenditures............. (8,204,179) (7,255,250) (6,873,281)
Proceeds from sales of revenue earning equipment... 6,445,337 6,163,455 4,747,409
Changes in assets and liabilities, net of effects
from sale in 1996 of certain claim
administration service operations, and in 1995
of the European car leasing and car dealership
operations --
Receivables................................... (20,482) (180,613) (181,439)
Due from affiliates........................... (48,583) (35,843) (43,087)
Inventories and prepaid expenses and other
assets..................................... (1,325) (1,422) 30,463
Accounts payable.............................. (117,767) 311,498 70,001
Accrued liabilities........................... 85,192 9,785 74,633
Accrued taxes................................. 30,316 6,067 6,656
Payments of public liability and property damage
claims and expenses............................. (123,928) (127,814) (118,380)
----------- ----------- -----------
Net cash flows (used for) provided by operating
activities.................................... $ (624,164) $ 66,957 $(1,226,104)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 7
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
Dollars in thousands ----------- --------- ----------
<S> <C> <C> <C>
Cash flows from investment activities:
Property and equipment expenditures.................. $ (179,802) $(178,279) $ (150,569)
Proceeds from sales of property and equipment........ 44,950 34,148 35,839
Available-for-sale securities --
Purchases......................................... (6,219) (6,375) (8,145)
Sales............................................. 6,422 6,625 5,221
Proceeds from sale in 1996 of certain claim
administration service operations and in 1995 of
the European car leasing and car dealership
operations, net of cash and equivalents........... 15,346 56,560 --
Purchases of various operations (see supplemental
disclosures below)................................ (6,054) -- (2,044)
----------- --------- ----------
Net cash flows used for investing activities.... (125,357) (87,321) (119,698)
----------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............. 304,604 329,157 719,289
Repayment of long-term debt.......................... (205,276) (340,442) (207,195)
Short-term borrowings:
Proceeds.......................................... 1,379,740 984,870 736,430
Repayments........................................ (1,180,063) (945,283) (614,439)
Ninety day term or less, net...................... 492,526 54,487 864,816
Cash dividend on common stock paid to Ford Motor
Company........................................... -- (25,000) --
Payment for the redemption of common and preferred
stock and related expenses........................ -- -- (145,091)
----------- --------- ----------
Net cash flows provided from financing
activities................................... 791,531 57,789 1,353,810
----------- --------- ----------
Effect of foreign exchange rate changes on cash........ 44 83 3,184
----------- --------- ----------
Net increase in cash and equivalents during the
period............................................... 42,054 37,508 11,192
Cash and equivalents at beginning of year.............. 137,257 99,749 88,557
----------- --------- ----------
Cash and equivalents at end of year.................... $ 179,311 $ 137,257 $ 99,749
=========== ========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for --
Interest (net of amounts capitalized)............. $ 300,120 $ 313,139 $ 257,652
Income taxes...................................... 38,899 33,775 36,341
</TABLE>
In connection with acquisitions made during the years 1996 and 1994,
liabilities assumed were $36 million and $27 million, respectively.
The accompanying notes are an integral part of this statement.
F-7
<PAGE> 8
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger, Change in Ownership and Capitalization
The Hertz Corporation (the "Company"), which was incorporated in Delaware in
1967, is a successor to corporations which were engaged in the automobile and
truck leasing and rental business since 1918. UAL Corporation ("UAL") (formerly
Allegis Corporation) purchased all of the Company's outstanding capital stock
from RCA Corporation ("RCA") on August 30, 1985. Park Ridge Corporation ("Park
Ridge"), which was 80%-owned by Ford Motor Company ("Ford"), purchased all of
the Company's outstanding capital stock from UAL on December 30, 1987. By 1989,
Ford reduced its ownership interest in Park Ridge to 49%. On July 19, 1993, Park
Ridge (which had no material assets other than the Company) was merged with and
into the Company, with the prior stockholders of Park Ridge becoming the
stockholders of the Company. The merger has been recorded as a "pooling of
interests".
In March 1994, Ford acquired the Company's common stock owned by Commerzbank
Aktiengesellschaft. On April 29, 1994, the Company redeemed its preferred and
common stock owned by AB Volvo for $145 million, borrowing the funds from Ford
to pay for the redemption, and Ford purchased all of the common stock of the
Company owned by Park Ridge Limited Partnership ("Partnership"). This resulted
in the Company becoming a wholly-owned subsidiary of Ford. In addition, the $150
million subordinated promissory note of the Company held by Ford Motor Credit
Company, a wholly-owned subsidiary of Ford ("FMCC"), was exchanged for $150
million of the Series B Preferred Stock of the Company, and a promissory note in
the amount of $18.5 million, owed by the Partnership to the Company was assumed
by Ford ("Ford Note"). In connection with these transactions, notes payable were
increased by $145 million, the Series A Preferred Stock was reduced by $104
million, and additional capital paid-in was reduced by $41 million; interest
expense was increased by $8.6 million and provision for taxes was decreased by
$3.0 million; and subordinated promissory notes were reduced by $150 million and
Series B Preferred Stock was increased by $150 million. The Ford Note was repaid
in 1996.
As of December 31, 1996, 100% of the Common Stock of the Company was owned by
Ford and 100% of the outstanding Preferred Stock was owned by FMCC.
F-8
<PAGE> 9
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The capital stock of the Company authorized, issued and outstanding as of
December 31, 1996, 1995 and 1994 is set forth below.
<TABLE>
<CAPTION>
--------------------------------------
PAR VALUE NUMBER OF SHARES
PER ISSUED AND
SHARE AUTHORIZED OUTSTANDING
--------- ---------- -----------
<S> <C> <C> <C>
Series A Preferred Stock:
Balance December 31, 1993................................ $100 4,500,000 3,400,000
Redemption in 1994....................................... -- (1,040,000)
--------- ----------
Balance December 31, 1994, 1995 and 1996................. $100 4,500,000 2,360,000
==== ========= ==========
Series B Preferred Stock
Balance December 31, 1993................................ $100 1,000,000 999,000
Issued in exchange for subordinated promissory note in
1994.................................................. 100 1,500,000 1,500,000
--------- ----------
Balance December 31, 1994, 1995 and 1996................. $100 2,500,000 2,499,000
==== ========= ==========
Class A Common Stock
Balance December 31, 1993, 1994, 1995 and 1996........... $ 1 200 200
==== ========= ==========
Class B Common Stock
Balance December 31, 1993................................ $ 1 800 311
Redemption in 1994....................................... -- (260)
--------- ----------
Balance December 31, 1994, 1995 and 1996................. $ 1 800 51
==== ========= ==========
Class C Common Stock
Balance December 31, 1993, 1994, 1995 and 1996........... $ 1 800 490
==== ========= ==========
</TABLE>
The holders of Series A Preferred Stock and Series B Preferred Stock are
entitled, when, as and if declared by the Board of Directors of the Company, to
cumulative annual dividends, but payable only out of funds legally available
therefor, compounded annually (if in arrears). The annual dividend rate through
December 31, 1998 is 10% for the Series A Preferred Stock and at various rates
which average 4.5% for the Series B Preferred Stock. Commencing January 1, 1999
the annual dividend rates for the Series A Preferred Stock and Series B
Preferred Stock are subject to adjustment and are reset on an annual basis. The
Series A Preferred Stock and the Series B Preferred Stock are redeemable by
their terms at the option of the Company at any time, and do not have any voting
rights, except that the holders of the Series A Preferred Stock shall have the
right to elect two directors in the event of default, and the holders of the
Series B Preferred Stock will be granted voting rights in the event of
significant and continuing net operating losses.
The holders of the Class A Common Stock and Class B Common Stock have one vote
per share and no special preferences. The holders of the Class C Common Stock
have one vote per share and have the right to designate three directors, until
such time as fewer than 40 shares thereof (adjusted for stock splits and the
like) shall be outstanding, provided, however, that the Class C Common Stock
shall in any event have 40% of the general voting power and the right to elect
not less than 40% of the members of such Board of Directors, until such time as
fewer than 40 shares thereof (as so adjusted) shall be outstanding. The Class C
Common Stock is convertible into Class B Common Stock on a share for share basis
at any time at the holder's option. Under certain circumstances, shares of Class
B Common Stock convert or are convertible into an equivalent number of shares of
Class A Common Stock.
F-9
<PAGE> 10
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of The Hertz
Corporation and its domestic and foreign subsidiaries. All significant
intercompany transactions are eliminated.
Consolidated Statement of Cash Flows
For purposes of this statement, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. See Merger, Change of Ownership and Capitalization for noncash
investing and financing activities.
Depreciable Assets
The provisions for depreciation and amortization are computed on a straight-line
basis over the estimated useful lives of the respective assets, as follows:
Revenue Earning Equipment:
<TABLE>
<CAPTION>
--------------
<S> <C>
Cars........................................................ 3 to 6 years
Other equipment............................................. 3 to 11 years
Buildings................................................... 20 to 50 years
Leasehold improvements...................................... Term of lease
Service cars and service equipment.......................... 3 to 25 years
Franchises, concessions, contract costs and leaseholds...... 10 to 40 years
Cost in excess of net assets of purchased businesses........ 10 to 40 years
</TABLE>
Hertz follows the practice of charging maintenance and repairs, including the
cost of minor replacements, to maintenance expense accounts. Costs of major
replacements of units of property are charged to property and equipment accounts
and depreciated on the basis indicated above. Gains and losses on dispositions
of property and equipment are included in income as realized. Upon disposal of
revenue earning equipment, depreciation expense is adjusted for the difference
between the net proceeds from sale and the remaining book value.
Environmental Conservation
The use of automobiles and other cars is subject to various governmental
controls designed to limit environmental damage, including that caused by
emissions and noise. Generally, these controls are met by the manufacturer,
except in the case of occasional equipment failure requiring repair by Hertz. To
comply with environmental regulations, measures are being taken at certain
locations to reduce the loss of vapor during the fueling process and to maintain
and replace underground fuel storage tanks. Hertz is also incurring and
providing for expenses for the cleanup of fuel discharges and other alleged
violations of environmental laws arising from the disposition of waste products.
Hertz does not believe that it will be required to make any material capital
expenditures for environmental control facilities or to make any other material
expenditures to meet the requirements of governmental authorities in this area.
Liabilities for these expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
Public Liability and Property Damage
Provisions for public liability and property damage on self-insured domestic
claims and reinsured foreign claims are made by charges to expense based upon
evaluations of estimated ultimate liabilities
F-10
<PAGE> 11
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
on reported and unreported claims. For its domestic operations, the Company is,
where permitted by applicable local law, a qualified self-insurer against
liability resulting from accidents under certificates of self-insurance for
financial responsibility in all states wherein its vehicles are registered. The
Company also self-insures general public liability and property damage for all
domestic operations. Since July 1, 1987, all claims have been retained and borne
by the Company up to a limit of $5 million for each occurrence, and the Company
has maintained insurance with unaffiliated carriers in excess of $5 million up
to $450 million per occurrence.
For its foreign operations, the Company purchases insurance to comply with local
legal requirements. From January 1, 1993 through December 31, 1996, vehicle
liability insurance purchased locally from unaffiliated carriers by Company
owned operations in Europe was reinsured by Hertz International RE Limited, a
wholly-owned subsidiary of the Company operating as a reinsurer in Dublin,
Ireland. Hertz International RE Limited effectively responded to the first $1.5
million of motor vehicle liability for each accident during this period, with
excess liability insurance coverage maintained by the Company with unaffiliated
carriers. Effective January 1, 1997, the Company replaced an unaffiliated
carrier that was the fronted insurer for claims up to $1.5 million per
occurrence by establishing a wholly-owned subsidiary, Probus Insurance Company
Europe Limited ("Probus"), a direct writer domiciled in Dublin, Ireland. Probus
now underwrites the Company's European vehicle liability program (except in
Switzerland and Denmark) up to $1.5 million per occurrence. Excess coverage for
claims that exceed $1.5 million continues to be maintained with unaffiliated
carriers. In the Company's foreign operations other than Europe, the Company is
self insured at various amounts up to $100,000 per occurrence, and maintains
excess liability insurance coverage up to $450 million per occurrence with
unaffiliated carriers.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the rate of
exchange in effect on the balance sheet date; income and expenses are translated
at the average rate of exchange prevailing during the year. The related
translation adjustments are reflected in the stockholders' equity section of the
consolidated balance sheet. Foreign currency gains and losses resulting from
transactions are included in earnings.
Income Taxes
Effective April 30, 1994, the Company and its domestic subsidiaries are filing
consolidated Federal income tax returns with Ford. The Company and its domestic
subsidiaries filed consolidated Federal income tax returns after December 31,
1987; prior thereto, from September 1, 1985 to December 31, 1987 they were
included in the consolidated Federal income tax return of UAL, and prior thereto
in the consolidated Federal income tax return of RCA. The Company provides for
current and deferred taxes as if it filed a separate consolidated tax return
with its domestic subsidiaries, except that under a tax sharing arrangement with
Ford, the Company's right to reimbursement for foreign tax credits is determined
based on the usage of such foreign tax credits by the consolidated group. By
virtue of its controlling beneficial ownership of the Company, Ford effectively
controls all of the Company's tax decisions. The Company and its subsidiaries
account for investment tax credits under the flow-through method. As of December
31, 1996, U.S. income taxes have not been provided on $209 million in
undistributed earnings of subsidiaries that have been or are intended to be
permanently reinvested outside the United States or are expected to be remitted
free of taxes.
F-11
<PAGE> 12
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Advertising
Hertz is a party to a cooperative advertising agreement with Ford pursuant to
which Ford participates in some of the cost of certain of Hertz' advertising
programs in the United States and abroad which feature the Ford name or
products. The amounts contributed by Ford for the years ended December 31, 1996,
1995 and 1994 were (in millions) $45.4, $44.1 and $42.0, respectively. This
program is expected to continue in the future. The Company incurred advertising
expense for the years ended December 31, 1996, 1995 and 1994 of (in millions)
$148.0, $134.5 and $133.6, respectively.
Pension and Income Saving Plans
Qualified domestic employees, after completion of specified periods of service,
are eligible to participate in the Retirement Plan for the Employees of The
Hertz Corporation ("Hertz Retirement Plan") and in the Income Savings Plan of
The Hertz Corporation ("Hertz Income Savings Plan"). Payments are made to
pension plans of others pursuant to various collective bargaining agreements.
Under the Hertz Retirement Plan, the Company pays the entire cost and employees
are not required to contribute. For each plan year beginning January 1, 1996 and
thereafter, a qualified employee's cash balance account is credited with an
annual cash balance credit equal to: (a) 3% of his/her pensionable earnings for
that plan year in the case of a qualified employee who is credited with less
than 60 continuous months of service from his/her most recent date of hire, or
(b) 4% of his/her pensionable earnings for that plan year in the case of a
qualified employee who is credited with 60 or more continuous months of service
from his/her most recent date of hire. In the case of a qualified employee who
is first credited with 60 continuous months of service after January 1 of a plan
year, the percentage of his/her pensionable earnings utilized in determining
his/her annual cash balance credit for that plan year shall be increased to 4%
effective as of the first day of the month coincident with or next following
his/her completion of 60 continuous months of service from his/her most recent
date of hire. This benefit is credited with guaranteed interest rates compounded
annually based on rates issued by the Pension Benefit Guaranty Corporation in
effect for the preceding December. In addition, all qualified employees age 50
or over with 10 or more years of credited service as of July 1, 1987, will have
an additional amount of their pensionable earnings credited to their account.
Hertz' funding policy is to contribute at least the minimum amount required by
the Employee Retirement Income Security Act of 1974.
Under the Hertz Income Savings Plan, the Company contributes 50% of the first 6%
of the employee's contribution for a maximum match contribution by the Company
of 3% of the employee's base salary.
Most of the Company's foreign subsidiaries have defined benefit retirement plans
or are required to participate in government plans. These plans are all funded,
except in Germany, where an unfunded liability is recorded. In certain
countries, when the subsidiaries make the required funding payments, they have
no further obligations under such plans.
Impairment of Long-Lived Assets and Certain Identifiable Intangibles
The Company evaluates the carrying value of goodwill for potential impairment on
an ongoing basis. Such evaluations compare operating income before amortization
of goodwill to the amortization recorded for the operations to which the
goodwill relates. The Company also considers projected future operating results,
trends and other circumstances in making such estimates and evaluations. In
addition, the Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable.
F-12
<PAGE> 13
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates and Assumptions
Use of estimates and assumptions as determined by management is required in the
preparation of consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those estimates
and assumptions. Certain amounts for prior periods have been reclassified to
conform with 1996 presentations.
NOTE 2 -- DEBT
Debt of the Company and its subsidiaries (in thousands of dollars) consists of
the following:
<TABLE>
<CAPTION>
-----------------------
DECEMBER 31
1996 1995
---------- ----------
<S> <C> <C>
Notes payable, including commercial paper, average interest
rate: 1996, 5.6%; 1995, 5.8%.............................. $1,498,002 $1,036,413
Promissory notes, average interest rate: 1996, 7.3%; 1995,
7.6% (effective average interest rate: 1996, 7.4%; 1995,
7.7%); net of unamortized discount: 1996, $3,602; 1995,
$3,019; due 1997 to 2005.................................. 1,941,398 1,694,641
Property and equipment lease obligations, average interest
rate: 1996, 7.5%; 1995, 7.9%; due 1997 to 1998............ 2,554 3,602
Medium-term notes, average interest rate: 1996, 9.3%; 1995,
9.4%; due 1997............................................ 75,300 119,175
Senior subordinated promissory notes, average interest rate:
1996, 9.7%; 1995, 9.5% (effective average interest rate:
1996, 9.8%; 1995, 9.6%); net of unamortized discount:
1996, $172; 1995, $313; due 1997 to 1998.................. 149,828 249,687
Junior subordinated promissory notes, average interest rate
6.9%; net of unamortized discount: 1996, $244; 1995, $286;
due 2000 to 2003.......................................... 399,756 399,714
Subsidiaries' debt:
Short-term borrowings --
Banks, average interest rate: 1996, 5.1%; 1995, 6.0%,
in foreign currencies................................. 782,765 684,634
Commercial paper, average interest rate: 1996, 6.2%;
1995, 5.8%, in foreign currencies..................... 141,805 11,357
Others, average interest rate: 1996, 2.7%; 1995, 3.7%,
in foreign currencies................................. 56,518 51,200
Other borrowings, average interest rate: 1996, 7.4%; 1995,
7.0%; in foreign currencies............................ 43,918 47,061
---------- ----------
Total....................................................... $5,091,844 $4,297,484
========== ==========
</TABLE>
The aggregate amounts of maturities of debt, in millions, are as follows: 1997,
$2,718.9 (including $2,478.9 of commercial paper, demand and other short-term
borrowings); 1998, $374.5; 1999, $451.1; 2000, $249.8; 2001, $398.9; after 2001,
$898.6. Included in these maturities at the earliest possible redemption date
are the following promissory notes of the Company which have put options that
can be exercised by the holders of such notes as follows: $5 million at 9.3% due
in 2005, that can be redeemed at the option of the holders in 1997; $25 million
at 9% due in 2000, that can be redeemed at the option of the holders in 1997,
1998 or 1999; $100 million at 9% due 2009, that can be redeemed at the option of
the holders in 1999; and $150 million at 6.3% due 2006, that can be redeemed at
the option of the holders in 2002.
F-13
<PAGE> 14
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- DEBT -- (CONTINUED)
The Company and its subsidiaries have entered into arrangements to manage
exposures to fluctuations in interest rates. See Note 13 -- Financial
Instruments.
During the year ended December 31, 1996, short-term borrowings, in millions,
were as follows: maximum amounts outstanding $2,129.2 commercial paper, $838.1
banks and $137.2 other; monthly average amounts outstanding $1,615.9 commercial
paper (weighted average interest rate 5.6%), $754.2 banks (weighted average
interest rate 5.3%) and $91.1 other (weighted average interest rate 2.5%).
During the year ended December 31, 1995, short-term borrowings, in millions,
were as follows: maximum amounts outstanding $1,853.8 commercial paper, $1,083.5
banks and $193.5 other; monthly average amounts outstanding $1,292.6 commercial
paper (weighted average interest rate 6.1%), $828.2 banks (weighted average
interest rate 6.4%) and $108.6 other (weighted average interest rate 4.3%).
During the year ended December 31, 1994, short-term borrowings, in millions,
were as follows: maximum amounts outstanding $1,021.3 commercial paper, $1,247.6
banks and $194.1 other; monthly average amounts outstanding $659.9 commercial
paper (weighted average interest rate 4.9%), $975.5 banks (weighted average
interest rate 5.8%) and $95.5 other (weighted average interest rate 5.3%).
The net amortized discount charged to interest expense for the years ended
December 31, 1996, 1995 and 1994 relating to debt and other liabilities, in
millions, was $.9, $.9, and $1.3, respectively. In addition, interest expense,
in millions, for the years 1995, and 1994 was reduced by $1.3 and $1.6,
respectively, of interest income, relating to refunds of prior years' state,
local and federal income taxes.
In 1996, the Company renewed the following two committed bank facilities with a
group of thirty-one commercial banks, which will be utilized to support
commercial paper and other short-term borrowings in the aggregate amount of
$2.08 billion: (i) five year credit agreement for $1.185 billion is committed
until June 30, 2001. The termination date is automatically extended for an
additional one-year period each June 30, unless the bank gives notice to the
contrary. A facility fee of .09% per annum is payable on the entire commitment
amount; and (ii) 364-day credit agreement for $895 million, renewed in June
1996, is committed through June 25, 1997. A facility fee of .0625% per annum is
payable on the entire commitment amount.
The Company also entered into a revolving loan agreement with Ford on June 8,
1994 under which the Company could borrow from Ford from time to time up to $250
million outstanding. See Note 14 -- Subsequent Events. Obligations of the
Company under this agreement would rank pari passu with the Company's senior
debt securities. A commitment fee of .09% per annum is payable on the unused
available credit. In addition, at December 31, 1996, the Company and a
subsidiary had $269 million of outstanding loans from Ford.
At December 31, 1996, the three credit facilities described above provided for
borrowings of $2.3 billion, all of which was available for borrowing.
The Company maintains a Sales Agency Agreement with Ford Financial Services,
Inc., an NASD registered broker-dealer and an indirect, wholly-owned subsidiary
of Ford ("FFS"), whereby FFS acts as the exclusive dealer for the Company's
domestic commercial paper program. The Company pays fees to FFS which range from
.035% to .05% per annum of commercial paper placed depending upon the monthly
average dollar value of the notes outstanding in the portfolio. In 1996, the
Company paid FFS $556,754 of such fees. FFS is under no obligation to purchase
any of the notes for its own account. FFS has acted as the Company's exclusive
commercial paper dealer since October 1994, and the Sales Agency Agreement may
not be amended or terminated without the written consent of both parties. The
F-14
<PAGE> 15
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- DEBT -- (CONTINUED)
Company, through its subsidiary Hertz Australia Pty. Limited ("Hertz
Australia"), has a similar agreement with Ford Credit Australia Limited, also an
indirect, wholly-owned subsidiary of Ford Motor Company.
The terms of the Company's loan agreements limit the payment of cash dividends.
At December 31, 1996, approximately $331 million of consolidated stockholders'
equity was free of such limitations.
NOTE 3 -- FOREIGN CURRENCY
Foreign currency exchange gains and losses included in net income were net gains
of $3.4 million, $2.0 million and $1.2 million for the years ended December 31,
1996, 1995 and 1994, respectively.
NOTE 4 -- AVAILABLE-FOR-SALE SECURITIES
As of December 31, 1996, Prepaid Expenses and Other Assets in the consolidated
balance sheet include available-for-sale securities at fair value (in thousands)
of $5,405 (cost $5,432). The fair value is calculated using information provided
by outside quotation services. These securities include various governmental and
corporate debt obligations, with the following maturity dates (in thousands):
fair value $113 (cost $116) in 1997; fair value $4,373 (cost $4,376) 1998
through 2002; fair value $899 (cost $929) 2003 through 2012; $20 fair value
(cost $11) after 2012. For the year ended December 31, 1996, proceeds of $6.4
million from the sale of available-for-sale securities were received, and a
gross realized gain of $105,813 and gross realized loss of $134,474 were
included in earnings. Actual cost was used in computing the realized gain and
loss on the sale. For the year ended December 31, 1996, unrealized holding
losses and unrealized holding gains, net of taxes, included in Stockholders'
Equity were $62,000 and $37,000, respectively.
NOTE 5 -- PURCHASES AND SALES OF OPERATIONS
In June 1996, the Company acquired all of the capital stock of a foreign
licensee car rental and leasing operation and the assets of a domestic car
rental operation. In February 1996, the Company acquired the assets of a
domestic construction equipment rental operation. The costs related to these
acquisitions exceeded the net assets acquired by $6.1 million.
In May 1996, the Company sold certain of its claim administration service
operations effective February 29, 1996, which included the administration of
workers' compensation claims and other related services, and health related
benefit claims. The net proceeds from the sale approximated $15.3 million, which
exceeded its book value by approximately $3 million. The total assets of these
operations at February 29, 1996 were $15.5 million and revenues for the year
ended December 31, 1995 were $31.0 million, with negligible net income.
Therefore, the Company believes that this transaction will not have a material
effect on its financial position or results of operations.
F-15
<PAGE> 16
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PURCHASES AND SALES OF OPERATIONS -- (CONTINUED)
On July 31, 1994, Axus, S.A., a car leasing company of the Company which
operates in various countries in Europe, acquired an additional interest in
Locaplan S.A., a car leasing operation in France, increasing its ownership from
50% to 100%. The cost relating to this acquisition approximated $2.3 million,
which exceeded the net assets acquired by approximately $2.2 million. Commencing
in August 1994, the accounts of this operation have been included in the
consolidated financial statements of the Company, which did not have a material
effect on the Company's consolidated financial position or results of
operations. These operations were sold by the Company effective January 1, 1995
to Hertz Leasing International, Inc. ("HLI"), at an amount equal to its book
value of approximately $61 million. HLI is an indirect, wholly-owned subsidiary
of Ford. For additional consideration payable over five years, except for
Australia, New Zealand and Brazil, Ford has received the worldwide rights
(subject to certain existing license rights) to use and sublicense others to use
the "Hertz" name in the conduct of car leasing businesses -- $9.3 million was
received in each of the years 1996 and 1995. The unaudited total assets as of
December 31, 1994 and unaudited total revenues and net income for the year ended
December 31, 1994 of the Company's European car leasing and car dealership
operations were (in millions) $482, $295 and $6, respectively. This transaction
did not have a material effect on the Company's financial position or results of
operations. See Note 14 -- Subsequent Event.
At December 31, 1996, a foreign subsidiary of the Company had $10.9 million of
loans receivable including related interest from foreign subsidiaries of HLI,
which mature in 1997.
In connection with the acquisition of the Company by Park Ridge in December 1987
and UAL in August 1985, the excess of the purchase price over the consolidated
equity of the Company at the time of these purchases was $658.3 million. These
costs are being amortized by the Company over 40 years. The unamortized amount
of such costs at December 31, 1996 was $501.3 million.
NOTE 6 -- PENSION AND INCOME SAVINGS PLAN AND POSTRETIREMENT BENEFIT PLANS
The following tables set forth the funded status and the net periodic pension
cost of the Hertz Retirement Plan covering its domestic ("U.S.") employees and
the retirement plans for foreign
F-16
<PAGE> 17
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- PENSION AND INCOME SAVINGS PLAN AND POSTRETIREMENT BENEFIT PLANS --
(CONTINUED)
operations ("Non-U.S.") and amounts included in the consolidated balance sheet
and statement of income (in millions of dollars):
<TABLE>
<CAPTION>
-----------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
U.S. NON-U.S. U.S. NON-U.S.
------- -------- ------ --------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligation --
Vested................................................ $ (73.7) $(34.1) $(62.6) $(27.9)
Nonvested............................................. (8.9) (4.8) (8.4) (3.7)
------- ------ ------ ------
Total.............................................. $ (82.6) $(38.9) $(71.0) $(31.6)
======= ====== ====== ======
Actuarial present value of projected benefit
obligation............................................ $(111.4) $(49.3) $(98.9) $(37.3)
Plan assets at fair value............................... 101.1 32.5 90.4 25.5
------- ------ ------ ------
Projected benefit obligation in excess of plan assets... (10.3) (16.8) (8.5) (11.8)
Unrecognized net (gain) loss............................ (20.0) 9.9 (14.2) 5.0
Prior service cost not yet recognized in net periodic
pension cost.......................................... -- -- .2 --
Remaining unrecognized net obligation................... 1.0 -- 1.3 --
------- ------ ------ ------
Pension liability included in the balance sheet......... $ (29.3) $ (6.9) $(21.2) $ (6.8)
======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------------------ ------------------ -----------------
U.S. NON-U.S. U.S. NON-U.S. U.S. NON-U.S.
------ -------- ------ -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during
the period............................ $ 8.0 $ 4.0 $ 5.3 $ 2.2 $ 6.4 2.3
Interest cost on projected benefit
obligation............................ 7.0 2.3 6.1 2.1 7.2 1.5
Return on assets:
Actual (gain) loss.................... (14.1) (1.9) (21.3) (1.5) .7 (1.5)
Deferred gain (loss).................. 7.5 -- 15.4 -- (6.1) --
Net amortization and deferral........... .8 -- .2 .1 1.8 .1
------ ----- ------ ----- ----- -----
Net periodic pension cost included in
the income statement.................. $ 9.2 $ 4.4 $ 5.7 $ 2.9 $10.0 $ 2.4
====== ===== ====== ===== ===== =====
</TABLE>
Significant assumptions used for the U.S. plan were as follows: weighted average
discount rate of 7.25% at December 31, 1996, 7.0% during 1996 (8.25% during 1995
and 7% during 1994); 5.5% rate of increase in future compensation levels (5.1%
for 1995 and 5.5% for 1994); and expected long-term rate of return on assets of
9%. Assumptions used for the Non-U.S. plans vary by country and are made in
accordance with local conditions, but do not vary materially from those used in
the U.S. plan. Plan assets consist principally of investments in stocks,
government bonds and other fixed income securities.
The provisions charged to income for the years ended December 31, 1996, 1995 and
1994 for all other pension plans were approximately (in millions) $6.7, $6.1 and
$6.0, respectively.
The provisions charged to income for the years ended December 31, 1996, 1995 and
1994 for the Hertz Income Savings Plan were approximately (in millions) $3.8,
$3.4 and $3.0, respectively.
F-17
<PAGE> 18
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- PENSION AND INCOME SAVINGS PLAN AND POSTRETIREMENT BENEFIT PLANS --
(CONTINUED)
The estimated cost for postretirement health care and life insurance benefits is
accrued on an actuarially determined basis. The following sets forth the plans'
status, reconciled with the amounts included in the consolidated balance sheet
and statement of income (in millions):
<TABLE>
<CAPTION>
------------
DECEMBER 31
ACTUARIAL PRESENT VALUE OF ACCUMULATED BENEFIT OBLIGATION -- 1996 1995
- - ------------------------------------------------------------ ---- ----
<S> <C> <C>
Retirees.................................................... $1.8 $1.7
Active employees eligible to retire....................... 2.0 3.0
Other active employees.................................... 4.3 3.5
---- ----
Total accumulated benefit obligation...................... 8.1 8.2
Unrecognized net gain..................................... 1.0 .3
---- ----
Accrued liability included in the balance sheet........... $9.1 $8.5
==== ====
</TABLE>
<TABLE>
<CAPTION>
--------------------
YEARS ENDED
DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Benefits attributed to employees' service................... $.3 $ .2 $ .2
Interest on accumulated benefit obligation.................. .5 .5 .4
Amortization of net gain.................................... -- (.1) (.3)
--- ---- ----
Net periodic postretirement benefit cost............... $.8 $ .6 $ .3
=== ==== ====
</TABLE>
The significant assumptions used for the postretirement benefit plans were as
follows: weighted average discount rate of 7.5% at December 31, 1996, 7.25%
during 1996 (8.75% in 1995 and 7.5% in 1994), 5.5% rate of increase in future
compensation levels (5.3% in 1995 and 5.5% in 1994), 7.5% weighted average
health care cost trend rate through 2001 (8.3% in 1995 and 9% in 1994), and 6.7%
weighted average trend rate in ten years (7.5% in 1995 and 8% in 1994). Changing
the assumed health care cost trend rates by one percentage point in each year
would change the accumulated postretirement benefit obligation as of December
31, 1996 by approximately $555,000, and the aggregate service and interest cost
components of net periodic postretirement benefit cost for 1996 by approximately
$90,000.
NOTE 7 -- REVENUE EARNING EQUIPMENT
Revenue earning equipment is used in the rental of cars and industrial and
construction equipment and the leasing of cars under closed-end leases where the
disposition of the cars upon termination of the lease is for the account of
Hertz. Revenue is recorded as earned under the terms of the rental or leasing
contract. Revenue on open contracts is accrued to the balance sheet date based
on the terms in the contracts. Expenses are recorded as incurred. Over the three
years ended December 31, 1996, on a weighted average basis, approximately 66% of
the cars acquired by the Company for its U.S. rental car fleet, and
approximately 33% of the cars acquired by the Company for its international
fleet, were manufactured by Ford. During 1996, approximately 64% of the cars
required by the Company domestically were manufactured by Ford. The percentage
of Ford cars acquired by the Company for its U.S. rental car fleet is expected
to remain at these or higher levels in the future. In 1996, approximately 28% of
the cars acquired by the Company for its international fleet were manufactured
by Ford, which represented the largest percentage of any automobile manufacturer
in that year.
Under operating leases, aggregate minimum future rentals for cars leased at
December 31, 1996 are receivable approximately as follows (in millions): $25 in
1997, $15 in 1998, $6 in 1999, and $1 in
F-18
<PAGE> 19
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- REVENUE EARNING EQUIPMENT -- (CONTINUED)
2000. Cars under lease at December 31, 1996 which are owned by Hertz amounted to
$95 million, net of accumulated depreciation of $25 million.
The average holding periods of cars and other revenue earning equipment are as
follows: cars used in the car rental business, 5 to 12 months; cars used in the
car leasing business, 36 months; and equipment used in the industrial and
construction equipment rental business, 24 to 60 months. At December 31, 1996,
the average ages of owned cars and other revenue earning equipment are as
follows: cars used in the rent a car business, 7 months; cars used in the car
leasing business, 19 months; and equipment used in the industrial and
construction equipments rental business, 19.7 months. At December 31, 1996, the
Company was subject to residual risk with respect to 17% of all cars in its
worldwide car rental and leasing operations and 100% of the equipment in the
industrial and construction equipment rental business.
Depreciation of revenue earning equipment includes the following (in thousands
of dollars):
<TABLE>
<CAPTION>
--------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Depreciation of revenue earning equipment.................. $904,504 $753,999 $651,413
Adjustment of depreciation upon disposal of the
equipment............................................. (23,221) (6,356) (22,983)
Rents paid for vehicles leased............................. 11,395 56,219 74,214
-------- -------- --------
Total................................................. $892,678 $803,862 $702,644
======== ======== ========
</TABLE>
Effective July 1, 1994, certain lives being used to compute the provision for
depreciation of revenue earning equipment used in the Company's industrial and
construction equipment rental business were increased to reflect changes in the
estimated residual values to be realized when the equipment is sold. As a result
of this change, depreciation of revenue earning equipment for the years 1995 and
1994 were decreased by $12.0 million and $9.6 million, respectively.
The adjustment of depreciation upon disposal of revenue earning equipment for
the years ended December 31, 1996, 1995, and 1994 included (in millions) net
gains of $20.7, $13.8 and $13.2, respectively, on the sale of industrial and
construction equipment, net gains of $2.5, net losses of $7.5 and net gains of
$9.8, respectively, on the sale of cars used in the rent a car and car leasing
operations.
In view of the favorable market conditions in 1995 and 1996 for the sale of used
equipment in the industrial and construction equipment rental business,
effective January 1, 1997, certain estimated useful lives being used to compute
the provision for depreciation will be increased to reflect the anticipated
changes in the estimated residual values to be realized when the equipment is
sold. This should result in lower annual depreciation charges and lower gains on
the disposal of the used equipment than has been the case in 1996 and 1995.
As of December 31, 1996 and 1995, Ford owed the Company and its subsidiaries
$445.1 million and $358.6 million, respectively, in connection with various car
repurchase and warranty programs. As of December 31, 1996 and 1995, the Company
and its subsidiaries owed Ford $26.6 million and $9.4 million, respectively
(which amounts are included in Accounts Payable in the consolidated balance
sheet) in connection with cars purchased. These transactions were made and are
being paid in the ordinary course of business.
During the year ended December 31, 1996, the Company purchased Ford cars at a
cost of approximately $4.3 billion, and sold these cars to Ford or its
affiliates under various repurchase programs for approximately $3.2 billion.
F-19
<PAGE> 20
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- TAXES ON INCOME
The provision for taxes on income consists of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Current:
Federal................................................... $31,360 $ 10,381 $38,797
Foreign................................................... 18,832 29,422 20,016
State and local........................................... 8,758.. (1,165) 8,236
------- -------- -------
Total current........................................ 58,950 38,638 67,049
------- -------- -------
Deferred:
Federal................................................... 23,772 35,577 2,027
Foreign................................................... 6,228 (11,577) (127)
State and local........................................... 9,000 4,500 2,800
------- -------- -------
Total deferred....................................... 39,000 28,500 4,700
------- -------- -------
Total provision...................................... $97,950 $ 67,138 $71,749
======= ======== =======
</TABLE>
The principal items in the deferred tax provision (benefit) are as follows (in
thousands of dollars):
<TABLE>
<S> <C> <C> <C>
Difference between tax and book depreciation................ $ 64,176 $ 34,790 $ 9,234
Accrued and prepaid expense deducted for tax purposes when
paid or incurred.......................................... (39,427) 13,671 (14,517)
Tax operating loss utilized (carryforwards)................. (7,217) 1,507 (2,636)
Federal alternative minimum tax credit utilized
(carryforwards)........................................... 10,217 (10,217) 1,072
Foreign tax credit utilized (carryforwards)................. 11,251 (11,251) --
Investment tax credit utilized.............................. -- -- 11,547
-------- -------- --------
Total deferred provision............................... $ 39,000 $ 28,500 $ 4,700
======== ======== ========
</TABLE>
The principal items in the deferred tax liability at December 31, 1996 and 1995
are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Difference between tax and book depreciation................ $ 309,368 $ 245,192
Accrued and prepaid expense deducted for tax purposes when
paid or incurred.......................................... (148,526) (109,099)
Tax operating loss carryforwards............................ (12,626) (5,409)
Foreign tax credit carryforwards............................ -- (11,251)
Federal alternative minimum tax credit carryforwards........ (31,416) (41,633)
--------- ---------
Total.................................................. $ 116,800 $ 77,800
========= =========
</TABLE>
The tax operating loss carryforwards at December 31, 1996 of $12.6 million
relate to certain foreign operations and have the following expiration dates (in
millions): $1.0 in 2001, $.2 in 2002, $.2 in 2006, and $11.2 with no expiration
dates. It is anticipated that such operations will become profitable in the
future and the carryforwards will be fully utilized.
As of December 31, 1996, the alternative minimum tax credit carryforwards of
$31.4 million (which have no expiration date) will be utilized upon reversal of
timing differences and against future taxable income.
F-20
<PAGE> 21
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- TAXES ON INCOME -- (CONTINUED)
The principal items accounting for the difference in taxes on income computed at
the U.S. statutory rate of 35% and as recorded are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Computed tax at statutory rate.............................. $ 89,799 $60,320 $56,991
State and local income taxes, net of Federal income tax
benefit................................................... 11,543 2,168 7,173
Tax effect on the amortization of the cost in excess of the
Company's net assets acquired by Park Ridge and UAL....... 5,762 5,764 5,760
Adjustments made to tax accruals in connection with tax
audit evaluations and the effects of prior years' tax
sharing arrangements between companies, UAL and RCA....... (13,945) -- (1,511)
Income taxes on foreign earnings at effective rates
different from the U.S. statutory rate, including the
anticipated realization of certain foreign tax benefits
and the effect of subsidiaries' gains and losses and
exchange adjustments with no tax effect................... 5,937 (3,890) 1,987
All other items, net, none of which exceeded 5% of computed
tax....................................................... (1,146) 2,776 1,349
-------- ------- -------
Total provision........................................ $ 97,950 $67,138 $71,749
======== ======= =======
</TABLE>
NOTE 9 -- LEASE AND CONCESSION AGREEMENTS
Hertz has various concession agreements which provide for payment of rents and a
percentage of revenue with a guaranteed minimum and real estate leases under
which the following amounts were expensed (in thousands of dollars):
<TABLE>
<CAPTION>
------------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Rents...................................................... $ 47,328 $ 49,903 $ 50,066
Concession fees:
Minimum fixed obligations................................ 123,014 121,632 114,920
Additional amounts, based on revenues.................... 131,904 121,461 107,685
-------- -------- --------
Total................................................. $302,246 $292,996 $272,671
======== ======== ========
</TABLE>
As of December 31, 1996, minimum obligations under existing agreements referred
to above are approximately as follows (in thousands of dollars):
<TABLE>
<CAPTION>
----------------------
RENTS CONCESSIONS
-------- -----------
<S> <C> <C>
Years ended December 31,
1997...................................................... $ 41,492 $90,128
1998...................................................... 36,638 66,049
1999...................................................... 30,726 45,970
2000...................................................... 26,363 29,577
2001...................................................... 23,178 13,187
Years after 2001............................................ 130,531 46,242
</TABLE>
F-21
<PAGE> 22
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- LEASE AND CONCESSION AGREEMENTS -- (CONTINUED)
In addition to the above, Hertz has various leases on cars and office and
computer equipment under which the following amounts were expensed (in thousands
of dollars):
<TABLE>
<CAPTION>
---------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cars........................................................ $11,395 $56,219 $74,214
Office and computer equipment............................... 21,772 23,965 23,679
------- ------- -------
Total.................................................. $33,167 $80,184 $97,893
======= ======= =======
</TABLE>
As of December 31, 1996, minimum obligations under existing agreements referred
to above that have a maturity of more than one year are as follows (in
thousands): office and computer equipment 1997, $8,279; 1998, $4,784; 1999,
$1,514; 2000, $66; 2001, $8.
NOTE 10 -- SEGMENT INFORMATION
The Company's business consists of two significant segments: Rental and leasing
of automobiles and certain other activities ("car rental"); and rental of
industrial, construction and materials handling equipment ("industrial and
construction equipment rental"). The contributions of these segments to other
financial data are summarized as follows (in millions of dollars):
<TABLE>
<CAPTION>
-----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues
Car rental................................................ $ 3,276 $ 3,068 $ 3,031
Industrial and construction equipment rental.............. 392 333 263
------- ------- -------
Total................................................... $ 3,668 $ 3,401 $ 3,294
======= ======= =======
Depreciation of revenue earning equipment
Car rental................................................ $ 815 $ 746 $ 663
Industrial and construction equipment rental.............. 78 58 40
------- ------- -------
Total................................................... $ 893 $ 804 $ 703
======= ======= =======
Depreciation of property and equipment
Car rental................................................ $ 71 $ 71 $ 61
Industrial and construction equipment rental.............. 11 9 8
------- ------- -------
Total................................................... $ 82 $ 80 $ 69
======= ======= =======
Amortization of intangibles
Car rental................................................ $ 18 $ 20 $ 19
Industrial and construction equipment rental.............. -- -- --
------- ------- -------
Total................................................... $ 18 $ 20 $ 19
======= ======= =======
Operating income (pre-tax income before interest)
Car rental................................................ $ 421 $ 356 $ 353
Industrial and construction equipment rental.............. 134 123 87
------- ------- -------
Total................................................... $ 555 $ 479 $ 440
======= ======= =======
Income before income taxes
Car rental................................................ $ 166 $ 87 $ 107
Industrial and construction equipment rental.............. 91 85 56
------- ------- -------
Total................................................... $ 257 $ 172 $ 163
======= ======= =======
Total assets at end of year
Car rental................................................ $ 6,779 $ 5,993 $ 6,023
Industrial and construction equipment rental.............. 870 664 498
------- ------- -------
Total................................................... $ 7,649 $ 6,657 $ 6,521
======= ======= =======
</TABLE>
F-22
<PAGE> 23
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
NOTE 10 -- SEGMENT INFORMATION -- (CONTINUED)
Revenue earning equipment, net, at end of year
Car rental................................................ $ 4,318 $ 3,627 $ 3,854
Industrial and construction equipment rental.............. 718 543 406
------- ------- -------
Total................................................... $ 5,036 $ 4,170 $ 4,260
======= ======= =======
Revenue earning equipment and property and equipment
Car rental
Expenditures............................................ $ 8,006 $ 7,144 $ 6,789
Proceeds from sale...................................... (6,386) (6,122) (4,718)
------- ------- -------
Net expenditures...................................... $ 1,620 $ 1,022 $ 2,071
======= ======= =======
Industrial and construction equipment rental
Expenditures............................................ $ 378 $ 290 $ 235
Proceeds from sale...................................... (104) (76) (65)
------- ------- -------
Net expenditures...................................... $ 274 $ 214 $ 170
======= ======= =======
</TABLE>
The Company operates in the United States and in foreign countries. The
operations within major geographic areas are summarized as follows (in millions
of dollars):
<TABLE>
<CAPTION>
-----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues
United States............................................. $ 2,723 $ 2,510 $ 2,258
Foreign operations (substantially Europe)................. 945 891 1,036
------- ------- -------
Total................................................... $ 3,668 $ 3,401 $ 3,294
======= ======= =======
Depreciation of revenue earnings equipment
United States............................................. $ 789 $ 717 $ 540
Foreign operations (substantially Europe)................. 104 87 163
------- ------- -------
Total................................................... $ 893 $ 804 $ 703
======= ======= =======
Depreciation of property and equipment
United States............................................. $ 63 $ 60 $ 51
Foreign operations (substantially Europe)................. 19 20 18
------- ------- -------
Total................................................... $ 82 $ 80 $ 69
======= ======= =======
Amortization of intangibles
United States............................................. $ 17 $ 19 $ 18
Foreign operations (substantially Europe)................. 1 1 1
------- ------- -------
Total................................................... $ 18 $ 20 $ 19
======= ======= =======
Operating income (pre-tax income before interest)
United States............................................. $ 451 $ 357 $ 315
Foreign operations (substantially Europe)................. 104 122 125
------- ------- -------
Total................................................... $ 555 $ 479 $ 440
======= ======= =======
Income before income taxes
United States............................................. $ 196 $ 98 $ 94
Foreign operations (substantially Europe)................. 61 74 69
------- ------- -------
Total................................................... $ 257 $ 172 $ 163
======= ======= =======
Total assets at end of year
United States............................................. $ 5,805 $ 4,971 $ 4,762
Foreign operations (substantially Europe)................. 1,844 1,686 1,759
------- ------- -------
Total................................................... $ 7,649 $ 6,657 $ 6,521
======= ======= =======
Revenue earning equipment, net, at end of year
United States............................................. $ 3,997 $ 3,240 $ 3,119
Foreign operations (substantially Europe)................. 1,039 930 1,141
------- ------- -------
Total................................................... $ 5,036 $ 4,170 $ 4,260
======= ======= =======
</TABLE>
F-23
<PAGE> 24
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
NOTE 10 -- SEGMENT INFORMATION -- (CONTINUED)
Revenue earning equipment and property and equipment
United States.............................................
Expenditures............................................ $ 6,011 $ 5,413 $ 5,226
Proceeds from sale...................................... (4,360) (4,452) (3,405)
------- ------- -------
Net expenditures...................................... $ 1,651 $ 961 $ 1,821
======= ======= =======
Foreign operations (substantially Europe)
Expenditures............................................ $ 2,373 $ 2,021 $ 1,798
Proceeds from sale...................................... (2,130) (1,746) (1,378)
------- ------- -------
Net expenditures...................................... $ 243 $ 275 $ 420
======= ======= =======
</TABLE>
NOTE 11 -- LITIGATION
In July 1996, the Company was sued in Harris County, Texas District Court in a
purported class action in which this plaintiff alleges that the Company's
practice of providing certain insurance products violates the Texas Insurance
Code because the Company did not obtain approval to sell insurance or obtain
regulatory approval of the premiums it charges. The complaint seeks restitution
of excessive premiums, equitable rescission of all insurance contracts entered
into by the class members, a declaratory judgment that the Company is selling
insurance illegally in Texas and injunctive relief. While it is possible that
the action could result in significant liability to the Company, the Company
does not expect the action to have a material adverse effect on the Company's
consolidated financial position or results of operations.
The U.S. Department of Labor has commenced an inquiry into the Company's
classification of certain employees as "exempt" for purposes of federal labor
laws and whether such employees have been improperly denied overtime pay. While
an adverse outcome of the inquiry could have an adverse effect on the Company's
results of operations for the quarter in which it occurs, the Company does not
believe that an adverse outcome would have a material adverse effect on the
Company's results of operations for a full year, or on the Company's
consolidated financial position.
Since 1992, in the Company's New York region (which includes parts of New Jersey
and Connecticut), the Company has been assessing higher rental rates for renters
who reside in the New York City boroughs of The Bronx, Brooklyn or Queens to
offer costs resulting from a higher incidence of accidents involving renters
residing in such boroughs. The City of New York passed an ordinance prohibiting
such pricing practice. The Company filed suit against The City of New York
claiming that such ordinance was in violation of federal anti-trust laws. The
Company's claim was rejected in U.S. District Court, and the Company appealed to
the U.S. Court of Appeals for the Second Circuit. That Court remanded the
proceeding to the U.S. District Court for trial. Pending the outcome of the
action in the U.S. District Court, the Court has stayed the ordinance,
permitting the Company to continue its pricing practice. If the Company is
ultimately unsuccessful in challenging the ordinance, the Company believes it
could take actions to mitigate the higher costs that would be experienced from
such rentals. Accordingly, the Company believes that an adverse outcome would
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
In addition to the foregoing, various legal actions, claims and governmental
inquiries and proceedings are pending or may be instituted or asserted in the
future against the Company and its subsidiaries. Litigation is subject to many
uncertainties, and the outcome of the individual litigated matters is not
predictable with assurance. It is possible that certain of the actions, claims,
inquiries or proceedings, including those discussed above, could be decided
unfavorably to the Company or the subsidiary involved. Although the amount of
liability with respect to these matters cannot be ascertained, potential
F-24
<PAGE> 25
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- LITIGATION -- (CONTINUED)
liability in excess of related accruals is not expected to materially affect the
consolidated financial position or results of operations of the Company.
NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of the quarterly operating results during 1996 and 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------------
OPERATING INCOME INCOME (LOSS)
(PRETAX INCOME BEFORE INCOME NET INCOME
REVENUES BEFORE INTEREST) TAXES (LOSS)
-------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
1996
First quarter......................... $ 803,142 $ 82,487 $ 15,172 $ 8,788
Second quarter........................ 911,401 144,260 69,284 39,545
Third quarter......................... 1,060,028 219,943 138,249 74,208
Fourth quarter........................ 893,812 108,679 33,864 36,078
---------- -------- -------- --------
Total Year......................... $3,668,383 $555,369 $256,569 $158,619
========== ======== ======== ========
1995
First quarter......................... $ 735,679 $ 69,705 $ (646) $ (365)
Second quarter........................ 858,555 115,089 34,515 19,637
Third quarter......................... 989,756 194,070 109,584 65,092
Fourth quarter........................ 816,598 100,553 28,891 20,842
---------- -------- -------- --------
Total Year......................... $3,400,588 $479,417 $172,344 $105,206
========== ======== ======== ========
</TABLE>
- - -------------------------
The tax provision in the fourth quarter of 1996 includes credits of $13.9
million resulting from adjustments made to tax accruals in connection with tax
audit evaluations and the effects of prior years' tax sharing arrangements
between the Company and its former parent companies, UAL and RCA.
Effective July 1, 1994, certain lives being used to compute the provision for
depreciation of revenue earning equipment used in the industrial and
construction equipment rental business were increased to reflect changes in the
estimated residual values to be realized when the equipment is sold. As a result
of this change, pre-tax income before interest includes credit adjustments of
$10.8 million in the first quarter of 1995 and $1.2 million in the second
quarter of 1995 as a result of decreasing depreciation of revenue earning
equipment.
The tax provision in the fourth quarter of 1995 includes $6.5 million of credits
relating to foreign taxes paid which were offset against U.S. income tax
liabilities.
NOTE 13 -- FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and trade receivables. The
Company places its cash equivalents with financial institutions and limits the
amount of credit exposure to any one financial institution. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base, and their dispersion
across different businesses and geographic areas. All borrowings by foreign
operations are either in the foreign operation's local
F-25
<PAGE> 26
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
currency or, if in non-local currency, on a fully hedged basis to minimize
foreign exchange exposure. As of December 31, 1996, the Company had no
significant concentration of credit risk.
Cash and Equivalents
Fair value approximates cost indicated on the balance sheet at December 31,
1996, because of the short-term maturity of these instruments.
Debt
Fair value is estimated based on quoted market rates as well as borrowing rates
currently available to the Company for loans with similar terms and average
maturities. Carrying value was used as fair value for borrowings with an initial
maturity of 92 days or less. The fair value of all debt at December 31, 1996
approximated $5.12 billion compared to carrying value of $5.09 billion.
Public Liability and Property Damage
Provisions for public liability and property damage on self-insured domestic
claims and reinsured foreign claims are made by charges to expense based upon
evaluations of estimated ultimate liabilities on reported and unreported claims.
These liabilities are anticipated to be paid in the future which range between
one and five years. The fair value of these liabilities at December 31, 1996
approximates $290 million compared to carrying value of $321 million. The fair
value was estimated using a 6.9% interest rate, which represents the long-term
borrowing rate available to the Company at December 31, 1996.
Financial Instruments
The Company and its subsidiaries have entered into arrangements to manage
exposure to fluctuations in interest rates. These arrangements consist of
interest-rate swap agreements ("swaps") and forward rate agreements ("FRAs").
The differential paid or received on these agreements is recognized as an
adjustment to interest expense. These agreements are not entered into for
trading purposes. The effect of these agreements is to make the Company less
susceptible to changes in interest rates by effectively converting certain
variable rate debt to fixed rate debt. Because of the relationship of current
market rates to historical fixed rates, the effect at December 31, 1996 of the
swap and FRA agreements is to give the Company an overall effective
weighted-average rate on debt of 6.53%, with 41% of debt effectively subject to
variable interest rates, compared to a weighted-average interest rate on debt of
6.48%, with 49% of debt subject to variable interest rates when not considering
the swap and FRA agreements. At December 31, 1996, these agreements expressed in
notional amounts aggregated $368.4 million swaps. Notional amounts are not
reflective of the Company's obligations under these agreements because the
Company is only obligated to pay the net amount of interest rate differential
between the fixed and variable rates specified in the contracts. The Company's
exposure to any credit loss in the event of non-performance by the
counterparties is further mitigated by the fact that all of these financial
instruments are with significant financial institutions that are rated "A" or
better by the major credit rating agencies. At December 31, 1996, the fair value
of all outstanding contracts, which is representative of the Company's
obligations under these contracts, assuming the contracts were terminated at
that date, was approximately a net payable of $4.0 million.
The Company and its subsidiaries have entered into arrangements to manage
exposure to fluctuations in foreign exchange rates for certain foreign currency
loans and selected marketing programs. These arrangements consist of foreign
exchange forward contracts and the purchase of foreign exchange
F-26
<PAGE> 27
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
options. At December 31, 1996 the total notional amount of these instruments was
$23.5 million and the fair value of all outstanding contracts, which is
representative of the Company's obligations under these contracts, assuming the
contracts were terminated at that date, was approximately a net payable of $.1
million.
The fair value of the interest rate and foreign currency instruments were
estimated using market prices provided by financial institutions. The following
is the estimated fair value and notional amount of the outstanding instruments
at December 31, 1996 and their maturity dates (in millions):
<TABLE>
<CAPTION>
---------------------------------
FAIR NOTIONAL
MATURITY VALUE(a) AMOUNT(b)
-------- -------- ---------
<S> <C> <C> <C>
Interest Rate Instruments
1997 $240.7
- - - Assets.................................................... $ --
- - - Liabilities............................................... .5
1998 73.3
- - - Assets.................................................... --
- - - Liabilities............................................... 1.0
1999 43.4
- - - Assets.................................................... (.1)
- - - Liabilities............................................... 2.2
2000 10.7
- - - Assets.................................................... --
- - - Liabilities............................................... .2
2001 .2
- - - Assets.................................................... --
- - - Liabilities............................................... --
2002 .1
- - - Assets.................................................... --
- - - Liabilities............................................... --
----- ------
Total.................................................. $(4.0) $368.4
===== ======
Foreign Currency Instruments(c)
1997 $ 16.8
- - - Assets.................................................... $ --
- - - Liabilities............................................... .1
1998 6.7
- - - Assets.................................................... --
- - - Liabilities............................................... --
----- ------
Total.................................................. $ (.1) $ 23.5
===== ======
</TABLE>
- - -------------------------
(a) Fair value is representative of the Company's obligation under the
contracts, assuming the contracts were terminated at December 31, 1996.
(b) The notional amount represents the contract amount and does not represent
the amount at risk.
(c) As of December 31, 1996, no one currency represented the majority of the
outstanding foreign currency instruments, except for the option to sell pound
sterling and buy U.S. dollars in the notional amount of $12.0 million.
F-27
<PAGE> 28
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- SUBSEQUENT EVENTS
In February 1997, Ford extended to the Company a line of credit of $500 million,
expiring June 30, 1999. This line of credit has an evergreen feature that
provides on an annual basis for automatic one-year extensions of the expiration
date, unless timely notice is provided by Ford at least one year prior to the
then scheduled expiration date. At that time, the revolving loan agreement
between the Company and Ford dated June 8, 1994 was terminated.
On February 27, 1997, the Company issued to Ford 1,290 shares of its 5.11%
Cumulative Series C Preferred Stock having an aggregate liquidation preference
of $129 million for a purchase price equal to the aggregate liquidation
preference.
On February 27, 1997, the Company paid a dividend of $460 million on its common
stock to Ford in the form of a 5.475% promissory note, which matures on or
before March 31, 1997.
On February 28, 1997, the Company filed a Registration Statement on Form S-1 in
connection with the proposed initial public offering of the Company's Class A
Common Stock (the "Offering").
The Company and Ford have entered into a Car Supply Agreement which will
commence on September 1, 1997 for a period of ten years. Under the Car Supply
Agreement, Ford and the Company have agreed to negotiate in good faith on an
annual basis with respect to the supply of cars. Ford has agreed to supply to
the Company and the Company has agreed to purchase from Ford, for each car model
year during the term of the agreement (i.e., the 1998 model year through the
2007 model year), (a) the lesser of 150,000 cars or 55% of the Company's fleet
requirements for its car rental business conducted in the United States; (b) 35%
of the Company's fleet requirements for its car rental business conducted in
Europe; and (c) 55% of the Company's fleet requirements for its car rental
business conducted other than in the United States and Europe. For each model
year, at least 50% of the cars supplied by Ford are required to be non-risk
cars. The Car Supply Agreement also provides that, for each model year, Ford
must strive to offer car fleet programs to the Company on terms and conditions
that are competitive with terms and conditions for the supply of cars then being
offered by other automobile manufacturers to the Company and other daily car
rental companies. In addition, for each model year, Ford must supply cars to the
Company on terms and conditions that are no less favorable than those offered by
Ford to other daily car rental companies, excluding franchised Ford vehicle
dealers who rent cars.
The Company and Ford have entered into a Joint Advertising Agreement which will
commence on September 1, 1997 for a period of ten years. Under the Joint
Advertising Agreement, Ford has agreed to pay to the Company one-half of the
Company's advertising costs, up to a limit of $39 million for the first year
and, for each year thereafter, a limit equal to the prior year's limit adjusted
for inflation. In addition, if for any year, one-half of the Company's
advertising costs exceed such limit and the Company has purchased from Ford a
percentage of its car fleet requirements for its car rental business conducted
in the United States for the corresponding model year (the "Ford Vehicle Share")
equal to 58% or more, then Ford will pay to the Company additional amounts for
such excess advertising costs. To be eligible for cost reimbursement under the
Joint Advertising Agreement, the advertising must meet certain conditions,
including the condition that it indicates that the Company features Ford
vehicles in a manner and with a prominence that is reasonably satisfactory to
Ford. The Joint Advertising Agreement further provides that if the Ford Vehicle
Share for any model year is less than 55%, Ford will not be obligated to pay the
Company any amount for its advertising costs for that year, except to the extent
that the Company's failure to achieve a 55% Ford Vehicle Share is attributable
to (a) Ford's failure to supply a sufficient quantity of cars for the Company to
achieve a 55% Ford Vehicle Share or (b) the fact that the terms and conditions
of Ford's car fleet programs offered to the Company were not competitive with
the terms and conditions for the supply of cars offered by other automobile
F-28
<PAGE> 29
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- SUBSEQUENT EVENTS -- (CONTINUED)
manufacturers to the Company and other daily car rental companies. In no event,
however, will Ford be required to pay any amount for the Company's advertising
costs for any year if the Ford Vehicle Share for the corresponding model year is
less than 40%.
F-29
<PAGE> 30
SCHEDULE II
THE HERTZ CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
--------------------------------------------------------------------
ADDITIONS DEDUCTIONS
BALANCE AT ---------- ----------------------
BEGINNING OF CHARGED TO TRANSLATION BALANCE AT
YEAR INCOME ADJUSTMENTS OTHER END OF YEAR
------------ ---------- ----------- ----- -----------
Dollars in thousands
<S> <C> <C> <C> <C> <C>
1996
Allowance for doubtful accounts... $ 7,985 $ 9,912 $ 59 $ 5,570(a) $ 12,268
======== ======== ===== ======== ========
Public liability and property
damage.......................... $311,669 $133,417 $ 40 $123,928(b) $321,118
======== ======== ===== ======== ========
1995
Allowance for doubtful accounts... $ 10,026 $ 4,926 $(319) $ 7,286(a) $ 7,985
======== ======== ===== ======== ========
Public liability and property
damage.......................... $304,328 $134,926 $(229) $127,814(b) $311,669
======== ======== ===== ======== ========
1994
Allowance for doubtful accounts... $ 6,862 $ 6,813 $(521) $ 4,170(a) $ 10,026
======== ======== ===== ======== ========
Public liability and property
damage.......................... $264,158 $159,049 $ 403 $118,476(b) $304,328
======== ======== ===== ======== ========
</TABLE>
- - -------------------------
(a) Amounts written off, net of recoveries. The year 1995 includes $2 million,
which represents the balance at December 31, 1994 relating to the European Car
Leasing and Car Dealership operations sold by the Company effective January 1,
1995.
(b) Payments of claims and expenses.
F-30
