ITEM 1. BUSINESS.
General
The Hertz Corporation and its subsidiaries ("Hertz"), affiliates and independent licensees are engaged principally in the business of renting automobiles and renting and leasing trucks, without drivers, in the United States and in approximately 150 foreign countries. Collectively, they operate what the registrant believes is the largest rent a car business in the world and one of the largest one-way truck rental businesses in the United States. In addition, through its wholly-owned subsidiary, Hertz Equipment Rental Corporation, Hertz operates what it believes to be the largest rental, lease and sale of construction and materials handling equipment business in the United States. Other activities of Hertz include the sale of its used vehicles, the leasing of automobiles in Australia and New Zealand and in Europe through an affiliate; and providing claim management and telecommunication services in the United States.
The registrant, which was incorporated in Delaware in 1967, is a successor to corporations which were engaged in the automobile and truck leasing and rental business since 1924. UAL Corporation ("UAL") (formerly Allegis Corporation) purchased all of the registrant's outstanding capital stock from RCA Corporation ("RCA") on August 30, 1985. Park Ridge Corporation ("Park Ridge") purchased all of the registrant's outstanding capital stock from UAL on December 30, 1987. On July 19, 1993, Park Ridge (which had no material assets other than the registrant) was merged with and into the registrant, with the prior stockholders of Park Ridge becoming the stockholders of the registrant. In March 1994, Ford Motor Company ("Ford") acquired the registrant's common stock owned by Commerzbank Aktiengesellschaft. On April 29, 1994, Ford purchased all of the common stock of the registrant owned by Park Ridge Limited Partnership. The registrant then redeemed the preferred and common stock of the registrant owned by AB Volvo, borrowing the funds to pay for the redemption. In addition, a subordinated promissory note of the registrant held by Ford Motor Credit Company was exchanged for an equivalent amount of preferred stock of the registrant. See Notes 1, 5, 7 and 14 of the Notes to Consolidated Financial Statements included in this Report.
For information with respect to business segments of Hertz, reference should be made to Note 10 of the Notes to Consolidated Financial Statements included in this Report.
Rent A Car
Hertz provides rent a car service throughout the United States, including virtually all major U.S. cities, and in major foreign countries. Rent a car service is also provided through independent licensees (see Business - Licensees). A wide variety of makes and models of automobiles are used for daily rental purposes, nearly all of which are current year or the previous year's models. Car rentals are made on a daily, weekly or monthly basis, the rental charge being computed on a limited or unlimited mileage rate, or on a time rate plus a mileage charge. Services provided to customers include public liability and property damage protection. In addition to vehicle rentals and licensee fees, revenues are generated from providing customers with ancillary products such as loss or collision damage waiver, theft protection, liability insurance supplement, personal accident insurance and personal effects coverage. Rent a car operations are subject to seasonal factors with the greatest activity occurring in the second and third calendar quarters (see Note 12 of the Notes to Consolidated Financial Statements included in this Report).
ITEM 1. BUSINESS (continued).
Hertz and certain licensees, under the Hertz "Rent it Here-Leave it There" program, offer customers in most parts of the world the convenience of leaving a rented car at a Hertz or licensee location in a city other than the one in which it was rented. Depending upon rental location and distance driven, a drop off charge or a special intercity rate may be imposed if the vehicle is not returned to the same location from which it is rented.
A centralized reservations service is also offered within the continental United States by use of a toll free telephone number. In addition, through "The Hertz #1 Club", Hertz maintains a computerized data retrieval system on participating customers' preferences as to type of car and other information typically needed prior to the rental of a car, so that, when #1 Club members make a reservation using their membership number, the renting location is able to have a rental agreement prepared prior to the time of their arrival. A similar service is available to Hertz' customers in certain foreign countries under the name "Hertz No. 1 Club". In addition, a Hertz charge card is offered for use by Hertz customers in connection with car rental services.
At most major airport locations within the United States, Canada, Europe and Australia, Hertz offers "Hertz #1 Club Gold," which is an expedited rental service designed for the frequent traveler. Hertz #1 Club Gold encompasses two services, canopied and counter service. When using #1 Club Gold canopy service, which is available at a number of major airport locations within the United States and the United Kingdom, the counter rental transaction is eliminated and members are taken by the Hertz courtesy bus to a separate canopied rental area, where an electronic sign board directs them to their assigned car, which is ready to go. Usually, there is nothing to sign. After presenting their driver's license and rental record at the gate, they are on their way.
Hertz also participates in packaged tour plans in conjunction with airlines, tour operators and hotels under which a certain period of rent a car usage is included with air fare, and often hotel accommodations, at a combined quoted price.
Rent a car facilities are operated at virtually all major airports and at downtown locations in major cities in the United States. Hertz estimates that airport revenues accounted for approximately 90% of its rent a car revenues in the United States in 1995. Arrangements are also in effect at hotels, motels and railroad terminals to facilitate car rentals at such locations.
The foreign rent a car operations of Hertz that generated the highest volumes of business during 1995 are those conducted in France, Germany, the United Kingdom, Italy, Canada, Spain, Australia and Switzerland. These operations are conducted by wholly-owned subsidiaries of Hertz. In general, Hertz' foreign rent a car operations are conducted along lines similar to those of rent a car operations of Hertz in the United States. Hertz believes there are no unusual risks associated with its foreign operations.
Hertz' ability to withdraw earnings or investments from foreign countries is, in some cases, subject to exchange controls and the utilization of foreign tax credits. It may also be affected by fluctuations in exchange rates for foreign currencies and by revaluation of such currencies in relation to the U.S. dollar by the governments involved. Foreign operations have been financed to a substantial extent through
ITEM 1. BUSINESS (continued).
loans from local lending sources in the currency of the countries in which such operations are conducted. Rent a car operations in foreign countries are, from time to time, subject to governmental regulations imposing varying degrees of restrictions. Hertz does not believe currency restrictions or other regulations have had any material impact on its operations as a whole.
In 1995, the registrant through its subsidiary, H.I.R.E. Corp., started offering vehicle renting services principally in the insurance and auto repair replacement market, and is presently operating this business in two states.
Equipment Rental and Sales
Hertz also rents, leases and sells a wide range of construction and materials handling equipment to construction, industrial and governmental users through its subsidiaries, Hertz Equipment Rental Corporation ("HERC") in the United States, a subsidiary of Hertz Equipment Rental International, Ltd. in Spain, and a subsidiary in France owned 51% by Hertz International, Ltd. and 49% by Equipment Rental Services Netherlands B.V., which operates under a license from HERC.
Rentals are made on a daily, weekly or monthly basis. Rates vary at different locations depending on local market and competitive factors.
HERC believes it operates the largest rental, lease and sale of construction and materials handling equipment business in the United States and has become so through providing superior equipment, operations and services.
HERC operations are subject to seasonal factors with the greatest activity occurring in the second and third calendar quarters and its operations have been profitable.
Truck Leasing and Rental and Car Leasing
In 1988, the registrant entered into a license agreement with Hertz Penske Truck Leasing, Inc., which has been succeeded by Penske Truck Leasing Co., L.P., ("Penske"), under which Penske has the right, as a Hertz System licensee, to conduct a one-way truck rental business (including trailers) for a 10 year period. The license agreement covers the entire United States, with certain exclusions for those cities and towns that were licensed to other Hertz System licensees, but under certain conditions, Penske may also operate in the localities of other Hertz System licensees.
Effective January 1, 1995, the registrant sold its European car leasing and car dealership operations to Hertz Leasing International, Inc. ("HLI"), at an amount equal to its book value of approximately $61 million. HLI is wholly owned by Ford. In addition, except for Australia and New Zealand, Ford has received the worldwide rights (subject to certain existing license rights) to use and sublicense others to use the "Hertz" name in the conduct of motor vehicle leasing businesses, and has agreed to pay the registrant a license fee payable over five years. The registrant believes that this transaction will not have a material effect on its financial position or future operations.
ITEM 1. BUSINESS (continued).
Other Operations
Through its subsidiary HCM Claim Management Corporation ("HCM"), Hertz provides a claim administration service to numerous customers, which includes investigating, evaluating, negotiating and disposing of a wide variety of claims including third-party, first-party, bodily injury, property damage, general liability, product liability and workers' compensation claims, but does not include underwriting of risks. In 1992, HCM became the claims administrator for workers' compensation claims of the registrant, which are underwritten by an outside insurance carrier, and also became the administrator for the registrant's medical, dental and other employee health related benefit plans. HCM provides these services throughout the United States and its operations have been profitable.
In 1991, Hertz began providing telecommunication services through its subsidiary Hertz Technologies, Inc. ("HTI"). HTI markets custom designed voice and data telecommunication packages of rates and services and makes available to customers throughout the United States the opportunity to take advantage of Hertz' negotiated rates with its underlying carriers providing, among other things, discounted long-distance services. HTI provides these services from Oklahoma City and its operations have been profitable.
Insurance
For its domestic operations, the registrant is a qualified self-insurer against liability resulting from accidents under certificates of self-insurance for financial responsibility in all states wherein its motor vehicles are registered. The registrant also self-insures general public liability and property damage for all domestic operations. For its foreign operations, Hertz generally does not act as a self-insurer. Instead, Hertz purchases insurance to comply with local legal requirements from unaffiliated carriers. Effective January 1, 1993, motor vehicle liability insurance for claims arising on or after January 1, 1993, purchased locally from unaffiliated carriers by Hertz owned operations in Europe, has been reinsured by Hertz International RE Limited, a reinsurer in Dublin, Ireland. Hertz also maintains insurance coverage with unaffiliated carriers, or with unaffiliated carriers through Ford, for such amounts in excess of those retained and borne by Hertz, as it determines to be necessary.
Provisions for public liability and property damage on self-insured domestic claims and reinsured foreign claims are made by charges to expense based upon evaluations of estimated ultimate liabilities on reported and unreported claims. At December 31, 1995, this liability was estimated at $312 million for combined domestic and foreign operations.
HERC generally requires its customers to provide their own liability insurance on rented equipment with HERC held harmless under various agreements.
Other types of insurance usually carried by business organizations, such as workers' compensation, property (including boiler and machinery and business interruption), commercial crime and fidelity and performance bonds, are purchased from various insurance companies, or through unaffiliated carriers with Ford, in amounts deemed adequate by Hertz for the respective hazards.
ITEM 1. BUSINESS (continued).
Vehicle Acquisition and Disposition
Hertz believes it is the largest single private purchaser of new vehicles in the United States. The acquisition and disposition of vehicles are, thus, important activities for Hertz and have a significant impact on profitability. Hertz obtains, subject to availability, a majority of its cars pursuant to various fleet programs established by original equipment manufacturers ("OEMs"). Such vehicles are deemed "nonrisk" because Hertz is able to return these vehicles to the OEMs at pre-established prices and time frames. In 1995, in Hertz' domestic and foreign operations, approximately 90% of the vehicles in the fleet were "nonrisk". Hertz disposes of "at risk" vehicles, whereby Hertz bears the economic risk of their eventual disposal, through wholesalers and miscellaneous other channels such as auctions. Over the years, the dynamics of the new and used car markets have had a negative impact on Hertz' sales efforts and Hertz has responded by purchasing fewer risk vehicles and by refining the vehicle mix of its fleet. Upon the sale of a vehicle, the difference between the net proceeds from sale and the remaining book value is recorded as an adjustment to depreciation in the period when sold (see Note 7 of the Notes to Consolidated Financial Statements included in this Report.)
The purchases of vehicles are financed through funds provided from operations and by an active and ongoing global borrowing program. Domestic short-term requirements are funded primarily in the commercial paper market, while medium and long-term funds are obtained from the U.S. bond market or the Euro-markets.
Licensees
The Hertz Corporation's wholly-owned subsidiaries, Hertz System, Inc. ("System") and Hertz International, Ltd. ("International"), respectively, issue licenses under franchise arrangements to independent licensees who are engaged in the vehicle renting business in the United States and many foreign countries. These licensees generally pay fees based on the number of vehicles they operate and/or on revenues. Licensees also share in the cost of the Hertz advertising program, reservations system, and certain other services. In return, licensees are provided with the use of the "Hertz" name, management and administrative assistance, training, the availability of Hertz charge cards, #1 Club, reservations service, the "Rent it Here-Leave it There" program and other services. System, which owns the Hertz service and trademarks and certain proprietary knowhow used by licensees, establishes the uniform standards and procedures under which all such licensees operate. The Hertz name has significant value. It is well known domestically and in all major international markets.
ITEM 1. BUSINESS (continued).
The establishment and operations of all licensees are financed independently by the licensee with Hertz having no investment interest in the licensee (except for two foreign licensees) or in the licensee's fleet. Licenses outside the United States are granted by International, with the consent of System. Initial license fees or the price for the sale to a licensee of a corporate location may be payable over a term of several years. New licenses continue to be issued and in some cases licensee businesses are purchased by Hertz.
Licensees are of importance since they enable Hertz to offer expanded national and international service and a broader "Rent it Here-Leave it There" program. License fees and other payments made by licensees do not contribute materially to Hertz' income.
Employees
On December 31, 1995, Hertz employed approximately 19,500 persons in its domestic and foreign operations. Labor contracts covering the terms of employment of approximately 4,500 employees in the United States are presently in effect with 96 local unions, affiliated primarily with the International Brotherhood of Teamsters and the International Association of Machinists (AFL-CIO). Labor contracts which cover approximately 1,500 of these employees will expire during 1996. Employee benefits in effect include group life insurance, hospitalization and surgical insurance, pension plans, and an income savings plan. Overseas employees are covered by a wide variety of union contracts and governmental regulations affecting, among other things, compensation, job retention rights and pensions. Hertz has had no work stoppage as a result of labor problems during the last 10 years that has materially affected its operations. Hertz believes its labor relations to be good.
Competition
Hertz believes that its rent a car business, collectively with its affiliates and independent licensees, is the largest in the world; that its licensed one-way truck rental business is one of the largest in the United States; and believes that its construction and materials handling equipment rental, lease and sales business is the largest in the United States. Hertz has substantial competitors with large resources in its rent a car and truck rental activities who compete with Hertz in all principal aspects of these activities, including price and service. Hertz is also faced with substantial competition from a growing number of smaller operators. At substantially all of its airport locations, it is faced with competition from one or more competitors on and off the airport. Competition in all of Hertz' areas of business is now, and is expected to continue to be, active and intense.
ITEM 1. BUSINESS (continued).
Governmental Regulation
Throughout the world, Hertz is subject to numerous types of governmental controls, including those relating to price regulation and advertising, currency controls, labor matters, charge card operations, environmental protection, used vehicle sales and franchising.
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 Hertz. To comply with environmental regulations, measures are being taken at certain locations to reduce the loss of vapor during the fueling process and to maintain and replace underground fuel storage tanks. Hertz is also incurring and providing for expenses for the cleanup of fuel discharges and other alleged violations of environmental laws arising from the disposition of waste products. Hertz does not believe that it will be required to make any material capital expenditures for environmental control facilities or to make any other material expenditures to meet the requirements of governmental authorities in this area.
Hertz' operations, as well as those of its competitors, could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing regulations. In the event of a severe disruption of fuel supplies, the operations of all vehicle renting and leasing companies could be adversely affected.
ITEM 2.
ITEM 2. PROPERTIES.
Hertz' operations are carried on at rental and sales offices and service facilities located at airports and in downtown and suburban areas. Most of such premises are leased. Substantially all airport locations are leased from governmental authorities charged with the operation of such airports under arrangements generally providing for payment of rents and a percentage of revenues with a guaranteed annual minimum (see Note 9 of the Notes to Consolidated Financial Statements included in this Report).
Hertz has facilities in the vicinity of Oklahoma City at which reservations for its worldwide car rental operations are processed and major domestic accounting functions are performed. Hertz maintains its executive offices in a facility in Park Ridge, New Jersey.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Various legal actions, governmental investigations and proceedings, and claims are pending or may be instituted or asserted in the future against the registrant and its subsidiaries. Litigation is subject to many uncertainties, and the outcome of the individual litigated matters is not predictable with assurance. It is reasonably possible that certain of the actions, investigations or proceedings could be decided unfavorably to the registrant or the subsidiary involved. Although the amount of liability at December 31, 1995 with respect to these matters cannot be ascertained, such liability could approximate up to $1 million (net of income tax benefits), and the registrant believes that any resulting liability should not materially affect the consolidated financial position, results of operations or cash flows of the registrant.
On January 9, 1995, Newark International Airport, in Newark, N.J., suffered an electrical outage that caused significant operational problems for one day due to a construction accident that occurred on the registrant's property. A subcontractor of the registrant was involved in this accident. The registrant believes that it has adequate defenses, indemnities and insurance coverage against existing and anticipated litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no market for the registrant's common stock. The registrant is a wholly-owned subsidiary of Ford.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
1995 vs. 1994
Revenues in 1995 of $3,401 million increased by $106 million as compared to 1994. This increase was primarily attributable to gains in the car rental operations resulting from a greater number of transactions, rate increases and changes in foreign exchange rates; and improvements in construction equipment rental and sales due to increased volume resulting from the opening of new locations and increased activity in construction and industrial related markets. These increases were partly offset by lower revenues in car leasing and car dealerships resulting from the sale of these operations in Europe effective January 1, 1995.
Total expenses increased $97 million to $3,228 million in 1995 as compared to $3,131 million in 1994. Direct operating expense decreased in amount and as a percent of revenues principally due to lower expenses relating to the sales of the European car leasing and car dealership operations in 1995 and lower costs in the domestic car rental operations for public liability and property damage claims, partly offset by higher costs relating to the increase in the volume of business. Depreciation of revenue earning equipment increased primarily due to an increase in vehicles and equipment operated, higher prices for automobiles, and lower net proceeds received on disposal of revenue earning equipment in excess of book value due to a softness in the domestic vehicle resale markets; these increases were partly offset by lower depreciation relating to the sale of the European car leasing operation in 1995, and a reduction in depreciation of $12.0 million in 1995 due to changes made effective July 1, 1994 increasing certain lives being used to compute the provision for depreciation to reflect changes in the estimated residual values to be realized when the equipment is sold. Selling, general and administrative expense increased primarily due to higher advertising and sales promotion costs and changes in foreign exchange rates. The increase in interest expense was primarily due to higher debt levels and interest rates in 1995, partly offset by higher interest income in 1995 and $8.6 million included in 1994 relating to interest receivable from Park Ridge Limited Partnership which was not collected.
The tax provision of $67 million in 1995 was lower than the tax provision of $72 million in 1994, primarily due to a lower effective tax rate in 1995. See Notes 1 and 8 of the Notes to Consolidated Financial Statements included in this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (continued).
1994 vs. 1993
Revenues in 1994 of $3,294 million increased by $440 million as compared to 1993. This increase was primarily attributable to increases in the car rental operations resulting from a greater number of transactions due to increased travel, an increase in market share, and changes in foreign exchange rates; improvements in construction equipment rental and sales in the United States due to increased volume resulting from improvements in the economy and increased volume from industrial related markets; and higher revenues in car leasing due to an acquisition made in July 1994 in Europe and changes in foreign exchange rates. These increases were partly offset by lower revenues in claim administration and telecommunication services due to decreases in volume.
Total expenses increased $379 million to $3,131 million in 1994 as compared to $2,752 million in 1993. Direct operating expense increased principally due to the higher volume of business and changes in foreign exchange rates, but was lower in 1994 as a percent of revenues due to more efficient fixed cost coverage. Depreciation of revenue earning equipment increased in 1994 primarily due to an increase in vehicles and equipment operated, higher prices for automobiles, and credits recorded in 1993 resulting from valuing certain pre-acquisition assets on a net of tax basis; these increases were partly offset by a reduction in depreciation of $9.6 million due to changes made effective July 1, 1994 increasing certain lives being used to compute the provision for depreciation to reflect changes in the estimated residual values to be realized when the equipment is sold. Selling, general and administrative expense increased primarily due to higher advertising costs and changes in foreign exchange rates. The increase in interest expense was primarily due to higher debt levels and lower interest income in 1994 and an $8.6 million write-off of interest receivable from Park Ridge Limited Partnership, partly offset by lower interest rates in 1994 in the foreign operations.
The tax provision of $72 million in 1994 was higher than the tax provision of $49 million in 1993, primarily due to the increase in income before income taxes in 1994 and changes in effective tax rates. See Notes 1 and 8 of the Notes to Consolidated Financial Statements included in this Report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Balance Sheet of the registrant at December 31, 1995 and 1994, and the related Consolidated Statement of Income and Reinvested Earnings and Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993, and other financial statement schedules are set forth under Item 14 hereof.
Selected quarterly data for each quarter of the years 1995 and 1994 is set forth in Note 12 of the Notes to Consolidated Financial Statements included in this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
3. Exhibits:
(3) Articles of Incorporation and By-Laws.
(i) Restated Certificate of Incorporation of The Hertz Corporation -- incorporated herein by reference to Exhibit (3)(i) to the registrant's report on Form 8-K dated July 20, 1993 (File No. 1-7541).
(ii) Certificate of Amendment of Restated Certificate of Incorporation of The Hertz Corporation filed with the Secretary of State of Delaware on April 28, 1994 -- incorporated by reference to Exhibit (3)(ii) to the registrant's report on Form 10-K dated March 13, 1995 (File No. 1-7541).
(iii) Certificate of Amendment of Restated Certificate of Incorporation of The Hertz Corporation filed with the Secretary of State of Delaware on December 18, 1995.
(iv) By-Laws of The Hertz Corporation adopted by its Board of Directors on July 19, 1993 -- incorporated by reference to Exhibit (3)(ii) to the registrant's report on Form 8-K dated July 20, 1993 (File No. 1-7541).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (continued).
3. Exhibits (continued):
(4) Instruments defining the rights of security holders, including indentures.
(iii) At December 31, 1995, Hertz had various obligations which could be considered as long-term debt, none of which exceeded 10% of the total assets of Hertz on a consolidated basis. Hertz agrees to furnish to the Commission upon request a copy of any such instrument defining the rights of the holders of such long-term debt.
(10) Material Contracts.
(i) (a) Agreement dated December 30, 1985 between The Hertz Corporation and Allegis Corporation incorporated herein by reference to Exhibit (10)(i)(a) to the registrant's report on Form 10-K for the year ended December 31, 1985 (File No. 1-7541).
(b) Use Agreement dated December 30, 1985 between The Hertz Corporation and Allegis Corporation incorporated herein by reference to Exhibit (10)(i)(b) to the registrant's report on Form 10-K for the year ended December 31, 1985 (File No. 1-7541).
(ii)(B)(a) Agreement dated January 1, 1988 between The Hertz Corporation and Ford Motor Company (portions of this Exhibit have been omitted and granted confidential treatment under Rule 24b-2) incorporated herein by reference to Exhibit (10)(ii)(B)(a) to the registrant's report on Form 10-K for the year ended December 31, 1987 (File No. 1-7541).
(b) Agreement dated January 1, 1988 between Hertz System, Inc. and Ford Motor Company (portions of this Exhibit have been omitted and granted confidential treatment under Rule 24b-2) incorporated by reference to Exhibit (10)(ii)(B)(b) to the registrant's report on Form 10-K for the year ended December 31, 1987 (File No. 1-7541).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (continued).
3. Exhibits (continued):
(10) Material Contracts (continued):
(ii)(B) (c) Agreement dated September 25, 1992 between Hertz System, Inc. and Ford Motor Company. (Portions of this Exhibit have been omitted and granted confidential treatment under Rule 24b-2) incorporated by reference to Exhibit (10)(ii)(B)(c) to the registrant's report on Form 10-Q for the quarterly period ended September 30, 1992 (File No. 1-7541).
(iii)(A) (a) Employment contract with Frank A. Olson dated April 16, 1987, as amended December 30, 1987, incorporated by reference to Exhibit (10)(iii)(A)(a) to the registrant's report on Form 10-K for the year ended December 31, 1987 (File No. 1-7541).
(b) Employment contract with Craig R. Koch dated April 16, 1987, as amended December 30, 1987, incorporated by reference to Exhibit (10)(iii)(A)(b) to the registrant's report on Form 10-K for the year ended December 31, 1987 (File No. 1-7541).
(c) Employment contract with William Sider dated July 1, 1992, incorporated by reference to Exhibit (10)(iii)(A)(c) to the registrant's report on Form 10-K for the year ended December 31, 1992 (File No. 1-7541).
(d) Employment contract with Brian J. Kennedy dated July 1, 1992, incorporated by reference to Exhibit (10)(iii)(A)(d) to the registrant's report on Form 10-K for the year ended December 31, 1992 (File No. 1-7541).
(e) Employment agreement with Daniel I. Kaplan dated February 17, 1995, incorporated by reference to Exhibit (10)(iii) (A)(e) to the registrant's report on Form 10-K dated March 13, 1995 (File No. 1-7541).
(f) Employment contract with Antoine E. Cau dated January 1, 1990, as amended April 4, 1990, December 13, 1990 and December 18, 1990 (portions of this Exhibit have been omitted and granted confidential treatment under Rule 24b-2) incorporated by reference to Exhibit (10)(iii)(A)(f) to the registrant's report on Form 10-K for the year ended December 31, 1990 (File No. 1-7541).
(g) Executive Incentive Compensation Plan, incorporated by reference to Exhibit (10)(iii)(A)(g) to the registrant's report on Form 10-K dated March 13, 1995 (File No. 1-7541).
(h) Long Term Incentive Plan, incorporated by reference to Exhibit (10)(iii)(A)(h) to the registrant's report on Form 10-K for the year ended December 31, 1991 (File No. 1-7541).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (continued).
3. Exhibits (continued):
(12) Computation of Consolidated Ratio of Earnings to Fixed Charges for each of the five years in the period ended December 31, 1995.
(21) Subsidiaries of the registrant. Listing of subsidiaries of the registrant at December 31, 1995.
(23) Consents of experts and counsel. Consent to the incorporation by reference of report of independent public accountants in previously filed registration statements under the Securities Act of 1933.
(27) Consolidated Financial Data Schedule for the year ended December 31, 1995.
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter ended December 31, 1995.
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE HERTZ CORPORATION (Registrant)
By: /s/ William Sider --------------------------------- William Sider Executive Vice President and Chief Financial Officer March 13, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the indicated capacities, on March 13, 1996.
/s/ Frank A. Olson /s/ Craig R. Koch - --------------------------------- -------------------------------------- Frank A. Olson Craig R. Koch Chairman of the Board, Chief President, Chief Operating Officer and Executive Officer and Director Director (Principal Executive Officer)
/s/ William Sider /s/ Leo A. Massad, Jr. - --------------------------------- -------------------------------------- William Sider Leo A. Massad, Jr. Executive Vice President, Chief Staff Vice President and Controller Financial Officer and Director (Principal Accounting Officer) (Principal Financial Officer)
/s/ Malcolm S. Macdonald /s/ David N. McCammon - --------------------------------- -------------------------------------- Malcolm S. Macdonald David N. McCammon Assistant Treasurer and Director Director
/s/ Peter J. Pestillo - --------------------------------- Peter J. Pestillo Director
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Hertz Corporation:
We have audited the accompanying consolidated balance sheet of The Hertz Corporation (a Delaware corporation and wholly-owned subsidiary of Ford Motor Company) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income and reinvested earnings and cash flows and the financial statement schedule listed in Item 14(a)2(i) for each of the two years ended December 31, 1995. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Hertz Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the two years ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey January 26, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Hertz Corporation:
We have audited the accompanying consolidated statements of income and reinvested earnings and cash flows of The Hertz Corporation (a Delaware corporation) and subsidiaries for the year ended December 31, 1993. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations of The Hertz Corporation and subsidiaries and their cash flows for the year ended December 31, 1993, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)2(i) for the year ended December 31, 1993, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York February 7, 1994
THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS)
ASSETS
The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS)
LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME AND REINVESTED EARNINGS (IN THOUSANDS OF DOLLARS)
The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
In connection with acquisitions made during the years 1994 and 1993, liabilities assumed were $27 million and $2.1 million, respectively.
The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Merger, Change in Ownership and Capitalization -- the registrant, which was incorporated in Delaware in 1967, is a successor to corporations which were engaged in the automobile and truck leasing and rental business since 1924. UAL Corporation ("UAL") (formerly Allegis Corporation) purchased all of the registrant's outstanding capital stock from RCA Corporation ("RCA") on August 30, 1985. Park Ridge Corporation ("Park Ridge") purchased all of the registrant's outstanding capital stock from UAL on December 30, 1987. On July 19, 1993, Park Ridge (which had no material assets other than the registrant) was merged with and into the registrant, with the prior stockholders of Park Ridge becoming the stockholders of the registrant. The merger has been recorded as a "pooling of interests". Under this method of accounting, when the entities before and after a merger are under common control with the same management, the operations are combined at historical cost. Consequently, the consolidated financial statements of the registrant included herein have been restated for all periods prior to the effective date of the merger, and are identical to the audited consolidated financial statements of Park Ridge for such periods. On the date of the merger, the registrant refinanced $334.3 million promissory notes of Park Ridge through the public issuance of $400 million aggregate principal amount of junior subordinated debt securities of the registrant; and a $150 million loan to Park Ridge from Ford Motor Credit Company ("FMCC") in the form of subordinated debt was assumed by the registrant (the "FMCC Note"). The FMCC Note, which had a scheduled maturity date of May 17, 2000, was subordinated in right of payment to all "Superior Indebtedness" (as defined for purposes of the FMCC Note) of the registrant including the junior subordinated debt securities referred to above.
In March 1994, Ford Motor Company ("Ford") acquired the registrant's common stock owned by Commerzbank Aktiengesellschaft. On April 29, 1994, the registrant redeemed its preferred and common stock owned by AB Volvo for $145 million, borrowing the funds from Ford to pay for the redemption, and Ford purchased all of the common stock of the registrant owned by Park Ridge Limited Partnership ("Partnership"). This resulted in the registrant becoming a wholly-owned subsidiary of Ford. In addition, the $150 million subordinated promissory note of the registrant held by FMCC, was exchanged for $150 million of Series B Preferred Stock of the registrant, and a promissory note in the amount of $18.5 million, owed by the Partnership to the registrant was assumed by Ford ("Ford Note"). In connection with these transactions, notes payable were increased by $145 million, Series A Preferred Stock was reduced by $104 million, and additional capital paid-in was reduced by $41 million; interest expense was increased by $8.6 million and provision for taxes was decreased by $3.0 million; and subordinated promissory notes were reduced by $150 million and Series B Preferred Stock was increased by $150 million. The Ford Note is payable on demand, with interest payable quarterly on the outstanding principal balance at a fluctuating rate per annum equal to LIBOR (London Interbank Offered Rate). At December 31, 1995, the registrant's receivable relating to the Ford Note was $18.7 million and is included in Due From Affiliates in the consolidated balance sheet, and will be repaid in 1996.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
As of December 31, 1995, 100% of the Common Stock of the registrant was owned by Ford and 100% of the outstanding Preferred Stock was owned by FMCC.
The capital stock of the registrant authorized and issued as of December 31, 1995, 1994 and 1993 and the additional capital paid-in for the years ended December 31, 1994 and 1995 are set forth below. There were no changes to the capital stock and additional capital paid-in during 1993.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
The holders of the Series A Preferred Stock ("Series A Stock") and the Series B Preferred Stock ("Series B Stock") are entitled, when, as and if declared by the Board of Directors of the registrant, to cumulative annual dividends, but payable only out of funds legally available therefor, compounded annually (if in arrears). The annual dividend rate through December 31, 1998 is 10% for the Series A Stock and at various rates which average 4.5% for the Series B Stock. Commencing January 1, 1999 the annual dividend rate for the Series A Stock and Series B Stock are subject to adjustment and are reset on an annual basis. The Series A Stock and the Series B Stock are redeemable by their terms at the option of the registrant at any time, and do not have any voting rights, except that the holders of the Series A Stock shall have the right to elect two directors in the event of default, and the holders of the Series B Stock will be granted voting rights in the event of significant and continuing net operating losses.
The holders of the Class A Common Stock and Class B Common Stock have one vote per share and no special preferences. The holders of the Class C Common Stock have one vote per share and have the right to designate three directors, until such time as fewer than 40 shares thereof (adjusted for stock splits and the like) shall be outstanding, provided, however, that the Class C Common Stock shall in any event have 40% of the general voting power and the right to elect not less than 40% of the members of such Board of Directors, until such time as fewer than 40 shares thereof (as so adjusted) shall be outstanding. The Class C Common Stock is convertible into Class B Common Stock on a share for share basis at any time at the holder's option.
Principles of Consolidation -- the consolidated financial statements include the accounts of The Hertz Corporation and its domestic and foreign subsidiaries. All significant intercompany transactions are eliminated.
Consolidated Statement of Cash Flows -- for purposes of this statement, the registrant considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. See page 25 for Noncash Investing and Financing Activities.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1 - Summary of Significant Accounting Policies (continued)
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:
Hertz follows the practice of charging maintenance and repairs, including the cost of minor replacements, to maintenance expense accounts. Costs of major replacements of units of property are charged to property and equipment accounts and depreciated on the basis indicated above. Gains and losses on dispositions of property and equipment are included in income as realized. Upon disposal of revenue earning equipment, depreciation expense is adjusted for the difference between the net proceeds from sale and the remaining book value.
Environmental Conservation -- the use of automobiles and other 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 Hertz. To comply with environmental regulations, measures are being taken at certain locations to reduce the loss of vapor during the fueling process and to maintain and replace underground fuel storage tanks. Hertz is also incurring and providing for expenses for the cleanup of fuel discharges and other alleged violations of environmental laws arising from the disposition of waste products. Hertz does not believe that it will be required to make any material capital expenditures for environmental control facilities or to make any other material expenditures to meet the requirements of governmental authorities in this area. Liabilities for these expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated.
Public Liability and Property Damage -- provisions for public liability and property damage on self-insured domestic claims and reinsured foreign claims are made by charges to expense based upon evaluations of estimated ultimate liabilities on reported and unreported claims. For its domestic operations, the registrant is a qualified self-insurer against liability resulting from accidents under certificates of self-insurance for financial responsibility in all states wherein its motor vehicles are registered. The registrant also self-insures general public liability and property damage for all domestic operations. Effective July 1, 1987, all claims are retained and borne by the registrant up to a limit of $5,000,000 for each accident. Self-insurance retention borne by the registrant for each accident prior to July 1, 1987 was as follows: $10,000,000 from September 1, 1986 to June 30, 1987; $1,000,000 and 50% of claims for amounts exceeding $1,000,000 up to $6,000,000 from February 17, 1985 to August 31, 1986; and $1,000,000 prior to February 17, 1985. For its foreign operations, Hertz generally does not act as a self-insurer. Instead, Hertz purchases insurance to comply with local legal requirements from unaffiliated carriers. Effective January 1, 1993, motor vehicle liability insurance for claims arising on or after January 1, 1993, purchased locally from unaffiliated carriers by
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1 - Summary of Significant Accounting Policies (continued)
Hertz owned operations in Europe, has been reinsured by Hertz International RE Limited ("HIRE"), a reinsurer in Dublin, Ireland. HIRE effectively responds to the first $1,500,000 of motor vehicle liability for each accident. Excess liability insurance coverage is maintained by Hertz with unaffiliated carriers, or through unaffiliated carriers with Ford.
Effective January 1, 1993, the registrant adopted the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS No. 109"), which requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The changes made in FAS No. 109, as they relate to the registrant, did not have a material effect on the registrant's consolidated financial position, results of operations or cash flows.
Effective April 30, 1994, the registrant and its domestic subsidiaries are filing consolidated Federal income tax returns with Ford. The registrant and its domestic subsidiaries filed consolidated Federal income tax returns after December 31, 1987; prior to that, from September 1, 1985 to December 31, 1987 they were included in the consolidated Federal income tax return of UAL, and prior thereto in the consolidated Federal income tax return of RCA. Pursuant to arrangements with Ford, UAL and RCA, the registrant provides for current and deferred taxes as if it filed a separate consolidated tax return with its domestic subsidiaries, except that if any items are subject to limitations in the registrant's consolidated return calculations, such as foreign tax credits, investment tax credits, capital losses and net operating losses, such limitations are determined on the basis of the entire Ford, UAL or RCA consolidated group, as appropriate. To the extent that items which would be subject to limitation at the registrant's consolidated return level are not limited in the Ford, UAL and RCA consolidated return, the registrant and its domestic subsidiaries receive credit for such items. The registrant and its subsidiaries account for investment tax credits under the flow-through method. As of December 31, 1995, U.S. income taxes have not been provided on $274 million in undistributed earnings of subsidiaries that have been or are intended to be permanently reinvested outside the United States or are expected to be remitted free of taxes.
Hertz is a party to a cooperative advertising agreement with Ford pursuant to which Ford participates in some of the cost of certain of Hertz' advertising programs in the United States and abroad which feature the Ford name or products. The amounts contributed by Ford for the years ended December 31, 1995, 1994 and 1993 were (in millions) $44.1, $42.0 and $40.3, respectively. This program will continue in the future.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1 - Summary of Significant Accounting Policies (continued)
Pension and Income Saving Plans -- substantially all domestic employees, after completion of specified periods of service, are eligible to participate in the Retirement Plan for the Employees of The Hertz Corporation ("Hertz Retirement Plan") and in the Income Savings Plan of The Hertz Corporation ("Hertz Income Savings Plan") as of August 30, 1985, and prior thereto in the Retirement Plan and in the Income Savings Plan of RCA. Payments are made to pension plans of others pursuant to various collective bargaining agreements. Under the Hertz Retirement Plan, through June 30, 1987 employees contributed a part of the cost of current-service benefits while Hertz contributed the remainder and all other costs under the projected unit credit cost method. Effective July 1, 1987, the Hertz Retirement Plan was revised to an "Account Balance Pension Plan" under which Hertz pays the entire cost and employees are no longer required to contribute. The normal retirement benefits are based on years of credited service and the five highest amounts of annual compensation during the employee's last ten years of credited service up to July 1, 1987. Effective July 1, 1987, the normal retirement benefit will be the value of their cash balance account accrued after July 1, 1987. Hertz' funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974. Under the Hertz Income Savings Plan, as explained below, Hertz contributes a fixed percentage of eligible employees' base salary. Employees may also elect to have Hertz contribute on their behalf, subject to a percentage limitation, any whole percentage of their base salary to the Plan, in lieu of being paid such salary in cash under a qualified cash or deferred arrangement described in Section 401(k) of the Internal Revenue Code. Prior to July 1, 1987, employees could also make their own contributions of their base salary, subject to a percentage limitation. Effective July 1, 1987, the Hertz Income Savings Plan was amended whereby Hertz contributes a percentage of eligible employees' salary only if the employee elects to contribute a portion of his/her base salary. Hertz' contribution was 66% of the first 6% of the employee's contribution for a maximum Hertz match of 4% of the employee's base salary. Employee after tax contributions were eliminated. Effective January 1, 1988, the Plan was further amended to change Hertz' contribution from 66% to 50% of the first 6% of the employee's contribution for a maximum Hertz match of 3% of the employee's base salary. Effective July 1, 1991, Hertz' contribution was suspended and was resumed on January 1, 1992.
Most of the registrant's foreign subsidiaries have defined benefit retirement plans or are required to participate in government plans. These plans are all funded, except in Germany, where an unfunded liability is recorded. In certain countries, when the subsidiaries make the required funding payments, they have no further obligations under such plans.
The American Institute of Certified Public Accountants issued in December 1993 Statement of Position No. 93-7, which requires, effective for financial statements for years beginning after June 15, 1994, that advertising costs be expensed in the periods in which those costs are incurred, or the first time the advertising takes place. Implementation of this statement did not have a material effect on Hertz' consolidated financial position, results of operations or cash flows.
Use of estimates and assumptions as determined by management is required in the preparation of consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates and assumptions. Certain amounts for prior periods have been reclassified to conform with 1995 presentations.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2 - Debt
Debt of the registrant and its subsidiaries (in thousands of dollars) consists of the following:
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2 - Debt (continued)
The aggregate amounts of maturities of debt, in millions, are as follows: 1996, $2,013.1 (including $1,783.4 of commercial paper, demand and other short-term borrowings); 1997, $214.9; 1998, $371.6; 1999, $349.7; 2000, $249.7; after 2000, $1,098.5.
During the year ended December 31, 1995, short-term borrowings, in millions, were as follows: maximum amounts outstanding $1,853.8 commercial paper, $1,083.5 banks and $193.5 other; monthly average amounts outstanding $1,292.6 commercial paper (weighted average interest rate 6.1%), $828.2 banks (weighted average interest rate 6.4%) and $108.6 other (weighted average interest rate 4.3%).
During the year ended December 31, 1994, short-term borrowings, in millions, were as follows: maximum amounts outstanding $1,021.3 commercial paper, $1,247.6 banks and $194.1 other; monthly average amounts outstanding $659.9 commercial paper (weighted average interest rate 4.9%), $975.5 banks (weighted average interest rate 5.8%) and $95.5 other (weighted average interest rate 5.3%).
During the year ended December 31, 1993, short-term borrowings, in millions, were as follows: maximum amounts outstanding $769.7 commercial paper, $940.1 banks and $48.0 other; monthly average amounts outstanding $287.5 commercial paper (weighted average interest rate 3.3%), $722.4 banks (weighted average interest rate 6.9%) and $25.2 other (weighted average interest rate 7.8%).
The net amortized discount charged to interest expense for the years ended December 31, 1995, 1994 and 1993 relating to debt and other liabilities was $.9 million, $1.3 million and $1.8 million, respectively. In addition, interest expense for the years 1995, 1994 and 1993 was reduced by $1.3 million, $1.6 million and $8.2 million, respectively, of interest income, relating to refunds of prior years' state, local and federal income taxes.
In 1994, the registrant entered into the following two committed bank facilities with a group of twenty-nine commercial banks, which will be utilized to support commercial paper and other short-term borrowings in the aggregate amount of $1.75 billion: (i) five year credit agreement for $1 billion is committed until June 30, 2000. The termination date is automatically extended for an additional one-year period each June 30, unless the bank gives notice to the contrary. A commitment fee of .125% per annum is payable on the unused available credit; and (ii) 364-day credit agreement for $751 million, renewed in June 1995, is committed until June 27, 1996. A commitment fee of .065% per annum is payable on the unused available credit.
The registrant also entered into a revolving loan agreement with Ford on June 8, 1994 under which the registrant may borrow from Ford from time to time up to $250 million outstanding at any one time. Obligations of the registrant under this agreement would rank pari passu with the registrant's senior debt securities. This agreement by its terms expires on June 30, 1999, on which date any amounts then outstanding thereunder are required to be repaid. A commitment fee of .125% per annum is payable on the unused available credit. In addition, at December 31, 1995, the registrant and a subsidiary had $268.9 million of outstanding loans from Ford.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2 - Debt (continued)
Hertz had consolidated unused lines of credit subject to customary terms and conditions, which includes unused amounts under the three facilities indicated above, of approximately $2.8 billion at December 31, 1995.
The terms of the registrant's loan agreements limit the payment of cash dividends. At December 31, 1995, approximately $158 million of consolidated shareholders' equity was free of such limitations.
Note 3 - Foreign Currency
Foreign currency exchange gains and losses included in net income were net gains of $2.0 million, $1.2 million and $1.4 million for the years ended December 31, 1995, 1994 and 1993, respectively. The cumulative translation charge adjustment at December 31, 1992 was $12.5 million. The net translation credit adjustments were $19.8 million and $23.5 million for the years ended December 31, 1995 and 1994, respectively. The net translation charge adjustment was $16.3 million for the year ended December 31, 1993.
Note 4 - Available-for-Sale Securities
Effective January 1, 1994, the registrant adopted the provisions of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires a more detailed disclosure of debt and equity securities held for investment, the methods to be used in determining fair value, and when to record unrealized holding gains and losses in earnings or in a separate component of shareholders' equity.
As of December 31, 1995, Prepaid Expenses and Other Assets in the consolidated balance sheet include available-for-sale securities at fair value of $5.8 million (cost $5.7 million). The fair value is calculated using information provided by outside quotation services. These securities include various governmental and corporate debt obligations, with the following maturity dates (in millions): fair value $.3 (cost $.3) in 1996; fair value $5.3 (cost $5.2) 1997 through 2001; fair value $.2 (cost $.2) 2002 through 2014. For the year ended December 31, 1995, proceeds of $6.6 million from the sale of available-for-sale securities were received, and a gross realized gain of $161,555 and gross realized loss of $56,647 were included in earnings. Actual cost was used in computing the realized gain and loss on the sale. For the year ended December 31, 1995, unrealized holding losses and unrealized holding gains, net of taxes, included in Shareholders' Equity were $26,000 and $126,000, respectively.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5 - Acquisitions
In 1992, the registrant entered into a lease agreement with a third party lessor, Hertz Funding Corp. ("HFC"), providing for the lease of vehicles purchased by HFC under a repurchase program offered by Ford. Under the lease, which was accounted for as an operating lease, the registrant made payments equal to the monthly depreciation and all expenses (including interest) of the third party lessor and was responsible for the remaining net cost on any vehicles that became ineligible under the repurchase program. At October 31, 1994, the net cost of the vehicles leased under this agreement was approximately $300 million. On November 1, 1994, the registrant acquired all of the issued and outstanding shares of HFC from PAZ ABS Corp. (an entity unaffiliated with the registrant or any of its subsidiaries) for the purpose of winding-down the activities of HFC. Commencing in November 1994, the accounts of HFC have been included in the consolidated financial statements of the registrant, which did not have a material effect on the registrant's consolidated financial position or results of operations.
On July 31, 1994, Axus, S.A., a car leasing company of the registrant which operates in various countries in Europe, acquired an additional interest in Locaplan S.A., a car leasing operation in France, increasing its ownership from 50% to 100%. The cost relating to this acquisition approximated $2.3 million, which exceeded the net assets acquired by approximately $2.2 million. Commencing in August 1994, the accounts of this operation have been included in the consolidated financial statements of the registrant, which did not have a material effect on the registrant's consolidated financial position or results of operations. These operations were sold by the registrant effective January 1, 1995 (see Note 14).
In connection with the acquisition of the registrant by Park Ridge in December 1987 and UAL in August 1985, the excess of the purchase price over the consolidated equity of the registrant at the time of these purchases was $658.3 million. These costs are being amortized by the registrant over 40 years. The unamortized amount of such costs at December 31, 1995 was $517.8 million.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6 - Pension and Income Savings Plans and Postretirement Benefit Plans
The following tables set forth the funded status and the net periodic pension cost of the Hertz Retirement Plan covering its domestic ("U.S.") employees and the retirement plans for foreign operations ("Non-U.S.") and amounts included in the consolidated balance sheet and statement of income (in millions of dollars):
Significant assumptions used for the U.S. plan were as follows: weighted average discount rate of 7.0% at December 31, 1995, 8.25% during 1995 (7% during 1994 and 7-3/4% during 1993); 5.1% rate of increase in future compensation levels (5.5% for 1994 and 6.4% for 1993); and expected long-term rate of return on assets of 9%. Assumptions used for the Non-U.S. plans vary by country and are made in accordance with local conditions, but do not vary materially from those used in the U.S. plan. Plan assets consist principally of investments in stocks, government bonds and other fixed income securities.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6 - Pension and Income Savings Plans and Postretirement Benefit Plans (continued)
The provisions charged to income for the years ended December 31, 1995, 1994 and 1993 for all other pension plans were approximately (in millions) $6.1, $6.0 and $5.6, respectively.
The provisions charged to income for the years ended December 31, 1995, 1994 and 1993 for the Hertz Income Savings Plan were approximately (in millions) $3.4, $3.0 and $2.6, respectively.
The estimated cost for postretirement health care and life insurance benefits is accrued on an actuarially determined basis. The following sets forth the plans' status, reconciled with the amounts included in the consolidated balance sheet and statement of income (in millions):
The significant assumptions used for the postretirement benefit plans were as follows: weighted average discount rate of 7.25% at December 31, 1995, 8.75% during 1995 (7.5% in 1994 and 7.0% in 1993), 5.3% rate of increase in future compensation levels (5.5% in 1994 and 6.4% in 1993), 8.3% weighted average health care cost trend rate through 2000 (9% in 1994 and 10% in 1993), and 7.5% weighted average trend rate in ten years (8% in 1994 and 8.6% in 1993). Changing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $550,000, and the aggregate service and interest cost components of net periodic postretirement benefit cost for 1995 by approximately $70,000.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7 - Revenue Earning Equipment
Revenue earning equipment is used in the rental of vehicles and construction equipment and the leasing of vehicles under closed-end leases where the disposition of the vehicles upon termination of the lease is for the account of Hertz. Revenue is recorded when it becomes receivable and expenses are recorded as incurred. Hertz' domestic revenue earning vehicles include approximately 65% Ford products, which are acquired from dealers who are independent from Ford. The percentage of Ford products acquired by Hertz is expected to continue at approximately this level in the future, pursuant to a long-term supply contract between the registrant and Ford. Hertz purchases the vehicles from Ford dealers at competitive prices.
Under operating leases, aggregate minimum future rentals for vehicles leased at December 31, 1995 are receivable approximately as follows (in millions): $29 in 1996, $18 in 1997, $7 in 1998, and $1 in 1999. Vehicles under lease at December 31, 1995 which are owned by Hertz amounted to $80 million, net of accumulated depreciation of $22 million.
The average holding periods of vehicles and other revenue earning equipment are as follows: car rental vehicles 5 to 8 months, car leasing vehicles 36 months, and other equipment 18 to 60 months. At December 31, 1995, the average ages of owned vehicles and other revenue earning equipment are as follows: car rental vehicles 5-1/2 months, car leasing vehicles 18 months, and other equipment 21 months. At December 31, 1995, approximately 15% of owned vehicles and all other revenue earning equipment were "at risk."
Depreciation of revenue earning equipment includes the following (in thousands of dollars):
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7 - Revenue Earning Equipment (continued)
Effective July 1, 1994, certain lives being used to compute the provision for depreciation of revenue earning equipment were increased to reflect changes in the estimated residual values to be realized when the equipment is sold. As a result of this change, depreciation of revenue earning equipment for the years 1995 and 1994 were decreased by $12.0 million and $9.6 million, respectively.
The adjustment of depreciation upon disposal of revenue earning equipment for the years ended December 31, 1995, 1994, and 1993 included (in millions) net gains of $13.8, $13.2 and $16.1, respectively, on the sale of equipment in the construction equipment rental operations in the United States; net losses of $7.5 and net gains of $9.8, and $7.9, respectively, in the car rental and car leasing operations; and in 1993, credits of $4.1 resulting from valuing pre-acquisition assets on a net of tax basis.
As of December 31, 1995 and 1994, Ford owed Hertz $358.6 million and $352.9 million, respectively, in connection with various vehicle repurchase and warranty programs. As of December 31, 1995 and 1994, Hertz owed Ford $9.4 million and $41.4 million, respectively, (included under Accounts Payable in the consolidated balance sheet) in connection with vehicles purchased. These transactions were made and are being paid in the ordinary course of business.
During the year ended December 31, 1995, the registrant purchased Ford vehicles at a cost of approximately $4.1 billion, and sold Ford vehicles to Ford or its affiliates under various repurchase programs for approximately $3.1 billion.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8 - Taxes on Income
The provision for taxes on income consists of the following (in thousands of dollars):
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8 - Taxes on Income (continued)
The principal items in the deferred tax liability at December 31, 1995 and 1994 are as follows (in thousands of dollars):
The tax operating loss carryforwards at December 31, 1995 of $5.4 million relate to certain foreign operations and have no expiration dates. It is anticipated that such operations will become profitable in the future and the carryforwards will be fully utilized.
As of December 31, 1995, the alternative minimum tax credit carryforwards of $41.6 million (which has no expiration date) will be utilized upon reversal of timing differences and against future taxable income.
As of December 31, 1995, the foreign tax credit carryforwards of $11.3 million ($.3 million will expire in 1999 and $11.0 million in 2000) is anticipated to be utilized through the consolidated Federal income tax returns filed with Ford.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8 - Taxes on Income (continued)
The principal items accounting for the difference in taxes on income computed at the U.S. statutory rate of 35% and as recorded are as follows (in thousands of dollars):
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9 - Lease and Concession Agreements
Hertz has various concession agreements which provide for payment of rents and a percentage of revenue with a guaranteed minimum and real estate leases under which the following amounts were expensed (in thousands of dollars):
As of December 31, 1995 minimum obligations under existing agreements referred to above are approximately as follows (in thousands of dollars):
In addition to the above, Hertz has various leases on vehicles and office and computer equipment under which the following amounts were expensed (in thousands of dollars):
As of December 31, 1995, minimum obligations under existing agreements referred to above that have a maturity of more than one year are as follows (in thousands): office and computer equipment 1996, $5,771; 1997, $2,944; 1998, $498; 1999, $63; 2000, $27.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 - Segment Information
Hertz' business consists of two significant segments: Rental and leasing of automobiles and certain other activities ("car rental"); and rental, leasing, and sales of construction and materials handling equipment ("construction equipment rental and sales"). The contributions of these segments to revenues are indicated in the Consolidated Statement of Income. The contribution of these segments to other financial data (in millions of dollars) are as follows:
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 - Segment Information (continued)
Hertz operates in the United States and in foreign countries. The operations within major geographic areas are summarized as follows (in millions of dollars):
Note 11 - Litigation
Various legal actions, governmental investigations and proceedings, and claims are pending or may be instituted or asserted in the future against the registrant and its subsidiaries. Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. It is reasonably possible that certain of the actions, investigations or proceedings could be decided unfavorably to the registrant or the subsidiary involved. Although the amount of liability at December 31, 1995 with respect to these matters cannot be ascertained, such liability could approximate up to $1 million (net of income tax benefits), and the registrant believes that any resulting liability should not materially affect the consolidated financial position, results of operations or cash flows of the registrant.
On January 9, 1995, Newark International Airport, in Newark, N.J., suffered an electrical outage that caused significant operational problems for one day due to a construction accident that occurred on the registrant's property. A subcontractor of the registrant was involved in this accident. The registrant believes that it has adequate defenses, indemnities and insurance coverage against existing and anticipated litigation.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12 - Quarterly Financial Information (Unaudited)
A summary of the quarterly operating results during 1995 and 1994 were as follows (in thousands):
Effective July 1, 1994, certain lives being used to compute the provision for depreciation of revenue earning equipment were increased to reflect changes in the estimated residual values to be realized when the equipment is sold. As a result of this change, pretax income before interest includes credit adjustments of $10.8 million in the first quarter of 1995 and $1.2 million in the second quarter of 1995 as a result of decreasing depreciation of revenue earning equipment.
The tax provision in the fourth quarter of 1995 includes $6.5 million credits relating to foreign taxes paid which is anticipated to be offset against U.S. income tax liabilities.
The tax provision in the fourth quarter of 1994 includes a $1.5 million credit resulting from adjustments made to tax accruals in connection with tax audit evaluations and the effects of prior years' tax sharing arrangements between the registrant and its former parent company, RCA.
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13 - Financial Instruments and Commitments
Financial instruments which potentially subject the registrant to concentrations of credit risk consist principally of cash equivalents and trade receivables. The registrant places its cash equivalents with financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the registrant's customer base, and their dispersion across different businesses and geographic areas. As of December 31, 1995, the registrant had no significant concentration of credit risk.
Cash and equivalents -- fair value approximates cost indicated on the balance sheet at December 31, 1995, because of the short-term maturity of these instruments.
Debt -- fair value is estimated based on quoted market rates as well as borrowing rates currently available to the registrant for loans with similar terms and average maturities. Carrying value was used as fair value for borrowings with an initial maturity of 92 days or less. The fair value of all debt at December 31, 1995 approximated $4.4 billion compared to carrying value of $4.3 billion.
Public Liability and Property Damage -- provisions for public liability and property damage on self-insured domestic claims and reinsured foreign claims are made by charges to expense based upon evaluations of estimated ultimate liabilities on reported and unreported claims. These liabilities are anticipated to be paid in the future which range between one and five years. The present (fair) value of these liabilities at December 31, 1995 approximates $284 million compared to carrying value of $312 million.
The registrant and its subsidiaries have entered into arrangements to manage exposure to fluctuations in interest rates. These arrangements consist of interest-rate swap agreements ("swaps") and forward rate agreements ("FRAs"). The differential paid or received on these agreements is recognized as an adjustment to interest expense. These agreements are not entered into for trading purposes. The effect of these agreements is to make the registrant less susceptible to changes in interest rates by effectively converting certain variable rate debt to fixed rate debt. Because of the relationship of current market rates to historical fixed rates, the effect at December 31, 1995 of the swap and FRA agreements is to give the registrant an overall effective weighted-average rate on debt of 6.94%, with 31% of debt effectively subject to variable interest rates, compared to a weighted-average interest rate on debt of 6.89%, with 42% of debt subject to variable interest rates when not considering the swap and FRA agreements. At December 31, 1995, these agreements expressed in notional amounts aggregated (in millions) $420.3 swaps, and FRAs in the amount of $31.7 which were settled in 1995. Notional amounts are not reflective of the registrant's obligations under these agreements because the registrant is only obligated to pay the net amount of interest rate differential between the fixed and variable rates specified in the contracts. The registrant's exposure to any credit loss in the event of non-performance by the counterparties is further
THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13 - Financial Instruments and Commitments (continued)
mitigated by the fact that all of these financial instruments are with significant financial institutions that are rated "A" or better by the major credit rating agencies. At December 31, 1995, the fair value of all outstanding contracts, which is representative of the registrant's obligations under these contracts, assuming the contracts were terminated at that date, was approximately a net payable of $4.8 million on the swaps. This relates to notional principal (in millions) of $420.3 swaps maturing $156.6, $233.8, $19.8 and $10.1 in 1996, 1997, 1998 and 1999, respectively; and of notional principal scheduled to start after December 31, 1995 of $13.4 swaps maturing $1.2, $.6, $.4 and $11.2 in 1996, 1997, 1998 and 1999, respectively.
Note 14 - Sale of European Car Leasing and Car Dealership Operations
Effective January 1, 1995, the registrant sold its European car leasing and car dealership operations to Hertz Leasing International, Inc. ("HLI"), at an amount equal to its book value of approximately $61 million. HLI is wholly owned by Ford. In addition, except for Australia and New Zealand, Ford has received the worldwide rights (subject to certain existing license rights) to use and sublicense others to use the "Hertz" name in the conduct of motor vehicle leasing businesses, and has agreed to pay the registrant a license fee payable over five years -- $9.3 million was received for the year 1995. The unaudited total assets as of December 31, 1994 and unaudited total revenues and net income for the year ended December 31, 1994 of the registrant's European car leasing and car dealership operations were (in millions) $482, $295 and $6, respectively. The registrant believes that this transaction will not have a material effect on its financial position or future operations.
At December 31, 1995, a foreign subsidiary of the registrant had $30.1 million loan receivables and related interest from foreign subsidiaries of HLI, which will be repaid in 1996 and 1997.
Note 15 - Impairment of Long-Lived Assets and Certain Identifiable Intangibles
The registrant evaluates the carrying value of goodwill for potential impairment on an ongoing basis. Such evaluations compare operating income before amortization of goodwill to the amortization recorded for the operations to which the goodwill relates. The registrant also considers projected future operating results, trends and other circumstances in making such estimates and evaluations.
Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was issued in March 1995. FAS 121 requires that, effective January 1, 1996, long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. It also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The effect of adopting FAS 121 is not expected to have a material effect on the registrant's consolidated financial position, results of operations or cash flows.
SCHEDULE II
THE HERTZ CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS OF DOLLARS)
(a) Amounts written off, net of recoveries. The year 1995 includes $2 million, which represents the balance at December 31, 1994 relating to the European Car Leasing and Car Dealership operations sold by the registrant effective January 1, 1995.
(b) Payments of claims and expenses.
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