HERTZ GLOBAL HOLDINGS INC - 10-K - 20070330 - FORM
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2006
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission
File Number 001-33139
HERTZ GLOBAL HOLDINGS, INC.
(Exact name of registrant as
specified in its charter)
Delaware
20-3530539
(State or other
jurisdiction of
(I.R.S. Employer
incorporation or
organization)
Identification Number)
225 Brae Boulevard
Park Ridge, New Jersey 07656-0713
(201) 307-2000
(Address, including ZIP Code,
and telephone number,
including area code, of registrant’s principal executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, Par
Value $.01 per share
New York Stock
Exchange
Securities registered pursuant
to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
o
No
x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
o
No
x
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
x
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
x
The initial public offering of
Hertz Global Holdings, Inc.’s common stock, par value of $0.01 per share,
commenced on November 15, 2006. Prior to that date, there was no public
market for the registrant’s common stock.
As of March 27, 2007, 320,621,080 shares
of the registrant’s common stock were outstanding.
Documents incorporated by reference:
Portions
of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders
scheduled for May 17, 2007 are incorporated by reference into Part III.
Unless the context
otherwise requires, in this Annual Report on Form 10-K, or “Annual
Report,” (i) “Hertz Holdings” means Hertz Global Holdings, Inc., our
top-level holding company, (ii) “Hertz” means The Hertz Corporation, our
primary operating company and a direct wholly owned subsidiary of Hertz
Investors, Inc., which is wholly owned by Hertz Holdings, (iii) “we,”
“us” and “our” mean (a) prior to December 21, 2005, Hertz and its
consolidated subsidiaries and (b) on and after December 21, 2005,
Hertz Holdings and its consolidated subsidiaries, including Hertz, (iv) “HERC”
means Hertz Equipment Rental Corporation, Hertz’s wholly owned equipment rental
subsidiary, together with our various other wholly owned international
subsidiaries that conduct our industrial, construction and material handling
equipment rental business, (v) “cars” means cars and light trucks
(including sport utility vehicles and, outside North America, light commercial
vehicles), (vi) “equipment” means industrial, construction and material
handling equipment, (vii) “EBITDA” means consolidated net income before
net interest expense, consolidated income taxes and consolidated depreciation
and amortization and (viii) “Corporate EBITDA” means “EBITDA” as that term
is defined under Hertz’s senior credit facilities, which is generally
consolidated net income before net interest expense (other than interest
expense relating to certain car rental fleet financing), consolidated income
taxes, consolidated depreciation (other than depreciation related to the car
rental fleet) and amortization and before certain other items, in each case as
more fully described in the agreements governing Hertz’s senior credit
facilities.
On December 21,
2005, or the “Closing Date,” an indirect, wholly owned subsidiary of Hertz
Holdings acquired all of Hertz’s common stock from Ford Holdings LLC, or “Ford
Holdings,” pursuant to a Stock Purchase Agreement, dated as of September 12,
2005, among Ford Motor Company, or “Ford,” Ford Holdings and Hertz Holdings
(previously known as CCMG Holdings, Inc.). As a result of this
transaction, investment funds associated with or designated by Clayton,
Dubilier & Rice, Inc. or “CD&R,” The Carlyle Group or “Carlyle”
and Merrill Lynch Global Private Equity or “MLGPE,” or, collectively, the “Sponsors,”
owned over 99% of the common stock of Hertz Holdings. As a result of the
initial public offering of the common stock of Hertz Holdings, the Sponsors now
own approximately 72% of the common stock of Hertz Holdings. We refer to the
acquisition of all of Hertz’s common stock as the “Acquisition.” We refer to
the Acquisition, together with related transactions entered into to finance the
cash consideration for the Acquisition, to refinance certain of our existing
indebtedness and to pay related transaction fees and expenses, as the “Transactions.”
The “Successor period ended December 31, 2005” refers to the 11-day
period from December 21, 2005 to December 31, 2005 and the “Predecessor
period ended December 20, 2005” refers to the period from January 1,
2005 to December 20, 2005. The term “Successor” refers to us following the
Acquisition and the term “Predecessor” refers to us prior to the Closing Date.
Certain financial information in this Annual Report
for the Predecessor period ended December 20, 2005 and Successor period
ended December 31, 2005 has been presented on a combined basis. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Results
of Operations” for a discussion of the presentation of our results for the year
ended December 31, 2005 on a combined basis.
Certain statements contained in this report under “Item
1—Business,” “Item 3—Legal Proceedings” and “Item 7—Management’s Discussion and
Analysis of Financial Condition and Results of Operations” including, without
limitation, those concerning our liquidity and capital resources, include “forward-looking
statements.” You should not place undue reliance on these statements. Forward-looking
statements include information concerning our liquidity and our possible or
assumed future results of operations, including descriptions of our business
strategies. These statements often
1
include words such as “believe,” “expect,” “anticipate,”
“intend,” “plan,” “estimate,” “seek,” “will,” “may” or similar expressions.
These statements are based on certain assumptions that we have made in light of
our experience in the industry as well as our perceptions of historical trends,
current conditions, expected future developments and other factors we believe
are appropriate in these circumstances. As you read this Annual Report, you
should understand that these statements are not guarantees of performance or
results. They involve risks, uncertainties and assumptions. You should
understand the risks and uncertainties discussed in “Item 1A—Risk Factors” and
elsewhere in this Annual Report, could affect our actual financial results and
could cause actual results to differ materially from those expressed in the
forward-looking statements. Some important factors include:
·
our operations;
·
economic performance;
·
financial condition;
·
management forecasts;
·
efficiencies;
·
cost savings and opportunities to increase productivity and
profitability;
·
income and margins;
·
liquidity;
·
anticipated growth;
·
economies of scale;
·
the economy;
·
future economic performance;
·
our ability to maintain profitability during adverse economic cycles
and unfavorable external events (including war, terrorist acts, natural
disasters and epidemic disease);
·
future acquisitions and dispositions;
·
litigation;
·
potential and contingent liabilities;
·
management’s plans;
·
taxes; and
·
refinancing of existing debt.
In light of these risks, uncertainties and assumptions,
the forward-looking statements contained in this Annual Report might not
prove to be accurate and you should not place undue reliance upon them. All
forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the foregoing cautionary
statements. All such statements speak only as of the date made, and we
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Market and Industry Data
Information in this
Annual Report about the car and equipment rental industries, including our
general expectations concerning the industries and our market position and
market share, are based in part on
2
industry data and
forecasts obtained from industry publications and surveys and internal company
surveys. Third-party industry publications and forecasts generally state
that the information contained therein has been obtained from sources generally
believed to be reliable. While we are not aware of any misstatements regarding
any industry data presented in this Annual Report, our estimates, in particular
as they relate to our general expectations concerning the car and equipment
rental industries, involve risks and uncertainties and are subject to change
based on various factors, including those discussed under the caption “Item 1A—Risk
Factors.”
3
PART I
ITEM 1.
BUSINESS
Our Company
We own what we believe is the
largest worldwide general use car rental brand and one of the largest equipment
rental businesses in the United States and Canada combined, both based on
revenues. Our Hertz brand name is one of the most recognized in the world,
signifying leadership in quality rental services and products. In our car
rental business segment, we and our independent licensees and associates accept
reservations for car rentals at approximately 7,600 locations in approximately
145 countries. We are the only car rental company that has an extensive network
of company-operated rental locations both in the United States and in all
major European markets. We maintain the leading airport car rental market
share, by overall reported revenues, in the United States and at the 69 major
airports in Europe where we have company-operated locations and data
regarding car rental concessionaire activity is available. We believe that we
also maintain the second largest market share, by revenues, in the off-airport
car rental market in the United States. In our equipment rental business
segment, we rent equipment through approximately 360 branches in the United
States, Canada, France and Spain, as well as through our international licensees.
We and our predecessors have been in the car rental business since 1918 and in
the equipment rental business since 1965. We have a diversified revenue base
and a highly variable cost structure and are able to dynamically manage fleet
capacity, the most significant determinant of our costs. This has helped us to
earn a pre-tax profit in each year since our incorporation in 1967. Our
revenues have grown at a compound annual growth rate of 7.7% over the last 20
years, with year-over-year growth in 18 of those 20 years.
Corporate History
Hertz Holdings was incorporated by the Sponsors in
Delaware in 2005 to serve as the top-level holding company for the consolidated
Hertz business. Hertz was incorporated in Delaware in 1967. Hertz is a
successor to corporations that have been engaged in the car and truck rental
and leasing business since 1918 and the equipment rental business since 1965.
Ford acquired an ownership interest in Hertz in 1987. Prior to this, Hertz was
a subsidiary of UAL Corporation (formerly Allegis Corporation), which acquired
Hertz’s outstanding capital stock from RCA Corporation in 1985.
On December 21,
2005, investment funds associated with or designated by the Sponsors, through
an indirect, wholly owned subsidiary of Hertz Holdings acquired all of Hertz’s
common stock from a subsidiary of Ford in the Acquisition, for aggregate
consideration of $4,379 million in cash and debt refinanced or assumed of
$10,116 million and transaction fees and expenses of $447 million. To finance
the cash consideration for the Acquisition, to refinance certain of our
existing indebtedness and to pay related transaction fees and expenses, the
Sponsors used:
·
equity
contributions totaling $2,295 million from the investment funds associated with
or designated by the Sponsors;
·
net
proceeds from a private placement by CCMG Acquisition Corporation of $1,800
million aggregate principal amount of 8.875% Senior Notes due 2014, or the “Senior
Dollar Notes,” $600 million aggregate principal amount of 10.5% Senior Subordinated
Notes due 2016, or the “Senior Subordinated Notes,” and
€
225
million aggregate principal amount of 7.875% Senior Notes due 2014, or the “Senior
Euro Notes.” In connection with the Transactions, CCMG Acquisition Corporation
merged with and into Hertz, with Hertz as the surviving corporation of the
merger. CCMG Acquisition Corporation had no operations prior to the
Acquisition. We refer to the Senior Dollar Notes and the Senior Euro Notes
together as the “Senior Notes;”
4
·
aggregate
borrowings of approximately $1,707 million by us under a new senior term
facility, or the “Senior Term Facility,” which consists of (a) a maximum
borrowing capacity of $2,000 million, which included a delayed draw facility of
$293 million and (b) a synthetic letter of credit facility in an aggregate
principal amount of $250 million;
·
aggregate
borrowings of approximately $400 million by Hertz and one of its Canadian
subsidiaries under a new senior asset-based revolving loan facility, or
the “Senior ABL Facility,” with a maximum borrowing capacity of $1,600 million
(which was increased in February 2007 to $1,800 million). We refer to the
Senior Term Facility and the Senior ABL Facility together as the “Senior Credit
Facilities;”
·
aggregate
proceeds of offerings totaling approximately $4,300 million by a special
purpose entity wholly owned by us of asset-backed securities backed by
our U.S. car rental fleet, or the “U.S. Fleet Debt,” all of which we issued
under our existing asset-backed notes program, or the “ABS Program”;
under which an additional $600 million of previously issued asset-backed
medium term notes having maturities from 2007 to 2009 remain outstanding
following the closing of the Transactions, and in connection with which
approximately $1,500 million of variable funding notes in two series were also
issued, but not funded, on the closing date of the Acquisition;
·
aggregate
borrowings of the foreign currency equivalent of approximately $1,781 million
by certain of our foreign subsidiaries under asset-based revolving loan
facilities with aggregate commitments equivalent to approximately $2,930
million (calculated in each case at December 31, 2005), subject to
borrowing bases comprised of rental vehicles, rental equipment, and related
assets of certain of our foreign subsidiaries, (substantially all of which are
organized outside of the United States) or one or more special purpose
entities, as the case may be, and, rental equipment and related assets of
certain of our subsidiaries organized outside North America or one or more
special purpose entities, as the case may be, which facilities (together with
certain capital lease obligations) are referred to collectively as the “International
Fleet Debt;” and
·
our
cash on hand in an aggregate amount of approximately $6.1 million.
In connection with the
Transactions, we also refinanced a significant portion of our existing
indebtedness, which was repaid as follows:
·
the
repurchase of approximately $3,700 million in aggregate principal amount of
existing senior notes having maturities from May 2006 to January 2028,
of which additional notes in the aggregate principal amount of approximately
$803.3 million remained outstanding following the Transactions;
·
the
repurchase of approximately
€
192.4 million (or
approximately $230.0 million, calculated as of December 31, 2005) in
aggregate principal amount of existing Euro-denominated medium term notes with
a maturity of July 2007, of which additional medium term notes in the
aggregate principal amount of approximately
€
7.6 million remained
outstanding following the Transactions;
·
the
repayment of a $1,185 million intercompany note issued by Hertz to Ford
Holdings on June 10, 2005 that would have matured in June 2010;
·
the
repayment of approximately $1,935 million under an interim credit facility that
would have matured on February 28, 2006;
·
the
repayment of commercial paper, notes payable and other bank debt of
approximately $1,212 million; and
5
·
the settlement of all
accrued interest and unamortized debt discounts relating to the above existing
indebtedness.
Our Markets
We operate in the global car
rental industry and in the equipment rental industry, primarily in the United
States.
Worldwide Car Rental
We believe that the global car rental industry exceeds
$30 billion in annual revenues. According to a 2007 report appearing in Auto
Rental News, car rental revenues in the United States totaled approximately $20
billion in 2006 and have grown at a 5.0% compound annual growth rate since
1990, including 6.2% growth in 2006. We believe car rental revenues in Western
Europe account for over $12.5 billion in annual revenues, with the airport
portion of the industry comprising approximately 40% of the total. Within
Europe, the largest markets are Germany, the United Kingdom and France. We
believe total rental revenues for the car rental industry in Europe in 2005
were approximately $10.5 billion in the nine countries—France, Germany, Italy,
the United Kingdom, Spain, the Netherlands, Switzerland, Belgium and Luxembourg—where
we have company-operated rental locations and over $2 billion in eight
other countries—Greece, Ireland, Portugal, Sweden, Norway, Denmark, Austria and
Finland—where our brand is present through our licensees.
We estimate that airport rentals account for
approximately one-half of the total market in the United States. This portion
of the market is significantly influenced by developments in the travel
industry and particularly in airline passenger traffic, or enplanements.
According to the FAA, enplanements in the United States only completed their
recovery and surpassed their pre-2001 levels in 2005. The FAA projected
in the first half of 2006 that domestic enplanements will grow at a compound
annual rate of 3.2% from 2006 to 2017, consistent with long-term historical
trends. The IATA projected in September 2006 that annual international
enplanements would grow at a compound annual rate of 4.8% from 2006 to 2010.
The off-airport part of the
industry has rental volume primarily driven by local business use, leisure
travel and the replacement of cars being repaired. Because Europe has generally
demonstrated a lower historical reliance on air travel, the European
off-airport car rental market is significantly more developed than it is in the
United States. However, we believe that in recent years, industry revenues from
off-airport car rentals in the United States have grown faster than revenues
from airport rentals.
Equipment Rental
We estimate the size of the U.S. equipment rental
industry, which is highly fragmented with few national competitors and many
regional and local operators, to be approximately $35 billion in annual
revenues, but the part of the rental industry dealing with equipment of the
type HERC rents is somewhat smaller than that. We believe that the industry
grew at a 9.7% compound annual growth rate between 1991 and 2005. Other market
data indicates that the equipment rental industries in France and Spain
generate roughly $4 billion and $2 billion in annual revenues, respectively,
although the portions of those markets in which HERC competes are smaller.
The equipment rental industry
serves a broad range of customers from small local contractors to large
industrial national accounts and encompasses a wide range of rental equipment
from small tools to heavy earthmoving equipment. The industry is undergoing a
strong recovery following the industrial recession and downturn in
non-residential construction spending between 2001 and 2003. We believe U.S.
non-residential construction spending grew at an annual rate of 14% in 2006 and
is projected to grow at an annual rate of 4% in 2007. We also believe, based on
an article in Rental Equipment
6
Register published on February 1,
2006, that rental equipment accounted for approximately 30% to 40% of all
equipment sold into the U.S. construction industry in 2005, up from
approximately 5% to 10% in 1991. In addition, we believe that the trend toward
rental instead of ownership of equipment in the U.S. construction industry will
continue and that as much as 50% of the equipment used in the industry could be
rental equipment within the next ten years.
Our Business Segments
Our business consists of two segments, car rental and
equipment rental. In addition, “corporate and other” includes general corporate
expenses, as well as other business activities, such as third-party claim
management services.
Car Rental: Our
“company-operated” rental locations are those through which we, or an
agent of ours, rent cars that we own or lease. We maintain a substantial
network of company-operated car rental locations both in the United
States and internationally, and what we believe to be the largest number of
company-operated airport car rental locations in the world, enabling us
to provide consistent quality and service worldwide. For the year ended December 31,
2006, we derived approximately 72% of our worldwide car rental revenues from
airport locations. Our licensees and associates also operate rental locations
in over 140 countries and jurisdictions, including most of the countries in
which we have company-operated rental locations.
Equipment Rental:
On the basis of revenues, we believe
HERC is the second largest equipment rental company in the United States and
Canada combined and one of the largest equipment rental companies in France and
Spain.
HERC rents a broad range
of earthmoving equipment, material handling equipment, aerial and electrical
equipment, air compressors, generators, pumps, small tools, compaction equipment
and construction-related trucks. HERC also derives revenues from the sale
of new equipment and consumables.
7
Set forth below are charts
showing revenues and operating income (loss), by segment, and revenues by
geographic area, all for the year ended December 31, 2006 and revenue
earning equipment at net book value, as of December 31, 2006 (the majority
of our international operations are in Europe). See Note 10 to the
Notes to our
consolidated financial statements included in this Annual Report under the
caption “Item 8—Financial Statements and Supplementary Data.”
Revenues by Segment for
Year Ended December 31, 2006(1)
$8.1 billion
Operating Income by Segment for
Year Ended December 31, 2006(2)
$1.2 billion
Revenues by Geographic Area for
Year Ended December 31, 2006
$8.1 billion
Revenue Earning Equipment, net book value as of
December 31, 2006
$9.8 billion
(1)
Car rental segment
revenue includes fees and certain cost reimbursements from licensees. See Note
10 to the Notes to our consolidated financial statements included in this
Annual Report under the caption “Item 8—Financial Statements and Supplementary
Data.”
(2)
Operating income
represents pre-tax income before interest expense and minority interest. The
above chart excludes an operating loss of $105.8 million attributable to our
Corporate and Other activities.
For further information on our
business segments, including financial information for the years ended December 31,
2006, 2005 and 2004, see Note 10 to the Notes to our consolidated financial
statements included in this Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
Worldwide Car Rental
Operations
We rent a wide variety of makes and models of cars,
nearly all of which are the current or previous year’s models. We generally
accept reservations only for a class of vehicles, although we accept
8
reservations for specific makes and models of vehicles
in our Prestige Collection luxury rental program, our Fun Collection
experiential rental program, our Green Collection environmentally friendly
rental program and a limited number of models in high-volume, leisure-oriented
destinations. We rent cars on a daily, weekend, weekly, monthly or multi-month
basis, with rental charges computed on a limited or unlimited mileage rate, or
on a time rate plus a mileage charge. Our rates vary at different locations
depending on local market conditions and other competitive and cost factors.
While cars are usually returned to the locations from which they are rented, we
also allow one-way rentals from and to certain locations. In addition to car
rentals and licensee fees, we generate revenues from reimbursements by
customers of airport concession fees and vehicle licensing costs, fueling
charges, and charges for ancillary customer products and services such as
supplemental equipment (child seats and ski racks), loss or collision damage waiver,
theft protection, liability and personal accident/effects insurance coverage,
Hertz NeverLost navigation systems and satellite radio services.
We have company-operated rental locations both
in the United States and internationally. The international car rental
operations that generated the highest volumes of business from our company-operated
locations for the year ended December 31, 2006 were, in descending order
of revenues, those conducted in France, Germany, Italy, the United Kingdom,
Spain, Australia and Canada. We also have company-operated rental
locations in the Netherlands, Switzerland, Belgium, Luxembourg, New Zealand,
Puerto Rico, Brazil and the U.S. Virgin Islands.
As of December 31, 2006, we had approximately
1,700 staffed rental locations in the United States, of which approximately
one-third were airport locations and two-thirds were off-airport locations, and
we regularly rent cars from over 950 other locations that are not staffed. As
of December 31, 2006, we had approximately 1,100 staffed rental locations
internationally, of which approximately one-fifth were airport locations and
four-fifths were off-airport locations, and we regularly rent cars from
approximately 80 other locations that are not staffed. We believe that our
extensive U.S. and international network of company-operated locations
contributes to the consistency of our service, cost control, fleet utilization,
yield management, competitive pricing and ability to offer one-way rentals.
In order to operate airport rental locations, we have
obtained concessions or similar leasing, licensing or permitting agreements or
arrangements, or “concessions,” granting us the right to conduct a car rental
business at all major, and many other, airports with regularly scheduled
passenger service in each country where we have company-operated rental
locations, except for airports where our licensees operate rental locations and
Orlando International Airport in Orlando, Florida. Our concessions were
obtained from the airports’ operators, which are typically governmental bodies
or authorities, following either negotiation or bidding for the right to
operate a car rental business there. The terms of an airport concession
typically require us to pay the airport’s operator concession fees based upon a
specified percentage of the revenues we generate at the airport, subject to a
minimum annual guarantee. Under most concessions, we must also pay fixed rent
for terminal counters or other leased properties and facilities. Most
concessions are for a fixed length of time, while others create operating
rights and payment obligations that are terminable at any time.
The terms of our concessions typically do not forbid,
and in a few instances actually require, us to seek reimbursement from
customers of concession fees we pay; however, in certain jurisdictions the law
limits or forbids our doing so. Where we are required or permitted to seek such
reimbursement, it is our general practice to do so. The number of car rental
concessions available at airports varies considerably, but, except at small,
regional airports, it is rarely less than four. At Orlando International
Airport, where we do not have a car rental concession, we operate an airport
rental location at a facility located near the airport’s premises and pick up
and drop off our customers at the airport under a permit from the airport’s
operator. Certain of our concession agreements require the consent of the
airport’s operator in connection with changes in ownership of us. We sought
those consents that were required in connection with our initial public
offering of our common stock, except where not obtaining
9
them would not, in our view, have had a material
adverse effect on our consolidated financial position or results of operations.
See “Item 1A—Risk Factors—Risks Related to Our Business—We face risks related
to changes in our ownership.”
The Hertz brand is one of the most recognized brands
in the world. It has been listed in Business Week’s “100 Most Valuable Global
Brands” in 2005 and in every year that it was eligible for inclusion in the
study since the study’s inception in 2001. We understand that this study is
limited to companies with public equity and their subsidiaries, and as a
result, Hertz was not eligible for inclusion in 2006. The Hertz brand has been
the only travel company brand to appear in the study. Moreover, our customer
surveys indicate that in the United States, Hertz is the car rental brand most
associated with the highest quality service. This is consistent with numerous
published best-in class car rental awards that we have won, both in the United
States and internationally, over many years. We have sought to support our
reputation for quality and customer service in car rental through a variety of
innovative service offerings, such as our customer loyalty program (Hertz #1
Club), our global expedited rental program (Hertz #1 Club Gold), our one-way
rental program (Rent-it-Here/Leave-it-There), our national-scale luxury
rental program (Prestige Collection), our national-scale experiential
rental program (Hertz Fun Collection), our environmentally friendly rental
program (Green Collection) and our in-car navigational services (Hertz
NeverLost). We intend to maintain our position as a premier company through an
intense focus on service, quality and product innovation.
In the United States, the Hertz brand had the highest
market share, by revenues, in 2005 and in the first ten months of 2006 at the
180 largest airports where we operated. Out of the approximately 150 major
European airports at which we have company-operated rental locations,
data regarding car rental concessionaire activity for the year ended December 31,
2005 was available at 69 of these airports. Based upon this data, we believe
that we were the largest airport car rental company, measured by aggregate
airport rental revenues during that period, at those 69 airports taken
together. In the United States, we intend to maintain or expand our market
share in the airport rental business. For a further description of our competitors,
market share and competitive position see “—Competition” below.
At our major airport rental locations, as well as at
some smaller airport and off-airport locations, customers participating in our
Hertz #1 Club Gold program are able to rent vehicles in an expedited manner. In
the United States, participants in Hertz #1 Club Gold often bypass the rental
counter entirely and proceed directly to their vehicles upon arrival at our
facility. For the year ended December 31, 2006, rentals by Hertz #1 Club
Gold members accounted for approximately 41% of our worldwide rental
transactions. We believe the Hertz #1 Club Gold program provides a significant
competitive advantage to us, particularly among frequent travelers, and we
have, through travel industry relationships, targeted such travelers for
participation in the program.
In addition to our airport locations, we operate
off-airport locations offering car rental services to a variety of customers.
Our off-airport rental customers include people wishing to rent cars closer to
home for business or leisure purposes, as well as those needing to travel to or
from airports. Our off-airport customers also include people who have been
referred by, or whose rental costs are being wholly or partially reimbursed by,
insurance companies following accidents in which their cars were damaged, those
expecting to lease cars that are not yet available from their leasing companies
and those needing cars while theirs are being repaired or are temporarily
unavailable for other reasons; we call these customers “replacement renters.”
At many of our off-airport locations we will provide pick-up and delivery
services in connection with rentals.
10
When compared to our airport rental locations, an
off-airport rental location typically services more types of customers, uses
smaller rental facilities with fewer employees, conducts pick-up and delivery
services and deals with replacement renters using specialized systems and
processes. In addition, on average, off-airport locations generate fewer
transactions per period than airport locations. At the same time, though, our
airport and off-airport rental locations employ common car fleets, are
supervised by common country, regional and local area management, use many
common systems and rely on common maintenance and administrative centers.
Moreover, airport and off-airport locations, outside the area of replacement
rentals, are supported by a common commercial sales force, benefit from many
common marketing activities and have many of the same customers. As a
consequence, we regard both types of locations as aspects of a single, unitary,
car rental business.
We believe that the off-airport portion of the car
rental market offers opportunities for us on several levels. First, presence in
the off-airport market can provide customers a more convenient and
geographically extensive network of rental locations, thereby creating revenue
opportunities from replacement renters, non-airline travel renters and airline
travelers with local rental needs. Second, it can give us a more balanced
revenue mix by reducing our reliance on airport travel and therefore limiting
our risk exposure to external events that may disrupt airline travel trends.
Third, it can produce higher fleet utilization as a result of the longer
average rental periods associated with off-airport business, compared to those
of airport rentals. Fourth, replacement rental volume is far less seasonal than
that of other business and leisure rentals, which permits efficiencies in both
fleet and labor planning. Finally, cross-selling opportunities exist for
us to promote off-airport rentals among frequent airport Hertz #1 Club renters
and, conversely, to promote airport rentals to off-airport renters. In view of
those benefits, along with our belief that our market share for off-airport
rentals is generally smaller than our market share for airport rentals, we
intend to seek profitable growth in the off-airport rental market, both in the
United States and internationally.
In the three years ended December 31, 2006, we
increased the number of our off-airport rental locations in the United States
by approximately 32% to approximately 1,380 locations. In 2007 and subsequent
years, our strategy may include selected openings of new off-airport locations,
the disciplined evaluation of existing locations and pursuit of same-store
sales growth. We anticipate that same-store sales growth would be driven by our
traditional leisure and business traveler customers and by increasing
penetration of the insurance replacement market, of which we currently have a
low market share. In the United States during the year ended December 31,
2006, approximately one-third of our rental revenues at off-airport locations
were related to replacement rentals. We believe that if we successfully pursue
our strategy of profitable off-airport growth, the proportion of replacement
rental revenues will increase. As we move forward, our determination of whether
to expand our U.S. off-airport network will be based upon a combination of
factors, including the concentration of target insurance company policy
holders, car dealerships, auto body shops and other clusters of retail,
commercial activity and potential profitability. We also intend to increase the
number of our staffed off-airport rental locations internationally on the basis
of similar criteria.
In addition to renting cars, in Germany we also rent
trucks of eight tons and over, including truck tractors. This truck rental
fleet consists of approximately 3,400 vehicles, which have either been acquired
under repurchase programs similar to those under which we purchase program cars
or are under operating leases. We believe we are a market leader in heavy truck
rental in Germany. Also, we are engaged in a car leasing business in Brazil.
Our truck rental activities in Germany and our car leasing activities in Brazil
are treated as part of our international car rental business in our
consolidated financial statements.
Our worldwide car rental operations generated $6,378.0
million in revenues and $373.5 million in income before income taxes and
minority interest during the year ended December 31, 2006.
11
We may also, from time to
time, pursue profitable growth within our car rental business by pursuing
opportunistic acquisitions that would expand our global car rental business.
Customers and Business Mix
We
categorize our car rental business based on two primary criteria—the purpose
for which customers rent from us (business or leisure) and the type of location
from which they rent (airport or off-airport). The table below sets forth, for
the year ended December 31, 2006, the percentages of rental revenues and
rental transactions in our U.S. and international operations derived from
business and leisure rentals and from airport and off-airport rentals.
Year ended December 31, 2006
U.S.
International
Revenues
Transactions
Revenues
Transactions
Type of
Car Rental
By Customer:
Business
47
%
51
%
48
%
52
%
Leisure
53
49
52
48
100
%
100
%
100
%
100
%
By Location:
Airport
79
%
80
%
54
%
57
%
Off-airport
21
20
46
43
100
%
100
%
100
%
100
%
Customers who rent from us for “business” purposes
include those who require cars in connection with commercial activities, the
activities of governments and other organizations or for temporary vehicle
replacement purposes. Most business customers rent cars from us on terms that
we have negotiated with their employers or other entities with which they are
associated, and those terms can differ substantially from the terms on which we
rent cars to the general public. We have negotiated arrangements relating to
car rental with many large businesses, governments and other organizations,
including most Fortune 500 companies.
Customers who rent from us for “leisure” purposes
include not only individual travelers booking vacation travel rentals with us
but also people renting to meet other personal needs. Leisure rentals, taken as
a whole, are longer in duration and generate more revenue per transaction than
do business rentals, although some types of business rentals, such as rentals
to replace temporarily unavailable cars, have a long average duration. Business
rentals and leisure rentals have different characteristics and place different
types of demands on our operations. We believe that maintaining an appropriate
balance between business and leisure rentals is important to the profitability
of our business and the consistency of our operations.
Our business and leisure customers rent from both our
airport and off-airport locations. Demand for airport rentals is correlated
with airline travel patterns, and transaction volumes generally follow
enplanement trends on a global basis. Customers often make reservations for
airport rentals when they book their flight plans, which makes our strong
relationships with travel agents, associations and other partners (e.g.,
airlines) a key competitive advantage in generating consistent and recurring
revenue streams.
Off-airport rentals typically involve people wishing
to rent cars closer to home for business or leisure purposes, as well as those
needing to travel to or from airports. This category also includes people who
have been referred by, or whose rental costs are being wholly or partially
reimbursed by, insurance companies because their cars have been damaged. In
order to attract these renters, we
12
must establish agreements with the referring insurers
establishing the relevant rental terms, including the arrangements made for
billing and payment. While we estimate our share of the insurance replacement
rental market was approximately 7% of the estimated rental revenue volume for
the year ended December 31, 2006, we have identified approximately 160
insurance companies, ranging from local or regional carriers to large, national
companies, as our target insurance replacement market. Although Enterprise
Rent-A-Car Company, or “Enterprise” currently has the largest share of the
insurance replacement market, we believe that many of these companies are
receptive to our replacement rental offerings and prefer to have at least two
national rental car suppliers. Enterprise has asserted that certain systems we
use to conduct insurance replacement rentals would infringe on patent rights it
expects to obtain. See “Item 1A—Risk Factors—Risks Related to Our Business—Claims
that the software products and information systems that we rely on are
infringing on the intellectual property rights of others could increase our
expenses or inhibit us from offering certain services, which could adversely
affect our results of operations.”
We conduct active sales and marketing programs to
attract and retain customers. Our commercial and travel industry sales force
calls on companies and other organizations whose employees and associates need
to rent cars for business purposes, as well as on membership associations, tour
operators, travel companies and other groups whose members, participants and
customers rent cars for either business or leisure purposes. A specialized
sales force calls on companies with replacement rental needs, including
insurance and leasing companies and car dealers. We also advertise our car
rental offerings through a variety of traditional media, such as television and
newspapers, direct mail and the Internet. In addition to advertising, we also
conduct a variety of other forms of marketing and promotion, including travel
industry business partnerships and press and public relations activities.
In almost all cases, when we rent a car, we rent it
directly to an individual who is identified in a written rental agreement that
we prepare. Except when we are accommodating someone who cannot drive, the
individual to whom we rent a car is required to have a valid driver’s license
and meet other rental criteria (including minimum age and creditworthiness
requirements) that vary on the basis of location and type of rental. Our rental
agreements permit only the individual renting the car, people signing
additional authorized operator forms and certain defined categories of other
individuals (such as fellow employees, parking attendants and in some cases
spouses or domestic partners) to operate the car.
With rare exceptions, individuals renting cars from us
are personally obligated to pay all amounts due under their rental agreements.
They typically pay us with a charge, credit or debit card issued by a third
party, although certain customers use a Hertz charge account that we have
established for them, usually as part of an agreement between us and their
employer. For the year ended December 31, 2006, all amounts charged to
Hertz charge accounts established in the United States, and approximately 99%
of amounts charged to Hertz charge accounts established by our international
subsidiaries, are billed directly to a company or other organization or are
guaranteed by a company. The remainder of the amounts charged to Hertz charge
accounts established by our international subsidiaries are billed to individual
account holders whose obligations are not guaranteed by the holder’s employer
or any other organization associated with the account holder. We also issue
rental vouchers and certificates that may be used to pay rental charges, mostly
for prepaid and tour-related rentals. In addition, where the law requires us to
do so, we rent cars on a cash basis.
In the United States for the
year ended December 31, 2006, 86% of our car rental revenues came from
customers who paid us with third-party charge, credit or debit cards,
while 8% came from customers using Hertz charge accounts, 4% came from
customers using rental vouchers or another method of payment and 2% came from
cash transactions. In our international operations for the year ended December 31,
2006, 53% of our car rental revenues came from customers who paid us with third-party
charge, credit or debit cards, while 27% came from customers using Hertz charge
accounts, 18% came from customers using rental vouchers or another method of
payment and 2% came from cash
13
transactions. For the year
ended December 31, 2006, we had bad debt expense ratios of 0.2% of car
rental revenues for our U.S. operations and 0.4% of car rental revenues for our
international operations.
Reservations
When customers reserve cars for rental from us and our
licensees, they may seek to do so through travel agents or third-party
travel websites. In many of those cases, the travel agent or website will
utilize a third-party operated computerized reservation system, also
known as a global distribution system, or “GDS,” to contact us and make the
reservation. There are currently four principal GDSs, and we have contracts
with all of them providing that we will process reservation requests made
through the GDSs. Historically, GDSs were owned and operated by airlines and
were subject to extensive regulation along with their airline owners. In recent
years, however, airlines have greatly reduced their ownership interests in GDSs
and the level of regulation to which GDSs are subject has substantially
decreased. The owner of one of the four GDSs, Galileo, has recently entered
into an agreement to acquire another GDS, Worldspan, which would result in
further concentration in that industry.
In major countries, including the United States and
all other countries with company-operated locations, customers may also
reserve cars for rental from us and our licensees worldwide through local,
national or toll-free telephone calls to our reservations centers, directly
through our rental locations or, in the case of replacement rentals, through
proprietary automated systems serving the insurance industry. Additionally, we
accept reservations for rentals from us and our licensees worldwide through our
websites. Our websites, which also allow customers to enroll in loyalty
programs, obtain copies of bills for past transactions and obtain information
about our rental offerings, have grown significantly in importance as a
reservations channel in recent years. Third-party travel websites have
also grown in importance to us as a reservations channel.
For the year ended December 31,
2006, approximately 34% of the worldwide reservations we accepted came through
travel agents using GDSs, while 30% came through phone calls to our
reservations centers, 25% through our websites, 7% through third-party
websites and 4% through local booking sources.
Fleet
We believe we are one of the largest private sector
purchasers of new cars in the world. During the year ended December 31,
2006, we also purchased approximately 7,200 used cars that were similar to
other cars in our rental fleet. During the year ended December 31, 2006,
we operated a peak rental fleet in the United States of approximately 310,000
cars and a combined peak rental fleet in our international operations of
approximately 168,000 cars, in each case exclusive of our licensees’ fleet.
During the year ended December 31, 2006, our approximate average holding
period for a rental car was ten months in the United States and nine months in
our international operations.
Over the five years ended December 31, 2006, we
have acquired, subject to availability, over 70% of our cars pursuant to
various fleet repurchase or guaranteed depreciation programs established by
automobile manufacturers. Under these programs, the manufacturers agree to
repurchase cars at a specified price or guarantee the depreciation rate on the
cars during established repurchase or auction periods, subject to, among other
things, certain car condition, mileage and holding period requirements.
Repurchase prices under repurchase programs are based on either a predetermined
percentage of original car cost and the month in which the car is returned or
the original capitalized cost less a set daily depreciation amount. Guaranteed
depreciation programs guarantee on an aggregate basis the residual value of the
cars covered by the programs upon sale according to certain parameters which
include the holding period, mileage and condition of the cars. These
14
repurchase and guaranteed depreciation programs limit
our residual risk with respect to cars purchased under the programs and allow
us to determine depreciation expense in advance. For this reason, cars
purchased by car rental companies under repurchase and guaranteed depreciation
programs are sometimes referred to by industry participants as “program” cars.
Conversely, those cars not purchased under repurchase or guaranteed
depreciation programs for which the car rental company is exposed to residual
risk are sometimes referred to as “risk” cars. For the year ended December 31,
2006, program cars as a percentage of all cars purchased by our U.S. operations
were 61% and as a percentage of all cars purchased by our international
operations were approximately 71%, or 64% when calculated on an aggregate
worldwide basis.
We expect the percentage of our car rental fleet
subject to repurchase or guaranteed depreciation programs to decrease
substantially due primarily to changes in the terms offered by automobile
manufacturers under repurchase programs. Accordingly, we expect to bear
increased risk relating to the residual market value and the related
depreciation on our car rental fleet and to use different rotational techniques
to accommodate our seasonal peak demand for cars.
Over the five years ended December 31, 2006,
approximately 47% of the cars acquired by us for our U.S. car rental fleet, and
approximately 32% of the cars acquired by us for our international fleet, were
manufactured by Ford and its subsidiaries. During the year ended December 31,
2006, approximately 40% of the cars acquired by us domestically were
manufactured by Ford and its subsidiaries and approximately 30% of the cars
acquired by us for our international fleet were manufactured by Ford and its
subsidiaries, which represented the largest percentage of any automobile
manufacturer during that period. The percentage of the fleet which we purchase
from Ford may decline as a result of recent changes to the vehicle supply
arrangements between Ford and us. See “—Relationship with Ford” and Note 14 to
the Notes to our consolidated financial statements included in this Annual
Report under the caption “Item 8—Financial Statements and Supplementary Data.”
Historically, we have also purchased a significant percentage of our car rental
fleet from General Motors Corporation, or “General Motors.” Over the five years
ended December 31, 2006, approximately 19% of the cars acquired by us for
our U.S. car rental fleet, and approximately 15% of the cars acquired by us for
our international fleet, were manufactured by General Motors. During the year
ended December 31, 2006, approximately 17% of the cars acquired by our
U.S. car rental fleet, and approximately 13% of the cars acquired by us for our
international fleet, were manufactured by General Motors.
Purchases of cars are financed through funds provided
from operations and by active and ongoing global borrowing programs. See “Item
7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources.”
We maintain automobile maintenance centers at certain
airports and in certain urban and off-airport areas, providing maintenance
facilities for our car rental fleet. Many of these facilities, which include
sophisticated car diagnostic and repair equipment, are accepted by automobile
manufacturers as eligible to perform and receive reimbursement for warranty
work. Collision damage and major repairs are generally performed by independent
contractors.
We dispose of risk cars, as
well as program cars that have for any reason become ineligible for
manufacturer repurchase or guaranteed depreciation programs, through a variety
of disposition channels, including auctions, brokered sales, sales to
wholesalers and, to a lesser extent and primarily in the United States, sales
at retail through a network of seven company-operated car sales locations
dedicated exclusively to the sale of used cars from our rental fleet. During
the year ended December 31, 2006, of the cars that were not repurchased by
manufacturers, we sold approximately 85% at auction or on a wholesale basis,
while 8% were sold at retail and 7% through other channels. We closed 24 retail
car sales locations in the United States in the year ended December 31,
2006. These closures did not have a significant impact on our results of
operations for the year ended December 31, 2006.
15
Licensees
We believe that our extensive worldwide ownership of
car rental operations contributes to the consistency of our high-quality service,
cost control, fleet utilization, yield management, competitive pricing and our
ability to offer one-way rentals. However, in certain predominantly smaller
U.S. and international markets, we have found it more efficient to utilize
independent licensees, which rent cars that they own. Our licensees operate
locations in over 140 countries, including most of the countries where we have
company-operated locations. As of December 31, 2006, we owned 96% of
all the cars in the combined company-owned and licensee-owned
fleets in the United States.
We believe that our licensee arrangements are
important to our business because they enable us to offer expanded national and
international service and a broader one-way rental program. Licenses are issued
principally by our wholly owned subsidiaries, Hertz System, Inc., or “System,”
and Hertz International, Ltd., or “HIL,” under franchise arrangements to
independent licensees and affiliates who are engaged in the car rental business
in the United States and in many foreign countries.
Licensees generally pay fees based on a percentage of
their revenues or the number of cars they operate. The operations of all
licensees, including the purchase and ownership of vehicles, are financed
independently by the licensees, and we do not have any investment interest in
the licensees or their fleets. System licensees share in the cost of our U.S.
advertising program, reservations system, sales force and certain other
services. Our European and other international licensees also share in the cost
of our reservations system, sales force and certain other services. In return,
licensees are provided the use of the Hertz brand name, management and
administrative assistance and training, reservations through our reservations
channels, the Hertz #1 Club and #1 Club Gold programs, our one-way rental
program and other services. In addition to car rental, certain licensees
outside the United States engage in car leasing, chauffeur-driven rentals
and renting camper vans under the Hertz name.
System licensees ordinarily
are limited as to transferability without our consent and are terminable by us
only for cause or after a fixed term. Licensees in the United States may
generally terminate for any reason on 90 days’ notice. In Europe and certain
other international jurisdictions, licensees typically do not have early
termination rights. Initial license fees or the price for the sale to a
licensee of a company-owned location may be payable over a term of
several years. We continue to issue new licenses and, from time to time,
purchase licensee businesses.
Competition
In the United States, our principal car rental
industry competitors are Avis Budget Group, Inc., or “ABG,” which
currently operates the Avis and Budget brands, Vanguard Car Rental USA Group,
or “Vanguard,” which operates the National Car Rental and Alamo brands, Dollar
Thrifty Automotive Group, Inc., or “DTG,” which operates the Dollar and
Thrifty brands, and Enterprise, which operates the Enterprise brand.
16
The
following table lists our estimated market share, and the estimated market
shares of our principal competitors and their licensees, at the 180 largest
U.S. airports at which we have company-operated locations, determined on
the basis of revenues reported to the airports’ operators on which concession
or off-airport permit fees are determined for the indicated periods. Complete
market share data is not available for any date later than for the ten months
ended October 31, 2006.
Ten
Months
Ended
October 31,
Years ended December 31,
2006
2005
2004
2003
2002
2001
Brand
Name
Hertz
28.4
%
29.2
%
29.6
%
29.0
%
29.2
%
29.5
%
Avis
19.9
20.2
20.2
21.2
22.3
21.6
Budget
10.4
10.5
10.2
10.4
10.8
11.8
ABG Brands(1)
30.3
30.7
30.4
31.6
33.1
33.4
National/Alamo (Vanguard Brands)(2)
19.7
19.4
19.8
20.8
21.8
25.4
Dollar
7.2
7.1
7.7
7.4
7.2
7.1
Thrifty
4.4
4.3
4.5
4.4
3.2
1.8
DTG Brands
11.6
11.4
12.2
11.8
10.4
8.9
Enterprise
7.6
7.0
6.0
5.0
3.9
2.0
Other
2.4
2.3
2.0
1.8
1.6
0.8
Total
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
(1)
ABG acquired all of
the outstanding shares of Avis Group Holdings, Inc. on March 1, 2001
and acquired substantially all of the domestic assets of the vehicle rental
business of Budget Group, Inc. on November 22, 2002.
(2)
National and Alamo
have been owned by Vanguard since October 2003.
The U.S. off-airport rental market has historically
been dominated by Enterprise. We now have a significant presence in the
off-airport market, and ABG’s brands also are present. Many smaller companies
also operate in the airport and off-airport rental markets.
In Europe, in addition to us, the principal
pan-European participants in the car rental industry are Avis Europe plc (which
is not an affiliate of ABG but is operating under a license from ABG), which
operates the Avis and Budget brands, and Europcar, which was acquired from
Volkswagen AG by Eurazeo in 2006. In certain European countries, there are also
other companies and brands with substantial market shares, including Sixt AG
(operating the Sixt brand), Vanguard (operating both the National Car Rental
and Alamo brands) in the United Kingdom and Germany, and through franchises in
Spain, Italy and France, and Enterprise (operating the Enterprise brand) in the
United Kingdom, Ireland and Germany. Europcar has acquired Vanguard’s European
business and has entered into an agreement relating to a trans-Atlantic
alliance with Vanguard. In every European country, there are also national,
regional or other, smaller companies operating in the airport and off-airport
rentals markets. Apart from Enterprise-branded operations, all of which
Enterprise owns, the other major car rental brands are present in European car
rental markets through a combination of company-operated and franchisee-
or licensee-operated locations.
17
Competition among car rental industry participants is
intense and frequently takes the form of price competition. For the year ended December 31,
2006, based on publicly available information, we believe some U.S. car rental
companies experienced transaction day growth and pricing increases compared to
comparable prior periods. For the year ended December 31, 2006, we
experienced a less than one percentage point volume decline versus the prior
period in the United States, while pricing was up over three percentage points.
The volume decline was the result of a reduction in fleet volume given
significant fleet cost increases, higher leisure pricing for the period from March
through May 2006 and the difficult comparison in the quarter ending December 31,
2006 due to the extraordinarily high volumes of post-hurricane rentals in the
Gulf Coast and Florida areas in 2005. During the year ended December 31,
2006, we experienced low to mid single digit transaction day growth in our
European operations and our car rental pricing was above the level of our
pricing during the year ended December 31, 2005.
Our competitors, some of which
may have access to substantial capital or which may benefit from lower
operating costs, may seek to compete aggressively on the basis of pricing. To
the extent that we match downward competitor pricing without reducing our
operating costs, it could have an adverse impact on our results of operations.
To the extent that we are not willing to match or remain within a reasonable competitive
margin of our competitors’ pricing, it could also have an adverse impact on our
results of operations, as we may lose market share. As a result of increased
use of the Internet as a travel distribution channel, pricing transparency has
increased. See “Item 1A—Risk Factors—Risks Related to Our Business—We face
intense competition that may lead to downward pricing, or an inability to
increase prices, which could have a material adverse impact on our results of
operations.” We believe, however, that the prominence and service reputation of
the Hertz brand and our extensive worldwide ownership of car rental operations
provide us with a competitive advantage.
Equipment Rental
Operations
We, through HERC, operate an
equipment rental business in the United States, Canada, France and Spain.
On
the basis of revenues, we believe HERC is the second largest equipment rental
company in the United States and Canada combined and one of the largest general
equipment rental companies in France and Spain.
HERC has operated in the United States since 1965.
HERC’s principal business is the rental of equipment.
HERC offers a broad range of equipment for rental; major categories include
earthmoving equipment, material handling equipment, aerial and electrical
equipment, air compressors, pumps, generators, small tools, compaction
equipment and construction-related trucks.
HERC’s comprehensive line of equipment enables it to
supply equipment to a wide variety of customers from local contractors to large
industrial plants. The fact that many larger companies, particularly those with
industrial plant operations, now require single source vendors, not only for
equipment rental, but also for management of their total equipment needs fits
well with HERC’s core competencies. Arrangements with such companies may
include maintenance of the tools and equipment they own, supplies and rental
tools for their labor force and custom management reports. HERC supports this
through its dedicated in-plant operations, tool trailers and plant management
systems.
As of December 31, 2006, HERC operated 362
equipment rental branches, of which 242 were in 40 states within the
United States, 33 were in Canada, 79 were in France and 8 were in Spain. HERC
generated same-store, year-over-year revenue growth for each of the last
thirteen quarters. HERC’s rental locations generally are situated in industrial
or commercial zones. A growing number of locations have highway or major
thoroughfare visibility. The typical location is approximately three acres in
size, though smaller in Europe, and includes a customer service center, an
equipment service
18
area and storage facilities for equipment. The
branches are built or conform to the specifications of the HERC prototype
branch, which stresses efficiency, safety and environmental compliance. Most
branches have stand-alone maintenance and fueling facilities and
showrooms.
HERC slightly contracted its network of equipment
rental locations during the 2001 to 2003 downturn in construction activities.
HERC added five new locations in the United States during 2004 and six during
2005. During the year ended December 31, 2006, HERC added ten U.S.
locations and two new Canadian locations. We expect HERC to add approximately
15 to 20 additional locations in the United States and approximately three
additional locations in Canada in 2007. In connection with its U.S. expansion,
we expect HERC will incur non-fleet start-up costs of approximately $0.6
million per location and additional fleet acquisition costs over an initial twelve-month
period of approximately $5.4 million per location.
Starting in 2004, HERC began to broaden its equipment
line in the United States and Canada to include more equipment with an
acquisition cost of under $10,000 per unit, ranging from air compressors and
generators to small tools and accessories, in order to supply customers who are
local contractors with a greater proportion of their overall equipment rental
needs. As of December 31, 2006, these activities, referred to as “general
rental activities,” were conducted at approximately 42% of HERC’s U.S. and
Canadian rental locations. Before it begins to conduct general rental
activities at a location, HERC typically renovates the location to make it more
appealing to walk-in customers and adds staff and equipment in anticipation of
subsequent demand.
HERC’s operations generated
$1,672.6 million in revenues and $269.5 million in income before income taxes
and minority interest during the year ended December 31, 2006.
Customers
HERC’s customers consist predominantly of commercial
accounts and represent a wide variety of industries, such as construction,
petrochemical, automobile manufacturing, railroad, power generation and
shipbuilding. Serving a number of different industries enables HERC to reduce
its dependence on a single or limited number of customers in the same business
and somewhat reduces the seasonality of HERC’s revenues and its dependence on
construction cycles. HERC primarily targets customers in medium to large
metropolitan markets. For the year ended December 31, 2006, no customer of
HERC accounted for more than 1.0% of HERC’s rental revenues. Of HERC’s combined
U.S. and Canadian rental revenues for the year ended December 31, 2006,
roughly half were derived from customers operating in the construction industry
(the majority of which was in the nonresidential sector), while the remaining
revenues were derived from rentals to industrial, governmental and other types
of customers.
Unlike in our car rental
business, where we enter into rental agreements with the people who will
operate the cars being rented, HERC ordinarily enters into a rental agreement
with the legal entity—typically a company, governmental body or other
organization—seeking to rent HERC’s equipment. Moreover, unlike in our car
rental business, where our cars are normally picked up and dropped off by
customers at our rental locations, HERC delivers much of its rental equipment
to its customers’ job sites and retrieves the equipment from the job sites when
the rentals conclude. Finally, unlike in our car rental business, HERC extends
credit terms to many of its customers to pay for rentals. Thus, for the year
ended December 31, 2006, 95% of HERC’s revenues came from customers who
were invoiced by HERC for rental charges, while 4% came from customers paying
with third-party charge, credit or debit cards and 1% came from customers
who paid with cash or used another method of payment. For the year ended December 31,
2006, HERC had a bad debt expense ratio of 0.3% of its revenues.
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Fleet
HERC acquires its equipment from a variety of
manufacturers. The equipment is typically new at the time of acquisition and is
not subject to any repurchase program. The per-unit acquisition cost of units
of rental equipment in HERC’s fleet vary from over $200,000 to under $100. As
of December 31, 2006, the average per-unit acquisition cost (excluding
small equipment purchased for less than $5,000 per unit) for HERC’s fleet in
the United States was approximately $35,000. As of December 31, 2006, the
average age of HERC’s rental fleet in the United States was 26 months. We
believe that this fleet is one of the youngest fleets in the industry. Having a
younger fleet reduces maintenance expenses, which generally escalate as
equipment ages. As of December 31, 2006, the average age of HERC’s
international rental fleet was 31 months in Canada and 33 months in France and
Spain, which we believe is roughly comparable to or younger than the average
ages of the fleets of HERC’s principal competitors in those countries.
HERC disposes of its used
equipment through a variety of channels, including private sales to customers
and other third parties, sales to wholesalers, brokered sales and auctions.
Ancillary to its rental business, HERC is also a dealer of certain brands of
new equipment in the United States and Canada, and sells consumables such as
gloves and hardhats at many of its rental locations.
Licensees
HERC licenses the Hertz name
to equipment rental businesses in eight countries in Europe and the Middle
East. The terms of those licenses are broadly similar to those we grant to our
international car rental licensees.
Competition
HERC’s competitors in the equipment rental industry
range from other large national companies to small regional and local
businesses. In each of the four countries where HERC operates, the equipment
rental industry is highly fragmented, with large numbers of companies operating
on a regional or local scale. The number of industry participants operating on
a national scale is, however, much smaller. HERC is one of the principal
national-scale industry participants in each of the four countries where
it operates. HERC’s operations in the United States represented approximately
76% of our worldwide equipment rental revenues during the year ended December 31,
2006. In the United States and Canada, the other top five national-scale
industry participants are United Rentals, Inc., or “URI,” RSC Equipment
Rental, Sunbelt Rentals, Home Depot Rentals and NES Rentals. A number of
individual Caterpillar dealers also participate in the equipment rental market
in the United States, Canada, France and Spain. In France, the other principal
national-scale industry participants are Loxam, Kiloutou and Laho, while
in Spain, the other principal national-scale industry participants are
GAM and Euroloc.
Competition in the equipment
rental industry is intense, and it often takes the form of price competition.
HERC’s competitors, some of which may have access to substantial capital, may
seek to compete aggressively on the basis of pricing. To the extent that HERC
matches downward competitor pricing, it could have an adverse impact on our
results of operations. To the extent that HERC is not willing to match
competitor pricing, it could also have an adverse impact on our results of
operations due to lower rental volume. From 2001 to 2003, the equipment rental
industry experienced downward pricing, measured by the rental rates charged by
rental companies.
For the
years ended December 31, 2004, 2005 and 2006, we believe industry pricing,
measured in the same way, improved in the United States and Canada and only
started to improve towards the end of 2005 in France and Spain. HERC also
experienced higher equipment rental volumes worldwide for the years ended December 31,
2005 and 2006. We believe that HERC’s competitive success has been
primarily the product of its 40 years of experience in the equipment rental
industry, its systems and procedures
20
for monitoring, controlling
and developing its branch network, its capacity to maintain a comprehensive
rental fleet, the quality of its sales force and its established national
accounts program.
Other Operations
Our wholly owned subsidiary,
Hertz Claim Management Corporation, or “HCM,” provides claim administration
services to us and, to a lesser extent, to third parties. These services
include investigating, evaluating, negotiating and disposing of a wide variety
of claims, including third-party, first-party, bodily injury,
property damage, general liability and product liability, but not the
underwriting of risks. HCM conducts business at nine regional offices in the
United States. Separate subsidiaries of ours conduct similar operations in nine
countries in Europe.
Seasonality
Car rental and equipment
rental are seasonal businesses, with decreased levels of business in the winter
months and heightened activity during the spring and summer. To accommodate
increased demand, we increase our available fleet and staff during the second
and third quarters. As business demand declines, fleet and staff are decreased
accordingly. However, certain operating expenses, including minimum concession
fees, rent, insurance and administrative overhead, remain fixed and cannot be
adjusted for seasonal demand. See “Item 1A—Risk Factors—Risks Related to Our
Business—Our business is highly seasonal, and a disruption in rental activity
during our peak season could materially adversely affect our results of
operations.” The following tables set forth this seasonaleffect by providing
quarterly revenues and operating income for each of the quarters in the year
ended December 31, 2006.
Revenues
Operating Income
In Millions of Dollars
In Millions of Dollars
Employees
As of December 31, 2006, we employed
approximately 31,500 persons, consisting of 22,200 persons in our U.S.
operations and 9,300 persons in our international operations. Employee benefits
in effect include group life insurance, hospitalization and surgical insurance,
pension plans and a defined contribution plan. International employees are
covered by a wide variety of union contracts and governmental regulations
affecting, among other things, compensation, job retention rights and
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pensions. Labor contracts covering the terms of
employment of approximately 7,400 employees in the United States (including
those in U.S. territories) are presently in effect under 140 active contracts
with local unions, affiliated primarily with the International Brotherhood of
Teamsters and the International Association of Machinists. Labor contracts
covering approximately 2,300 of these employees will expire during 2007. We
have had no material work stoppage as a result of labor problems during
the last ten years, and we believe our labor relations to be good. Nonetheless,
we may be unable to negotiate new labor contracts on terms advantageous to us,
or without labor interruptions.
In addition to the employees referred to above, we
employ a substantial number of temporary workers, and engage outside services,
as is customary in the industry, principally for the non-revenue movement of
rental cars and equipment between rental locations and the movement of rental
equipment to and from customers’ job sites.
As part of our effort to implement our strategy of
reducing operating costs, we are evaluating our workforce and operations and
making adjustments, including headcount reductions and process improvements to
optimize work flow at rental locations and maintenance facilities as well as
streamlining our back-office operations, that we believe are necessary and appropriate.
On January 5, 2007 and February 28,
2007, we announced job reductions affecting a total of approximately 1,550
employees primarily in our U.S. car rental operations, with much smaller
reductions occurring in U.S. equipment rental operations, the corporate
headquarters in Park Ridge, New Jersey, and the U.S. service center in Oklahoma
City, as well as in Canada, Puerto Rico, Brazil, Australia and New Zealand.
Risk Management
Three types of
generally insurable risks arise in our operations:
·
legal liability arising from the operation of
our cars and on-road equipment (vehicle liability);
·
legal liability to members of the public and
employees from other causes (general liability/workers’ compensation); and
·
risk of property damage and/or business interruption
and/or increased cost of working as a consequence of property damage.
In addition, we offer optional liability insurance and
other products providing insurance coverage, which create additional risk
exposures for us. Our risk of property damage is also increased when we waive
the provisions in our rental contracts that hold a renter responsible for
damage or loss under an optional loss or damage waiver that we offer. We bear
these and other risks, except to the extent the risks are transferred through
insurance or contracts.
In many cases we self-insure
our risks or reinsure risks through wholly owned insurance subsidiaries. We
mitigate our exposure to large liability losses by maintaining excess insurance
coverage, subject to deductibles and caps, through unaffiliated carriers with
respect to our domestic operations and our car rental operations in Europe. For
our international operations outside Europe and for HERC’s operations in
Europe, we maintain some liability insurance coverage with unaffiliated
carriers. We also maintain property insurance through our captive insurer,
Probus Insurance Company Europe Limited, or “Probus” (with the risk reinsured
with unaffiliated insurance carriers) domestically and in Europe, subject to
deductibles.
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Third-Party
Liability
In our domestic operations, we
are required by applicable financial responsibility laws to maintain insurance
against legal liability for bodily injury (including death) or property damage
to third parties arising from the operation of our cars and on-road equipment,
sometimes called “vehicle liability,” in stipulated amounts. In most places, we
satisfy those requirements by qualifying as a self-insurer, a process that
typically involves governmental filings and demonstration of financial
responsibility, which sometimes requires the posting of a bond or other
security. In the remaining places, we obtain an insurance policy from an
unaffiliated insurance carrier and indemnify the carrier for any amounts paid
under the policy. As a result of such arrangements, we bear economic
responsibility for domestic vehicle liability, except to the extent we
successfully transfer such liability to others through insurance or contractual
arrangements.
For our car rental operations
in Europe, we have established two wholly owned insurance subsidiaries, Probus,
a direct writer of insurance domiciled in Ireland, and Hertz International RE
Limited, or “HIRE,” a reinsurer organized in Ireland. In European countries
with company-operated locations, we purchase from Probus the vehicle
liability insurance required by law, and Probus reinsures the risks under such
insurance with HIRE. Effective January 1, 2007 reinsurance is provided by
another subsidiary of ours. Thus, as with our domestic operations, we bear economic
responsibility for vehicle liability in our European car rental operations,
except to the extent that we transfer such liability to others through
insurance or contractual arrangements. For our international operations outside
Europe and for HERC’s operations in Europe, we maintain some form of vehicle
liability insurance coverage. The nature of such coverage, and our economic
responsibility for covered losses, varies considerably. In all cases, though,
we believe the amounts and nature of the coverage we obtain is adequate in
light of the respective potential hazards.
Both domestically and in our
international operations, from time to time in the course of our business we
become legally responsible to members of the public for bodily injury (including
death) or property damage arising from causes other than the operation of our
cars and on-road equipment, sometimes known as “general liability.” As with
vehicle liability, we bear economic responsibility for general liability
losses, except to the extent we transfer such losses to others through
insurance or contractual arrangements.
To mitigate our exposure to
large vehicle and general liability losses domestically and in our car rental
operations in Europe, we maintain excess insurance coverage with unaffiliated
insurance carriers against such losses to the extent they exceed $10 million
per occurrence (for occurrences in Europe before December 15, 2003, to the
extent such losses exceeded $5 million per occurrence). The coverage provided
under such excess insurance policies is limited to $100 million for the current
policy year, which began on December 21, 2006 and ends on December 21,
2007 (for occurrences between December 15, 2005 and December 20,
2005, the limit is $235 million; between December 15, 2004 and December 14,
2005, $185 million; between December 15, 2003 and December 14, 2004,
$150 million; and between December 15, 2002 and December 14, 2003,
$675 million). For our international operations outside Europe and for HERC’s
operations in Europe, we also maintain liability insurance coverage with
unaffiliated carriers in such amounts as we deem adequate in light of the
respective potential hazards, where such insurance is obtainable on
commercially reasonable terms.
Our domestic rental contracts, both for car rental and
for equipment rental, typically provide that the renter will indemnify us for
liability arising from the operation of the rented vehicle or equipment (for
car rentals in certain places, though, only to the extent such liability exceeds
the amount stipulated in the applicable financial responsibility law). In
addition, many of HERC’s domestic rental contracts require the renter to
maintain liability insurance under which HERC is entitled to coverage. While
such provisions are sometimes effective to transfer liability to renters, their
value to us, particularly in cases of large losses, may be limited. The rental
contracts used in our international operations sometimes
23
contain provisions relating to insurance or indemnity,
but they are typically more limited than those employed in our domestic
operations.
In our domestic car rental operations, we offer an
optional liability insurance product, Liability Insurance Supplement, or “LIS,”
that provides vehicle liability insurance coverage substantially higher than
state minimum levels to the renter and other authorized operators of a rented
vehicle. LIS coverage is provided under excess liability insurance policies
issued by an unaffiliated insurance carrier, the risks under which are reinsured
with a subsidiary of ours. As a consequence of those reinsurance arrangements,
rental customers’ purchases of LIS do not reduce our economic exposure to
vehicle liability. Instead, our exposure to vehicle liability is potentially
increased when LIS is purchased, because insured renters and other operators
may have vehicle liability imposed on them in circumstances and in amounts
where the applicable rental agreement or applicable law would not, absent the
arrangements just described, impose vehicle liability on us.
In both our domestic car rental operations and our
company-operated international car rental operations in many countries,
we offer an optional product or products providing insurance coverage, or “PAI/PEC”
coverage, to the renter and the renter’s immediate family members traveling
with the renter for accidental death or accidental medical expenses arising
during the rental period or for damage or loss of their property during the
rental period. PAI/PEC coverage is provided under insurance policies issued by
unaffiliated carriers or, in some parts of Europe, by Probus, and the risks
under such policies either are reinsured with HIRE or another subsidiary of
ours or are the subject of indemnification arrangements between us and the
carriers. Rental customers’ purchases of PAI/PEC coverage create additional
risk exposures for us, since we would not typically be liable for the risks
insured by PAI/PEC coverage if that coverage had not been purchased.
Our offering of LIS and PAI/PEC coverage in our domestic
car rental operations is conducted pursuant to limited licenses or exemptions
under state laws governing the licensing of insurance producers. In our
international car rental operations, our offering of PAI/PEC coverage
historically has not been regulated; however, in the countries of the European
Union, the regulatory environment for insurance intermediaries is rapidly
evolving, and we cannot assure you either that we will be able to continue
offering PAI/PEC coverage without substantial changes in its offering process
or in the terms of the coverage or that such changes, if required, would not
render uneconomic our continued offering of the coverage. Due to a change in
law in Australia, we have discontinued the sales of insurance products there.
Provisions on our books for
self-insured vehicle liability losses are made by charges to expense based upon
evaluations of estimated ultimate liabilities on reported and unreported
claims. As of December 31, 2006, this liability was estimated at $327.0
million for our combined domestic and international operations.
Damage to Our Property
We bear the risk of damage to our property, unless
such risk is transferred through insurance or contractual arrangements.
To mitigate our risk of large, single-site property damage
losses domestically and in Europe, we maintain property insurance through our
captive insurer, Probus (with the risk reinsured with unaffiliated insurance
carriers), generally with a per-occurrence deductible of $3.0 million ($10
million effective April 30, 2006 in the United States) and $2.5 million in
respect of vehicle damage, and $50,000 in respect of all other losses, in
Europe. For our international operations outside Europe, we also maintain
property insurance coverage with unaffiliated carriers in such amounts as we
deem adequate in light of the respective hazards, where such insurance is
available on commercially reasonable terms.
24
Our rental contracts typically
provide that the renter is responsible for damage to or loss (including loss
through theft) of rented vehicles or equipment. We generally offer an optional
rental product, known in various countries as “loss damage waiver,” “collision
damage waiver,” “theft protection” or “accident excess reduction,” under which
we waive or limit our right to make a claim for such damage or loss. This
product is not regulated as insurance, but it is subject to specific laws in
roughly half of the U.S. jurisdictions where we operate.
Collision damage costs and the
costs of stolen or unaccounted-for vehicles and equipment, along with other
damage to our property, are charged to expense as incurred.
Other Risks
To manage other risks
associated with our businesses, or to comply with applicable law, we purchase
other types of insurance carried by business organizations, such as worker’s
compensation and employer’s liability (for which we, through contracts with
insurers domestically, bear the risk of the first $5 million of loss from any
occurrence), commercial crime and fidelity, performance bonds and directors’
and officers’ liability insurance, from unaffiliated insurance companies in
amounts deemed by us to be adequate in light of the respective hazards, where
such coverage is obtainable on commercially reasonable terms.
Governmental Regulation and Environmental Matters
Throughout the world, we are
subject to numerous types of governmental controls, including those relating to
prices and advertising, privacy and data protection, currency controls, labor
matters, charge card operations, insurance, environmental protection, used car
sales and licensing.
Environmental
The environmental requirements
applicable to our operations generally pertain to (i) the operation and
maintenance of cars, trucks and other vehicles, such as heavy equipment, buses
and vans; (ii) the ownership and operation of tanks for the storage of
petroleum products, including gasoline, diesel fuel and oil; and (iii) the
generation, storage, transportation and disposal of waste materials, including
oil, vehicle wash sludge and waste water. We have made, and will continue to
make, expenditures to comply with applicable environmental laws and
regulations.
The use of cars and other
vehicles is subject to various governmental requirements designed to limit
environmental damage, including those caused by emissions and noise. Generally,
these requirements are met by the manufacturer, except in the case of
occasional equipment failure requiring repair by us. Measures are taken at
certain locations in states that require the installation of Stage II Vapor Recovery
equipment to reduce the loss of vapor during the fueling process.
We utilize tanks worldwide,
approximately 490 of which are underground and 1,840 of which are aboveground,
to store petroleum products, and we believe our tanks are maintained in material
compliance with environmental regulations, including federal and state
financial responsibility requirements for corrective action and third-party
claims due to releases. Our compliance program for our tanks is intended to
ensure that (i) the tanks are properly registered with the state or other
jurisdiction in which the tanks are located and (ii) the tanks have been
either replaced or upgraded to meet applicable leak detection and spill,
overfill and corrosion protection requirements.
We are also incurring and
providing for expenses for the investigation and cleanup of contamination from
the discharge of petroleum substances at, or emanating from, currently and
formerly owned and leased properties, as well as contamination at other
locations at which our wastes have reportedly been identified. The amount of
any such expenses or related natural resource damages for which we may be held
responsible could be substantial. The probable losses that we expect to incur
for such matters have been accrued, and those losses are reflected in our
consolidated financial statements.
25
As of December 31, 2006
and December 31, 2005, the aggregate amounts accrued for environmental
liabilities reflected in our consolidated balance sheet in “Other accrued
liabilities” were $3.7 million and $3.9 million, respectively. The accrual
generally represents the estimated cost to study potential environmental issues
at sites deemed to require investigation or clean-up activities, and the
estimated cost to implement remediation actions, including ongoing maintenance,
as required. Cost estimates are developed by site. Initial cost estimates are
based on historical experience at similar sites and are refined over time on
the basis of in-depth studies of the site. For many sites, the remediation
costs and other damages for which we ultimately may be responsible cannot be
reasonably estimated because of uncertainties with respect to factors such as
our connection to the site, the nature of the contamination, the involvement of
other potentially responsible parties, the application of laws and other
standards or regulations, site conditions, and the nature and scope of
investigations, studies, and remediation to be undertaken (including the
technologies to be required and the extent, duration, and success of
remediation).
With respect to cleanup
expenditures for the discharge of petroleum substances at, or emanating from,
currently and formerly owned or leased properties, we have received
reimbursement, in whole or in part, from certain U.S. states that maintain
underground storage tank petroleum cleanup reimbursement funds. Such funds have
been established to assist tank owners in the payment of cleanup costs
associated with releases from registered tanks. With respect to off-site U.S.
locations at which our wastes have reportedly been identified, we have been and
continue to be required to contribute to cleanup costs due to strict joint and
several cleanup liability imposed by the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 and comparable state
superfund statutes.
Environmental legislation and
regulations and related administrative policies have changed rapidly in recent
years, both in the United States and in other countries. There is a risk that
governmental environmental requirements, or enforcement thereof, may become
more stringent in the future and that we may be subject to legal proceedings
brought by government agencies or private parties with respect to environmental
matters. In addition, with respect to cleanup of contamination, additional
locations at which wastes generated by us or substances used by us may have
been released or disposed, and of which we are currently unaware, may in the
future become the subject of cleanup for which we may be liable, in whole or
part. Further, at airport-leased properties, we may be subject to
environmental requirements imposed by airports that are more restrictive than
those obligations imposed by environmental regulatory agencies. Accordingly,
while we believe that we are in substantial compliance with applicable
requirements of environmental laws, we cannot offer assurance that our future
environmental liabilities will not be material to our consolidated financial
position, results of operations or cash flows.
Dealings with Renters
In the United States, car and equipment rental
transactions are generally subject to Article 2A of the Uniform Commercial
Code, which governs “leases” of tangible personal property. Car rental is also
specifically regulated in more than half of the states of the United States.
The subjects of state regulation include the methods by which we advertise,
quote and charge prices, the consequences of failing to honor reservations, the
terms on which we deal with vehicle loss or damage (including the protections
we provide to renters purchasing loss or damage waivers) and the terms and
method of sale of the optional insurance coverage that we offer. Some states
(including California, New York, Nevada and Illinois) regulate the price at which
we may sell loss or damage waivers, and many state insurance regulators have
authority over the prices and terms of the optional insurance coverage we
offer. See “—Risk Management” above for further discussion regarding the loss
or damage waivers and optional insurance coverages that we offer renters.
Internationally, regulatory regimes vary greatly by jurisdiction, but they do
not generally prevent us from dealing with customers in a manner similar to
that employed in the United States.
26
Both in the United States and
internationally, we are subject to increasing regulation relating to customer
privacy and data protection. In general, we are limited in the uses to which we
may put data that we collect about renters, including the circumstances in
which we may communicate with them. In addition, we are generally obligated to
take reasonable steps to protect customer data while it is in our possession.
Our failure to do so could subject us to substantial legal liability or
seriously damage our reputation.
Changes in Regulation
Changes in government
regulation of our business have the potential to alter our business practices,
or our profitability, materially. Depending on the jurisdiction, those changes
may come about through new legislation, the issuance of new regulations or
changes in the interpretation of existing laws and regulations by a court,
regulatory body or governmental official. Sometimes those changes may have not
just prospective but also retroactive effect; this is particularly true when a
change is made through reinterpretation of laws or regulations that have been
in effect for some time. Moreover, changes in regulation that may seem neutral
on their face may have either more or less impact on us than on our
competitors, depending on the circumstances. Recent or potential changes in law
or regulation that affect us relate to insurance intermediaries, customer
privacy and data security and rate regulation, each as described under “Item 1A—Risk
Factors—Risks Related to Our Business—Changes in the U.S. and foreign legal and
regulatory environment that impact our operations, including laws and
regulations relating to the insurance products we sell, customer privacy, data
security, insurance rates and expenses we pass through to customers by means of
separate charges, could disrupt our business, increase our expenses or
otherwise could have a material adverse effect on our results of operations.”
In addition, our operations,
as well as those of our competitors, also could be affected by any limitation in
the fuel supply or by any imposition of mandatory allocation or rationing
regulations. We are not aware of any current proposal to impose such a regime
in the United States or internationally. Such a regime could, however, be
quickly imposed if there were a serious disruption in supply for any reason,
including an act of war, terrorist incident or other problem affecting
petroleum supply, refining, distribution or pricing.
Relationship with Ford
Prior to the Acquisition,
Ford, through its wholly owned subsidiary Ford Holdings, was Hertz’s only
stockholder. As a result of the Acquisition, Hertz Holdings indirectly owns all
of Hertz’s outstanding common stock. As a result of our initial public
offering, investment funds associated with or designated by the Sponsors
currently own approximately 72% of Hertz Holdings’ outstanding common stock.
Set forth below are
descriptions of certain agreements, relationships and transactions between
Hertz and Ford that survived the completion of the Acquisition.
Supply and Advertising
Arrangements
On July 5, 2005, Hertz,
one of its wholly owned subsidiaries and Ford signed a Master Supply and
Advertising Agreement, effective July 5, 2005 and expiring August 31,
2010, that covers the 2005 through 2010 vehicle model years.
The terms of the Master Supply
and Advertising Agreement only apply to our fleet requirements and advertising
in the United States and to Ford, Lincoln or Mercury brand vehicles, or “Ford
Vehicles.” Under the Master Supply and Advertising Agreement, Ford has agreed
to supply to us and we have agreed to purchase from Ford, during each of the
2005 through 2010 vehicle model years, a specific number of Ford Vehicles. Ford
has also agreed in the Master Supply and Advertising Agreement to pay us a
contribution toward the cost of our advertising of Ford Vehicles equal to
one-half of our total expenditure on such advertising, up to a specified
maximum amount. To be eligible for advertising
27
cost contribution under the
Master Supply and Advertising Agreement, the advertising must meet certain
conditions, including the condition that we feature Ford Vehicles in a manner
and with a prominence that is reasonably satisfactory to Ford. It further
provides that the amounts Ford will be obligated to pay to us for our advertising
costs will be increased or reduced according to the number of Ford Vehicles
acquired by us in any model year, provided Ford will not be required to pay any
amount for our advertising costs for any year if the number of Ford Vehicles
acquired by us in the corresponding model year is less than a specified minimum
except to the extent that our failure to acquire the specified minimum number
of Ford Vehicles is attributable to the availability of Ford Vehicles or Ford
vehicle production is disrupted for reasons beyond the control of Ford. To the
extent we acquire less than a specified minimum number of Ford Vehicles in any
model year, we have agreed to pay Ford a specified amount per vehicle below the
minimum.
The advertising contributions
paid by Ford for the 2006 vehicle model year were slightly higher than the
advertising contributions we received from Ford for the 2005 model year due to
an increase in the number of Ford Vehicles acquired and an increase in the per
car contribution. We expect that contributions in future years will be below
levels for the 2006 model year based upon anticipated reductions in the number
of Ford Vehicles to be acquired. We do not expect that the reductions in Ford’s
advertising contributions will have a material adverse effect on our results of
operations.
Under the terms of the Master
Supply and Advertising Agreement, we are able to enter into vehicle advertising
and supply agreements with other automobile manufacturers in the United States
and in other countries, and we intend to explore those opportunities. However,
we cannot offer assurance that we will be able to obtain advertising
contributions from other automobile manufacturers that will mitigate reductions
in Ford’s advertising contributions.
Ford subsidiaries and affiliates
also supply other brands of cars, including Jaguar, Volvo, Mazda and Land Rover
cars, to us in the United States under arrangements separate from the Master
Supply and Advertising Agreement. In addition, Ford and its subsidiaries and
affiliates are significant suppliers of cars to our international operations.
Other Relationships and
Transactions
We and Ford also engage in
other transactions in the ordinary course of our respective businesses. These
transactions include HERC’s providing equipment rental services to Ford, our
providing insurance and insurance claim management services to Ford and our
providing car rental services to Ford. In addition, Ford subsidiaries are our
car rental licensees in Scandinavia and Finland.
We may be exposed to liabilities
for regulatory or tax contingencies of Ford arising from the period during
which we were a consolidated subsidiary of Ford. While Ford has agreed to
indemnify us for certain liabilities pursuant to the arrangements relating to
our separation from Ford, we cannot offer assurance that any payments in
respect of these indemnification arrangements will be made available.
Available Information
We file annual and quarterly reports and other
information with the United States Securities and Exchange Commission, or the “SEC.”
You may read and copy any documents that we file at the SEC’s public reference
room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for further information about the public reference room. In addition, the SEC
maintains an Internet website (www.sec.gov) that contains reports and other
information about issuers that file electronically with the SEC, including
Hertz Holdings. You may also access, free of charge, our reports filed with the
SEC (for example, our Annual Report on Form 10-K, our Quarterly
Reports on Form 10-Q and our Current Reports on Form 8-K
and any amendments to those forms) indirectly through our Internet website
(www.hertz.com). Reports filed with or furnished to the SEC will be available as
soon as reasonably practicable after they are filed with or furnished to the
SEC. The information found on our website is not part of this or any other
report filed with or furnished to the SEC.
28
ITEM 1A. RISK FACTORS
Our business is subject to a number of important risks
and uncertainties, some of which are described below. The risks described
below, however, are not the only risks that we face. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial may also impair our business operations. Any of these risks may have
a material adverse effect on our business, financial condition, results of
operations and cash flows.
Risks Related to Our Business
An economic
downturn could result in a decline in business and leisure travel and
non-residential capital investment, which could harm our business.
Our results of operations are
affected by many economic factors, including the level of economic activity in
the markets in which we operate. A decline in economic activity either in the
United States or in international markets may have a material adverse effect on
our business. In the car rental business, a decline in economic activity
typically results in a decline in both business and leisure travel and,
accordingly, a decline in the volume of car rental transactions. In the
equipment rental business, a decline in economic activity typically results in
a decline in activity in non-residential construction and other businesses in
which our equipment rental customers operate and, therefore, results in a
decline in the volume of equipment rental transactions. In the case of a
decline in car or equipment rental activity, we may reduce rental rates to meet
competitive pressures, which could have a material adverse effect on our
results of operations. A decline in economic activity also may have a material
adverse effect on residual values realized on the disposition of our revenue
earning cars and/or equipment.
We face
intense competition that may lead to downward pricing, or an inability to
increase prices, which could have a material adverse impact on our results of
operations.
The markets in which we
operate are highly competitive. See “Item 1—Business—Worldwide Car Rental—Competition”
and “Item 1—Business—Equipment Rental—Competition.” We believe that price is
one of the primary competitive factors in the car and equipment rental markets.
Our competitors, some of whom may have access to substantial capital, may seek
to compete aggressively on the basis of pricing. To the extent that we match
competitors’ downward pricing, it could have a material adverse impact on our
results of operations. To the extent that we do not match or remain within a
reasonable competitive distance from our competitors’ pricing, it could also
have a material adverse impact on our results of operations, as we may lose
rental volume. The Internet has increased pricing transparency among car rental
companies by enabling cost-conscious customers, including business travelers,
to more easily obtain the lowest rates available from car rental companies for
any given trip. This transparency may increase the prevalence and intensity of
price competition in the future.
Our car
rental business is dependent on the air travel industry, and disruptions in air
travel patterns could harm our business.
We estimate that approximately
72% of our worldwide car rental revenues during the year ended December 31,
2006 were generated at our airport rental locations. Significant capacity
reductions or airfare increases (e.g., due to an increase in fuel costs) could
result in reduced air travel and have a material adverse effect on our results
of operations. In addition, any event that disrupts or reduces business or leisure
air travel could have a material adverse effect on our results of operations.
In particular, many U.S. airlines have experienced economic distress in recent
years. Any further deterioration in the economic condition of U.S. and
international airlines could exacerbate reductions in air travel. Other events
that impact air travel could include work stoppages, military conflicts,
terrorist incidents, natural disasters, epidemic diseases, or the response of
governments to any of
29
these events. For example,
shortly before the September 11, 2001 terrorist attacks, we estimated that
we would earn a pre-tax profit of approximately $250 million in 2001; by
contrast, our actual pre-tax profit for 2001 was only approximately $3 million,
and we continued to feel the adverse effects of the attacks well into the
following year. On a smaller scale, the 2003 outbreak of Severe Acute
Respiratory Syndrome, or “SARS,” in the Toronto, Canada area and parts of Asia,
significantly reduced our 2003 results of operations in Canada.
Our business is highly
seasonal, and a disruption in rental activity during our peak season could
materially adversely affect our results of operations.
Certain significant components
of our expenses, including real estate taxes, rent, utilities, maintenance and
other facility-related expenses, the costs of operating our information
systems and minimum staffing costs, are fixed in the short-run. Seasonal
changes in our revenues do not alter those fixed expenses, typically resulting
in higher profitability in periods when our revenues are higher and lower
profitability in periods when our revenues are lower. The second and third
quarters of the year have historically been our strongest quarters due to their
increased levels of leisure travel and construction activity. In 2006, the
second and third quarters accounted for approximately 25% and 28% of total
revenues and 29% and 82% of income before income taxes and minority interest,
respectively. Any occurrence that disrupts rental activity during the second or
third quarters could have a disproportionately material adverse effect on our
liquidity and/or results of operations. See “Item 7—Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.”
We may
not be successful in our business strategy to expand into the off-airport
rental market, including marketing to replacement renters and insurance
companies that reimburse or pay for such rentals.
We have been increasing our
presence in the off-airport car rental market in the United States. We
currently intend to pursue profitable growth opportunities in the off-airport
market. We may do this through a combination of selected new location openings,
a disciplined evaluation of existing locations and the pursuit of same-store
sales growth. In order to increase revenues at our existing and any new
off-airport locations, we will need to successfully market to insurance
companies and other companies that provide rental referrals to those needing
cars while their vehicles are being repaired or are temporarily unavailable for
other reasons, as well as to the renters themselves. This could involve a
significant number of additional off-airport locations or strategic changes
with respect to our existing locations. We incur minimal non-fleet costs in
opening our new off-airport locations, but new off-airport locations, once
opened, take time to generate their full potential revenues. As a result,
revenues at new locations do not initially cover their start-up costs and often
do not, for some time, cover the costs of their ongoing operation. See “Item 1—Business—Worldwide
Car Rental—Operations.” The results of this strategy and the success of our
implementation of this strategy will not be known for a number of years. If we
are unable to grow profitably in our off-airport network, properly react to
changes in market conditions or successfully market to replacement renters and
the insurance companies covering the cost of their rentals, our financial
condition, results of operations and cash flows could be materially adversely
affected.
We face
risks of increased costs of cars and of decreased profitability, including as a
result of limited supplies of competitively priced cars.
We believe we are one of the largest private sector
purchasers of new cars in the world for our rental fleet, and during the year
ended December 31, 2006, our approximate average holding period for a
rental car was ten months in the United States and nine months in our
international car rental operations. In recent years, the average cost of new
cars has increased. In the United States, increases of approximately 17% in
monthly per-car depreciation costs for 2006 model year program
30
cars began to adversely affect our results of
operations in the fourth quarter of 2005, as those cars began to enter our
fleet. On a comparable basis, we expect 2007 model year program vehicle
depreciation costs to rise approximately 20% and per-car depreciation costs for
2007 model year U.S. risk cars to decline slightly. As a consequence of those
changes in per-car costs, as well as the larger proportion of our U.S. fleet we
expect to purchase as risk cars and other actions we expect to take to mitigate
program car cost increases, we expect our net per-car depreciation costs for
2007 model year cars in the United States will increase by approximately 5%
from our net per-car depreciation costs for 2006 model year U.S. cars. We began
to experience the impact of those cost changes and mitigation actions in the
fourth quarter of 2006, as substantial numbers of 2007 model year cars began to
enter our U.S. rental fleet. We may not be able to offset these car cost
increases to a degree sufficient to maintain our profitability.
Historically, we have purchased more of the cars we rent
from Ford than from any other automobile manufacturer. Over the five years
ended December 31, 2006, approximately 47% of the cars acquired by us for
our U.S. car rental fleet, and approximately 32% of the cars acquired by us for
our international fleet, were manufactured by Ford and its subsidiaries. During
the year ended December 31, 2006, approximately 40% of the cars acquired
by us domestically were manufactured by Ford and its subsidiaries and
approximately 30% of the cars acquired by us for our international fleet were
manufactured by Ford and its subsidiaries, which represented the largest
percentage of any automobile manufacturer during that period. Under our Master
Supply and Advertising Agreement with Ford, Ford has agreed to develop fleet offerings
in the United States that are generally competitive with terms and conditions
of similar offerings by other automobile manufacturers. The Master Supply and
Advertising Agreement expires in 2010. See “Item 1—Business—Relationship with
Ford—Supply and Advertising Arrangements.” We cannot assure you that we will be
able to extend the Master Supply and Advertising Agreement beyond its current
term or enter into similar agreements at reasonable terms. In the future, we
expect to buy a smaller proportion of our car rental fleet from Ford than we
have in the past. If Ford does not offer us competitive terms and conditions,
and we are not able to purchase sufficient quantities of cars from other
automobile manufacturers on competitive terms and conditions, then we may be
forced to purchase cars at higher prices, or on terms less competitive, than
for cars purchased by our competitors. Historically, we have also purchased a
significant percentage of our car rental fleet from General Motors. Over the
five years ended December 31, 2006, approximately 19% of the cars acquired
by us for our U.S. car rental fleet, and approximately 15% of the cars acquired
by us for our international fleet, were manufactured by General Motors. During
the year ended December 31, 2006, approximately 17% of the cars acquired
by our U.S. car rental fleet, and approximately 13% of the cars acquired by us
for our international fleet, were manufactured by General Motors.
To date we have not entered
into any long-term car supply arrangements with manufacturers other than Ford.
In addition, certain car manufacturers, including Ford, have adopted strategies
to de-emphasize sales to the car rental industry which they view as less
profitable due to historical sales incentive and other discount programs that
tended to lower the average cost of cars for fleet purchasers such as us.
Reduced or limited supplies of equipment together with increased prices are
risks that we also face in our equipment rental business. We cannot offer
assurance that we will be able to pass on increased costs of cars or equipment
to our rental customers. Failure to pass on significant cost increases to our
customers would have a material adverse impact on our results of operations and
financial condition.
We face risks related
to decreased acquisition or disposition of cars through repurchase and
guaranteed depreciation programs.
For the year ended December 31, 2006,
approximately 64% of the cars purchased in our combined U.S. and international
car rental fleet were subject to repurchase by car manufacturers under
31
contractual repurchase or guaranteed depreciation
programs. Under these programs, car manufacturers agree to repurchase cars at a
specified price or guarantee the depreciation rate on the cars during a
specified time period, typically subject to certain car condition and mileage
requirements. These repurchase and guaranteed depreciation programs limit the
risk to us that the market value of a car at the time of its disposition will
be less than its estimated residual value at such time. We refer to this risk
as “residual risk.” For this reason, cars purchased by car rental companies
under repurchase and guaranteed depreciation programs are sometimes referred to
by industry participants as “program” cars. Conversely, those cars not
purchased under repurchase or guaranteed depreciation programs for which the
car rental company is exposed to residual risk are sometimes referred to as “risk”
cars.
Repurchase and guaranteed depreciation programs enable
us to determine our depreciation expense in advance. This predictability is
useful to us, since depreciation is a significant cost factor in our
operations. Repurchase and guaranteed depreciation programs are also useful in
managing our seasonal peak demand for fleet, because some of them permit us to
acquire cars and dispose of them after relatively short periods of time. A
trade-off we face when we purchase program cars is that we typically pay
the manufacturer of a program car more than we would pay to buy the same car as
a risk car. Program cars thus involve a larger initial investment than their
risk counterparts. If a program car is damaged or otherwise becomes ineligible
for return or sale under the relevant program, our loss upon the disposition of
the car will be larger than if the car had been a risk car, because our initial
investment in the car was larger.
We expect the percentage of our car rental fleet
subject to repurchase or guaranteed depreciation programs to decrease
substantially due primarily to changes in the terms offered by automobile
manufacturers under repurchase programs. Accordingly, we expect to bear
increased risk relating to the residual market value and the related
depreciation on our car rental fleet and to use different rotational techniques
to accommodate our seasonal peak demand for cars.
Repurchase and guaranteed depreciation programs
generally provide us with flexibility to reduce the size of our fleet by
returning cars sooner than originally expected without risk of loss in the
event of an economic downturn or to respond to changes in rental demand. This
flexibility will be reduced as the percentage of program cars in our car rental
fleet decreases materially. See “Item 1—Business—Worldwide Car Rental—Fleet”
and “Item 7—Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Overview.”
In the future, car
manufacturers could modify or eliminate their repurchase or guaranteed
depreciation programs or change their return policies (which include condition,
mileage and holding period requirements for returned cars) from one program
year to another to make it disadvantageous to acquire certain cars. Any such
modification or elimination would increase our exposure to the risks described
in the preceding paragraphs. In addition, because we obtain a substantial
portion of our financing in reliance on repurchase and guaranteed depreciation
programs, the modification or elimination of those programs, or the associated
return policies, by manufacturers or significant adverse changes in the
financial condition of manufacturers could make needed vehicle-related
debt financing significantly more difficult to obtain on reasonable terms. See “—Our
reliance on asset-backed financing to purchase cars subjects us to a
number of risks, many of which are beyond our control.”
We could be harmed by a
decline in the results of operations or financial condition of the
manufacturers of our cars, particularly if they are unable, or reject their
obligations, to repurchase program cars from us or to guarantee the
depreciation of program cars.
In 2005 and 2006, Ford and General Motors, which are
the principal suppliers of cars to us on both a program and risk basis, have
experienced deterioration in their operating results and significant
32
declines in their credit ratings. A severe or
persistent decline in the results of operations or financial condition of a
manufacturer of cars that we own could reduce the cars’ residual values,
particularly to the extent that the manufacturer unexpectedly announced the eventual
elimination of its models or nameplates or ceased manufacturing them
altogether. Such a reduction could cause us to sustain a loss on the ultimate
sale of risk cars, on which we bear the risk of such declines in residual
value, or require us to depreciate those cars on a more rapid basis while we
own them.
In addition, if a decline in results or conditions
were so severe as to cause a manufacturer to default on an obligation to
repurchase or guarantee the depreciation of program cars we own, or to cause a
manufacturer to commence bankruptcy reorganization proceedings, and reject its
repurchase or guaranteed depreciation obligations, we would have to dispose of
those program cars without the benefits of the associated programs. This could
significantly increase our expenses. In addition, disposing of program cars
following a manufacturer default or rejection of the program in bankruptcy
could result in losses similar to those associated with the disposition of cars
that have become ineligible for return or sale under the applicable program.
Such losses could be material if a large number of program cars were affected.
For example, we estimate that if Ford Motor Company, but not its subsidiaries,
were to file for bankruptcy reorganization and reject all its commitments to
repurchase program cars from us, we would sustain material losses, which could
be as high as over one hundred million dollars, upon disposition of those cars.
A reduction in the number of program cars that we buy would reduce the magnitude
of this exposure, but it would simultaneously increase our exposure to residual
value risk. See “—We face risks related to decreased acquisition or disposition
of cars through repurchase and guaranteed depreciation programs.”
Any default or reorganization
of a manufacturer that has sold us program cars might also leave us with a
substantial unpaid claim against the manufacturer with respect to program cars
that were sold and returned to the car manufacturer but not paid for, or that
were sold for less than their agreed repurchase price or guaranteed value. For
the year ended December 31, 2006, outstanding month-end receivables for
cars sold to manufacturers were as much as $805 million, with the highest
amount for a single manufacturer being $204 million owed by Ford. A decline in
the economic and business prospects of car manufacturers, including any
economic distress impacting the suppliers of car components to manufacturers,
could also cause manufacturers to raise the prices we pay for cars or reduce their
supply to us. In addition, events negatively affecting the car manufacturers
could affect how much we may borrow under our asset-backed financing. See
“—Our reliance on asset-backed financing to purchase cars subjects us to
a number of risks, many of which are beyond our control.”
We may not be
successful in implementing our strategy of reducing operating costs and our
cost reduction initiatives may have other adverse consequences.
We are implementing
initiatives to reduce our operating expenses. These initiatives include
headcount reductions, as well as other expense controls. We cannot assure you
that we will be able to implement our cost reduction initiatives successfully,
or at all. Even if we are successful in our cost reduction initiatives, we may
face other risks associated with our plans, including declines in employee
morale or the level of customer service we provide. Any of these risks could
materialize and therefore may have a material adverse impact on our results of
operations, financial condition and cash flows.
Our reliance on asset-backed
financing to purchase cars subjects us to a number of risks, many of which are
beyond our control.
We rely significantly
on asset-backed financing to purchase cars for our domestic and
international car rental fleets. In connection with the Acquisition, a
bankruptcy-remote special purpose entity wholly owned by us issued
approximately $4,300 million of new debt (plus an additional $1,500 million in
the form of variable funding notes issued but not funded at the closing of the
Acquisition) backed by our U.S. car rental fleet under our U.S. asset-backed
securities program, or our “ABS Program.” In
33
addition, we issued
$600 million of medium term notes backed by our U.S. car rental fleet prior to
the Acquisition, or the “pre-Acquisition ABS Notes,” all of which remain
outstanding. As part of the Acquisition, various of our non-U.S. subsidiaries
and certain special purpose entities issued approximately $1,781 million of
debt under loan facilities secured by rental vehicles and related assets of
certain of our subsidiaries (all of which are organized outside the United
States) or by rental equipment and related assets of certain of our
subsidiaries organized outside North America, as well as (subject to certain limited
exceptions) substantially all our other assets outside North America. The asset-backed
debt issued in connection with the Transactions has expected final payment
dates ranging from 2008 to 2010 and the pre-Acquisition ABS Notes have expected
final payment dates ranging from 2007 to 2009. Based upon these repayment
dates, this debt will need to be refinanced within five years from the date of
the closing of the Transactions. Consequently, if our access to asset-backed
financing were reduced or were to become significantly more expensive for any
reason, we cannot assure you that we would be able to refinance or replace our
existing asset-backed financing or continue to finance new car
acquisitions through asset-backed financing on favorable terms, or at all.
Our asset-backed financing capacity could be decreased, or financing
costs and interest rates could be increased, as a result of risks and
contingencies, many of which are beyond our control, including, without
limitation:
·
rating
agencies that provide credit ratings for our asset-backed indebtedness,
third-party credit enhancers that insure our asset-backed
indebtedness or other third parties requiring changes in the terms and
structure of our asset-backed financing, including increased credit
enhancement (i) in connection with the incurrence of additional or
refinancing of existing asset-backed debt, (ii) upon the occurrence
of external events, such as changes in general economic and market conditions
or further deterioration in the credit ratings of our principal car
manufacturers, including Ford and General Motors, or (iii) or otherwise;
·
the
terms and availability of third-party credit enhancement at the time of
the incurrence of additional or refinancing of existing asset-backed
debt;
·
the
insolvency or deterioration of the financial condition of one or more of the
third-party credit enhancers that insure our asset-backed
indebtedness;
·
the
occurrence of certain events that, under the agreements governing our asset-backed
financing, could result, among other things, in (i) an amortization event
pursuant to which payments of principal and interest on the affected series of
asset-backed notes may be accelerated, or (ii) a liquidation event
of default pursuant to which the trustee or holders of asset-backed notes
would be permitted to require the sale of fleet vehicles or equipment that
collateralize the asset-backed financing; or
·
changes
in law that negatively impact our asset-backed financing structure.
Any disruption in our ability to refinance or replace
our existing asset-backed financing or to continue to finance new car
acquisitions through asset-backed financing, or any negative development
in the terms of the asset-backed financing available to us, could cause
our cost of financing to increase significantly and have a material adverse
effect on our financial condition and results of operations. The assets that
collateralize our asset-backed financing will not be available to satisfy
the claims of our general creditors. The terms of our senior credit facilities
permit us to finance or refinance new car acquisitions through other means,
including secured financing that is not limited to the assets of special
purpose entity subsidiaries. We may seek in the future to finance or refinance
new car acquisitions, including cars excluded from the ABS Program, through
such other means. No assurances can be given, however, as to whether such
financing will be available, or as to whether the terms of such financing will
be comparable to the debt issued under the ABS Program.
34
Most of our asset-backed debt
outside the United States was issued under an interim facility which provided
for increased margins if the debt was not refinanced by March 21, 2007. We
are in the process of negotiating new financing facilities to enable us to
refinance this debt. However, we cannot assure you that these efforts will be
successful or, if they are successful, that the new facilities will enable us
to finance our operations at rates which are as favorable to us as those of the
existing facility. On March 21, 2007, the existing facility was amended
and restated to, among other things, modify the provisions which provide for
increased margins. The effect of these changes will be to reduce or eliminate
the adverse consequences of these provisions to us for an interim period that
will end on December 21, 2007 in order to give us additional time to
refinance the interim facility. As a result of the changes, there was no
increase in margins on March 21, 2007. The extent of the relief that we
will receive during the remainder of the interim period will depend upon our
ability to achieve certain interim goals during that period. We cannot assure
you that we will be successful in achieving these interim goals.
Fluctuations in fuel
costs or reduced supplies could harm our business.
We could be adversely affected
by limitations on fuel supplies, the imposition of mandatory allocations or
rationing of fuel or significant increases in fuel prices. A severe or protracted
disruption of fuel supplies or significant increases in fuel prices could have
a material adverse effect on our financial condition and results of operations,
either by directly interfering with our normal activities or by disrupting the
air travel on which a significant portion of our car rental business relies.
See “—Our car rental business is dependent on the air travel industry, and
disruptions in air travel patterns could harm our business.”
Manufacturer
safety recalls could create risks to our business.
Our cars may be subject to
safety recalls by their manufacturers. Under certain circumstances, the recalls
may cause us to attempt to retrieve cars from renters or to decline to re-rent
returned cars until we can arrange for the steps described in the recalls to be
taken. If a large number of cars are the subject of simultaneous recalls, or if
needed replacement parts are not in adequate supply, we may not be able to
re-rent recalled cars for a significant period of time. We could also face liability
claims if recalls affect cars that we have already sold. Depending on the
severity of the recall, it could materially adversely affect our revenues,
create customer service problems, reduce the residual value of the cars
involved and harm our general reputation.
We face
risks arising from our heavy reliance on communications networks and
centralized information systems.
We rely heavily on information
systems to accept reservations, process rental and sales transactions, manage
our fleets of cars and equipment, account for our activities and otherwise
conduct our business. We have centralized our information systems in two
redundant facilities in Oklahoma City, Oklahoma, and we rely on communications
service providers to link our systems with the business locations these systems
serve. A simultaneous loss of both facilities, or a major disruption of
communications between the systems and the locations they serve, could cause a
loss of reservations, interfere with our ability to manage our fleet, slow rental
and sales processes and otherwise materially adversely affect our ability to
manage our business effectively. Our systems back-up plans, business continuity
plans and insurance programs are designed to mitigate such a risk, not to
eliminate it. In addition, because our systems contain information about
millions of individuals and businesses, our failure to maintain the security of
the data we hold, whether the result of our own error or the malfeasance or
errors of others, could harm our reputation or give rise to legal liabilities
leading to lower revenues, increased costs and other material adverse effects
on our results of operations.
35
The
concentration of our reservations, accounting and information technology
functions at a limited number of facilities in Oklahoma, Alabama and Ireland
creates risks for us.
We have concentrated our
reservations functions for the United States in two facilities, one in Oklahoma
City, Oklahoma, and one in Saraland (Mobile County), Alabama, and we have
concentrated our accounting functions for the United States in two facilities
in Oklahoma City. Similarly, we have concentrated reservations and accounting functions
for our European operations in a single facility near Dublin, Ireland. In
addition, our major information systems are centralized in two of our
facilities in Oklahoma City. A disruption of normal business at any of our
principal facilities in Oklahoma City, Saraland or Dublin, whether as the
result of localized conditions (such as a fire or explosion) or as the result
of events or circumstances of broader geographic impact (such as an earthquake,
storm, flood, epidemic, strike, act of war, civil unrest or terrorist act),
could materially adversely affect our business by disrupting normal
reservations, customer service, accounting and systems activities. Our systems
designs, business continuity plans and insurance programs are designed to
mitigate those risks, not to eliminate them, and this is particularly true with
respect to events of broad geographic impact.
Claims
that the software products and information systems that we rely on are
infringing on the intellectual property rights of others could increase our
expenses or inhibit us from offering certain services, which could adversely
affect our results of operations.
A number of entities, including some of our
competitors, have sought, or may in the future obtain, patents and other
intellectual property rights that cover or affect software products and other
components of information systems that we rely on to operate our business. For
example, Enterprise has asserted that certain systems we use to conduct
insurance replacement rentals would infringe on patent rights it would obtain
if it were granted certain patents for which it has applied. One of the patent
applications has received a notice of allowance and we expect that Enterprise
will be issued a patent pursuant to that application in the near future.
Litigation may be necessary to determine the validity
and scope of third-party rights or to defend against claims of
infringement. If a court determines that one or more of the software products
or other components of information systems we use infringe on intellectual
property owned by others or we agree to settle such a dispute, we may be liable
for money damages. In addition, we may be required to cease using those
products and components unless we obtain licenses from the owners of the intellectual
property, redesign those products and components in such a way as to avoid
infringement or cease altogether the use of those products and components. Each
of these alternatives could increase our expenses materially or impact the
marketability of our services. Any litigation, regardless of the outcome, could
result in substantial costs and diversion of resources and could have a
material adverse effect on our business. In addition, a third-party
intellectual property owner might not allow us to use its intellectual property
at any price, or on terms acceptable to us, which could materially affect our
competitive position and our results of operations.
For example, if Enterprise
obtains the patent referred to above and after that were to pursue and prevail
on claims of infringement similar to those it has previously asserted, it could
have a material adverse effect on our insurance replacement business and, in
turn, our off-airport business. We have already commenced litigation against
Enterprise with respect to claims it has made to third parties regarding the
patent rights referred to above. See “Item 3—Legal Proceedings” for more
information regarding that litigation.
36
If we acquire any
businesses in the future, they could prove difficult to integrate, disrupt our
business, or have an adverse effect on our results of operations.
We intend
to pursue growth primarily through internal growth, but from time to time we
may consider opportunistic acquisitions which may be significant. Any future
acquisition would involve numerous risks including, without limitation:
·
potential
disruption of our ongoing business and distraction of management;
·
difficulty
integrating the acquired business; and
·
exposure
to unknown liabilities, including litigation against the companies we may
acquire.
If we make acquisitions in the
future, acquisition-related accounting charges may affect our balance
sheet and results of operations. In addition, the financing of any significant
acquisition may result in changes in our capital structure, including the
incurrence of additional indebtedness. We may not be successful in addressing
these risks or any other problems encountered in connection with any
acquisitions.
We face risks related
to changes in our ownership.
A substantial number of our
airport concession agreements, as well as certain of our other agreements with
third parties, require the consent of the airports’ operators or other parties
in connection with any change in ownership of us. Changes in ownership of us
could also require the approval of other governmental authorities (including
insurance regulators, regulators of our retail used car sales activities and
antitrust regulators), and we cannot offer assurance that those approvals would
be obtained on terms acceptable to us. If our owners were to proceed to change
their ownership of us without obtaining necessary approvals, or if significant
conditions on our operations were imposed in connection with obtaining such
approvals, our ability to conduct our business could be impaired, resulting in
a material adverse effect on our results of operations and financial condition.
We face risks related
to liabilities and insurance.
Our businesses expose us to
claims for personal injury, death and property damage resulting from the use of
the cars and equipment rented or sold by us and for workers’ compensation
claims and other employment-related claims by our employees. Currently,
we generally self-insure up to $10 million per occurrence in the United States
and Europe for vehicle and general liability exposures and maintain insurance
with unaffiliated carriers in excess of such levels up to $100 million per
occurrence, or in the case of equipment rental in Europe and international
operations outside of Europe, in such lower amounts as we deem adequate given
the risks. We cannot assure you that we will not be exposed to uninsured
liability at levels in excess of our historical levels resulting from multiple
payouts or otherwise, that liabilities in respect of existing or future claims will
not exceed the level of our insurance, that we will have sufficient capital
available to pay any uninsured claims or that insurance with unaffiliated
carriers will continue to be available to us on economically reasonable terms
or at all. See “Item 1—Business—Risk Management” and “Item 3—Legal Proceedings.”
We could face
significant withdrawal liability if we withdraw from participation in one or
more multiemployer pension plans in which we participate.
We participate in various “multiemployer”
pension plans administered by labor unions representing some of our employees.
We make periodic contributions to these plans to allow them to meet their
pension benefit obligations to their participants. In the event that we
withdrew from participation in one or more of these plans, then applicable law
could require us to make an additional lump-sum contribution to those plans,
and we would have to reflect that on our balance sheet and statement of
operations. Our withdrawal liability for any multiemployer plan would depend on
the extent of the plan’s funding of vested benefits. We currently do not expect
to incur any withdrawal liability in the
37
near future. However, in the
ordinary course of our renegotiation of collective bargaining agreements with
labor unions that maintain these plans, we could decide to discontinue
participation in a plan, and in that event, we could face a withdrawal
liability. Some multiemployer plans, including ones in which we participate,
are reported to have significantly underfunded liabilities. Such underfunding
could increase the size of our potential withdrawal liability.
We have
received an informal request from the SEC to provide information about car
rental services that we provide to our independent registered public accounting
firm in the ordinary course of business.
In July 2005, the Division of Enforcement of the
SEC informed us that it was conducting an informal inquiry and asked Hertz to
voluntarily provide documents and information related to car rental services
that we provide to our independent registered public accounting firm
PricewaterhouseCoopers LLP, or “PwC.” The SEC noted in its letter that the
inquiry should not be construed as an indication by the SEC or its staff that
any violations of law have occurred, or as a reflection upon any person, entity
or security. We cooperated with the SEC by providing it with certain requested
information in July and September 2005. Since then, we have received
no further requests from the SEC with respect to this informal inquiry, but neither
have we been advised that it has been closed.
After learning of this
informal inquiry, our audit committee and representatives of PwC discussed PwC’s
independence with respect to us. PwC reconfirmed that it has been and remains
independent with respect to us. In making this determination, PwC considered,
among other things, its belief that PwC’s arrangements with us represent arm’s-length
transactions that were negotiated in the normal course of business, and,
therefore, that the commercial relationship does not impair PwC’s independence
with respect to us. If the SEC were to take a different view and it were
ultimately determined that PwC was not independent with respect to us for
certain periods, our filings with the SEC which contain our consolidated
financial statements for such periods would be non-compliant with applicable
securities laws. A determination that PwC was not independent with respect to
us could, among other things, cause us to be in violation of, or in default
under, the instruments governing our indebtedness and airport concession
agreements, limit our access to capital markets and result in regulatory
sanctions. Also, in the event of such a determination, we may be required to
have independent audits conducted on our previously audited financial
statements by another independent registered public accounting firm for the
affected periods. The time involved to conduct such independent audits may make
it more difficult to obtain capital on favorable terms, or at all, pending the
completion of such audits. Any of the foregoing could have a material adverse
effect on our results of operations, liquidity and financial condition, the
trading prices of our securities and the continued eligibility for listing of
our common stock on The New York Stock Exchange, or “NYSE.”
Environmental
laws and regulations and the costs of complying with them, or any liability or
obligation imposed under them, could adversely affect our financial position,
results of operations or cash flows.
We are regulated by federal, state, local and foreign
environmental laws and regulations in connection with our operations,
including, among other things, with respect to the ownership and operation of
tanks for the storage of petroleum products, such as gasoline, diesel fuel and
motor and waste oils. We have established a compliance program for our tanks
that is intended to ensure that the tanks are properly registered with the
state or other jurisdiction in which the tanks are located and have been either
replaced or upgraded to meet applicable leak detection and spill, overfill and
corrosion protection requirements. However, we cannot assure you that these
tank systems will at all times remain free from undetected leaks or that the
use of these tanks will not result in significant spills.
We have made, and will
continue to make, expenditures to comply with environmental laws and
regulations, including, among others, expenditures for the cleanup of
contamination at or emanating
38
from, currently and formerly
owned and leased properties, as well as contamination at other locations at
which our wastes have reportedly been identified. We cannot assure you that
compliance with existing or future environmental legislation and regulations
will not require material expenditures by us or otherwise have a material
adverse effect on our consolidated financial position, results of operations or
cash flows. See “Item 1—Business—Governmental Regulation and Environmental
Matters” and “Item 3—Legal Proceedings.”
Changes
in the U.S. and foreign legal and regulatory environment that impact our
operations, including laws and regulations relating to the insurance products
we sell, customer privacy, data security, insurance rates and expenses we pass
through to customers by means of separate charges, could disrupt our business,
increase our expenses or otherwise could have a material adverse effect on our
results of operations.
We are subject to a wide variety of laws and
regulations in the United States and the other countries and jurisdictions in which
we operate, and changes in the level of government regulation of our business
have the potential to materially alter our business practices or our
profitability. Depending on the jurisdiction, those changes may come about
through new legislation, the issuance of new laws and regulations or changes in
the interpretation of existing laws and regulations by a court, regulatory body
or governmental official. Sometimes those changes may have not just prospective
but also retroactive effect, which is particularly true when a change is made
through reinterpretation of laws or regulations that have been in effect for
some time. Moreover, changes in regulation that may seem neutral on their face
may have either more or less impact on us than on our competitors, depending on
the circumstances.
The optional liability insurance policies and products
providing insurance coverage in our domestic car rental operations are
conducted pursuant to limited licenses or exemptions under state laws governing
the licensing of insurance producers. In our international car rental
operations, our offering of optional products providing insurance coverage
historically has not been regulated. Any changes in the law in the United
States or internationally that change our operating requirements with respect
to insurance could increase our costs of compliance or make it uneconomical to
offer such products, which would lead to a reduction in revenues. For instance,
in the countries of the European Union, the regulatory environment for insurance
intermediaries is rapidly evolving, and we cannot assure you either that we
will be able to continue offering such coverage without substantial changes in
our offering process or in the terms of the coverage or that such changes, if
required, would not render uneconomic our continued offering of the coverage.
Due to a change in law in Australia, we have discontinued sales of insurance
products there. See “Item 1—Business—Risk Management” for further discussion
regarding how changes in the regulation of insurance intermediaries may affect
us internationally.
Laws in many countries and jurisdictions limit the
types of information we may collect about individuals with whom we deal or
propose to deal, as well as how we collect, retain and use the information that
we are permitted to collect. In addition, the centralized nature of our
information systems requires the routine flow of information about customers
and potential customers across national borders, particularly into the United
States. If this flow of information were to become illegal, or subject to
onerous restrictions, our ability to serve our customers could be seriously
impaired for an extended period of time. Other changes in the regulation of
customer privacy and data security could likewise have a material adverse
effect on our business. Privacy and data security are rapidly evolving areas of
regulation, and additional regulation in those areas, some of it potentially
difficult for us to accommodate, is frequently proposed and occasionally adopted.
Thus, changes in the worldwide legal and regulatory environment in the areas of
customer privacy, data security and cross-border data flows could have a
material adverse effect on our business, primarily through the impairment of
our marketing and transaction processing activities.
39
Further, the substantive regulation of the rates we
charge car renters, either through direct price regulation or a requirement
that we disregard a customer’s source market (location or place of residence)
for rate purposes, could reduce our revenues or increase our expenses. We set
rates based on a variety of factors including the sources of rental
reservations geographically and the means through which the reservations were
made, all of which are in response to various market factors and costs. The
European Commission is considering a directive that could restrict our ability
to take into account the country of residence of European Union residents for
rate purposes, and bills have been introduced into the New York State legislature
that would seek to prohibit us from charging higher rates to renters residing
in certain boroughs of New York City. The adoption of any such measures could
have a material adverse impact on our revenues and results of operations.
In most places where we
operate, we pass through various expenses, including the recovery of vehicle
licensing costs and airport concession fees, to our rental customers as
separate charges. The Attorneys General of Massachusetts, Virginia, Montana and
Alaska have in the past two years taken positions that car rental companies may
not pass through to customers, by means of separate charges, certain of their
expenses, such as vehicle licensing costs and airport concession fees, or that
car rental companies’ ability to pass through such expenses is limited. In
addition, we are currently a defendant in an action challenging the propriety
of certain expense pass-through charges in Nevada. We believe our expense
pass-through charges, where imposed, are lawful, and expense pass-throughs
have, when challenged, been upheld in courts of other states. The position of
the Attorney General of Virginia was reversed by subsequent legislation, while
the concerns of the Attorney General of Montana, which related primarily to our
licensees’ passing through of vehicle licensing costs, were resolved by
assurances of voluntary compliance by our licensees (which permitted passing
through of such costs subject to certain limitations of small operational
significance). Nonetheless, we cannot offer assurance that the Attorney General
of Massachusetts or Alaska, or of another state, will not take enforcement
action against us with respect to our car rental expense pass-throughs. If such
action were taken and an Attorney General were to prevail, it could have a
material adverse impact on our revenues and results of operations. In the
United States, our revenues from car rental expense pass-throughs for the year
ended December 31, 2006, were approximately $311.5 million.
The
misuse or theft of information we possess could harm our reputation or
competitive position, adversely affect the trading price of our common stock or
give rise to material liabilities.
We possess non-public
information with respect to millions of individuals, including our customers
and our current and former employees, and thousands of businesses, as well as
non-public information with respect to our own affairs. The misuse or
theft of that information by either our employees or third parties could result
in material damage to our brand, reputation or competitive position or
materially affect the price at which shares of our common stock trade. In
addition, depending on the type of information involved, the nature of our
relationship with the person or entity to which the information relates, the
cause and the jurisdiction whose laws are applicable, such misuse or theft of
information could result in governmental investigations or material civil or
criminal liability. The laws that would be applicable to such a failure are rapidly
evolving and becoming more burdensome. See “—Changes in the U.S. and foreign
legal and regulatory environment that impact our operations, including laws and
regulations relating to the insurance products we sell, customer privacy, data
security, insurance rates and expenses we pass through to customers by means of
separate charges, could disrupt our business, increase our expenses or
otherwise could have a material adverse effect on our results of operations.”
40
The Sponsors control us
and may have conflicts of interest with us in the future.
Clayton, Dubilier &
Rice Fund VII, L.P. and related funds, Carlyle Partners IV, L.P. and related
funds and ML Global Private Equity Fund, L.P. and related funds currently
beneficially own approximately 24.2%, 23.9% and 23.5%, respectively, of the
outstanding shares of the common stock of Hertz Holdings. These funds and Hertz
Holdings are parties to a Stockholders Agreement, pursuant to which the funds
have agreed to vote in favor of nominees to our board of directors nominated by
the other funds. As a result, the Sponsors will continue to exercise control
over matters requiring stockholder approval and our policy and affairs, for
example, by being able to direct the use of proceeds received from future
securities offerings. See “Item 13—Certain Relationships and Related
Transactions, and Director Independence.”
Additionally, the Sponsors are
in the business of making investments in companies and may from time to time
acquire and hold interests in businesses that compete directly or indirectly
with us. One or more of the Sponsors may also pursue acquisition opportunities
that may be complementary to our business and, as a result, those acquisition
opportunities may not be available to us. So long as investment funds associated
with or designated by the Sponsors continue to indirectly own a significant
amount of the outstanding shares of our common stock, even if such amount is
less than 50%, the Sponsors will continue to be able to strongly influence or
effectively control our decisions. While we have adopted a code of ethics and
business conduct that applies to all our directors, it does not preclude the
Sponsors from becoming engaged in businesses that compete with us or preclude
our directors from taking advantage of business opportunities other than those
made available to them through the use of their position as directors or the
use of our property.
Risks Relating to Our Substantial Indebtedness
We have substantial
debt and may incur substantial additional debt, which could adversely affect
our financial condition, our ability to obtain financing in the future and our
ability to react to changes in our business.
As of December 31, 2006,
we had an aggregate principal amount of debt outstanding of $12,359.4 million
and a debt to equity ratio, calculated using the total amount of our
outstanding debt net of unamortized discounts of 4.9 to 1.
Our
substantial debt could have important consequences to you. For example, it
could:
·
make
it more difficult for us to satisfy our obligations to the holders of our
outstanding debt securities and to the lenders under our senior credit
facilities and the U.S. and international fleet debt financings entered into as
part of the Transactions, resulting in possible defaults on and acceleration of
such indebtedness;
·
require
us to dedicate a substantial portion of our cash flows from operations to make
payments on our debt, which would reduce the availability of our cash flows
from operations to fund working capital, capital expenditures or other general
corporate purposes;
·
increase
our vulnerability to general adverse economic and industry conditions,
including interest rate fluctuations, because a portion of our borrowings,
including under the agreements governing our U.S. and international fleet debt
financings entered into as part of the Transactions and our senior credit
facilities, is at variable rates of interest;
·
place
us at a competitive disadvantage to our competitors with proportionately less
debt or comparable debt at more favorable interest rates;
·
limit
our ability to refinance our existing indebtedness or borrow additional funds
in the future;
·
limit
our flexibility in planning for, or reacting to, changing conditions in our
business and industry; and
41
·
limit
our ability to react to competitive pressures, or make it difficult for us to
carry out capital spending that is necessary or important to our growth
strategy and our efforts to improve operating margins.
Any of the foregoing impacts
of our substantial indebtedness could have a material adverse effect on our
business, financial condition and results of operations.
Despite our current
indebtedness levels, we and our subsidiaries may be able to incur substantially
more debt. This could further exacerbate the risks associated with our
substantial indebtedness.
We and our subsidiaries may be
able to incur substantial additional indebtedness in the future. The terms of
the instruments governing our indebtedness do not prohibit us or fully prohibit
our subsidiaries from doing so. As of December 31, 2006, our senior credit
facilities provided us commitments for additional aggregate borrowings (subject
to borrowing base limitations) of approximately $1,611.1 million, and permitted
additional borrowings beyond those commitments under certain circumstances. As
of December 31, 2006, our U.S. fleet debt facilities, international fleet
debt facilities and our fleet financing facility for our fleet in Hawaii,
Kansas, Puerto Rico and St. Thomas, the U.S. Virgin Islands provided us commitments
for additional aggregate borrowings of approximately $1,500.0 million, the
foreign currency equivalent of $1,236.4 million and $107.0 million,
respectively, subject to borrowing base limitations. If new debt is added to
our current debt levels, the related risks that we now face would increase. In
addition, the instruments governing our indebtedness do not prevent us or our
subsidiaries from incurring obligations that do not constitute indebtedness. On
June 30, 2006, Hertz Holdings entered into a $1.0 billion loan facility in
order to finance the payment of a special cash dividend of $4.32 per share on June 30,
2006. Although this facility was repaid in full with the proceeds from our
initial public offering, we cannot assure you that Hertz Holdings will not
enter into similar transactions in the future.
We may not be able to
generate sufficient cash to service all of our debt, and may be forced to take
other actions to satisfy our obligations under such indebtedness, which may not
be successful.
Our ability to make scheduled
payments on our indebtedness, or to refinance our obligations under our debt
agreements, will depend on the financial and operating performance of us and
our subsidiaries, which, in turn, will be subject to prevailing economic and competitive
conditions and to the financial and business risk factors, many of which may be
beyond our control, as described under “—Risks Related to Our Business” above.
We cannot assure you that we
will maintain a level of cash flows from operating activities sufficient to
permit us to pay the principal, premium, if any, and interest on our
indebtedness.
If our cash flows and capital
resources are insufficient to fund our debt service obligations, we may be
forced to reduce or delay capital expenditures, sell assets, seek to obtain
additional equity capital or restructure our indebtedness. In the future, our
cash flows and capital resources may not be sufficient for payments of interest
on and principal of our debt, and such alternative measures may not be successful
and may not permit us to meet scheduled debt service obligations. We also
cannot assure you that we will be able to refinance any of our indebtedness or
obtain additional financing, particularly because of our high levels of debt
and the debt incurrence restrictions imposed by the agreements governing our
debt, as well as prevailing market conditions. In the absence of such operating
results and resources, we could face substantial liquidity problems and might
be required to dispose of material assets or operations to meet our debt
service and other obligations. The instruments governing our indebtedness
restrict our ability to dispose of assets and restrict the use of proceeds from
any such dispositions. We cannot assure you we will be able to consummate those
sales, or, if we do, what the timing of the sales will be or whether the
proceeds that we realize will be adequate to meet debt service obligations when
due.
42
A
significant portion of our outstanding indebtedness is secured by substantially
all of our consolidated assets. As a result of these security interests, such
assets would only be available to satisfy claims of our general creditors or to
holders of our equity securities if we were to become insolvent to the extent
the value of such assets exceeded the amount of our indebtedness and other
obligations. In addition, the existence of these security interests may
adversely affect our financial flexibility.
Indebtedness under our senior
credit facilities is secured by a lien on substantially all our assets (other
than assets of foreign subsidiaries), including pledges of all or a portion of
the capital stock of certain of our subsidiaries. Our senior notes and senior
subordinated notes are unsecured and therefore do not have the benefit of such
collateral. Accordingly, if an event of default were to occur under our senior
credit facilities, the senior secured lenders under such facilities would have
a prior right to our assets, to the exclusion of our general creditors,
including the holders of our senior notes and senior subordinated notes. In
that event, our assets would first be used to repay in full all indebtedness
and other obligations secured by them (including all amounts outstanding under
our senior credit facilities), resulting in all or a portion of our assets
being unavailable to satisfy the claims of our unsecured indebtedness.
Furthermore, many of the subsidiaries that hold our U.S. and international car
rental fleets in connection with our asset-backed financing programs are
intended to be bankruptcy remote and the assets held by them may not be
available to our general creditors in a bankruptcy unless and until they are
transferred to a non-bankruptcy remote entity. As of December 31, 2006,
substantially all of our consolidated assets, including our car and equipment
rental fleets, have been pledged for the benefit of the lenders under our
senior credit facilities or are subject to securitization facilities in
connection with our U.S. and international fleet debt facilities. As a result,
the lenders under these facilities would have a prior claim on such assets in
the event of our bankruptcy, insolvency, liquidation or reorganization, and we
may not have sufficient funds to pay all of our creditors and holders of our
unsecured indebtedness may receive less, ratably, than the holders of our
senior debt, and may not be fully paid, or may not be paid at all, even when
other creditors receive full payment for their claims. In that event, holders
of our equity securities would not be entitled to receive any of our assets or
the proceeds therefrom. As discussed below, the pledge of these assets and
other restrictions may limit our flexibility in raising capital for other
purposes. Because substantially all of our assets are pledged under these
financing arrangements, our ability to incur additional secured indebtedness or
to sell or dispose of assets to raise capital may be impaired, which could have
an adverse effect on our financial flexibility.
Restrictive
covenants in certain of the agreements and instruments governing our
indebtedness may adversely affect our financial flexibility.
Our senior credit
facilities and the indentures governing our senior notes and senior
subordinated notes contain covenants that, among other things, restrict Hertz’s
and its subsidiaries’ ability to:
·
dispose
of assets;
·
incur
additional indebtedness;
·
incur
guarantee obligations;
·
prepay
other indebtedness or amend other debt instruments;
·
pay
dividends;
·
create
liens on assets;
·
enter
into sale and leaseback transactions;
·
make
investments, loans or advances;
43
·
make
acquisitions;
·
engage
in mergers or consolidations;
·
change
the business conducted by us; and
·
engage
in certain transactions with affiliates.
In addition, under our Senior Credit Facilities, we
are required to comply with financial covenants. If we fail to maintain a
specified minimum level of borrowing capacity under our Senior ABL Facility, we
will then be subject to financial covenants under that facility, including
covenants that will obligate us to maintain a specified debt to Corporate
EBITDA leverage ratio and a specified Corporate EBITDA to fixed charges
coverage ratio. The financial covenants in our Senior Term Facility include
obligations to maintain a specified debt to Corporate EBITDA leverage ratio and
a specified Corporate EBITDA to interest expense coverage ratio for specified
periods. Both our Senior ABL Facility and our Senior Term Facility also impose
limitations on the amount of our capital expenditures. Our ability to comply
with these covenants in future periods will depend on our ongoing financial and
operating performance, which in turn will be subject to economic conditions and
to financial, market and competitive factors, many of which are beyond our
control. Our ability to comply with these covenants in future periods will also
depend substantially on the pricing of our products and services, our success
at implementing cost reduction initiatives and our ability to successfully
implement our overall business strategy. Our ability to comply with the
covenants and restrictions contained in our senior credit facilities and the
indentures for our senior notes and senior subordinated notes may be affected
by economic, financial and industry conditions beyond our control. The breach
of any of these covenants or restrictions could result in a default under
either our senior credit facilities or the indentures that would permit the
applicable lenders or holders of the senior notes and senior subordinated
notes, as the case may be, to declare all amounts outstanding thereunder to be
due and payable, together with accrued and unpaid interest. In any such case,
we may be unable to make borrowings under the senior credit facilities and may
not be able to repay the amounts due under the senior credit facilities and the
senior notes and senior subordinated notes. This could have serious
consequences to our financial condition and results of operations and could
cause us to become bankrupt or insolvent.
We are also subject to operational limitations under
the terms of our ABS Program. For example, there are contractual limitations
with respect to the cars that secure our ABS Program. These limitations are
based on the identity or credit ratings of the cars’ manufacturers, the
existence of satisfactory repurchase or guaranteed depreciation arrangements
for the cars or the physical characteristics of the cars. As a result, we may
be required to limit the percentage of cars from any one manufacturer or
increase the credit enhancement related to the program and may not be able to
take advantage of certain cost savings that might otherwise be available
through manufacturers. If these limitations prevented us from purchasing, or
retaining in our fleet, cars on terms that we would otherwise find
advantageous, our results of operations could be adversely affected.
Further, the facilities relating to our international
fleet financing contain a number of covenants, including a covenant that
restricts the ability of Hertz International, Ltd., a subsidiary of ours that
is the direct or indirect holding company of substantially all of our non-U.S.
operating subsidiaries, to make dividends and other restricted payments (which
may include payments of intercompany indebtedness), in an amount greater than
€
100
million plus a specified excess cash flow amount, calculated by reference to
excess cash flow in earlier periods. Subject to certain exceptions, until the
later of one year from the Closing Date and such time as 50% of the commitments
under the facilities on the Closing Date have been replaced by permanent
take-out international asset-based facilities, the specified excess cash
flow amount will be zero. Thereafter, this specified excess cash flow amount
will be between 50% and 100% of excess cash flow based on the percentage of
facilities relating to
44
our international fleet debt at the closing of the
Acquisition that have been replaced by permanent take-out international asset-based
facilities. These restrictions will limit the availability of funds from Hertz
International, Ltd. and its subsidiaries to help us make payments on our
indebtedness. Certain of these permanent take-out international asset-based
facilities are expected to be novel and complicated structures. We cannot
assure you that we will be able to complete such permanent take-out financings
on terms acceptable to us or on a timely basis, if at all; if we are unable to
do so, our liquidity and interest costs may be adversely affected. See “—Our
reliance on asset-backed financing to purchase cars subjects us to a number of
risks, many of which are beyond our control.”
Certain of our Canadian
subsidiaries are parties to our Senior ABL Facility and are not subject to
these International Fleet Debt restrictions. Our non-U.S. subsidiaries, including
the operations of these Canadian subsidiaries, accounted for approximately 30%
of our total revenues and 24% of our Corporate EBITDA for the year ended December 31,
2006. See Note 10 to the Notes to our consolidated financial statements
included in this Annual Report under the caption “Item 8—Financial Statements
and Supplementary Data.”
An
increase in interest rates would increase the cost of servicing our debt and
could reduce our profitability.
A significant portion of our
outstanding debt, including borrowings under our Senior Credit Facilities,
International Fleet Debt and certain of our other outstanding debt securities,
bear interest at variable rates. As a result, an increase in interest rates,
whether because of an increase in market interest rates or an increase in our
own cost of borrowing, would increase the cost of servicing our debt and could
materially reduce our profitability, including, in the case of the U.S. Fleet
Debt and the International Fleet Debt, our Corporate EBITDA. The impact of such
an increase would be more significant than it would be for some other companies
because of our substantial debt. For a discussion of how we manage our exposure
to changes in interest rates through the use of interest rate swap agreements
on certain portions of our outstanding debt, see “Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Market
Risks—Interest Rate Risk.”
The
instruments governing our debt contain cross default or cross acceleration
provisions that may cause all of the debt issued under such instruments to
become immediately due and payable as a result of a default under an unrelated
debt instrument.
The indentures governing our
senior notes and senior subordinated notes and the agreements governing our
senior credit facilities contain numerous covenants and require us to meet
certain financial ratios and tests which utilize Corporate EBITDA. Our failure
to comply with the obligations contained in these agreements or other
instruments governing our indebtedness could result in an event of default
under the applicable instrument, which could result in the related debt and the
debt issued under other instruments becoming immediately due and payable. In
such event, we would need to raise funds from alternative sources, which funds
may not be available to us on favorable terms, on a timely basis or at all.
Alternatively, such a default could require us to sell our assets and otherwise
curtail our operations in order to pay our creditors. Such alternative measures
could have a material adverse effect on our business, financial condition and
results of operations.
Risks Relating to Our
Common Stock
We may
have a contingent liability arising out of electronic communications sent to
institutional accounts by a previously named underwriter that did not
participate as an underwriter in the initial public offering of our common
stock.
We understand that, during the week of October 23,
2006, several e-mails authored by an employee of a previously named underwriter
for the initial public offering of our common stock were ultimately
45
forwarded by employees of that underwriter to
approximately 175 institutional accounts. We were not involved in any way in
the preparation or distribution of the e-mail messages by the employees of this
previously named underwriter, and we had no knowledge of them until after they
were sent. We requested that the previously named underwriter notify the
institutional accounts who received these e-mail messages from its employees
that the e-mail messages were distributed in error and should be disregarded.
In addition, this previously named underwriter did not participate as an
underwriter in the initial public offering of our common stock.
The e-mail messages may constitute a prospectus or
prospectuses not meeting the requirements of the Securities Act of 1933, as
amended, or the “Securities Act.” We, the Sponsors and the other underwriters
that participated in the initial public offering of our common stock disclaim
all responsibility for the contents of these e-mail messages.
We do not believe that the
e-mail messages constitute a violation by us of the Securities Act. However, if
any or all of these communications were to be held by a court to be a violation
by us of the Securities Act, the recipients of the e-mails, if any, who
purchased shares of our common stock in the initial public offering might have
the right, under certain circumstances, to require us to repurchase those
shares. Consequently, we could have a contingent liability arising out of these
possible violations of the Securities Act. The magnitude of this liability, if
any, is presently impossible to quantify, and would depend, in part, upon the
number of shares purchased by the recipients of the e-mails and the trading price
of our common stock. If any liability is asserted, we intend to contest the
matter vigorously.
Hertz
Holdings is a holding company with no operations of its own that depends on its
subsidiaries for cash.
The operations of Hertz
Holdings are conducted almost entirely through its subsidiaries and its ability
to generate cash to meet its debt service obligations, if any, or to pay
dividends is highly dependent on the earnings and the receipt of funds from its
subsidiaries via dividends or intercompany loans. However, none of the
subsidiaries of Hertz Holdings are obligated to make funds available to Hertz
Holdings for the payment of dividends. In addition, payments of dividends and
interest among the companies in our group may be subject to withholding taxes.
Further, the terms of the indentures governing Hertz’s senior notes and senior
subordinated notes and the agreements governing Hertz’s senior credit
facilities and Hertz’s fleet debt facilities significantly restrict the ability
of the subsidiaries of Hertz to pay dividends or otherwise transfer assets to
Hertz Holdings. Furthermore, the subsidiaries of Hertz are permitted under the
terms of Hertz’s senior credit facilities and other indebtedness to incur
additional indebtedness that may severely restrict or prohibit the making of
distributions, the payment of dividends or the making of loans by such
subsidiaries to Hertz Holdings. See “—Restrictive covenants in certain of the
agreements governing our indebtedness may adversely affect our financial
flexibility.” In addition, Delaware law may impose requirements that may
restrict our ability to pay dividends to holders of our common stock.
If the
ownership of our common stock continues to be highly concentrated, it will
prevent other stockholders from influencing significant corporate decisions.
The concentrated holdings of
the funds associated with the Sponsors, certain provisions of the Stockholders
Agreement among the funds and Hertz Holdings and the presence of these funds’
nominees on our board of directors of Hertz Holdings may result in a delay or
the deterrence of possible changes in control of Hertz Holdings, which may
reduce the market price of our common stock. The interests of the Sponsors may
conflict with the interests of our other stockholders. See “Item 1A—Risk
Factors—The Sponsors control us and
may have conflicts of interest with us in the future.” Our board of
directors has adopted corporate governance guidelines that will, among other
things, address potential conflicts between a director’s interests and our
interests. In addition, we
46
have adopted a code of
business conduct that, among other things, requires our employees to avoid
actions or relationships that might conflict or appear to conflict with their
job responsibilities or the interests of Hertz Holdings, and to disclose their
outside activities, financial interests or relationships that may present a
possible conflict of interest or the appearance of a conflict to management or
corporate counsel. These corporate governance guidelines and code of business
ethics will not, by themselves, prohibit transactions with our principal
stockholders.
Our share
price may decline due to the large number of shares eligible for future sale.
Sales of substantial amounts of our common stock, or
the possibility of such sales, may adversely affect the price of our common
stock and impede our ability to raise capital through the issuance of equity
securities.
There were 320,618,692 shares of our common stock
outstanding as of December 31, 2006. Of these shares, the shares of common
stock sold in the initial public offering are freely transferable without
restriction or further registration under the Securities Act, unless purchased
by our “affiliates” as that term is defined in Rule 144 under the
Securities Act. The remaining 232,383,692 shares of common stock outstanding
will be restricted securities within the meaning of Rule 144 under the
Securities Act, but will be eligible for resale subject to applicable volume,
manner of sale, holding period and other limitations of Rule 144 or
pursuant to an exemption from registration under Rule 701 under the
Securities Act. In November 2006, we filed a registration statement under
the Securities Act to register the shares of common stock to be issued under
our stock incentive plans and, as a result, all shares of common stock acquired
upon exercise of stock options and other equity-based awards granted under
these plans will also be freely tradable under the Securities Act unless
purchased by our affiliates. A total of 28.5 million shares of common stock are
reserved for issuance under our stock incentive plans.
We, each of the funds
associated with or designated by the Sponsors that currently own shares of our
common stock, our executive officers and directors have agreed to a “lock-up,”
meaning that, subject to certain exceptions, neither we nor they will sell any
shares without the prior consent of the representatives of the underwriters
before May 14, 2007. Following the expiration of this 180-day
lock-up period, 229,500,000 of these shares of our common stock will be
eligible for future sale, subject to the applicable volume, manner of sale,
holding period and other limitations of Rule 144. In addition, our
existing stockholders have the right under certain circumstances to require
that we register their shares for resale. As of December 31, 2006, these
registration rights apply to the 229,500,000 shares of our outstanding common
stock owned by the investment funds affiliated with or designated by the
Sponsors.
Our certificate
of incorporation, by-laws and Delaware law may discourage takeovers and
business combinations that our stockholders might consider in their best
interests.
A number of provisions
in our certificate of incorporation and by-laws, as well as anti-takeover
provisions of Delaware law, may have the effect of delaying, deterring,
preventing or rendering more difficult a change in control of Hertz Holdings
that our stockholders might consider in their best interests. These provisions
include:
·
establishment
of a classified board of directors, with staggered terms;
·
granting
to the board of directors sole power to set the number of directors and to fill
any vacancy on the board of directors, whether such vacancy occurs as a result
of an increase in the number of directors or otherwise;
·
limitations
on the ability of stockholders to remove directors;
47
·
the
ability of our board of directors to designate and issue one or more series of
preferred stock without stockholder approval, the terms of which may be
determined at the sole discretion of the board of directors;
·
prohibition
on stockholders from calling special meetings of stockholders;
·
establishment
of advance notice requirements for stockholder proposals and nominations for
election to the board of directors at stockholder meetings; and
·
prohibiting
our stockholders from acting by written consent if investment funds affiliated
with or designated by the Sponsors cease to collectively hold a majority of our
outstanding common stock.
These provisions may prevent our stockholders from
receiving the benefit from any premium to the market price of our common stock
offered by a bidder in a takeover context. Even in the absence of a takeover
attempt, the existence of these provisions may adversely affect the prevailing
market price of our common stock if they are viewed as discouraging takeover
attempts in the future.
Our certificate of incorporation and by-laws may also
make it difficult for stockholders to replace or remove our management. These
provisions may facilitate management entrenchment that may delay, deter, render
more difficult or prevent a change in our control, which may not be in the best
interests of our stockholders.
48
ITEM 1B.
UNRESOLVED
STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We operate car rental locations at or near airports
and in central business districts and suburban areas of major cities in North
America (the United States, including Puerto Rico and the U.S. Virgin Islands,
and Canada), Europe (France, Germany, Italy, the United Kingdom, Spain, the
Netherlands, Switzerland, Belgium and Luxembourg), the Pacific (Australia and
New Zealand) and Brazil, as well as retail used car sales locations in the
United States and France. We operate equipment rental locations in North
America (the United States and Canada) and Europe (France and Spain). We also
operate headquarters, sales offices and service facilities in the foregoing
countries in support of our car rental and equipment rental operations, as well
as small car rental sales offices and service facilities in a select number of
other countries in Europe and Asia.
Of such locations, fewer than 10% are owned by us. The
remaining locations are leased or operated under concessions from governmental
authorities and private entities. Those leases and concession agreements
typically require the payment of minimum rents or minimum concession fees and
often also require us to pay or reimburse operating expenses; to pay additional
rent, or concession fees above guaranteed minimums, based on a percentage of
revenues or sales arising at the relevant premises; or to do both. See Note 9
to the Notes to our consolidated financial statements included in this Annual
Report under the caption “Item 8—Financial Statements and Supplementary Data.”
We own four major facilities
in the vicinity of Oklahoma City, Oklahoma at which reservations for our car
rental operations are processed, global information systems are serviced and
major domestic and international accounting functions are performed. We also
have a long-term lease for a reservation and financial center near Dublin,
Ireland, at which we have centralized our European car rental reservation and
customer relations and accounting functions, and we lease a reservation center
in Saraland (Mobile County), Alabama to supplement the capacity of our Oklahoma
City car rental reservation center. We maintain our executive offices in an
owned facility in Park Ridge, New Jersey, and lease a European headquarters
office in Uxbridge, England.
ITEM 3.
LEGAL
PROCEEDINGS
Fuel—Related Class Actions
We are a
defendant in four purported class actions—filed in Texas, Oklahoma, New Mexico
and Nevada—in which the plaintiffs have put forth alternate theories to
challenge the application of our Fuel and Service Charge, or “FSC,” on rentals
of cars that are returned with less fuel than when rented.
1.
Texas
On March 15, 2004,
Jose M. Gomez, individually and on behalf of
all other similarly situated persons, v. The Hertz Corporation
was
commenced in the 214
th
Judicial District Court of Nueces County,
Texas. Gomez purports to be a class action filed alternatively on behalf of all
persons who were charged a FSC by us or all Texas residents who were charged a
FSC by us. The petition alleged that the FSC is an unlawful penalty and that,
therefore, it is void and unenforceable. The plaintiff seeks an unspecified
amount of compensatory damages, with the return of all FSC paid or the
difference between the FSC and our actual costs, disgorgement of unearned
profits, attorneys’ fees and costs. In response to various motions by us, the
plaintiff filed two amended petitions which scaled back the putative class from
a nationwide class to a class of all Texas residents who were charged a FSC by
us or by our
49
Corpus Christi
licensee. A new cause of action was also added for conversion for which the
plaintiff is seeking punitive damages. After some limited discovery, we filed a
motion for summary judgment in December 2004. That motion was denied in January 2005.
The parties then engaged in more extensive discovery. In April 2006, the
plaintiff further amended his petition by adding a cause of action for
fraudulent misrepresentation and, at the plaintiff’s request, a hearing on the
plaintiff’s motion for class certification was scheduled for August 2006.
In May 2006, the plaintiff filed a fourth amended petition which deleted
the cause of action for conversion and the plaintiff also filed a first amended
motion for class certification in anticipation of the August 2006 hearing
on class certification. After the hearing, the plaintiff filed a fifth amended
petition seeking to further refine the putative class as including all Texas
residents who were charged a FSC in Texas after February 6, 2000. In October 2006,
the judge entered a class certification order which certified a class of all
Texas residents who were charged an FSC in Texas after February 6, 2000.
We are appealing the order.
2.
Oklahoma
On November 18,
2004,
Keith Kochner, individually and on
behalf of all similarly situated persons, v. The Hertz Corporation
was commenced in the District Court in and for Tulsa County, State of Oklahoma.
As with the Gomez case, Kochner purports to be a class action, this time on
behalf of Oklahoma residents who rented from us and incurred our FSC. The
petition alleged that the imposition of the FSC is a breach of contract and
amounts to an unconscionable penalty or liquidated damages in violation of Article 2A
of the Oklahoma Uniform Commercial Code. The plaintiff seeks an unspecified
amount of compensatory damages, with the return of all FSC paid or the
difference between the FSC and our actual costs, disgorgement of unearned
profits, attorneys’ fees and costs. In March 2005, the trial court granted
our motion to dismiss the action but also granted the plaintiff the right to
replead. In April 2005, the plaintiff filed an amended class action
petition, newly alleging that our FSC violates the Oklahoma Consumer Protection
Act and that we have been unjustly enriched, and again alleging that our FSC is
unconscionable under Article 2A of the Oklahoma Uniform Commercial Code.
In May 2005, we filed a motion to dismiss the amended class action
petition. In October 2005, the court granted our motion to dismiss, but
allowed the plaintiff to file a second amended complaint and we then answered
the complaint. Discovery has now commenced.
3.
New
Mexico
On December 13,
2005,
Janelle Johnson, individually and on
behalf of all other similarly situated persons v. The Hertz Corporation
was filed in the Second Judicial District Court of the County of Bernalillo,
New Mexico. As with the Gomez and Kochner cases, Johnson purports to be a class
action, this time on behalf of all New Mexico residents who rented from us and who
were charged a FSC. The complaint alleges that the FSC is unconscionable as a
matter of law under pertinent sections of the New Mexico Uniform Commercial
Code and that, under New Mexico common law, the collection of FSC does not
constitute valid liquidated damages, but rather is a void penalty. The
plaintiff seeks an unspecified amount of compensatory damages, with the return
of all FSC paid or the difference between the FSC and its actual cost. In the
alternative, the plaintiff requests that the court exercise its equitable
jurisdiction and order us to cease and desist from our unlawful conduct and to
modify our lease provisions to conform with applicable provisions of New Mexico
statutory and common law. The complaint also asks for attorneys’ fees and costs.
We have removed the action to the U.S. District Court for the District of New
Mexico and, in lieu of an answer, filed a motion to dismiss. In November 2006,
the judge granted our motion to dismiss the liquidated damages claim and the
substantive unconscionability claim but did not grant our motion to
50
dismiss the procedural
unconscionability claim or the claim for equitable relief. Plaintiff then
amended her complaint to replead the unconscionability claim and to add a
fraudulent misrepresentation claim. In December 2006, we filed a motion to
dismiss the amended complaint and, in January 2007, the court quickly
dismissed the new fraud claim and reaffirmed the dismissal of the substantive
unconscionability claim. In February 2007, the plaintiff dismissed the
case with prejudice.
4.
Nevada
On January 10, 2007,
Marlena Guerra, individually and on behalf of all other similarly
situated persons, v. The Hertz Corporation
was filed in the United
States District Court for the District of Nevada. As with the Gomez and Kochner
cases, Guerra purports to be a class action on behalf of all individuals and
business entities who rented vehicles at Las Vegas McCarran International
Airport and were charged a FSC. The complaint alleged that those customers who
paid the FSC were fraudulently charged a surcharge required for fuel in
violation of Nevada’s Deceptive Trade Practices Act. The plaintiff also alleged
the FSC violates the Nevada Uniform Commercial Code, or “UCC,” since it is
unconscionable and operates as an unlawful liquidated damages provision.
Finally, the plaintiff claimed that we breached our own rental agreement—which
the plaintiff claims to have been modified so as not to violate Nevada law—by
charging the FSC, since such charges violate the UCC and/or the prohibition
against fuel surcharges. The plaintiff seeks compensatory damages, including
the return of all FSC paid or the difference between the FSC and its actual
costs, plus prejudgment interest, attorneys’ fees and costs. In March 2007,
we filed a motion to dismiss.
Other Consumer or
Supplier Class Actions
1.
HERC LDW
On August 15,
2006,
Davis Landscape, Ltd., individually and on behalf
of all others similarly situated, v. Hertz Equipment Rental Corporation
,
or “HERC,” was filed in the United States District Court for the District of
New Jersey. Davis Landscape, Ltd., purports to be a nationwide class action on
behalf of all persons and business entities who rented equipment from HERC and
who paid a Loss Damage Waiver, or “LDW,” charge. The complaint alleges that the
LDW is deceptive and unconscionable as a matter of law under pertinent sections
of New Jersey law, including the New Jersey Consumer Fraud Act and the New
Jersey Uniform Commercial Code. The plaintiff seeks an unspecified amount of
statutory damages under the New Jersey Consumer Fraud Act, an unspecified
amount of compensatory damages with the return of all LDW charges paid,
declaratory relief and an injunction prohibiting HERC from engaging in acts
with respect to the LDW charge that violate the New Jersey Consumer Fraud Act.
The complaint also asks for attorneys’ fees and costs. In October 2006, we
filed an answer to the complaint. In November 2006, the plaintiff filed an
amended complaint adding an additional plaintiff, Miguel V. Pro, an individual
residing in Texas, and new claims relating to HERC’s charging of an “Environmental
Recovery Fee.” Causes of action for breach of contract and breach of implied
covenant of good faith and fair dealing were also added. In January 2007,
we filed an answer to the amended complaint. Discovery has now commenced.
2.
Concession Fee
Recoveries
On October 13, 2006,
Janet Sobel,
Daniel Dugan Ph.D., and Lydia Lee
,
individually
and on behalf of all others similarly situated, v. The Hertz Corporation and
Enterprise Rent-A-Car Company
was filed in the United States
District Court for the District of Nevada. Sobel purports to be a nationwide
class action on behalf of all persons who rented cars from Hertz or Enterprise
at airports in Nevada and whom Hertz or Enterprise charged airport concession
51
recovery fees. The complaint alleged that the airport
concession recovery fees violate certain provisions of Nevada law, including
Nevada’s Deceptive Trade Practices Act. The plaintiffs seek an unspecified
amount of compensatory damages, restitution of any charges found to be improper
and an injunction prohibiting Hertz and Enterprise from quoting or charging any
of the fees prohibited by Nevada law. The complaint also asks for attorneys’
fees and costs. In November 2006, the plaintiffs and Enterprise stipulated
and agreed that claims against Enterprise would be dismissed without prejudice.
In January 2007, we filed a motion to dismiss.
We believe that we have meritorious defenses in the
foregoing matters and will defend ourselves vigorously.
In addition, we are currently a defendant in numerous
actions and have received numerous claims on which actions have not yet been
commenced for public liability and property damage arising from the operation
of motor vehicles and equipment rented from us and our licensees. In the
aggregate, we can be expected to expend material sums to defend and settle
public liability and property damage actions and claims or to pay judgments
resulting from them.
On February 19, 2007,
The Hertz Corporation and TSD Rental LLC v. Enterprise Rent-A-Car
Company and The Crawford Group, Inc.
was filed in the United
States District Court for the District of Massachusetts. In this action, we and
our co-plaintiff seek damages and injunctive relief based upon allegations that
Enterprise and its corporate parent, The Crawford Group, Inc., unlawfully
engaged in anticompetitive and unfair and deceptive business practices by
claiming to customers of Hertz that once Enterprise obtains a patent it has
applied for relating to its insurance replacement reservation system, Hertz
will be prevented from using the co-plaintiff’s EDiCAR system, which Hertz
currently uses in its insurance replacement business. The complaint alleges,
among other things, that Enterprise’s threats are improper because the
Enterprise patent, once issued, should be invalid and unenforceable. See “Item
1A—Risk
Factors—Risks Related to Our Business—Claims that the software products and
information systems that we rely on are infringing on the intellectual property
rights of others could increase our expenses or inhibit us from offering
certain services, which could adversely affect our results of operations.”
In addition to the foregoing,
various legal actions, claims and governmental inquiries and proceedings are
pending or may be instituted or asserted in the future against us and our
subsidiaries. Litigation is subject to many uncertainties, and the outcome of
the individual litigated matters is not predictable with assurance. It is
possible that certain of the actions, claims, inquiries or proceedings,
including those discussed above, could be decided unfavorably to us or any of
our subsidiaries involved. Although the amount of liability with respect to
these matters cannot be ascertained, potential liability in excess of related
accruals is not expected to materially affect our consolidated financial
position, results of operations or cash flows but it could be material in the
period in which it is recorded.
ITEM 4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
52
EXECUTIVE OFFICERS OF
THE REGISTRANT
Set forth
below are the names, ages, number of years employed by our Company as of March 29,
2007 and positions of our executive officers.
Name
Age
Number of
Years
Employed
by Us
Position
Mark P. Frissora
51
—
Chief Executive Officer and Chairman of the Board
Paul J. Siracusa
62
37
Executive Vice President and Chief Financial Officer
Joseph R. Nothwang
60
30
Executive Vice President and President, Vehicle
Rental and Leasing, The Americas and Pacific
Brian J. Kennedy
65
23
Executive Vice President, Marketing & Sales
Gerald A. Plescia
51
27
Executive Vice President and President, HERC
Michel Taride
50
21
Executive Vice President and President, Hertz Europe
Limited
Harold E. Rolfe
49
8
Senior Vice President, General Counsel &
Secretary
Mr. Frissora
has served as the Chief Executive Officer, or “CEO,” and Chairman of the Board
of Hertz and Hertz Holdings since January 1, 2007 and as CEO and a
director of Hertz and Hertz Holdings since July 19, 2006. Prior to joining
Hertz and Hertz Holdings, Mr. Frissora served as Chief Executive Officer
of Tenneco Inc. from November 1999 to July 2006 and as President of
the automotive operations of Tenneco Inc. from April 1999 to July 2006.
He also served as the Chairman of Tenneco Inc. from March 2000 to July 2006.
From 1996 to April 1999, he held various positions within Tenneco Inc.’s
automotive operations, including Senior Vice President and General Manager of
the worldwide original equipment business. Previously Mr. Frissora served
as a Vice President of Aeroquip Vickers Corporation from 1991 to 1996. In the
15 years prior to joining Aeroquip Vickers, he served for ten years with
General Electric and five years with Philips Lighting Company in management
roles focusing on product development and marketing. He is a director of NCR
Corporation, where he serves on its compensation committee.
Mr. Siracusa
has served as the Executive Vice President and Chief Financial Officer of Hertz
Holdings since the Acquisition in December 2005. He has served as the
Executive Vice President and Chief Financial Officer of Hertz since August 1997.
From January 1996 to August 1997, he served as Vice President,
Finance and Chief Financial Officer, Hertz International, Ltd., based in
England. He served as Staff Vice President and Controller Worldwide Rent A Car
for Hertz from August 1994 until December 1995 and has served in
various other financial positions with us since 1969. Mr. Siracusa served
as a director on Hertz’s Board of Directors from January 2004 until December 2005.
Mr. Nothwang
has served as the Executive Vice President and President of Vehicle Rental and
Leasing, The Americas and Pacific, for Hertz since January 2000 and as the
Executive Vice President and President of Vehicle Rental and Leasing, The Americas
and Pacific of Hertz Holdings since June 2006. From September 1995
until December 1999 he was Executive Vice President and General Manager,
U.S. Car Rental Operations for Hertz. From August 1993 until August 1995
he was Vice President and General Manager U.S. Car Rental Operations for Hertz.
Prior to that he was Division Vice President, Region Operations for Hertz since
1985. He served in various other operating positions with Hertz between 1976
and 1985.
53
Mr. Kennedy
has served as Hertz’s Executive Vice President, Marketing & Sales
since February 1988 and as the Executive Vice President, Sales &
Marketing, of Hertz Holdings since June 2006. From May 1987 through January 1988,
he served as Executive Vice President and General Manager of Hertz’s Car Rental
Division, prior to which, from October 1983, he served as Senior Vice
President, Marketing for Hertz.
Mr. Plescia
has served as the Executive Vice President and President, HERC since July 1997
and as the Executive Vice President and President, HERC, of Hertz Holdings
since June 2006. From September 1991 until June 1997, he served
as Division Vice President, Field Operations, HERC and has served in various
other operations and financial positions with us since 1979.
Mr. Taride
has served as the Executive Vice President and President, Hertz Europe Limited
since January 2004 and as the Executive Vice President and President,
Hertz Europe Limited, of Hertz Holdings since June 2006. From January 2003
until December 2003, he served as Vice President and President, Hertz
Europe Limited. From April 2000 until December 2002, he served as
Vice President and General Manager, Rent A Car, Hertz Europe Limited. From July 1998
to March 2000, he was General Manager, Rent A Car France and HERC Europe.
Previously, he served in various other operating positions in Europe from 1980
to 1983 and from 1985 to 1998.
Mr. Rolfe
has served as the Senior Vice President, General Counsel and Secretary of Hertz
Holdings since June 2006. He served as the General Counsel and Secretary
of Hertz Holdings from December 2005 until June 2006 and as the
Senior Vice President, General Counsel and Secretary of Hertz since May 1999.
He served as the Senior Vice President and General Counsel of Hertz from October 1998
to May 1999. Previously he served as Vice President and General Counsel,
Corporate Property Investors, New York, New York from June 1991 until September 1998.
Mr. Shafer
has served as the Senior Vice President, Quality Assurance &
Administration for Hertz since January 2003 and as the Senior Vice
President, Quality Assurance & Administration of Hertz Holdings since June 2006.
From February 1998 until December 2002, he had served as Vice
President and President, Hertz Europe Limited. From January 1991 until January 1998,
he was Division Vice President, Western Region Rent A Car Operations for Hertz.
He served in various other operating positions with Hertz from 1966 to 1990.
Mr. Foti
has served as the Controller of Hertz Holdings since December 21, 2005 and
as the Staff Vice President and Controller of Hertz since July 1997.
Previously he served as Staff Vice President, Internal Audit for Hertz from February 1990
until June 1997. Previously he served in various other financial positions
with us since 1978.
Ms. Douglas
has served as the Treasurer of Hertz Holdings and Hertz since July 2006.
Prior to joining Hertz Holdings and Hertz, Ms. Douglas served as Treasurer
of Coty Inc. from December 1999 until July 2006. Previously, Ms. Douglas
served as an Assistant Treasurer of Nabisco from June 1995 until December 1999.
54
PART II
ITEM 5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common
stock began trading on the NYSE on November 16, 2006. On March 27,
2007, there were 402 registered holders of our common stock. The following
table sets forth, for the period indicated, the highest and lowest closing sale
price for our common stock since our initial public offering, or “IPO,” as
reported by the NYSE:
2006
High
Low
4
th
Quarter (commencing November 16, 2006)
$
17.39
$
14.75
There were no repurchases of
our equity securities by us or on our behalf during the fourth quarter of 2006
and we do not have a formal or publicly announced stock repurchase program.
CURRENT DIVIDEND POLICY
We do not
expect to pay dividends on our common stock for the foreseeable future. The
agreements governing our indebtedness restrict our ability to pay future
dividends. See “Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources—Financing.”
PRE-IPO DIVIDENDS
On June 30, 2006, we paid
special dividends of $4.32 per share to the holders of our common stock,
totaling approximately $999.2 million. On November 21, 2006, we paid a
special cash dividend to holders of record of our common stock immediately
prior to the IPO in an amount of $1.12 per share, or approximately $260.3
million in the aggregate.
USE OF PROCEEDS FROM
REGISTERED SECURITIES
On November 15,
2006, we registered 88,235,000 shares of our common stock for an aggregate
offering price of $1,323.5 million in our initial public offering. On November 21,
2006 we closed the sale of our common stock at a price of $15.00 per share in
an underwritten initial public offering. This offering was effected pursuant to
a Registration Statement on Form S-1 (File No. 333-135782),
which the Securities and Exchange Commission declared effective on November 15,
2006. Goldman, Sachs & Co., Lehman Brothers Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated acted as managing underwriters in
the offering. Of the $1,323.5 million of gross proceeds raised in the offering:
·
approximately
$56.2 million was paid to the underwriters in connection with the underwriting
discount;
·
approximately
$7.0 million was used in connection with offering expenses, printing fees,
listing fees, filing fees, accounting fees and legal fees;
·
approximately
$1,000.0 million was used to repay borrowings outstanding under the Hertz
Holdings Loan Facility and to pay related fees and expenses; and
·
approximately $260.3
million was used to pay special cash dividends of $1.12 per share on November 21,
2006 to stockholders of record of Hertz Holdings immediately prior to the
initial public offering.
RECENT SALES OF
UNREGISTERED SECURITIES
None
55
RECENT PERFORMANCE
The following graph compares the cumulative total
stockholder return on Hertz Global Holdings, Inc. Common Stock with the
Russell 1000 Index and the Hemscott Industry Group 761 - Rental &
Leasing Services. The Russell 1000 Index is included because it is comprised of
the 1,000 largest publicly traded issuers and has a median total market
capitalization of approximately $5 billion which is similar to our total market
capitalization. The Hemscott Industry Group 761 - Rental & Leasing
Services is a published, market capitalization-weighted index representing 24
stocks of companies that rent or lease various durable goods to the commercial
and consumer market including cars and trucks, medical and industrial
equipment, appliances, tools and other miscellaneous goods, including Hertz
Global Holdings, Inc., ABG, DTG and URI.
The results are based on an
assumed $100 invested on November 15, 2006, at the market close, through December 31,
2006.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG HERTZ GLOBAL HOLDINGS,
RUSSELL 1000 INDEX AND HEMSCOTT GROUP INDEX
ASSUMES
DIVIDEND REINVESTMENT
FISCAL YEAR ENDING DECEMBER 31, 2006
56
Equity Compensation
Plan Information
The
following table summarizes the securities authorized for issuance pursuant to
our equity compensation plans as of December 31, 2006:
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
Equity compensation
plans approved by securityholders
15,748,354
$
5.85
12,751,646
Equity compensation
plans not approved by securityholders
—
N/A
—
Total
15,748,354
$
5.85
12,751,646
57
ITEM 6.
SELECTED
FINANCIAL DATA
The following table presents selected consolidated
financial information and other data for our business. The selected
consolidated statement of operations data for the year ended December 31,
2006, the Successor period ended December 31, 2005, the Predecessor period
ended December 20, 2005 and the year ended December 31, 2004 and the
selected consolidated balance sheet data as of December 31, 2006 and 2005
presented below were derived from our consolidated financial statements and the
related notes thereto included in this Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
You should
read the following information in conjunction with the section of this Annual
Report entitled “Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements
and related notes thereto included in this Annual Report under the caption “Item
8—Financial Statements and Supplementary Data.”
Successor
Predecessor
For the Periods From
(In millions of dollars,
except per share data)
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Year ended
December 31,
2003
Year ended
December 31,
2002
Statement of Operations Data
Revenues:
Car rental
$
6,273.6
$
129.4
$
5,820.5
$
5,430.8
$
4,819.3
$
4,537.6
Equipment rental
1,672.1
22.5
1,392.4
1,162.0
1,037.8
1,018.7
Other(a)
112.7
2.6
101.8
83.2
76.6
82.1
Total revenues
8,058.4
154.5
7,314.7
6,676.0
5,933.7
5,638.4
Expenses:
Direct operating
4,476.0
103.0
4,086.3
3,734.4
3,316.1
3,093.0
Depreciation of revenue earning equipment(b)
1,757.2
43.8
1,555.9
1,463.3
1,523.4
1,499.5
Selling, general and administrative
723.9
15.1
623.4
591.3
501.7
463.1
Interest, net of interest income(c)
900.7
25.8
474.2
384.4
355.0
366.4
Total expenses
7,857.8
187.7
6,739.8
6,173.4
5,696.2
5,422.0
Income (loss) before income taxes and minority
interest
200.6
(33.2
)
574.9
502.6
237.5
216.4
(Provision) benefit for taxes on income(d)
(68.0
)
12.2
(191.3
)
(133.9
)
(78.9
)
(72.4
)
Minority interest
(16.7
)
(0.3
)
(12.3
)
(3.2
)
—
—
Income (loss) before cumulative effect of change in
accounting principle
115.9
(21.3
)
371.3
365.5
158.6
144.0
Cumulative effect of change in accounting
principle(e)
—
—
—
—
—
(294.0
)
Net income (loss)
$
115.9
$
(21.3
)
$
371.3
$
365.5
$
158.6
$
(150.0
)
Weighted average
shares outstanding (in millions)(f)
Basic
242.5
229.5
229.5
229.5
229.5
229.5
Diluted
243.4
229.5
229.5
229.5
229.5
229.5
Earnings (loss) per share(f)
Basic
$
0.48
$
(0.09
)
$
1.62
$
1.59
$
0.69
$
(0.65
)
Diluted
$
0.48
$
(0.09
)
$
1.62
$
1.59
$
0.69
$
(0.65
)
Other
Financial Data
Net non-fleet capital
expenditures
$
159.8
$
7.3
$
261.9
$
227.1
$
172.1
$
189.2
58
Successor
Predecessor
December 31,
2006
2005
2004
2003
2002
Balance Sheet Data
Cash and equivalents and short-term investments
$
674.5
$
843.9
$
1,235.0
$
1,110.1
$
601.3
Total assets(g)
18,677.4
18,580.9
14,096.4
12,579.0
11,128.9
Total debt
12,276.2
12,515.0
8,428.0
7,627.9
7,043.2
Stockholders’ equity(h)
2,534.6
2,266.2
2,670.2
2,225.4
1,921.9
(a)
Includes fees and certain cost reimbursements from our
licensees and revenues from our car leasing operations and third-party
claim management services.
(b)
For the year ended December 31, 2006, the
Successor period ended December 31, 2005 and the Predecessor period ended December 20,
2005, depreciation of revenue earning equipment was reduced by $13.1 million,
$1.2 million and $33.8 million, respectively, resulting from the net effects of
changing depreciation rates to reflect changes in the estimated residual value
of revenue earning equipment. For the year ended December 31, 2006, the
Successor period ended December 31, 2005, the Predecessor period ended December 20,
2005, and the years ended December 31, 2004, 2003 and 2002, depreciation
of revenue earning equipment includes net gains of $35.9 million, $2.1 million,
$68.3 million, $57.2 million, a net loss of $0.8 million and a net gain of
$10.8 million, respectively, from the disposal of revenue earning equipment.
(c)
For the year ended December 31, 2006, the
Successor period ended December 31, 2005, the Predecessor period ended December 20,
2005, and the years ended December 31, 2004, 2003 and 2002, interest
income was $42.6 million, $1.1 million, $36.1 million, $23.7 million, $17.9
million and $10.3 million, respectively.
(d)
For the year ended December 31, 2006, we
established valuation allowances of $9.8 million relating to the realization of
deferred tax assets attributable to net operating losses and other temporary
differences in certain European countries. Additionally, certain tax reserves
were recorded for certain federal and state contingencies. The Predecessor
period ended December 20, 2005 includes the reversal of a valuation
allowance on foreign tax credit carryforwards of $35.0 million (established in
2004) and favorable foreign tax adjustments of $5.3 million relating to periods
prior to 2005, partly offset by a $31.3 million provision relating to the
repatriation of foreign earnings. The Predecessor period ended December 31,
2004 includes benefits of $46.6 million relating to net adjustments to federal
and foreign tax accruals.
(e)
Cumulative effect of change in accounting principle
represents a non-cash charge for the year ended December 31, 2002, related
to impairment of goodwill in our equipment rental business, recognized in
accordance with the adoption of Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets.”
(f)
Amounts for the Successor period ended December 31,
2005 and the Predecessor periods are computed based upon 229,500,000 shares of
common stock outstanding immediately after the Acquisition applied to our
historical net income (loss) amounts. Amounts for the Successor year ended December 31,
2006 are computed based on the weighted average shares outstanding during the
period applied to our historical net income (loss) amount. Due to the changes
in our capital structure, historical share and per share data will not be
comparable to, or meaningful in the context of, future periods.
(g)
Substantially all of our revenue earning equipment, as
well as certain related assets, are owned by special purpose entities, or are
subject to liens in favor of our lenders under our Senior ABL Facility, our
asset-backed securities program, our International Fleet Debt Facilities
or the fleet financing facility relating to our car rental fleet in Hawaii,
Kansas, Puerto Rico and St. Thomas, the U.S. Virgin Islands. Substantially all
our other assets in the United States are also subject to liens in favor of our
lenders under our Senior Credit Facilities, and substantially all our other
assets outside the United States are (with certain limited exceptions) subject
to liens in favor of our lenders under our International Fleet Debt Facilities
or (in the case of our Canadian HERC business) our Senior ABL Facility. None of
such assets are available to satisfy the claims of our general creditors. For a
description of those facilities, see “Item 7—Management’s Discussion and
Analysis of Financial Conditions and Results of Operations—Liquidity and
Capital Resources.”
(h)
Includes equity contributions totaling $2,295 million
to Hertz Holdings from investment funds associated with or designated by the
Sponsors on or prior to December 21, 2005, net proceeds from the sale of
stock to employees and the initial public offering of approximately $1,284.5
million and the payment of special cash dividends to our stockholders of
approximately $999.2 million on June 30, 2006 and approximately $260.3
million on November 21, 2006.
59
ITEM 7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results
of operations and financial condition covers periods prior to the consummation
of the Transactions. Accordingly, the discussion and analysis of historical
periods prior to the year ended December 31, 2006 does not reflect the
significant impact that the Transactions had on us, including significantly
increased leverage and liquidity requirements. The statements in the discussion
and analysis regarding industry outlook, our expectations regarding the
performance of our business and the other non-historical statements are forward-looking
statements. These forward-looking statements are subject to numerous
risks and uncertainties, including, but not limited to, the risks and
uncertainties described in “Item 1A—Risk Factors.” The following discussion and
analysis provides information that we believe to be relevant to an
understanding of our consolidated financial condition and results of operation.
Our actual results may differ materially from those contained in or implied by
any forward-looking statements. You should read the following discussion
together with the sections entitled “Cautionary Note Regarding Forward-Looking
Statements,” “Item 1A—Risk Factors,” “Item 6—Selected Financial Data” and our
consolidated financial statements and related notes included in this Annual
Report under the caption “Item 8—Financial Statements and Supplementary Data.”
Overview
We are engaged principally in the business of renting
cars and renting equipment.
Our revenues primarily
are derived from rental and related charges and consist of:
·
Car
rental revenues (revenues from all company-operated car rental
operations, including charges to customers for the reimbursement of costs
incurred relating to airport concession fees and vehicle license fees, the
fueling of vehicles and the sale of loss or collision damage waivers, liability
insurance coverage and other products);
·
Equipment
rental revenues (revenues from all company-operated equipment rental
operations, including amounts charged to customers for the fueling and delivery
of equipment and sale of loss damage waivers); and
·
Other
revenues (fees and certain cost reimbursements from our licensees and revenues
from our car leasing operations and our third-party claim management
services).
Our equipment rental business also derives revenues
from the sale of new equipment and consumables.
Our expenses primarily
consist of:
·
Direct
operating expenses (primarily wages and related benefits; commissions and
concession fees paid to airport authorities, travel agents and others;
facility, self-insurance and reservations costs; the cost of new equipment and
consumables purchased for resale; and other costs relating to the operation and
rental of revenue earning equipment, such as damage, maintenance and fuel
costs);
·
Depreciation
expense relating to revenue earning equipment (including net gains or losses on
the disposal of such equipment). Revenue earning equipment includes cars and
equipment;
·
Selling,
general and administrative expenses (including advertising); and
·
Interest
expense, net of interest income.
The car and equipment rental industries are
significantly influenced by general economic conditions. The car rental
industry is also significantly influenced by developments in the travel
industry, and,
60
particularly, in airline passenger traffic. Our
profitability is primarily a function of the volume and pricing of rental
transactions and the utilization of cars and equipment. Significant changes in
the purchase price of cars and equipment or interest rates can also have a
significant effect on our profitability depending on our ability to adjust
pricing for these changes. In the United States, increases of approximately 17%
in monthly per-car depreciation costs for 2006 model year program cars
began to adversely affect our results of operations in the fourth quarter of
2005, as those cars began to enter our fleet. On a comparable basis, we expect
2007 model year program vehicle depreciation costs to rise approximately 20%
and per-car depreciation costs for 2007 model year U.S. risk cars to decline
slightly. As a consequence of those changes in per-car costs, as well as the
larger proportion of our U.S. fleet we expect to purchase as risk cars and
other actions we expect to take to mitigate program car cost increases, we
expect our net per-car depreciation costs for 2007 model year cars in the
United States will increase by approximately 5% from our net per-car
depreciation costs for 2006 model year U.S. cars. We began to experience the
impact of those cost changes and mitigation actions in the fourth quarter of
2006, as substantial numbers of 2007 model year cars began to enter our U.S.
rental fleet. Our business requires significant expenditures for cars and
equipment, and consequently we require substantial liquidity to finance such
expenditures.
Our car rental and equipment rental operations are
seasonal businesses, with decreased levels of business in the winter months and
heightened activity during the spring and summer. We have the ability to
dynamically manage fleet capacity, the most significant portion of our cost
structure, to meet market demand. For instance, to accommodate increased
demand, we increase our available fleet and staff during the second and third
quarters of the year. As business demand declines, fleet and staff are
decreased accordingly. A number of our other major operating costs, including
airport concession fees, commissions and vehicle liability expenses, are
directly related to revenues or transaction volumes. In addition, our
management expects to utilize enhanced process improvements, including
efficiency initiatives and use of our information systems, to help manage our
variable costs. Approximately two-thirds of our typical annual operating
costs represent variable costs, while the remaining one-third are fixed
or semi-fixed. We also maintain a flexible workforce, with a significant
number of part time and seasonal workers. However, certain operating expenses,
including minimum concession fees, rent, insurance, and administrative
overhead, remain fixed and cannot be adjusted for seasonal demand.
As part of our effort to implement our strategy of
reducing operating costs, we are evaluating our workforce and operations and
making adjustments, including headcount reductions and process improvements to
optimize work flow at rental locations and maintenance facilities as well as
streamlining our back-office operations, that we believe are necessary and
appropriate. When we make adjustments to our workforce and operations, we may
incur incremental expenses that delay the benefit of a more efficient workforce
and operating structure, but we believe that increasing our operating
efficiency and reducing the costs associated with the operation of our business
are important to our long-term competitiveness.
On January 5, 2007, we announced the first in a
series of initiatives to further improve our competitiveness through targeted
job reductions affecting approximately 200 employees primarily at our corporate
headquarters in Park Ridge, New Jersey and our U.S. service center in Oklahoma
City. These reductions are expected to result in annualized savings of up to
$15.8 million. We expect to incur an estimated $3.3 million to $3.8 million
restructuring charge in the first quarter of 2007 for severance and related
costs arising from these reductions.
On February 28, 2007, we announced the second
initiative to further improve our competitiveness and industry leadership
through targeted job reductions affecting
approximately 1,350 employees primarily in our U.S. car rental operations, with
much smaller reductions occurring in U.S. equipment rental operations, the
corporate headquarters in Park Ridge, New Jersey, and the U.S. service center
in Oklahoma City, as well as in Canada, Puerto Rico, Brazil, Australia and New
Zealand. These
61
reductions are expected to result in annualized
savings of up to $125.0 million. We
expect to incur an estimated $9.0 million to $11.0 million restructuring charge
in the first quarter of 2007 for severance and related costs arising from these
reductions.
Further cost reduction initiatives are in process. We
currently anticipate incurring future charges to earnings in connection with
those initiatives; however, we have not yet developed detailed estimates of
these expenses.
In the United States, industry revenues from airport
rentals only in 2004 returned to levels seen before the 2001 recession and the September 11,
2001 terrorist attacks. For the year ended December 31, 2006, based on
publicly available information, we believe some U.S. car rental companies
experienced transaction day growth and pricing increases compared to comparable
prior periods. For the year ended December 31, 2006, we experienced a less
than one percentage point volume decline versus the prior period in the U.S.,
while pricing was up over three percentage points. The volume decline was the
result of a reduction in fleet volume given significant fleet cost increases,
higher leisure pricing for the period from March through May 2006 and
the difficult comparison in the quarter ending December 31, 2006 due to
the extraordinarily high volumes of post-hurricane rentals in the Gulf Coast
and Florida areas in 2005. During the year ended December 31, 2006, we
experienced low to mid single digit transaction day growth in our European
operations and our car rental pricing was above the level of our pricing during
the year ended December 31, 2005.
In the three years ended December 31, 2006, we
increased the number of our off-airport rental locations in the United States
by approximately 32% to approximately 1,380 locations. Revenues from our U.S.
off-airport operations grew during the same period, representing $885.2
million, $843.7 million, $697.4 and $576.9 million of our total car rental
revenues in the years ended December 31, 2006, 2005, 2004 and 2003,
respectively. In 2007 and subsequent years our strategy may include selected
openings of new off-airport locations, the disciplined evaluation of existing
locations and the pursuit of same-store sales growth. When we open a new
off-airport location, we incur a number of costs, including those relating to
site selection, lease negotiation, recruitment of employees, selection and
development of managers, initial sales activities and integration of our
systems with those of the companies who will reimburse the location’s
replacement renters for their rentals. A new off-airport location, once opened,
takes time to generate its full potential revenues, and as a result revenues at
new locations do not initially cover their start-up costs and often do not, for
some time, cover the costs of their ongoing operation.
From 2001 to 2003, the equipment rental industry
experienced downward pricing, measured by the rental rates charged by rental
companies.
For the years
ended December 31, 2004, 2005 and 2006, we believe industry pricing,
measured in the same way, improved in the United States and Canada and only
started to improve towards the end of 2005 in France and Spain. HERC also
experienced higher equipment rental volumes worldwide for the years ended December 31,
2005 and 2006. HERC slightly contracted its network of equipment rental
locations during the 2001 to 2003 downturn in construction activities. HERC
added five new locations in the United States in 2004 and six new locations in
2005. During the year ended December 31, 2006, HERC added ten new U.S.
locations and two new Canadian locations. HERC expects to add approximately 15
to 20 additional new locations in the United States and three additional
locations in Canada in 2007. In its U.S. expansion, we expect HERC will incur
non-fleet start-up costs of approximately $0.6 million per location and additional
fleet acquisition costs over an initial twelve-month period of
approximately $5.4 million per location.
Property damage and business
interruption from the 2005 hurricanes in Florida and other Gulf Coast states
did not have a material effect on our results of operations for the year ended December 31,
2005.
62
Critical Accounting
Policies and Estimates
Our discussion and analysis of financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America, or “GAAP.” The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts in our financial statements and accompanying notes.
We believe the following
critical accounting policies affect the more significant judgments and
estimates used in the preparation of our financial statements and changes in
these judgments and estimates may impact our future results of operations and
financial condition. For additional discussion of our accounting policies, see
Note 1 to the Notes to our consolidated financial statements included in this
Annual Report under the caption “Item 8—Financial Statements and Supplementary
Data.”
Revenue Earning Equipment
Our principal assets are
revenue earning equipment, which represented approximately 53% of our total
assets as of December 31, 2006. Revenue earning equipment consists of
vehicles utilized in our car rental operations and equipment utilized in our
equipment rental operations. For the year ended December 31, 2006, 64% of
the vehicles purchased for our U.S. and international car rental fleet were
subject to repurchase by automobile manufacturers under contractual repurchase
and guaranteed depreciation programs, subject to certain manufacturers’ car
condition and mileage requirements, at a specific price during a specified time
period. These programs limit our residual risk with respect to vehicles
purchased under the programs. For all other vehicles, as well as equipment
acquired by our equipment rental business, we use historical experience and
monitor market conditions to set depreciation rates. When revenue earning
equipment is acquired, we estimate the period that we will hold the asset.
Depreciation is recorded on a straight-line basis over the estimated holding
period, with the objective of minimizing gain or loss on the disposition of the
revenue earning equipment. Depreciation rates are reviewed on an ongoing basis
based on management’s routine review of present and estimated future market
conditions and their effect on residual values at the time of disposal. Upon
disposal of the revenue earning equipment, depreciation expense is adjusted for
the difference between the net proceeds received and the remaining net book
value. As market conditions change, we adjust our depreciation rates
prospectively, over the remaining holding period, to reflect these changes in
market conditions. See Note 7 to the Notes to our consolidated financial
statements included in this Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
Public Liability and Property Damage
The obligation for public
liability and property damage on self-insured U.S. and international vehicles
and equipment represents an estimate for both reported accident claims not yet
paid, and claims incurred but not yet reported. The related liabilities are
recorded on a non-discounted basis. Reserve requirements are based on actuarial
evaluations of historical accident claim experience and trends, as well as
future projections of ultimate losses, expenses, premiums and administrative
costs. The adequacy of the liability is regularly monitored based on evolving
accident claim history. If our estimates change or if actual results differ
from these assumptions, the amount of the recorded liability is adjusted to
reflect these results.
Pensions
Our employee pension costs and obligations are
dependent on our assumptions used by actuaries in calculating such amounts.
These assumptions include discount rates, salary growth, long-term return
63
on plan assets, retirement rates, mortality rates and
other factors. Actual results that differ from our assumptions are accumulated
and amortized over future periods and, therefore, generally affect our
recognized expense in such future periods. While we believe that the
assumptions used are appropriate, significant differences in actual experience
or significant changes in assumptions would affect our pension costs and
obligations.
In September 2006,
the FASB issued Statement of Financial Accounting Standards, or “SFAS” No. 158,
or “SFAS No. 158,” “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans.” SFAS No. 158 requires employers to fully
recognize the obligations associated with single-employer defined benefit
pension plans, retiree healthcare and other postretirement plans in their
financial statements. The provisions of SFAS No. 158 were effective as of
our fiscal year ending December 31, 2006.
The effect of applying SFAS No. 158 as
of December 31, 2006 was as follows (in thousands of dollars):
Before application
of SFAS No. 158
Adjustments
Increase
(Decrease)
After application
of SFAS No. 158
Accrued salaries and
other compensation
$
474,777
$
(11,311
)
$
463,466
Deferred taxes on
income
1,796,200
4,873
1,801,073
Total liabilities
16,134,464
(6,438
)
16,128,026
Accumulated other
comprehensive income
88,090
6,438
94,528
Total stockholders’ equity
2,528,124
6,438
2,534,562
See Note 5 to the Notes to our
consolidated financial statements included in this Annual Report under the
caption “Item 8—Financial Statements and Supplementary Data.”
Goodwill and Other Intangible Assets
We review goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount of the goodwill may
not be recoverable, and also review goodwill annually in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets.” Our annual review is conducted in the
second quarter of each year. Under SFAS No. 142, goodwill impairment is
deemed to exist if the carrying value of goodwill exceeds its fair value. In
addition, SFAS No. 142 requires that goodwill be tested at least annually
using a two-step process. The first step is to identify any potential
impairment by comparing the carrying value of the reporting unit to its fair
value. If a potential impairment is identified, the second step is to compare
the implied fair value of goodwill with its carrying amount to measure the
impairment loss. We estimate the fair value of our reporting units using a
discounted cash flow methodology. A significant decline in the projected cash
flows used to determine fair value could result in a goodwill impairment
charge.
The Acquisition was recorded by allocating the cost of
the assets acquired, including intangible assets and liabilities assumed, based
on their estimated fair values at the Acquisition date. Consequently, as a
result of the Acquisition, we have recognized significant intangible assets. In
accordance with SFAS No. 142, we reevaluate the estimated useful lives of
our intangible assets annually or as circumstances change. Those intangible
assets considered to have indefinite useful lives are evaluated for impairment
on an annual basis, by comparing the fair value of the intangible asset to its
carrying value. In addition, whenever events or changes in circumstances
indicate that the carrying value of intangible assets might not be recoverable,
we will perform an impairment review. We estimate the fair value of our
intangible assets using a discounted cash flow methodology. Intangible assets
with finite useful lives are amortized over their respective estimated useful
lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting
for Impairment or Disposal of Long-Lived Assets.”
64
Our estimates are based upon historical trends,
management’s knowledge and experience and overall economic factors. While we
believe our estimates are reasonable, different assumptions regarding items
such as future cash flows and volatility in the markets we serve could affect
our evaluations and result in an impairment charge to the carrying amount of
our goodwill and our intangible assets.
See Note 2 to the Notes to our consolidated financial
statements included in this Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
Income Taxes
Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
of a change in tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized.
During 2006, a third party was engaged to perform a
comprehensive analysis of our deferred taxes in order to remediate a
significant deficiency noted during the 2005 testing of internal controls over
financial reporting related to income taxes. The domestic deferred tax analysis
was finalized in the fourth quarter of 2006 and resulted in a $159.4 million decrease
to our deferred tax liability and a $156.3 million decrease to our goodwill. We
have determined that these adjustments were not material to our current or
previously issued consolidated financial statements.
See Note 8 to the Notes to our
consolidated financial statements included in this Annual Report under the
caption “Item 8—Financial Statements and Supplementary Data.”
Stock-Based Compensation
In December 2004, the Financial Accounting
Standards Board, or the “FASB,” revised its SFAS, No. 123, with SFAS No. 123R,
“Share-Based Payment.” The revised statement requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That cost
is to be recognized over the period during which the employee is required to
provide service in exchange for the award. We have accounted for our employee
stock-based compensation awards in accordance with SFAS No. 123R. As
disclosed in Note 6 to the Notes to our consolidated financial statements
included
in this Annual
Report under the caption “Item 8—Financial Statements and Supplementary
Data,” we estimated the fair value of options issued at the date of grant using
a Black-Scholes option-pricing model, which includes assumptions
related to volatility, expected term, dividend yield, risk-free interest rate
and forfeiture rate. The non-cash stock-based compensation expense associated
with the Hertz Holdings Stock Incentive Plan is pushed down from Hertz Holdings
and recorded on the books at the Hertz level.
As described under “—Hertz Holdings Stock Incentive
Plan,” Hertz Holdings granted or modified options to purchase shares of its
common stock and sold shares of its common stock to certain of its employees in
May, June and August of 2006. Our management and the compensation
committee of our Board of Directors determined that the fair value per share of
our common stock was $10.00 ($4.56 after giving effect to special cash
dividends paid on June 30, 2006 and November 21, 2006) as of May 15,
2006, $12.00 per share ($6.56 after giving effect to special cash dividends
paid on June 30, 2006 and November 21, 2006) as of June 30, 2006
and $6.56 as of August 15, 2006 (after adjustment for the special cash
dividend paid on November 21, 2006). Determining the fair value of our
common stock as of each of these dates required making subjective judgments.
Hertz engaged an independent valuation specialist to perform a valuation of the
common stock of Hertz Holdings as of
65
May 15, 2006, June 30, 2006 and August 15,
2006 to assist management and the compensation committee of our Board of
Directors in connection with the determination of the fair market value of our
common stock as of these dates.
Several events that occurred over the period from late
August through September 2006, as well as the proximity of the
then-proposed initial public offering of our common stock, led us to reconsider
the method used for estimating the fair value of our common stock under SFAS No. 123R
as of August 15, 2006, and we have subsequently determined that the fair
value of our common stock as of August 15, 2006 should be $16.37 per
share, rather than $7.68 ($6.56 after adjustment for the special cash dividend
paid on November 21, 2006) as had originally been determined at that time.
In determining the fair value per share of our common stock as of the August 15,
2006 date, we placed significantly greater weight on these additional events
than on the valuation report prepared by the independent valuation specialist
as of August 15, 2006.
The events that led us to reconsider the fair value of
our common stock as of August 15, 2006, in addition to the proximity of
the offering, include the emergence of an actively traded car rental industry
participant comparable in size to us, ABG, and the related increase in analyst
coverage of the car rental industry, with the associated emergence of coverage
that includes fully developed, forward-looking income statement, balance
sheet and revenue models and price targets and multiples for industry
participants that utilize a more standardized valuation metric that utilizes
measures similar to what Hertz Holdings refers to as “Corporate EBITDA.” Before
ABG’s emergence as a stand-alone public company and the industry research
that has been associated with it, there was limited forward-looking
industry trend information or valuation information available to provide
forward-looking valuation benchmarks for companies in the car rental
industry. This situation changed in August and September 2006 as
analysts from major investment banking firms developed detailed projections
models and provided their views of industry trends. Also in September 2006,
analysts from two major investment banking firms each published their views
with respect to trends in the car rental industry and of the appropriate
valuation for ABG, including forward-looking price targets for ABG’s
stock. Each of these factors was also considered important when determining the
initial public offering price range for our common stock.
We determined the fair value of our common stock as of
August 15, 2006 for financial reporting purposes by applying a
marketability discount, reflecting the likelihood and timing of the successful
completion of the then-proposed initial public offering of our common stock as
of August 15, 2006, to the assumed initial public offering price range of
$16.00 or $18.00 per share.
The options granted on August 15, 2006 were
issued at strike prices of $7.68 per share ($6.56 after adjustment for the
special cash dividend paid on November 21, 2006), $10.68 per share ($9.56
after adjustment for the special cash dividend paid on November 21, 2006)
and $15.68 per share ($14.56 after adjustment for the special cash dividend
paid on November 21, 2006), and we will record compensation expense
totaling $19.0 million based on a fair value per share of $16.37 that will be
amortized over the service period that began on the grant date. We also
recognized compensation expense of $13.2 million associated with the difference
between the price of $7.68 per share ($6.56 after adjustment for the special
cash dividend paid on November 21, 2006) paid for the stock issued on August 15,
2006 and the reassessed fair value per share of $16.37 in the third quarter of
2006.
Because the shares sold in May 2006 were issued
at a price at least equal to the fair market value of our common stock on the
date of the issuances, we were not required to recognize compensation expense
associated with these issuances. The compensation expense for the stock options
we issued in May and June 2006 was initially determined to be $72.9
million, which we will recognize over the service period that began on the
grant dates. As a result of a modification of these options made in June 2006
in connection with the special cash dividend paid on June 30, 2006, an
additional $14.1 million of compensation expense will also be recognized over
the remaining service period of the
66
options. In June 2006 we sold shares to Craig R.
Koch, our former Chief Executive Officer, for less than their fair value as determined
as of the date of issuance, and recognized compensation expense of $0.2 million
as a result. See “—Hertz Holdings Stock Incentive Plan.”
If the fair value of our common stock exceeded the May 2006
option strike price by $1.00, we would have had to record additional
compensation expense of $10.8 million in the aggregate over the service period
of those options beginning in the second quarter of 2006, as well as a charge
of $1.8 million in the aggregate as compensation expense associated with the May 2006
stock sales, the full amount of which would have been required to be recorded
in the second quarter of 2006. If the fair value of our common stock had been
$1.00 higher at the time of the special cash dividend paid on June 30,
2006, we would have had to recognize additional expense, related to the
modification of the exercise price of the options, of $1.5 million, to be
amortized over the service period of those options.
Prior to the consummation of
the initial public offering of the common stock of Hertz Holdings on November 21,
2006, Hertz Holdings declared a special cash dividend, to be paid promptly
following the completion of the offering. In connection with the special cash
dividend, Hertz Holdings’ outstanding stock options were adjusted to preserve
the intrinsic value of the options, consistent with applicable tax law and the
terms of the Stock Incentive Plan. The Board approved this modification on October 12,
2006. Beginning on that date, the cost of the modification was recognized
ratably over the remainder of the requisite service period for each grant.
Because the modification was effective before the amount of the dividend was
known, the cost of the modification reflected the assumption that the dividend
would be funded by the proceeds to Hertz Holdings from the sale of the common
stock after deducting underwriting discounts and commissions and offering
expenses. The assumed proceeds from the sale of the common stock were
determined by assuming an offering price equivalent to the midpoint of the
range set forth on the cover page of the initial public offering
prospectus (or $17.00 per share) and resulted in an estimated dividend of $1.83
per share. The actual dividend declared was $1.12 per share. We will recognize
incremental compensation cost of $14.2 million related to the cost of modifying
the exercise prices of the stock options for the special cash dividend paid on November 21,
2006 over the remainder of the five-year requisite service period. This charge
is based on the estimated dividend, rather than the actual dividend paid.
67
Results of Operations
In the
following discussion, comparisons are made between the years ended December 31,
2006 and December 31, 2005 (combined) and December 31, 2005
(combined) and December 31, 2004, notwithstanding the presentation in our
consolidated statements of operations for the year ended December 31,
2006, the Successor period ended December 31, 2005 and the Predecessor
period ended December 20, 2005. A split presentation of an annual period
is required under GAAP when a change in accounting basis occurs. Consequently,
the combined presentation for 2005 is not a recognized presentation under GAAP.
Accounting for an acquisition requires that the historical carrying values of
assets acquired and liabilities assumed be adjusted to fair value. A resulting
higher cost basis associated with the allocation of the purchase price impacts
post-acquisition period results, which impacts period-to-period comparisons. We
believe a discussion of the separate periods presented for the year ended December 31,
2005 in our consolidated statements of operations may impede understanding of
our operating performance. The impact of the Acquisition on the 11-day
Successor period ended December 31, 2005 does not materially affect the
comparison of the annual periods and, accordingly, we have prepared the
discussion of our results of operations by comparing the year ended December 31,
2005 (combined) with the year ended December 31, 2006 and 2004 without
regard to the differentiation between Predecessor and Successor results of
operations for the Predecessor period ended December 20, 2005 and the
Successor period ended December 31, 2005.
Successor
Combined
Successor
Predecessor
For the periods from
(In thousands of dollars)
Year Ended
December 31,
2006
Year Ended
December 31,
2005
December 21, 2005
to December 31,
2005
January 1, 2005
to December 20,
2005
Year ended
December 31,
2004
Revenues:
Car rental
$
6,273,612
$
5,949,921
$
129,448
$
5,820,473
$
5,430,805
Equipment rental
1,672,093
1,414,891
22,430
1,392,461
1,161,955
Other
112,700
104,402
2,591
101,811
83,192
Total revenues
8,058,405
7,469,214
154,469
7,314,745
6,675,952
Expenses:
Direct operating
4,475,974
4,189,302
102,958
4,086,344
3,734,361
Depreciation of revenue
earning equipment
1,757,202
1,599,689
43,827
1,555,862
1,463,258
Selling, general and
administrative
723,921
638,553
15,167
623,386
591,317
Interest, net of interest
income
900,657
499,982
25,735
474,247
384,464
Total expenses
7,857,754
6,927,526
187,687
6,739,839
6,173,400
Income (loss) before income taxes and minority
interest
200,651
541,688
(33,218
)
574,906
502,552
(Provision) benefit for taxes on income
(67,994
)
(179,089
)
12,243
(191,332
)
(133,870
)
Minority interest
(16,714
)
(12,622
)
(371
)
(12,251
)
(3,211
)
Net income (loss)
$
115,943
$
349,977
$
(21,346
)
$
371,323
$
365,471
68
The
following table sets forth for each of the periods indicated, the percentage of
total revenues represented by the various line items in our consolidated
statements of operations:
Successor
Combined
Successor
Predecessor
For the periods from
Year Ended
December 31,
2006
Year Ended
December 31,
2005
December 21, 2005
to December 31,
2005
January 1, 2005
to December 20,
2005
Year ended
December 31,
2004
Revenues:
Car rental
77.9
%
79.7
%
83.8
%
79.6
%
81.3
%
Equipment rental
20.7
18.9
14.5
19.0
17.4
Other
1.4
1.4
1.7
1.4
1.3
Total revenues
100.0
100.0
100.0
100.0
100.0
Expenses:
Direct operating
55.5
56.1
66.6
55.9
55.9
Depreciation of revenue earning equipment
21.8
21.4
28.4
21.3
21.9
Selling, general and administrative
9.0
8.5
9.8
8.5
8.9
Interest, net of interest income
11.2
6.7
16.7
6.4
5.8
Total expenses
97.5
92.7
121.5
92.1
92.5
Income (loss) before
income taxes and minority interest
2.5
7.3
(21.5
)
7.9
7.5
(Provision) benefit
for taxes on income
(0.9
)
(2.4
)
7.9
(2.6
)
(2.0
)
Minority interest
(0.2
)
(0.2
)
(0.2
)
(0.2
)
—
Net income (loss)
1.4
%
4.7
%
(13.8
)%
5.1
%
5.5
%
69
The following table
sets forth certain of our selected car rental, equipment rental and other
operating data for each of the periods indicated:
Successor
Combined
Predecessor
Years Ended, or as of December 31,
2006
2005
2004
Selected Car Rental
Operating Data:
Worldwide transaction days
(in thousands)(a)
123,462
122,102
115,246
Domestic
85,931
86,116
81,262
International
37,531
35,986
33,984
Worldwide rental rate
revenue per transaction day(b)
$
43.15
$
42.03
$
41.92
Domestic
$
43.86
$
42.43
$
41.85
International
$
41.53
$
41.10
$
42.10
Worldwide average number of
company-operated cars during the period
438,100
438,800
414,700
Domestic
296,400
301,400
285,500
International
141,700
137,400
129,200
Worldwide revenue earning
equipment, net (in millions of dollars)
Rental and rental related
revenue (in millions of dollars)(c)
$
1,462.6
$
1,254.3
$
1,032.5
Same store revenue growth(d)
16.8
%
21.6
%
13.3
%
Average acquisition cost of
rental equipment operated during the period (in millions of dollars)
$
3,018.3
$
2,588.0
$
2,305.7
Revenue earning equipment,
net (in millions of dollars)
$
2,439.1
$
2,075.5
$
1,525.7
Other Operating Data:
Cash flows from operating
activities (in million of dollars)
$
2,614.6
$
1,458.6
$
2,251.4
EBITDA (in millions of
dollars)(e)
3,100.7
2,819.5
2,525.3
Corporate EBITDA (in millions of dollars)(e)
1,378.7
1,141.3
N/A
(a)
Transaction
days represents the total number of days that vehicles were on rent in a given
period.
(b)
Car
rental rate revenue consists of all revenue, net of discounts, associated with
the rental of cars including charges for optional insurance products, but
excluding revenue derived from fueling and concession and other expense
pass-throughs, NeverLost units and certain ancillary revenue. Rental rate
revenue per transaction day is calculated as total rental rate revenue, divided
by the total number of transaction days, with all periods adjusted to eliminate
the effect of fluctuations in foreign currency. Our management believes
eliminating the effect of fluctuations in foreign currency is appropriate so as
not to affect the comparability of underlying trends. This statistic is
important to management as it represents the best measurement of the changes in
underlying pricing in the car rental business and encompasses the elements in
car rental pricing that management has the ability to control. The following table reconciles
our car rental revenue to our rental rate revenue and rental rate revenue per
transaction day (in millions of dollars, except as noted):
Successor
Combined
Predecessor
Years Ended December 31,
2006
2005
2004
Car rental revenue per statement of operations
$
6,273.6
$
5,949.9
$
5,430.8
Non-rental rate revenue
(836.8
)
(758.2
)
(561.4
)
Foreign currency adjustment
(109.5
)
(59.2
)
(37.8
)
Rental rate revenue
$
5,327.3
$
5,132.5
$
4,831.6
Transaction days (in thousands)
123,462
122,102
115,246
Rental
rate revenue per transaction day (in whole dollars)
$
43.15
$
42.03
$
41.92
70
(c)
Equipment
rental and rental related revenue consists of all revenue, net of discounts,
associated with the rental of equipment including charges for delivery, loss
damage waivers and fueling, but excluding revenue arising from the sale of
equipment, parts and supplies and certain other ancillary revenue. Rental and
rental related revenue is adjusted in all periods to eliminate the effect of
fluctuations in foreign currency. Our management believes eliminating the
effect of fluctuations in foreign currency is appropriate so as not to affect
the comparability of underlying trends. This statistic is important to our management
as it is utilized in the measurement of rental revenue generated per dollar
invested in fleet on an annualized basis and is comparable with the reporting
of other industry participants. The
following table reconciles our equipment rental revenue to our equipment rental
and rental related revenue (in millions of dollars):
Successor
Combined
Predecessor
Year ended December 31,
2006
2005
2004
Equipment rental revenue per statement of operations
$
1,672.1
$
1,414.9
$
1,162.0
Equipment sales and other revenue
(193.6
)
(158.8
)
(134.2
)
Foreign currency adjustment
(15.9
)
(1.8
)
4.7
Rental
and rental related revenue
$
1,462.6
$
1,254.3
$
1,032.5
(d)
Same store revenue
growth represents the change in the current period total same store revenue
over the prior period total same store revenue as a percentage of the prior
period. The same store revenue amounts are adjusted in all periods to eliminate
the effect of fluctuations in foreign currency. Our management believes
eliminating the effect of fluctuations in foreign currency is appropriate so as
not to affect the comparability of underlying trends.
(e)
We present EBITDA and
Corporate EBITDA in this report to provide investors with supplemental measures
of our operating performance and liquidity and, in the case of Corporate
EBITDA, information utilized in the calculation of the financial covenants
under our senior credit facilities. EBITDA, as used in this report, is defined
as consolidated net income before net interest expense, consolidated income
taxes and consolidated depreciation and amortization. Corporate EBITDA differs
from the term “EBITDA” as it is commonly used. Corporate EBITDA, as used in
this report, means “EBITDA” as that term is defined under our senior credit
facilities, which is generally consolidated net income before net interest
expense (other than interest expense relating to certain car rental fleet
financing), consolidated income taxes, consolidated depreciation (other than
depreciation related to the car rental fleet) and amortization and before
certain other items, in each case as more fully defined in the agreements
governing our senior credit facilities. The other items excluded in this calculation
include, but are not limited to: non-cash expenses and charges; extraordinary,
unusual or non-recurring gains or losses; gains or losses associated with the
sale or writedown of assets not in the ordinary course of business; certain
management fees paid to the Sponsors; and earnings to the extent of cash
dividends or distributions paid from non-controlled affiliates. Further, the
covenants in our senior credit facilities are calculated using Corporate EBITDA
for the most recent four fiscal quarters as a whole. As a result, the measure
can be disproportionately affected by a particularly strong or weak quarter.
Further, it may not be comparable to the measure for any subsequent
four-quarter period or for any complete fiscal year.
Management uses EBITDA and Corporate EBITDA as
performance and cash flow metrics for internal monitoring and planning
purposes, including the preparation of our annual operating budget and monthly
operating reviews, as well as to facilitate analysis of investment decisions.
In addition, both metrics are important to allow us to evaluate profitability
and make performance trend comparisons between us and our competitors. Further,
we believe EBITDA and Corporate
71
EBITDA are frequently used by securities analysts,
investors and other interested parties in the evaluation of companies in our
industries.
EBITDA is also used by management and investors to
evaluate our operating performance exclusive of financing costs and
depreciation policies. Further, because we have two business segments that are
financed differently and have different underlying depreciation
characteristics, EBITDA enables investors to isolate the effects on
profitability of operating metrics such as revenue, operating expenses and
selling, general and administrative expenses. In addition to its use to monitor
performance trends, EBITDA provides a comparative metric to management and
investors that is consistent across companies with different capital structures
and depreciation policies. This enables management and investors to compare our
performance on a consolidated basis and on a segment basis to that of our
peers. In addition, our management uses consolidated EBITDA as a proxy for cash
flow available to finance fleet expenditures and the costs of our capital structure
on a day-to-day basis so that we can more easily monitor our cash flows when a
full statement of cash flows is not available.
Corporate EBITDA also serves as an important measure
of our performance. Corporate EBITDA for our car rental segment enables us to
assess our operating performance inclusive of fleet management performance,
depreciation assumptions and the cost of financing our fleet. In addition,
Corporate EBITDA for our car rental segment allows us to compare our
performance, inclusive of fleet mix and financing decisions, to the performance
of our competitors. Since most of our competitors utilize asset-backed
fleet debt to finance fleet acquisitions, this measure is relevant for
evaluating our operating efficiency inclusive of our fleet acquisition and
utilization. For our equipment rental segment, Corporate EBITDA provides an
appropriate measure of performance because the investment in our equipment
fleet is longer-term in nature than for our car rental segment and, therefore,
Corporate EBITDA allows management to assess operating performance exclusive of
interim changes in depreciation assumptions. Further, unlike our car rental
segment, our equipment rental fleet is not financed through separate
securitization-based fleet financing facilities, but rather through our
corporate debt. Corporate EBITDA for our equipment rental segment is a key
measure used to make investment decisions because it enables us to evaluate
return on investments. For both segments, Corporate EBITDA provides a relevant
profitability metric for use in comparison of our performance against our
public peers, many of whom publicly disclose a comparable metric. In addition,
we believe that investors, analysts and rating agencies consider EBITDA and
Corporate EBITDA useful in measuring our ability to meet our debt service
obligations and make capital expenditures. Several of our material debt
covenants are based on financial ratios utilizing Corporate EBITDA and
non-compliance with those covenants could result in the requirement to
immediately repay all amounts outstanding under those agreements, which could
have a material adverse effect on our results of operations, financial position
and cash flows.
EBITDA and Corporate EBITDA are not recognized
measurements under GAAP. When evaluating our operating performance or
liquidity, investors should not consider EBITDA and Corporate EBITDA in
isolation of, or as a substitute for, measures of our financial performance and
liquidity as determined in accordance with GAAP, such as net income, operating
income or net cash provided by operating activities. EBITDA and Corporate
EBITDA may have material limitations as performance measures because they
exclude items that are necessary elements of our costs and operations. Because
other companies may calculate EBITDA and Corporate EBITDA differently than we
do, EBITDA may not be, and Corporate EBITDA as presented in this filing is not,
comparable to similarly titled measures reported by other companies.
The calculation of Pro forma Corporate EBITDA in the
table below reflects historical financial data except for car rental fleet
interest and non-cash amortization of debt costs for the Predecessor periods
presented which have been calculated on a pro forma basis to give effect to our
new
72
capital structure as if the fleet financings
associated with the Transactions had occurred on January 1, 2005. This
calculation may not be representative of the calculation of Corporate EBITDA
under our senior credit facilities for any period prior to December 31,
2006 because consolidated interest expense (as defined in the agreements
governing our senior credit facilities), a component of Corporate EBITDA, is
calculated on a transitional basis until such date. For periods prior to December 31,
2006, Corporate EBITDA under this transitional formula would have been higher
than the amount shown in the table below. Accordingly, we believe that the
presentation of this amount would be misleading to investors and have instead
provided what we believe to be a more meaningful calculation of Corporate
EBITDA.
Borrowings under our senior credit facilities are a
key source of our liquidity. Our ability to borrow under these senior credit
facilities depends upon, among other things, the maintenance of a sufficient
borrowing base and compliance with the financial ratio covenants based on
Corporate EBITDA set forth in the credit agreements for our senior credit
facilities. Our senior term loan facility requires us to maintain a specified
consolidated leverage ratio and consolidated interest expense coverage ratio
based on Corporate EBITDA, while our senior asset-based loan facility
requires that a specified consolidated leverage ratio and consolidated fixed
charge coverage ratio be maintained for periods during which there is less than
$200 million of available borrowing capacity under the senior asset-based
loan facility. These financial covenants became applicable to us beginning September 30,
2006, reflecting the four quarter period ending thereon. Failure to comply with
these financial ratio covenants would result in a default under the credit
agreements for our senior credit facilities and, absent a waiver or an
amendment from the lenders, permit the acceleration of all outstanding
borrowings under the senior credit facilities. As of December 31, 2006, we
performed the calculations associated with the above noted financial covenants
and determined that we are in compliance with such covenants.
As of December 31, 2006, Hertz had an aggregate
principal amount outstanding of $1,986.3 million pursuant to its senior term
loan facility and no borrowings outstanding under its senior asset-based
loan facility. For the year ended December 31, 2006, Hertz is required
under the senior term loan facility to have a consolidated leverage ratio of
not more than 6.25:1 and a consolidated interest expense coverage ratio of not
less than 1.50:1. In addition, under its senior asset-based loan
facility, if there is less than $200 million of available borrowing capacity
under that facility as of December 31, 2006, Hertz is required to have a
consolidated leverage ratio of not more than 6.25:1 and a consolidated fixed
charge coverage ratio of not less than 1:1 for the year then ended. Under the
senior term loan facility, for the year ended December 31, 2006, we had a
consolidated leverage ratio of approximately 3.5:1 and a consolidated interest
expense coverage ratio of approximately 3.2:1. Since we have maintained
sufficient borrowing capacity under our senior asset-based loan facility
as of December 31, 2006, and expect to maintain such capacity in the
future, the consolidated fixed charge coverage ratio was not deemed relevant
for presentation. For further information on the terms of Hertz’s senior credit
facilities, see Note 3 to the Notes to our consolidated financial statements
included in this Annual Report under the caption “Item 8—Financial Statements
and Supplementary Data.” We have a significant amount of debt. For a discussion
of the risks associated with our significant leverage, see “Item 1A—Risk
Factors—Risks Relating to Our Substantial Indebtedness.”
73
For purposes of consistency, we have revised our
calculation of Corporate EBITDA for 2005 and 2006 so that the identified
extraordinary, unusual or non-recurring gains or losses are consistent with
those used in the calculations of certain other non-GAAP measures. The
following table reconciles historical net income (loss) (i) on an actual
basis to Corporate EBITDA for the Successor year ended December 31, 2006,
(ii) on a pro forma basis, as it relates to car rental fleet interest and
non-cash amortization of debt costs, to Corporate EBITDA for the combined year
ended December 31, 2005, the Successor period ended December 31, 2005
and the Predecessor period ended December 20, 2005 and (iii) to
EBITDA for the Predecessor year ended December 31, 2004 (in millions of
dollars):
Successor
Combined
Successor
Predecessor
For the Periods From
Year ended
December 31,
Year ended
December 31,
December 21,
2005 to
December 31,
January 1,
2005 to
December 20,
Year ended
December 31,
2006
2005
2005
2005
2004
Net income (loss)(1)
$
115.9
$
350.0
$
(21.3
)
$
371.3
$
365.5
Depreciation and
amortization(2)
2,016.1
1,790.4
51.4
1,739.0
1,641.5
Interest, net of interest
income(1)(3)
900.7
500.0
25.8
474.2
384.4
Provision (benefit) for
taxes on income
68.0
179.1
(12.2
)
191.3
133.9
EBITDA
3,100.7
2,819.5
43.7
2,775.8
$
2,525.3
Adjustments:
Car rental fleet interest(4)
(400.0
)
(406.9
)
(11.7
)
(395.2
)
Car rental fleet
depreciation(5)
(1,479.6
)
(1,381.5
)
(37.4
)
(1,344.1
)
Non-cash expenses and
charges(6)
130.6
106.2
2.5
103.7
Extraordinary, unusual or
non-recurring gains or losses(7)
23.8
4.0
—
4.0
Sponsors’ fees
3.2
—
—
—
Pro forma Corporate EBITDA(8)
$
1,378.7
$
1,141.3
$
(2.9
)
$
1,144.2
(1)
For the year ended December 31,
2006, includes corporate audit fees of $0.1 million and $40.0 million ($26.0
million net of tax) of interest expense attributable to Hertz Holdings. For the
year ended December 31, 2006, the Successor period ended December 31,
2005, the Predecessor period ended December 20, 2005 and the year ended December 31,
2004, includes corporate minority interest of $16.7 million, $0.3 million,
$12.3 million and $3.2 million, respectively.
(2)
For the year ended December 31,
2006, the Successor period ended December 31, 2005, the Predecessor period
ended December 20, 2005 and the year ended December 31, 2004,
depreciation and amortization was $1,659.8 million, $42.6 million, $1,485.9
million and $1,365.3 million, respectively, in our car rental segment and
$350.3 million, $8.6 million, $248.2 million and $271.4 million, respectively,
in our equipment rental segment.
(3)
For the year ended December 31,
2006, the Successor period ended December 31, 2005, the Predecessor period
ended December 20, 2005 and the year ended
74
December 31, 2004,
interest, net of interest income was $424.1 million, $15.8 million, $349.2
million and $305.0 million, respectively, in our car rental segment and $140.0
million, $3.4 million, $86.4 million and $72.0 million, respectively, in our
equipment rental segment.
(4)
As defined in the
credit agreements governing our senior credit facilities, Corporate EBITDA
includes a reduction for certain car rental fleet related interest. For the
Predecessor period presented, car rental fleet interest has been calculated on
a pro forma basis to give effect to the U.S. and international fleet debt
financings entered into as part of the Transactions as if they had occurred on January 1,
2005. For the Successor periods presented, car rental fleet interest is based
on actual results.
(5)
As defined in the
credit agreements governing our senior credit facilities, Corporate EBITDA
includes a reduction for car rental fleet depreciation. For all periods
presented, car rental fleet depreciation does not vary from the historical
amounts.
(6)
For the year ended December 31,
2006, the Successor period ended December 31, 2005 and the Predecessor
period ended December 20, 2005, non-cash expenses and charges were
$73.0 million, $2.5 million and $92.4 million, respectively, in our car rental
segment and $(0.4) million, $0.0 million and $1.0 million, respectively, in our
equipment rental segment.
As defined in the credit agreements governing our
senior credit facilities, Corporate EBITDA excludes the impact of certain
non-cash expenses and charges. For the Predecessor period ended December 20,
2005, non-cash amortization of debt costs included in car rental fleet interest
has been calculated on a pro forma basis to give effect to the U.S. and
international fleet debt financings entered into as part of the Transactions as
if they had occurred on January 1, 2005. For the Successor periods
presented, non-cash amortization of debt costs included in car rental fleet
interest is based on actual results. The adjustments reflect the following (in
millions of dollars):
Corporate unrealized
losses on currency translation of Euro-denominated senior notes
19.2
—
—
—
Non-cash
amortization of debt costs included in car rental fleet interest
71.6
83.2
2.5
80.7
Non-cash
charges for workers’ compensation
1.0
12.5
—
12.5
Corporate non-cash
charges for pension
9.1
—
—
—
Corporate unrealized
loss on derivatives
2.5
—
—
—
Total
$
130.6
$
106.2
$
2.5
$
103.7
75
(7)
As defined in the
credit agreements governing our senior credit facilities, Corporate EBITDA
excludes the impact of extraordinary, unusual or non-recurring gains or losses
or charges or credits. The adjustments reflect the following (in millions of
dollars):
(8)
For the Predecessor
period presented, car rental fleet interest has been presented on a pro forma
basis to give effect to the U.S. and international fleet debt financings
entered into as part of the Transactions as if they had occurred on January 1,
2005 for all periods presented. For the Successor periods presented, car rental
fleet interest is based on actual results.
The following table reconciles historical net cash
provided by (used in) operating activities to EBITDA for the year ended December 31,
2006, the combined year ended December 31, 2005, the Successor period
ended December 31, 2005, the Predecessor period ended December 20,
2005 and the year ended December 31, 2004, respectively (in millions of
dollars):
Successor
Combined
Successor
Predecessor
For the Periods From
Year ended
December 31,
2006
Year ended
December 31,
2005
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Net cash provided by (used
in) operating activities
$
2,614.6
$
1,458.6
$
(277.5
)
$
1,736.1
$
2,251.4
Stock-based employee
compensation
(27.2
)
(10.5
)
—
(10.5
)
(5.6
)
Provision
for public liability and property damage
(169.1
)
(160.0
)
(1.9
)
(158.1
)
(153.1
)
Minority interest
(16.7
)
(12.6
)
(0.3
)
(12.3
)
(3.2
)
Deferred taxes on income
(30.4
)
423.7
12.2
411.5
(129.6
)
Payments of public liability
and property damage claims and expenses
192.5
163.8
7.9
155.9
178.7
Provision (benefit) for
taxes on income
68.0
179.1
(12.2
)
191.3
133.9
Interest expense, net of
interest income
900.7
500.0
25.8
474.2
384.4
Net changes in assets and
liabilities
(431.7
)
277.4
289.7
(12.3
)
(131.6
)
EBITDA
$
3,100.7
$
2,819.5
$
43.7
$
2,775.8
$
2,525.3
76
Year Ended December 31,
2006 Compared with Year Ended December 31, 2005 (Combined)
Revenues
Total revenues of $8,058.4 million for the year ended December 31,
2006 increased by 7.9% from $7,469.2 million for the year ended December 31,
2005.
Revenues from our car rental operations of $6,273.6
million for the year ended December 31, 2006 increased by $323.7 million,
or 5.4%, from $5,949.9 million for the year ended December 31, 2005. The
increase was primarily the result of a 1.1% increase in car rental volume
worldwide, a 2.7% increase in pricing worldwide, increases in airport
concession recovery and refueling fees, license and tax reimbursement fees and
the effects of foreign currency translation of approximately $36.4 million.
Revenues from our equipment rental operations of
$1,672.1 million for the year ended December 31, 2006 increased by $257.2
million, or 18.2%, from $1,414.9 million for the year ended December 31,
2005. The increase was primarily due to higher rental volume and improved
pricing in the United States and Canada and the effects of foreign currency
translation of approximately $18.9 million.
Revenues from all other
sources of $112.7 million for the year ended December 31, 2006 increased
by $8.3 million, or 7.9%, from $104.4 million for the year ended December 31,
2005, primarily due to the increase in car rental licensee revenue and the
effects of foreign currency translation.
Expenses
Total expenses of $7,857.8 million for the year ended December 31,
2006 increased by 13.4% from $6,927.5 million for the year ended December 31,
2005 and total expenses as a percentage of revenues increased to 97.5% for the
year ended December 31, 2006 compared with 92.7% for the year ended December 31,
2005.
Direct operating expenses of $4,476.0 million for the
year ended December 31, 2006 increased by $286.7 million, or 6.8%, from
$4,189.3 million for the year ended December 31, 2005. The increase was
the result of increases in personnel related expenses, fleet related expenses
and other direct operating expenses.
Personnel related expenses increased $21.7 million, or
1.4%. The increase primarily related to an increase in wages and the effects of
foreign currency translation of approximately $8.3 million, partly offset by a
decrease in benefits due to a decrease in the number of employees.
Fleet related expenses increased $69.2 million, or
7.1%. The majority of the increase primarily related to the increase in
worldwide rental volume and included increases in gasoline costs of $28.9
million, which also reflects the higher price of gasoline, vehicle damage and
maintenance expense of $25.1 million, vehicle excise tax of $5.4 million, self-insurance
expense of $4.1 million and the effects of foreign currency translation of
approximately $8.7 million.
Other direct operating expenses increased $195.8
million, or 12.0%. The majority of the increase related to the increase in
worldwide rental volume and included increases in concession fees in our car
rental operations of $35.2 million, commission fees of $21.7 million, facility
expenses of $21.4 million, customer service costs of $11.5 million and
guaranteed charge card fees of $10.7 million. Additionally, there were
increases in the amortization of other intangible assets of $59.4 million, the
cost of equipment and supplies sold of $24.7 million and the effects of foreign
currency translation of approximately $13.1 million.
Depreciation of revenue earning equipment for our car
rental operations of $1,479.6 million for the year ended December 31, 2006
increased by 7.1% from $1,381.5 million for the year ended December 31,
2005. The increase was primarily due to
higher depreciation costs for 2006 and 2007 model year program cars,
lower net proceeds received in excess of book value on the disposal of
77
used cars in the United
States and a $9.0 million increase in depreciation for our international car
rental operations due to increases in depreciation rates made during 2006 to
reflect changes in the estimated residual values of cars. This increase was
partly offset by a $3.7 million net reduction in depreciation in our domestic
car rental operations resulting from a decrease in depreciation rates effective
January 1, 2006 to reflect changes in the estimated residual values of
cars.
Depreciation of revenue earning equipment for our equipment rental
operations of $277.6 million for the year ended December 31, 2006
increased by 27.2% from $218.2 million for the year ended December 31,
2005 due an increase in the quantity of equipment operated and lower net
proceeds received in excess of book value on the disposal of used equipment in
the United States. This increase was partly offset by a $15.3 million and $3.1
million net reduction in depreciation for our United States and Canadian
operations combined and our French equipment rental operations, respectively,
resulting from decreases in depreciation rates during 2006 to reflect changes
in the estimated residual values of equipment.
Selling, general and administrative expenses of $723.9
million for the year ended December 31, 2006 increased by 13.4% from
$638.5 million for the year ended December 31, 2005. The increase was
primarily due to increases in administrative and sales promotion expenses.
The increase in administrative expenses was
primarily the result of an increase in consulting and legal fees of $23.6 million,
foreign currency transaction losses of $22.1 million associated with the
Euro-denominated debt and non-cash stock purchase and stock option compensation
charges of $16.7 million. The increase in sales promotion expenses was
primarily the result of increased sales commissions, salaries and incentive
compensation.
Interest expense, net of interest income, of $900.7
million for the year ended December 31, 2006 increased by 80.1% from
$500.0 million for the year ended December 31, 2005, primarily due to increases
in the weighted average interest rate and the weighted average debt
outstanding. The increase was partly offset by an increase in interest income.
The provision for taxes on income of $68.0 million for
the year ended December 31, 2006 decreased by 62.0% from $179.1 million
for the year ended December 31, 2005, primarily due to a decrease in
income before income taxes and minority interest for the year ended December 31,
2006 as compared to the year ended December 31, 2005 and a $31.3 million
provision relating to the repatriation of foreign earnings for the year ended December 31,
2005. The decrease was partly offset by the establishment of valuation
allowances of $9.8 million relating to the realization of deferred tax assets
in certain European countries and the establishment of certain federal and
state contingencies for the year ended December 31, 2006 and the reversal
of a valuation allowance on foreign tax credit carryforwards of $35.0 million
and favorable foreign tax adjustments of $5.3 million for the year ended December 31,
2005. The effective tax rate for the year ended December 31, 2006 was
33.9% as compared to 33.1% for the year ended December 31, 2005. See Note
8 to the Notes to our consolidated financial statements included in this
Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
Minority interest of $16.7
million for the year ended December 31, 2006 increased $4.1 million from
$12.6 million for the year ended December 31, 2005. The increase was due
to an increase in our majority-owned subsidiary Navigation Solutions, L.L.C.’s,
or “Navigation Solutions’,” net income in the year ended December 31,
2006. See Note 4 to the Notes to our consolidated financial statements included
in this
Annual Report
under the caption “Item 8—Financial Statements and Supplementary Data.”
Net Income
We had net income of $115.9
million for the year ended December 31, 2006, representing a decrease of
$234.1 million, or 66.9%, from $350.0 million for the year ended December 31,
2005. The decrease
78
in net income was primarily
due to the 80.1% increase in interest expense over the year ended December 31,
2005, as well as the net effect of other contributing factors noted above. The
impact of changes in exchange rates on net income was mitigated by the fact
that not only foreign revenues but also most foreign expenses were incurred in
local currencies.
Effects of Acquisition
Increased interest expense resulting from our higher
debt levels and increased depreciation and amortization expense resulting from
the revaluation of our tangible assets and the recognition of certain
identified intangible assets, all in connection with the Acquisition, had a
significant adverse impact on full year 2006 income before income taxes and
minority interest.
The
following table summarizes the purchase accounting effects of the Acquisition
on our results of operations for the year ended December 31, 2006 (in
millions of dollars):
Depreciation and amortization of tangible and
intangible assets:
Other intangible assets
$
61.2
Revenue earning equipment
13.8
Property and equipment
10.0
Accretion of revalued liabilities:
Discount on debt
8.8
Workers’ compensation and public liability and property damage
5.4
$
99.2
Year Ended December 31,
2005 (Combined) with Year Ended December 31, 2004
Revenues
Total revenues of $7,469.2 million for the year ended December 31,
2005 increased by 11.9% from $6,676.0 million for the year ended December 31,
2004.
Revenues from our car rental operations of $5,949.9
million for the year ended December 31, 2005 increased by $519.1 million,
or 9.6%, from $5,430.8 million for the year ended December 31, 2004. The
increase was primarily the result of a 4.1% increase in car rental volume
worldwide, a 0.2% increase in pricing worldwide, an increase in airport
concession recovery and refueling fees and the effects of foreign currency
translation of approximately $23.1 million.
Revenues from our equipment rental operations of
$1,414.9 million for the year ended December 31, 2005 increased by $252.9
million, or 21.8%, from $1,162.0 million for the year ended December 31,
2004. The increase was primarily due to higher rental volume and improved
pricing in the United States and Canada and the effects of foreign currency
translation of approximately $12.3 million.
Revenues from all other sources of $104.4 million for
the year ended December 31, 2005 increased by $21.2 million, or 25.5%,
from $83.2 million for the year ended December 31, 2004, primarily due to
the increase in car rental licensee revenue and the effects of foreign currency
translation.
Expenses
Total expenses of $6,927.5 million for the year ended
December 31, 2005 increased by 12.2% from $6,173.4 million for the year
ended December 31, 2004, principally due to the increase in revenues.
Total expenses as a percentage of revenues increased to 92.7% for the year
ended December 31, 2005 compared with 92.5% for the year ended
December 31, 2004.
79
Direct operating expenses of $4,189.3 million for the
year ended December 31, 2005 increased by $454.9 million (inclusive of
$22.1 million related to the effects of foreign currency translation), or
12.2%, from $3,734.4 million for the year ended December 31, 2004. The
increase was the result of increases in personnel related expenses, fleet
related expenses and other direct operating expenses.
Personnel related expenses increased $139.8 million,
or 9.7%. The increase primarily related to an increase in the number of
employees and higher health care costs.
Fleet related expenses increased $94.9 million, or
10.8%. The majority of the increase primarily related to the increase in
worldwide rental volume and included increases in gasoline costs of $49.3
million, which also reflects the higher price of gasoline, self-insurance
of $16.4 million and vehicle damage and maintenance expense of $9.1 million.
Other direct operating expenses increased $220.3
million, or 15.7%. The majority of the increase primarily related to the
increase in worldwide rental volume and included increases in commission fees
of $51.0 million, facility expenses of $49.1 million (which includes a gain in
2004 of $7.5 million from the condemnation of a car rental and support facility
in Florida), concession fees in our car rental operations of $25.9 million,
customer service costs of $17.5 million and guaranteed charge card fees of
$10.9 million. Additionally, there were increases in the cost of equipment sold
of $18.7 million, equipment rental cost of $10.0 million and the receipt in
2004 of $7.0 million for claims made by us on our insurance policies for
business interruption losses resulting from the terrorist attacks of September 11,
2001.
Depreciation of revenue earning equipment for our car
rental operations of $1,381.5 million for the year ended December 31, 2005
increased by 12.4% from $1,228.6 million for the year ended December 31,
2004. The increase was primarily due to the increase in the average number of
vehicles worldwide, higher cost of vehicles in the U.S., lower net proceeds
received in excess of book value on the disposal of vehicles and the effects of
foreign currency translation. This increase was partly offset by a $21.8
million net reduction in depreciation for our domestic car rental operations
resulting from a decrease in depreciation rates to reflect changes in the
estimated residual values of vehicles. Depreciation of revenue earning
equipment for our equipment rental operations of $218.2 million for the year
ended December 31, 2005 decreased by 7.0% from $234.7 million for the year
ended December 31, 2004 due to higher net proceeds received in excess of
book value on the disposal of used equipment in the United States, and a $13.2
million net reduction in depreciation resulting from the effects of changes in
depreciation rates of equipment in the U.S. and Canada, partly offset by an
increase in the quantity of equipment operated.
Selling, general and administrative expenses of $638.5
million for the year ended December 31, 2005 increased by 8.0% from $591.3
million for the year ended December 31, 2004. The increase was primarily
due to increases in administrative and sales promotion expenses and the effects
of foreign currency translation. The increases in administrative and sales
promotion expenses were primarily due to increases in salaries, commissions and
benefits relating to the improvement in earnings for the year ended December 31,
2005.
Interest expense, net of interest income, of $500.0
million for the year ended December 31, 2005 increased by 30.0% from
$384.4 million for the year ended December 31, 2004, primarily due to
increases in the weighted average debt outstanding, the weighted average
interest rate and $35.6 million of interest expense on the $1,185.0 million
Intercompany Note payable to Ford Holdings LLC relating to a dividend declared
and paid to Ford Holdings LLC on June 10, 2005. The increase was partly
offset by an increase in interest income.
The provision for taxes on income of $179.1 million
for the year ended December 31, 2005 increased by 33.8% from $133.9
million for the year ended December 31, 2004, primarily due to an increase
in income before income taxes and minority interest and a $31.3 million
provision relating to the
80
repatriation of foreign earnings for the year ended December 31,
2005, and net favorable tax adjustments in 2004 totaling $46.6 million,
principally relating to the evaluation of certain federal and foreign tax
accruals and foreign tax credits. The increase was partly offset by the
reversal of a valuation allowance on foreign tax credit carryforwards of $35.0
million and favorable foreign tax adjustments of $5.3 million. The effective
tax rate for the year ended December 31, 2005 was 33.1% as compared to
26.6% for the year ended December 31, 2004. See Notes 1 and 8 to the Notes
to our consolidated financial statements included in this
Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
Minority interest of $12.6
million for the year ended December 31, 2005 increased $9.4 million from
$3.2 million for the year ended December 31, 2004. The increase was due to
only two quarters of earnings being included in 2004 as we increased our
ownership interest in Navigation Solutions beginning in July 2004. See
Note 4 to the Notes to our consolidated financial statements included in this
Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
Net Income
We had net income of $350.0
million for the year ended December 31, 2005, representing a decrease of
$15.5 million, or 4.2%, from $365.5 million for the year ended December 31,
2004. The decrease in net income was primarily due to the one-time $31.3
million tax provision relating to the repatriation of foreign earnings, as well
as the net effect of other contributing factors noted above. The impact of
changes in exchange rates on net income was mitigated by the fact that not only
foreign revenues but also most foreign expenses were incurred in local
currencies.
Effects of Acquisition
The loss for the Successor
period ended December 31, 2005 relates to lower rental demand due to the
seasonality of the business and costs associated with the Transactions.
Increased interest expense resulting from our higher debt levels and increased
depreciation and amortization expense resulting from the revaluation of our
assets and the recognition of certain identified intangible assets, all in
connection with the Acquisition, had a significant adverse impact on full year
2006 income before income taxes and minority interest.
Liquidity and Capital Resources
As of December 31, 2006, we had cash and
equivalents of $674.5 million, a decrease of $169.4 million from December 31,
2005. As of December 31, 2006, we had $552.5 million of restricted cash to
be used for the purchase of revenue earning vehicles, the repayment of
outstanding indebtedness primarily under our ABS Program and to satisfy certain
of our self-insurance reserve requirements.
Our domestic and foreign operations are funded by cash
provided by operating activities and by extensive financing arrangements
maintained by us in the United States, Europe, Puerto Rico, Australia, New
Zealand, Canada and Brazil. Net cash provided by operating activities during
the year ended December 31, 2006 was $2,614.6 million, an increase of
$1,156.0 million from the year ended December 31, 2005. This increase was
primarily due to a decrease in year-over-year changes in our receivables and an
increase in year-over-year changes in our deferred taxes, partly offset by a
decrease in accrued taxes.
Our primary use of cash in investing activities is for
the acquisition of revenue earning equipment, which consists of cars and
equipment. Net cash used in investing activities during the year ended December 31,
2006 was $2,287.9 million, a decrease of $4,205.0 million from the year ended December 31,
2005. The decrease is primarily due to
the purchase of predecessor company stock in 2005 and a decrease in
revenue earning equipment expenditures, partly offset by a decrease in proceeds
from the disposal of revenue earning equipment and proceeds from the sale of
short-term
81
investments in 2005.
For the year ended December 31, 2006, our expenditures for revenue earning
equipment were $11,420.9 million, partially offset by proceeds from the
disposal of such equipment of $9,555.0 million. These assets are purchased by
us in accordance with the terms of programs negotiated with the car and
equipment manufacturers.
For the year ended December 31, 2006, our capital
expenditures for property and non-revenue earning equipment were $223.9
million. For the year ended December 31, 2006, we experienced a decreased
level of net expenditures for revenue earning equipment and property and non-revenue
earning equipment compared to the year ended December 31, 2005. This
decrease was primarily due to the change in fleet mix, a decrease in the
percentage of program cars purchased and an increase in the percentage of lower
cost non-program cars purchased for the year ended December 31,
2006. For 2007, we expect the level of net expenditures for revenue earning
equipment to be lower than 2006 and the level of expenditures for property and
non-revenue earning equipment to be similar to that of 2006. See “—Capital
Expenditures” below.
Our car rental and equipment rental operations are
seasonal businesses with decreased levels of business in the winter months and
heightened activity during the spring and summer. This is particularly true of
our airport car rental operations and our equipment rental operations. To
accommodate increased demand, we maintain a larger fleet by holding vehicles
and equipment and purchasing additional fleet which increases our financing
requirements in the second and third quarters of the year. These seasonal
financing needs are funded by increasing the utilization of our bank credit
facilities and the variable funding notes portion of our U.S. Fleet Debt
Facilities and, in past years, our commercial paper program. As business demand
moderates during the winter, we reduce our fleet accordingly and dispose of
vehicles and equipment. The disposal proceeds are used to reduce debt.
We are highly leveraged and a substantial portion of
our liquidity needs arise from debt service on indebtedness incurred in
connection with the Transactions and from the funding of our costs of
operations, working capital and capital expenditures.
As of December 31, 2006, we had approximately
$12,276.2 million of total indebtedness outstanding. Cash paid for interest
during the year ended December 31, 2006, was $681.5 million, net of
amounts capitalized.
We rely significantly on asset-backed financing
to purchase cars for our domestic and international car rental fleets. For
further information concerning our asset-backed financing programs, see “—U.S.
Fleet Debt” and “—International Fleet Debt” below. For a discussion of risks
related to our reliance on asset-backed financing to purchase cars, see “Item
1A—Risk Factors—Risks Related to Our Business—Our reliance on asset-backed
financing to purchase cars subjects us to a number of risks, many of which are
beyond our control.”
Also, substantially all of our revenue earning
equipment and certain related assets are owned by special purpose entities, or
are subject to liens in favor of our lenders under the Senior ABL Facility, the
ABS Program, the International Fleet Debt Facilities or the fleet financing
facility relating to our car rental fleet in Hawaii, Kansas, Puerto Rico and
St. Thomas, the U.S. Virgin Islands, all as described in more detail below.
Substantially all our other assets in the United States are also subject to
liens in favor of our lenders under the Senior Credit Facilities, and
substantially all of our other assets outside the United States are (with
certain limited exceptions) subject to liens in favor of our lenders under the
International Fleet Debt Facilities or (in the case of our Canadian HERC
business) the Senior ABL Facility. None of such assets will be available to
satisfy the claims of our general creditors.
We believe that cash generated
from operations, together with amounts available under the Senior Credit
Facilities, asset-backed financing and other available financing
arrangements will be adequate to permit us to meet our debt service
obligations, ongoing costs of operations, working capital needs
82
and capital expenditure
requirements for the foreseeable future. Our future financial and operating
performance, ability to service or refinance our debt and ability to comply
with covenants and restrictions contained in our debt agreements will be
subject to future economic conditions and to financial, business and other
factors, many of which are beyond our control. See “Cautionary Note Regarding
Forward-Looking Statements” and “Item 1A—Risk Factors.”
Financing
Senior Credit
Facilities
Senior Term
Facility.
In
connection with the Acquisition, Hertz entered into a credit agreement with
respect to its Senior Term Facility with Deutsche Bank AG, New York Branch as
administrative agent and collateral agent, Lehman Commercial Paper Inc. as
syndication agent, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated as documentation agent, and the other financial institutions
party thereto from time to time. The facility consisted of a $2,000.0 million
secured term loan facility providing for loans denominated in U.S. dollars, which
included a delayed draw facility of $293.0 million. In addition, there is a
pre-funded synthetic letter of credit facility in an aggregate principal amount
of $250.0 million. On the Closing Date, Hertz utilized $1,707.0 million of the
Senior Term Facility and $182.2 million in letters of credit. As of December 31,
2006, we had $1,947.9 million in borrowings outstanding under this facility,
which is net of a discount of $38.4 million and had issued $238.9 million in
letters of credit. The term loan facility and the synthetic letter of credit
facility will mature on December 21, 2012.
Senior
ABL Facility.
Hertz,
Hertz Equipment Rental Corporation and certain other subsidiaries of Hertz also
entered into a credit agreement with respect to the Senior ABL Facility with
Deutsche Bank AG, New York Branch as administrative agent and collateral agent,
Deutsche Bank AG, Canada Branch as Canadian Agent and Canadian collateral
agent, Lehman Commercial Paper Inc. as syndication agent, Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated as
documentation agent and the financial institutions party thereto from time to
time. This facility provided (subject to availability under a borrowing base)
for aggregate maximum borrowings of $1,600.0 million (which was increased in
February 2007 to $1,800.0 million) under a revolving loan facility
providing for loans denominated in U.S. dollars, Canadian dollars, Euros and
Pounds Sterling. Up to $200.0 million of the revolving loan facility is
available for the issuance of letters of credit. Hertz and Hertz Equipment
Rental Corporation are the U.S. borrowers under the Senior ABL Facility and
Matthews Equipment Limited and its subsidiary Western Shut-Down (1995) Ltd. are
the Canadian borrowers under the Senior ABL Facility. At December 31,
2006, net of a discount of $22.2 million, Hertz and Matthews Equipment Limited
collectively had no borrowings outstanding under this facility and issued $18.2
million in letters of credit. The Senior ABL Facility will mature on December 21,
2010.
Hertz’s obligations under the Senior Term Facility and
the Senior ABL Facility are guaranteed by Hertz Investors, Inc., its
immediate parent and most of its direct and indirect domestic subsidiaries
(subject to certain exceptions, including for subsidiaries involved in the U.S.
Fleet Debt Facility and similar special purpose financings), though HERC does
not guarantee our obligations under the Senior ABL Facility because it is a
borrower under that facility. In addition, the obligations of the Canadian
borrowers under the Senior ABL Facility are guaranteed by their respective
subsidiaries, if any, subject to limited exceptions. The lenders under each of
the Senior Term Facility and the Senior ABL Facility have received a security
interest in substantially all of the tangible and intangible assets of the
borrowers and guarantors under those facilities, including pledges of the stock
of certain of their respective subsidiaries, subject in each case to certain
exceptions (including in respect of the U.S. Fleet Debt, the International
Fleet Debt and, in the case of the Senior ABL Facility, other secured fleet
financing.) Consequently, these assets will not be available to satisfy the
claims of our general creditors.
83
The Senior Credit Facilities contain a number of
covenants that, among other things, limit or restrict the ability of the
borrowers and the guarantors to dispose of assets, incur additional
indebtedness, incur guarantee obligations, prepay other indebtedness, make
dividends and other restricted payments, create liens, make investments, make
acquisitions, engage in mergers, change the nature of their business, make
capital expenditures, or engage in certain transactions with affiliates. Under
the Senior Term Facility, the borrowers are subject to financial covenants,
including a requirement to maintain a specified debt to Corporate EBITDA leverage
ratio and a specified Corporate EBITDA to interest expense coverage ratio for
specified periods (the requirements for both of these ratios vary throughout
the term of the loan.) Also, under the Senior ABL Facility, if the borrowers
fail to maintain a specified minimum level of borrowing capacity, they will
then be subject to financial covenants under such facility, including a
specified debt to Corporate EBITDA leverage ratio (the ratio varies throughout
the term of the loan) and a specified Corporate EBITDA to fixed charges
coverage ratio of one to one. Failure to comply with the financial covenants
under the Senior Credit Facilities would result in a default under the credit
agreements governing our Senior Credit Facilities and, absent a waiver or an
amendment from our lenders, permit the acceleration of all outstanding
borrowings under the Senior Credit Facilities. As of December 31, 2006, we
performed the calculations associated with the above noted financial covenants
and determined that we were in compliance with such financial covenants. The
Senior Credit Facilities are subject to certain mandatory prepayment
requirements and provide for customary events of default.
On June 30, 2006, we entered into amendments to
each of our Senior Term Facility and Senior ABL Facility. The amendments
provide, among other things, for additional capacity under the covenants in
these credit facilities to enter into certain sale and leaseback transactions,
to pay dividends and, in the case of the amendment to the Senior Term Facility,
to make investments. These amendments also have the effect of reducing the
restrictions in the Senior Credit Facilities on Hertz’s ability to provide cash
to Hertz Holdings (whether in the form of a loan or a dividend) that would
enable Hertz Holdings to service its indebtedness. The amendment to the Senior
Term Facility also permits us to use proceeds of the unused portion of the
$293.0 million delayed draw facility to repay borrowings outstanding under the
Senior ABL Facility, in addition to repaying certain of our other outstanding
indebtedness. As previously noted, on July 10, 2006, the remaining $208.1
million of the delayed draw facility was drawn down to pay down the equivalent
amount of borrowings outstanding under the Senior ABL Facility.
On February 9, 2007, Hertz entered into an
amendment to its Senior Term Facility. The amendment was entered into for the
purpose of (i) lowering the interest rates payable on the Senior Term
Facility by up to 50 basis points from the interest rates previously payable
thereunder, and revising financial ratio requirements for specific interest
rate levels; (ii) eliminating certain mandatory prepayment requirements; (iii) increasing
the amounts of certain other types of indebtedness that Hertz and its
subsidiaries may incur outside of the Senior Term Facility; (iv) permitting
certain additional asset dispositions and sale and leaseback transactions; and (v) effecting
certain technical and administrative changes to the Senior Term Facility.
On February 15, 2007,
Hertz, Hertz Equipment Rental Corporation and certain other subsidiaries
entered into an amendment to their Senior ABL Facility. The amendment was
entered into for the purpose of (i) lowering the interest rates payble on
the Senior ABL Facility by up to 25 basis points from the interest rates
previously payable thereunder, and revising financial ratio requirements for
specific interest rate levels; (ii) increasing the availability under the
Senior ABL Facility from $1,600 million to $1,800 million; (iii) extending
the term of the commitments under the Senior ABL Facility to February 15,
2012; (iv) increasing the amounts of certain other types of indebtedness
that the borrowers and their subsidiaries may incur outside of the Senior ABL
Facility; (iv) permitting certain additional asset dispositions and sale
and leaseback transactions; and (v) effecting certain technical and
administrative changes to the Senior ABL Facility.
84
Senior Notes and Senior Subordinated Notes
In connection with the
Acquisition, CCMG Acquisition Corporation issued the Senior Notes and the
Senior Subordinated Notes under separate indentures between CCMG Acquisition
Corporation and Wells Fargo Bank, National Association, as trustee. Hertz and
the guarantors entered into supplemental indentures, dated as of the Closing
Date, pursuant to which Hertz assumed the obligations of CCMG Acquisition
Corporation under the Senior Notes, the Senior Subordinated Notes and the
respective indentures, and the guarantors issued the related guarantees. CCMG
Acquisition Corporation subsequently merged with and into Hertz, with Hertz as
the surviving entity.
As of December 31, 2006,
$2,097.0 million and $600.0 million in borrowings were outstanding under the
Senior Notes and Senior Subordinated Notes, respectively.
Prior to October 1, 2006, our Senior
Euro Notes were not designated as a net investment hedge of our
Euro-denominated net investments in our foreign operations. For the nine months
ended September 30, 2006, we incurred unrealized exchange transaction
losses of $19.2 million resulting from the translation of these
Euro-denominated notes into the U.S. dollar, which are recorded in our
consolidated statement of operations in “Selling, general and administrative”
expenses. On October 1, 2006, we designated our Senior Euro Notes as an
effective net investment hedge of our Euro-denominated net investment in our
foreign operations. As a result of this net investment hedge designation, as of
December 31, 2006, $7.1 million of losses, which is net of tax of $4.6
million, attributable to the translation of our Senior Euro Notes into the U.S.
dollar, are recorded in our consolidated balance sheet in “Accumulated other
comprehensive income (loss).” The Senior Notes will mature on January 1,
2014, and the Senior Subordinated Notes will mature on January 1, 2016.
The Senior Dollar Notes bear interest at a rate per annum of 8.875%, the Senior
Euro Notes bear interest at a rate per annum of 7.875% and the Senior
Subordinated Notes bear interest at a rate per annum of 10.5%. Hertz’s
obligations under the indentures are guaranteed by each of its direct and
indirect domestic subsidiaries that is a guarantor under the Senior Term
Facility.
Both the indenture for the
Senior Notes and the indenture for the Senior Subordinated Notes contain
covenants that, among other things, limit the ability of Hertz and its
restricted subsidiaries, described in the respective indentures, to incur more
debt, pay dividends, redeem stock or make other distributions, make
investments, create liens, transfer or sell assets, merge or consolidate and
enter into certain transactions with Hertz’s affiliates. The indenture for the
Senior Subordinated Notes also contains subordination provisions and
limitations on the types of senior subordinated debt that may be incurred. The
indentures also contain certain mandatory and optional prepayment or redemption
provisions and provide for customary events of default.
On January 12, 2007,
Hertz completed exchange offers for the outstanding Senior Notes and Senior
Subordinated Notes whereby over 99% of the outstanding notes were exchanged for
a like principal amount of new notes with identical terms that were registered
under the Securities Act of 1933 pursuant to a registration statement on Form S-4.
Fleet Financing
U.S.
Fleet Debt.
In
connection with the Acquisition, Hertz Vehicle Financing LLC, or “HVF,” a
bankruptcy-remote special purpose entity wholly owned by Hertz, entered
into an amended and restated base indenture, or the “ABS Indenture,” dated as
of the Closing Date, with BNY Midwest Trust Company as trustee, and a number of
related supplements to the ABS Indenture, each dated as of the Closing Date,
with BNY Midwest Trust Company as trustee and securities intermediary, or,
collectively, the “ABS Supplement.” On the Closing Date, HVF, as issuer, issued
approximately $4,300.0 million of new medium term asset-backed notes
consisting of 11 classes of notes in two series under the ABS Supplement. HVF
also issued approximately $1,500.0 million of variable funding notes in two
series, none of which were funded at closing. As of December 31, 2006,
$4,299.9 million, net of a $0.1 million discount, in medium term notes were
outstanding and no aggregate borrowings were outstanding in the form of
variable funding notes.
85
Each class of notes matures three, four or five years
from the Closing Date. The variable funding notes will be funded through the
bank multi seller commercial paper market. The assets of HVF, including the
U.S. car rental fleet owned by HVF and certain related assets, collateralize
the U.S. Fleet Debt and Pre-Acquisition ABS Notes. Consequently, these assets
will not be available to satisfy the claims of our general creditors.
In connection with the Acquisition and the issuance of
$3,550.0 million of floating rate U.S. Fleet Debt, HVF and Hertz entered into
seven interest rate swap agreements, or the “HVF Swaps,” effective December 21,
2005, which qualify as cash flow hedging instruments in accordance with SFAS
133 “Accounting for Derivative Instruments and Hedging Activities.” These
agreements mature at various terms, in connection with the scheduled maturity
of the associated debt obligations, through November 25, 2011. Under these
agreements, HVF pays monthly interest at a fixed rate of 4.5% per annum in exchange
for monthly amounts at one-month LIBOR, effectively transforming the floating
rate U.S. Fleet Debt to fixed rate obligations. As of December 31, 2006
and December 31, 2005, the fair value of the HVF Swaps were $50.6 million
and $37.0 million, respectively, which are reflected in our consolidated
balance sheet in “Prepaid expenses and other assets.” For the year ended December 31,
2006, we recorded a benefit of $1.0 million in our consolidated statement of
operations, in “Interest, net of interest income,” associated with previously
recognized ineffectiveness of the HVF Swaps.
HVF is subject to numerous restrictive covenants under
the ABS Indenture and the other agreements governing the U.S. Fleet Debt,
including restrictive covenants with respect to liens, indebtedness, benefit
plans, mergers, disposition of assets, acquisition of assets, dividends,
officers’ compensation, investments, agreements, the types of business it may
conduct and other customary covenants for a bankruptcy-remote special
purpose entity. The U.S. Fleet Debt is subject to events of default and
amortization events that are customary in nature for U.S. rental car asset-backed
securitizations of this type. The occurrence of an amortization event or event
of default could result in the acceleration of principal of the notes and a
liquidation of the U.S. car rental fleet.
International
Fleet Debt.
In connection with the Acquisition,
Hertz International, Ltd., or “HIL,” a Delaware corporation organized as a
foreign subsidiary holding company and a direct subsidiary of Hertz, and
certain of its subsidiaries (all of which are organized outside the United
States), together with certain bankruptcy-remote special purpose entities
(whether organized as HIL’s subsidiaries or as non-affiliated “orphan”
companies), or “SPEs,” entered into revolving bridge loan facilities providing
commitments to lend, in various currencies, up to an aggregate foreign currency
equivalent of approximately $3,197.0 million (calculated as of December 31,
2006), subject to borrowing bases comprised of rental vehicles and related
assets of certain of HIL’s subsidiaries (all of which are organized outside the
United States) or one or more SPEs, as the case may be, and rental equipment
and related assets of certain of HIL’s subsidiaries organized outside North
America or one or more SPEs, as the case may be. As of December 31, 2006,
the foreign currency equivalent of $1,954.6 million in borrowings was
outstanding under these facilities, net of a $4.4 million discount. These
facilities are referred to collectively as the “International Fleet Debt
Facilities.”
The International Fleet Debt Facilities contain a
number of covenants (including, without limitation, covenants customary for
transactions similar to the International Fleet Debt Facilities) that, among
other things, limit or restrict the ability of HIL, the borrowers and the other
subsidiaries of HIL to dispose of assets, incur additional indebtedness, incur
guarantee obligations, create liens, make investments, make acquisitions,
engage in mergers, make negative pledges, change the nature of their business
or engage in certain transactions with affiliates. In addition, HIL is
restricted from making dividends and other restricted payments (which may
include payments of intercompany indebtedness) in an amount greater than
€
100
million plus a specified excess cash flow amount calculated by reference to
excess cash flow in earlier periods. Subject to certain exceptions, until the
later of one year from the Closing Date and such time as 50% of the commitments
under the
86
International Fleet Debt Facilities as of the closing
of the Acquisition have been replaced by permanent take-out international asset-based
facilities, the specified excess cash flow amount will be zero. Thereafter,
this specified excess cash flow amount will be between 50% and 100% of
cumulative excess cash flow based on the percentage of the International Fleet
Debt Facilities that have been replaced by permanent take-out international
asset-based facilities. As a result of the contractual restrictions on
HIL’s ability to pay dividends to Hertz as of December 31, 2006, the restricted
net assets of our consolidated subsidiaries exceeded 25% of our total
consolidated net assets.
The subsidiaries conducting the car rental business in
certain European jurisdictions may, at their option, continue to engage in
capital lease financings relating to revenue earning equipment outside the
International Fleet Debt Facilities. As of December 31, 2006, there were
$33.2 million of capital lease financings outstanding. These capital lease
financings are included in the International Fleet Debt total.
In May 2006, in connection with the forecasted
issuance of the permanent take-out international asset-based facilities,
HIL purchased two swaptions for
€
3.3 million, to protect
itself from interest rate increases. These swaptions give HIL the right, but
not the obligation, to enter into three year interest rate swaps, based on a
total notional amount of
€
600 million at an interest rate of 4.155%. As
of December 31, 2006, the fair value of the swaptions was
€
1.3
million (or $1.7 million), which is reflected in our consolidated balance sheet in “Prepaid expenses and other assets.”
During the year ended December 31, 2006, the fair value adjustment related
to these swaps was a loss of $2.6 million, which was recorded in our
consolidated statement of operations in “Selling, general and administrative”
expenses. The swaptions were renewed in 2007 prior to their scheduled
expiration date of March 15, 2007 and now expire on September 5,
2007. See Note 16 to the Notes to our consolidated financial statements
included in this Annual Report under the caption “Item 8—Financial Statements
and Supplementary Data.”
On March 21, 2007, certain amendments to the
International Fleet Debt Facilities were entered into for the purpose of, among
other things, extending the dates when margins on the affected faciilties are
scheduled to step up. See Note 16—Subsequent Events.
Fleet
Financing Facility.
On
September 29, 2006, Hertz and PUERTO RICANCARS, INC., a Puerto Rican
corporation and wholly owned indirect subsidiary of Hertz, or “PR Cars,”
entered into a credit agreement to finance the acquisition of Hertz’s and/or PR
Cars’ fleet in Hawaii, Kansas, Puerto Rico and St. Thomas, the U.S. Virgin
Islands, or the “Fleet Financing Facility,” with the several banks and other
financial institutions from time to time party thereto as lenders, GELCO
Corporation d.b.a. GE Fleet Services, or the “Fleet Financing Agent,” as
administrative agent, as collateral agent for collateral owned by Hertz and as
collateral agent for collateral owned by PR Cars. Affiliates of Merrill Lynch &
Co. are lenders under the Fleet Financing Facility.
The Fleet Financing Facility provides (subject to
availability under a borrowing base) a revolving credit facility of up to
$275.0 million to Hertz and PR Cars. On September 29, 2006, Hertz borrowed
$124.0 million under this facility to refinance other debt. The borrowing base
formula is subject to downward adjustment upon the occurrence of certain events
and (in certain other instances) at the permitted discretion of the Fleet
Financing Agent. As of December 31, 2006, Hertz and PR Cars had $144.9
million (net of a $2.1 million discount) and $21.0 million, respectively, of
borrowings outstanding.
The Fleet Financing Facility will mature on December 21,
2011, but Hertz and PR Cars may terminate or reduce the commitments of the
lenders thereunder at any time. The Fleet Financing Facility is subject to
mandatory prepayment in the amount by which outstanding extensions of credit to
Hertz or PR Cars exceed the lesser of the Hertz or PR Cars borrowing base, as
applicable, and the commitments then in effect.
87
The obligations of each of the borrowers under the
Fleet Financing Facility are guaranteed by each of Hertz’s direct and indirect
domestic subsidiaries (other than subsidiaries whose only material assets
consist of securities and debt of foreign subsidiaries and related assets,
subsidiaries involved in the ABS Program or other similar special purpose
financings, subsidiaries with minority ownership positions, certain
subsidiaries of foreign subsidiaries and certain immaterial subsidiaries). In
addition, the obligations of PR Cars are guaranteed by Hertz. The obligations
of Hertz under the Fleet Financing Facility and the other loan documents,
including, without limitation, its guarantee of PR Cars’ obligations under the
Fleet Financing Facility, are secured by security interests in Hertz’s rental car
fleet in Hawaii and by certain assets related to Hertz’s rental car fleet in
Hawaii and Kansas, including, without limitation, manufacturer repurchase
program agreements. PR Cars’ obligations under the Fleet Financing Facility and
the other loan documents are secured by security interests in PR Cars’ rental
car fleet in Puerto Rico and St. Thomas, U.S. Virgin Islands and by certain
assets related thereto.
At the applicable borrower’s election, the interest
rates per annum applicable to the loans under the Fleet Financing Facility will
be based on a fluctuating rate of interest measured by reference to either (1) LIBOR
plus a borrowing margin of 125 basis points or (2) an alternate base rate
of the prime rate plus a borrowing margin of 25 basis points. As of December 31,
2006, the average interest rate was 6.6% (LIBOR based).
The Fleet Financing Facility contains a number of
covenants that, among other things, limit or restrict the ability of the
borrowers and their subsidiaries to create liens, dispose of assets, engage in
mergers, enter into agreements which restrict liens on the Fleet Financing
Facility collateral or Hertz’s rental car fleet in Kansas or change the nature
of their business.
During the fourth quarter of
2006, certain of the documents relating to the Fleet Financing Facility were
amended to make certain technical and administrative changes.
Hertz Holdings Loan
Facility
On June 30, 2006, Hertz
Holdings entered into a loan facility with Deutsche Bank, AG, New York Branch,
Lehman Commercial Paper Inc., Merrill Lynch Capital Corporation, Goldman Sachs
Credit Partners L.P., JPMorgan Chase Bank, N.A. and Morgan Stanley Senior
Funding, Inc. or affiliates thereof, providing for a loan of $1.0 billion,
or the “Hertz Holdings Loan Facility,” for the purpose of paying a special cash
dividend to the holders of its common stock and paying fees and expenses
related to the facility. The Hertz Holdings Loan Facility was repaid in full
with the proceeds of our initial public offering, and the restrictive covenants
contained therein were terminated.
Pre-Acquisition
Financing
As of December 31, 2006, we had approximately
$633.5 million (net of a $5.5 million discount) outstanding in pre-Acquisition
promissory notes issued under three separate indentures at an average interest
rate of 7.2%. These pre-Acquisition promissory notes have maturities ranging
from 2007 to 2028.
As of December 31, 2006, we had approximately
€
7.6
million (or $10.0 million) outstanding in pre-Acquisition Euro-denominated
medium term notes, in connection with which we entered into an interest rate
swap agreement on December 21, 2005, effective January 16, 2006 and
maturing on July 16, 2007. The purpose of this interest rate swap is to
lock in the interest cash outflows at a fixed rate of 4.1% on the variable rate
Euro-denominated medium term notes. Funds sufficient to repay all obligations
associated with the remaining
€
7.6 million of
Euro-denominated medium term notes at maturity have been placed in escrow for
satisfaction of these obligations.
88
We also had outstanding as of December 31,
2006 approximately $545.3 million in borrowings, net of a $10.5 million
discount, consisting of pre-Acquisition ABS Notes with an average interest rate
of 3.2%. These pre-Acquisition ABS Notes have maturities ranging from 2007 to
2009. See “U.S. Fleet Debt” for a discussion of the collateralization of the
pre-Acquisition ABS Notes.
Credit Facilities
As of December 31,
2006, the following credit facilities were available for the use of Hertz and
its subsidiaries:
·
The
Senior Term Facility had $11.1 million available under the letter of credit
facility. No amounts were available to refinance certain existing debt under
the delayed draw facility.
·
The
Senior ABL Facility had the foreign currency equivalent of approximately
$1,600.0 million of remaining capacity, all of which was available under the
borrowing base limitation and $181.8 million of which was available under the
letter of credit facility sublimit.
·
The
International Fleet Debt Facilities had the foreign currency equivalent of
approximately $1,236.4 million of remaining capacity and $231.4 million
available under the borrowing base limitation.
·
The
U.S. Fleet Debt had approximately $1,500.0 million of remaining capacity and
$34.3 million available under the borrowing base limitation. No additional
amounts were available under the letter of credit facility.
·
The
Fleet Financing Facility had approximately $107.0 million of remaining capacity
and $16.5 million available under the borrowing base limitation.
As of December 31, 2006,
substantially all of our assets are pledged under one or more of the facilities
noted above. We are currently in compliance with all of the covenants contained
in the various facilities noted above that are currently applicable to us.
Contractual Obligations
The
following table details the contractual cash obligations for debt and related
interest payable, operating leases and concession agreements and other purchase
obligations as of December 31, 2006 (in millions of dollars):
Payments Due by Period
Total
2007
2008 to
2009
2010 to
2011
After 2011
Debt(1)
$
12,359.4
$
2,543.2
$
1,863.2
$
3,045.0
$
4,908.0
Interest on debt(2)
3,504.6
737.2
1,149.7
850.1
767.6
Operating leases and
concession agreements(3)
1,740.2
385.2
502.2
269.9
582.9
Purchase
obligations(4)
5,699.8
5,595.1
104.1
0.6
—
Total
$
23,304.0
$
9,260.7
$
3,619.2
$
4,165.6
$
6,258.5
(1)
Amounts represent
aggregate debt obligations included in “Debt” in our consolidated balance sheet
and include $2,162.6 million of commercial paper and other short-term borrowings.
These amounts exclude estimated payments under interest rate swap agreements.
See Note 3 to the Notes to our consolidated financial statements included in
this Annual Report under the caption “Item 8—Financial Statements and
Supplementary Data.”
(2)
Amounts represent the
estimated interest payments based on the principal amounts, minimum non-cancelable
maturity dates and applicable interest rates on the debt at December 31,
2006.
89
The minimum non-cancelable
obligations under the International Fleet Debt, Senior ABL Facility and the
Fleet Financing Facility matured between January and March 2007.
While there was no requirement to do so, these obligations were subsequently
renewed.
(3)
Includes obligations
under various concession agreements, which provide for payment of rents and a
percentage of revenue with a guaranteed minimum, and lease agreements for real
estate, revenue earning equipment and office and computer equipment. Such
obligations are reflected to the extent of their minimum non-cancelable terms.
See Note 9 to the Notes to our consolidated financial statements included in
this Annual Report under the caption “Item 8—Financial Statements and
Supplementary Data.”
(4)
Purchase
obligations represent agreements to purchase goods or services that are legally
binding on us and that specify all significant terms, including fixed or
minimum quantities; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Only the minimum non-cancelable portion
of purchase agreements and related cancellation penalties are included as
obligations. In the case of contracts, which state minimum quantities of goods
or services, amounts reflect only the stipulated minimums; all other contracts
reflect estimated amounts. Of the total purchase obligations as of December 31,
2006, $5,499.0 million represent fleet purchases where contracts have been
signed or are pending with committed orders under the terms of such
arrangements. We do not regard our employment relationships with our employees
as “agreements to purchase services” for these purposes.
Other Factors
Goodwill and Other
Intangible Assets Following the Acquisition
We have recognized a
significant amount of goodwill and other intangible assets in connection with
the Acquisition. We perform an impairment analysis with respect to our goodwill
and indefinite-lived intangible assets at least annually, or more
frequently if changes in circumstances indicate that the carrying amount of the
goodwill or other intangible assets may not be recoverable. If we identify an
impairment in goodwill or other intangible assets we may be required to take a
charge that could negatively impact our future earnings.
Foreign Currency
Provisions are not made for
U.S. income taxes on undistributed earnings of foreign subsidiaries that are
intended to be indefinitely reinvested outside the United States or are
expected to be remitted free of taxes. Foreign operations have been financed to
a substantial extent through loans from local lending sources in the currency
of the countries in which such operations are conducted. Car rental operations
in foreign countries are, from time to time, subject to governmental
regulations imposing varying degrees of currency restrictions. Currency
restrictions and other regulations historically have not had a material impact
on our operations as a whole.
90
Capital Expenditures
The table
below shows revenue earning equipment and property and equipment capital
expenditures and related disposal proceeds received by quarter for 2006, 2005
and 2004 (in millions of dollars):
Revenue Earning Equipment
Property and Equipment
Capital
Expenditures
Disposal
Proceeds
Net Capital
Expenditures
(Proceeds)
Capital
Expenditures
Disposal
Proceeds
Net Capital
Expenditures
2006
Successor
First Quarter
$
3,862.1
$
(2,591.3
)
$
1,270.8
$
64.7
$
(19.8
)
$
44.9
Second Quarter
3,678.2
(2,308.2
)
1,370.0
65.9
(8.7
)
57.2
Third Quarter
1,814.5
(2,099.0
)
(284.5
)
50.5
(19.3
)
31.2
Fourth Quarter
2,066.1
(2,556.5
)
(490.4
)
42.8
(16.3
)
26.5
Total Year
$
11,420.9
$
(9,555.0
)
$
1,865.9
$
223.9
$
(64.1
)
$
159.8
2005
Predecessor
First Quarter
$
3,600.2
$
(2,307.4
)
$
1,292.8
$
81.3
$
(9.0
)
$
72.3
Second Quarter
4,040.4
(2,304.3
)
1,736.1
105.5
(21.3
)
84.2
Third Quarter
2,377.5
(2,579.5
)
(202.0
)
92.9
(19.0
)
73.9
Fourth Quarter (Oct. 1-Dec. 20, 2005)
2,168.1
(2,915.1
)
(747.0
)
54.8
(23.3
)
31.5
Successor
Fourth Quarter (Dec. 21-Dec. 31,
2005)
234.8
(199.7
)
35.1
8.5
(1.2
)
7.3
Total Year
$
12,421.0
$
(10,306.0
)
$
2,115.0
$
343.0
$
(73.8
)
$
269.2
2004
Predecessor
First Quarter
$
2,916.1
$
(1,860.7
)
$
1,055.4
$
61.2
$
(11.7
)
$
49.5
Second Quarter
3,804.1
(1,921.2
)
1,882.9
82.8
(20.9
)
61.9
Third Quarter
2,179.0
(2,321.8
)
(142.8
)
74.6
(19.4
)
55.2
Fourth Quarter
2,410.9
(2,637.2
)
(226.3
)
67.8
(7.3
)
60.5
Total Year
$
11,310.1
$
(8,740.9
)
$
2,569.2
$
286.4
$
(59.3
)
$
227.1
Revenue earning equipment expenditures in our car
rental operations were $10,545.7 million, $11,493.9 million and $10,665.4
million for the years ended December 31, 2006, 2005 and 2004,
respectively. Revenue earning equipment expenditures in our equipment rental
operations were $875.2 million, $927.1 million and $644.7 million for the years
ended December 31, 2006, 2005 and 2004, respectively.
Revenue earning equipment expenditures in our car
rental and equipment rental operations for the year ended December 31,
2006 decreased by 8.2% and 5.6%, respectively, compared to the year ended December 31,
2005.
The decrease in our
car rental revenue earning equipment expenditures is due to the change in the
mix of purchases made during the year ended December 31, 2006 as compared
to the year ended December 31, 2005. Revenue earning equipment
expenditures in our car rental and equipment rental operations for the year
ended December 31, 2005 increased by 7.8% and 43.8%, respectively,
compared to the year ended December 31, 2004. The increase in equipment
rental revenue earning equipment expenditures is primarily the result of higher
rental volume.
Property and equipment expenditures in our car rental
operations were $166.4 million, $271.1 million and $220.3 million for the years
ended December 31, 2006, 2005 and 2004, respectively. Property and
equipment expenditures in our equipment rental operations were $54.4 million
$69.0 million and $63.1 million for the years ended December 31, 2006,
2005 and 2004, respectively. Property and equipment expenditures in our “corporate
and other” activities were $3.1 million, $2.9 million and $3.0 million for the
years ended December 31, 2006, 2005 and 2004, respectively.
91
Property and equipment expenditures in our car rental,
equipment rental and “corporate and other” operations for the year ended December 31,
2006 decreased by 38.6%, 21.2% and increased by 6.9%, respectively, compared to
the year ended December 31, 2005. Property and equipment expenditures in
our car rental, equipment rental and “corporate and other” operations for the
year ended December 31, 2005 increased by 23.0%, 9.4% and decreased by
3.3%, respectively, compared to the year ended December 31, 2004.
For the year ended December 31, 2006, we
experienced a level of net expenditures for revenue earning equipment and
property and equipment slightly lower than our net expenditures in 2005. This
decrease was due to a decrease in the percentage of program cars purchased and
an increase in the percentage of lower cost non-program cars purchased for the
year ended December 31, 2006.
For the year ended December 31,
2005, we experienced a level of net expenditures for revenue earning equipment
and property and equipment slightly lower than our net expenditures in 2004. The
net capital expenditures decrease was due to increased disposals partly offset
by increases in the prices of 2006 model year vehicles acquired beginning in
the fourth quarter of 2005, together with capital expenditures relating to the
expansion of our off-airport locations.
Off-Balance Sheet
Commitments
As of December 31, 2006
and 2005, the following guarantees (including indemnification commitments) were
issued and outstanding:
Indemnifications
In the ordinary course of
business, we execute contracts involving indemnifications standard in the
relevant industry and indemnifications specific to a transaction such as the
sale of a business. These indemnifications might include claims relating to the
following: environmental matters; intellectual property rights; governmental
regulations and employment-related matters; customer, supplier and other
commercial contractual relationships; and financial matters. Performance under
these indemnities would generally be triggered by a breach of terms of the
contract or by a third-party claim. We regularly evaluate the probability
of having to incur costs associated with these indemnifications and have
accrued for expected losses that are probable and estimable. The types of
indemnifications for which payments are possible include the following:
Sponsors; Directors
On the Closing Date, Hertz
entered into customary indemnification agreements with Hertz Holdings, the
Sponsors and Hertz Holdings’ stockholders affiliated with the Sponsors,
pursuant to which Hertz Holdings and Hertz will indemnify the Sponsors, Hertz
Holdings’ stockholders affiliated with the Sponsors and their respective
affiliates, directors, officers, partners, members, employees, agents,
representatives and controlling persons, against certain liabilities arising
out of performance of a consulting agreement with Hertz Holdings and each of
the Sponsors and certain other claims and liabilities, including liabilities
arising out of financing arrangements or securities offerings. We do not
believe that these indemnifications are reasonably likely to have a material impact
on us. We have also entered into indemnification agreements with each of our
directors.
Environmental
We have indemnified various
parties for the costs associated with remediating numerous hazardous substance
storage, recycling or disposal sites in many states and, in some instances, for
natural resource damages. The amount of any such expenses or related natural
resource damages for which we may be held responsible could be substantial. The
probable losses that we expect to incur for such matters have been accrued, and
those losses are reflected in our
consolidated financial
92
statements. As of December 31,
2006 and December 31, 2005, the aggregate amounts accrued for
environmental liabilities, including liability for environmental indemnities,
reflected in our
consolidated
balance sheet in “Other accrued liabilities” were $3.7 million and $3.9
million, respectively. The accrual generally represents the estimated cost to
study potential environmental issues at sites deemed to require investigation
or clean-up activities, and the estimated cost to implement remediation
actions, including ongoing maintenance, as required. Cost estimates are
developed by site. Initial cost estimates are based on historical experience at
similar sites and are refined over time on the basis of in-depth studies of the
sites. For many sites, the remediation costs and other damages for which we
ultimately may be responsible cannot be reasonably estimated because of
uncertainties with respect to factors such as our connection to the site, the
materials there, the involvement of other potentially responsible parties, the
application of laws and other standards or regulations, site conditions, and
the nature and scope of investigations, studies, and remediation to be
undertaken (including the technologies to be required and the extent, duration,
and success of remediation).
Risk Management
For a discussion of additional
risks arising from our operations, including vehicle liability, general
liability and property damage insurable risks, see “Item 1—Business—Risk
Management.”
Market Risks
We are exposed to a variety of
market risks, including the effects of changes in interest rates and foreign
currency exchange rates. We manage our exposure to these market risks through
our regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. Derivative financial
instruments are viewed as risk management tools and historically have not been
used for speculative or trading purposes. In addition, derivative financial
instruments are entered into with a diversified group of major financial
institutions in order to manage our exposure to counterparty nonperformance on
such instruments. For more information on these exposures, see Note 13 to the
Notes to our consolidated financial statements included in this
Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
Interest Rate Risk
From time to time, we enter into interest rate swap
agreements to manage interest rate risk. Effective September 30, 2003, we
entered into interest rate swap agreements relating to the issuance of our 4.7%
notes due October 2, 2006. Effective June 3, 2004, we entered into
interest rate swap agreements relating to the issuance of our 6.35% notes due June 15,
2010. Under these agreements, we paid interest at a variable rate in exchange
for fixed rate receipts, effectively transforming these notes to floating rate
obligations. As a result of the Acquisition, a significant portion of the
underlying fixed rate debt was tendered, causing the interest rate swaps to be
ineffective as of December 21, 2005. Consequently, any changes in the fair
value of the derivatives were recognized in the statement of operations.
Between December 21, 2005 (the date the hedge accounting was discontinued)
and December 31, 2005, the fair value adjustment related to these interest
rate swaps was a gain of $2.7 million, which was recorded in our consolidated
statement of operations in “Selling, general and administrative” expenses.
During January 2006, we assigned these interest rate swaps to a third
party in return for cash. As a result of the assignment of these interest rate
swaps, we recorded a gain of $1.0 million which is reflected in our
consolidated statement of operations in ““Selling, general and administrative”
expenses.”
In connection with the
Acquisition and the issuance of the $3,550.0 million of floating rate U.S.
Fleet Debt, HVF and Hertz entered into seven interest rate swap agreements, or
the “HVF Swaps,” effective December 21, 2005. These agreements mature at
various terms, in connection with the scheduled maturity of the associated debt
obligations, through November 25, 2011. Under these agreements, we
93
pay monthly interest at a
fixed rate of 4.5% per annum in exchange for monthly amounts at one-month
LIBOR, effectively transforming the floating rate U.S. Fleet Debt to fixed rate
obligations.
In connection with the
remaining
€
7.6 million untendered balance of our
Euro-denominated medium term notes, we entered into an interest rate swap
agreement on December 21, 2005, effective January 16, 2006, and
maturing on July 16, 2007. The purpose of this interest rate swap is to
lock in the interest cash outflows at a fixed rate of 4.1% on the variable rate
Euro-denominated medium term notes.
In May 2006, in
connection with the forecasted issuance of the permanent take-out international
asset-based facilities, HIL purchased two swaptions for
€
3.3
million, to protect itself from interest rate increases. These swaptions give
HIL the right, but not the obligation, to enter into three year interest rate
swaps based on a total notional amount of
€
600 million at an interest
rate of 4.155%. The swaptions were renewed in 2007 prior to their scheduled
expiration date of March 15, 2007 and now expire on September 5,
2007.
See Notes 3, 13 and 16 to the
Notes to our consolidated financial statements included in this
Annual Report under the caption “Item 8—Financial
Statements and Supplementary Data.”
We have a significant amount
of debt (including under our U.S. and International Fleet Debt and Senior ABL
Facility) with variable rates of interest based generally on LIBOR, EURIBOR or
their equivalents for local currencies plus an applicable margin. Increases in
interest rates could therefore significantly increase the associated interest
payments that we are required to make on this debt.
We have assessed our exposure
to changes in interest rates by analyzing the sensitivity to our earnings
assuming various changes in market interest rates. Assuming a hypothetical
increase of one percentage point in interest rates on our debt portfolio as of December 31,
2006, our net interest expense would increase by an estimated $15.9 million
over a twelve-month period.
Consistent with the terms of
the agreements governing the respective debt obligations, we may hedge a
portion of the floating rate interest exposure under the Senior Credit
Facilities and the U.S. and International Fleet Debt to provide protection in
respect of such exposure.
Foreign Currency Risk
We manage our foreign currency
risk primarily by incurring, to the extent practicable, operating and financing
expenses in the local currency in the countries in which we operate, including
making fleet and equipment purchases and borrowing for working capital needs.
Also, we have purchased foreign exchange options to manage exposure to
fluctuations in foreign exchange rates for selected marketing programs. The
effect of exchange rate changes on these financial instruments would not
materially affect our consolidated financial position, results of operations or
cash flows. Our risks with respect to currency option contracts are limited to
the premium paid for the right to exercise the option and the future
performance of the option’s counterparty. Premiums paid for options outstanding
as of December 31, 2006, were approximately $0.3 million, and we limit
counterparties to financial institutions that have strong credit ratings.
We also manage exposure to
fluctuations in currency risk on intercompany loans we make to certain of our
subsidiaries by entering into foreign currency forward contracts at the time of
the loans. The forward rate is reflected in the intercompany loan rate to the
subsidiaries, and as a result, the forward contracts have no material impact on
our results of operations.
In connection with the
Transactions, we issued
€
225 million of unhedged
Senior Euro Notes. Prior to October 1,
2006, our Senior Euro Notes were not designated as a net investment hedge of
our Euro-denominated net investments. For the nine months ended September 30,
2006, we incurred unrealized exchange transaction losses of $19.2 million
resulting from the translation of these Euro-denominated notes into the U.S.
dollar, which are recorded in our consolidated statement of
94
operations
in “Selling, general and administrative” expenses. On October 1, 2006, we
designated our Senior Euro Notes as an effective net investment hedge of our
Euro-denominated net investment in our foreign operations. As a result of this
net investment hedge designation, as of December 31, 2006, $7.1 million of
losses attributable to the translation of our Senior Euro Notes into the U.S.
dollar are recorded in our consolidated balance sheet in “Accumulated other
comprehensive income (loss).”
Inflation
The increased acquisition cost
of vehicles is the primary inflationary factor affecting us. Many of our other
operating expenses are also expected to increase with inflation, including
health care costs. Management does not expect that the effect of inflation on
our overall operating costs will be greater for us than for our competitors.
Like-Kind Exchange
Program
In January 2006, we
implemented a like-kind exchange program for our U.S. car rental business.
Pursuant to the program, we dispose of vehicles and acquire replacement
vehicles in a form intended to allow such dispositions and replacements to
qualify as tax-deferred “like-kind exchanges” pursuant to section 1031 of the
Internal Revenue Code. The program has resulted in a material deferral of
federal and state income taxes for fiscal 2006. A like-kind exchange program
for HERC has been in place for several years. We cannot, however, offer
assurance that the expected tax deferral will be achieved or that the relevant
law concerning the programs will remain in its current form. In addition, the
benefit of deferral is subject to recapture, if, for example, there were a
material downsizing of our fleet.
Employee Retirement
Benefits
Pension
We sponsor defined benefit pension plans worldwide.
Pension obligations give rise to significant expenses that are dependent on
assumptions discussed in Note 5 of the Notes to our consolidated financial
statements included in this
Annual
Report under the caption “Item 8—Financial Statements and Supplementary Data.” Our
2006 worldwide pre-tax pension expense was approximately $35.6 million, which
is a decrease of $1.9 million from 2005 primarily attributable to the
elimination of the amortization of net loss component of 2006 net periodic
pension cost because of the purchase accounting charges that were recognized in
2005. As of the Acquisition date, a liability was recorded for the projected
benefit obligation in excess of plan assets, which eliminated any previously
existing unrecognized net gain or loss, or unrecognized prior service cost.
The funded status (i.e., the dollar amount by which
the present value of projected benefit obligations exceeded the market value of
pension plan assets) of our U.S. qualified plan, in which most domestic
employees participate, declined as of December 31, 2006, compared with December 31,
2005. The ratio of assets to the projected benefit obligation was consistent from
December 31, 2005 to December 31, 2006. The primary reason for the
decline in dollar terms is that no contributions were made in 2006.
We review our pension assumptions regularly and from
time to time make contributions beyond those legally required. For example, no
discretionary contributions were made to our U.S. qualified plan in the year
ended December 31, 2006 and $28.0 million and $48.0 million were made to
our U.S. qualified plan for the years ended December 31, 2005 and 2004,
respectively. After giving effect to these contributions, based on current
interest rates and on our return assumptions and assuming no additional
contributions, we do not expect to be required to pay any variable-rate
premiums to the Pension Benefit Guaranty Corporation before 2010. For the year
ended December 31, 2006, we contributed $28.8 million to our worldwide
pension plans, including a discretionary contribution of
95
$15.6 million to our U.K. defined benefit pension plan
and benefit payments made through unfunded plans.
We participate in various “multiemployer”
pension plans administrated by labor unions representing some of our employees.
We make periodic contributions to these plans to allow them to meet their
pension benefit obligations to their participants. In the event that we
withdrew from participation in one of these plans, then applicable law could
require us to make an additional lump-sum contribution to the plan, and we
would have to reflect that as an expense in our statement of operations and as
a liability on our balance sheet. Our withdrawal liability for any
multiemployer plan would depend on the extent of the plan’s funding of vested
benefits. We currently do not expect to incur any material withdrawal liability
in the near future. However, in the ordinary course of our renegotiation of
collective bargaining agreements with labor unions that maintain these plans,
we could decide to discontinue participation in a plan, and in that event we
could face a withdrawal liability. Some multiemployer plans, including one in
which we participate, are reported to have significant underfunded liabilities.
Such underfunding could increase the size of our potential withdrawal
liability.
Other Postretirement Benefits
We provide limited
postretirement health care and life insurance for employees of our domestic
operations with hire dates prior to January 1, 1990. There are no plan
assets associated with this plan. We provide for these postretirement costs
through monthly accruals. The net periodic postretirement benefit cost for the
year ended December 31, 2006 was $1.1 million and the accumulated benefit
obligation as of December 31, 2006 was $16.6 million compared to a net
periodic postretirement benefit cost of $1.6 million for the year ended
December 31, 2005 and an accumulated benefit obligation of $18.2 million
as of December 31, 2005. The decrease in the accumulated benefit
obligation was primarily attributable to the increase in the discount rate from
5.5% as of December 31, 2005 to 5.7% as of December 31, 2006.
Hertz Holdings Stock
Incentive Plan
On February 15, 2006, our Board of Directors and
that of Hertz jointly approved the Hertz Global Holdings, Inc. Stock
Incentive Plan, or the “Stock Incentive Plan.” The Stock Incentive Plan
provides for the sale of shares of stock of Hertz Holdings to our executive
officers, other key employees and directors as well as the grant of stock
options to purchase shares of Hertz Holdings to those individuals.
During the second quarter of 2006, we made an equity
offering to approximately 350 of Hertz’s executives and key employees (not
including Craig R. Koch, our former Chief Executive Officer). The shares sold
and options granted to our employees in connection with this equity offering
are subject to and governed by the terms of the Stock Incentive Plan. The
offering closed on May 5, 2006. In connection with this offering, we sold
1,757,354 shares at a purchase price of $10.00 per share and granted options to
purchase an additional 2,786,354 shares at an exercise price of $10.00 per share
($4.56 after adjustment for
special
cash dividends paid on June 30, 2006 and November 21, 2006).
In addition, on May 18, 2006, we granted Hertz’s key executives and
employees (except for Mr. Koch) options to acquire an additional 9,515,000
shares of our common stock at $10.00 per share ($4.56 after adjustment for special cash dividends paid on June 30,
2006 and November 21, 2006), 800,000 shares at $15.00 per share
($9.56 after adjustment for special cash
dividends paid on June 30, 2006 and November 21, 2006) and
800,000 shares at $20.00 per share ($14.56 after adjustment for special cash dividends paid on June 30,
2006 and November 21, 2006). These options are subject to and
governed by the Stock Incentive Plan.
96
On June 12, 2006, Mr. Koch purchased 50,000
shares of the common stock of Hertz Holdings at a purchase price of $10.00 per
share and received options to purchase an additional 100,000 shares at a
purchase price of $10.00 per share ($5.68 after adjustment for the
special cash dividend paid on June 30,
2006). On August 15, 2006, the options issued to Mr. Koch in
June 2006 were cancelled and he was issued options to purchase 112,000
shares of common stock of Hertz Holdings at an exercise price of $7.68 per share
($6.56 after adjustment for the special
cash dividend paid on November 21, 2006). Hertz Holdings made a
payment to Mr. Koch in connection with his share purchase equal to
$80,000.
On August 15, 2006, certain newly-hired
employees purchased an aggregate of 20,000 shares at a purchase price of $7.68
per share and were granted options to purchase 220,000 shares of Hertz Holdings
stock at an exercise price of $7.68 per share ($6.56 after adjustment for the
special cash dividend paid on November 21, 2006). Also on August 15,
2006, in accordance with the terms of his employment agreement, Mr. Frissora
purchased 1,056,338 shares of the common stock of Hertz Holdings at a price of
$5.68 per share and was granted options to purchase 800,000 shares of common
stock of Hertz Holdings at an exercise price of $7.68 per share ($6.56 after
adjustment for the special cash dividend paid on November 21, 2006),
400,000 options at an exercise price of $10.68 per share ($9.56 after
adjustment for the special cash dividend paid on November 21, 2006) and
400,000 options at an exercise price of $15.68 per share ($14.56 after
adjustment for the special cash dividend paid on November 21, 2006). All
of Mr. Frissora’s options will vest 20% per year on the first five
anniversaries of the date of commencement of his employment and will have a ten
year term.
During September 2006, we determined that the
fair value of our common stock as of August 15, 2006 was $16.37 per share,
rather than the $7.68 that had originally been determined at that time and
which we use for purposes of the Stock Incentive Plan and federal income tax
purposes. Consequently, we recognized compensation expense of approximately
$13.0 million, including amounts for a tax gross-up on the initial $2.00
discount to fair market value in accordance with Mr. Frissora’s employment
agreement, in the quarter ended September 30, 2006.
In order to assist management and the Compensation
Committee of the Board of Directors in their determination of the value of the
common stock of Hertz Holdings, Hertz engaged an independent valuation
specialist to perform a valuation of the common stock of Hertz Holdings at May 15,
2006 and June 30, 2006. The May 15th date is close to the initial
stock purchase and option grant date of May 5, 2006 and the second option
grant date of May 18, 2006. The June 30th date coincides with the
payment of the special cash dividend of $4.32 per share.
The independent valuation specialist weighted each of
the income, market transaction and market comparable valuation approaches
equally. Management and the Compensation Committee of the Board of Directors
believe that the valuation approaches employed are appropriate for an
enterprise such as Hertz Holdings, which has an established financial history
of profitable operations and generation of positive cash flows. The results of
the approaches were not significantly different from one another.
In connection with the authorization of the
special cash dividend of $4.32 per share paid
on June 30, 2006, the Board of Hertz Holdings authorized the
modification of the option exercise prices downward by an amount equal to the
per share amount of the special cash
dividend paid on June 30, 2006, thereby preserving the intrinsic
value of the options, consistent with applicable tax law. In order to assist
management and the Compensation Committee of the Board of Directors in their
determination of the value of the common stock of Hertz Holdings, an
independent valuation was performed as of immediately before and after the
modification. We will recognize incremental compensation cost of approximately
$14.1 million related to the cost of modifying the exercise prices of the stock
options for the special cash dividend over the remainder of the five-year
requisite vesting period that began on the grant date.
97
Prior to the consummation of
the initial public offering of the common stock of Hertz Holdings on November 21,
2006, Hertz Holdings declared a special cash dividend, to be paid promptly
following the completion of the offering. In connection with the special cash
dividend, Hertz Holdings’ outstanding stock options were adjusted to preserve
the intrinsic value of the options, consistent with applicable tax law and the
terms of the Stock Incentive Plan. The Board approved this modification on October 12,
2006. Beginning on that date, the cost of the modification was recognized
ratably over the remainder of the requisite service period for each grant.
Because the modification was effective before the amount of the dividend was
known, the cost of the modification reflected the assumption that the dividend
would be funded by the proceeds to Hertz Holdings from the sale of the common
stock after deducting underwriting discounts and commissions and offering
expenses. The assumed proceeds from the sale of the common stock were
determined by assuming an offering price equivalent to the midpoint of the
range set forth on the cover page of the initial public offering
prospectus (or $17.00 per share) and resulted in an estimated dividend of $1.83
per share. The actual dividend declared was $1.12 per share. We will recognize
incremental compensation cost of $14.2 million related to the cost of modifying
the exercise prices of the stock options for the special cash dividend paid on November 21,
2006 over the remainder of the five-year requisite service period. This charge
was based on the estimated dividend, rather than the actual dividend paid.
Share Purchase by Our
Chief Executive Officer
On July 10, 2006, Mark P.
Frissora accepted an offer of employment to serve as our Chief Executive
Officer. On August 15, 2006, Mr. Frissora purchased 1,056,338 shares
of our common stock at a price of $5.68 per share, which was $2.00 below the
fair market value of $7.68 on that date. As discussed under “—Critical Accounting
Policies and Estimates—Stock-Based Compensation,” we have subsequently
determined that the fair value of our common stock as of August 15, 2006
should be $16.37 per share, rather than $7.68 as had originally been determined
at that time. Consequently, we recognized compensation expense of approximately
$13.0 million, including amounts for a tax gross-up on the initial $2.00
discount to fair market value in accordance with Mr. Frissora’s employment
agreement, in the third quarter of 2006.
Recent Accounting
Pronouncements
In June 2006, the FASB issued FASB Interpretation
No. 48, or “FIN 48,” “Accounting for Uncertainty in Income Taxes.” FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The impact of FIN 48 on our financial
position as of January 1, 2007 is estimated to be up to a $30.0 million
increase in total liabilities.
In June 2006, the Emerging Issues Task Force, or “EITF,”
issued EITF No. 06-3, or “EITF 06-3,” “How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation),” which relates
to any tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction. EITF 06-3 states that the
presentation of the taxes, either on a gross (included in revenues and costs)
or a net basis (excluded from revenues), is an accounting policy decision that
should be disclosed pursuant to Accounting Principles Board Opinion No. 22,
“Disclosure of Accounting Policies,” if those amounts are significant. EITF 06-3
should be applied to financial reports for interim and annual reporting periods
beginning after December 15, 2006. Sales tax amounts collected from
customers have been
98
recorded on a net basis. The adoption of EITF 06-3
will not have any impact on our financial position or results of operations.
In September 2006, the United States Securities
and Exchange Commission or the “SEC,” issued Staff Accounting Bulletin No. 108,
or “SAB No. 108.” “Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108
provides guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial
statements are materially misstated. SAB No. 108 requires registrants to
apply the new guidance to material errors in existence at the beginning of the
first fiscal year ending after November 15, 2006 by correcting those
errors through a one-time cumulative effect adjustment to beginning-of-year
retained earnings. The adoption of SAB No. 108 did not have any impact on
our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157
or “SFAS No. 157”, “Fair Value Measurements,” SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles and expands disclosures about fair
value measurements. The provisions of SFAS No. 157 are effective for the
fiscal year beginning after November 15, 2007. We are currently reviewing
SFAS No. 157 to determine its impact, if any, on our financial position or
results of operations.
In February 2007, the
FASB issued SFAS No. 159, or “SFAS No. 159,” “The Fair Value Option
for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. The provisions of SFAS 159 are effective as of January 1, 2008. We
are currently reviewing SFAS 159 to determine its impact, if any, on our
financial position or results of operations..
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Item 7—Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Market Risks,” which appears on pages 93
to 95 of this Annual Report.
99
ITEM 8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors and Stockholders
of Hertz Global Holdings, Inc.:
We have completed integrated audits of Hertz Global
Holdings, Inc.’s 2006 and 2005 consolidated financial statements and of its
internal control over financial reporting as of December 31, 2006 in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial
statement schedules
In our opinion, the consolidated financial statements
listed in the index appearing under Item 15(a)(1) present fairly, in all
material respects, the financial position of Hertz Global Holdings, Inc. and
its subsidiaries (Successor Company) at December 31, 2006 and December 31,
2005, and the results of their operations and their cash flows for the year
ended December 31, 2006 and for the period from December 21, 2005 to December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 15(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). 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 of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment,
included in Management’s Report on Internal Control Over Financial Reporting
appearing under Item 9A, that the Company maintained effective internal control
over financial reporting as of December 31, 2006 based on criteria established
in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal
Control - Integrated
Framework i
ssued by the COSO. The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management’s assessment
and on the effectiveness of the Company’s internal control over financial
reporting based on our audit. We conducted our audit of internal control over
financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such
other procedures as we consider
100
necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
/s/
PricewaterhouseCoopers LLP
Florham
Park, New Jersey
March 30, 2007
To The
Board of Directors and
Shareholder of Hertz Global Holdings, Inc.:
In our opinion, the consolidated financial statements
listed in the index appearing under Item 15(a)(1) present fairly, in all
material respects, the results of operations and cash flows of Hertz Global
Holdings, Inc. and its subsidiaries (Predecessor Company) for the period from
January 1, 2005 to December 20, 2005 and for the year ended December 31, 2004
in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). These 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/
PricewaterhouseCoopers LLP
Florham
Park, New Jersey
April 4,
2006, except for the effects of the restatement described
in Note
1A (not presented herein) to the consolidated financial
statements
appearing under Item 8 of the Company's Annual
Report
on Form 10-K/A for the year ended December 31, 2005,
as to
which the date is July 14, 2006
101
HERTZ GLOBAL HOLDINGS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
(In
Thousands of Dollars)
December 31,
2006
December 31,
2005
ASSETS
Cash and equivalents
$
674,549
$
843,908
Restricted cash
552,516
289,201
Receivables,
less allowance for doubtful accounts of $1,989 and $460
1,656,542
1,823,188
Inventories, at lower of
cost or market
112,119
105,532
Prepaid expenses and other
assets
369,922
396,415
Revenue earning equipment, at cost:
Cars
8,188,794
7,439,579
Less accumulated
depreciation
(822,387
)
(40,114
)
Other equipment
2,686,947
2,083,299
Less accumulated
depreciation
(247,846
)
(7,799
)
Total revenue earning
equipment
9,805,508
9,474,965
Property and equipment, at cost:
Land, buildings and
leasehold improvements
969,195
921,421
Service equipment
597,882
474,110
1,567,077
1,395,531
Less accumulated
depreciation
(199,020
)
(5,507
)
Total property and equipment
1,368,057
1,390,024
Other intangible assets, net
3,173,495
3,235,265
Goodwill
964,693
1,022,381
Total assets
$
18,677,401
$
18,580,879
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Accounts payable
$
654,327
$
621,876
Accrued salaries and other
compensation
463,466
433,636
Other accrued liabilities
513,483
446,292
Accrued taxes
92,469
115,462
Debt
12,276,184
12,515,005
Public liability and
property damage
327,024
320,955
Deferred taxes on income
1,801,073
1,852,542
Total liabilities
16,128,026
16,305,768
Commitments and contingencies
Minority interest
14,813
8,929
Stockholders’ equity:
Common Stock, $0.01 par
value, 2,000,000,000 shares authorized, 320,618,692 and 229,500,000 shares
issued
3,206
2,295
Preferred Stock, $0.01 par
value, 200,000,000 shares authorized, no shares issued
—
—
Additional capital paid-in
2,427,293
2,292,705
Retained earnings (deficit)
9,535
(21,346
)
Accumulated other
comprehensive income (loss)
94,528
(7,472
)
Total stockholders’ equity
2,534,562
2,266,182
Total liabilities and stockholders’ equity
$
18,677,401
$
18,580,879
The accompanying notes are an integral part of these financial statements.
102
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars, except share data)
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Revenues:
Car rental
$
6,273,612
$
129,448
$
5,820,473
$
5,430,805
Equipment rental
1,672,093
22,430
1,392,461
1,161,955
Other
112,700
2,591
101,811
83,192
Total revenues
8,058,405
154,469
7,314,745
6,675,952
Expenses:
Direct operating
4,475,974
102,958
4,086,344
3,734,361
Depreciation of revenue earning equipment
1,757,202
43,827
1,555,862
1,463,258
Selling, general and administrative
723,921
15,167
623,386
591,317
Interest, net of interest income of $42,553, $1,077, $36,156 and
$23,707
900,657
25,735
474,247
384,464
Total expenses
7,857,754
187,687
6,739,839
6,173,400
Income (loss) before
income taxes and minority interest
200,651
(33,218
)
574,906
502,552
(Provision) benefit
for taxes on income
(67,994
)
12,243
(191,332
)
(133,870
)
Minority interest
(16,714
)
(371
)
(12,251
)
(3,211
)
Net income (loss)
$
115,943
$
(21,346
)
$
371,323
$
365,471
Weighted average shares outstanding (in thousands)
Basic
242,460
229,500
229,500
229,500
Diluted
243,354
229,500
229,500
229,500
Earnings (loss) per share
Basic
$
0.48
$
(0.09
)
$
1.62
$
1.59
Diluted
$
0.48
$
(0.09
)
$
1.62
$
1.59
The accompanying notes are an integral part of these financial statements.
103
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands of Dollars, except share data)
Number
of Shares
Common
Stock
Preferred
Stock
Additional
Capital
Paid-In
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Predecessor
Balance at:
DECEMBER 31, 2003
100
$
—
$
—
$
983,132
$
1,113,746
$
128,513
$
2,225,391
Net income
365,471
365,471
Translation adjustment changes
83,420
83,420
Unrealized holding losses on securities, net of tax
of $8
(82
)
(82
)
Minimum pension liability adjustment, net of tax of
$1,076
(3,953
)
(3,953
)
Total Comprehensive Income
444,856
DECEMBER 31, 2004
100
—
—
983,132
1,479,217
207,898
2,670,247
Net income
371,323
371,323
Change in fair value of derivatives qualifying as
cash flow hedges, net of tax of $281
424
424
Translation adjustment changes
(123,893
)
(123,893
)
Unrealized holding losses on securities, net of tax
of $5
(37
)
(37
)
Minimum pension liability adjustment, net of tax of
$5,891
(12,076
)
(12,076
)
Total Comprehensive Income
235,741
Dividend to Ford Motor Company
(1,185,000
)
(1,185,000
)
DECEMBER 20, 2005
100
—
—
983,132
665,540
72,316
1,720,988
Successor
Balance at:
DECEMBER 21, 2005
—
—
—
—
—
—
—
Sale of common stock
229,500,000
2,295
2,292,705
2,295,000
Net loss
(21,346
)
(21,346
)
Change in fair value of derivatives qualifying as
cash flow hedges, net of tax of $2,704
(4,078
)
(4,078
)
Translation adjustment changes
(3,394
)
(3,394
)
Total Comprehensive Loss
(28,818
)
DECEMBER 31, 2005
229,500,000
2,295
—
2,292,705
(21,346
)
(7,472
)
2,266,182
Net income
115,943
115,943
Translation adjustment changes
95,023
95,023
Unrealized holding losses on securities, net of tax
of $4
(30
)
(30
)
Unrealized loss on Euro-denominated debt, net of tax
of $4,648
(7,066
)
(7,066
)
Change in fair value of derivatives qualifying as
cash flow hedges, net of tax of $5,023
7,621
7,621
Adjustment to initially apply FASB Statement
No. 158, net of tax of $4,873
6,438
6,438
Minimum pension liability adjustment, net of tax of
$9
14
14
Total Comprehensive Income
217,943
Sale of common stock in initial public offering
88,235,000
882
1,259,384
1,260,266
Cash dividends ($4.32 and $1.12 per common share)
(1,174,456
)
(85,062
)
(1,259,518
)
Stock-based employee compensation
25,452
25,452
Sale of stock under employee equity offering
2,883,692
29
24,208
24,237
DECEMBER 31, 2006
320,618,692
$
3,206
$
—
$
2,427,293
$
9,535
$
94,528
$
2,534,562
The accompanying notes are an integral part of these financial statements.
104
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Cash flows from operating activities:
Net income (loss)
$
115,943
$
(21,346
)
$
371,323
$
365,471
Non-cash
expenses:
Depreciation of revenue earning equipment
1,757,202
43,827
1,555,862
1,463,258
Depreciation of property and equipment
197,230
5,511
182,363
177,597
Amortization of other intangible assets
61,614
2,075
749
607
Amortization of deferred financing costs
66,127
1,304
5,299
4,960
Amortization of debt discount
38,872
456
1,999
2,543
Stock-based employee compensation
27,179
—
10,496
5,584
Provision for public liability and property damage
169,143
1,918
158,050
153,139
Loss on revaluation of foreign denominated debt
19,233
(2,826
)
—
—
Provision for losses on doubtful accounts
17,132
462
11,447
14,133
Minority interest
16,714
371
12,251
3,211
Deferred taxes on income
30,354
(12,243
)
(411,461
)
129,576
Changes in assets and
liabilities, net of effects of acquisition:
Receivables
229,663
(121,497
)
(547,302
)
57,303
Due from affiliates
—
107,791
83,868
75,607
Inventories, prepaid expenses and other assets
(17,128
)
(166,545
)
(134,052
)
(27,778
)
Accounts payable
(4,708
)
(58,565
)
(32,676
)
(58,318
)
Accrued liabilities
86,308
(52,157
)
51,364
50,831
Accrued taxes
(3,789
)
1,881
572,452
12,315
Payments of public
liability and property damage claims and expenses
(192,524
)
(7,938
)
(155,904
)
(178,654
)
Net cash provided by
(used in) operating activities
$
2,614,565
$
(277,521
)
$
1,736,128
$
2,251,385
105
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands of Dollars)
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Cash flows from investing activities:
Net change in restricted cash
$
(260,212
)
$
(273,640
)
$
(12,660
)
$
(2,901
)
Purchase of predecessor company stock
—
(4,379,374
)
—
—
Proceeds from sales (purchases) of short-term investments, net
—
—
556,997
(56,889
)
Revenue earning equipment expenditures
(11,420,898
)
(234,757
)
(12,186,205
)
(11,310,032
)
Proceeds from disposal of revenue earning equipment
9,555,025
199,711
10,106,260
8,740,920
Property and equipment expenditures
(223,943
)
(8,503
)
(334,543
)
(286,428
)
Proceeds from disposal of property and equipment
64,144
1,246
72,572
59,253
Available-for-sale
securities:
Purchases
(2,464
)
—
(243
)
(11,261
)
Sales
514
—
245
19,448
Other
(66
)
—
—
—
Changes in investment in joint venture
—
—
—
2,000
Net cash used in investing activities
(2,287,900
)
(4,695,317
)
(1,797,577
)
(2,845,890
)
Cash flows from
financing activities:
Issuance of an intercompany note
—
—
1,185,000
—
Proceeds from issuance of long-term debt
1,309,437
8,643,894
27,162
1,985,981
Repayment of long-term debt
(1,247,425
)
(5,118,559
)
(619,402
)
(913,635
)
Short-term
borrowings:
Proceeds
747,469
10,333
3,208,085
1,382,587
Repayments
(901,123
)
(1,357,614
)
(2,263,346
)
(973,659
)
Ninety-day term or less, net
(465,595
)
364,009
270,715
(846,780
)
Dividends paid
(1,259,518
)
—
(1,185,000
)
—
Proceeds from the sale of stock
1,284,503
2,295,000
—
—
Distributions to minority interest
(10,830
)
—
(8,614
)
—
Payment of financing costs
(40,783
)
(192,419
)
—
—
Net cash (used in) provided by financing activities
(583,865
)
4,644,644
614,600
634,494
Effect of foreign exchange rate changes on cash and equivalents
87,841
(1,894
)
(57,120
)
27,990
Net (decrease)
increase in cash and equivalents during the period
(169,359
)
(330,088
)
496,031
67,979
Cash and equivalents
at beginning of period
843,908
1,173,996
677,965
609,986
Cash and equivalents
at end of period
$
674,549
$
843,908
$
1,173,996
$
677,965
Supplemental
disclosures of cash flow information:
Cash paid (received) during the period for:
Interest (net of amounts capitalized)
$
681,480
$
124,005
$
416,436
$
377,279
Income taxes
33,645
(379
)
29,883
(4,149
)
Non-cash
transactions excluded from cash flow presentation:
Revaluation of net assets to fair market value, net
of tax
$
75,459
$
2,145,563
$
—
$
—
Non-cash
settlement of outstanding balances with Ford
—
112,490
—
—
The accompanying notes are an integral part of these financial statements.
106
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Summary of
Significant Accounting Policies
Background and Change in Ownership
Background
Hertz Global Holdings, Inc. is referred to herein
as “Hertz Holdings.” The Hertz Corporation is referred to herein as “Hertz.”
The terms “we,” “us,” and “our” refer to (i) prior to December 21,
2005, Hertz and its consolidated subsidiaries and (ii) on and after December 21,
2005, Hertz Holdings and its consolidated subsidiaries (including Hertz). 100%
of Hertz’s outstanding capital stock is owned by Hertz Investors, Inc.
(previously known as CCMG Corporation), and 100% of Hertz Investors, Inc.’s
capital stock is owned by Hertz Holdings. Hertz Holdings was incorporated on August 31,
2005 by the Sponsors (as defined below) to serve as the top-level holding
company for Hertz, its primary operating company. Financial information for the
Predecessor period is for Hertz.
Hertz Holdings was
incorporated in Delaware in 2005 and had no operations prior to the Acquisition
(as defined below). Hertz was incorporated in Delaware in 1967 and is a
successor to corporations that have been engaged in the automobile and truck
rental and leasing business since 1918. Ford Motor Company, or “Ford,” first
acquired an ownership interest in Hertz in 1987. Previously, Hertz had been a
subsidiary of UAL Corporation (formerly Allegis Corporation), which had
acquired Hertz’s outstanding capital stock from RCA Corporation in 1985. Hertz
became a wholly owned subsidiary of Ford as a result of a series of
transactions in 1993 and 1994. Hertz continued as a wholly owned subsidiary of
Ford until April 1997. In 1997, Hertz completed a public offering of
approximately 50.6% of Hertz’s Class A Common Stock, or the “Class A
Common Stock,” which represented approximately 19.1% of Hertz’s economic
interest. In March 2001, Ford, through a subsidiary, acquired all of Hertz’s
outstanding Class A Common Stock that it did not already own for $35.50
per share, or approximately $735 million. As a result of that acquisition,
Hertz’s Class A Common Stock ceased to be traded on the NYSE. However,
because certain of Hertz’s debt securities were sold through public offerings,
Hertz continued to file periodic reports under the Securities Exchange Act of
1934.
The Acquisition and
Related Transactions
On December 21,
2005, or the “Closing Date,” investment funds associated with or designated by
Clayton, Dubilier & Rice, Inc., or “CD&R,” The Carlyle Group,
or “Carlyle,” and Merrill Lynch Global Private Equity, or “MLGPE,” or
collectively the “Sponsors,” through CCMG Acquisition Corporation, a wholly
owned subsidiary of Hertz Holdings (previously known as CCMG Holdings, Inc.)
acquired all of Hertz’s common stock from a subsidiary of Ford, or the “Acquisition,”
for aggregate consideration of $4,379 million in cash and debt refinanced or
assumed of $10,116 million and transaction fees and expenses of $447 million.
To finance the cash consideration for the Acquisition, to refinance certain of
our existing indebtedness and to pay related transaction fees and expenses, or
the “Transactions,” the Sponsors used:
·
equity
contributions totaling $2,295 million from the investment funds associated with
or designated by the Sponsors;
·
net
proceeds from a private placement by CCMG Acquisition Corporation of $1,800
million aggregate principal amount of 8.875% Senior Notes due 2014, or the “Senior
Dollar Notes,” $600 million aggregate principal amount of 10.5% Senior
Subordinated Notes due 2016, or the “Senior Subordinated Notes,” and
€
225
million aggregate principal amount of 7.875% Senior Notes due 2014, or the “Senior
Euro Notes.” In connection with the Transactions, CCMG Acquisition Corporation
merged with and into Hertz, with Hertz as the surviving corporation of
107
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the merger. CCMG Acquisition Corporation had no
operations prior to the Acquisition. We refer to the Senior Dollar Notes and
the Senior Euro Notes together as the “Senior Notes.” See Note 3
—
Debt;
·
aggregate
borrowings of approximately $1,707 million by us under a new senior term
facility, or the “Senior Term Facility,” which consists of (a) a maximum
borrowing capacity of $2,000 million, which included a delayed draw facility of
$293 million and (b) a synthetic letter of credit facility in an aggregate
principal amount of $250 million. See Note 16
—
Subsequent
Events;
·
aggregate
borrowings of approximately $400 million by Hertz and one of its Canadian
subsidiaries under a new senior asset-based revolving loan facility, or
the “Senior ABL Facility,” with a maximum borrowing capacity of $1,600 million
(which was increased in February 2007 to $1,800 million). We refer to the
Senior Term Facility and the Senior ABL Facility together as the “Senior Credit
Facilities.” See Note 16
—
Subsequent
Events;
·
aggregate
proceeds of offerings totaling approximately $4,300 million by a special
purpose entity wholly owned by us of asset-backed securities backed by
our U.S. car rental fleet, or the “U.S. Fleet Debt,” all of which we issued
under our existing asset-backed notes program, or the “ABS Program”;
under which an additional $600 million of previously issued asset-backed
medium term notes having maturities from 2007 to 2009 remain outstanding
following the closing of the Transactions, and in connection with which
approximately $1,500 million of variable funding notes in two series were also
issued, but not funded, on the closing date of the Acquisition;
·
aggregate
borrowings of the foreign currency equivalent of approximately $1,781 million
by certain of our foreign subsidiaries under asset-based revolving loan
facilities with aggregate commitments equivalent to approximately $2,930
million (calculated in each case at December 31, 2005), subject to
borrowing bases comprised of rental vehicles, rental equipment, and related
assets of certain of our foreign subsidiaries, (all of which are organized
outside of the United States) or one or more special purpose entities, as the
case may be, and, rental equipment and related assets of certain of our
subsidiaries organized outside North America or one or more special purpose
entities, as the case may be, which facilities (together with certain capital
lease obligations) are referred to collectively as the “International Fleet
Debt;” and
·
our
cash on hand in an aggregate amount of approximately $6.1 million.
In connection with the
Transactions, we also refinanced a significant portion of our existing
indebtedness, which was repaid as follows:
·
the
repurchase of approximately $3,700 million in aggregate principal amount of
existing senior notes having maturities from May 2006 to January 2028,
of which additional notes in the aggregate principal amount of approximately
$803.3 million remained outstanding following the Transactions;
·
the
repurchase of approximately
€
192.4 million (or
approximately $230.0 million, calculated as of December 31, 2005) in
aggregate principal amount of existing Euro-denominated medium term notes with
a maturity of July 2007, of which additional medium term notes in the
aggregate principal amount of approximately
€
7.6 million remained
outstanding following the Transactions;
108
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
·
the
repayment of a $1,185 million intercompany note issued by Hertz to Ford
Holdings on June 10, 2005 that would have matured in June 2010;
·
the
repayment of approximately $1,935 million under an interim credit facility that
would have matured on February 28, 2006;
·
the
repayment of commercial paper, notes payable and other bank debt of
approximately $1,212 million; and
·
the
settlement of all accrued interest and unamortized debt discounts relating to
the above existing indebtedness.
The term “Successor” refers to us following the
Acquisition. The term “Predecessor” refers to us prior to the Acquisition. The “Successor
period ended December 31, 2005” refers to the period from December 21,
2005 to December 31, 2005 and the “Predecessor period ended December 20,
2005” refers to the period from January 1, 2005 to December 20, 2005.
The Acquisition was recorded by allocating the cost of
the assets acquired, including intangible assets and liabilities assumed, based
on their estimated fair values at the Acquisition date. Consequently, the
excess of the cost of the Acquisition over the net of amounts assigned to the
fair value of assets acquired and the liabilities assumed is recorded to
goodwill.
The Acquisition has been accounted for as a purchase
in accordance with Financial Accounting Standards Board, or “FASB,” Statement
of Financial Accounting Standards, or “SFAS,” No. 141, “Business
Combinations,” with intangible assets recorded in conformity with SFAS No. 142,
“Goodwill and Other Intangible Assets,” requiring an allocation of the purchase
price to the tangible and intangible net assets acquired based on their
relative fair values as of the date of acquisition. The allocation of purchase
price is based on management’s judgment after evaluating several factors,
including actuarial estimates for pension liabilities, fair values of our
indebtedness and other liabilities, and valuation assessments of our tangible
and intangible assets determined with the assistance of a valuation specialist.
The
following table summarizes the fair values of the assets purchased and
liabilities assumed as of the Acquisition date (in millions of dollars):
Cash, cash
equivalents and restricted cash
$
1,184
Receivables
1,813
Inventories
104
Prepaid expenses and
other assets
405
Revenue earning
equipment, cars
7,415
Revenue earning
equipment, other equipment
2,075
Property and
equipment
1,380
Other intangible
assets
3,237
Goodwill
952
Accounts payable and
accrued liabilities
(1,670
)
Debt
(12,512
)
Public liability and
property damage
(348
)
Deferred taxes on
income
(1,731
)
Minority interest
(9
)
Total contributed
capital
$
2,295
109
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table summarizes the allocation of the Acquisition purchase price (in
millions of dollars):
Purchase
price allocation:
Purchase price
$
14,495
Estimated transaction
fees and expenses
447
Total cash estimated
purchase price
14,942
Less:
Debt refinanced
$
8,346
Assumption of remaining existing debt
1,770
Fair value adjustment to tangible assets
322
Other intangible assets acquired
3,237
Deferred financing fees
315
13,990
Excess purchase price
attributed to goodwill
$
952
The foreign currency impact on goodwill subsequent to
the Acquisition date totaled approximately $13 million.
Initial Public Offering
In November 2006, we
completed our initial public offering of 88,235,000 shares of common stock at a
per share price of $15.00, with proceeds to us before underwriting discounts
and offering expenses of approximately $1.3 billion. The proceeds were used to
repay borrowings that were outstanding under a $1.0 billion loan facility
entered into by Hertz Holdings, or the “Hertz Holdings Loan Facility,” and to
pay related transaction fees and expenses. The proceeds were also used to pay
special cash dividends of $1.12 per share on November 21, 2006 to
stockholders of record of Hertz Holdings immediately prior to the initial
public offering. Immediately following the initial public offering, the
Sponsors’ ownership percentage in us decreased to approximately 71.6%.
Principles of Consolidation
The consolidated financial
statements include the accounts of Hertz Holdings and our domestic and foreign
subsidiaries. All significant intercompany transactions have been eliminated.
Revenue Recognition
Rental and rental-related
revenue (including cost reimbursements from customers where we consider
ourselves to be the principal versus an agent) are recognized over the period
the revenue earning equipment is rented based on the terms of the rental or
leasing contract.
Cash and Equivalents
We consider all highly liquid
debt instruments purchased with an original maturity of three months or less to
be cash equivalents.
Restricted Cash
Restricted cash includes cash
and equivalents that are not readily available for our normal disbursements.
Restricted cash and equivalents are restricted for the acquisition of vehicles
and other specified uses under our asset backed notes program and to satisfy
certain of our self insurance
110
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reserve requirements. As of December 31,
2006 and 2005, the portion of total restricted cash that was associated with
our Fleet debt was $487.0 million and $191.5 million, respectively.
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:
Cars
5 to 16
months
Other equipment
24 to
108 months
Buildings
20 to 50
years
Capitalized internal
use software
1 to 10
years
Service cars and
service equipment
1 to 25
years
Other intangible
assets
5 to 10
years
Leasehold improvements
The shorter of their
economic lives or the lease term.
We follow 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 capitalized 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. When revenue earning equipment is acquired, we
estimate the period we will hold the asset. Depreciation is recorded on a
straight-line basis over the estimated holding period, with the objective of
minimizing gain or loss on the disposition of the revenue earning equipment.
Depreciation rates are reviewed on an ongoing basis based on management’s
routine review of present and estimated future market conditions and their
effect on residual values at the time of disposal. Upon disposal of the revenue
earning equipment, depreciation expense is adjusted for the difference between
the net proceeds received and the remaining net book value.
Environmental Liabilities
The use of automobiles and
other vehicles 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 us. To comply with environmental
regulations, measures are taken at certain locations to reduce the loss of
vapor during the fueling process and to maintain, upgrade and replace
underground fuel storage tanks. We also incur and provide for expenses for the
cleanup of petroleum discharges and other alleged violations of environmental
laws arising from the disposition of waste products. We do not believe that we
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 at undiscounted amounts when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
Public Liability and Property Damage
The obligation for public
liability and property damage on self-insured U.S. and international vehicles
and equipment represents an estimate for both reported accident claims not yet
paid, and claims incurred but not yet reported. The related liabilities are
recorded on a non-discounted basis. Reserve requirements are based on actuarial
evaluations of historical accident claim experience and trends, as
111
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
well as future projections of
ultimate losses, expenses, premiums and administrative costs. The adequacy of
the liability is regularly monitored based on evolving accident claim history.
If our estimates change or if actual results differ from these assumptions, the
amount of the recorded liability is adjusted to reflect these results. As of
the Acquisition date, this liability was revalued on a discounted basis which approximated
its fair value.
Pensions
Our employee pension costs and obligations are
dependent on our assumptions used by actuaries in calculating such amounts.
These assumptions include discount rates, salary growth, long-term return on
plan assets, retirement rates, mortality rates and other factors. Actual
results that differ from our assumptions are accumulated and amortized over
future periods and, therefore, generally affect our recognized expense in such
future periods. While we believe that the assumptions used are appropriate,
significant differences in actual experience or significant changes in
assumptions would affect our pension costs and obligations. As of the
Acquisition date, a liability was recorded for the projected benefit obligation
in excess of plan assets which eliminated any previously existing unrecognized
net gain or loss, or unrecognized prior service cost.
In September 2006,
the FASB issued SFAS No. 158, or “SFAS No. 158,” “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158
requires employers to fully recognize the obligations associated with single-employer
defined benefit pension plans, retiree healthcare and other postretirement
plans in their financial statements. The provisions of SFAS No. 158 were
effective as of our fiscal year ending December 31, 2006.
The effect of applying SFAS No. 158 as
of December 31, 2006 was as follows (in thousands of dollars):
Before application
of SFAS No. 158
Adjustments
Increase
(Decrease)
After application
of SFAS No. 158
Accrued salaries and
other compensation
$
474,777
$
(11,311
)
$
463,466
Deferred taxes on
income
1,796,200
4,873
1,801,073
Total liabilities
16,134,464
(6,438
)
16,128,026
Accumulated other
comprehensive income
88,090
6,438
94,528
Total stockholders’ equity
2,528,124
6,438
2,534,562
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 “Accumulated
other comprehensive income (loss)” in the stockholders’ equity section of our
consolidated balance sheet. As of December 31, 2006, the accumulated
foreign currency translation gain was $91.6 million and as of December 31,
2005, the accumulated foreign currency loss was of $3.4 million. On the
Acquisition date, the existing accumulated foreign currency translation gains
and losses were eliminated from “Accumulated other comprehensive income (loss)”
on our consolidated balance sheet. Foreign currency gains and losses resulting
from transactions are included in earnings.
112
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
of a change in tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized.
Prior to the Acquisition, Hertz and its domestic
subsidiaries filed a consolidated federal income tax return with Ford. Pursuant
to a tax sharing agreement, or the “Agreement,” with Ford, current and deferred
taxes were reported and paid to Ford, as if Hertz had filed its own
consolidated tax returns with its domestic subsidiaries. The Agreement provided
that Hertz was reimbursed for foreign tax credits in accordance with the
utilization of those credits by the Ford consolidated tax group.
On December 21, 2005, in connection with the
Acquisition, the Agreement with Ford was terminated. Upon termination, all tax
payables and receivables with Ford were cancelled and neither Hertz nor Ford
has any future rights or obligations under the Agreement. Hertz may be exposed
to tax liabilities attributable to periods it was a consolidated subsidiary of
Ford. While Ford has agreed to indemnify Hertz for certain tax liabilities
pursuant to the arrangements relating to our separation from Ford, we cannot
offer assurance that payments in respect of the indemnification agreement will
be available.
During 2006, a third party was
engaged to perform a comprehensive analysis of our deferred taxes. The domestic
deferred tax analysis was finalized in the fourth quarter of 2006 and resulted
in a $159.4 million decrease to our deferred tax liability and a $156.3 million
decrease to our goodwill. We have determined that these adjustments are not material
to our current or previously issued consolidated financial statements.
Advertising
Advertising and sales
promotion costs are expensed as incurred.
Legal Fees
We accrue for legal fees and
other directly related costs of third parties when it is probable that such
fees and costs will be incurred and the amounts can be reasonably estimated.
Impairment of Long-Lived Assets and Intangibles
We evaluate the carrying value
of goodwill and indefinite-lived intangible assets for impairment at least
annually in accordance with SFAS No. 142 “Goodwill and Other Intangible
Assets.” See Note 2—Goodwill and Other Intangible Assets. Long-lived assets,
other than goodwill and indefinite-lived intangible assets, are reviewed for
impairment in accordance with SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets.” Under SFAS No. 144, these assets are
tested for impairment whenever events or changes in circumstances indicate that
the carrying amounts of long-lived assets may not be recoverable. The carrying
amounts of the assets are based upon our estimates of the undiscounted cash
flows that are expected to result from the use and eventual disposition of the
assets. An impairment charge is recognized for the amount, if any, by which the
carrying value of an asset exceeds its fair value.
113
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options (Predecessor only)
Prior to the Acquisition, certain of our employees
were granted options to purchase shares of Ford common stock under Ford’s 1998
Long-Term Incentive Plan, or the “1998 Plan.” Effective January 1, 2003,
we adopted the fair value recognition provisions of SFAS No. 123, “Accounting
for Stock-Based Compensation.”
Effective with the
Acquisition, all unvested options became vested and exercisable. The total
stock-based compensation expense, net of related tax effects, was $6.8
million for the Predecessor period ended December 20, 2005 and $3.6
million for the year ended December 31, 2004.
Stock-Based Compensation
In December 2004, the
FASB, revised SFAS No. 123, with SFAS No. 123R, “Share-Based Payment.”
The revised statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost is to be recognized over the period during
which the employee is required to provide service in exchange for the award.
Beginning January 1, 2006, we accounted for our employee stock-based
compensation awards in accordance with SFAS No. 123R. We have estimated
the fair value of options issued at the date of grant using a Black-Scholes
option-pricing model, which includes assumptions related to volatility,
expected life, dividend yield, risk-free interest rate and forfeiture rate. See
Note 6—Hertz Holdings Stock Incentive Plan.
Use of Estimates and Assumptions
Use of estimates and
assumptions as determined by management are required in the preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, or “GAAP.” Actual results
could differ from those estimates and assumptions.
Reclassifications
Certain prior year amounts
have been reclassified to conform with current reporting.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation
No. 48, or “FIN 48,” “Accounting for Uncertainty in Income Taxes.” FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The impact of FIN 48 on our financial position as
of January 1, 2007 is estimated to be up to a $30.0 million increase
in total liabilities.
In June 2006, the Emerging Issues Task Force, or “EITF,”
issued EITF No. 06-3, or “EITF 06-3,” “How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation),” which relates
to any tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction. EITF 06-3 states that the
presentation of the taxes, either on a gross (included in revenues and costs)
or a net
114
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
basis (excluded from revenues), is an accounting
policy decision that should be disclosed pursuant to Accounting Principles
Board Opinion No. 22, “Disclosure of Accounting Policies,” if those
amounts are significant. EITF 06-3 should be applied to financial reports
for interim and annual reporting periods beginning after December 15,
2006. Sales tax amounts collected from customers have been recorded on a net
basis. The adoption of EITF 06-3 will not have any impact on our
financial position or results of operations.
In September 2006, the United States Securities
and Exchange Commission, or the “SEC,” issued Staff Accounting Bulletin No. 108,
or “SAB No. 108,” “Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108
provides guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial
statements are materially misstated. SAB No. 108 requires registrants to
apply the new guidance to material errors in existence at the beginning of the
first fiscal year ending after November 15, 2006 by correcting those
errors through a one-time cumulative effect adjustment to beginning-of-year
retained earnings. The adoption of SAB No. 108 did not have any impact on
our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157,
or “SFAS No. 157,” “Fair Value Measurements.” SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with
GAAP and expands disclosures about fair value measurements. The provisions of
SFAS No. 157 are effective for the fiscal year beginning after November 15,
2007. We are currently reviewing SFAS No. 157 to determine its impact, if
any, on our financial position or results of operations.
In February 2007, the
FASB issued SFAS No. 159, or “SFAS No. 159,” “The Fair Value Option
for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. The provisions of SFAS 159 are effective as of January 1,
2008. We are currently reviewing SFAS 159 to determine its impact, if any,
on our financial position or results of operations.
Note 2—Goodwill and
Other Intangible Assets
We account for our goodwill under SFAS No. 142.
Under SFAS No. 142, goodwill is no longer amortized, but instead must be
tested for impairment at least annually. We conducted the required annual
goodwill and indefinite-lived intangible asset impairment test in the second
quarter of 2006 and determined that there was no impairment. The Acquisition
was recorded by allocating the cost of the assets acquired, including
intangible assets and liabilities assumed, based on their estimated fair values
at the Acquisition date. Consequently, the excess of the cost of the
Acquisition over the net of amounts assigned to the fair value of assets
acquired and the liabilities assumed is recorded to goodwill.
The Acquisition has been accounted for as a purchase
in accordance with SFAS No. 141, with intangible assets recorded in
conformity with SFAS No. 142, requiring an allocation of the purchase
price to the tangible and intangible net assets acquired based on their
relative fair values as of the date of acquisition. The allocation of purchase
price is based on management’s judgment after evaluating several factors,
including actuarial estimates for pension liabilities, fair values of our
indebtedness and other liabilities, and valuation assessments of our tangible
and intangible assets determined with the assistance of a valuation specialist.
115
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following summarizes the changes in our goodwill, by segment, for the periods
presented (in thousands of dollars):
Car Rental
Equipment
Rental
Total
Balance as of
December 31, 2005
$
393,395
$
628,986
$
1,022,381
Change as result of
purchase accounting adjustments(1)
(63,591
)
(6,587
)
(70,178
)
Other changes(2)
6,775
5,715
12,490
Balance as of
December 31, 2006
$
336,579
$
628,114
$
964,693
(1)
Consists of a decrease
of approximately $156.5 million relating to tax adjustments booked in the
fourth quarter of 2006 for tax liabilities indemnified by Ford at the date of
sale, partly offset by: (i) a revision to estimated federal and state tax
liabilities as of the date of acquisition, based on the tax returns filed,
totaling $60.5 million; (ii) adjustments made to the fair value of certain
estimated liabilities as of the date of acquisition of $23.9 million, partly
offset by the tax effect of these adjustments; and (iii) further revisions
to the valuation of certain tangible assets, partly offset by the tax effect of
these adjustments.
(2)
Consists of changes
primarily resulting from the translation of foreign currencies at different
exchange rates from the beginning of the period to the end of the period.
Other
intangible assets, net consisted of the following major classes (in thousands
of dollars):
December 31, 2006
December 31, 2005
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
Amortized intangible
assets:
Customer-related
$
611,783
$
(63,046
)
$
548,737
$
612,000
$
(1,844
)
$
610,156
Other
1,270
(512
)
758
1,209
(100
)
1,109
Total
613,053
(63,558
)
549,495
613,209
(1,944
)
611,265
Indefinite-lived
intangible assets:
Trade name
2,624,000
—
2,624,000
2,624,000
—
2,624,000
Total other intangible
assets, net
$
3,237,053
$
(63,558
)
$
3,173,495
$
3,237,209
$
(1,944
)
$
3,235,265
Amortization of other
intangible assets for the year ended December 31, 2006, the Successor
period ended December 31, 2005 and the Predecessor period ended December 20,
2005 and the year ended December 31, 2004 and was $61.6 million, $2.1
million, $0.7 million, $0.6 million, respectively. Future amortization expense
of other intangible assets is expected to be approximately $61.2 million per
year for each of the next five years.
116
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3—Debt
Our debt
consists of the following (in thousands of dollars):
December 31,
2006
December 31,
2005
Corporate Debt
Senior Term Facility,
average interest rate: 2006, 7.4%; 2005, 8.5% (effective average interest
rate: 2006,
7.5%;
2005, 8.7%); net of unamortized discount: 2006, $38,378; 2005, $44,806
$
1,947,907
$
1,662,194
Senior ABL Facility,
average interest rate: 2006,
N/A; 2005, 6.5% (effective average interest rate:
2006, N/A;
2005, 6.9%); net of unamortized discount: 2006, $22,188; 2005, $27,832
(22,188
)
471,202
Senior Notes, average
interest rate: 2006,
8.7%;
2005, 8.7% (effective average interest rate: 2006, 8.7%; 2005, 8.7%);
2,097,030
2,066,083
Senior Subordinated
Notes, average interest rate: 2006,
10.5%; 2005, 10.5% (effective average interest
rate: 2006, 10.5%;
2005, 10.5%);
600,000
600,000
Promissory notes,
average interest rate: 2006,
7.2%; 2005, 6.9% (effective average interest rate:
2006, 7.3%;
2005, 7.0%); net of unamortized discount: 2006, $5,545; 2005, $4,875;.
633,463
798,422
Notes payable,
including commercial paper, average interest rate: 2006,
4.1%; 2005, 4.3%
6,175
100,362
Foreign subsidiaries’ debt in foreign currencies:
Short-term
borrowings:
Banks, average interest rate: 2006,
13.4%; 2005, 3.6%
2,340
3,139
Commercial paper, average interest rate: 2005, 2.8%
—
47,284
Other borrowings, average interest rate: 2006,
5.1%; 2005, 4.4%
12,546
14,419
Total Corporate Debt
5,277,273
5,763,105
Fleet Debt
U.S. Fleet Debt and
pre-Acquisition ABS Notes, average interest rate: 2006,
4.4%; 2005, 4.4%
(effective average interest rate: 2006, 4.5%; 2005, 4.4%); net of unamortized discount:
2006, $10,631;
2005, $19,822
4,845,202
4,920,178
International Fleet
Debt in foreign currencies, average interest rate: 2006,
5.4%; 2005, 4.4%
(effective average interest rate: 2006, 5.4%; 2005, 4.5%); net of unamortized discount:
2006, $4,443;
2005, $16,063
1,987,787
1,831,722
Fleet Financing
Facility, average interest rate: 2006, 6.6% (effective average interest rate:
2006, 6.7%); net of unamortized discount: 2006, $2,078
165,922
—
Total Fleet Debt
6,998,911
6,751,900
Total Debt
$
12,276,184
$
12,515,005
The aggregate amounts of maturities of debt (in
millions of dollars) are as follows: 2007, $
2,543.2 (including $2,162.6 of other
short-term borrowings); 2008, $842.1;
2009, $1,021.1;
2010, $2,924.1;
2011, $120.9;
after 2011, $4,908.0.
117
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the year ended December 31, 2006,
short-term borrowings (in millions of dollars) were as follows: maximum month
end amounts outstanding of $11.1 of commercial paper and $3,077.5 of bank
borrowings; monthly average amounts outstanding of $12.4 of commercial paper
(weighted-average interest rate 0.6%) and $2,509.9 of bank borrowings
(weighted-average interest rate 5.2%).
During the year ended December 31, 2005, short-term
borrowings (in millions of dollars) were as follows: maximum month end amounts
outstanding of $2,052.7 of commercial paper and $3,113.7 of bank borrowings;
monthly average amounts outstanding of $1,569.5 of commercial paper (weighted-average
interest rate 3.1%) and $1,798.3 of bank borrowings (weighted-average
interest rate 5.2%).
As of December 31, 2006,
there were standby letters of credit issued totaling $460.9 million. Of this
amount, $234.0 million has been issued for the benefit of the ABS Program
($200.0 million of which was issued by Ford and $34.0 million of which relates
to the Senior Credit Facilities below) and the remainder is primarily to
support self-insurance programs (including insurance policies with respect to
which we have indemnified the issuers for any losses) in the United States,
Canada and Europe and to support airport concession obligations in the United
States and Canada. As of December 31, 2006, the full amount of these
letters of credit was undrawn.
Senior Credit Facilities
In connection with the Acquisition, Hertz entered into
a credit agreement with respect to its Senior Term Facility with Deutsche Bank
AG, New York Branch as administrative agent and collateral agent, Lehman
Commercial Paper Inc. as syndication agent, Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated as documentation
agent, and the other financial institutions party thereto from time to time.
The facility consisted of a $2,000.0 million secured term loan facility providing
for loans denominated in U.S. dollars, which included a delayed draw facility
of $293.0 million. In addition, there is a pre-funded synthetic letter of
credit facility in an aggregate principal amount of $250.0 million. On the
Closing Date, Hertz utilized $1,707.0 million of the Senior Term Facility and
$182.2 million in letters of credit. As of December 31, 2006, we had $
1,947.9 million in
borrowings outstanding under this facility, which is net of a discount of $38.4 million and had
issued $238.9 million in letters of credit. The term loan facility and the
synthetic letter of credit facility will mature on December 21, 2012.
The term loan will
amortize in nominal quarterly installments (not exceeding one percent of the
aggregate principal amount thereof per annum) until the maturity date. At the
borrower’s election, the interest rates per annum applicable to the loans under
the Senior Term Facility will be based on a fluctuating rate of interest
measured by reference to either (1) an adjusted London inter-bank offered
rate, or “LIBOR,” plus a borrowing margin or (2) an alternate base rate
plus a borrowing margin. In addition, the borrower pays fees on the unused term
loan commitments of the lenders, letter of credit participation fees on the
full amount of the synthetic letter of credit facility plus fronting fees for
the letter of credit issuing banks and other customary fees in respect of the
Senior Term Facility.
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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hertz, Hertz Equipment Rental Corporation and certain
other subsidiaries of Hertz also entered into a credit agreement with respect
to the Senior ABL Facility with Deutsche Bank AG, New York Branch as
administrative agent and collateral agent, Deutsche Bank AG, Canada Branch as
Canadian Agent and Canadian collateral agent, Lehman Commercial Paper Inc. as
syndication agent, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated as documentation agent and the financial institutions party
thereto from time to time. This facility provided (subject to availability
under a borrowing base) for aggregate maximum borrowings of $1,600.0 million
(which was increased in February 2007 to $1,800.0 million) under a
revolving loan facility providing for loans denominated in U.S. dollars,
Canadian dollars, Euros and Pounds Sterling. Up to $200.0 million of the
revolving loan facility is available for the issuance of letters of credit.
Hertz and Hertz Equipment Rental Corporation are the U.S. borrowers under the
Senior ABL Facility and Matthews Equipment Limited and its subsidiary Western
Shut-Down (1995) Ltd. are the Canadian borrowers under the Senior ABL Facility.
At December 31, 2006, net of a discount of $22.2 million, Hertz and
Matthews Equipment Limited collectively had no borrowings outstanding under
this facility and issued $18.2 million in letters of credit. The Senior ABL
Facility will mature on December 21, 2010. At the borrower’s election, the
interest rates per annum applicable to the loans under the Senior ABL Facility
will be based on a fluctuating rate of interest measured by reference to either
(1) adjusted LIBOR plus a borrowing margin or (2) an alternate base
rate plus a borrowing margin. The borrower will pay customary commitment and
other fees in respect of the Senior ABL Facility.
Hertz’s obligations under the Senior Term Facility and
the Senior ABL Facility are guaranteed by Hertz Investors, Inc., its
immediate parent, and most of its direct and indirect domestic subsidiaries
(subject to certain exceptions, including for subsidiaries involved in the U.S.
Fleet Debt Facility and similar special purpose financings), though Hertz
Equipment Rental Corporation does not guarantee Hertz’s obligations under the
Senior ABL Facility because it is a borrower under that facility. In addition,
the obligations of the Canadian borrowers under the Senior ABL Facility are
guaranteed by their respective subsidiaries, if any, subject to limited
exceptions. The lenders under each of the Senior Term Facility and the Senior
ABL Facility have received a security interest in substantially all of the
tangible and intangible assets of the borrowers and guarantors under those
facilities, including pledges of the stock of certain of their respective
subsidiaries, subject in each case to certain exceptions (including in respect
of the U.S. Fleet Debt, the International Fleet Debt and, in the case of the
Senior ABL Facility, other secured fleet financing.) Consequently, these assets
will not be available to satisfy the claims of our general creditors.
The Senior Credit Facilities contain a number of
covenants that, among other things, limit or restrict the ability of the
borrowers and the guarantors to dispose of assets, incur additional
indebtedness, incur guarantee obligations, prepay other indebtedness, make
dividends and other restricted payments, create liens, make investments, make
acquisitions, engage in mergers, change the nature of their business, make
capital expenditures, or engage in certain transactions with affiliates. Under
the Senior Term Facility, the borrower is required to comply with specified
financial ratios and tests, including a minimum interest expense coverage ratio
and a maximum leverage ratio. Under the Senior ABL Facility, upon excess
availability falling below certain levels, specified financial ratios and
tests, including a minimum fixed charge coverage ratio and a maximum leverage
ratio, will apply. The Senior Credit Facilities are subject to certain
mandatory prepayment requirements and provide for customary events of default.
Restrictive covenants in the Senior Term Facility (as
amended) permit cash dividends to be paid to Hertz Holdings (i) in an
aggregate amount not to exceed the greater of a specified minimum amount and
1.0% of consolidated tangible assets less certain investments, (ii) in
additional amounts at any
119
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
time, up to a specified available amount determined by
reference to, among other things, consolidated net income from October 1,
2005 to the end of the most recent fiscal quarter for which consolidated
financial statements of Hertz are available and (iii) in additional
amounts at any time, up to a specified amount of certain equity contributions
made by Hertz Holdings to Hertz.
Restrictive covenants in the Senior ABL Facility (as
amended) permit cash dividends to be paid to Hertz Holdings in an aggregate
amount, taken together with certain other investments, acquisitions and
optional prepayments, not to exceed $100 million. Hertz may also pay additional
cash dividends under the Senior ABL Facility at any time, and in any amount, so
long as (a) there is at least $250 million of availability under the
facility after giving effect to the proposed dividend, (b) if certain
other payments when taken together with the proposed dividend would exceed $50
million in a 30-day period, Hertz can demonstrate projected average
availability in the following six-month period of $250 million or more and (c) (i) Hertz
can demonstrate pro forma compliance with the consolidated leverage ratio and
consolidated fixed charge coverage ratio set forth in the Senior ABL Facility
or (ii) the amount of the proposed dividend does not exceed the sum of (x) the
greater of a specified minimum amount and 1.0% of consolidated tangible assets
plus (y) a specified available amount determined by reference to, among
other things, consolidated net income from October 1, 2005 to the end of
the most recent fiscal quarter for which consolidated financial statements of
Hertz are available plus (z) a specified amount of certain equity
contributions made by Hertz Holdings to the borrowers under such facility.
On June 30, 2006, we entered into amendments to
each of our Senior Term Facility and Senior ABL Facility. The amendments
provide, among other things, for additional capacity under the covenants in
these credit facilities to enter into certain sale and leaseback transactions,
to pay dividends (subject to the limitations described above) and, in the case
of the amendment to the Senior Term Facility, to make investments.
These amendments also have the effect of
reducing the restrictions in the Senior Credit Facilities on Hertz’s ability to
provide cash to Hertz Holdings (whether in the form of a loan or a dividend)
that would enable Hertz Holdings to service its indebtedness. The amendment
to the Senior Term Facility also permits us to use proceeds of the unused
portion of the $293.0 million delayed draw facility to repay borrowings
outstanding under the Senior ABL Facility. On July 10, 2006, the remaining
$208.1 million of the delayed draw facility was drawn down to pay down the
equivalent amount of borrowings under the Senior ABL Facility.
In February 2007, we
entered into amendments to each of our Senior Term Facility and Senior ABL
Facility, see Note 16—Subsequent Events.
Senior Notes and Senior Subordinated Notes
In connection with the Acquisition, CCMG Acquisition
Corporation issued the Senior Notes and the Senior Subordinated Notes under
separate indentures between CCMG Acquisition Corporation and Wells Fargo Bank,
National Association, as trustee. Hertz and the guarantors entered into
supplemental indentures, dated as of the Closing Date, pursuant to which Hertz
assumed the obligations of CCMG Acquisition Corporation under the Senior Notes,
the Senior Subordinated Notes and the respective indentures, and the guarantors
issued the related guarantees. CCMG Acquisition Corporation subsequently merged
with and into Hertz, with Hertz as the surviving entity.
As of December 31, 2006, $2,097.0 million and
$600.0 million in borrowings were outstanding under the Senior Notes and Senior
Subordinated Notes, respectively.
Prior to October 1, 2006, our Senior Euro Notes were not designated
as a net investment hedge of our Euro-denominated net investments in our
foreign operations. For the nine months ended September 30, 2006, we
incurred unrealized
120
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
exchange transaction losses
of $19.2 million resulting from the translation of these Euro-denominated notes
into the U.S. dollar, which are recorded in our consolidated statement of
operations in “Selling, general and administrative” expenses. On October 1,
2006, we designated our Senior Euro Notes as an effective net investment hedge
of our Euro-denominated net investment in our foreign operations. As a result
of this net investment hedge designation, as of December 31, 2006, $7.1
million of losses, which is net of tax of $4.6 million, attributable to the
translation of our Senior Euro Notes into the U.S. dollar, are recorded in our
consolidated balance sheet in “Accumulated other comprehensive income (loss).”
The
Senior Notes will mature on January 1, 2014, and the Senior Subordinated
Notes will mature on January 1, 2016. The Senior Dollar Notes bear
interest at a rate per annum of 8.875%, the Senior Euro Notes bear interest at
a rate per annum of 7.875% and the Senior Subordinated Notes bear interest at a
rate per annum of 10.5%. Hertz’s obligations under the indentures are
guaranteed by each of its direct and indirect domestic subsidiaries that is a
guarantor under the Senior Term Facility.
Both the indenture for the Senior Notes and the
indenture for the Senior Subordinated Notes contain covenants that, among other
things, limit the ability of Hertz and its restricted subsidiaries, described
in the respective indentures, to incur more debt, pay dividends, redeem stock
or make other distributions, make investments, create liens, transfer or sell
assets, merge or consolidate and enter into certain transactions with Hertz’s
affiliates. The indenture for the Senior Subordinated Notes also contains
subordination provisions and limitations on the types of senior subordinated
debt that may be incurred. The indentures also contain certain mandatory and
optional prepayment or redemption provisions and provide for customary events
of default.
The restrictive covenants in
the indentures governing the Senior Notes and the Senior Subordinated Notes
permit Hertz to make loans, advances, dividends or distributions to Hertz
Holdings in an amount determined by reference to consolidated net income for
the period from October 1, 2005 to the end of the most recently ended
fiscal quarter for which consolidated financial statements of Hertz are
available, so long as Hertz’s consolidated coverage ratio remains greater than
or equal to 2.00:1.00 after giving pro forma effect to such restricted
payments. Hertz is also permitted to make restricted payments to Hertz Holdings
in an amount not exceeding the greater of a specified minimum amount and 1% of
consolidated tangible assets (which payments are deducted in determining the
amount available as described in the preceding sentence), and in an amount
equal to certain equity contributions to Hertz. Hertz is also permitted to make
restricted payments to its parent company in an amount not to exceed in any
fiscal year 6% of the aggregate gross proceeds received by The Hertz
Corporation through a contribution to equity capital from such offering to
enable the public parent company to pay dividends to its stockholders.
Fleet Financing
U.S.
Fleet Debt.
In
connection
with
the
Acquisition,
Hertz
Vehicle
Financing
LLC,
or
“HVF,”
a
bankruptcy-remote
special
purpose
entity
wholly-owned
by
Hertz,
entered
into
an
amended
and
restated
base
indenture,
or
the
“ABS
Indenture,”
dated
as
of
the
Closing
Date,
with
BNY
Midwest
Trust
Company
as
trustee,
and
a
number
of
related
supplements
to
the
ABS
Indenture,
each
dated
as
of
the
Closing
Date,
with
BNY
Midwest
Trust
Company
as
trustee
and
securities
intermediary,
or,
collectively,
the
“ABS
Supplement.”
On
the
Closing
Date,
HVF,
as
issuer,
issued
approximately
$4,300.0
million
of
new
medium
term
asset-backed
notes
consisting
of
11
classes
of
notes
in
two
series
under
the
ABS
Supplement.
HVF
also
issued
approximately
$1,500.0
million
of
variable
funding
notes
in
two
series,
none
of
which
were
funded
at
closing.
As
of
December 31,
2006,
$
4,299.9
million,
121
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
net
of
a
$
0.1
million
discount,
in medium term notes were outstanding
and no aggregate borrowings were outstanding in the form of variable funding
notes.
Each class of notes matures three, four or five years
from the Closing Date. The variable funding notes will be funded through the
bank multi-seller commercial paper market. The assets of HVF, including
the U.S. car rental fleet owned by HVF and certain related assets, collateralize
the U.S. Fleet Debt and pre-Acquisition ABS Notes. Consequently, these assets
will not be available to satisfy the claims of Hertz’s general creditors.
The various series of U.S. Fleet Debt have either
fixed or floating rates of interest. The interest rate per annum applicable to
any floating rate notes (other than any variable funding asset-backed
debt) is based on a fluctuating rate of interest measured by reference to
one-month LIBOR plus a spread, although HVF intends to maintain hedging transactions
so that it will not be required to pay a rate in excess of 4.87% per annum in
order to receive the LIBOR amounts due from time to time on such floating rate
notes. The interest rate per annum applicable to any variable funding asset-backed
debt is either the blended average commercial paper rate, if funded through the
commercial paper market, or if commercial paper is not being issued, the
greater of the prime rate or the federal funds rate, or if requisite notice is
provided, the Eurodollar rate plus a spread.
In connection with the Acquisition and the issuance of
$3,550.0 million of floating rate U.S. Fleet Debt, HVF and Hertz entered into
seven interest rate swap agreements, or the “HVF Swaps,” effective December 21,
2005, which qualify as cash flow hedging instruments in accordance with SFAS
133 “Accounting for Derivative Instruments and Hedging Activities.” These
agreements mature at various terms, in connection with the scheduled maturity
of the associated debt obligations, through November 25, 2011. Under these
agreements, HVF pays monthly interest at a fixed rate of 4.5% per annum in
exchange for monthly amounts at one-month LIBOR, effectively transforming the
floating rate U.S. Fleet Debt to fixed rate obligations. As of December 31,
2006 and December 31, 2005, the fair value of the HVF Swaps were $50.6
million and $37.0 million, respectively, which are reflected in our
consolidated balance sheet in “Prepaid expenses and other assets.” For the year
ended December 31, 2006, we recorded a benefit of $1.0 million in our
consolidated statement of operations, in “Interest, net of interest income,”
associated with previously recognized ineffectiveness of the HVF Swaps.
The U.S. Fleet Debt issued on the closing date of the
Acquisition has the benefit of financial guaranty insurance policies under
which either MBIA Insurance Corporation or Ambac Assurance Corporation will
guarantee the timely payment of interest on and ultimate payment of principal
of such notes.
HVF is subject to numerous restrictive covenants under
the ABS Indenture and the other agreements governing the U.S. Fleet Debt,
including restrictive covenants with respect to liens, indebtedness, benefit
plans, mergers, disposition of assets, acquisition of assets, dividends,
officers’ compensation, investments, agreements, the types of business it may
conduct and other customary covenants for a bankruptcy-remote special
purpose entity. The U.S. Fleet Debt is subject to events of default and
amortization events that are customary in nature for U.S. rental car asset
backed securitizations of this type. The occurrence of an amortization event or
event of default could result in the acceleration of principal of the notes and
a liquidation of the U.S. car rental fleet.
International
Fleet Debt.
In
connection with the Acquisition, Hertz International, Ltd., or “HIL,” a
Delaware corporation organized as a foreign subsidiary holding company and a
direct subsidiary of Hertz, and certain of its subsidiaries (all of which are
organized outside the United States), together with certain bankruptcy-remote
special purpose entities (whether organized as HIL’s subsidiaries or as
non-affiliated “orphan” companies), or “SPEs,” entered into revolving bridge
loan facilities providing
122
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
commitments to lend, in various currencies up to an
aggregate foreign currency equivalent of approximately $3,197.0 million
(calculated as of December 31, 2006), subject to borrowing bases comprised
of rental vehicles and related assets of certain of HIL’s subsidiaries (all of
which are organized outside the United States) or one or more SPEs, as the case
may be, and rental equipment and related assets of certain of HIL’s
subsidiaries organized outside North America or one or more SPEs, as the case
may be. As of December 31, 2006, the foreign currency equivalent of
$1,954.6 million in borrowings was outstanding under these facilities, net of a
$4.4 million discount. These facilities are referred to collectively as the “International
Fleet Debt Facilities.”
The International Fleet Debt Facilities consist of
four revolving loan tranches (Tranches A1, A2, B and C), each subject to
borrowing bases comprising the revenue earning equipment and related assets of
each applicable borrower (or, in the case of a borrower that is a SPE
on-lending loan proceeds to a fleet-owning SPE or subsidiary, as the case
may be, the rental vehicles and related assets of such fleet-owning SPE
or subsidiary). A portion of the Tranche C loan will be available for the
issuance of letters of credit.
The obligations of the borrowers under the
International Fleet Debt Facilities are guaranteed by HIL, and by the other
borrowers and certain related entities under the applicable tranche, in each
case subject to certain legal, tax, cost and other structuring considerations.
The obligations and the guarantees of the obligations of the Tranche A
borrowers under the Tranche A2 loans are subordinated to the obligations and
the guarantees of the obligations of such borrowers under the Tranche A1 loans.
Subject to legal, tax, cost and other structuring considerations and to certain
exceptions, the International Fleet Debt Facilities are secured by a material
part of the assets of each borrower, certain related entities and each
guarantor, including pledges of the capital stock of each borrower and certain
related entities. The obligations of the Tranche A borrowers under the Tranche
A2 loans and the guarantees thereof are secured on a junior second priority
basis by any assets securing the obligations of the Tranche A borrowers under the
Tranche A1 loans and the guarantees thereof. In addition, Hertz has guaranteed
the obligations of its Brazilian subsidiary with respect to an aggregate
principal amount of the Tranche B loan not exceeding $52.0 million (or such
other principal amount as may be agreed to by the Senior Credit Facilities
lenders). That guarantee is secured equally and ratably with borrowings under
the Senior Term Facility. The assets that collateralize the International Fleet
Debt Facilities will not be available to satisfy the claims of Hertz’s general
creditors.
The facilities under each of the tranches mature five
years from the Closing Date. Subject to certain exceptions, the loans are
subject to mandatory prepayment and reduction in commitment amounts equal to
the net proceeds of specified types of take-out financing transactions and
asset sales.
The interest rates per annum applicable to loans under
the International Fleet Debt Facilities are based on fluctuating rates of
interest measured by reference to one-month LIBOR, EURIBOR or their equivalents
for local currencies as appropriate (in the case of the Tranche A1 and A2
loans); relevant local currency base rates (in the case of Tranche B loans); or
one-month EURIBOR (in the case of the Tranche C loans), in each case plus a
borrowing margin. In addition, the borrowers under each of Tranche A1, Tranche
A2, Tranche B and Tranche C of the International Fleet Debt Facilities will pay
fees on the unused commitments of the lenders under the applicable tranche, and
other customary fees and expenses in respect of such facilities, and the
Tranche A1 and A2 borrowing margins are subject to increase if HIL does not
repay borrowings thereunder within specified periods of time and upon the
occurrence of other specified events.
The International Fleet Debt
Facilities contain a number of covenants (including, without limitation,
covenants customary for transactions similar to the International Fleet Debt
Facilities) that, among
123
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
other things, limit or
restrict the ability of HIL, the borrowers and the other subsidiaries of HIL to
dispose of assets, incur additional indebtedness, incur guarantee obligations,
create liens, make investments, make acquisitions, engage in mergers, make
negative pledges, change the nature of their business or engage in certain
transactions with affiliates. In addition, HIL is restricted from making
dividends and other restricted payments (which may include payments of
intercompany indebtedness) in an amount greater than
€
100
million plus a specified excess cash flow amount calculated by reference to
excess cash flow in earlier periods. Subject to certain exceptions, until the
later of one year from the Closing Date and such time as 50% of the commitments
under the International Fleet Debt Facilities as of the closing of the
Acquisition have been replaced by permanent take-out international asset-based
facilities, the specified excess cash flow amount will be zero. Thereafter,
this specified excess cash flow amount will be between 50% and 100% of
cumulative excess cash flow based on the percentage of the International Fleet
Debt Facilities that have been replaced by permanent take-out international
asset-based facilities. As a result of the contractual restrictions on
HIL’s ability to pay dividends to Hertz as of December 31, 2006, the
restricted net assets of our consolidated subsidiaries exceeded 25% of our
total consolidated net assets.
The subsidiaries conducting
the car rental business in certain European jurisdictions may, at their option,
continue to engage in capital lease financings relating to revenue earning
equipment outside the International Fleet Debt Facilities. As of December 31,
2006 and December 31, 2005, there were $33.2 million and $95.6 million,
respectively, of such capital lease financings outstanding. These capital lease
financings are included in the International Fleet Debt total.
In May 2006, in
connection with the forecasted issuance of the permanent take-out international
asset-based facilities, HIL purchased two swaptions for
€
3.3
million, to protect itself from interest rate increases. These swaptions give
HIL the right, but not the obligation, to enter into three year interest rate
swaps, based on a total notional amount of
€
600 million at an interest
rate of 4.155%. As of December 31, 2006, the fair value of the swaptions
was
€
1.3
million (or $1.7 million), which is reflected in our consolidated balance sheet
in “Prepaid expenses and other assets.” During the year ended December 31,
2006, the fair value adjustment related to these swaps was a loss of $2.6
million, which was recorded in our consolidated
statement of operations in “Selling, general and administrative” expenses. The
swaptions were renewed in 2007 prior to their scheduled expiration date of
March 15, 2007 and now expire on September 5, 2007. See Note 16—Subsequent
Events.
On March 21, 2007,
certain amendments to the International Fleet Debt Facilities were entered into
for the purpose of, among other things, extending the dates when margins on the
affected facilities are scheduled to step up. See Note 16—Subsequent
Events.
Fleet Financing Facility.
On September 29, 2006, Hertz
and PUERTO RICANCARS, INC., a Puerto Rican corporation and wholly owned
indirect subsidiary of Hertz, or ‘‘PR Cars,’’ entered into a credit agreement
to finance the acquisition of Hertz’s and/or PR Cars’ fleet in Hawaii, Kansas,
Puerto Rico and St. Thomas, U.S. Virgin Islands, dated as of September 29,
2006, or the ‘‘Fleet Financing Facility,’’ with the several banks and other
financial institutions from time to time party thereto as lenders, GELCO
Corporation d.b.a. GE Fleet Services, or the ‘‘Fleet Financing Agent,’’ as
administrative agent, as collateral agent for collateral owned by Hertz and as
collateral agent for collateral owned by PR Cars. Affiliates of Merrill Lynch &
Co. are lenders under the Fleet Financing Facility.
The Fleet Financing Facility
provides (subject to availability under a borrowing base) a revolving credit
facility of up to $275.0 million to Hertz and PR Cars. On September 29,
2006, Hertz borrowed $124.0 million under this facility to refinance other
debt. The borrowing base formula is subject to downward adjustment upon the
occurrence of certain events and (in certain other instances) at the permitted
124
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
discretion of the Fleet
Financing Agent. As of December 31, 2006, Hertz and PR Cars had $144.9
million (net of a $2.1 million discount) and $21.0 million, respectively, of
borrowings outstanding.
The Fleet Financing Facility
will mature on December 21, 2011, but Hertz and PR Cars may terminate or
reduce the commitments of the lenders thereunder at any time. The Fleet
Financing Facility is subject to mandatory prepayment in the amount by which
outstanding extensions of credit to Hertz or PR Cars exceed the lesser of the
Hertz or PR Cars borrowing base, as applicable, and the commitments then in
effect.
The obligations of each of the
borrowers under the Fleet Financing Facility are guaranteed by each of Hertz’s
direct and indirect domestic subsidiaries (other than subsidiaries whose only
material assets consist of securities and debt of foreign subsidiaries and
related assets, subsidiaries involved in the ABS Program or other similar
special purpose financings, subsidiaries with minority ownership positions,
certain subsidiaries of foreign subsidiaries and certain immaterial
subsidiaries). In addition, the obligations of PR Cars are guaranteed by Hertz.
The obligations of Hertz under the Fleet Financing Facility and the other loan
documents, including, without limitation, its guarantee of PR Cars’ obligations
under the Fleet Financing Facility, are secured by security interests in Hertz’s
rental car fleet in Hawaii and by certain assets related to Hertz’s rental car
fleet in Hawaii and Kansas, including, without limitation, manufacturer
repurchase program agreements. PR Cars’ obligations under the Fleet Financing
Facility and the other loan documents are secured by security interests in PR
Cars’ rental car fleet in Puerto Rico and St. Thomas, the U.S. Virgin Islands
and by certain assets related thereto.
At the applicable borrower’s
election, the interest rates per annum applicable to the loans under the Fleet
Financing Facility will be based on a fluctuating rate of interest measured by
reference to either (1) LIBOR plus a borrowing margin of 125 basis points
or (2) an alternate base rate of the prime rate plus a borrowing margin of
25 basis points. As of December 31, 2006, the average interest rate was
6.6% (LIBOR based).
The Fleet Financing Facility
contains a number of covenants that, among other things, limit or restrict the
ability of the borrowers and their subsidiaries to create liens, dispose of
assets, engage in mergers, enter into agreements which restrict liens on the
Fleet Financing Facility collateral or Hertz’s rental car fleet in Kansas or
change the nature of their business.
During the fourth quarter of
2006, certain of the documents relating to the Fleet Financing Facility were
amended to make certain technical and administrative changes.
Hertz Holdings Loan Facility
On June 30, 2006, Hertz
Holdings entered into a loan facility with Deutsche Bank, AG, New York Branch,
Lehman Commercial Paper Inc., Merrill Lynch Capital Corporation, Goldman Sachs
Credit Partners L.P., JPMorgan Chase Bank, N.A. and Morgan Stanley Senior
Funding, Inc. or affiliates thereof, providing for a loan of $1.0 billion,
or the “Hertz Holdings Loan Facility,” for the purpose of paying a special cash
dividend to the holders of its common stock and paying fees and expenses
related to the facility. The Hertz Holdings Loan Facility was repaid in full
with the proceeds of our initial public offering, and the restrictive covenants
contained therein were terminated.
Pre-Acquisition Debt
As of December 31, 2006,
we had approximately $
633.5
million (net of a $5.5
million discount) outstanding in pre-Acquisition promissory notes issued under
three separate indentures at an average interest rate of 7.2%. These
pre-Acquisition promissory notes have maturities ranging from 2007 to 2028.
125
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2006, we had approximately
€
7.6
million (or $10.0
million) outstanding in pre-Acquisition Euro-denominated medium term notes, in
connection with which we entered into an interest rate swap agreement on December 21,
2005, effective January 16, 2006 and maturing on July 16, 2007. The
purpose of this interest rate swap is to lock in the interest cash outflows at
a fixed rate of 4.1% on the variable rate Euro-denominated medium term notes.
Funds sufficient to repay all obligations associated with the remaining
€
7.6
million of Euro-denominated medium term notes at maturity have been placed in
escrow for satisfaction of these obligations.
We also had outstanding as of December 31,
2006 approximately $
545.3
million in borrowings, net of a $10.5
million discount, consisting of pre-Acquisition ABS Notes with an average
interest rate of 3.2%.
These pre-Acquisition ABS Notes have maturities ranging from 2007 to 2009. See “U.S.
Fleet Debt” for a discussion of the collateralization of the pre-Acquisition
ABS Notes.
Credit Facilities
As of December 31,
2006, the following credit facilities were available for the use of Hertz and
its subsidiaries:
·
The
Senior Term Facility had $11.1 million available under the letter of credit
facility. No amounts were available to refinance certain existing debt under
the delayed draw facility.
·
The
Senior ABL Facility had the foreign currency equivalent of approximately
$1,600.0 million of remaining capacity, all of which was available under the
borrowing base limitation and $181.8 million of which is available under the
letter of credit facility sublimit.
·
The
International Fleet Debt Facilities had the foreign currency equivalent of
approximately $1,236.4
million of remaining capacity and $231.4
million available under the borrowing base limitation.
·
The
U.S. Fleet Debt had approximately $1,500.0
million of remaining capacity and $34.3
million available under the borrowing base limitation. No additional amounts
were available under the letter of credit facility.
·
The
Fleet Financing Facility had approximately $107.0 million of remaining capacity
and $16.5 million available under the borrowing base limitation.
As of December 31, 2006,
substantially all of our assets are pledged under one or more of the facilities
noted above. We are currently in compliance with all of the covenants contained
in the various facilities noted above that are currently applicable to us.
Note 4—Purchases and
Sales of Operations
In June 1999, Hertz
entered into a Limited Liability Company Agreement, or “LLC Agreement,” with a
subsidiary of Orbital Sciences Corporation, or “Orbital,” whereby Navigation
Solutions, L.L.C., or “Navigation Solutions,” a limited liability company, was
formed to purchase NeverLost vehicle navigation systems for installation in
selected vehicles in our North American fleet. In July 2001, Orbital’s
subsidiary sold its membership interest in Navigation Solutions to a subsidiary
of Thales North America, Inc., or “Thales.” During 2004 (prior to July 1),
we received distributions of $2.0 million under the LLC Agreement, which
represented our 40% ownership interest. In January 2004, along with
Thales, Hertz amended the LLC Agreement to provide for Hertz to increase its
ownership interest to 65% and for Navigation Solutions to purchase additional
NeverLost vehicle navigation systems. For those periods prior to July 1,
2004, the results of operations and investment in this joint venture had
126
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
been reported using the equity
method of accounting. On July 1, 2004, Hertz’s ownership interest in
Navigation Solutions increased from 40% to 65% as a result of an equity
distribution by Navigation Solutions to the other member of Navigation
Solutions, effectively reducing their ownership interest to 35%. Based upon
this ownership change, we began consolidating 100% of Navigation Solutions’
balance sheet and results of operations into our financial statements and
deducting the minority interest share relating to the 35% member.
Note 5—Employee
Retirement Benefits
Qualified U.S. employees, after completion of specified
periods of service, are eligible to participate in The Hertz Corporation
Account Balance Defined Benefit Pension Plan, or “Hertz Retirement Plan,” a
cash balance plan. Under this qualified Hertz Retirement Plan, we pay the
entire cost and employees are not required to contribute.
Most of our foreign subsidiaries have defined benefit
retirement plans or participate in various insured or multiemployer plans. In
certain countries, when the subsidiaries make the required funding payments,
they have no further obligations under such plans. We participate in various
multiemployer pension plans administered by labor unions representing some of
our employees. We make periodic contributions to these plans to allow them to
meet their pension benefit obligations to their participants. Contributions to
U.S. multiemployer plans were $7.7 million, $7.2 million and $7.1 million for
2006, 2005 and 2004, respectively.
Company plans are generally funded, except for certain
nonqualified U.S. defined benefit plans and in Germany, where unfunded
liabilities are recorded.
We sponsor defined contribution plans for certain
eligible U.S. and non-U.S. employees. We match contributions of participating
employees on the basis specified in the plans.
We also sponsor postretirement health care and life
insurance benefits for a limited number of employees with hire dates prior to January 1,
1990. The postretirement health care plan is contributory with participants’
contributions adjusted annually. An unfunded liability is recorded. In 2006, we
recognized a liability of $1.0 million for a key officer post-retirement car
benefit. This plan provides the use of a vehicle for retired Senior Vice
Presidents and above who have a minimum of 20 years of service and who retired
at age 58 or above.
We use a December 31 measurement date for all our
plans.
127
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables set forth
the funded status and the net periodic pension cost of the Hertz Retirement
Plan, other postretirement benefit plans (including health care and life
insurance plans covering domestic (“U.S.”) employees) and the retirement plans
for foreign operations (“Non-U.S.”), together with amounts included in our
consolidated balance sheet and statement of operations (in millions of
dollars):
Pension Benefits
Postretirement
U.S.
Non-U.S.
Benefits (U.S.)
2006
2005
2006
2005
2006
2005
Change in Benefit Obligation
Benefit obligation at
January 1
$
400.0
$
339.2
$
160.3
$
132.2
$
18.2
$
17.3
Service cost
28.0
24.4
9.6
7.1
0.4
0.4
Interest cost
22.2
19.6
8.4
6.3
0.8
1.0
Employee contributions
—
—
1.5
1.4
0.1
0.1
Plan amendments
0.1
—
—
—
1.0
—
Benefits paid
(15.6
)
(10.7
)
(2.4
)
(2.2
)
(0.2
)
(0.4
)
Foreign exchange translation
—
—
21.1
(17.8
)
—
—
Actuarial loss (gain)
2.9
27.5
10.6
33.3
(3.7
)
(0.2
)
Benefit obligation at
December 31
$
437.6
$
400.0
$
209.1
$
160.3
$
16.6
$
18.2
Change in Plan Assets
Fair value of plan assets at January 1
$
310.2
$
270.5
$
95.1
$
83.9
$
—
$
—
Actual return on plan assets
39.3
18.0
14.0
17.2
—
—
Company contributions
4.9
32.4
23.9
5.6
0.1
0.3
Employee contributions
—
—
1.5
1.4
0.1
0.1
Benefits paid
(15.6
)
(10.7
)
(2.4
)
(2.2
)
(0.2
)
(0.4
)
Foreign exchange translation
—
—
12.8
(10.5
)
—
—
Other
—
—
(0.2
)
(0.3
)
—
—
Fair value of plan assets at December 31
$
338.8
$
310.2
$
144.7
$
95.1
$
—
$
—
Funded
Status of the Plan
Plan assets less than benefit obligation
$
(98.8
)
$
(89.8
)
$
(64.4
)
$
(65.2
)
$
(16.6
)
$
(18.2
)
Unamortized:
Transition obligation
—
—
—
—
—
—
Prior service cost
—
—
—
—
—
—
Net losses and other
—
(0.7
)
—
—
—
—
Net amount recognized
$
(98.8
)
$
(90.5
)
$
(64.4
)
$
(65.2
)
$
(16.6
)
$
(18.2
)
Amounts
Recognized in the Balance Sheet Assets/(Liabilities) (Prior to the adoption
of SFAS 158)
Intangible assets (including prepaid assets)
$
—
$
—
$
—
Accrued liabilities
(90.5
)
(65.2
)
(18.2
)
Deferred taxes on income
—
—
—
Accumulated other comprehensive loss, net of tax
—
—
—
Net amount recognized
$
(90.5
)
$
(65.2
)
$
(18.2
)
Pension
Plans in Which Accumulated Benefit Obligation Exceeds Plan Assets at
December 31 (Prior to the adoption of SFAS 158)
Projected benefit obligation
$
64.2
$
155.0
Accumulated benefit obligation
51.1
127.6
Fair value of plan assets
—
90.8
128
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pension Benefits
Postretirement
U.S.
Non-U.S.
Benefits (U.S.)
For 2006 after the adoption of
SFAS 158:
Liabilities
$
(98.8
)
$
(64.4
)
$
(16.6
)
Net obligation recognized in the balance sheet
$
(98.8
)
$
(64.4
)
$
(16.6
)
Initial net asset (obligation)
$
—
$
—
$
—
Prior service credit (cost)
(0.2
)
—
—
Net gain (loss)
13.1
(5.2
)
3.6
Accumulated other comprehensive income (loss)
12.9
(5.2
)
3.6
Prepaid (unfunded accrued) pension or postretirement (benefit) cost
(111.7
)
(59.2
)
(20.2
)
Net asset (obligation) recognized in the balance sheet
$
(98.8
)
$
(64.4
)
$
(16.6
)
Changes due to minimum pension
liability and intangible asset recognition prior to the adoption of SFAS 158:
Other comprehensive income (loss)
$
—
$
—
$
—
Changes in plan assets and
benefit obligations recognized in other comprehensive income (loss):
Total recognized in other comprehensive income (loss)
$
—
$
—
$
—
Total recognized in net periodic benefit cost and other comprehensive
loss (income)
$
26.2
$
9.4
$
1.1
Estimated amounts that will be
amortized from accumulated other comprehensive income over the next fiscal
year:
Net gain (loss)
$
—
$
—
$
0.2
Balance sheet
adjustment: Increase in accumulated other comprehensive (income) loss (before
tax) to reflect the adoption of SFAS 158
$
(12.9
)
$
5.2
$
(3.6
)
Pension Benefits
Postretirement
U.S.
Non-U.S.
Benefits (U.S.)
2006
2005
2006
2005
2006
2005
Accumulated
Benefit Obligation at December 31
$
365.4
$
330.1
$
164.0
$
131.3
N/A
N/A
Weighted-average
assumptions as of December 31
Discount rate
5.70
%
5.50
%
4.81
%
4.65
%
5.70
%
5.50
%
Expected return on assets
8.75
%
8.75
%
7.22
%
6.88
%
N/A
N/A
Average rate of increase in compensation
4.3
%
4.3
%
3.8
%
3.6
%
N/A
N/A
Initial health care cost trend rate
—
—
—
—
9.5
%
10.0
%
Ultimate health care cost trend rate
—
—
—
—
5.0
%
5.0
%
Number of years to
ultimate trend rate
—
—
—
—
8
8
The discount rate used to determine the December 31,
2006 benefit obligations for U.S. pension plans is based on an average of three
indices of high quality corporate bonds whose duration closely matches that of
our plans. The rates on these bond indices are adjusted to reflect callable
issues. For our plans outside the U.S., the discount rate reflects the market
rates for high-quality corporate bonds currently available. The discount rate
in a country was determined based on a yield curve constructed from high
quality corporate bonds in that country. The rate selected from the yield curve
has a duration that matches our plan.
129
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
expected return on plan assets for each funded plan is based on expected future
investment returns considering the target investment mix of plan assets.
Pension Benefits
U.S.
Non-U.S.
Successor
Predecessor
Successor
Predecessor
For the periods from
For the periods from
Year
ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year
ended
December 31,
2004
Year
ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year
ended
December 31,
2004
Components of Net Periodic
Benefit Cost:
Service cost
$ 28.0
$ 0.7
$ 23.7
$ 21.1
$ 9.5
$ 0.2
$ 6.9
$ 5.4
Interest cost
22.2
0.6
19.0
17.7
8.4
0.2
6.1
5.4
Expected return on plan assets
(24.0
)
(0.6
)
(20.8
)
(17.9
)
(8.5
)
(0.2
)
(5.4
)
(4.5
)
Amortization:
Transition
—
—
—
—
—
—
—
—
Amendments
—
—
0.5
0.5
—
—
—
—
Losses and other
—
0.1
3.5
1.8
—
0.1
1.8
1.2
Settlement loss
—
—
1.1
—
—
—
—
—
Net pension expense
$ 26.2
$ 0.8
$ 27.0
$ 23.2
$ 9.4
$ 0.3
$ 9.4
$ 7.5
Weighted-average discount rate for
expense
5.50
%
5.75
%
5.75
%
6.25
%
4.65
%
5.14
%
5.14
%
5.52
%
Weighted-average
assumed long-term rate of return on assets
8.75
%
8.75
%
8.75
%
8.75
%
6.88
%
6.90
%
6.90
%
6.93
%
Postretirement Benefits (U.S.)
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Components of Net Periodic
Benefit Cost:
Service cost
$ 0.4
$ —
$ 0.4
$ 0.4
Interest cost
0.8
0.1
0.9
1.0
Amortization:
Losses and other
(0.1
)
—
0.2
0.2
Net postretirement expense
$ 1.1
$ 0.1
$ 1.5
$ 1.6
Weighted-average discount rate for expense
5.50
%
5.75
%
5.75
%
6.25
%
Initial health care cost trend rate
10.0
%
11.0
%
11.0
%
10.0
%
Ultimate health care cost trend rate
5.0
%
5.0
%
5.0
%
5.0
%
Number of years to
ultimate trend rate
8
9
9
10
Changing
the assumed health care cost trend rates by one percentage point is estimated
to have the following effects (in millions of dollars):
One Percentage
Point Increase
One Percentage
Point Decrease
Effect on total of
service and interest cost components
$ 0.1
$ (0.1
)
Effect on postretirement
benefit obligation
$ 1.0
$ (0.9
)
130
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provisions charged to income for the year ended December 31,
2006, the Successor period ended December 31, 2005 and the Predecessor
period ended December 20, 2005 and the year ended December 31, 2004
for all other pension plans were approximately (in millions of dollars) $8.0,
$0.2, $8.0 and $7.8, respectively.
The provisions charged to
income for the year ended December 31, 2006, the Successor period ended December 31,
2005 and the Predecessor period ended December 20, 2005 and the year ended
December 31, 2004 for the defined contribution plans were approximately
(in millions of dollars) $15.1, $0.5, $14.8 and $13.7, respectively.
Plan Assets
Our major
U.S. and Non-U.S. pension plans’ weighted-average asset allocations at December 31,
2006 and 2005, by asset category, are as follows:
Plan Assets
Asset Category
2006
2005
2006
2005
U.S.
Non-U.S.
Equity securities
72.4
%
70.6
%
85.0
%
86.2
%
Fixed income
securities
27.6
29.4
15.0
13.8
Total
100.0
%
100.0
%
100.0
%
100.0
%
We have a long-term investment outlook for the assets
held in our Company sponsored plans, which is consistent with the long-term
nature of each plan’s respective liabilities. We have two major plans which
reside in the U.S. and the United Kingdom.
The U.S. Plan, or the “Plan,” currently has a target
asset allocation of 70% equity and 30% fixed income. The equity portion of the
Plan is invested in one passively managed index fund, one actively managed U.S.
small/midcap fund and one actively managed international portfolio. The fixed
income portion of the Plan is actively managed by a professional investment
manager and is benchmarked to the Lehman Long Govt/Credit Index. The Plan
currently assumes an 8.75% rate of return on assets which represents the
expected long-term annual weighted-average return for the Plan in total.
The annualized long-term performance of the Plan has generally been in excess
of the long-term rate of return assumptions.
The U.K. Plan currently
invests in a professionally managed Balanced Consensus Index Fund which has the
investment objective of achieving a total return relatively equal to its
benchmark. The benchmark is based upon the average asset weightings of a broad
universe of U.K. pension funds invested in pooled investment vehicles and each
of their relevant indices. The asset allocation as of December 31, 2006,
was 85.0% equity and 15.0% fixed income. The U.K. Plan currently assumes a rate
of return on assets of 7.3%, which represents the expected long-term annual
weighted-average return.
Contributions
Our policy for funded plans is
to contribute annually, at a minimum, amounts required by applicable laws,
regulations, and union agreements. From time to time we make contributions
beyond those legally required. In 2006, we made no discretionary cash
contributions to our U.S. pension plan, while in 2005, we made discretionary
cash contributions of $28.0 million to our U.S. pension plan. In 2007, we
expect to contribute, at a minimum, approximately $27.8 million to our
worldwide pension plans,
131
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
including contributions
required by funding regulations, discretionary contributions and benefit
payments for unfunded plans.
Estimated Future Benefit Payments
The
following table presents estimated future benefit payments (in millions of
dollars):
Pension Benefits
Postretirement
Benefits (U.S.)
2007
$ 34.6
$ 0.6
2008
18.7
0.7
2009
23.3
0.8
2010
25.1
1.0
2011
27.8
1.1
2012-2016
199.2
7.0
The expected benefit payments
for 2007 include a lump sum payment of $17.9 million to our former Chief
Executive Officer, Craig R. Koch.
Note 6—Hertz Holdings
Stock Incentive Plan
On February 15, 2006, the Boards of Directors of
Hertz and Hertz Holdings jointly approved the Hertz Global Holdings, Inc.
Stock Incentive Plan, or the “Stock Incentive Plan.” The Stock Incentive Plan
provides for the sale of Hertz Holdings common stock to our executive officers,
other key employees and directors as well as the grant of stock options to
purchase shares of Hertz Holdings common stock to those individuals. The Board
of Directors of Hertz Holdings, or a committee designated by it, selects the
officers, employees and directors eligible to participate in the Stock
Incentive Plan and either the Board or the Compensation Committee of Hertz
Holdings may determine the specific number of shares to be offered or options
to be granted to an individual employee or director. A maximum of 25 million
shares are reserved for issuance under the Stock Incentive Plan. We currently
intend to satisfy any need for shares of our common stock associated with the
exercise of options issued under the Stock Incentive Plan through those new
shares reserved for issuance, not through the use of Treasury shares or open
market purchases of shares. The Stock Incentive Plan was approved by the
stockholders of Hertz Holdings on March 8, 2006.
All option grants will be non-qualified options with a
per-share exercise price no less than fair market value of one share of Hertz
Holdings stock on the grant date. Any stock options granted will generally have
a term of ten years, and unless otherwise determined by the Board or the
Compensation Committee of Hertz Holdings, will vest in five equal annual
installments. The Board or Compensation Committee may accelerate the vesting of
an option at any time. In addition, vesting of options will be accelerated if
Hertz Holdings experiences a change in control (as defined in the Stock
Incentive Plan) unless options with substantially equivalent terms and economic
value are substituted for existing options in place of accelerated vesting.
Vesting of options will also be accelerated in the event of an employee’s death
or disability (as defined in the Stock Incentive Plan). Upon a termination for
cause (as defined in the Stock Incentive Plan), all options held by an employee
are immediately cancelled. Following a termination without cause, vested
options will generally remain exercisable through the earliest of the
expiration of their term or 60 days following termination of employment (180
days in the case of death, disability or retirement at normal retirement age).
132
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unless sooner terminated by the Board of Directors,
the Stock Incentive Plan will remain in effect until February 15, 2016.
During the second quarter of 2006, Hertz Holdings made
an equity offering to approximately 350 of our executives and key employees
(not including Craig R. Koch, our former Chairman of the Board and Chief
Executive Officer). The shares sold and options granted to our employees in
connection with this equity offering are subject to and governed by the terms
of the Stock Incentive Plan. The offering closed on May 5, 2006. In
connection with this offering, Hertz Holdings sold 1,757,354 shares at a
purchase price of $10.00 per share and granted options to purchase an
additional 2,786,354 shares at an exercise price of $10.00 per share ($4.56 per
share after adjustment for
special cash dividends paid on June 30,
2006 and November 21, 2006). In addition, on May 18, 2006,
Hertz Holdings granted our key executives and employees (except for Mr. Koch)
options to acquire an additional 9,515,000 shares of Hertz Holdings common
stock at $10.00 per share ($4.56 per share after adjustment for special cash
dividends paid on June 30, 2006 and November 21, 2006),
800,000 shares at $15.00 per share ($9.56 per share after adjustment for special cash
dividends paid on June 30, 2006 and November 21, 2006) and
800,000 shares at $20.00 per share ($14.56 per share after adjustment for special cash
dividends paid on June 30, 2006 and November 21, 2006). These
options are subject to and governed by the terms of the Stock Incentive Plan.
The $10.00 per share purchase price and exercise price was based on the Board’s
determination of the fair market value of the common stock of Hertz Holdings as
of the grant date, as supported by an independent third party valuation.
On June 12, 2006, Mr. Koch purchased 50,000
shares of common stock of Hertz Holdings at a purchase price of $10.00 per
share and received options to purchase an additional 100,000 shares at a
purchase price of $10.00 per share ($5.68 per share after adjustment for the
special cash
dividend paid on June 30, 2006). On August 15, 2006, the
options issued to Mr. Koch in June 2006 were cancelled and he was
issued options to purchase 112,000 shares of common stock of Hertz Holdings at
an exercise price of $7.68 per share ($6.56 after adjustment for the special
cash dividend paid on November 21, 2006). Hertz Holdings made a payment to Mr. Koch in connection with his
share purchase equal to $80,000.
On August 15, 2006, certain newly-hired employees
purchased an aggregate of 20,000 shares at a price of $7.68 per share and were
granted options to purchase 220,000 shares of Hertz Holdings stock at an
exercise price of $7.68 per share ($6.56 after adjustment for the special cash
dividend paid on November 21, 2006). Also on August 15, 2006, in
accordance with the terms of his employment agreement, Mr. Frissora
purchased 1,056,338 shares of common stock of Hertz Holdings at a price of
$5.68, which was $2.00 below the fair market value of $7.68 on that date, and
was granted options to purchase 800,000 shares of Hertz Holdings at an exercise
price of $7.68 per share ($6.56 after adjustment for the special cash dividend
paid on November 21, 2006), 400,000 options at an exercise price of $10.68
per share ($9.56 after adjustment for the special cash dividend paid on November 21,
2006) and 400,000 options at an exercise price of $15.68 per share ($14.56 after
adjustment for the special cash dividend paid on November 21, 2006). All
of Mr. Frissora’s options will vest 20% per year on the first five
anniversaries of the date of commencement of his employment and will have a ten
year term.
In September 2006, we determined that the fair
value of the common stock of Hertz Holdings as of August 15, 2006 was
$16.37 per share, rather than the $7.68 that had originally been determined at
that time and which we used for purposes of the Stock Incentive Plan and
federal income tax purposes. Consequently, we recognized compensation expense
of $13.2 million, including amounts
133
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for a tax gross-up on the initial $2.00 discount to
fair market value in accordance with Mr. Frissora’s employment agreement,
in the quarter ended September 30, 2006.
The five-year vesting period is the requisite service
period over which compensation cost will be recognized for all grants except
the one to Mr. Koch. For all grants except the one for Mr. Koch, we
will recognize compensation cost on a straight-line basis over the five-year
vesting period. For Mr. Koch, all of the compensation costs were
recognized over his expected service period in 2006. The options will be
accounted for as equity-classified awards.
The value of each option award is estimated on the
grant date using a Black-Scholes option valuation model that incorporates the
assumptions noted in the following table. Because the stock of Hertz Holdings
was not publicly traded at the time of these grants, we have used the
calculated value method, substituting the historical volatility of an
appropriate industry sector index for the expected volatility of Hertz Holdings’
common stock price as an assumption in the valuation model. We measure the
compensation cost related to employee stock options based on the calculated
value instead of fair value of the options because we cannot reasonably
estimate the volatility of Hertz Holdings’ common stock. We selected the Dow
Jones Specialized Consumer Services sub-sector within the consumer services
industry, and we used the U.S. large capitalization component, which includes
the top 70% of the index universe (by market value).
The calculation of the historical volatility of the
index was made using the daily historical closing values of the index for the
preceding 6.5 years, because that is the expected term of the options using the
simplified approach allowed under SAB No. 107.
The
risk-free interest rate is the implied zero-coupon yield for U.S. Treasury
securities having a maturity of 6.5 years as of the grant date, which is the
expected term of the options. The assumed dividend yield is zero. We assume
that each year 1% of the options that are outstanding but not vested will be
forfeited because of employee attrition.
Assumption
2006 Grants
Expected volatility
50.2
%
Expected dividends
0.0
%
Expected term (years)
6.5
Risk-free rate
4.89% - 5.0
7%
Forfeiture rate (per year)
1.0
%
A summary
of option activity under the Stock Incentive Plan as of December 31, 2006
is presented below. All of the outstanding options are non-vested and not
exercisable.
Non-vested
Shares
Weighted-
Average
Exercise Price
Weighted-
Average Grant-
Date Calculated
Value
Non-vested as of
January 1, 2006
—
$
—
$ —
Granted
15,833,354
$ 5.85
$ 5.99
Forfeited or Expired
(85,000
)
$ —
$ 5.63
Non-vested as of
December 31, 2006
15,748,354
$ 5.85
$ 5.99
134
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the year ended December 31,
2006, we recognized compensation cost of approximately $13.8 million ($8.3
million, net of tax), and, as of December 31, 2006, there was
approximately $106.2 million of total unrecognized compensation cost related to
non-vested stock options granted by Hertz Holdings under the Stock Incentive
Plan, including costs related to modifying the exercise prices of certain
option grants in order to preserve the intrinsic value of the options,
consistent with applicable tax law, to reflect the special cash dividend of
$4.32 per share that was paid on June 30, 2006 and $1.12 that was paid on November 21,
2006. These remaining costs are expected to be recognized over the remaining
4.4 years of the five-year requisite service period that began on the grant
dates.
Note 7—Depreciation of
Revenue Earning Equipment
Depreciation
of revenue earning equipment includes the following (in thousands of dollars):
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Depreciation of
revenue earning equipment
$
1,761,804
$
45,362
$
1,605,243
$
1,506,988
Adjustment of
depreciation upon disposal of the equipment
(35,857
)
(2,123
)
(68,307
)
(57,212
)
Rents paid for
vehicles leased
31,255
588
18,926
13,482
Total
$
1,757,202
$
43,827
$
1,555,862
$
1,463,258
The adjustment of depreciation upon disposal of
revenue earning equipment for the year ended December 31, 2006, the
Successor period ended December 31, 2005, the Predecessor period ended December 20,
2005 and the year ended December 31, 2004 included (in millions of
dollars) net gains of $16.3, $1.3, $41.8 and $25.8, respectively, on the
disposal of industrial and construction equipment used in our equipment rental
operations, and net gains of $19.6, $0.8, $26.5 and $31.4, respectively, on the
disposal of vehicles used in the car rental operations. Depreciation rates
being used to compute the provision for depreciation of revenue earning
equipment were decreased for all vehicles effective January 1, 2006 in our
domestic car rental operations and in our U.S. and Canadian equipment rental
operations to reflect changes in the estimated residual values to be realized
when revenue earning equipment is sold. Depreciation rates on certain vehicles
were increased effective October 1, 2006 in our domestic car rental
operations. Depreciation rates were also decreased effective April 1, 2006
in our French equipment rental operations. Depreciation rates were increased
during 2006 in our international car rental operations to reflect changes in
the estimated residual values of vehicles. The rate changes resulted in a net
reduction of $3.7 million in our domestic car rental depreciation expense, a
net reduction of $15.3 million in our combined U.S. and Canadian equipment
rental operations depreciation expense, a net reduction of $3.1 million in our
French equipment rental operations depreciation expense and a net increase of
$9.0 million in our international car rental operations depreciation expense.
As a result of the
Acquisition, the net book value of our revenue earning equipment was adjusted
to its estimated fair value, resulting in a net increase of $93.1 million. This
net increase in net book value resulted in an increase in depreciation expense
of approximately $13.8 million and $0.5 million for the year ended December 31,
2006 and the Successor period ended December 31, 2005, respectively.
135
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8—Taxes on Income
The
components of income (loss) before income taxes and minority interest for the
periods were as follows (in thousands of dollars):
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Domestic
$
97,044
$
(19,144
)
$
371,570
$
322,759
Foreign
103,607
(14,074
)
203,336
179,793
Total
$
200,651
$
(33,218
)
$
574,906
$
502,552
The total
provision (benefit) for taxes on income consists of the following (in thousands
of dollars):
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Current:
Federal
$
6,576
$
—
$
577,573
$
(22,950
)
Foreign
28,527
—
17,550
16,679
State and local
2,537
—
7,670
10,565
Total current
37,640
—
602,793
4,294
Deferred:
Federal
28,499
(5,711
)
(435,037
)
132,877
Foreign
11,148
(4,822
)
11,224
(11,801
)
State and local
(9,293
)
(1,710
)
12,352
8,500
Total deferred
30,354
(12,243
)
(411,461
)
129,576
Total provision
(benefit)
$
67,994
$
(12,243
)
$
191,332
$
133,870
136
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
principal items of the U.S. and foreign net deferred tax liability at December 31,
2006 and 2005 are as follows (in thousands of dollars):
2006
2005
Deferred Tax Assets:
Employee benefit plans
$
130,966
$
126,454
Net operating loss carryforwards
411,744
101,156
Foreign tax credit carryforwards
14,604
—
Federal and state alternative minimum tax credit carryforwards
4,683
4,464
Accrued and prepaid expenses deducted for tax purposes when paid or
incurred
89,809
145,608
Total Deferred Tax Assets
651,806
377,682
Less: Valuation Reserves
(31,191
)
(21,377
)
Total Net Deferred Tax Assets
620,615
356,305
Deferred Tax Liabilities:
Depreciation on tangible assets
(1,207,796
)
(1,027,906
)
Intangible assets
(1,213,892
)
(1,180,941
)
Total Deferred Tax Liabilities
(2,421,688
)
(2,208,847
)
Net Deferred Tax
Liability
$
(1,801,073
)
$
(1,852,542
)
At December 31, 2006, deferred tax assets of
$371.3 million related to U.S. Net Operating Loss, or “NOL,” carryforwards of $836.9
million were recorded. These NOLs begin to expire in 2025.
At December 31, 2006, deferred tax assets of
$40.4 million related to foreign NOL carryforwards were recorded. All of these
NOLs have an indefinite carryforward period. A valuation allowance of $31.2
million at December 31, 2006 was recorded against the deferred tax asset
as those deferred tax assets relate to jurisdictions which have historical
losses. The valuation allowance relates to the likelihood that a portion of the
NOL carryforwards may not be utilized in the future.
The American Jobs Creation Act, or “the Act,” was
enacted in October 2004. The Act contained a provision allowing a one-time
favorable tax benefit in 2005 related to the repatriation of foreign earnings
to the U.S. During 2005, in connection with the Acquisition, $547.8 million of
foreign earnings from certain foreign subsidiaries of Hertz were repatriated to
the U.S. The repatriation generated $168.2 million of tax expense, of which
$136.9 million was mitigated by foreign tax credits, resulting in a net tax
expense of $31.3 million.
On July 13, 2006, the FASB issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109”, or “FIN No. 48.” FIN No. 48
clarifies the criteria that must be met prior to recognition of the financial
statement benefit of a position taken in a tax return. FIN No. 48 will
require companies to include additional qualitative and quantitative
disclosures within their financial statements. The disclosures will include
potential tax benefits from positions taken for tax return purposes that have
not been recognized for financial reporting purposes and a tabular presentation
of significant changes during each period. The disclosures will also include a
discussion of the nature of uncertainties, factors which could cause a change,
and an estimated range of reasonably possible changes in tax uncertainties. FIN
No. 48 will also require a company to recognize a financial statement
benefit for a position taken for tax return purposes when it is more likely
than not that the position will be sustained. FIN No. 48 will be effective
for fiscal years beginning after December 15, 2006. Tax positions taken in
prior years are being evaluated under FIN No. 48 and
137
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
management anticipates a decrease to the opening
balance of retained earnings as of January 1, 2007 of up to
$30.0 million.
The
significant items in the reconciliation of the statutory and effective income
tax rates consisted of the following:
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Statutory Federal Tax
Rate
35.0
%
35.0
%
35.0
%
35.0
%
Foreign tax
differential
(4.8
)
(2.8
)
2.7
(3.8
)
State and local
income taxes, net of federal income tax benefit
2.3
3.4
2.3
2.5
Increase (decrease)
in valuation allowance
4.9
—
(6.1
)
6.9
Adjustments made to
federal and foreign tax accruals in connection with tax audit evaluations
0.7
—
—
(13.9
)
Change in statutory
rates
(5.4
)
—
—
—
All other items, net
1.2
1.3
(0.6
)
(0.1
)
Effective Tax Rate
33.9
%
36.9
%
33.3
%
26.6
%
The effective income tax rate on earnings before
income taxes and minority interest for the successor periods ended December 31,
2006 and December 31, 2005 was 33.9% and 36.9%, respectively. The
effective income tax rate for the predecessor periods ended December 20,
2005 and December 31, 2004 was 33.3% and 26.6%, respectively. The lower
effective tax rate in 2004 was attributable to an audit settlement of the 1999
through 2003 income tax years.
As of December 31, 2006,
approximately $417.0 million of undistributed earnings of foreign
subsidiaries existed for which U.S. deferred taxes have not been recorded
because it is management’s current intention to permanently reinvest these
undistributed earnings offshore. If in the future these earnings are
repatriated to the United States, or it is determined such earnings will be repatriated
in the foreseeable future, additional tax provisions will be recorded.
138
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9—Lease and
Concession Agreements
We have
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):
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Rents
$
120,726
$
3,500
$
112,627
$
100,243
Concession fees:
Minimum fixed obligations
279,487
7,653
246,304
227,535
Additional amounts, based on revenues
194,220
5,544
178,431
182,069
Total
$
594,433
$
16,697
$
537,362
$
509,847
As of December 31,
2006, minimum obligations under existing agreements referred to above are
approximately as follows (in thousands of dollars):
Rents
Concessions
2007
$
105,836
$
247,444
2008
89,275
186,131
2009
68,838
143,653
2010
52,252
101,765
2011
41,201
74,518
Years after 2011
188,315
394,591
Many of our concession agreements and real estate
leases require us to pay or reimburse operating expenses, such as common area
charges and real estate taxes, to pay concession fees above guaranteed minimums
or additional rent based on a percentage of revenues or sales (as defined in
those agreements) arising at the relevant premises, or both. Such obligations
are not reflected in the table of minimum future obligations appearing
immediately above.
In
addition to the above, we have various leases on revenue earning equipment and
office and computer equipment under which the following amounts were expensed
(in thousands of dollars):
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Revenue earning
equipment
$
31,255
$
588
$
18,926
$
13,482
Office and computer
equipment
14,718
466
14,984
15,338
Total
$
45,973
$
1,054
$
33,910
$
28,820
As of December 31, 2006,
minimum obligations under existing agreements referred to above that have a
maturity of more than one year are as follows (in thousands of dollars): 2007,
$31,962; 2008, $11,658; 2009, $2,615; 2010, $123; 2011, $4; years after 2011,
$0.
139
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10—Segment Information
We
follow SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information.” The statement requires companies to disclose segment data
based on how management makes decisions about allocating resources to segments
and measuring their performance.
Our
operating segments are aggregated into reportable business segments based
primarily upon similar economic characteristics, products, services, customers,
and delivery methods. We have identified two reportable segments: rental of
cars and light trucks, or “car rental”; and rental of industrial, construction
and material handling equipment, or “equipment rental.” The contribution of
these segments, as well as “corporate and other,” for the year ended December 31,
2006, the Successor period ended December 31, 2005, the Predecessor period
ended December 20, 2005 and the year ended December 31, 2004 are
summarized below (in millions of dollars). “Corporate and other” includes
general corporate expenses, certain interest expense (including, in Successor
periods, net interest on corporate debt), as well as other business activities,
such as our third party claim management services.
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Revenues
Car rental
$
6,378.0
$
131.8
$
5,915.0
$
5,507.7
Equipment rental
1,672.6
22.5
1,392.8
1,162.2
Corporate and other
7.8
0.2
6.9
6.1
Total
$
8,058.4
$
154.5
$
7,314.7
$
6,676.0
Income (loss) before income
taxes and minority interest
Car rental
$
373.5
$
(16.2
)
$
390.8
$
437.7
Equipment rental
269.5
(11.4
)
250.5
87.8
Corporate and other
(442.4
)
(5.6
)
(66.4
)
(22.9
)
Total
$
200.6
$
(33.2
)
$
574.9
$
502.6
Depreciation of revenue
earning equipment
Car rental
$
1,479.6
$
37.4
$
1,344.1
$
1,228.6
Equipment rental
277.6
6.4
211.8
234.7
Corporate and other
—
—
—
—
Total
$
1,757.2
$
43.8
$
1,555.9
$
1,463.3
Depreciation of property and
equipment
Car rental
$
150.8
$
4.1
$
141.1
$
136.1
Equipment rental
40.5
1.2
36.4
36.7
Corporate and other
5.9
0.2
4.9
4.8
Total
$
197.2
$
5.5
$
182.4
$
177.6
Amortization of other
intangible assets
Car rental
$
29.4
$
1.1
$
0.7
$
0.6
Equipment rental
32.2
1.0
—
—
Corporate and other
—
—
—
—
Total
$
61.6
$
2.1
$
0.7
$
0.6
Interest expense, net of
interest income
Car rental
$
424.1
$
15.8
$
349.2
$
305.0
Equipment rental
140.0
3.4
86.4
72.0
Corporate and other
336.6
6.6
38.6
7.4
Total
$
900.7
$
25.8
$
474.2
$
384.4
Revenue earning equipment
and property and equipment
Car
rental
Expenditures
$
10,712.1
$
234.9
$
11,530.1
$
10,885.7
Proceeds from disposals
(9,362.7
)
(199.8
)
(9,927.2
)
(8,554.3
)
Net expenditures
$
1,349.4
$
35.1
$
1,602.9
$
2,331.4
Equipment
rental
Expenditures
$
929.6
$
8.2
$
987.9
$
707.8
Proceeds from disposals
(256.5
)
(1.1
)
(251.4
)
(245.5
)
Net expenditures
$
673.1
$
7.1
$
736.5
$
462.3
Corporate
and other
Expenditures
$
3.1
$
0.2
$
2.7
$
3.0
Proceeds from disposals
—
—
(0.3
)
(0.4
)
Net expenditures
$
3.1
$
0.2
$
2.4
$
2.6
140
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006
2005
Total assets at end of year
Car rental
$
10,597.0
$
11,456.4
Equipment rental
4,475.9
3,418.8
Corporate and other
3,604.5
3,705.7
Total
$
18,677.4
$
18,580.9
Revenue earning equipment, net, at end of year
Car rental
$
7,366.4
$
7,399.5
Equipment rental
2,439.1
2,075.5
Corporate and other
—
—
Total
$
9,805.5
$
9,475.0
141
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We operate
in the United States and in foreign countries. Foreign operations are
substantially in Europe. The operations within major geographic areas are
summarized below (in millions of dollars):
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Revenues
United States
$
5,631.2
$
123.7
$
5,150.5
$
4,678.2
Foreign
2,427.2
30.8
2,164.2
1,997.8
Total
$
8,058.4
$
154.5
$
7,314.7
$
6,676.0
Income (loss) before income taxes and minority
interest
United States
$
61.0
$
(19.1
)
$
371.6
$
322.8
Foreign
139.6
(14.1
)
203.3
179.8
Total
$
200.6
$
(33.2
)
$
574.9
$
502.6
Depreciation of revenue earning equipment
United States
$
1,333.2
$
35.5
$
1,179.8
$
1,107.3
Foreign
424.0
8.3
376.1
356.0
Total
$
1,757.2
$
43.8
$
1,555.9
$
1,463.3
Depreciation of property and equipment
United States
$
150.7
$
4.6
$
140.3
$
136.4
Foreign
46.5
0.9
42.1
41.2
Total
$
197.2
$
5.5
$
182.4
$
177.6
Amortization of other intangible assets
United States
$
43.1
$
1.3
$
0.1
$
—
Foreign
18.5
0.8
0.6
0.6
Total
$
61.6
$
2.1
$
0.7
$
0.6
Interest expense, net of interest income
United States
$
746.0
$
22.0
$
414.4
$
338.5
Foreign
154.7
3.8
59.8
45.9
Total
$
900.7
$
25.8
$
474.2
$
384.4
Revenue earning equipment and property and equipment
United States
Expenditures
$
8,037.8
$
188.9
$
8,762.3
$
7,928.5
Proceeds from disposals
(6,613.0
)
(131.8
)
(6,940.8
)
(5,818.6
)
Net expenditures
$
1,424.8
$
57.1
$
1,821.5
$
2,109.9
Foreign
Expenditures
$
3,607.0
$
54.4
$
3,758.4
$
3,668.0
Proceeds from disposals
(3,006.2
)
(69.1
)
(3,238.1
)
(2,981.6
)
Net expenditures
$
600.8
$
(14.7
)
$
520.3
$
686.4
142
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2006
2005
Total assets at end of year
United States
$
14,057.4
$
13,981.0
Foreign
4,620.0
4,599.9
Total
$
18,677.4
$
18,580.9
Revenue earning equipment, net, at end of year
United States
$
7,243.3
$
7,270.9
Foreign
2,562.2
2,204.1
Total
$
9,805.5
$
9,475.0
Note 11—Litigation and
Guarantees
Legal
Proceedings
Fuel—Related Class Actions
We are a defendant in four purported class actions—filed
in Texas, Oklahoma, New Mexico and Nevada—in which the plaintiffs have put
forth alternate theories to challenge the application of our Fuel and Service
Charge, or “FSC,” on rentals of cars that are returned with less fuel than when
rented.
1. Texas
On March 15, 2004,
Jose M. Gomez, individually and on behalf of all
other similarly situated persons, v. The Hertz Corporation
was
commenced in the 214
th
Judicial District Court of Nueces County,
Texas. Gomez purports to be a class action filed alternatively on behalf of all
persons who were charged a FSC by us or all Texas residents who were charged a
FSC by us. The petition alleged that the FSC is an unlawful penalty and that,
therefore, it is void and unenforceable. The plaintiff seeks an unspecified
amount of compensatory damages, with the return of all FSC paid or the
difference between the FSC and our actual costs, disgorgement of unearned
profits, attorneys’ fees and costs. In response to various motions by us, the
plaintiff filed two amended petitions which scaled back the putative class from
a nationwide class to a class of all Texas residents who were charged a FSC by
us or by our Corpus Christi licensee. A new cause of action was also added for
conversion for which the plaintiff is seeking punitive damages. After some
limited discovery, we filed a motion for summary judgment in December 2004.
That motion was denied in January 2005. The parties then engaged in more
extensive discovery. In April 2006, the plaintiff further amended his
petition by adding a cause of action for fraudulent misrepresentation and, at
the plaintiff’s request, a hearing on the plaintiff’s motion for class
certification was scheduled for August 2006. In May 2006, the
plaintiff filed a fourth amended petition which deleted the cause of action for
conversion and the plaintiff also filed a first amended motion for class
certification in anticipation of the August 2006 hearing on class
certification. After the hearing, the plaintiff filed a fifth amended petition
seeking to further refine the putative class as including all Texas residents who
were charged a FSC in Texas after February 6, 2000. In October 2006,
the judge entered a class certification order which certified a class of all
Texas residents who were charged an FSC in Texas after February 6, 2000.
We are appealing the order.
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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Oklahoma
On November 18, 2004,
Keith Kochner, individually and on behalf of all similarly situated
persons, v. The Hertz Corporation
was commenced in the District
Court in and for Tulsa County, State of Oklahoma. As with the Gomez case,
Kochner purports to be a class action, this time on behalf of Oklahoma
residents who rented from us and incurred our FSC. The petition alleged that
the imposition of the FSC is a breach of contract and amounts to an
unconscionable penalty or liquidated damages in violation of Article 2A of
the Oklahoma Uniform Commercial Code. The plaintiff seeks an unspecified amount
of compensatory damages, with the return of all FSC paid or the difference
between the FSC and our actual costs, disgorgement of unearned profits,
attorneys’ fees and costs. In March 2005, the trial court granted our
motion to dismiss the action but also granted the plaintiff the right to
replead. In April 2005, the plaintiff filed an amended class action
petition, newly alleging that our FSC violates the Oklahoma Consumer Protection
Act and that we have been unjustly enriched, and again alleging that our FSC is
unconscionable under Article 2A of the Oklahoma Uniform Commercial Code.
In May 2005, we filed a motion to dismiss the amended class action
petition. In October 2005, the court granted our motion to dismiss, but
allowed the plaintiff to file a second amended complaint and we then answered
the complaint. Discovery has now commenced.
3. New Mexico
On December 13, 2005,
Janelle Johnson, individually and on behalf of all
other similarly situated persons v. The Hertz Corporation
was filed
in the Second Judicial District Court of the County of Bernalillo, New Mexico.
As with the Gomez and Kochner cases, Johnson purports to be a class action,
this time on behalf of all New Mexico residents who rented from us and who were
charged a FSC. The complaint alleges that the FSC is unconscionable as a matter
of law under pertinent sections of the New Mexico Uniform Commercial Code and
that, under New Mexico common law, the collection of FSC does not constitute
valid liquidated damages, but rather is a void penalty. The plaintiff seeks an
unspecified amount of compensatory damages, with the return of all FSC paid or
the difference between the FSC and its actual cost. In the alternative, the
plaintiff requests that the court exercise its equitable jurisdiction and order
us to cease and desist from our unlawful conduct and to modify our lease
provisions to conform with applicable provisions of New Mexico statutory and
common law. The complaint also asks for attorneys’ fees and costs. We have
removed the action to the U.S. District Court for the District of New Mexico
and, in lieu of an answer, filed a motion to dismiss. In November 2006,
the judge granted our motion to dismiss the liquidated damages claim and the
substantive unconscionability claim but did not grant our motion to dismiss the
procedural unconscionability claim or the claim for equitable relief. Plaintiff
then amended her complaint to replead the unconscionability claim and to add a
fraudulent misrepresentation claim. In December 2006, we filed a motion to
dismiss the amended complaint and, in January 2007, the court quickly
dismissed the new fraud claim and reaffirmed the dismissal of the substantive
unconscionability claim. In February 2007, the plaintiff dismissed the
case with prejudice.
4. Nevada
On January 10, 2007,
Marlena
Guerra, individually and on behalf of all other similarly situated persons, v.
The Hertz Corporation
was filed in the United States District Court
for the District of Nevada. As with the Gomez and Kochner cases, Guerra
purports to be a class action on behalf of all individuals and business
entities who rented vehicles at Las Vegas McCarran International
144
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Airport and were charged a FSC. The complaint alleged
that those customers who paid the FSC were fraudulently charged a surcharge
required for fuel in violation of Nevada’s Deceptive Trade Practices Act. The
plaintiff also alleged the FSC violates the Nevada Uniform Commercial Code, or “UCC,”
since it is unconscionable and operates as an unlawful liquidated damages
provision. Finally, the plaintiff claimed that we breached our own rental
agreement—which the plaintiff claims to have been modified so as not to violate
Nevada law—by charging the FSC, since such charges violate the UCC and/or the
prohibition against fuel surcharges. The plaintiff seeks compensatory damages,
including the return of all FSC paid or the difference between the FSC and its
actual costs, plus prejudgment interest, attorneys’ fees and costs. In March 2007,
we filed a motion to dismiss.
Other Consumer or
Supplier Class Actions
1. HERC LDW
On August 15, 2006,
Davis Landscape, Ltd., individually and on behalf of all others
similarly situated, v. Hertz Equipment Rental Corporation
, or “HERC,”
was filed in the United States District Court for the District of New Jersey.
Davis Landscape, Ltd., purports to be a nationwide class action on behalf of
all persons and business entities who rented equipment from HERC and who paid a
Loss Damage Waiver, or “LDW,” charge. The complaint alleges that the LDW is
deceptive and unconscionable as a matter of law under pertinent sections of New
Jersey law, including the New Jersey Consumer Fraud Act and the New Jersey
Uniform Commercial Code. The plaintiff seeks an unspecified amount of statutory
damages under the New Jersey Consumer Fraud Act, an unspecified amount of
compensatory damages with the return of all LDW charges paid, declaratory
relief and an injunction prohibiting HERC from engaging in acts with respect to
the LDW charge that violate the New Jersey Consumer Fraud Act. The complaint
also asks for attorneys’ fees and costs. In October 2006, we filed an
answer to the complaint. In November 2006, the plaintiff filed an amended
complaint adding an additional plaintiff, Miguel V. Pro, an individual residing
in Texas, and new claims relating to HERC’s charging of an “Environmental
Recovery Fee.” Causes of action for breach of contract and breach of implied
covenant of good faith and fair dealing were also added. In January 2007,
we filed an answer to the amended complaint. Discovery has now commenced.
2. Concession Fee Recoveries
On October 13, 2006,
Janet Sobel, Daniel Dugan Ph.D., and Lydia Lee, individually and on
behalf of all others similarly situated, v. The Hertz Corporation and
Enterprise Rent-A-Car Company
was filed in the United States
District Court for the District of Nevada. Sobel purports to be a nationwide
class action on behalf of all persons who rented cars from Hertz or Enterprise
at airports in Nevada and whom Hertz or Enterprise charged airport concession
recovery fees. The complaint alleged that the airport concession recovery fees
violate certain provisions of Nevada law, including Nevada’s Deceptive Trade
Practices Act. The plaintiffs seek an unspecified amount of compensatory
damages, restitution of any charges found to be improper and an injunction
prohibiting Hertz and Enterprise from quoting or charging any of the fees
prohibited by Nevada law. The complaint also asks for attorneys’ fees and
costs. In November 2006, the plaintiffs and Enterprise stipulated and
agreed that claims against Enterprise would be dismissed without prejudice. In January 2007,
we filed a motion to dismiss.
We believe that we have meritorious defenses in the
foregoing matters and will defend ourselves vigorously.
145
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, we are currently
a defendant in numerous actions and have received numerous claims on which
actions have not yet been commenced for public liability and property damage
arising from the operation of motor vehicles and equipment rented from us and
our licensees. In the aggregate, we can be expected to expend material sums to
defend and settle public liability and property damage actions and claims or to
pay judgments resulting from them.
On February 19, 2007,
The Hertz Corporation and TSD Rental LLC v.
Enterprise Rent-A-Car Company and The Crawford Group, Inc.
was
filed in the United States District Court for the District of Massachusetts. In
this action, we and our co-plaintiff seek damages and injunctive relief based
upon allegations that Enterprise and its corporate parent, The Crawford Group, Inc.,
unlawfully engaged in anticompetitive and unfair and deceptive business
practices by claiming to customers of Hertz that once Enterprise obtains a
patent that it has applied for relating to its insurance replacement
reservation system, Hertz will be prevented from using the co-plaintiff’s
EDiCAR system, which Hertz currently uses in its insurance replacement
business. The complaint alleges, among other things, that Enterprise’s threats
are improper because the Enterprise patent, once issued, should be invalid and
unenforceable.
In addition to the foregoing,
various legal actions, claims and governmental inquiries and proceedings are
pending or may be instituted or asserted in the future against us and our
subsidiaries. Litigation is subject to many uncertainties, and the outcome of
the individual litigated matters is not predictable with assurance. It is
possible that certain of the actions, claims, inquiries or proceedings,
including those discussed above, could be decided unfavorably to us or any of
our subsidiaries involved. Although the amount of liability with respect to these
matters cannot be ascertained, potential liability in excess of related
accruals is not expected to materially affect our consolidated financial
position, results of operations or cash flows but it could be material in the
period in which it is recorded.
Guarantees
At December 31, 2006, the
following guarantees (including indemnification commitments) were issued and
outstanding.
Indemnifications
In the ordinary course of
business, we execute contracts involving indemnifications standard in the
relevant industry and indemnifications specific to a transaction such as sale
of a business. These indemnifications might include claims relating to the
following: environmental matters; intellectual property rights; governmental
regulations and employment-related matters; customer, supplier and other
commercial contractual relationships; and financial matters. Performance under
these indemnities would generally be triggered by a breach of terms of the
contract or by a third party claim. We regularly evaluate the probability of
having to incur costs associated with these indemnifications and have accrued
for expected losses that are probable and estimable. The types of
indemnifications for which payments are possible include the following:
Sponsors; Directors
On the Closing Date, Hertz
entered into customary indemnification agreements with Hertz Holdings, the
Sponsors and Hertz Holdings’ stockholders affiliated with the Sponsors,
pursuant to which Hertz Holdings and Hertz will indemnify the Sponsors, Hertz
Holdings’ stockholders affiliated with the Sponsors and their respective
affiliates, directors, officers, partners, members, employees, agents,
representatives and controlling persons, against certain liabilities arising
out of performance of a consulting agreement with Hertz Holdings and each of
the Sponsors and certain other claims and liabilities, including liabilities
arising out of financing arrangements or securities offerings. We do not
146
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
believe that these
indemnifications are reasonably likely to have a material impact on us. We have
also entered into indemnification agreements with each of our directors.
Environmental
We have indemnified various parties for the costs
associated with remediating numerous hazardous substance storage, recycling or
disposal sites in many states and, in some instances, for natural resource
damages. The amount of any such expenses or related natural resource damages
for which we may be held responsible could be substantial. The probable losses
that we expect to incur for such matters have been accrued and those losses are
reflected in our consolidated financial statements. As of December 31,
2006 and 2005, the aggregate amounts accrued for environmental liabilities
including liability for environmental indemnities, reflected in our
consolidated balance sheet in “Other
accrued liabilities” were $3.7 million and $3.9 million, respectively. The
accrual generally represents the estimated cost to study potential
environmental issues at sites deemed to require investigation or clean-up
activities, and the estimated cost to implement remediation actions, including
ongoing maintenance, as required. Cost estimates are developed by site. Initial
cost estimates are based on historical experience at similar sites and are
refined over time on the basis of in-depth studies of the site. For many sites,
the remediation costs and other damages for which we ultimately may be
responsible cannot be reasonably estimated because of uncertainties with
respect to factors such as our connection to the site, the materials there, the
involvement of other potentially responsible parties, the application of laws
and other standards or regulations, site conditions, and the nature and scope
of investigations, studies, and remediation to be undertaken (including the technologies
to be required and the extent, duration, and success of remediation).
Note 12—Quarterly
Financial Information (Unaudited)
A summary
of the quarterly operating results during 2006 and 2005 were as follows (in
thousands of dollars, except per share data):
Successor
First
Quarter
2006
Second
Quarter
2006
Third
Quarter
2006
Fourth
Quarter
2006
Revenues
$
1,786,594
$
2,040,633
$
2,240,594
$
1,990,584
Operating income: pre-tax
income before interest expense and minority interest
147,013
(1)(2)
269,883
(4)
413,685
(6)
270,727
(8)
(Loss) income before
income taxes and minority interest
(63,300
)(1)(2)(3)
57,273
(4)(5)
163,971
(6)(7)
42,707
(8)(9)(10)
Net (loss) income
(49,236
)
17,818
107,538
39,823
(11)
(Loss) earnings per
share, basic
$
(0.21
)
$
0.08
$
0.46
$
0.14
(Loss) earnings per share,
diluted
$
(0.21
)
$
0.08
$
0.46
$
0.14
147
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Predecessor
Successor
For the periods from
First
Quarter
2005
Second
Quarter
2005
Third
Quarter
2005
October 1,
2005 to
December 20,
2005
December 21,
2005 to
December 31,
2005
Revenues
$
1,640,573
$
1,862,329
$
2,123,630
$
1,688,213
$
154,469
Operating income (loss): pre-tax income (loss)
before interest expense and minority interest
134,691
267,386
(12)
405,460
(13)
241,616
(16)
(7,483
)(16)
Income (loss) before income taxes and minority
interest
35,479
154,554
(12)
264,296
(13)(14)
120,577
(16)(17)
(33,218
)(16)
Net income (loss)
20,875
99,200
205,221
(15)
46,027
(18)
(21,346
)
Loss per share, basic
$
0.09
$
0.43
$
0.89
$
0.20
$
(0.09
)
Loss per share,
diluted
$
0.09
$
0.43
$
0.89
$
0.20
$
(0.09
)
(1)
Includes a $3.6
million and a $5.1 million decrease in depreciation expense related to a change
in revenue earning equipment depreciation rates in our domestic car rental
operations and our combined U.S. and Canadian equipment rental operations,
respectively.
(2)
Includes a gain of
$6.6 million related to the assignment of certain interest rate swaps. See note (9).
(3)
Includes $76.5 million
of net interest expense on corporate debt.
(4)
Includes a $5.4
million and $1.1 million decrease in depreciation expense related to a change
in revenue earning equipment depreciation rates in our combined U.S. and
Canadian and our French equipment rental operations, respectively, and a $1.0
million increase in depreciation expense related to a change in revenue earning
equipment depreciation rates in our international car rental operations.
(5)
Includes $78.2 million
of net interest expense on corporate debt.
(6)
Includes a $0.5
million, $2.7 million and a $1.0 million decrease in depreciation expense
related to a change in revenue earning equipment depreciation rates in our
domestic car rental operations, our combined U.S. and Canadian and our French
equipment rental operations, respectively, and a $3.0 million increase in depreciation
expense related to a change in revenue earning equipment depreciation rates in
our international car rental operations.
(7)
Includes $93.4 million
of net interest expense on corporate debt.
(8)
Includes a $2.1
million and $1.0 million decrease in depreciation expense related to a change
in revenue earning equipment depreciation rates in our combined U.S. and
Canadian and our French equipment rental operations, respectively, and a $4.9
million increase in depreciation expense related to a change in revenue earning
equipment depreciation rates in our domestic and international car rental
operations.
(9)
Includes an adjustment
of $5.6 million to correct the original gain amount of $6.6 million disclosed
in the first quarter of 2006 which did not take into account the relinquishment
of a counterparty receivable in the amount of $5.6 million—see note (2).
This adjustment had a negative impact on the quarter of $0.02 per share on a
fully diluted basis and had no effect on Corporate EBITDA.
(10)
Includes $88.4 million of net
interest expense on corporate debt.
148
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11)
Included favorable net tax adjustments of $2.9 million related to
prior periods, which had the impact of $0.01 per share in the quarter on a
fully diluted basis and no effect on Corporate EBITDA.
(12)
Includes a $14.9 million
decrease in depreciation expense related to a change in revenue earning
equipment depreciation rates in our domestic car rental operations and our
combined U.S. and Canadian equipment rental operations.
(13)
Includes a $9.8 million
decrease in depreciation expense related to a change in revenue earning
equipment depreciation rates in our domestic car rental operations and our
combined U.S. and Canadian equipment rental operations.
(14)
Includes interest expense of
$16.3 million on the Intercompany note payable to Ford Holdings LLC (relating
to the dividend declared and paid on June 10, 2005).
(15)
Includes the reversal of a
valuation allowance on foreign tax credit carryforwards of $35.0 million.
(16)
The total combined fourth
quarter of 2005 includes a $10.3 million decrease in depreciation expense
related to a change in revenue earning equipment depreciation rates in our
domestic car rental operations and our combined U.S. and Canadian equipment
rental operations.
(17)
Includes interest expense of
$15.6 million on the Intercompany note payable to Ford Holdings LLC (relating
to the dividend declared and paid on June 10, 2005) for the Predecessor
period October 1, 2005 to December 20, 2005. The note was repaid on December 21,
2005.
(18)
Includes
a $31.3 million provision relating to the repatriation of foreign earnings and
favorable foreign tax adjustments of $5.3 million relating to years prior to
2005.
Note 13—Financial
Instruments
Financial instruments, which
potentially subject us to concentrations of credit risk, consist principally of
cash equivalents, short term investments and trade receivables. We place our
cash equivalents with a number of financial institutions and investment funds
to limit 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 our customer base, and their
dispersion across different businesses and geographic areas. As of December 31,
2006, we had no significant concentration of credit risk.
Cash and Equivalents and Restricted Cash
Fair value approximates cost
indicated on the balance sheet at December 31, 2006 because of the
short-term maturity of these instruments.
Debt
For borrowings with an initial
maturity of 93 days or less, fair value approximates carrying value because of
the short-term nature of these instruments. For all other debt, fair value is
estimated based on quoted market rates as well as borrowing rates currently
available to us for loans with similar terms and average maturities. The
aggregate fair value of all debt at December 31, 2006 approximated $12.5
billion, compared to its aggregate carrying value of $12.4 billion. Since all
debt was recorded at fair value on December 21, 2005 due to the
Acquisition, the fair value approximated carrying value at December 31,
2005.
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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Instruments and Hedging Activities
We utilize certain derivative
instruments to enhance our ability to manage risk relating to cash flow and
interest rate exposure. Derivative instruments are entered into for periods
consistent with the related underlying exposures. We document all relationships
between hedging instruments and hedged items, as well as our risk-management
objectives and strategies for undertaking various hedge transactions.
Interest Rate Risk
From time to time, we enter into interest rate swap
agreements to manage interest rate risk. Effective September 30, 2003, we
entered into interest rate swap agreements relating to the issuance of our 4.7%
notes due October 2, 2006. Effective June 3, 2004, we entered into
interest rate swap agreements relating to the issuance of our 6.35% notes due June 15,
2010. Under these agreements, we paid interest at a variable rate in exchange
for fixed rate receipts, effectively transforming these notes to floating rate
obligations. As a result of the Acquisition, a significant portion of the
underlying fixed rate debt was tendered, causing the interest rate swaps to be
ineffective as of December 21, 2005. Consequently, any changes in the fair
value of the interest rate swaps were recognized in the statement of
operations. Between December 21, 2005 (the date the hedge accounting was
discontinued) and December 31, 2005, the fair value adjustment related to
these interest rate swaps was a gain of $2.7 million, which was recorded in our
consolidated statement of operations in “
Selling, general and administrative” expenses. During January 2006,
we assigned these interest rate swaps to a third party in return for cash. As a
result of the assignment of these interest rate swaps, we recorded a gain of
$1.0 million, which is reflected in our consolidated statement of operations in
“Selling, general and
administrative” expenses. See Note 12 to the Notes to our consolidated
financial statements included in this Annual Report under caption “Item 8—Financial Statements and
Supplementary Data.”
In connection with the Acquisition and the issuance of
$3,550.0 million of floating rate U.S. Fleet Debt, HVF and Hertz entered into
seven interest rate swap agreements, or the “HVF swaps,” effective December 21,
2005, which qualify as cash flow hedging instruments in accordance with SFAS
133. The HVF swaps were entered into for the purpose of locking in the interest
cash outflows on the floating rate U.S. Fleet Debt. These agreements mature at
various terms, in connection with the scheduled maturity of the associated debt
obligations, through November 25, 2011. Under these agreements, HVF pays
monthly interest at a fixed rate of 4.5% per annum in exchange for monthly
amounts at one-month LIBOR, effectively transforming the floating rate U.S.
Fleet Debt to fixed rate obligations. For the Successor period ended December 31,
2005, we recognized $1.0 million of interest expense in our consolidated
statement of operations, which resulted from the inherent ineffectiveness
associated with the HVF swaps, as these interest rate swaps were entered into
at off-market rates. For the year ended December 31, 2006, we recorded a
benefit of $1.0 million in our consolidated statement of operations associated
with previously recognized ineffectiveness of the HVF Swaps. As of December 31,
2006, the fair value of HVF swaps was $50.6 million, which is reflected in our
consolidated balance sheet in “Prepaid expenses and other assets.”
Additionally, as of December 31, 2006, $3.5 million, net of $2.4 million
of tax, was reflected in our consolidated balance sheet in “Accumulated other
comprehensive income (loss).”
Also in connection with the issuance of $3,550.0
million of floating rate U.S. Fleet Debt, Hertz entered into seven differential
interest rate swap agreements, or the “differential swaps.” These differential
swaps were required to be put in place to protect the counterparties to the HVF
swaps in the event of a default by HVF on the asset backed notes, which will
cause a “rapid amortization” of the notes. In
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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the event of a “rapid amortization period,” the
differential is transferred to Hertz. There was no initial payment associated
with these differential swaps and their notional amounts are and will continue
to be zero unless 1) there is an amortization event, which causes the rapid
amortization of the loan balance, 2) there is an increased probability that an
amortization event will occur, which would cause the rapid amortization of the
loan balance, or 3) the debt is prepaid. Given this and that the initial
assessment of the probability of the occurrence of an amortization event is
considered remote, the current fair value of the differential swaps is
considered to be zero. Should any of the above events occur, then the
differential swaps will have a fair value, which will result in the
differential swaps being recorded at fair value on the balance sheet, with a
corresponding amount affecting earnings, as there is no qualifying hedge
relationship.
In connection with our Euro-denominated medium term
notes that were not tendered to us in connection with the Acquisition, we
entered into an interest rate swap agreement on December 21, 2005, effective
January 16, 2006, maturing on July 16, 2007. The purpose of this
interest rate swap is to lock in the interest cash outflows at a fixed rate of
4.1% on the variable rate Euro-denominated medium term notes. As the critical
terms of the swap and remaining portion of the Euro-denominated medium term
notes match, the swap qualifies for cash flow hedge accounting and the shortcut
method of assessing effectiveness, in accordance with SFAS 133. Therefore, the
fair value of the swap will be carried on the balance sheet, with offsetting
gains or losses recorded in other comprehensive income. At December 31,
2006, the fair value of this swap was $0.1 million.
In May 2006, in
connection with the forecasted issuance of the permanent take-out international
asset-based facilities, HIL purchased two swaptions for
€
3.3
million, to protect itself from interest rate increases. These swaptions give
HIL the right, but not the obligation, to enter into three year interest rate
swaps, based on a total notional amount of
€
600 million at an interest
rate of 4.155%. As of December 31, 2006, the fair value of the swaptions
was
€
1.3
million (or $1.7 million), which is reflected in our consolidated balance sheet
in “Prepaid expenses and other assets.” During the year ended December 31,
2006, the fair value adjustment related to these swaps was a loss of $2.6
million, which was recorded in our consolidated statement of operations in “Selling,
general and administrative” expenses. The swaptions were renewed in 2007 prior
to their scheduled expiration date of March 15, 2007 and now expire on
September 5, 2007. See Note 16—Subsequent Events.
Foreign Currency Risk
We manage our foreign currency risk primarily by
incurring, to the extent practicable, operating and financing expenses in the
local currency in the countries in which we operate, including making fleet and
equipment purchases and borrowing for working capital needs. Also, we have
purchased foreign exchange options to manage exposure to fluctuations in
foreign exchange rates for selected marketing programs. At December 31,
2006, the total notional amount of these foreign exchange options was $9.7
million, maturing at various dates in 2007, and the fair value of all
outstanding foreign exchange options, was approximately $0.3 million. The fair
value of the foreign currency options were estimated using market prices
provided by financial institutions. Gains and losses resulting from changes in
the fair value of these options are included in our results of operations. The
total notional amount included options to buy Euro in the amount of $5.9
million and sell yen and Canadian dollars in the amounts of $2.3 million and $1.5
million, respectively.
We also manage exposure to fluctuations in currency
risk on intercompany loans we make to certain of our subsidiaries by entering
into foreign currency forward contracts, or “forwards,” at the time of the
loans. The forward rate is reflected in the intercompany loan rate to the
subsidiaries, and as a result, the forwards have no material impact on our
results of operations. At December 31, 2006, the total
151
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
notional amount of these forwards was $252.7 million,
maturing within one month. The total notional amount includes forwards to sell
Canadian dollars and Euro in the notional amounts of $189.1 million and $63.7
million, respectively.
In connection with the
Transactions, Hertz issued
€
225 million of unhedged
Senior Euro Notes. Prior to October 1,
2006, our Senior Euro Notes were not designated as a net investment hedge of
our Euro-denominated net investments in our foreign operations. For the nine
months ended September 30, 2006, we incurred unrealized exchange
transaction losses of $19.2 million resulting from the translation of these
Euro-denominated notes into the U.S. dollar, which are recorded in our
consolidated statement of operations in “Selling, general and administrative”
expenses. On October 1, 2006, we designated our Senior Euro Notes as an
effective net investment hedge of our Euro-denominated net investment in our
foreign operations. As a result of this net investment hedge designation, as of
December 31, 2006, $7.1 million of losses, which is net of tax of $4.6
million, attributable to the translation of our Senior Euro Notes into the U.S.
dollar are recorded in our consolidated balance sheet in “Accumulated other
comprehensive income (loss).”
Note 14—Related Party
Transactions
Relationship with Ford
Prior to the Acquisition, we
were an indirect, wholly owned subsidiary of Ford. We and certain of our
subsidiaries had entered into contracts, or other transactions or
relationships, with Ford or subsidiaries of Ford, the most significant of which
are described below.
Car purchases/repurchases and advertising arrangements
Over the three years ended December 31, 2006, on
a weighted average basis, approximately 41% of the cars acquired by us for our
U.S. car rental fleet, and approximately 32% of the cars acquired by us for our
international fleet, were manufactured by Ford and subsidiaries. During the
year ended December 31, 2006, approximately 40% of the cars we acquired
domestically were manufactured by Ford and subsidiaries and approximately 30%
of the cars we acquired for our international fleet were manufactured by Ford
and subsidiaries, which represented the largest percentage of any automobile
manufacturer in that year.
On July 5, 2005, Hertz, one of its wholly owned
subsidiaries and Ford signed a Master Supply and Advertising Agreement,
effective July 5, 2005 and expiring August 31, 2010, that covers the
2005 through 2010 vehicle model years. This agreement replaces and supersedes
previously existing joint advertising and vehicle supply agreements that would
have expired August 31, 2007.
The terms of the Master Supply and Advertising
Agreement only apply to our fleet requirements and advertising in the United
States and to Ford, Lincoln or Mercury brand vehicles, or “Ford Vehicles.”
Under the Master Supply and Advertising Agreement, Ford has agreed to supply to
us and we have agreed to purchase from Ford, during each of the 2005 through
2010 vehicle model years, a specific number of Ford Vehicles. Ford has also
agreed in the Master Supply and Advertising Agreement to pay us a contribution
toward the cost of our advertising of Ford Vehicles equal to one-half of our
total expenditure on such advertising, up to a specified maximum amount. To be
eligible for advertising cost contribution under the Master Supply and
Advertising Agreement, the advertising must meet certain conditions, including
the condition that we feature Ford Vehicles in a manner and with a prominence
that is reasonably satisfactory to Ford. It further provides that the amounts
Ford will be obligated to pay to us for our advertising costs will be increased
or reduced according to the number of Ford Vehicles acquired by us in any model
year, provided Ford will not be required to pay any
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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amount for our advertising costs for any year if the
number of Ford Vehicles acquired by us in the corresponding model year is less
than a specified minimum except to the extent that our failure to acquire the
specified minimum number of Ford Vehicles is attributable to the availability
of Ford Vehicles or Ford vehicle production is disrupted for reasons beyond the
control of Ford. To the extent we acquire less than a specified minimum number
of Ford Vehicles in any model year, we have agreed to pay Ford a specified
amount per vehicle below the minimum.
The amounts contributed by Ford for the year ended December 31,
2006, the Successor period ended December 31, 2005, the Predecessor period
ended December 20, 2005 and the year ended December 31, 2004 were (in
millions of dollars) $42.7, $1.3, $42.4 and $38.1, respectively. The advertising
contributions paid by Ford for the 2006 vehicle model year under the Master
Supply and Advertising Agreement were more than the advertising contributions
we received from Ford for the 2005 model year due to an increase in the number
of Ford Vehicles acquired and an increase in the per car contribution. We
expect that contributions in future years will be below levels for the 2006
model year based upon anticipated reductions in the number of Ford Vehicles to
be acquired. We do not expect that the reductions in Ford’s advertising
contributions will have a material adverse effect on our results of operations.
We incurred net advertising expense for the year ended December 31, 2006,
the Successor period ended December 31, 2005, the Predecessor period ended
December 20, 2005 and the year ended December 31, 2004 of (in
millions of dollars) $154.5, $5.0, $159.9 and $168.3, respectively.
Under the terms of the Master Supply and Advertising
Agreement we will be able to enter into vehicle advertising and supply agreements
with other automobile manufacturers in the United States and in other
countries, and we intend to explore those opportunities. However, we cannot
offer assurance that we will be able to obtain advertising contributions from
other automobile manufacturers that will mitigate the reduction in Ford’s
advertising contributions.
Ford subsidiaries and affiliates also supply other
brands of cars, including Jaguar, Volvo, Mazda and Land Rover cars, to us in
the United States under arrangements separate from the Master Supply and
Advertising Agreement. In addition, Ford, its subsidiaries and affiliates are
significant suppliers of cars to our international operations.
During the year ended December 31,
2006, the Successor period ended December 31, 2005, the Predecessor period
ended December 20, 2005 and the year ended December 31, 2004, we
purchased cars from Ford and its subsidiaries at a cost of approximately (in
billions of dollars) $4.1, $0.1, $4.7 and $4.4, respectively, and sold cars to
Ford and its subsidiaries under various repurchase programs for approximately
(in billions of dollars) $3.1, $0.1, $3.5 and $3.3, respectively.
Stock option plan
Certain employees of ours
participate in the stock option plan of Ford under Ford’s 1998 Long-Term
Incentive Plan. As a result of the Acquisition, all outstanding options became
vested. See Note 1—Summary of Significant Accounting Policies.
Taxes
Prior to the Acquisition, Hertz and its domestic
subsidiaries filed a consolidated federal income tax return with Ford. Pursuant
to a tax sharing agreement, or the “Agreement,” with Ford, current and deferred
taxes were reported, and paid to Ford, as if Hertz had filed its own
consolidated tax returns with its domestic subsidiaries. The Agreement provided
that Hertz was reimbursed for foreign tax credits in accordance with the
utilization of those credits by the Ford consolidated tax group.
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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 21, 2005, in
connection with the Acquisition, the Agreement with Ford was terminated. Upon
termination, all tax payables and receivables with Ford were cancelled and
neither Hertz nor Ford has any future rights or obligations under the Agreement.
Hertz may be exposed to tax liabilities attributable to periods it was a
consolidated subsidiary of Ford. While Ford has agreed to indemnify Hertz for
certain tax liabilities pursuant to the arrangements relating to our separation
from Ford, we cannot offer assurance that payments in respect of the
indemnification agreement will be available.
Other relationships and
transactions
We and Ford also engage in
other transactions in the ordinary course of our respective businesses. These
transactions include providing equipment rental services to Ford, our providing
insurance and insurance claim management services to Ford and our providing car
rental services to Ford. In addition, Ford subsidiaries are our car rental
licensees in Scandinavia and Finland.
Relationship with Hertz Investors, Inc. and the
Sponsors
Stockholders Agreement
In connection with the
Acquisition, we entered into a stockholders agreement, or the “Stockholders
Agreement,” with investment funds associated with or designated by the Sponsors.
The Stockholders Agreement contains agreements that entitle investment funds
associated with or designated by the Sponsors to nominate all of our directors.
The director nominees are to include three nominees of an investment fund
associated with CD&R (one of whom shall serve as the chairman), two
nominees of investment funds associated with Carlyle, two nominees of an
investment fund associated with MLGPE and three independent directors, subject
to adjustment in the case that the applicable investment fund sells more than a
specified amount of its shareholdings in us. Upon completion of the initial
public offering of our common stock, the Stockholders Agreement was amended and
restated among other things, to reflect an agreement of the Sponsors to
increase the size of our Board. Each Sponsor will continue to have the right
with respect to director nominees described above, but up to an additional
three independent directors may also be nominated, subject to unanimous consent
of the directors (other than the independent directors) nominated by the
investment funds associated with or designated by the Sponsors. In addition,
the Stockholders Agreement, as amended, provides that one of the nominees of an
investment fund associated with CD&R shall serve as the chairman of the
executive and governance committee and, unless otherwise agreed by this fund,
as Chairman of the Board. On October 12, 2006, our Board elected four
independent directors, effective from completion of the initial public offering
of our common stock.
The Stockholders Agreement
also granted to the investment funds associated with or designated by the
Sponsors special governance rights, including rights of approval over our
budget, certain business combination transactions, the incurrence of additional
material indebtedness, amendments to our certificate of incorporation and
certain other transactions and grants to investment funds associated with
CD&R or to the majority of directors nominated by the Sponsors the right to
remove Hertz’s chief executive officer. Any replacement chief executive officer
requires the consent of investment funds associated with CD&R as well as
investment funds associated with at least one other Sponsor. The rights
described above apply only for so long as the investment funds associated with
the applicable Sponsor maintain certain specified minimum levels of
shareholdings in us. The Stockholders Agreement also gives investment funds
associated with the Sponsors preemptive rights with respect to certain
issuances of our equity securities, including Hertz, subject to certain exceptions.
It also contains restrictions on the transfer of our shares, as well as
tag-along and drag along rights and rights of first offer. Upon the completion
of the initial public offering of our common stock, this agreement was amended
and restated to remove these rights of approval (other than the
154
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
approval and retention rights
relating to our chief executive officer) and preemptive rights and to retain
tag-along and drag-along rights, and restrictions on transfers of our shares,
in certain circumstances.
In addition, the Stockholders
Agreement limits the rights of the investment funds associated with or
designated by the Sponsors that have invested in our common stock and our
affiliates, subject to several exceptions, to own, manage, operate or control
any of our competitors (as defined in the Stockholders Agreement). The
Stockholders Agreement may be amended from time to time in the future to
eliminate or modify these restrictions without our consent.
Registration Rights
Agreement
On the Closing Date, we entered
into a registration rights agreement, or the “Registration Rights Agreement,”
with investment funds associated with or designated by the Sponsors. The
Registration Rights Agreement grants to certain of these investment funds the
right, following the earlier of the initial public offering of our common stock
and the eighth anniversary of the Closing Date, to cause us, at our own
expense, to use our best efforts to register such securities held by the
investment funds for public resale, subject to certain limitations. The
exercise of this right was limited to three requests by the group of investment
funds associated with each Sponsor, except for registrations effected pursuant
to Form S-3, which are unlimited, subject to certain limitations, if
we are eligible to use Form S-3. In the event we register any of our
common stock following our initial public offering, these investment funds also
have the right to require us to use our best efforts to include shares of our
common stock held by them, subject to certain limitations, including as
determined by the underwriters. The Registration Rights Agreement also provides
for us to indemnify the investment funds party to that agreement and their
affiliates in connection with the registration of our securities.
Consulting agreements
Sponsor Consulting Agreements
On the Closing Date, we
entered into consulting agreements, or the “Consulting Agreements,” with Hertz
and each of the Sponsors (or one of their affiliates), pursuant to which such
Sponsor or its affiliate agreed to provide us and our subsidiaries with
financial advisory and management consulting services. Pursuant to the
Consulting Agreements, we or our affiliates agreed to pay to each of the three
Sponsors or its affiliate an annual fee of $1 million for such services, plus
expenses, unless the Sponsors unanimously agreed to a higher amount. If an
individual designated by CD&R, serves as both Chairman of our board of
directors and Chief Executive Officer for any quarter, we agreed to pay
CD&R an additional fee of $500,000 for that quarter. The Sponsor or its
affiliate under each Consulting Agreement also agreed to provide us and our
subsidiaries with financial, investment banking, management advisory and other
agreed upon services with respect to proposed transactions, including any
proposed acquisition, merger, full or partial recapitalization, reorganization
of our structure or shareholdings, or sales of assets or equity interests. In
connection with such transactional services, each Consulting Agreement provided
that we would pay a fee (together with expenses) to be based on a percentage of
the transaction value, as defined in the agreements. No transactional services
fees were paid under the Consulting Agreements in connection with the initial
public offering, and none were paid in connection with the Hertz Holdings Loan
Facility. Each Consulting Agreement provided for termination upon the first to
occur of (i) the consummation of an initial public offering by Hertz
Holdings, if a majority of the Sponsor-designated directors have
requested the termination of all Consulting Agreements, (ii) December 21,
2015, (iii) the date the applicable Sponsor and its affiliates cease to
own at least 25% of the Hertz Holdings common stock it held on the Closing
Date, and (iv) upon notice by the applicable Sponsor or its affiliate. We
reevaluated our need for the Consulting Agreements in connection with the
initial public offering. In connection with this reevaluation, we
155
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
determined it would be in our
best interest to terminate the Consulting Agreements following the consummation
of our initial public offering, and the Sponsors agreed to terminate these
agreements at that time for a fee of $5 million ($15 million in the aggregate)
which is recorded in our consolidated statement of operations in “Selling,
general and administrative” expenses.
Other Consulting Arrangements
On September 29, 2006,
Hertz entered into an agreement with Tenzing Consulting LLC, a management
consulting firm in which Thomas McLeod, who is the brother-in-law of our
director David H. Wasserman, is a principal. Under the arrangement, which has
now been fully performed, Tenzing Consulting LLC provided supply chain
management and corporate purchasing management consulting. In exchange for
these services, Tenzing Consulting LLC received fees of $25,000 per week, plus
reimbursement of out-of-pocket expenses. For the year ended December 31,
2006, the total amount of such fees and expenses paid to Tenzing Consulting LLC
under this agreement was approximately $0.2 million.
Guarantees
Hertz’s obligations under the
Senior Term Facility and Senior ABL Facility are guaranteed by Hertz’s
immediate parent, Hertz Investors, Inc. (previously known as CCMG
Corporation.) Hertz Holdings is not a guarantor of these facilities. See Note 3—Debt.
Indemnification
agreements
On the Closing Date, Hertz
entered into customary indemnification agreements with Hertz Holdings, the
Sponsors and Hertz Holdings stockholders affiliated with the Sponsors, pursuant
to which Hertz Holdings and Hertz will indemnify the Sponsors, the Hertz
Holdings stockholders affiliated with the Sponsors and their respective
affiliates, directors, officers, partners, members, employees, agents,
representatives and controlling persons, against certain liabilities arising
out of the performance of a consulting agreement with Hertz Holdings and each
of the Sponsors and certain other claims and liabilities, including liabilities
arising out of financing arrangements or securities offerings. We have not
recorded any liability because these liabilities are considered to be de
minimis.
Hertz Holdings has entered
into indemnification agreements with each of its directors. The indemnification
agreements provide the directors with contractual rights to the indemnification
and expense advancement rights provided under our by-laws, as well as
contractual rights to additional indemnification as provided in the
indemnification agreements.
Director Stock
Incentive Plan
On October 12, 2006, the
Board of Directors of Hertz Holdings approved a Director Stock Incentive Plan.
The stockholders of Hertz Holdings approved the Director Stock Incentive Plan
on October 20, 2006. The Director Stock Incentive Plan provides for the
grant of shares of common stock of Hertz Holdings, options to purchase shares
of common stock of Hertz Holdings and “phantom shares,” which are the right to
receive shares of common stock of Hertz Holdings at a specified point in the
future. A maximum of 3,500,000 shares are reserved for issuance under the
Director Stock Incentive Plan.
Options granted under the
Director Stock Incentive Plan must be granted at an exercise price no less than
fair market value of such shares on the date of grant. Options granted as part
of a director’s annual retainer fee will be fully vested at the time of grant
and will generally have a 10-year term.
A director may generally elect
to receive all or a portion of fees that would otherwise be payable in cash in
the form of shares of common stock of Hertz Holdings having a fair market value
at such time
156
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
equal to the amount of such
fees. Any such shares will be paid to the director when cash fees would
otherwise be payable, although, if a director so chooses, these shares may be
payable on a tax-deferred basis in phantom shares, in which case the actual
shares of the common stock of Hertz Holdings will be paid to the director
promptly following the date on which he or she ceases to serve as a director
(or, if earlier, upon a change in control).
A director will recognize ordinary
income upon exercising options granted under the Director Stock Incentive Plan
in an amount equal to the fair market value of the shares acquired on the date
of exercise, less the exercise price, and Hertz Holdings will have a
corresponding tax deduction at that time. In the case of shares issued in lieu
of cash fees, a director who is an individual will generally recognize ordinary
income equal to the fair market value of such shares on the date such shares
are paid to the director and Hertz Holdings will have a corresponding tax
deduction at that time.
Other
In connection with the
Acquisition, Hertz paid a fee of $25 million to each Sponsor and reimbursed
certain expenses of the Sponsors and their affiliates. Of this amount, $35
million has been recorded as deferred finance charges and $40 million has been
recorded as direct costs of the Acquisition. In addition, an affiliate of one
of the Sponsors was engaged to provide advisory services to the Sponsors and
was paid a fee of $5 million. This affiliate is in the business of providing
such services and was engaged by the Sponsors in an arm’s-length
transaction.
Financing Arrangements with Related Parties
Affiliates of ML Global
Private Equity, L.P. and its related funds, which are stockholders of Hertz
Holdings, and of Merrill Lynch & Co., one of the underwriters in the
initial public offering of our common stock, were lenders under the Hertz
Holdings Loan Facility; are lenders under the original and amended Senior Term
Facility, the original and amended Senior ABL Facility and the Fleet Financing
Facility; acted as initial purchasers with respect to the offerings of the
Senior Notes and the Senior Subordinated Notes; acted as structuring advisors
and agents under Hertz’s asset-backed facilities; and acted as dealer
managers and solicitation agents for Hertz’s tender offers for its existing
debt securities in connection with the Acquisition. See Note 3—Debt.
Other Sponsor Relationships
In connection with our car and
equipment rental businesses, we enter into millions of rental transactions
every year involving millions of customers. In order to conduct those
businesses, we also procure goods and services from thousands of vendors. Some of those customers and vendors may be
affiliated with the Sponsors or members of our Board of Directors. We believe
that all such rental and procurement transactions have been conducted on an
arms-length basis and involved terms no less favorable to us than those that we
believe we would have obtained in the absence of such affiliation. It is our
management’s practice to bring to the attention of our Board of Directors any
transaction, even if it arises in the ordinary course of business, in which our
management believes that the terms being sought by transaction participants
affiliated with the Sponsors or our Directors would be less favorable to us
than those to which we would agree absent such affiliation.
Note 15—Earnings (Loss) Per Share
As a result of the
Acquisition, our capital structure initially consisted of 229,500,000 shares of
common stock outstanding. Earnings per share for the Predecessor period ended December 20,
2005 and the year ended December 31, 2004 reflect our initial
post-Acquisition capital structure on a consistent basis. See Note 1—Summary of
Significant Accounting Policies—Background and Change in
157
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Ownership—Initial Public
Offering and Note 6—Hertz Holdings Stock Incentive Plan for a discussion of
subsequent capital structure changes. Basic earnings per share have been
computed based upon the weighted average number of common shares outstanding.
Dilutive earnings per share have been computed based upon the weighted average
number of common shares outstanding plus the effect of all potentially dilutive
common stock equivalents.
The
following table sets forth the computation of basic and diluted earnings (loss)
per share (in thousands of dollars, except per share amounts):
Successor
Predecessor
For the periods from
Year ended
December 31,
2006
December 21,
2005 to
December 31,
2005
January 1,
2005 to
December 20,
2005
Year ended
December 31,
2004
Basic and diluted
earnings (loss) per share:
Numerator:
Net income (loss)
$
115,943
$
(21,346
)
$
371,323
$
365,471
Denominator:
Weighted average shares used in basic and diluted computation
242,460
229,500
229,500
229,500
Add: Dilutive impact of stock options
894
—
—
—
Weighted average shares used in dilutive computation
243,354
229,500
229,500
229,500
Earnings (loss) per share, basic
$
0.48
$
(0.09
)
$
1.62
$
1.59
Earnings (loss) per share,
diluted
$
0.48
$
(0.09
)
$
1.62
$
1.59
Diluted earnings per share
computations for the year ended December 31, 2006 excluded the
weighted-average impact of the assumed exercise of 11,520 shares issuable under
stock option plans because such impact would be antidilutive.
Note 16—Subsequent Events
Restructuring
As part of our effort to
implement our strategy of reducing operating costs, we are evaluating our
workforce and operations and making adjustments, including headcount reductions
and process improvements to optimize work flow at rental locations and
maintenance facilities as well as streamlining our back-office operations, that
we believe are necessary and appropriate. When we make adjustments to our
workforce and operations, we may incur incremental expenses that delay the
benefit of a more efficient workforce and operating structure, but we believe
that increasing our operating efficiency and reducing the costs associated with
the operation of our business are important to our long-term competitiveness.
On January 5, 2007, we
announced the first in a series of initiatives to further improve our competitiveness
through targeted job reductions affecting approximately 200 employees primarily
at our corporate headquarters in Park Ridge, New Jersey and our U.S. service
center in Oklahoma City. We expect to incur an estimated $3.3 million to $3.8
million restructuring charge in the first quarter of 2007 for severance and
related costs arising from these reductions.
On February 28, 2007, we
announced the second initiative to further improve our competitiveness and
industry leadership through targeted job reductions affecting approximately 1,350 employees
158
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
primarily
in our U.S. car rental operations, with much smaller reductions occurring in
U.S. equipment rental operations, the corporate headquarters in Park Ridge, New
Jersey, and the U.S. service center in Oklahoma City, as well as in Canada,
Puerto Rico, Brazil, Australia and New Zealand
. We expect to incur an estimated $9.0 million to $11.0 million
restructuring charge in the first quarter of 2007 for severance and related
costs arising from these reductions.
Further cost reduction
initiatives are in process. We currently anticipate incurring future charges to
earnings in connection with those initiatives; however, we have not yet
developed detailed estimates of these expenses.
Exchange Offers
On January 12, 2007,
Hertz completed exchange offers for the outstanding Senior Notes and Senior
Subordinated Notes whereby over 99% of the outstanding notes were exchanged for
a like principal amount of new notes with identical terms that were registered
under the Securities Act of 1933 pursuant to a registration statement on Form S-4.
Amendments to the
Senior Term Facility and the Senior ABL Facility
On February 9, 2007,
Hertz entered into an amendment to its Senior Term Facility. The amendment was
entered into for the purpose of (i) lowering the interest rate on the
Senior Term Facility by 50 basis points from the interest rate previously in
effect, and revising financial ratio requirements for specific interest rate
levels; (ii) eliminating certain mandatory prepayment requirements; (iii) increasing
the amounts of certain other types of indebtedness that Hertz and its
subsidiaries may incur outside of the Senior Term Facility; (iv) permitting
certain additional asset dispositions and sale and leaseback transactions; and (v) effecting
certain technical and administrative changes to the Senior Term Facility.
On February 15, 2007,
Hertz, Hertz Equipment Rental Corporation and certain other subsidiaries
entered into an amendment to their Senior ABL Facility. The amendment was
entered into for the purpose of (i) lowering the interest rate on the
Senior ABL Facility by 25 basis points from the interest rate previously in
effect, and revising financial ratio requirements for specific interest rate
levels; (ii) increasing the availability under the Senior ABL Facility
from $1,600 million to $1,800 million; (iii) extending the term of the
commitments under the Senior ABL Facility to February 15, 2012; (iv) increasing
the amounts of certain other types of indebtedness that the borrowers and their
subsidiaries may incur outside of the Senior ABL Facility; (iv) permitting
certain additional asset dispositions and sale and leaseback transactions; and (v) effecting
certain technical and administrative changes to the Senior ABL Facility.
Amendments to certain of the agreements relating to
the International Fleet Debt Facilities
On March 21, 2007,
certain of the agreements relating to the International Fleet Debt Facilities
were amended and restated for the purpose of (i) extending the dates when
margins on the facilities are scheduled to step up, subject to satisfaction of
interim goals pertaining to the execution of agreements with automobile
manufacturers and dealers that are required in connection with the planned
securitization of the international car rental fleet and the take-out of the
Tranche A1 and Tranche A2 loans; (ii) subject to certain conditions, permitting
the financing of value-added tax receivables under the facilities; and (iii)
effecting certain technical and administrative changes to the terms of the
facilities.
HIL Swaption Extension
and Payment
On February 8, 2007, the
€
600
million HIL swaptions that were to expire on March 15, 2007 were extended
at a cost of
€
1.8
million. The HIL swaptions now expire on September 5, 2007.
159
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HERTZ GLOBAL HOLDINGS, INC.
PARENT COMPANY BALANCE SHEETS
(In Thousands of Dollars)
December 31,
2006
December 31,
2005
ASSETS
Cash and equivalents
$
2,718
$
—
Receivables
31
—
Deferred taxes on
income
15,732
—
Investments in
subsidiaries
2,518,453
2,266,182
Total assets
$
2,536,934
$
2,266,182
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
1,076
$
—
Accrued liabilities
1,296
—
Total Liabilities
2,372
—
Stockholders’ equity:
Common stock, $0.01 par value, 2,000,000,000 shares authorized,
320,618,692 and 229,500,000 shares issued
3,206
2,295
Additional capital paid-in
2,427,293
2,292,705
Retained earnings (deficit)
9,535
(21,346
)
Accumulated other comprehensive income (loss)
94,528
(7,472
)
Total stockholders’ equity
2,534,562
2,266,182
Total liabilities and
stockholders’ equity
$
2,536,934
$
2,266,182
The accompanying notes are an integral part of these financial statements.
160
HERTZ GLOBAL HOLDINGS, INC.
PARENT COMPANY STATEMENTS OF OPERATIONS
(In Thousands of Dollars)
Year ended
December 31, 2006
For the period from
December 21, 2005
to December 31, 2005
Revenues
$
—
$
—
Expenses:
Selling, general and administrative
92
—
Interest, net of interest income of $250 and $0
39,986
—
Total Expenses
40,078
—
Other income (loss)
15,471
—
Loss before income taxes
(24,607
)
—
Benefit for taxes on
income
15,732
—
Equity earnings
(losses) of subsidiaries, net of tax
140,289
(21,346
)
Net income (loss)
$
131,414
$
(21,346
)
The accompanying notes are an integral part of these financial statements.
161
HERTZ GLOBAL HOLDINGS,
INC.
PARENT COMPANY STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands of Dollars, except share data)
Number
of Shares
Common
Stock
Additional
Capital
Paid-In
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Balance at:
DECEMBER 21, 2005
—
$
—
$
—
$
—
$
—
$
—
Sale of common stock
229,500,000
2,295
2,292,705
2,295,000
Net loss
(21,346
)
(21,346
)
Total comprehensive loss of subsidiary
(7,472
)
(7,472
)
Total Comprehensive Loss
(28,818
)
DECEMBER 31, 2005
229,500,000
2,295
2,292,705
(21,346
)
(7,472
)
2,266,182
Net income
131,414
131,414
Reduction in subsidiary equity for dividends received
(15,471
)
(15,471
)
Total comprehensive income of subsidiary
102,000
102,000
Total Comprehensive Income
217,943
Sale of common stock in initial public offering
88,235,000
882
1,259,384
1,260,266
Cash dividends ($4.32 and $1.12 per common share)
(1,174,456
)
(85,062
)
(1,259,518
)
Stock-based employee compensation
25,452
25,452
Sale of stock under employee equity offering
2,883,692
29
24,208
24,237
DECEMBER 31, 2006
320,618,692
$
3,206
$
2,427,293
$
9,535
$
94,528
$
2,534,562
The accompanying notes are an integral part of these financial statements.
162
HERTZ GLOBAL HOLDINGS, INC.
PARENT COMPANY STATEMENTS OF
CASH FLOWS
(In Thousands of Dollars)
Year ended
December 31, 2006
For the period from
December 21, 2005 to
December 31, 2005
Cash flows from operating activities:
Net income (loss)
$
131,414
$
(21,346
)
Non-cash expenses:
Amortization of deferred financing costs
505
—
Amortization of debt discount
5,000
—
Deferred taxes on income
(15,732
)
—
Changes in assets and
liabilities:
Receivables
(31
)
—
Accounts payable
1,076
—
Accrued liabilities
1,296
—
Equity (earnings) losses of subsidiaries, net of tax
(140,289
)
21,346
Net cash flows used
in operating activities
(16,761
)
—
Cash flows from investing
activities:
Investment in and advances to consolidated subsidiaries
(15,472
)
(2,295,000
)
Dividends from subsidiary
15,471
—
Net cash used in
investing activities
(1
)
(2,295,000
)
Cash flows from
financing activities:
Proceeds from issuance of long-term debt
1,000,000
—
Repayment of long-term debt
(1,000,000
)
—
Payment of financing costs
(5,505
)
—
Proceeds from the sale of common stock
1,284,503
2,295,000
Dividends paid
(1,259,518
)
—
Net cash provided by
financing activities
19,480
2,295,000
Effect of foreign exchange rate changes on cash and equivalents
—
—
Net increase in cash
and equivalents during the period
2,718
—
Cash and equivalents
at beginning of period
—
—
Cash and equivalents
at end of period
$
2,718
$
—
Supplemental
disclosures of cash flow information:
Cash paid (received) during the period for:
Interest (net of amounts capitalized)
$
34,482
$
—
Income taxes
—
—
The accompanying notes are an integral part of these financial statements.
163
HERTZ GLOBAL HOLDINGS,
INC.
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
Note 1—Background and Basis of
Presentation
Hertz Global Holdings, Inc., or “Hertz Holdings,”
is the top-level holding company that conducts substantially all of its
business operations through its indirect subsidiaries. Hertz Holdings was
incorporated in Delaware on August 31, 2005 in anticipation of the December 21,
2005 acquisition by its subsidiary, Hertz Investors, Inc., of the Hertz
Corporation. Hertz Holdings had no operations prior to December 21, 2005,
and accordingly, its results of operations and cash flows have only been
presented for the post-acquisition 11-day period ended December 31,
2005 and the year ended December 31, 2006.
There are significant
restrictions over the ability of Hertz Holdings to obtain funds from its
indirect subsidiaries through dividends, loans or advances. Accordingly, these
condensed financial statements have been presented on a “parent-only” basis.
Under a parent-only presentation, the investments of Hertz Holdings in its
consolidated subsidiaries are presented under the equity method of accounting.
These parent-only financial statements should be read in conjunction with the
consolidated financial statements of Hertz Holdings
included in
this Annual Report under the caption “Item 8—Financial Statements and
Supplementary Data.”
Note 2—Debt
On June 30, 2006, Hertz
Holdings entered into a loan facility with Deutsche Bank, AG, New York Branch,
Lehman Commercial Paper Inc., Merrill Lynch Capital Corporation, Goldman Sachs
Credit Partners L.P., JPMorgan Chase Bank, N.A. and Morgan Stanley Senior
Funding, Inc. or affiliates thereof, providing for a loan of $1.0 billion,
or the “Hertz Holdings Loan Facility,” for the purpose of paying a special cash
dividend to the holders of record of its common stock immediately prior to the
initial public offering and paying fees and expenses related to the facility.
The Hertz Holdings Loan Facility was repaid in full with the proceeds of our
initial public offering, and the restrictive covenants contained therein were
terminated. As of December 31, 2006, Hertz Holdings had no direct
outstanding debt obligations, but its indirect subsidiaries did. For a
discussion of the debt obligations of the indirect subsidiaries of Hertz
Holdings, see Note 3 to the
Notes
to our consolidated financial statements included in this Annual Report under
the caption “Item 8—Financial Statements and Supplementary Data.”
Note 3—Commitments and
Contingencies
Hertz Holdings has no direct
commitments and contingencies, but its indirect subsidiaries do. For a discussion
of the commitments and contingencies of the indirect subsidiaries of Hertz
Holdings, see Note 9 to the
Notes to our consolidated financial statements
included in this Annual Report under the caption “Item 8—Financial Statements
and Supplementary Data.”
Note 4—Dividends
Cash dividends received by the Company from its
subsidiaries during 2006 were $15.5 million.
164
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
HERTZ GLOBAL HOLDINGS, INC. AND
SUBSIDIARIES
(In Thousands of Dollars)
Balance at
Additions
Beginning of
Period
Charged to
Expense
Translation
Adjustments
Deductions
Balance at
End of Period
Allowance for doubtful accounts:
Successor
Year
ended December 31, 2006
$
460
$
17,132
$
401
$
16,004
(b)
$
1,989
For the
period from December 21, 2005 to December 31, 2005
$
—
(a)
$
462
$
(10
)
$
(8
)(b)
$
460
Predecessor
For the
period from January 1, 2005 to December 20, 2005
$
30,447
$
11,447
$
(1,202
)
$
22,529
(b)
$
18,163
Year ended December 31, 2004
$
35,758
$
14,133
$
1,123
$
20,567
(b)
$
30,447
(a)
The
underlying accounts receivable were revalued at their estimated net realizable
value as of the date of the Acquisition. Accordingly, the allowance for
doubtful accounts was valued at zero.
(b)
Amounts written off, net of recoveries.
165
ITEM 9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and
procedures are controls and other procedures that are designed to ensure that
information required to be disclosed in company reports filed or submitted
under the Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in company reports
filed under the Exchange Act is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
An evaluation of the
effectiveness of our disclosure controls and procedures was performed under the
supervision of, and with the participation of, management, including our Chief
Executive Officer and Chief Financial Officer, as of the end of the period
covered by this report. Based upon this evaluation, our management, including
our Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f) under
the Securities Exchange Act of 1934, as amended. We are not, however, an
accelerated filer and are therefore not yet required to report on our
assessment of our internal control over financial reporting under Rule 13a-15(f).
Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2006. The
assessment was based on criteria established in the framework
Internal Control—Integrated Framework
, issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management concluded that our internal control over
financial reporting was effective as of December 31, 2006. PricewaterhouseCoopers
LLP, our independent registered public accounting firm, has issued an
attestation report on management’s assessment of internal control over
financial reporting. Their report is included herein.
Changes in Internal Control Over Financial Reporting
No changes in our internal
control over financial reporting occurred during the fiscal quarter ended December 31,
2006 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B.
OTHER
INFORMATION
None.
166
PART III
ITEM 10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information related to our
directors is set forth under the caption “Election of Directors” of our proxy
statement, or the “2007 Proxy Statement,” for our annual meeting of stockholders
scheduled for May 17, 2007. Such information is incorporated herein by
reference.
Information relating to our Executive Officers is
included in Part I of this Annual Report under the caption “Executive Officers of the Registrant.”
Information relating to compliance with Section 16(a) of
the Exchange Act is set forth under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance” of our 2007 Proxy Statement. Such information
is incorporated herein by reference.
Information relating to the Audit Committee and Board
of Directors determinations concerning whether a member of the Audit Committee
is a “financial expert” as that term is defined under Item 407(d)(5) of
Regulation S-K is set forth under the caption “Corporate Governance and General
Information Concerning the Board of Directors and its Committees,” of our 2007
Proxy Statement. Such information is incorporated herein by reference.
Information related to our
code of ethics is set forth under the caption “Code of Ethics of Hertz Global
Holdings, Inc.” of our 2007 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 11.
EXECUTIVE
COMPENSATION
Information relating to this
item is set forth under the captions “Executive Compensation,” “Compensation
Committee Interlocks and Insider Participation” and “Compensation Committee
Report” of our 2007 Proxy Statement. Such information is incorporated herein by
reference.
ITEM 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information relating to this
item is set forth in this Annual Report under the caption “Item 5—Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity, Securities—Equity Compensation Plan Information” and under the caption “Security
Ownership of Certain Beneficial Owners, Directors and Officers” of our 2007
Proxy Statement. Such information is incorporated herein by reference.
ITEM 13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information relating to this
item is set forth under the captions “Certain Relationships and Related Party
Transactions” and “Corporate Governance and General Information Concerning the
Board of Directors and its Committees” of our 2007 Proxy Statement. Such
information is incorporated herein by reference.
ITEM 14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES
Information relating to this item is set forth under
the captions “Independent Registered Public Accounting Firm fees” of our 2007
Proxy Statement. Such information is incorporated herein by reference.
167
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
The following documents are
filed as part of this report:
Page
(a)
1.
Financial Statements:
Our financial statements filed herewith are set forth in Part II,
Item 8 of this Annual Report as follows:
Stock Purchase Agreement, dated as of September 12,
2005, among CCMG Holdings, Inc., Ford Holdings LLC and Ford Motor Company
(Incorporated by reference to Exhibit 2 to the Quarterly Report on Form 10-Q
of Ford Motor Company, as filed on November 7, 2005.)
3.1
Amended and Restated Certificate of Incorporation of
Hertz Global Holdings, Inc.
3.2
Amended and Restated By-Laws of Hertz Global
Holdings, Inc.
4.1.1
Indenture, dated as of December 21, 2005, by and
between CCMG Acquisition Corporation, as Issuer, the Subsidiary Guarantors
from time to time parties thereto, and Wells Fargo Bank, National
Association, as Trustee, governing the U.S. Dollar 8.875% Senior Notes due
2014 and the Euro 7.875% Senior Notes due 2014**
4.1.2
Merger Supplemental
Indenture, dated as of December 21, 2005, by and between The Hertz
Corporation and Wells Fargo Bank, National Association, as Trustee, relating
to the U.S. Dollar 8.875% Senior Notes due 2014 and the Euro 7.875% Senior
Notes due 2014**
4.1.3
Supplemental
Indenture in Respect of Subsidiary Guarantee, dated as of December 21, 2005,
by and between The Hertz Corporation, the Subsidiary Guarantors named
therein, and Wells Fargo Bank, National Association, as Trustee, relating to
the U.S. Dollar 8.875% Senior Notes due 2014 and the Euro 7.875% Senior Notes
due 2014**
168
4.1.4
Third Supplemental
Indenture, dated as of July 7, 2006, by and between The Hertz Corporation,
the Subsidiary Guarantors named therein, and Wells Fargo Bank, National
Association, as Trustee, relating to the U.S. Dollar 8.875% Senior Notes due
2014 and the Euro 7.875% Senior Notes due 2014 (Incorporated by reference to
Exhibit 4.3 to the Current Report on Form 8-K of The Hertz Corporation, as
filed on July 7, 2006.)
4.2.1
Indenture, dated as
of December 21, 2005, by and between CCMG Acquisition Corporation, as Issuer,
the Subsidiary Guarantors from time to time parties thereto, and Wells Fargo
Bank, National Association, as Trustee, governing the 10.5% Senior
Subordinated Notes due 2016**
4.2.2
Merger Supplemental
Indenture, dated as of December 21, 2005, by and between The Hertz
Corporation and Wells Fargo Bank, National Association, as Trustee, relating
to the 10.5% Senior Subordinated Notes due 2016**
4.2.3
Supplemental
Indenture in Respect of Subsidiary Guarantee, dated as of December 21, 2005,
by and between The Hertz Corporation, the Subsidiary Guarantors named
therein, and Wells Fargo Bank, National Association, as Trustee, relating to
the 10.5% Senior Subordinated Notes due 2016**
4.2.4
Third Supplemental
Indenture, dated as of July 7, 2006, by and between The Hertz Corporation,
the Subsidiary Guarantors named therein, and Wells Fargo Bank, National
Association, as Trustee, relating to the 10.5% Senior Subordinated Notes due
2016 (Incorporated by reference to Exhibit 4.4 to the Current Report on Form
8-K of The Hertz Corporation, as filed on July 7, 2006.)
4.3.1
Exchange and
Registration Rights Agreement, dated as of December 21, 2005, by and between
CCMG Acquisition Corporation, Deutsche Bank Securities Inc. and the other
financial institutions named therein, relating to the 8.875% Senior Notes due
2014 and the 7.875% Senior Notes due 2014**
4.3.2
Joinder Agreement to
the Exchange and Registration Rights Agreement, dated as of December 21,
2005, of The Hertz Corporation relating to the 8.875% Senior Notes due 2014
and the 7.875% Senior Notes due 2014**
4.3.3
Joinder Agreement to
the Exchange and Registration Rights Agreement, dated as of December 21,
2005, of the Subsidiary Guarantors named therein, relating to the 8.875%
Senior Notes due 2014 and the 7.875% Senior Notes due 2014**
4.4.1
Exchange and
Registration Rights Agreement, dated as of December 21, 2005, by and between
CCMG Acquisition Corporation, Deutsche Bank Securities Inc. and the other
financial institutions named therein, relating to the 10.5% Senior
Subordinated Notes due 2016**
4.4.2
Joinder Agreement to
the Exchange and Registration Rights Agreement, dated as of December 21,
2005, of The Hertz Corporation, relating to the 10.5% Senior Subordinated
Notes due 2016**
4.4.3
Joinder Agreement to
the Exchange and Registration Rights Agreement, dated as of December 21,
2005, of the Subsidiary Guarantors named therein, relating to the 10.5%
Senior Subordinated Notes due 2016**
169
4.5.1
Senior Bridge
Facilities Agreement, dated as of December 21, 2005, by and between Hertz
International, Ltd., certain of its subsidiaries, Hertz Europe Limited, as
Coordinator, BNP Paribas and The Royal Bank of Scotland plc, as Mandated Lead
Arrangers, Calyon, as Co-Arranger, BNP Paribas, The Royal Bank of Scotland
plc, and Calyon, as Joint Bookrunners, BNP Paribas, as Facility Agent, BNP
Paribas, as Security Agent, BNP Paribas, as Global Coordinator, and the
financial institutions named therein**
4.5.2
Intercreditor Deed,
dated as of December 21, 2005, by and between Hertz International, Ltd., as
Parent, Hertz Europe Limited, as Coordinator, certain of its subsidiaries,
BNP Paribas as A/C Facility Agent and NZ Facility Agent, BNP Paribas as
Security Agent, Banco BNP Paribas Brasil S.A., as Brazilian Facility Agent,
BNP Paribas, as Australian Security Trustee, the financial institutions named
therein, and The Hertz Corporation**
4.5.3
Australian Purchaser
Charge (Project H)—Unlimited, dated as of December 21, 2005, by and between
Hertz Australia Pty Limited and HA Funding Pty Limited**
4.5.4
Australian Purchaser
Charge (Project H)—South Australia, dated as of December 21, 2005, by and
between Hertz Australia Pty Limited and HA Funding Pty Limited**
4.5.5
Australian Purchaser
Charge (Project H)—Queensland, dated as of December 21, 2005, by and between
Hertz Australia Pty Limited and HA Funding Pty Limited**
4.5.6
Australian Share
Mortgage of Purchaser Shares (Project H), dated as of December 21, 2005, by
and between Hertz Investment (Holdings) Pty Limited and HA Funding Pty
Limited**
4.5.7
Australian Issuer
Charge (Project H), dated as of December 21, 2005, by and between Hertz Note
Issuer Pty Limited and HA Funding Pty Limited**
4.5.8
Australian Borrower
Charge (Project H), dated as of December 20, 2005, by and between HA Funding
Pty Limited and the BNP Paribas**
4.5.9
Australian Security
Trust Deed (Project H), dated as of December 21, 2005, between HA Funding Pty
Limited and BNP Paribas**
4.5.10
Business Pledge
Agreement, dated as of December 21, 2005, by and between Hertz Belgium N.V.,
as Pledgor, and BNP Paribas S.A., as Pledgee (English language version)**
4.5.11
Receivables and Bank
Account Pledge Agreement, dated as of December 21, 2005, by and between Hertz
Belgium NV as Pledgor, and BNP Paribas, as Pledgee**
4.5.12
Share Pledge Agreement,
dated as of December 21, 2005, by and between Hertz Holdings Netherlands
B.V., as Pledgor, and BNP Paribas, as Pledgee**
4.5.13
Security Agreement,
dated as of December 21, 2005, by and between Hertz Canada Limited, as
Obligor, and BNP Paribas (Canada), as Security Agent**
4.5.14.1
Deed of Hypothec,
dated as of December 21, 2005, by and between Hertz Canada Limited and BNP
Paribas (Canada), and related Bond and Bond Pledge Agreement**
4.5.14.2
Bond Pledge
Agreement, dated as of December 21, 2005, by and between Hertz Canada
Limited, as Pledgor, and BNP Paribas (Canada), as Security Agent**
4.5.15
Security Agreement,
dated as of December 21, 2005, by and between 1677932 Ontario Limited, as
Obligor, and BNP Paribas (Canada), as Security Agent**
4.5.16
Security Agreement,
dated as of December 21, 2005, by and between CMGC Canada Acquisition ULC, as
Obligor, and BNP Paribas (Canada), as Security Agent**
170
4.5.17
Pledge of a Business
as a Going Concern (Acte de Nantissement de Fonds de Commerce), dated as of
December 21, 2005, by and between Hertz France, as Pledgor, and BNP Paribas,
as Security Agent, and the beneficiaries described therein (English language
version)**
4.5.18
Bank Account Pledge
Agreement (Acte de Nantissement de Solde de Compte Bancaire), dated as of
December 21, 2005, by and between Hertz France, as Pledgor, and BNP Paribas,
as Security Agent, and the beneficiaries described therein (English language
version)**
4.5.19
Share Account Pledge
Agreement (Acte de Nantissement de Compte d'Instruments Financiers), dated as
of December 21, 2005, by and between Hertz France, as Pledgor, BNP Paribas,
as Security Agent, Hertz Equipement France, as Account Holder, BNP Paribas,
as Bank Account Holder, and the beneficiaries described therein**
4.5.20
Pledge of a Business
as a Going Concern (Acte de Nantissement de Fonds de Commerce), dated as of
December 21, 2005, by and between Hertz Equipement France, as Pledgor, BNP
Paribas, as Security Agent, and the beneficiaries described therein (English
language version)**
4.5.21
Bank Account Pledge
Agreement (Acte de Nantissement de Solde de Compte Bancaire), dated as of
December 21, 2005, by and between Hertz Equipement France, as Pledgor, BNP
Paribas, as Security Agent, and the beneficiaries described therein (English
language version)**
4.5.22
Master Agreement For
Assignment of Receivables (Contrat Cadre de Cession de Creances
Professionnelles a Titre de Garantie), dated as of December 21, 2005, by and
between Hertz Equipement France, as Assignor, BNP Paribas, as Security Agent,
and the assignees described therein**
4.5.23
Pledge of a Business
as a Going Concern (Acte de Nantissement de Fonds de Commerce), dated as of
December 21, 2005, by and between Equipole Finance Services, as Pledgor, BNP
Paribas, as Security Agent, and the beneficiaries described therein (English
language version)**
4.5.24
Master Agreement for
Assignment of Receivables (Contrat Cadre de Cession de Creances
Professionnelles a Titre de Garantie), dated as of December 21, 2005, by and
between Equipole Finance Services, as Assignor, BNP Paribas, as Security
Agent, and the assignees described therein**
4.5.25
Bank Account Pledge
Agreement (Acte de Nantissement de Solde de Compte Bancaire), dated as of
December 21, 2005, by and between Equipole Finance Services, as Pledgor, BNP
Paribas, as Security Agent, and the beneficiaries described therein (English
language version)**
4.5.26
Shares Account Pledge
Agreement (Acte de Nantissement de Compte d'Instruments Financiers), dated as
of December 21, 2005, by and between Equipole, as Pledgor, BNP Paribas, as
Security Agent, Equipole Finance Services, as Account Holder, BNP Paribas, as
Bank Account Holder, and the beneficiaries described therein**
4.5.27
Share Account Pledge
Agreement (Acte de Nantissement de Compte d'Instruments Financiers), dated as
of December 21, 2005, by and between Equipole, as Pledgor, BNP Paribas, as
Security Agent, Hertz France, as Account Holder, BNP Paribas, as Bank Account
Holder, and the beneficiaries described therein**
171
4.5.28
Shares Account Pledge
Agreement (Acte de Nantissement de Compte d'Instruments Financiers), dated as
of December 21, 2005, by and between Equipole, as Pledgor, BNP Paribas, as
Security Agent, Hertz Equipement France, as Account Holder, BNP Paribas, as
Bank Account Holder, and the beneficiaries described therein**
4.5.29
Account Pledge
Agreement, dated as of December 21, 2005, among Hertz Autovermietung GmbH,
The Royal Bank of Scotland plc, Calyon, BNP Paribas (Canada) and Indosuez
Finance (U.K.) Limited as Pledgees and BNP Paribas S.A. as Security Agent**
4.5.30
Global Assignment
Agreement, dated as of December 21, 2005, between Hertz Autoverrmietung GmbH
as assignor and BNP Paribas S.A. as Security Agent and lender (English language
version)**
4.5.31
Security Transfer of
Moveable Assets, dated as of December 21, 2005, between Hertz Autovermietung
GmbH as assignor and BNP Paribas S.A. as Security Agent and lender**
4.5.32
Share Pledge
Agreement, dated as of December 21, 2005, among Equipole S.A. (France), The
Royal Bank of Scotland plc, Calyon, BNP Paribas (Canada), Indosuez Finance
(U.K.) Limited and BNP Paribas S.A., as Security Agent**
4.5.33
Security Assignment
of Receivables, dated as of December 21, 2005, between Hertz Italiana S.p.A.
as assignor and BNP Paribas S.A. as Security Agent**
4.5.34
Pledge Agreement over
the Balance of Bank Account, dated as of December 21, 2005, between Hertz
Italiana S.p.A. as pledgor and BNP Paribas S.A. as Pledgee and Security
Agent**
4.5.35
Pledge Agreement over
the Balance of Bank Account, dated as of December 21, 2005, between Hertz
Italiana S.p.A., as Pledgor, and BNP Paribas S.A., as Pledgee and Security
Agent**
4.5.36
Pledge Agreement over
Hertz Italiana S.p.A. shares, dated as of December 21, 2005, between Hertz
Holding South Europe S.r.l as Pledgor and BNP Paribas S.A. as Pledgee and
Security Agent**
4.5.37
Deed of
Non-Possessory Pledge of Movables, dated as of December 21, 2005, between
Stuurgroep Holland B.V., as Pledgor, and BNS Automobile Funding B.V. and BNP
Paribas as Security Agent, as Pledgees**
4.5.38
Deed of Disclosed
Pledge of Receivables, dated as of December 21, 2005, between Stuurgroep
Holland B.V., as Pledgor, and BNS Automobile Funding B.V. and BNP Paribas as
Security Agent, as Pledgees**
4.5.39
Deed of Undisclosed
Pledge of Receivables between Stuurgroep Holland B.V., as Pledgor, and BNS
Automobile Funding B.V. and BNP Paribas as Security Agent, as Pledgees**
4.5.40
Deed of Pledge of
Registered Shares, dated as of December 21, 2005, between Stuurgroep Holland
B.V., as Pledgor, BNS Automobile Funding B.V. and BNP Paribas, as Pledgees,
and Hertz Automobielen Netherlands B.V.**
4.5.41
Deed of Pledge on
Registered Shares, dated as of December 21, 2005, between Hertz Holdings
Netherlands B.V., as Pledgor, BNS Automobile Funding B.V., as Pledgee, and
Stuurgroep Holland B.V.**
4.5.42
Deed of Disclosed
Pledge of Receivables between BNS Automobile Funding B.V., as Pledgor, and
BNP Paribas as Security Agent, as Pledgee**
172
4.5.43
Pledges of Shares
Contract, dated as of December 21, 2005, among Hertz de España, S.A, Hertz
Alquiler de Maquinaria, S.L., BNS Automobile Funding B.V. and BNP Paribas
S.A. as Security Agent relating to Hertz Alquiler de Maquinaria**
4.5.44
Contract on Pledges
of Credit Rights, dated as of December 21, 2005, among Hertz de España, S.A.,
BNS Automobile Funding B.V. and BNP Paribas S.A. as Security Agent**
4.5.45
Pledge of Credit
Rights of Insurance Policies Contract, dated as of December 21, 2005, among
Hertz de España, S.A., BNS Automobile Funding B.V. and BNP Paribas S.A. as
Security Agent**
4.5.46
Pledge of Credit
Rights of Bank Accounts, dated as of December 21, 2005 among Hertz de España,
S.A., as Pledgor, BNS Automobile Funding B.V. and BNP Paribas S.A., as
Security Agent**
4.5.47
Pledges over VAT
Credit Rights Contract, dated as of December 21, 2005, among Hertz de España,
S.A., as Pledgor, BNS Automobile Funding B.V. and BNP Paribas S.A., as
Security Agent**
4.5.48
Contract on Pledges
of Credit Rights, dated as of December 21, 2005, among Hertz Alquiler de
Maquinaria, S.L., as Pledgor, BNS Automobile Funding B.V. and BNP Paribas
S.A., as Security Agent**
4.5.49
Pledge of Credit
Rights of Bank Accounts Contract, dated as of December 21, 2005, among Hertz
Alquiler de Maquinaria, S.L., as Pledgor, BNS Automobile Funding B.V. and BNP
Paribas S.A., as Security Agent**
4.5.50
Pledges of Credit
Rights of Insurance Policies Contract, dates as of December 21, 2005, among
Hertz Alquiler de Maquinaria, S.L., as Pledgor, BNS Automobile Funding B.V.
and BNP Paribas S.A., as Security Agent**
4.5.51
Pledges over VAT
Credit Rights Contracts, dated as of December 21, 2005, among Hertz Alquiler
de Maquinaria S.L., as Pledgor, BNS Automobile Funding B.V., and BNP Paribas
S.A., as Security Agent**
4.5.52
Pledges of Credit
Rights Contract, dated as of December 21, 2005, among BNS Automobile Funding
B.V., as Pledgor, Hertz de Espana S.A., Hertz Alquiler de Maquinaria, S.L.,
and BNP Paribas S.A., as Security Agent**
4.5.53
Pledges of Shares
Contract, dated as of December 21, 2005, among Hertz International Ltd.,
Hertz Equipment Rental International, Limited, Hertz de España, S.A., and BNP
Paribas S.A., as Security Agent**
4.5.54
Share Pledge
Agreement, dated as of December 21, 2005, between Hertz AG and BNP Paribas
S.A. as Security Agent relating to the pledge of the entire share capital of
Züri-Leu Garage AG and Société Immobilière Fair Play**
4.5.55
Assignment Agreement,
dated as of December 21, 2005, between Hertz AG and BNP Paribas S.A. as
Security Agent relating to the assignment and transfer of trade receivables,
insurance claims, inter-company receivables and bank accounts**
4.5.56
Share Pledge
Agreement, dated as of December 21, 2005, between Hertz Holdings South Europe
S.r.l and BNP Paribas S.A. as Security Agent relating to the pledge of the
entire share capital of Hertz AG**
4.5.57
Deed of Charge, dated
as of December 21, 2005, between Hertz (U.K.) Limited as Chargor and BNP Paribas
as Security Agent**
173
4.5.58
Deed of Charge over
Shares, in Hertz (U.K.) Limited, dated as of December 21, 2005, between Hertz
Holdings II U.K. Limited as Chargor and BNP Paribas as Security Agent**
4.5.59
Deed of Charge over
Shares in Hertz Holdings III UK Limited, dated as of December 21, 2005,
between Hertz International, Ltd. and BNP Paribas as Security Agent**
4.5.60
Deed of Charge, dated
as of December 21, 2005, between BNS Automobile Funding B.V. as Chargor and
BNP Paribas as Security Agent**
4.6.1
Credit Agreement,
dated as of December 21, 2005, by and between The Hertz Corporation, the
several lenders from time to time parties thereto, Deutsche Bank AG, New York
Branch, as Administrative Agent and Collateral Agent, Lehman Commercial Paper
Inc., as Syndication Agent, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner and Smith Incorporated, as Documentation Agent, Deutsche Bank
Securities Inc., Lehman Brothers Inc., and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, as Joint Lead Arrangers, and
BNP Paribas, The Royal Bank of Scotland plc, and Calyon New York Branch, as
Co-Arrangers, and Deutsche Bank Securities Inc., Lehman Brothers, Inc.,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith Incorporated,
Goldman Sachs Credit Partners L.P., and JPMorgan Chase Bank, N.A., as Joint
Bookrunning Managers**
4.6.2
Guarantee and
Collateral Agreement, dated as of December 21, 2005, by and between CCMG
Corporation, The Hertz Corporation, certain of its subsidiaries, and Deutsche
Bank AG, New York Branch, as Administrative Agent and Collateral Agent**
4.6.3
Copyright Security
Agreement, dated as of December 21, 2005, by and between The Hertz
Corporation, certain of its subsidiaries, and Deutsche Bank AG, New York
Branch, as Administrative Agent and Collateral Agent**
4.6.4
Trademark Security
Agreement, dated as of December 21, 2005, by and between The Hertz
Corporation, certain of its subsidiaries, and Deutsche Bank AG, New York
Branch, as Administrative Agent and Collateral Agent**
4.6.5
Deed of Trust,
Security Agreement, and Assignment of Leases and Rents and Fixture Filing,
dated as of December 21, 2005, among the Hertz Corporation and Deutsche Bank
AG, New York Branch**
4.6.6
Term Loan Mortgage
Schedule listing the material differences in mortgages from Exhibit 4.6.5 for
each of the mortgaged properties**
4.6.7
Amendment, dated as
of June 30, 2006, among The Hertz Corporation, Deutsche Bank AG, New York
Branch, and the other parties signatory thereto, to the Credit Agreement,
dated as of December 21, 2005, by and between The Hertz Corporation, the
several lenders from time to time parties thereto, Deutsche Bank AG, New York
Branch, as Administrative Agent and Collateral Agent, Lehman Commercial Paper
Inc., as Syndication Agent, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner and Smith Incorporated, as Documentation Agent, Deutsche Bank
Securities Inc., Lehman Brothers Inc., and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, as Joint Lead Arrangers, and
BNP Paribas, The Royal Bank of Scotland plc, and Calyon New York Branch, as
Co-Arrangers, and Deutsche Bank Securities Inc., Lehman Brothers, Inc.,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith Incorporated,
Goldman Sachs Credit Partners L.P., and JPMorgan Chase Bank, N.A., as Joint
Bookrunning Managers (Incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K of The Hertz Corporation, as filed on July 7, 2006.)
174
4.6.8
Second Amendment,
dated as of February 9, 2007, among The Hertz Corporation, Deutsche Bank AG,
New York Branch, and the other parties signatory thereto, to the Credit
Agreement, dated as of December 21, 2005, by and between The Hertz
Corporation, the several lenders from time to time parties thereto, Deutsche
Bank AG, New York Branch, as Administrative Agent and Collateral Agent,
Lehman Commercial Paper Inc., as Syndication Agent, Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner and Smith Incorporated, as Documentation Agent,
Deutsche Bank Securities Inc., Lehman Brothers Inc., and Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner and Smith Incorporated, as Joint Lead
Arrangers, and BNP Paribas, The Royal Bank of Scotland plc, and Calyon New
York Branch, as Co-Arrangers, and Deutsche Bank Securities Inc., Lehman
Brothers, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and
Smith Incorporated, Goldman Sachs Credit Partners L.P., and JPMorgan Chase
Bank, N.A., as Joint Bookrunning Managers
4.7.1
Credit Agreement,
dated as of December 21, 2005, by and between Hertz Equipment Rental
Corporation, The Hertz Corporation, the Canadian Borrowers parties thereto,
the several lenders from time to time parties thereto, Deutsche Bank AG, New
York Branch, as Administrative Agent and Collateral Agent, Deutsche Bank AG,
Canada Branch, as Canadian Agent and Canadian Collateral Agent, Lehman
Commercial Paper Inc., as Syndication Agent, Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, as Documentation Agent, Deutsche
Bank Securities Inc., Lehman Brothers Inc., and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner and Smith Incorporated, as Joint Lead
Arrangers, BNP Paribas, The Royal Bank of Scotland plc, and Calyon New York
Branch, as Co-Arrangers, and Deutsche Bank Securities Inc., Lehman Brothers
Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated, Goldman Sachs Credit Partners L.P., and JPMorgan Chase Bank,
N.A., as Joint Bookrunning Managers**
4.7.2
U.S. Guarantee and
Collateral Agreement, dated as of December 21, 2005, by and between CCMG
Corporation, The Hertz Corporation, certain of its subsidiaries, and Deutsche
Bank AG, New York Branch, as Administrative Agent and Collateral Agent**
4.7.3
Canadian Guarantee
and Collateral Agreement, dated as of December 21, 2005, by and between
Matthews Equipment Limited, Western Shut-Down (1995) Limited, certain of its
subsidiaries, and Deutsche Bank AG, Canada Branch, as Canadian Agent and
Canadian Collateral Agent**
4.7.4
Copyright Security
Agreement, dated as of December 21, 2005, by and between The Hertz
Corporation, certain of its subsidiaries, and Deutsche Bank AG, New York
Branch, as Administrative Agent and Collateral Agent**
4.7.5
Trademark Security
Agreement, dated as of December 21, 2005, by and between The Hertz
Corporation, certain of its subsidiaries, and Deutsche Bank AG, New York
Branch, as Administrative Agent and Collateral Agent**
4.7.6
Trademark Security
Agreement, dated as of December 21, 2005, by and between Matthews Equipment
Limited and Deutsche Bank AG, Canada Branch, as Canadian Agent and Canadian
Collateral Agent**
4.7.7
Deed of Trust,
Security Agreement, and Assignment of Leases and Rents and Fixture Filing,
dated as of December 21, 2005, among the Hertz Corporation and Deutsche Bank
AG, New York Branch**
175
4.7.8
Term Loan Mortgage
Schedule listing the material differences in mortgages from Exhibit 4.7.7 for
each of the mortgaged properties**
4.7.9
Amendment, dated as
of June 30, 2006, among Hertz Equipment Rental Corporation, The Hertz
Corporation, Matthews Equipment Limited, Western Shut-Down (1995) Limited,
Deutsche Bank AG, New York Branch, Deutsche Bank AG, Canada Branch, and the
other parties signatory thereto, to the Credit Agreement, dated as of December
21, 2005, by and between Hertz Equipment Rental Corporation, The Hertz
Corporation, the Canadian Borrowers parties thereto, the several lenders from
time to time parties thereto, Deutsche Bank AG, New York Branch, as
Administrative Agent and Collateral Agent, Deutsche Bank AG, Canada Branch,
as Canadian Agent and Canadian Collateral Agent, Lehman Commercial Paper
Inc., as Syndication Agent, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner and Smith Incorporated, as Documentation Agent, Deutsche Bank Securities
Inc., Lehman Brothers Inc., and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner and Smith Incorporated, as Joint Lead Arrangers, BNP Paribas,
The Royal Bank of Scotland plc, and Calyon New York Branch, as Co-Arrangers,
and Deutsche Bank Securities Inc., Lehman Brothers Inc., Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner and Smith Incorporated, Goldman Sachs
Credit Partners L.P., and JPMorgan Chase Bank, N.A., as Joint Bookrunning
Managers (Incorporated by reference to Exhibit 4.2 to the Current Report on
Form 8-K of The Hertz Corporation, as filed on July 7, 2006.)
4.7.10
Second Amendment,
dated as of February 15, 2007, among Hertz Equipment Rental Corporation, The
Hertz Corporation, Matthews Equipment Limited, Western Shut-Down (1995) Limited,
Deutsche Bank AG, New York Branch, Deutsche Bank AG, Canada Branch, and the
other parties signatory thereto, to the Credit Agreement, dated as of
December 21, 2005, by and between Hertz Equipment Rental Corporation, The
Hertz Corporation, the Canadian Borrowers parties thereto, the several
lenders from time to time parties thereto, Deutsche Bank AG, New York Branch,
as Administrative Agent and Collateral Agent, Deutsche Bank AG, Canada
Branch, as Canadian Agent and Canadian Collateral Agent, Lehman Commercial
Paper Inc., as Syndication Agent, Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner and Smith Incorporated, as Documentation Agent, Deutsche Bank
Securities Inc., Lehman Brothers Inc., and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, as Joint Lead Arrangers, BNP
Paribas, The Royal Bank of Scotland plc, and Calyon New York Branch, as
Co-Arrangers, and Deutsche Bank Securities Inc., Lehman Brothers Inc.,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith Incorporated,
Goldman Sachs Credit Partners L.P., and JPMorgan Chase Bank, N.A., as Joint
Bookrunning Managers
4.8
Intercreditor
Agreement, dated as of December 21, 2005, by and between Deutsche Bank AG,
New York Branch, as ABL Agent, Deutsche Bank AG, New York Branch, as Term
Agent, as acknowledged by CCMG Corporation, The Hertz Corporation and certain
of its subsidiaries**
4.9.1
Second Amended and
Restated Base Indenture, dated as of August 1, 2006, between Hertz Vehicle
Financing LLC, as Issuer, and BNY Midwest Trust Company, as Trustee
4.9.2
Amended and Restated
Series 2005-1 Supplement to the Second Amended and Restated Base Indenture,
dated as of August 1, 2006, between Hertz Vehicle Financing LLC, as Issuer,
and BNY Midwest Trust Company, as Trustee and Securities Intermediary
4.9.3
Amended and Restated
Series 2005-2 Supplement to the Second Amended and Restated Base Indenture,
dated as of August 1, 2006, between Hertz Vehicle Financing LLC, as Issuer,
and BNY Midwest Trust Company, as Trustee and Securities Intermediary
176
4.9.4
Amended and Restated
Series 2005-3 Supplement to the Second Amended and Restated Base Indenture,
dated as of August 1, 2006, between Hertz Vehicle Financing LLC, as Issuer,
and BNY Midwest Trust Company, as Trustee and Securities Intermediary
4.9.5
Amended and Restated
Series 2005-4 Supplement to the Second Amended and Restated Base Indenture,
dated as of August 1, 2006, between Hertz Vehicle Financing LLC, as Issuer,
and BNY Midwest Trust Company, as Trustee and Securities Intermediary
4.9.6
Second Amended and
Restated Series 2004-1 Supplement to the Second Amended and Restated Base
Indenture, dated as of August 1, 2006, between Hertz Vehicle Financing LLC,
as Issuer, and BNY Midwest Trust Company, as Trustee and Securities
Intermediary
4.9.7
Second Amended and
Restated Master Motor Vehicle Operating Lease and Servicing Agreement, dated
as of August 1, 2006, between The Hertz Corporation, as Lessee and Servicer,
and Hertz Vehicle Financing LLC, as Lessor
4.9.8
Amended and Restated
Participation, Purchase and Sale Agreement, dated as of December 21, 2005, by
and between Hertz General Interest LLC, Hertz Vehicle Financing LLC and The
Hertz Corporation, as Lessee and Servicer**
4.9.9
Purchase and Sale
Agreement, dated as of December 21, 2005, by and between The Hertz
Corporation, Hertz Vehicle Financing LLC and Hertz Funding Corp.**
4.9.10
Contribution
Agreement, dated as of December 21, 2005, by and between Hertz Vehicle
Financing LLC and The Hertz Corporation**
4.9.11
Second Amended and
Restated Collateral Agency Agreement, dated as of January 26, 2007, among
Hertz Vehicle Financing LLC, as a Grantor, Hertz General Interest LLC, as a
Grantor, The Hertz Corporation, as Servicer, BNY Midwest Trust Company, as
Collateral Agent, BNY Midwest Trust Company, as Trustee and a Secured Party,
and The Hertz Corporation, as a Secured Party
4.9.12
Amended and Restated
Administration Agreement, dated as of December 21, 2005, by and between The
Hertz Corporation, Hertz Vehicle Financing LLC, and BNY Midwest Trust
Company, as Trustee**
4.9.13
Amended and Restated
Master Exchange Agreement, dated as of January 26, 2007, among The Hertz
Corporation, Hertz Vehicle Financing LLC, Hertz General Interest LLC, Hertz
Car Exchange Inc., and J.P. Morgan Property Holdings LLC
4.9.14
Amended and Restated
Escrow Agreement, dated as of January 26, 2007, among The Hertz Corporation,
Hertz Vehicle Financing LLC, Hertz General Interest LLC, Hertz Car Exchange
Inc., and J.P. Morgan Chase Bank, N.A.
4.9.15
Amended and Restated
Class A-1 Note Purchase Agreement (Series 2005-3 Variable Funding Rental Car
Asset Backed Notes, Class Aa-1), dated as of March 3, 2006, by and between
Hertz Vehicle Financing LLC, The Hertz Corporation, as Administrator, certain
Conduit Investors, each as a Conduit Investor, certain Financial
Institutions, each as a Committed Note Purchaser, certain Funding Agents, and
Lehman Commercial Paper Inc., as Administrative Agent**
4.9.16
Amended and Restated
Class A-2 Note Purchase Agreement (Series 2005-3 Variable Funding Rental Car
Asset backed Notes, Class A-2), dated as of March 3, 2006, by and between
Hertz Vehicle Financing LLC, The Hertz Corporation, as Administrator, certain
Conduit Investors, each as a Conduit Investor, certain Financial
Institutions, each as a Committed Note Purchaser, certain Funding Agents, and
Lehman Commercial Paper Inc., as Administrative Agent**
177
4.9.17
Amended and Restated
Class A Note Purchase Agreement (Series 2005-4 Variable Funding Rental Car Asset
Backed Notes, Class A), dated as of March 3, 2006, by and between Hertz
Vehicle Financing LLC, The Hertz Corporation, as Administrator, certain
Conduit Investors, each as a Conduit Investor, certain Financial
Institutions, each as a Committed Note Purchaser, certain Funding Agents, and
Lehman Commercial Paper Inc., as Administrative Agent**
4.9.18
Letter of Credit
Facility Agreement, dated as of December 21, 2005, by and between The Hertz
Corporation, Hertz Vehicle Financing LLC, and Ford Motor Company**
4.9.19
Insurance Agreement,
dated as of December 21, 2005, by and between MBIA Insurance Corporation, as
Insurer, Hertz Vehicle Financing LLC, as Issuer, and BNY Midwest Trust
Company, as Trustee**
4.9.20
Insurance Agreement,
dated as of December 21, 2005, by and between Ambac Assurance Corporation, as
Insurer, Hertz Vehicle Financing LLC, as Issuer, and BNY Midwest Trust
Company, as Trustee**
4.9.21
Note Guaranty
Insurance Policy, dated as of December 21, 2005, of MBIA Insurance
Corporation, relating to Series 2005-1 Rental Car Asset Backed Notes**
4.9.22
Note Guaranty
Insurance Policy, dated as of December 21, 2005, of MBIA Insurance
Corporation, relating to Series 2005-4 Rental Car Asset Backed Notes**
4.9.23
Note Guaranty
Insurance Policy, dated as of December 21, 2005, of Ambac Assurance
Corporation, relating to Series 2005-2 Rental Car Asset Backed Notes**
4.9.24
Note Guaranty
Insurance Policy, dated as of December 21, 2005, of Ambac Assurance
Corporation, relating to Series 2005-3 Rental Car Asset Backed Notes**
4.9.25
Supplement to Second
Amended and Restated Collateral Agency Agreement, dated as of January 26,
2007, among The Hertz Corporation, as Grantor, Gelco Corporation d/b/a GE
Fleet Services, as Secured Party and BNY Midwest Trust Company as Collateral
Agent
4.10
Amended and Restated
Stockholders Agreement, dated as of November 20, 2006, among Hertz Global
Holdings, Inc., Clayton, Dubilier & Rice Fund VII, L.P., CDR CCMG
Co-Investor L.P., CD&R Parallel Fund VII, L.P., Carlyle Partners IV,
L.P., CP IV Coinvestment, L.P., CEP II U.S. Investments, L.P., CEP II
Participations S.à.r.l SICAR, ML Global Private Equity Fund, L.P., Merrill
Lynch Ventures L.P. 2001, ML Hertz Co-Investor, L.P. and CMC-Hertz Partners,
L.P.
4.11
Registration Rights
Agreement, dated as of December 21, 2005, among CCMG Holdings, Inc. (now
known as Hertz Global Holdings, Inc.), Clayton, Dubilier & Rice Fund VII,
L.P., CDR CCMG Co-Investor L.P., Carlyle Partners IV, L.P., CP IV
Coinvestment, L.P., CEP II U.S. Investments, L.P., CEP II Participations
S.à.r.l, ML Global Private Equity Fund, L.P., Merrill Lynch Ventures L.P.
2001, ML Hertz Co-Investor, L.P. and CMC-Hertz Partners, L.P. (filed as the
exhibit of the same number to Amendment No. 3 to the Registration Statement
on Form S-1 filed on October 23, 2006)
4.12
Amendment No. 1,
dated as of November 20, 2006, to the Registration Rights Agreement, dated as
of December 21, 2005, among CCMG Holdings, Inc. (now known as Hertz Global
Holdings, Inc.), Clayton, Dubilier & Rice Fund VII, L.P., CDR CCMG
Co-Investor L.P., CD&R Parallel Fund VII, L.P., Carlyle Partners IV,
L.P., CP IV Coinvestment, L.P., CEP II U.S. Investments, L.P., CEP II
Participations S.à.r.l SICAR, ML Global Private Equity Fund, L.P., Merrill
Lynch Ventures L.P. 2001, ML Hertz Co-Investor, L.P. and CMC-Hertz Partners,
L.P.
178
4.13
Credit Agreement,
dated as of September 29, 2006, among The Hertz Corporation, Puerto
Ricancars, Inc., the several banks and other financial institutions from time
to time parties as lenders thereto and Gelco Corporation d.b.a. GE Fleet
Services, as administrative agent and collateral agents for the lenders
thereunder (filed as the exhibit of the same number to Amendment No. 4 to the
Registration Statement on Form S-1 filed on October 27, 2006)
4.13.1
First Amendment,
dated as of October 6, 2006, to the Credit Agreement, dated as of September
29, 2006, among The Hertz Corporation, Puerto Ricancars, Inc., the several
banks and other financial institutions from time to time parties as lenders
thereto and Gelco Corporation d.b.a. GE Fleet Services, as administrative
agent and collateral agents for the lenders thereunder (filed as the exhibit
of the same number to Amendment No. 4 to the Registration Statement on Form
S-1 filed on October 27, 2006)
4.13.2
Second Amendment,
dated as of October 31, 2006, to the Credit Agreement, dated as of September
29, 2006, among The Hertz Corporation, Puerto Ricancars, Inc., the several
banks and other financial institutions from time to time parties as lenders
thereto and Gelco Corporation d.b.a. GE Fleet Services, as administrative
agent and collateral agents for the lenders thereunder
4.14
Form of Stock
Certificate (filed as the exhibit of the same number to Amendment No. 6,
filed on November 7, 2006, to the registrant’s Registration Statement on Form
S-1(File No. 333-135782) (such registration statement, the “Registration
Statement”))
10.1
Hertz Global
Holdings, Inc. Stock Incentive Plan* **
10.1.1
First Amendment to
the Hertz Global Holdings, Inc. Stock Incentive Plan (filed as the exhibit of
the same number to Amendment No. 4 to the Registration Statement on Form S-1
filed on October 27, 2006)*
10.2
Form of Stock
Subscription Agreement under Stock Incentive Plan* **
10.3
Form of Stock Option
Agreement under Stock Incentive Plan* **
10.4
Employment Agreement
between The Hertz Corporation and Craig R. Koch (Incorporated by reference to
Exhibit 10.4(3) to the Registration Statement No. 333-125764 of The Hertz
Corporation)*
10.5
Form of Change in
Control Agreement (and certain terms related thereto) among The Hertz
Corporation, Ford Motor Company and each of Messrs. Koch, Nothwang, Siracusa,
Taride and Plescia (Incorporated by reference to Exhibit 10.5 to the
Registration Statement No. 333- 125764 of The Hertz Corporation)*
10.6
Non-Compete
Agreement, dated April 10, 2000, between Hertz Europe Limited and Michel
Taride (Incorporated by reference to Exhibit 10.6 to the Registration
Statement No. 333-125764 of The Hertz Corporation)*
10.7
The Hertz Corporation
Compensation Supplemental Retirement and Savings Plan (Incorporated by
reference to Exhibit 10.7 to the Registration Statement No. 333-125764 of The
Hertz Corporation)*
10.8
The Hertz Corporation
Executive Long Term Incentive Compensation Plan (Incorporated by reference to
Exhibit 10.8 to the Registration Statement No. 333-125764 of The Hertz
Corporation)*
179
10.9
The Hertz Corporation
Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit
10.9 to the Registration Statement No. 333-125764 of The Hertz Corporation)*
10.10
The Hertz Corporation
Benefit Equalization Plan (Incorporated by reference to Exhibit 10.10 to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.11
The Hertz Corporation
Key Officer Postretirement Assigned Car Benefit Plan (Incorporated by
reference to Exhibit 10.11 to the Registration Statement No. 333-125764 of
The Hertz Corporation)*
10.12
The Hertz Corporation
Retirement Plan (Incorporated by reference to Exhibit 10.12 to the
Registration Statement No. 333-125764 of the Hertz Corporation)*
10.13
The Hertz Corporation
(UK) 1972 Pension Plan (Incorporated by reference to Exhibit 10.13 to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.14
The Hertz Corporation
(UK) Supplementary Unapproved Pension Scheme (Incorporated by reference to
Exhibit 10.14 to the Registration Statement No. 333-125764 of The Hertz
Corporation)*
10.15
RCA Executive
Deferred Compensation Plan and Employee Participation Agreement, dated May
29, 1985, between Craig R. Koch and The Hertz Corporation (Incorporated by
reference to Exhibit 10.15 to the Registration Statement No. 333-125764 of
The Hertz Corporation)*
10.16
The Hertz Corporation
2005 Executive Incentive Compensation Plan* **
10.17
Letter Agreement,
dated October 19, 2005, as amended and restated as of November 15, 2005,
between CCMG Holdings, Inc. (now known as Hertz Global Holdings, Inc.) and
Craig R. Koch* **
10.18
Amended and Restated
Indemnification Agreement, dated as of December 21, 2005, by and between The
Hertz Corporation, Hertz Vehicles LLC, Hertz Funding Corp., Hertz General
Interest LLC, and Hertz Vehicle Financing LLC**
10.19
Consulting Agreement,
dated as of December 21, 2005, by and between CCMG Holdings, Inc. (now known
as Hertz Global Holdings, Inc.), The Hertz Corporation, and Clayton, Dubilier
& Rice, Inc.**
10.20
Consulting Agreement,
dated as of December 21, 2005, by and between CCMG Holdings, Inc. (now known
as Hertz Global Holdings, Inc.), The Hertz Corporation, and TC Group IV,
L.L.C.**
10.21
Consulting Agreement,
dated as of December 21, 2005, by and between CCMG Holdings, Inc. (now known
as Hertz Global Holdings, Inc.), The Hertz Corporation, and Merrill Lynch
Global Partners, Inc.**
10.22
Indemnification
Agreement, dated as of December 21, 2005, by and between CCMG Holdings, Inc.
(now known as Hertz Global Holdings, Inc.), The Hertz Corporation, Clayton,
Dubilier & Rice Fund VII, L.P., CDR CCMG Co-Investor L.P., and Clayton,
Dubilier & Rice, Inc.**
10.23
Indemnification
Agreement, dated as of December 21, 2005, by and between CCMG Holdings, Inc.
(now known as Hertz Global Holdings, Inc.), The Hertz Corporation, Carlyle
Partners IV, L.P., CP IV Coinvestment L.P., CEP II U.S. Investments, L.P.,
CEP II Participations S.à.r.l., and TC Group IV, L.L.C.**
180
10.24
Indemnification
Agreement, dated as of December 21, 2005, by and between CCMG Holdings, Inc.
(now known as Hertz Global Holdings, Inc.), The Hertz Corporation, ML Global
Private Equity Fund, L.P., Merrill Lynch Ventures L.P. 2001, CMC-Hertz
Partners, L.P., ML Hertz Co-Investor, L.P., and Merrill Lynch Global
Partners, Inc.**
10.25
Tax Sharing
Agreement, dated as of December 21, 2005, by and between CCMG Holdings, Inc.
(now known as Hertz Global Holdings, Inc.), CCMG Corporation, The Hertz
Corporation, and Hertz International, Ltd.**
10.26
Tax Sharing
Agreement, dated as of December 21, 2005, by and between CCMG Holdings, Inc.
(now known as Hertz Global Holdings, Inc.), CCMG Corporation, and The Hertz
Corporation**
10.27
Master Supply and
Advertising Agreement, dated as of July 5, 2005, by and between Ford Motor
Company, The Hertz Corporation and Hertz General Interest LLC (Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K of The Hertz
Corporation filed with the Securities and Exchange Commission on July 11,
2005. Such Exhibit omits certain information that has been filed separately
with the Securities and Exchange Commission and submitted pursuant to an
application for confidential treatment.)
10.28
Employment letter
agreement, dated as of July 10, 2006, between Hertz Global Holdings, Inc. and
Mark P. Frissora (Incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of The Hertz Corporation filed with the Securities and
Exchange Commission on August 14, 2006.)
10.29
Form of Director
Indemnification Agreement (filed as the exhibit of the same number to
Amendment No. 3 to our Registration Statement on Form S-1, filed on October
23, 2006)
10.30
Termination letter
agreement, dated as of November 20, 2006, among Hertz Global Holdings, Inc.
(formerly known as CCMG Holdings, Inc.), The Hertz Corporation and Clayton,
Dubilier & Rice, Inc., terminating the Consulting Agreement, dated as of
December 21, 2005, among Hertz Global Holdings, Inc., the Hertz Corporation
and Clayton, Dubilier & Rice, Inc.
10.31
Termination letter
agreement, dated as of November 20, 2006, among Hertz Global Holdings, Inc.
(formerly known as CCMG Holdings, Inc.), The Hertz Corporation and TC Group
IV, L.L.C., terminating the Consulting Agreement, dated as of December 21,
2005, among Hertz Global Holdings, Inc., the Hertz Corporation and TC Group
IV, L.L.C.
10.32
Termination letter
agreement, dated as of November 20, 2006, among Hertz Global Holdings, Inc.
(formerly known as CCMG Holdings, Inc.), The Hertz Corporation and Merrill
Lynch Global Partners, Inc., terminating the Consulting Agreement, dated as
of December 21, 2005, among Hertz Global Holdings, Inc., the Hertz
Corporation and Merrill Lynch Global Partners, Inc.
10.33
Hertz Global
Holdings, Inc. Director Stock Incentive Plan* (filed as the exhibit of the
same number to Amendment No. 6 to the Registration Statement on Form S-1
filed on November 7, 2006)
12
Computation of
Consolidated Ratio of Earnings to Fixed Charges for the year ended December
31, 2006, the periods ended December 31, 2005 and December 20, 2005 and each
of the three years in the period ended December 31, 2004.
21.1
List of subsidiaries
23.1
Consent of
PricewaterhouseCoopers LLP
181
31.1-31.2
Rule
13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief
Financial Officer
32.1-32.2
Section 1350 Certifications
of Chief Executive Officer and Chief Financial Officer
*
Indicates
management compensation plan.
**
Incorporated by
reference to the exhibit of the same number to the Current Report on Form 8-K
of The Hertz Corporation, as filed on March 31, 2006.
As of December 31,
2006, we had various additional obligations which could be considered long-term
debt, none of which exceeded 10% of our total assets on a consolidated basis.
We agree to furnish to the SEC upon request a copy of any such instrument
defining the rights of the holders of such long-term debt.
Schedules and exhibits not included above have been
omitted because the information required has been included in the financial
statements or notes thereto or are not applicable or not required.
182
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the borough of Park
Ridge, and state of New Jersey, on the 30
th
day of March, 2007.
HERTZ
GLOBAL HOLDINGS, INC.
(Registrant)
By:
/s/ PAUL J. SIRACUSA
Name:
Paul J. Siracusa
Title:
Executive Vice President and Chief Financial Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on March 30, 2007:
Signature
Title
/s/ GEORGE W.
TAMKE
Lead Director
George
W. Tamke
/s/ MARK P.
FRISSORA
Chief
Executive Officer and Chairman of the Board of Directors
Mark P.
Frissora
/s/ PAUL J.
SIRACUSA
Executive
Vice President and Chief Financial Officer
Paul J.
Siracusa
/s/ RICHARD J.
FOTI
Staff
Vice President and Controller
Richard
J. Foti
/s/ NATHAN K.
SLEEPER
Director
Nathan
K. Sleeper
/s/ DAVID H.
WASSERMAN
Director
David H.
Wasserman
/s/
BRIAN A. BERNASEK
Director
Brian A.
Bernasek
/s/ GREGORY S.
LEDFORD
Director
Gregory
S. Ledford
/s/ GEORGE A.
BITAR
Director
George A. Bitar
/s/ ROBERT F.
END
Director
Robert F. End
184
/s/ BARRY
H. BERACHA
Independent
Director
Barry H. Beracha
/s/ CARL T.
BERQUIST
Independent
Director
Carl T.
Berquist
/s/ MICHAEL J.
DURHAM
Independent
Director
Michael
J. Durham
/s/ HENRY C.
WOLF
Independent
Director
Henry C. Wolf
185
EXHIBIT
INDEX
Exhibit
Number
Description
2.1
Stock Purchase
Agreement, dated as of September 12, 2005, among CCMG Holdings, Inc., Ford
Holdings LLC and Ford Motor Company (Incorporated by reference to Exhibit 2
to the Quarterly Report on Form 10-Q of Ford Motor Company, as filed on
November 7, 2005.)
3.1
Amended and Restated Certificate of Incorporation of
Hertz Global Holdings, Inc.
3.2
Amended and Restated By-Laws of Hertz Global
Holdings, Inc.
4.1.1
Indenture, dated as of December 21, 2005, by and
between CCMG Acquisition Corporation, as Issuer, the Subsidiary Guarantors
from time to time parties thereto, and Wells Fargo Bank, National
Association, as Trustee, governing the U.S. Dollar 8.875% Senior Notes due
2014 and the Euro 7.875% Senior Notes due 2014**
4.1.2
Merger Supplemental Indenture, dated as of December
21, 2005, by and between The Hertz Corporation and Wells Fargo Bank, National
Association, as Trustee, relating to the U.S. Dollar 8.875% Senior Notes due
2014 and the Euro 7.875% Senior Notes due 2014**
4.1.3
Supplemental Indenture in Respect of Subsidiary
Guarantee, dated as of December 21, 2005, by and between The Hertz
Corporation, the Subsidiary Guarantors named therein, and Wells Fargo Bank,
National Association, as Trustee, relating to the U.S. Dollar 8.875% Senior
Notes due 2014 and the Euro 7.875% Senior Notes due 2014**
4.1.4
Third Supplemental Indenture, dated as of July 7,
2006, by and between The Hertz Corporation, the Subsidiary Guarantors named
therein, and Wells Fargo Bank, National Association, as Trustee, relating to
the U.S. Dollar 8.875% Senior Notes due 2014 and the Euro 7.875% Senior Notes
due 2014 (Incorporated by reference to Exhibit 4.3 to the Current Report on
Form 8-K of The Hertz Corporation, as filed on July 7, 2006.)
4.2.1
Indenture, dated as of December 21, 2005, by and
between CCMG Acquisition Corporation, as Issuer, the Subsidiary Guarantors
from time to time parties thereto, and Wells Fargo Bank, National
Association, as Trustee, governing the 10.5% Senior Subordinated Notes due
2016**
4.2.2
Merger Supplemental Indenture, dated as of December
21, 2005, by and between The Hertz Corporation and Wells Fargo Bank, National
Association, as Trustee, relating to the 10.5% Senior Subordinated Notes due
2016**
4.2.3
Supplemental Indenture in Respect of Subsidiary
Guarantee, dated as of December 21, 2005, by and between The Hertz
Corporation, the Subsidiary Guarantors named therein, and Wells Fargo Bank,
National Association, as Trustee, relating to the 10.5% Senior Subordinated
Notes due 2016**
4.2.4
Third Supplemental Indenture, dated as of July 7,
2006, by and between The Hertz Corporation, the Subsidiary Guarantors named
therein, and Wells Fargo Bank, National Association, as Trustee, relating to
the 10.5% Senior Subordinated Notes due 2016 (Incorporated by reference to
Exhibit 4.4 to the Current Report on Form 8-K of The Hertz Corporation, as
filed on July 7, 2006.)
4.3.1
Exchange and Registration Rights Agreement, dated as
of December 21, 2005, by and between CCMG Acquisition Corporation, Deutsche
Bank Securities Inc. and the other financial institutions named therein,
relating to the 8.875% Senior Notes due 2014 and the 7.875% Senior Notes due
2014**
186
4.3.2
Joinder Agreement to the Exchange and Registration
Rights Agreement, dated as of December 21, 2005, of The Hertz Corporation
relating to the 8.875% Senior Notes due 2014 and the 7.875% Senior Notes due
2014**
4.3.3
Joinder Agreement to the Exchange and Registration
Rights Agreement, dated as of December 21, 2005, of the Subsidiary Guarantors
named therein, relating to the 8.875% Senior Notes due 2014 and the 7.875%
Senior Notes due 2014**
4.4.1
Exchange and Registration Rights Agreement, dated as
of December 21, 2005, by and between CCMG Acquisition Corporation, Deutsche
Bank Securities Inc. and the other financial institutions named therein,
relating to the 10.5% Senior Subordinated Notes due 2016**
4.4.2
Joinder Agreement to the Exchange and Registration
Rights Agreement, dated as of December 21, 2005, of The Hertz Corporation,
relating to the 10.5% Senior Subordinated Notes due 2016**
4.4.3
Joinder Agreement to the Exchange and Registration
Rights Agreement, dated as of December 21, 2005, of the Subsidiary Guarantors
named therein, relating to the 10.5% Senior Subordinated Notes due 2016**
4.5.1
Senior Bridge Facilities Agreement, dated as of
December 21, 2005, by and between Hertz International, Ltd., certain of its
subsidiaries, Hertz Europe Limited, as Coordinator, BNP Paribas and The Royal
Bank of Scotland plc, as Mandated Lead Arrangers, Calyon, as Co-Arranger, BNP
Paribas, The Royal Bank of Scotland plc, and Calyon, as Joint Bookrunners,
BNP Paribas, as Facility Agent, BNP Paribas, as Security Agent, BNP Paribas,
as Global Coordinator, and the financial institutions named therein**
4.5.2
Intercreditor Deed, dated as of December 21, 2005,
by and between Hertz International, Ltd., as Parent, Hertz Europe Limited, as
Coordinator, certain of its subsidiaries, BNP Paribas as A/C Facility Agent
and NZ Facility Agent, BNP Paribas as Security Agent, Banco BNP Paribas
Brasil S.A., as Brazilian Facility Agent, BNP Paribas, as Australian Security
Trustee, the financial institutions named therein, and The Hertz Corporation**
4.5.3
Australian Purchaser Charge (Project H)—Unlimited,
dated as of December 21, 2005, by and between Hertz Australia Pty Limited and
HA Funding Pty Limited**
4.5.4
Australian Purchaser Charge (Project H)—South
Australia, dated as of December 21, 2005, by and between Hertz Australia Pty
Limited and HA Funding Pty Limited**
4.5.5
Australian Purchaser Charge (Project H)—Queensland,
dated as of December 21, 2005, by and between Hertz Australia Pty Limited and
HA Funding Pty Limited**
4.5.6
Australian Share Mortgage of Purchaser Shares
(Project H), dated as of December 21, 2005, by and between Hertz Investment
(Holdings) Pty Limited and HA Funding Pty Limited**
4.5.7
Australian Issuer Charge (Project H), dated as of
December 21, 2005, by and between Hertz Note Issuer Pty Limited and HA
Funding Pty Limited**
4.5.8
Australian Borrower Charge (Project H), dated as of
December 20, 2005, by and between HA Funding Pty Limited and the BNP
Paribas**
4.5.9
Australian Security Trust Deed (Project H), dated as
of December 21, 2005, between HA Funding Pty Limited and BNP Paribas**
187
4.5.10
Business Pledge Agreement, dated as of December 21,
2005, by and between Hertz Belgium N.V., as Pledgor, and BNP Paribas S.A., as
Pledgee (English language version)**
4.5.11
Receivables and Bank Account Pledge Agreement, dated
as of December 21, 2005, by and between Hertz Belgium NV as Pledgor, and BNP
Paribas, as Pledgee**
4.5.12
Share Pledge Agreement, dated as of December 21,
2005, by and between Hertz Holdings Netherlands B.V., as Pledgor, and BNP
Paribas, as Pledgee**
4.5.13
Security Agreement, dated as of December 21, 2005,
by and between Hertz Canada Limited, as Obligor, and BNP Paribas (Canada), as
Security Agent**
4.5.14.1
Deed of Hypothec, dated as of December 21, 2005, by
and between Hertz Canada Limited and BNP Paribas (Canada), and related Bond
and Bond Pledge Agreement**
4.5.14.2
Bond Pledge Agreement, dated as of December 21,
2005, by and between Hertz Canada Limited, as Pledgor, and BNP Paribas (Canada),
as Security Agent**
4.5.15
Security Agreement, dated as of December 21, 2005,
by and between 1677932 Ontario Limited, as Obligor, and BNP Paribas (Canada),
as Security Agent**
4.5.16
Security Agreement, dated as of December 21, 2005,
by and between CMGC Canada Acquisition ULC, as Obligor, and BNP Paribas
(Canada), as Security Agent**
4.5.17
Pledge of a Business as a Going Concern (Acte de
Nantissement de Fonds de Commerce), dated as of December 21, 2005, by and
between Hertz France, as Pledgor, and BNP Paribas, as Security Agent, and the
beneficiaries described therein (English language version)**
4.5.18
Bank Account Pledge Agreement (Acte de Nantissement
de Solde de Compte Bancaire), dated as of December 21, 2005, by and between
Hertz France, as Pledgor, and BNP Paribas, as Security Agent, and the
beneficiaries described therein (English language version)**
4.5.19
Share Account Pledge Agreement (Acte de Nantissement
de Compte d'Instruments Financiers), dated as of December 21, 2005, by and
between Hertz France, as Pledgor, BNP Paribas, as Security Agent, Hertz
Equipement France, as Account Holder, BNP Paribas, as Bank Account Holder,
and the beneficiaries described therein**
4.5.20
Pledge of a Business as a Going Concern (Acte de
Nantissement de Fonds de Commerce), dated as of December 21, 2005, by and
between Hertz Equipement France, as Pledgor, BNP Paribas, as Security Agent,
and the beneficiaries described therein (English language version)**
4.5.21
Bank Account Pledge Agreement (Acte de Nantissement
de Solde de Compte Bancaire), dated as of December 21, 2005, by and between
Hertz Equipement France, as Pledgor, BNP Paribas, as Security Agent, and the
beneficiaries described therein (English language version)**
4.5.22
Master Agreement For Assignment of Receivables
(Contrat Cadre de Cession de Creances Professionnelles a Titre de Garantie),
dated as of December 21, 2005, by and between Hertz Equipement France, as
Assignor, BNP Paribas, as Security Agent, and the assignees described therein**
188
4.5.23
Pledge of a Business as a Going Concern (Acte de
Nantissement de Fonds de Commerce), dated as of December 21, 2005, by and
between Equipole Finance Services, as Pledgor, BNP Paribas, as Security
Agent, and the beneficiaries described therein (English language version)**
4.5.24
Master Agreement for Assignment of Receivables
(Contrat Cadre de Cession de Creances Professionnelles a Titre de Garantie),
dated as of December 21, 2005, by and between Equipole Finance Services, as
Assignor, BNP Paribas, as Security Agent, and the assignees described
therein**
4.5.25
Bank Account Pledge Agreement (Acte de Nantissement
de Solde de Compte Bancaire), dated as of December 21, 2005, by and between
Equipole Finance Services, as Pledgor, BNP Paribas, as Security Agent, and
the beneficiaries described therein (English language version)**
4.5.26
Shares Account Pledge Agreement (Acte de
Nantissement de Compte d'Instruments Financiers), dated as of December 21,
2005, by and between Equipole, as Pledgor, BNP Paribas, as Security Agent,
Equipole Finance Services, as Account Holder, BNP Paribas, as Bank Account
Holder, and the beneficiaries described therein**
4.5.27
Share Account Pledge Agreement (Acte de Nantissement
de Compte d'Instruments Financiers), dated as of December 21, 2005, by and
between Equipole, as Pledgor, BNP Paribas, as Security Agent, Hertz France,
as Account Holder, BNP Paribas, as Bank Account Holder, and the beneficiaries
described therein**
4.5.28
Shares Account Pledge Agreement (Acte de
Nantissement de Compte d'Instruments Financiers), dated as of December 21,
2005, by and between Equipole, as Pledgor, BNP Paribas, as Security Agent,
Hertz Equipement France, as Account Holder, BNP Paribas, as Bank Account
Holder, and the beneficiaries described therein**
4.5.29
Account Pledge Agreement, dated as of December 21,
2005, among Hertz Autovermietung GmbH, The Royal Bank of Scotland plc,
Calyon, BNP Paribas (Canada) and Indosuez Finance (U.K.) Limited as Pledgees
and BNP Paribas S.A. as Security Agent**
4.5.30
Global Assignment Agreement, dated as of December
21, 2005, between Hertz Autoverrmietung GmbH as assignor and BNP Paribas S.A.
as Security Agent and lender (English language version)**
4.5.31
Security Transfer of Moveable Assets, dated as of
December 21, 2005, between Hertz Autovermietung GmbH as assignor and BNP
Paribas S.A. as Security Agent and lender**
4.5.32
Share Pledge Agreement, dated as of December 21,
2005, among Equipole S.A. (France), The Royal Bank of Scotland plc, Calyon,
BNP Paribas (Canada), Indosuez Finance (U.K.) Limited and BNP Paribas S.A.,
as Security Agent**
4.5.33
Security Assignment of Receivables, dated as of
December 21, 2005, between Hertz Italiana S.p.A. as assignor and BNP Paribas
S.A. as Security Agent**
4.5.34
Pledge Agreement over the Balance of Bank Account,
dated as of December 21, 2005, between Hertz Italiana S.p.A. as pledgor and
BNP Paribas S.A. as Pledgee and Security Agent**
4.5.35
Pledge Agreement over the Balance of Bank Account,
dated as of December 21, 2005, between Hertz Italiana S.p.A., as Pledgor, and
BNP Paribas S.A., as Pledgee and Security Agent**
189
4.5.36
Pledge Agreement over Hertz Italiana S.p.A. shares,
dated as of December 21, 2005, between Hertz Holding South Europe S.r.l as
Pledgor and BNP Paribas S.A. as Pledgee and Security Agent**
4.5.37
Deed of Non-Possessory Pledge of Movables, dated as
of December 21, 2005, between Stuurgroep Holland B.V., as Pledgor, and BNS
Automobile Funding B.V. and BNP Paribas as Security Agent, as Pledgees**
4.5.38
Deed of Disclosed Pledge of Receivables, dated as of
December 21, 2005, between Stuurgroep Holland B.V., as Pledgor, and BNS
Automobile Funding B.V. and BNP Paribas as Security Agent, as Pledgees**
4.5.39
Deed of Undisclosed Pledge of Receivables between
Stuurgroep Holland B.V., as Pledgor, and BNS Automobile Funding B.V. and BNP
Paribas as Security Agent, as Pledgees**
4.5.40
Deed of Pledge of Registered Shares, dated as of
December 21, 2005, between Stuurgroep Holland B.V., as Pledgor, BNS
Automobile Funding B.V. and BNP Paribas, as Pledgees, and Hertz Automobielen
Netherlands B.V.**
4.5.41
Deed of Pledge on Registered Shares, dated as of
December 21, 2005, between Hertz Holdings Netherlands B.V., as Pledgor, BNS
Automobile Funding B.V., as Pledgee, and Stuurgroep Holland B.V.**
4.5.42
Deed of Disclosed Pledge of Receivables between BNS
Automobile Funding B.V., as Pledgor, and BNP Paribas as Security Agent, as
Pledgee**
4.5.43
Pledges of Shares Contract, dated as of December 21,
2005, among Hertz de España, S.A, Hertz Alquiler de Maquinaria, S.L., BNS
Automobile Funding B.V. and BNP Paribas S.A. as Security Agent relating to
Hertz Alquiler de Maquinaria**
4.5.44
Contract on Pledges of Credit Rights, dated as of
December 21, 2005, among Hertz de España, S.A., BNS Automobile Funding B.V.
and BNP Paribas S.A. as Security Agent**
4.5.45
Pledge of Credit Rights of Insurance Policies
Contract, dated as of December 21, 2005, among Hertz de España, S.A., BNS
Automobile Funding B.V. and BNP Paribas S.A. as Security Agent**
4.5.46
Pledge of Credit Rights of Bank Accounts, dated as
of December 21, 2005 among Hertz de España, S.A., as Pledgor, BNS Automobile
Funding B.V. and BNP Paribas S.A., as Security Agent**
4.5.47
Pledges over VAT Credit Rights Contract, dated as of
December 21, 2005, among Hertz de España, S.A., as Pledgor, BNS Automobile
Funding B.V. and BNP Paribas S.A., as Security Agent**
4.5.48
Contract on Pledges of Credit Rights, dated as of
December 21, 2005, among Hertz Alquiler de Maquinaria, S.L., as Pledgor, BNS
Automobile Funding B.V. and BNP Paribas S.A., as Security Agent**
4.5.49
Pledge of Credit Rights of Bank Accounts Contract,
dated as of December 21, 2005, among Hertz Alquiler de Maquinaria, S.L., as
Pledgor, BNS Automobile Funding B.V. and BNP Paribas S.A., as Security
Agent**
4.5.50
Pledges of Credit Rights of Insurance Policies
Contract, dates as of December 21, 2005, among Hertz Alquiler de Maquinaria,
S.L., as Pledgor, BNS Automobile Funding B.V. and BNP Paribas S.A., as
Security Agent**
190
4.5.51
Pledges over VAT Credit Rights Contracts, dated as
of December 21, 2005, among Hertz Alquiler de Maquinaria S.L., as Pledgor,
BNS Automobile Funding B.V., and BNP Paribas S.A., as Security Agent**
4.5.52
Pledges of Credit Rights Contract, dated as of
December 21, 2005, among BNS Automobile Funding B.V., as Pledgor, Hertz de
Espana S.A., Hertz Alquiler de Maquinaria, S.L., and BNP Paribas S.A., as
Security Agent**
4.5.53
Pledges of Shares Contract, dated as of December 21,
2005, among Hertz International Ltd., Hertz Equipment Rental International,
Limited, Hertz de España, S.A., and BNP Paribas S.A., as Security Agent**
4.5.54
Share Pledge Agreement, dated as of December 21,
2005, between Hertz AG and BNP Paribas S.A. as Security Agent relating to the
pledge of the entire share capital of Züri-Leu Garage AG and Société
Immobilière Fair Play**
4.5.55
Assignment Agreement, dated as of December 21, 2005,
between Hertz AG and BNP Paribas S.A. as Security Agent relating to the
assignment and transfer of trade receivables, insurance claims, inter-company
receivables and bank accounts**
4.5.56
Share Pledge Agreement, dated as of December 21,
2005, between Hertz Holdings South Europe S.r.l and BNP Paribas S.A. as
Security Agent relating to the pledge of the entire share capital of Hertz
AG**
4.5.57
Deed of Charge, dated as of December 21, 2005,
between Hertz (U.K.) Limited as Chargor and BNP Paribas as Security Agent**
4.5.58
Deed of Charge over Shares, in Hertz (U.K.) Limited,
dated as of December 21, 2005, between Hertz Holdings II U.K. Limited as
Chargor and BNP Paribas as Security Agent**
4.5.59
Deed of Charge over Shares in Hertz Holdings III UK
Limited, dated as of December 21, 2005, between Hertz International, Ltd. and
BNP Paribas as Security Agent**
4.5.60
Deed of Charge, dated as of December 21, 2005,
between BNS Automobile Funding B.V. as Chargor and BNP Paribas as Security
Agent**
4.6.1
Credit Agreement, dated as of December 21, 2005, by
and between The Hertz Corporation, the several lenders from time to time
parties thereto, Deutsche Bank AG, New York Branch, as Administrative Agent
and Collateral Agent, Lehman Commercial Paper Inc., as Syndication Agent,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated, as Documentation Agent, Deutsche Bank Securities Inc., Lehman
Brothers Inc., and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and
Smith Incorporated, as Joint Lead Arrangers, and BNP Paribas, The Royal Bank
of Scotland plc, and Calyon New York Branch, as Co-Arrangers, and Deutsche
Bank Securities Inc., Lehman Brothers, Inc., Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, Goldman Sachs Credit Partners
L.P., and JPMorgan Chase Bank, N.A., as Joint Bookrunning Managers**
4.6.2
Guarantee and Collateral Agreement, dated as of
December 21, 2005, by and between CCMG Corporation, The Hertz Corporation,
certain of its subsidiaries, and Deutsche Bank AG, New York Branch, as
Administrative Agent and Collateral Agent**
4.6.3
Copyright Security Agreement, dated as of December
21, 2005, by and between The Hertz Corporation, certain of its subsidiaries,
and Deutsche Bank AG, New York Branch, as Administrative Agent and Collateral
Agent**
191
4.6.4
Trademark Security Agreement, dated as of December
21, 2005, by and between The Hertz Corporation, certain of its subsidiaries,
and Deutsche Bank AG, New York Branch, as Administrative Agent and Collateral
Agent**
4.6.5
Deed of Trust, Security Agreement, and Assignment of
Leases and Rents and Fixture Filing, dated as of December 21, 2005, among the
Hertz Corporation and Deutsche Bank AG, New York Branch**
4.6.6
Term Loan Mortgage Schedule listing the material
differences in mortgages from Exhibit 4.6.5 for each of the mortgaged
properties**
4.6.7
Amendment, dated as of June 30, 2006, among The
Hertz Corporation, Deutsche Bank AG, New York Branch, and the other parties
signatory thereto, to the Credit Agreement, dated as of December 21, 2005, by
and between The Hertz Corporation, the several lenders from time to time
parties thereto, Deutsche Bank AG, New York Branch, as Administrative Agent
and Collateral Agent, Lehman Commercial Paper Inc., as Syndication Agent,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated, as Documentation Agent, Deutsche Bank Securities Inc., Lehman
Brothers Inc., and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and
Smith Incorporated, as Joint Lead Arrangers, and BNP Paribas, The Royal Bank
of Scotland plc, and Calyon New York Branch, as Co-Arrangers, and Deutsche
Bank Securities Inc., Lehman Brothers, Inc., Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, Goldman Sachs Credit Partners
L.P., and JPMorgan Chase Bank, N.A., as Joint Bookrunning Managers
(Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K
of The Hertz Corporation, as filed on July 7, 2006.)
4.6.8
Second Amendment, dated as of February 9, 2007,
among The Hertz Corporation, Deutsche Bank AG, New York Branch, and the other
parties signatory thereto, to the Credit Agreement, dated as of December 21,
2005, by and between The Hertz Corporation, the several lenders from time to
time parties thereto, Deutsche Bank AG, New York Branch, as Administrative
Agent and Collateral Agent, Lehman Commercial Paper Inc., as Syndication
Agent, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated, as Documentation Agent, Deutsche Bank Securities Inc., Lehman
Brothers Inc., and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and
Smith Incorporated, as Joint Lead Arrangers, and BNP Paribas, The Royal Bank
of Scotland plc, and Calyon New York Branch, as Co-Arrangers, and Deutsche
Bank Securities Inc., Lehman Brothers, Inc., Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, Goldman Sachs Credit Partners
L.P., and JPMorgan Chase Bank, N.A., as Joint Bookrunning Managers
192
4.7.1
Credit Agreement, dated as of December 21, 2005, by
and between Hertz Equipment Rental Corporation, The Hertz Corporation, the
Canadian Borrowers parties thereto, the several lenders from time to time
parties thereto, Deutsche Bank AG, New York Branch, as Administrative Agent
and Collateral Agent, Deutsche Bank AG, Canada Branch, as Canadian Agent and
Canadian Collateral Agent, Lehman Commercial Paper Inc., as Syndication
Agent, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated, as Documentation Agent, Deutsche Bank Securities Inc., Lehman
Brothers Inc., and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and
Smith Incorporated, as Joint Lead Arrangers, BNP Paribas, The Royal Bank of
Scotland plc, and Calyon New York Branch, as Co-Arrangers, and Deutsche Bank
Securities Inc., Lehman Brothers Inc., Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, Goldman Sachs Credit Partners
L.P., and JPMorgan Chase Bank, N.A., as Joint Bookrunning Managers**
4.7.2
U.S. Guarantee and Collateral Agreement, dated as of
December 21, 2005, by and between CCMG Corporation, The Hertz Corporation,
certain of its subsidiaries, and Deutsche Bank AG, New York Branch, as
Administrative Agent and Collateral Agent**
4.7.3
Canadian Guarantee and Collateral Agreement, dated
as of December 21, 2005, by and between Matthews Equipment Limited, Western
Shut-Down (1995) Limited, certain of its subsidiaries, and Deutsche Bank AG,
Canada Branch, as Canadian Agent and Canadian Collateral Agent**
4.7.4
Copyright Security Agreement, dated as of December
21, 2005, by and between The Hertz Corporation, certain of its subsidiaries,
and Deutsche Bank AG, New York Branch, as Administrative Agent and Collateral
Agent**
4.7.5
Trademark Security Agreement, dated as of December
21, 2005, by and between The Hertz Corporation, certain of its subsidiaries,
and Deutsche Bank AG, New York Branch, as Administrative Agent and Collateral
Agent**
4.7.6
Trademark Security Agreement, dated as of December
21, 2005, by and between Matthews Equipment Limited and Deutsche Bank AG,
Canada Branch, as Canadian Agent and Canadian Collateral Agent**
4.7.7
Deed of Trust, Security Agreement, and Assignment of
Leases and Rents and Fixture Filing, dated as of December 21, 2005, among the
Hertz Corporation and Deutsche Bank AG, New York Branch**
4.7.8
Term Loan Mortgage Schedule listing the material
differences in mortgages from Exhibit 4.7.7 for each of the mortgaged
properties**
193
4.7.9
Amendment, dated as of June 30, 2006, among Hertz
Equipment Rental Corporation, The Hertz Corporation, Matthews Equipment
Limited, Western Shut-Down (1995) Limited, Deutsche Bank AG, New York Branch,
Deutsche Bank AG, Canada Branch, and the other parties signatory thereto, to
the Credit Agreement, dated as of December 21, 2005, by and between Hertz
Equipment Rental Corporation, The Hertz Corporation, the Canadian Borrowers
parties thereto, the several lenders from time to time parties thereto,
Deutsche Bank AG, New York Branch, as Administrative Agent and Collateral
Agent, Deutsche Bank AG, Canada Branch, as Canadian Agent and Canadian
Collateral Agent, Lehman Commercial Paper Inc., as Syndication Agent, Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith Incorporated, as
Documentation Agent, Deutsche Bank Securities Inc., Lehman Brothers Inc., and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated, as Joint Lead Arrangers, BNP Paribas, The Royal Bank of
Scotland plc, and Calyon New York Branch, as Co-Arrangers, and Deutsche Bank
Securities Inc., Lehman Brothers Inc., Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner and Smith Incorporated, Goldman Sachs Credit Partners L.P.,
and JPMorgan Chase Bank, N.A., as Joint Bookrunning Managers (Incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K of The Hertz
Corporation, as filed on July 7, 2006.)
4.7.10
Second Amendment, dated as of February 15, 2007,
among Hertz Equipment Rental Corporation, The Hertz Corporation, Matthews
Equipment Limited, Western Shut-Down (1995) Limited, Deutsche Bank AG, New
York Branch, Deutsche Bank AG, Canada Branch, and the other parties signatory
thereto, to the Credit Agreement, dated as of December 21, 2005, by and
between Hertz Equipment Rental Corporation, The Hertz Corporation, the
Canadian Borrowers parties thereto, the several lenders from time to time parties
thereto, Deutsche Bank AG, New York Branch, as Administrative Agent and
Collateral Agent, Deutsche Bank AG, Canada Branch, as Canadian Agent and
Canadian Collateral Agent, Lehman Commercial Paper Inc., as Syndication
Agent, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated, as Documentation Agent, Deutsche Bank Securities Inc., Lehman
Brothers Inc., and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and
Smith Incorporated, as Joint Lead Arrangers, BNP Paribas, The Royal Bank of
Scotland plc, and Calyon New York Branch, as Co-Arrangers, and Deutsche Bank
Securities Inc., Lehman Brothers Inc., Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner and Smith Incorporated, Goldman Sachs Credit Partners
L.P., and JPMorgan Chase Bank, N.A., as Joint Bookrunning Managers
4.8
Intercreditor Agreement, dated as of December 21,
2005, by and between Deutsche Bank AG, New York Branch, as ABL Agent,
Deutsche Bank AG, New York Branch, as Term Agent, as acknowledged by CCMG
Corporation, The Hertz Corporation and certain of its subsidiaries**
4.9.1
Second Amended and Restated Base Indenture, dated as
of August 1, 2006, between Hertz Vehicle Financing LLC, as Issuer, and BNY
Midwest Trust Company, as Trustee
4.9.2
Amended and Restated Series 2005-1 Supplement to the
Second Amended and Restated Base Indenture, dated as of August 1, 2006,
between Hertz Vehicle Financing LLC, as Issuer, and BNY Midwest Trust
Company, as Trustee and Securities Intermediary
4.9.3
Amended and Restated Series 2005-2 Supplement to the
Second Amended and Restated Base Indenture, dated as of August 1, 2006,
between Hertz Vehicle Financing LLC, as Issuer, and BNY Midwest Trust
Company, as Trustee and Securities Intermediary
194
4.9.4
Amended and Restated Series 2005-3 Supplement to the
Second Amended and Restated Base Indenture, dated as of August 1, 2006,
between Hertz Vehicle Financing LLC, as Issuer, and BNY Midwest Trust
Company, as Trustee and Securities Intermediary
4.9.5
Amended and Restated Series 2005-4 Supplement to the
Second Amended and Restated Base Indenture, dated as of August 1, 2006,
between Hertz Vehicle Financing LLC, as Issuer, and BNY Midwest Trust
Company, as Trustee and Securities Intermediary
4.9.6
Second Amended and Restated Series 2004-1 Supplement
to the Second Amended and Restated Base Indenture, dated as of August 1,
2006, between Hertz Vehicle Financing LLC, as Issuer, and BNY Midwest Trust
Company, as Trustee and Securities Intermediary
4.9.7
Second Amended and Restated Master Motor Vehicle
Operating Lease and Servicing Agreement, dated as of August 1, 2006, between
The Hertz Corporation, as Lessee and Servicer, and Hertz Vehicle Financing
LLC, as Lessor
4.9.8
Amended and Restated Participation, Purchase and
Sale Agreement, dated as of December 21, 2005, by and between Hertz General
Interest LLC, Hertz Vehicle Financing LLC and The Hertz Corporation, as
Lessee and Servicer**
4.9.9
Purchase and Sale Agreement, dated as of December
21, 2005, by and between The Hertz Corporation, Hertz Vehicle Financing LLC
and Hertz Funding Corp.**
4.9.10
Contribution Agreement, dated as of December 21,
2005, by and between Hertz Vehicle Financing LLC and The Hertz Corporation**
4.9.11
Second Amended and Restated Collateral Agency
Agreement, dated as of January 26, 2007, among Hertz Vehicle Financing LLC,
as a Grantor, Hertz General Interest LLC, as a Grantor, The Hertz
Corporation, as Servicer, BNY Midwest Trust Company, as Collateral Agent, BNY
Midwest Trust Company, as Trustee and a Secured Party, and The Hertz
Corporation, as a Secured Party
4.9.12
Amended and Restated Administration Agreement, dated
as of December 21, 2005, by and between The Hertz Corporation, Hertz Vehicle
Financing LLC, and BNY Midwest Trust Company, as Trustee**
4.9.13
Amended and Restated Master Exchange Agreement,
dated as of January 26, 2007, among The Hertz Corporation, Hertz Vehicle
Financing LLC, Hertz General Interest LLC, Hertz Car Exchange Inc., and J.P.
Morgan Property Holdings LLC
4.9.14
Amended and Restated Escrow Agreement, dated as of
January 26, 2007, among The Hertz Corporation, Hertz Vehicle Financing LLC,
Hertz General Interest LLC, Hertz Car Exchange Inc., and J.P. Morgan Chase
Bank, N.A.
4.9.15
Amended and Restated Class A-1 Note Purchase
Agreement (Series 2005-3 Variable Funding Rental Car Asset Backed Notes,
Class Aa-1), dated as of March 3, 2006, by and between Hertz Vehicle
Financing LLC, The Hertz Corporation, as Administrator, certain Conduit
Investors, each as a Conduit Investor, certain Financial Institutions, each
as a Committed Note Purchaser, certain Funding Agents, and Lehman Commercial
Paper Inc., as Administrative Agent**
195
4.9.16
Amended and Restated Class A-2 Note Purchase
Agreement (Series 2005-3 Variable Funding Rental Car Asset backed Notes,
Class A-2), dated as of March 3, 2006, by and between Hertz Vehicle Financing
LLC, The Hertz Corporation, as Administrator, certain Conduit Investors, each
as a Conduit Investor, certain Financial Institutions, each as a Committed
Note Purchaser, certain Funding Agents, and Lehman Commercial Paper Inc., as
Administrative Agent**
4.9.17
Amended and Restated Class A Note Purchase Agreement
(Series 2005-4 Variable Funding Rental Car Asset Backed Notes, Class A),
dated as of March 3, 2006, by and between Hertz Vehicle Financing LLC, The
Hertz Corporation, as Administrator, certain Conduit Investors, each as a
Conduit Investor, certain Financial Institutions, each as a Committed Note
Purchaser, certain Funding Agents, and Lehman Commercial Paper Inc., as
Administrative Agent**
4.9.18
Letter of Credit Facility Agreement, dated as of
December 21, 2005, by and between The Hertz Corporation, Hertz Vehicle
Financing LLC, and Ford Motor Company**
4.9.19
Insurance Agreement, dated as of December 21, 2005,
by and between MBIA Insurance Corporation, as Insurer, Hertz Vehicle
Financing LLC, as Issuer, and BNY Midwest Trust Company, as Trustee**
4.9.20
Insurance Agreement, dated as of December 21, 2005,
by and between Ambac Assurance Corporation, as Insurer, Hertz Vehicle
Financing LLC, as Issuer, and BNY Midwest Trust Company, as Trustee**
4.9.21
Note Guaranty Insurance Policy, dated as of December
21, 2005, of MBIA Insurance Corporation, relating to Series 2005-1 Rental Car
Asset Backed Notes**
4.9.22
Note Guaranty Insurance Policy, dated as of December
21, 2005, of MBIA Insurance Corporation, relating to Series 2005-4 Rental Car
Asset Backed Notes**
4.9.23
Note Guaranty Insurance Policy, dated as of December
21, 2005, of Ambac Assurance Corporation, relating to Series 2005-2 Rental
Car Asset Backed Notes**
4.9.24
Note Guaranty Insurance Policy, dated as of December
21, 2005, of Ambac Assurance Corporation, relating to Series 2005-3 Rental
Car Asset Backed Notes**
4.9.25
Supplement to Second Amended and Restated Collateral
Agency Agreement, dated as of January 26, 2007, among The Hertz Corporation,
as Grantor, Gelco Corporation d/b/a GE Fleet Services, as Secured Party and
BNY Midwest Trust Company as Collateral Agent
4.10
Amended and Restated Stockholders Agreement, dated
as of November 20, 2006, among Hertz Global Holdings, Inc., Clayton, Dubilier
& Rice Fund VII, L.P., CDR CCMG Co-Investor L.P., CD&R Parallel Fund
VII, L.P., Carlyle Partners IV, L.P., CP IV Coinvestment, L.P., CEP II U.S.
Investments, L.P., CEP II Participations S.à.r.l SICAR, ML Global Private
Equity Fund, L.P., Merrill Lynch Ventures L.P. 2001, ML Hertz Co-Investor,
L.P. and CMC-Hertz Partners, L.P.
4.11
Registration Rights Agreement, dated as of December
21, 2005, among CCMG Holdings, Inc. (now known as Hertz Global Holdings,
Inc.), Clayton, Dubilier & Rice Fund VII, L.P., CDR CCMG Co-Investor
L.P., Carlyle Partners IV, L.P., CP IV Coinvestment, L.P., CEP II U.S.
Investments, L.P., CEP II Participations S.à.r.l, ML Global Private Equity
Fund, L.P., Merrill Lynch Ventures L.P. 2001, ML Hertz Co-Investor, L.P. and
CMC-Hertz Partners, L.P. (filed as the exhibit of the same number to
Amendment No. 3 to the Registration Statement on Form S-1 filed on October
23, 2006)
196
4.12
Amendment No. 1, dated as of November 20, 2006, to
the Registration Rights Agreement, dated as of December 21, 2005, among CCMG
Holdings, Inc. (now known as Hertz Global Holdings, Inc.), Clayton, Dubilier
& Rice Fund VII, L.P., CDR CCMG Co-Investor L.P., CD&R Parallel Fund
VII, L.P., Carlyle Partners IV, L.P., CP IV Coinvestment, L.P., CEP II U.S.
Investments, L.P., CEP II Participations S.à.r.l SICAR, ML Global Private
Equity Fund, L.P., Merrill Lynch Ventures L.P. 2001, ML Hertz Co-Investor,
L.P. and CMC-Hertz Partners, L.P.
4.13
Credit Agreement, dated as of September 29, 2006,
among The Hertz Corporation, Puerto Ricancars, Inc., the several banks and
other financial institutions from time to time parties as lenders thereto and
Gelco Corporation d.b.a. GE Fleet Services, as administrative agent and
collateral agents for the lenders thereunder (filed as the exhibit of the
same number to Amendment No. 4 to the Registration Statement on Form S-1
filed on October 27, 2006)
4.13.1
First Amendment, dated as of October 6, 2006, to the
Credit Agreement, dated as of September 29, 2006, among The Hertz
Corporation, Puerto Ricancars, Inc., the several banks and other financial
institutions from time to time parties as lenders thereto and Gelco
Corporation d.b.a. GE Fleet Services, as administrative agent and collateral
agents for the lenders thereunder (filed as the exhibit of the same number to
Amendment No. 4 to the Registration Statement on Form S-1 filed on October
27, 2006)
4.13.2
Second Amendment, dated as of October 31, 2006, to
the Credit Agreement, dated as of September 29, 2006, among The Hertz
Corporation, Puerto Ricancars, Inc., the several banks and other financial
institutions from time to time parties as lenders thereto and Gelco
Corporation d.b.a. GE Fleet Services, as administrative agent and collateral
agents for the lenders thereunder
4.14
Form of Stock Certificate (filed as the exhibit of
the same number to Amendment No. 6, filed on November 7, 2006, to the
registrant’s Registration Statement on Form S-1(File No. 333-135782) (such
registration statement, the “Registration Statement”))
10.1
Hertz Global Holdings, Inc. Stock Incentive Plan* **
10.1.1
First Amendment to the Hertz Global Holdings, Inc.
Stock Incentive Plan (filed as the exhibit of the same number to Amendment
No. 4 to the Registration Statement on Form S-1 filed on October 27, 2006)*
10.2
Form of Stock Subscription Agreement under Stock
Incentive Plan* **
10.3
Form of Stock Option Agreement under Stock Incentive
Plan* **
10.4
Employment Agreement between The Hertz Corporation
and Craig R. Koch (Incorporated by reference to Exhibit 10.4(3) to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.5
Form of Change in Control Agreement (and certain
terms related thereto) among The Hertz Corporation, Ford Motor Company and
each of Messrs. Koch, Nothwang, Siracusa, Taride and Plescia (Incorporated by
reference to Exhibit 10.5 to the Registration Statement No. 333- 125764 of
The Hertz Corporation)*
10.6
Non-Compete Agreement, dated April 10, 2000, between
Hertz Europe Limited and Michel Taride (Incorporated by reference to Exhibit
10.6 to the Registration Statement No. 333-125764 of The Hertz Corporation)*
197
10.7
The Hertz Corporation Compensation Supplemental
Retirement and Savings Plan (Incorporated by reference to Exhibit 10.7 to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.8
The Hertz Corporation Executive Long Term Incentive
Compensation Plan (Incorporated by reference to Exhibit 10.8 to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.9
The Hertz Corporation Supplemental Executive
Retirement Plan (Incorporated by reference to Exhibit 10.9 to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.10
The Hertz Corporation Benefit Equalization Plan
(Incorporated by reference to Exhibit 10.10 to the Registration Statement No.
333-125764 of The Hertz Corporation)*
10.11
The Hertz Corporation Key Officer Postretirement
Assigned Car Benefit Plan (Incorporated by reference to Exhibit 10.11 to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.12
The Hertz Corporation Retirement Plan (Incorporated
by reference to Exhibit 10.12 to the Registration Statement No. 333-125764 of
the Hertz Corporation)*
10.13
The Hertz Corporation (UK) 1972 Pension Plan
(Incorporated by reference to Exhibit 10.13 to the Registration Statement No.
333-125764 of The Hertz Corporation)*
10.14
The Hertz Corporation (UK) Supplementary Unapproved
Pension Scheme (Incorporated by reference to Exhibit 10.14 to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.15
RCA Executive Deferred Compensation Plan and
Employee Participation Agreement, dated May 29, 1985, between Craig R. Koch
and The Hertz Corporation (Incorporated by reference to Exhibit 10.15 to the
Registration Statement No. 333-125764 of The Hertz Corporation)*
10.16
The Hertz Corporation 2005 Executive Incentive
Compensation Plan* **
10.17
Letter Agreement, dated October 19, 2005, as amended
and restated as of November 15, 2005, between CCMG Holdings, Inc. (now known
as Hertz Global Holdings, Inc.) and Craig R. Koch* **
10.18
Amended and Restated Indemnification Agreement,
dated as of December 21, 2005, by and between The Hertz Corporation, Hertz
Vehicles LLC, Hertz Funding Corp., Hertz General Interest LLC, and Hertz
Vehicle Financing LLC**
10.19
Consulting Agreement, dated as of December 21, 2005,
by and between CCMG Holdings, Inc. (now known as Hertz Global Holdings, Inc.),
The Hertz Corporation, and Clayton, Dubilier & Rice, Inc.**
10.20
Consulting Agreement, dated as of December 21, 2005,
by and between CCMG Holdings, Inc. (now known as Hertz Global Holdings,
Inc.), The Hertz Corporation, and TC Group IV, L.L.C.**
10.21
Consulting Agreement, dated as of December 21, 2005,
by and between CCMG Holdings, Inc. (now known as Hertz Global Holdings,
Inc.), The Hertz Corporation, and Merrill Lynch Global Partners, Inc.**
198
10.22
Indemnification Agreement, dated as of December 21,
2005, by and between CCMG Holdings, Inc. (now known as Hertz Global Holdings,
Inc.), The Hertz Corporation, Clayton, Dubilier & Rice Fund VII, L.P.,
CDR CCMG Co-Investor L.P., and Clayton, Dubilier & Rice, Inc.**
10.23
Indemnification Agreement, dated as of December 21,
2005, by and between CCMG Holdings, Inc. (now known as Hertz Global Holdings,
Inc.), The Hertz Corporation, Carlyle Partners IV, L.P., CP IV Coinvestment
L.P., CEP II U.S. Investments, L.P., CEP II Participations S.à.r.l., and TC Group
IV, L.L.C.**
10.24
Indemnification Agreement, dated as of December 21,
2005, by and between CCMG Holdings, Inc. (now known as Hertz Global Holdings,
Inc.), The Hertz Corporation, ML Global Private Equity Fund, L.P., Merrill
Lynch Ventures L.P. 2001, CMC-Hertz Partners, L.P., ML Hertz Co-Investor,
L.P., and Merrill Lynch Global Partners, Inc.**
10.25
Tax Sharing Agreement, dated as of December 21,
2005, by and between CCMG Holdings, Inc. (now known as Hertz Global Holdings,
Inc.), CCMG Corporation, The Hertz Corporation, and Hertz International,
Ltd.**
10.26
Tax Sharing Agreement, dated as of December 21,
2005, by and between CCMG Holdings, Inc. (now known as Hertz Global Holdings,
Inc.), CCMG Corporation, and The Hertz Corporation**
10.27
Master Supply and Advertising Agreement, dated as of
July 5, 2005, by and between Ford Motor Company, The Hertz Corporation and
Hertz General Interest LLC (Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of The Hertz Corporation filed with the Securities
and Exchange Commission on July 11, 2005. Such Exhibit omits certain
information that has been filed separately with the Securities and Exchange
Commission and submitted pursuant to an application for confidential
treatment.)
10.28
Employment letter agreement, dated as of July 10,
2006, between Hertz Global Holdings, Inc. and Mark P. Frissora (Incorporated
by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of The
Hertz Corporation filed with the Securities and Exchange Commission on August
14, 2006.)
10.29
Form of Director Indemnification Agreement (filed as
the exhibit of the same number to Amendment No. 3 to our Registration
Statement on Form S-1, filed on October 23, 2006)
10.30
Termination letter agreement, dated as of November
20, 2006, among Hertz Global Holdings, Inc. (formerly known as CCMG Holdings,
Inc.), The Hertz Corporation and Clayton, Dubilier & Rice, Inc.,
terminating the Consulting Agreement, dated as of December 21, 2005, among
Hertz Global Holdings, Inc., the Hertz Corporation and Clayton, Dubilier
& Rice, Inc.
10.31
Termination letter agreement, dated as of November
20, 2006, among Hertz Global Holdings, Inc. (formerly known as CCMG Holdings,
Inc.), The Hertz Corporation and TC Group IV, L.L.C., terminating the
Consulting Agreement, dated as of December 21, 2005, among Hertz Global
Holdings, Inc., the Hertz Corporation and TC Group IV, L.L.C.
10.32
Termination letter agreement, dated as of November
20, 2006, among Hertz Global Holdings, Inc. (formerly known as CCMG Holdings,
Inc.), The Hertz Corporation and Merrill Lynch Global Partners, Inc.,
terminating the Consulting Agreement, dated as of December 21, 2005, among
Hertz Global Holdings, Inc., the Hertz Corporation and Merrill Lynch Global
Partners, Inc.
199
10.33
Hertz Global Holdings, Inc. Director Stock Incentive
Plan* (filed as the exhibit of the same number to Amendment No. 6 to the
Registration Statement on Form S-1 filed on November 7, 2006)
12
Computation of Consolidated Ratio of Earnings to
Fixed Charges for the year ended December 31, 2006, the periods ended
December 31, 2005 and December 20, 2005 and each of the three years in the
period ended December 31, 2004.
21.1
List of subsidiaries
23.1
Consent of PricewaterhouseCoopers LLP
31.1-31.2
Rule 13a-14(a)/15d-14(a) Certifications of Chief
Executive Officer and Chief Financial Officer
32.1-32.2
Section 1350
Certifications of Chief Executive Officer and Chief Financial Officer
*
Indicates
management compensation plan.
**
Incorporated by
reference to the exhibit of the same number to the Current Report on Form 8-K
of The Hertz Corporation, as filed on March 31, 2006.
As of December 31,
2006, we had various additional obligations which could be considered long-term
debt, none of which exceeded 10% of our total assets on a consolidated basis.
We agree to furnish to the SEC upon request a copy of any such instrument
defining the rights of the holders of such long-term debt.
Schedules and exhibits not included above have been
omitted because the information required has been included in the financial
statements or notes thereto or are not applicable or not required.
Next Section
