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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.
20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year
ended December 31, 2004
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 1-7541 THE HERTZ CORPORATION  Delaware
    
    13-1938568(State of Incorporation)
    
    (I.R.S. Employer Identification No.)225 Brae Boulevard,Park Ridge, New Jersey
    
    07656-0713(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: 201-307-2000 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None The Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K
and is therefore filing this Form with the reduced disclosure format as permitted. 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 þ  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. þ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
 Yes o  No þ State the aggregate market value of the voting and non-voting common stock held by non-affiliates
of the Registrant: None (As of March 21, 2005, all of the common stock of the Registrant is owned
by its affiliate, Ford Holdings LLC). Indicate the number of shares outstanding of each of the Registrants classes of common stock, as
of March 21, 2005: Common Stock, $0.01 par value per share  100 shares. Documents Incorporated By Reference None




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THE HERTZ CORPORATION AND SUBSIDIARIES
INDEX PageEXPLANATORY NOTE
    
    
    1PART IITEM 1. Business
    
    
    111ITEM 2. Properties
    
    
    1112ITEM 3. Legal Proceedings
    
    
    1214ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    14PART IIITEM 5. Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    15ITEM 6. Selected Financial Data
    
    
    1617ITEM 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    1731ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31ITEM 8. Financial Statements and Supplementary Data
    
    
    3265ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    66ITEM 9A. Controls and Procedures
    
    
    6667ITEM 9B. Other Information
    
    
    67PART IIIITEM 10. Directors and Executive Officers of the Registrant
    
    
    68ITEM 11. Executive Compensation
    
    
    68ITEM 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    68ITEM 13. Certain Relationships and Related Transactions
    
    
    68ITEM 14. Principal Accounting Fees and Services
    
    
    68PART IVITEM 15. Exhibits, Financial Statement Schedules
    
    
    69SIGNATURES
    
    
    70EXHIBIT INDEX
    
    
    71EX-12 COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGESEX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATIONEX-32.2 CERTIFICATION




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Explanatory Note The Hertz Corporation (together with its subsidiaries, referred to herein as Hertz or the
Company) is restating its consolidated statements of operations for the years ended December 31,
2003 and 2002, and for the quarters ended March 31, 2004, June 30, 2004, September 30, 2004 and the
four quarters of 2003 (the Restatement). The Restatement also affects periods prior to 2002. The
Restatement is reported in this Annual Report on Form 10-K for the year ended December 31, 2004
(the Report) and will be reported in the Companys Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005. The Restatement corrects certain of the Companys historical accounting policies in order to
conform with generally accepted accounting principles (GAAP). Under those historical policies,
the Company netted certain amounts charged to its car rental and industrial and construction
equipment rental customers or other parties against expenses and netted certain expenses incurred
relating to amounts charged to its customers or other parties against revenues. The effect of the
Restatement will be to increase previously reported revenues and expenses for each of the affected
periods by equal amounts. Consequently, the Restatement will not result in a change in the
Companys previously reported income before income taxes and minority interest, income before
cumulative effect of change in accounting principle or net income (loss), nor will it change the
Companys liquidity or financial condition. Additionally, the Restatement will not have any effect
on the Companys previously reported consolidated balance sheets or consolidated statements of cash
flows. For a discussion of the Restatement adjustments, see Note 1A to the Notes to the Companys
consolidated financial statements included in this Report. For more information on the impact of
the Restatement on years 2001 and 2000, see Item 6, Selected Financial Data, included in this
Report. For more information on the impact of the Restatement on quarterly consolidated statements
of operations for 2004 and 2003, see Note 13 to the Notes to the Companys consolidated financial
statements included in this Report. The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on
Form 10-Q for the periods affected by the Restatement and the financial statements and related
financial information contained in such reports should no longer be relied upon. All prior period amounts affected by the Restatement and presented in this Annual Report on Form
10-K are reflected on a restated basis. 
 PART I 
 ITEM 1. Business. General The Company is an indirect wholly owned subsidiary of Ford Motor Company (Ford). The Company and its affiliates, associates and independent licensees represent what the Company
believes is the largest worldwide general use car rental brand based upon revenues and one of the
largest industrial and construction equipment rental businesses in North America based upon
revenues. The Companys Hertz brand name is recognized worldwide as a leader in quality rental
services and products. The Company, together with its affiliates, associates and independent
licensees, currently rents cars and industrial and construction equipment and operates its other
businesses from over 7,200 locations throughout the United States and in over 150 foreign countries
and jurisdictions. For the year ended December 31, 2004, the Company generated revenues, income before income taxes
and minority interest and net income of $6.7 billion, $502.6 million and $365.5 million,
respectively. 1




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The Company, which was incorporated in Delaware in 1967, is a successor to corporations that have
been engaged in the automobile and truck rental and leasing business since 1918. Ford first
acquired an ownership interest in the Company in 1987. Previously, the Company had been a
subsidiary of UAL Corporation (formerly Allegis Corporation), which had acquired the Companys
outstanding capital stock from RCA Corporation in 1985. See Note 1 to the Notes to the Companys
consolidated financial statements included in this Report. 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 its Class A Common Stock (the Class A Common
Stock), which represented approximately 19.1% of the economic interest in Hertz. In March 2001,
Ford FSG, Inc. (FSG), an indirect wholly owned subsidiary of Ford that then owned an approximate
81.5% economic interest in the Company, acquired all of the Company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 FSGs acquisition, the Companys Class A Common Stock ceased to be traded on the New York Stock
Exchange. However, because certain of the Companys debt securities were sold through public
offerings, the Company continues to file periodic reports under the Securities Exchange Act of
1934. In 2003, FSG was dissolved and the shares of the Companys Common Stock owned by FSG were
distributed to Ford and Ford Holdings LLC. In February 2004, Ford Holdings LLC became the sole
owner of the Companys Common Stock. The Companys principal executive offices are located at 225 Brae Boulevard, Park Ridge, New Jersey
07656. The Companys telephone number is (201) 307-2000 and its principal U.S. website is
www.hertz.com. Access to the Companys periodic reports filed with the Securities and Exchange
Commission is available through the Companys website. Hertz, HERC, The Source, Hertz Local Edition, Hertz #1 Club Gold, The Hertz #1 Club,
and Hertz NeverLost are trademarks or service marks of the Company. All other trademarks, service
marks or brand names appearing in this Report are the property of their respective holders. Certain statements contained in this report under Business and Managements Discussion and
Analysis of Financial Condition and Results of Operations, including, without limitation, those
concerning (i) the Companys outlook and (ii) the Companys liquidity and capital resources,
contain forward-looking statements concerning the Companys operations, economic performance and
financial condition. Because such statements involve risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, economic downturn; competition; the
Companys dependence on air travel; terrorist attacks, acts of war, epidemic diseases, or measures
taken by governments in response thereto that negatively affect the travel industry; limitations
upon the Companys liquidity and capital raising ability; increases in the cost of cars and
limitations on the supply of competitively priced cars; seasonality in the Companys businesses;
and Fords continued control of the Company. Car Rental The Company maintains a substantial network of company-operated car rental locations both in the
United States and in Europe, and what it believes to be the largest number of on-airport car rental
locations in the world, enabling the Company to provide consistent quality and service worldwide.
The Company derives approximately 74% of its car rental revenues from on-airport locations. The Companys worldwide car rental operations and certain other related activities generated $5.5
billion in revenues and $438 million in income before income taxes and minority interest during
2004. Industrial and Construction Equipment Rental The Company, domestically through its wholly owned subsidiary, Hertz Equipment Rental Corporation,
and internationally through various subsidiaries (all such subsidiaries, collectively, HERC),
maintains a 2




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significant market share in the North American industrial and construction equipment rental market.
HERC rents a broad range of earthmoving equipment, material handling equipment, aerial and
electrical equipment, air compressors, pumps, small tools, compaction equipment and
construction-related trucks. HERC currently operates what it believes to be the third largest
equipment rental business in North America, the third largest equipment rental business in Spain
and the fourth largest in France based upon revenues. The Companys worldwide industrial and construction equipment rental operations generated $1.2
billion in revenues and $88 million in income before income taxes and minority interest during
2004. Other Activities Other activities of the Company include third-party claim management services. Business Segments The Companys business consists of two significant segments, the rental of cars and light
trucks (car rental), and the rental of industrial, construction and material handling equipment
(industrial and construction equipment rental). Set forth below is certain information with
respect to these segments, as well as corporate and other, for the year ended December 31, 2004.
Corporate and other includes general corporate expenses, as well as other business activities, such
as claim management services. See Note 11 to the Notes to the Companys consolidated financial
statements included in this Report. Year Ended December 31, 2004Industrial andConstruction
    
    
    CorporateCar Rental
    
    
    Equipment Rental
    
    
    and Other
    
    
    TotalDollars in millionsRevenues
    
    $
    5,508
    
    
    $
    1,162
    
    
    $
    6
    
    
    $
    6,676Operating income (loss): pre-tax income (loss) before
interest expense and minority interest
    
    
    742
    
    
    
    160
    
    
    
    (15
    )
    
    
    887Income (loss) before income taxes and minority interest
    
    
    438
    
    
    
    88
    
    
    
    (23
    )
    
    
    503Revenue earning equipment, net, at end of year
    
    
    7,597
    
    
    
    1,526
    
    
    
    
    
    
    
    9,123
 Set forth below is certain information with respect to the Companys U.S. and foreign
operations for the year ended December 31, 2004 (substantially all of the Companys foreign
operations consist of car rental and industrial and construction equipment rental operations). Year Ended December 31, 2004U.S.
    
    
    Foreign
    
    
    TotalDollars in millionsRevenues
    
    $
    4,678
    
    
    $
    1,998
    
    
    $
    6,676Operating income: pre-tax income before
interest expense and minority interest
    
    
    661
    
    
    
    226
    
    
    
    887Income before income taxes and minority interest
    
    
    323
    
    
    
    180
    
    
    
    503Revenue earning equipment, net, at end of year
    
    
    6,705
    
    
    
    2,418
    
    
    
    9,123
 Worldwide Car Rental U.S. Operations Car Rental.The Company provides car rental services through facilities operated at all major
airports and in central business districts and key suburban centers throughout the United States. The Company uses a wide variety of makes and models of cars for daily rental purposes, nearly all
of which are the current or previous years models. The Company rents cars on a daily, weekend,
weekly or monthly basis, with rental charges computed on a limited or unlimited mileage rate, or on
a time rate plus a mileage charge. The Companys rates vary at different locations depending on
local market conditions and other competitive and cost factors. While cars are often returned to
the locations from which they are rented, the Company also allows one-way rentals of its cars under
its Rent It Here  Leave It There 3




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program. In addition to car rentals and licensee fees, the Company generates 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, liability insurance and personal
accident/effects coverage, Hertz NeverLost navigation system and satellite radios. The Company conducts operations in the United States through company-operated and licensee-operated
locations. Company-operated locations are those locations through which the Company, or an agent of
the Company, rents cars that the Company owns, as compared to licensee locations through which
licensees rent cars that they own. The Company believes that its extensive worldwide ownership of
its operations contributes to the consistency of its high-quality service, cost control, fleet
utilization, yield management, competitive pricing and the Companys ability to offer one-way
rentals through its Rent It Here  Leave It There program. However, in certain predominantly
smaller domestic markets, the Company has found it more efficient to utilize licensees. At
December 31, 2004, the Company owned 95% of all the cars in the combined company-owned and licensee
fleet. At the Companys major airport rental locations, as well as at selected off-airport locations,
customers participating in the Companys Hertz #1 Club Gold program are able to rent vehicles in an
expedited manner, often bypassing the rental counter entirely and proceeding directly to their
vehicles upon arrival at the Companys facility. The Company believes the Hertz #1 Club Gold
program provides it a significant competitive advantage, particularly among frequent travelers, and
it has, through travel industry relationships, targeted such travelers for participation in the
program. The Company maintains automobile maintenance centers at certain airports and in certain urban and
suburban areas, providing maintenance facilities for the Companys rental fleet. Many of these
facilities, which include sophisticated car diagnostic and repair equipment, are accepted by
automobile manufacturers as eligible to perform and receive reimbursement for warranty work.
Collision damage and major repairs are generally performed by independent contractors. Airport Operations.The Company has 335 concession agreements at airports in the United States.
These agreements are entered into with airport authorities, through either negotiation or bidding
for the right to conduct a car rental business at the airport. The agreements typically provide for
concession payments based upon a specified percentage of revenue generated at the airport, subject
to a minimum annual fee and sometimes include fixed rent for terminal counters or other leased
properties and facilities. Concession agreements typically do not forbid, and in a few instances
actually require, the Company to seek reimbursement from customers of concession fees paid;
however, in certain states such reimbursement is limited or prohibited by law. The number of car
rental concessions available at airports varies considerably, but it is rarely less than four. Suburban Operations.The Companys expanding number of suburban locations offer rental services to
a variety of types of customers, including those who have been referred by, and whose rental costs
are being wholly or partially reimbursed by, insurance companies following accidents in which their
vehicles were damaged (often called insurance replacement rentals), those needing vehicles while
theirs are being repaired by automobile dealers or body shops and those wishing to rent for local
commercial or leisure purposes. At many of its suburban locations, the Company will provide
pick-up and delivery services in connection with rentals. International Operations At December 31, 2004, the Company and its affiliates, associates and licensees, operated in over
150 foreign countries and jurisdictions. In general, international operations are conducted
similarly to those of the Company in the United States. Although the Company has found it more
efficient to conduct a greater proportion of its international operations through licensees as
compared to the Companys U.S. operations, it continues to conduct its operations primarily through
company-operated locations in the major Western European markets, as well as in Australia, Brazil,
Canada and New Zealand. The international car rental operations that generated the highest volumes
of business from company-operated 4




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locations in 2004 were, in descending order of revenues, those conducted in France, Germany, Italy,
the United Kingdom, Australia, Canada, Spain, the Netherlands and Switzerland. The Companys global reservations systems and websites allow customers worldwide to book
reservations in any of the Companys worldwide markets. Additionally, a local or toll-free
telephone number is offered in all major foreign countries which provides access to the Companys
global car rental reservations system. Reservations The Company accepts reservations for Hertz car rental services worldwide through computerized
reservations systems, also known as global distribution systems, utilized by travel agents and, in
major countries, including the United States and all other countries with company-operated
locations, through local, national, or toll-free telephone calls to Hertz reservations centers. In
addition, reservations are accepted through the Companys interactive website and websites operated
by third parties. The Companys car rental websites, which also allow customers to enroll in its
loyalty programs, obtain copies of bills for past transactions and obtain information about the
Companys rental offerings, have grown significantly in importance as a reservations channel in
recent years. Car Acquisition and Disposition The Company believes it is one of the largest private sector purchasers of new cars in the world.
The Company acquires, subject to availability, a majority of its cars pursuant to various fleet
repurchase programs established by automobile manufacturers. Under these programs, automobile
manufacturers agree to repurchase cars at a specified price during established repurchase periods,
subject to certain car condition and mileage requirements. Repurchase prices under the repurchase
programs are based on either (i) a predetermined percentage of original car cost and the month in
which the car is returned or (ii) the original capitalized cost less a set daily depreciation
amount. These repurchase programs limit the Companys residual risk with respect to cars purchased
under the programs. For these reasons, cars purchased by car rental companies under repurchase
programs are sometimes referred to by industry participants as non-risk or program cars.
Conversely, those cars not purchased under repurchase programs for which the car rental company is
exposed to residual risk are sometimes referred to as risk cars. During 2004, non-risk cars as a
percentage of all cars purchased by the Companys U.S. operations and international operations were
approximately 85% and 74%, respectively. Over the five years ended December 31, 2004, on a weighted-average basis, approximately 55% of the
cars acquired by the Company for its U.S. car rental fleet, and approximately 29% of the cars
acquired by the Company for its international fleet, were manufactured by Ford and its
subsidiaries. During 2004, approximately 41% of the cars acquired by the Company domestically were
manufactured by Ford and its subsidiaries and approximately 32% of the cars acquired by the Company
for its international fleet were manufactured by Ford and its subsidiaries, which represented the
largest percentage of any automobile manufacturer in that year. See Note 15 to the Notes to the
Companys consolidated financial statements included in this Report. Purchases of cars are financed through funds provided from operations and by active and ongoing
global borrowing programs. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources. The Company disposes of risk cars, as well as program cars that have for any reason become
ineligible for manufacturer repurchase, through a variety of disposition channels, including
auctions, brokered sales, sales to wholesalers and, to a lesser extent (primarily in the United
States), sales at retail through a network of company-operated car sales locations dedicated
exclusively to the sale of used cars from the Companys rental fleet. 5




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Licensees While the Company believes that its extensive worldwide ownership of its operations provides an
important competitive advantage, the Company has found it more efficient to operate through
licensees in certain markets. The Companys licensees operate in over 150 countries and
jurisdictions worldwide. The Company believes that its licensee arrangements are important to the
Companys business because they enable the Company to offer expanded national and international
service and a broader one-way rental program. Licenses are issued principally by the Companys
wholly owned subsidiaries, Hertz System, Inc. (System) and Hertz International, Ltd. (Hertz
International), 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 and
jurisdictions. Licensees generally pay fees based on the number of cars they operate and/or on their revenues. The
operations of all licensees, including the purchase and ownership of vehicles, are financed
independently by the licensees, with the Company having no investment interest in them or their
fleet. Licensees also share in the cost of the Companys advertising program, reservations system,
sales force and certain other services. In return, licensees are provided the use of the Hertz
brand name, management and administrative assistance and training, reservations through the
Companys reservations channels, the Hertz #1 Club and #1 Club Gold expedited rental programs, the
Rent It Here  Leave It There one-way rental program and other services. System licenses ordinarily are limited as to transferability without the Companys consent and are
terminable by the Company only for cause or after a fixed term. Licensees may generally terminate
for any reason on 90 days notice. 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. New licenses continue to be
issued and, from time to time, licensee businesses are purchased by the Company. Car Leasing Effective January 1, 2000, Hertz International entered into license and management services
agreements with Axus International, Inc. (Axus), a wholly owned vehicle leasing subsidiary of
Ford Motor Credit Company (Ford Credit), a subsidiary of Ford, under which Hertz International
licensed the Hertz name and agreed to provide management services to Axus for a five-year term. On
August 31, 2000, the Company transferred substantially all the net assets of its leasing operations
in Australia, New Zealand and the United Kingdom to Axus for $99.2 million. In the fourth quarter
of 2002, Ford Credit sold the Axus operations in Australia and New Zealand and in the first quarter
of 2003, Axus operations in Europe were sold. Hertz International continued to license the Hertz
name and provide management services until these operations were sold. During 2003 and 2002, fees
earned by the Company from these agreements were approximately $1.8 million and $11.5 million,
respectively. The Company continues to maintain leasing operations in Brazil. Industrial and Construction Equipment Rental HERCs principal business is the rental of industrial and construction equipment. HERC rents a
broad range of equipment; major categories include earthmoving equipment, material handling
equipment, aerial and electrical equipment, air compressors, pumps,
small tools, compaction equipment and
construction-related trucks. HERC expanded its operations, mainly as a result of acquisitions,
from 1998 through 2000. HERCs comprehensive line of equipment enables it to supply equipment to a wide range of customers
from local contractors to large industrial plants. Also, larger companies, particularly those with
industrial plant operations, are requiring single source vendors, not only for equipment rental,
but also for management of their total equipment needs. This includes maintenance of their owned
equipment, tools and supplies for their labor force, and custom management reports. HERC supports
this through its dedicated in-plant operations, tool trailers, and plant management systems. HERCs customers consist predominantly of commercial accounts and represent a wide variety of
industries, such as railroad, automobile manufacturing, petrochemicals, movie production,
shipbuilding and construction. Serving a number of different industries enables HERC to reduce its
dependence on a 6




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single or limited number of customers in the same business. HERC primarily targets customers in
medium to large metropolitan markets. HERCs rental locations generally are situated in industrial or commercial zones. A growing number
of locations have highway or major thoroughfare visibility. The average location is two acres in
size, though smaller in Europe, and includes a customer service center, an equipment service 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 acquires its industrial and construction equipment from a variety of manufacturers. The
equipment is typically new at the time of acquisition and is acquired on a risk basis. HERC
disposes of its used equipment through a variety of channels, including auctions, brokered sales,
sales to wholesalers and negotiated sales to customers and other third parties. 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 masks at many of its rental locations. Other Operations of the Company Claim Management The Companys wholly owned subsidiary, Hertz Claim Management Corporation (HCM), provides claim
administration services to the Company and to outside customers. These services include
investigating, evaluating, negotiating and disposing of a wide variety of claims, including third
party, first party, bodily injury, property damage, general liability and product liability, but
not the underwriting of risks. HCM conducts business at nine regional offices in the United
States. Separate subsidiaries of the Company conduct similar operations in seven countries
throughout Europe. Risk Management
Third-Party Liability
In its domestic operations, the Company is 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 its vehicles (sometimes called vehicle liability)
in stipulated amounts. In most places, the Company satisfies 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, the Company obtains an insurance policy from an unaffiliated insurance carrier and
indemnifies the carrier for any amounts paid under the policy. As a result of such arrangements,
the Company bears economic responsibility for domestic vehicle liability, except to the extent it
successfully transfers such liability to others through insurance or contractual arrangements. For its car rental operations in Europe, the Company has established two wholly owned insurance
subsidiaries, Probus Insurance Company Europe Limited (Probus), a direct writer of insurance
domiciled in Ireland, and Hertz International RE Limited (HIRE), a reinsurer currently organized
in Ireland. In most European countries with company-operated locations, the Company purchases from
Probus the vehicle liability insurance required by law, and Probus reinsures the risks under such
insurance with HIRE. In the remaining countries in Europe with company-operated locations, the
Company obtains the coverage from unaffiliated insurance carriers, which reinsure their risks with
HIRE. Thus, as with its domestic operations, the Company bears economic responsibility for vehicle
liability in its European car rental operations, except to the extent that it transfers such
liability to others through insurance or contractual arrangements. For its international
operations outside Europe and for HERCs operations in Europe, the Company maintains some form of
vehicle liability insurance coverage. The nature of such coverage, and the Companys economic
responsibility for covered losses, varies considerably. Both domestically and in its international operations, the Company from time to time in the course
of its business becomes legally responsible to members of the public for bodily injury (including
death) or property damage arising from causes other than the operation of its vehicles (sometimes
known as general liability). As with vehicle liability, the Company bears economic
responsibility for general liability 7




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losses, except to the extent it transfers such losses to others through insurance or contractual
arrangements. To mitigate its exposure to large vehicle and general liability losses domestically and in its car
rental operations in Europe, the Company maintains excess insurance coverage with unaffiliated
insurance carriers against such losses to the extent they exceed $10 million per occurrence (for
occurrences domestically before December 15, 2002, and 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 $695 million in any policy year (for occurrences between January
1, 2001, and December 15, 2002, $725 million in any policy year; for occurrences before January 1,
2001, $450 million in any policy year). For its international operations outside Europe and for
HERCs operations in Europe, the Company also maintains liability insurance coverage with
unaffiliated carriers in such amounts as it deems adequate in light of the respective potential
hazards, where such insurance is obtainable on commercially reasonable terms. The Companys domestic rental contracts, both for car rental and for industrial
and construction equipment rental, typically provide that the renter will indemnify the Company 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 the Company, particularly in
cases of large losses, may be limited. The rental contracts used in the Companys international
operations sometimes contain provisions relating to insurance or indemnity, but they are typically
more limited than those employed in the Companys domestic operations. In its domestic car rental operations, the Company offers an optional liability insurance product,
Liability Insurance Supplement (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 the
Company. As a consequence of those reinsurance arrangements, rental customers purchases of LIS do
not reduce the Companys economic exposure to vehicle liability. Instead, the Companys 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 the Company. In both its domestic car rental operations and its company-operated international car rental
operations in many countries, the Company offers an optional product or products providing
insurance coverage (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 the Company or are the subject of indemnification arrangements between the Company and the
carriers. Rental customers purchases of PAI/PEC coverage create additional risk exposures for the
Company, since it would not typically be liable for the risks insured by PAI/PEC coverage if that
coverage had not been purchased. The Companys offering of LIS and PAI/PEC coverage in its domestic car rental operations is
conducted pursuant to limited licenses or exemptions under state laws governing the licensing of
insurance producers. In its international car rental operations, the Companys offering of PAI/PEC
coverage historically has not been regulated; however, in the countries of the European Union and
Australia, the regulatory environment for insurance intermediaries is rapidly evolving, and there
can be no assurance either that the Company 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 the Companys continued offering of the coverage. 8




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Provisions on the Companys books of account for self-insured vehicle and other liability losses
are made by charges to expense based upon evaluations of estimated ultimate liabilities on reported
and unreported claims. At December 31, 2004, this liability was estimated at $391.7 million for
the Companys combined domestic and international operations. Damage to Company Property The Company bears the risk of damage to its own property, unless such risk is transferred through
insurance or contractual arrangements. To mitigate its risk of large, single-site property damage losses domestically and in Europe, the
Company maintains property insurance with unaffiliated insurance carriers, generally with a
per-occurrence deductible of $3.0 million domestically and $2.5 million in Europe. For its
international operations outside Europe, the Company also maintains property insurance coverage
with unaffiliated carriers in such amounts as it deems adequate in light of the respective hazards,
where such insurance is available on commercially reasonable terms. The Companys rental contracts typically provide that the renter is, subject to certain exceptions,
responsible for damage to or loss (including loss through theft) of
rented vehicles or industrial and construction equipment. The Company generally offers an optional rental product, known in various
countries as loss damage waiver, collision damage waiver, theft protection or accident excess
reduction, under which the Company waives or limits its 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 domestic jurisdictions where the Company operates. Collision damage costs and the costs of stolen or unaccounted-for vehicles and equipment, along
with other damage to the Companys property, are charged to expense as incurred. Other Risks To manage other risks associated with its businesses, or to comply with applicable law, the Company
purchases other types of insurance carried by business organizations, such as workers compensation
and employers liability (for which the Company, through contracts with its insurers domestically,
bears 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 the Company to be adequate in light of the respective hazards, where
such coverage is obtainable on commercially reasonable terms. In certain cases, such insurance is
obtained under policies procured by Ford. Competition The markets in which the Company operates are highly competitive. In any given location, the
Company may encounter competition from national, regional and local companies. In the United
States, the Companys principal competitors in the airport car rental market are Cendant
Corporation, which operates the Avis and Budget brands, Vanguard Car Rental USA Group, which
operates the National Car Rental and Alamo brands and Dollar Thrifty Automotive Group, Inc.,
which operates the Dollar and Thrifty brands. Enterprise Rent-A-Car Company (Enterprise),
which also competes in the airport car rental market, is the Companys principal competitor in the
suburban local use and insurance replacement markets in the United States. In Europe, the
Companys principal competitors in the car rental market are Avis Europe plc, Europcar, Sixt,
National Car Rental and Enterprise. The Company competes primarily on the basis of customer service
and price. In addition, the Company believes extensive worldwide ownership of its operations and
its access to the global capital markets provide it with an advantage over its competitors. HERCs competitors in the equipment rental industry range from other large national companies, such
as United Rentals, Inc. and the Rental Service Division of Atlas Copco Group, to many small
regional businesses. HERCs competitive success is primarily due to its 40 years of experience in
the equipment 9




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rental industry, its systems and procedures for monitoring, controlling and developing its branch
network, its capacity to maintain a comprehensive rental fleet and its established national
accounts program. The Company believes that price is one of the primary competitive factors in the car and industrial
and construction equipment rental markets. Competitors of the Company, some of which have access to
substantial capital, may seek to compete aggressively on the basis of pricing. To the extent that
the Company matches downward competitor pricing, it could have an adverse impact on the Companys
results of operations. To the extent that the Company is not willing to match competitor pricing,
it could also have an adverse impact on the Companys results of operations as the Company may lose
market share. Employees On December 31, 2004, the Company employed approximately 31,400 persons in its domestic and
foreign operations. Labor contracts covering the terms of employment of approximately 7,600
employees in the United States are presently in effect under 145 active contracts with local
unions, affiliated primarily with the International Brotherhood of Teamsters and the International
Association of Machinists (AFL-CIO). Labor contracts covering approximately 2,500 of these
employees will expire during 2005. Employee benefits in effect include group life insurance,
hospitalization and surgical insurance, pension plans and a defined contribution plan. Overseas
employees are covered by a wide variety of union contracts and governmental regulations affecting,
among other things, compensation, job retention rights and pensions. The Company has had no
material work stoppage as a result of labor problems during the last 10 years. The Company believes
its labor relations to be good. In addition to the employees referred to above, the Company employs a substantial number of
temporary workers, and engages outside services, as is customary in the industry, principally for
the non-revenue movement of the rental fleet between locations. Governmental Regulation and Environmental Matters Throughout the world, the Company is subject to numerous types of governmental controls,
including those relating to price regulation and advertising, privacy and data protection, currency
controls, labor matters, charge card operations, insurance, environmental protection, used car
sales and franchising. The Companys operations, as well as those of its competitors, could be affected by any limitation
in the fuel supply or by any imposition of mandatory allocation or rationing regulations. In the
event of a severe disruption of fuel supplies, the operations of all car and industrial and
construction equipment rental companies could be adversely affected. Historically, there has been
no material disruption of operations resulting from lack of fuel availability. The environmental legal and regulatory requirements applicable to the Companys operations 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 used oil; and (iii) the generation, storage, transportation and
disposal of waste materials, including used oil, vehicle wash sludge and waste water. The Company
has 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 the Company. 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. The Company operates approximately 400 underground tanks and 1,500 aboveground tanks in the U.S. to
store petroleum products, and the Company believes its tanks are maintained in material compliance
with environmental regulations, including federal and state financial responsibility requirements
for corrective action and third-party claims due to releases. The Companys compliance program for
its tanks is intended to ensure that (i) the tanks are properly registered with the state in which
the tanks are located 10




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and (ii) the tanks have been either upgraded or replaced to meet federal and state leak detection
and spill, overfill and corrosion protection requirements. The Company is also incurring and providing for expenses for the cleanup of contamination from the
discharge of petroleum substances at its owned and leased properties, as well as contamination at
other locations at which the Companys wastes have reportedly been identified. With respect to
cleanup expenditures for the discharge of petroleum substances at the Companys owned or leased
properties, the Company has received reimbursement, in whole or in part, from certain states that
maintain underground storage tank petroleum cleanup 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 locations at which the Companys wastes have reportedly
been identified, the Company has been and continues to be required to contribute to cleanup costs
due to strict joint and several cleanup liability 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 the Company may be subject to legal proceedings brought by government agencies or
private parties with respect to environmental matters. In addition, with respect to cleanup of
contamination, additional locations at which wastes generated by the Company may have been released
or disposed, and of which the Company is currently unaware, may in the future become the subject of
cleanup for which the Company may be liable, in whole or part. Further, at airport-leased
properties, the Company may be subject to environmental requirements imposed by airports that are
more restrictive than those obligations imposed by environmental regulatory agencies. Accordingly,
while the Company believes that it is in substantial compliance with applicable requirements of
environmental laws, there can be no assurance that the Companys future environmental liabilities
will not be material to the Companys consolidated financial position, results of operations or
cash flows. 
 ITEM 2. Properties. The Company operates 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.
The Company operates industrial and construction equipment rental locations in North America (the
United States and Canada) and Europe (France and Spain). The Company also operates headquarters,
sales offices and service facilities in the foregoing countries in support of its car rental and
industrial and construction equipment rental businesses, 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 the Company. 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 the Company 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 10 to the Notes to the Companys consolidated
financial statements included in this Report. The Company owns four major facilities in the vicinity of Oklahoma City, Oklahoma at which
reservations for its car rental operations are processed, global strategic information systems for
its car rental and industrial and construction equipment rental businesses are serviced and major
domestic and international accounting functions are performed. The Company also has an owned
reservation and 11




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financial center near Dublin, Ireland, at which it has centralized its European car rental
reservation operations and accounting functions, and leases a reservation center in Saraland
(Mobile County), Alabama to supplement the capacity of its Oklahoma City car rental reservation
center. The Company maintains its executive offices in an owned facility in Park Ridge, New
Jersey, and leases a European headquarters office near London, England. 
 ITEM 3. Legal Proceedings. The Company is not required to disclose any pending legal proceedings in response to Item 103
of Regulation S-K. The following information is furnished on a supplemental basis. Litigation  Pending On March 1, 2002, Bowdoin Square, L.L.C. v. Winn-Dixie Montgomery, Inc., Wal-Mart Stores East,
Inc., The Hertz Corporation, et al.was commenced in the Circuit Court for Madison County, Alabama.
The complaint alleges that the Company, Wal-Mart Stores East, Inc. and other defendants violated
certain private land use restrictions and intentionally interfered with plaintiffs contractual
relationship with its tenant, Winn-Dixie Montgomery, Inc., when the Company subleased a former
Wal-Mart store located in a shopping center in Saraland (Mobile County), Alabama. The complaint
also alleges that the Company and other defendants negligently and wantonly injured the value of
plaintiffs interest in the shopping center. A motion to transfer the case to the Circuit Court for
Mobile County was granted in September 2002, and the Company filed its answer to the complaint.
The plaintiffs claims against Winn-Dixie Montgomery, Inc. have been severed and will be tried
separately from the claims against Wal-Mart and the Company. A trial of the claims against
Wal-Mart and the Company is scheduled to begin in April 2005. On August 1, 2002, Jennifer Myers, an individual and on behalf of all others similarly situated, v.
The Hertz Corporationwas filed in the United States District Court for the Eastern District of New
York. The complaint alleges a nationwide opt-in collective action on behalf of all Senior
Station Managers, Station Managers and B Station Managers employed by the Company throughout the
United States, contesting their exempt classification and seeking payment of overtime compensation
under the federal Fair Labor Standards Act (FLSA). The complaint also contains a subclass for
all such managers employed in New York for alleged violations of state labor laws. Plaintiffs
have not yet been permitted to obtain a nationwide opt-in, as discovery has been thus far limited
to the location where the plaintiffs are employed in an effort by the court to determine the
viability of a nationwide action. To that end, depositions were completed, and in July 2004 the
Company fully briefed and filed a motion for summary judgment, which was denied in March 2005. On June 16, 2003, Wide World Tours of Mission Valley, Inc., Travel Support Systems, Inc., Vacation
Marketing Group of Hawaii., Cecilia Pedroza, and International Travel Bureau, Inc. v. Avis Rent A
Car System, Inc., Budget Rent A Car System, Inc., Dollar Rent A Car, Inc., Enterprise Rent-A-Car
Company, The Hertz Corporation, and Thrifty Rent-A-Car System, Inc.was commenced in Superior Court
of the State of California, for the County of San Diego. Wide World Tourspurports to be a class
action on behalf of certain United States travel agents and agencies that regularly book customers
with the major rental car companies. The complaint alleges that the defendant rental car companies
breached their unwritten contracts with the plaintiffs by knowingly and deliberately
under-reporting and underpaying the commissions due to the plaintiffs, that in so doing the
defendants engaged in deceit and that the defendants engaged in unfair competition by deducting
processing fees or other administrative fees from payments they make to travel agents. After the
defendants filed misjoinder motions, an amended complaint was filed against the Company with a
separate new lawsuit commenced against Avis. After a hearing in April 2004, the judge certified a
class of California only travel agencies. In November 2004, the Company and the representative
plaintiffs, following mediation, agreed to a nationwide settlement. Under the terms of the
settlement, the plaintiffs will file an amended complaint on behalf of a nationwide class of travel
agents and the Company, without admitting liability and in return for a general release, will
provide members of the settlement class with car rental certificates the majority of which, when
utilized by customers of the class members, will result in the payment of a bonus commission to the
sponsoring 12




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##### Table of Contents



members. In addition, the Company has agreed to pay the fees of the plaintiffs attorneys. In
March 2005, the court granted preliminary approval to the settlement. On August 28, 2003, Naomi R. Henderson, individually and on behalf of all others similarly
situated, v. The Hertz Corporationwas commenced in the Superior Court of New Jersey, Essex County.
Hendersonpurports to be a class action on behalf of all persons who purchased optional insurance
products in the State of New Jersey or in other states from or through the Company at times that
the Company did not have required licenses to sell such insurance. In January 2004, the Companys
motion to dismiss was granted and an order of dismissal was thereafter entered. The plaintiff has
appealed the dismissal, and that appeal has now been briefed, argued and submitted to the New
Jersey Appellate Division for a decision. On December 22, 2003, Stephen Moore, on behalf of himself and all others similarly situated, v. The
Hertz Corporationwas commenced in the Circuit Court of the Thirteenth Judicial Circuit of the
State of Florida, in and for Hillsborough County. Moorepurports to be a class action on behalf of
persons who rented vehicles from the Company in Florida and were allegedly overcharged for the
recovery of a tire and battery solid waste management fee and the recovery of registration fees for
the issuance of Florida license plates. Similar lawsuits were separately commenced by the same
plaintiff against Avis Rent A Car System Inc. and Budget Rent A Car System, Inc. In February 2004,
the plaintiff filed an amended class action complaint which alleges that, in addition to the
initial causes of action, the Company deceptively collected an improper federal excise tax on
frequent flyer mileage awards to class members. The Company answered the amended complaint and
discovery commenced. In January 2005, the Company filed a motion for summary judgment and the
plaintiff filed a revised motion for class certification. Rulings on these motions are expected in
the second quarter of 2005. On March 15, 2004, Jose M. Gomez, individually and on behalf of all other similarly situated
persons, v. The Hertz Corporationwas commenced in the 214th Judicial District Court of
Nueces County, Texas. Gomezpurports to be a class action filed alternatively on behalf of all
persons who were charged a Fuel and Service Charge (FSC) by the Company or all Texas residents
who were charged a FSC by the Company. The complaint alleges that the FSC is an unlawful penalty
and that, therefore, it is void and unenforceable. In response to various motions by the Company,
the plaintiff has filed two amended complaints which scaled back the putative class from a
nationwide class to a class of all Texas residents who were charged a FSC by the Company or by its
Corpus Christi Licensee. A new cause of action was also added for conversion. After some limited
discovery, the Company filed a motion for summary judgment in December 2004. That motion was
denied in January 2005. More extensive discovery will now commence. On November 18, 2004, Keith Kochner, individually and on behalf of all similarly situated persons,
v. The Hertz Corporationwas commenced in the District Court in and for Tulsa County, State of
Oklahoma. As with the Gomezcase, Kochnerpurports to be a class action, this time on behalf of
Oklahoma residents who rented from the Company and incurred the Companys FSC. The petition
alleges 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.
In March 2005, the trial court granted the Companys motion to dismiss the action but also granted
the plaintiff the right to replead. In addition, the Company is currently a defendant in numerous actions and has received numerous
claims on which actions have not yet been commenced for bodily injury, including death, and
property damage (PL/PD) arising from the operation of motor vehicles and equipment rented from
the Company and its licensees. In aggregate, the Company can be expected to expend material sums
to defend and settle PL/PD actions and claims or to pay judgments resulting from them. Among the PL/PD pending actions against the Company are a total of 142 actions filed in Mississippi
on behalf of 4,176 plaintiffs seeking damages for silicosis, which the plaintiffs allegedly
sustained from the use of equipment rented from HERC. The complaints name HERC as one of
approximately 88 co-defendants. PL/PD claims and actions are provided for within the Companys
PL/PD program. 13




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The Company believes it has meritorious defenses in the foregoing matters and will defend itself
vigorously. In addition to the foregoing, various legal actions, claims and governmental inquiries and
proceedings are pending or may be instituted or asserted in the future against the Company and its
subsidiaries. Litigation is subject to many uncertainties, and the outcome of the individual
litigated matters is not predictable with assurance. It is possible that certain of the actions,
claims, inquiries or proceedings, including those discussed above, could be decided unfavorably to
the Company or the subsidiary involved. Although the amount of liability with respect to these
matters cannot be ascertained, potential liability in excess of related accruals is not expected to
materially affect the consolidated financial position, results of operations or cash flows of the
Company. Litigation  Recently ResolvedJames Han, individually and on behalf of all others similarly situated v. The Hertz Corporation.
(Previously discussed on pages 9 and 10 of the Companys Annual Report on Form 10-K for the year
ended December 31, 2003.) The Appellate Division of the New York Supreme Court, First Department,
affirmed the trial courts dismissal of Han. The time period for further appeal has now expired. 
 ITEM 4. Submission Of Matters To A Vote Of Security Holders. Omitted. 14




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##### Table of Contents



PART II 
  ITEM 5.
    Market For Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities. All shares of the Companys Common Stock at December 31, 2004 were owned by Ford Holdings LLC
and, as such, there is no market for the Companys Common Stock. Based on the terms of an indenture dated April 1, 1986, under which the Company has outstanding
debt securities, the Companys ability to pay dividends is restricted. Such restriction provides
that the Company may not pay dividends, invest in its own shares or permit investments by certain
subsidiaries of the Company (Restricted Subsidiaries) in the Companys shares subsequent to a
specified date if, together with total investments by the Company and its Restricted Subsidiaries
in subsidiaries that are not Restricted Subsidiaries made subsequent to such specified date, the
aggregate of any such dividends or investments exceeds the sum of (i) a specified dollar amount,
(ii) the aggregate net income of the Company and its Restricted Subsidiaries earned subsequent to
such specified date and (iii) net proceeds received from capital stock issued subsequent to such
specified date. At December 31, 2004, approximately $1,172 million of consolidated stockholders
equity was free of such limitations. The foregoing amount was not affected by the Restatement
described in Note 1A to the Notes to the Companys consolidated financial statements included in
this Report. The Company did not pay any dividends in 2004, 2003 and 2002. The Company expects to begin paying
semi-annual dividends to Ford, commencing in June 2005, in aggregate amounts that would cause the
Company to maintain an estimated prospective 3.5-to-1 full-year average debt-to-equity ratio, after
dividend payments, computed on a monthly average basis (with no dividends to be paid if such ratio
would exceed 3.5-to-1). 15




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##### Table of Contents



ITEM 6. Selected Financial Data. The selected consolidated statement of operations data for each of the years in the three-year
period ended December 31, 2004, and consolidated balance sheet data as of December 31, 2004 and
2003 presented below (other than the ratio of earnings to fixed charges) were derived from the
audited consolidated financial statements of the Company and the related notes thereto included in
this Report. The selected consolidated statement of operations data presented below for the years
ended December 31, 2003, 2002, 2001 and 2000 has been restated. For a discussion of the
Restatement, see Note 1A to the Notes to the Companys consolidated financial statements included
in this Report. The financial data presented below and the related notes thereto should be read in
conjunction with the consolidated financial statements of the Company and the related notes thereto
included in this Report. Years ended, or at December 31,2004
    
    
    2003 (a)
    
    
    2002 (a)
    
    
    2001 (a)
    
    
    2000 (a)Restated
    
    
    Restated
    
    
    Restated
    
    
    RestatedDollars in millionsStatement of OperationsRevenuesCar rental
    
    $
    5,430.8
    
    
    $
    4,819.3
    
    
    $
    4,537.6
    
    
    $
    4,366.6
    
    
    $
    4,553.9Industrial and construction equipment rental
    
    
    1,162.0
    
    
    
    1,037.8
    
    
    
    1,018.7
    
    
    
    1,128.7
    
    
    
    1,106.3Other (b)
    
    
    83.2
    
    
    
    76.6
    
    
    
    82.1
    
    
    
    101.6
    
    
    
    137.5Total revenues
    
    
    6,676.0
    
    
    
    5,933.7
    
    
    
    5,638.4
    
    
    
    5,596.9
    
    
    
    5,797.7ExpensesDirect operating
    
    
    3,734.4
    
    
    
    3,316.1
    
    
    
    3,093.0
    
    
    
    3,248.0
    
    
    
    3,019.2Depreciation of revenue earning equipment (c)
    
    
    1,463.3
    
    
    
    1,523.4
    
    
    
    1,499.5
    
    
    
    1,462.3
    
    
    
    1,323.5Selling, general and administrative
    
    
    591.3
    
    
    
    501.7
    
    
    
    463.1
    
    
    
    479.2
    
    
    
    459.3Interest,
net of interest income of $23.7, $17.9, $10.3,
$9.0 and $13.5
    
    
    384.4
    
    
    
    355.0
    
    
    
    366.4
    
    
    
    404.7
    
    
    
    414.8Total expenses
    
    
    6,173.4
    
    
    
    5,696.2
    
    
    
    5,422.0
    
    
    
    5,594.2
    
    
    
    5,216.8Income before income taxes and minority interest
    
    
    502.6
    
    
    
    237.5
    
    
    
    216.4
    
    
    
    2.7
    
    
    
    580.9(Provision) benefit for taxes on income (d)
    
    
    (133.9
    )
    
    
    (78.9
    )
    
    
    (72.4
    )
    
    
    20.6
    
    
    
    (222.5
    )Minority interest
    
    
    (3.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before cumulative effect of change in accounting
principle
    
    
    365.5
    
    
    
    158.6
    
    
    
    144.0
    
    
    
    23.3
    
    
    
    358.4Cumulative effect of change in accounting principle (e)
    
    
    
    
    
    
    
    
    
    
    (294.0
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    365.5
    
    
    $
    158.6
    
    
    $
    (150.0
    )
    
    $
    23.3
    
    
    $
    358.4Ratio of earnings to fixed charges (f)
    
    
    1.9
    
    
    
    1.5
    
    
    
    1.4
    
    
    
    1.0
    
    
    
    2.1Balance Sheet DataRevenue earning equipment, netCars
    
    $
    7,597.2
    
    
    $
    6,462.0
    
    
    $
    5,998.3
    
    
    $
    5,220.4
    
    
    $
    5,186.2Other equipment
    
    
    1,525.7
    
    
    
    1,331.3
    
    
    
    1,427.6
    
    
    
    1,631.3
    
    
    
    1,736.3Total assets
    
    
    14,096.4
    
    
    
    12,579.0
    
    
    
    11,128.9
    
    
    
    10,158.4
    
    
    
    10,620.0Total debt
    
    
    8,428.0
    
    
    
    7,627.9
    
    
    
    7,043.2
    
    
    
    6,314.0
    
    
    
    6,676.0Stockholders equity
    
    
    2,670.2
    
    
    
    2,225.4
    
    
    
    1,921.9
    
    
    
    1,984.4
    
    
    
    1,984.1
   (a)
    
    The selected consolidated statement of operations data for 2003, 2002, 2001 and 2000 has
been restated to reflect the effect of the Companys Restatement as discussed in Note 1A to
the Notes to the Companys consolidated financial statements included in this Report. As a
result of the Restatement, total revenues and total expenses for 2003, 2002, 2001 and 2000 in
the previously issued consolidated statements of operations were increased by $725.8 million,
$670.3 million, $681.1 million and $724.2 million, respectively.(b)
    
    Includes fees and expense reimbursements from licensees and revenues from car leasing
operations, telecommunications services through 2001 and claim management services. Certain
foreign car leasing operations were transferred to an affiliated company on August 31, 2000.(c)
    
    For 2004, 2003, 2002, 2001 and 2000, depreciation of revenue earning equipment includes a net
gain of $57.2 million, a net loss of $0.8 million, a net gain of $10.8 million, a net loss of
$1.6 million, and a net gain of $54.5 million, respectively, from the disposal of revenue
earning equipment.(d)
    
    Includes benefits of $46.6 million in 2004 relating to net adjustments to Federal and foreign
tax accruals and includes benefits of $30.2 million in 2001 from certain foreign tax credits.(e)
    
    Cumulative effect of change in accounting principle represents a non-cash charge in 2002,
related to impairment of goodwill in the Companys industrial and construction equipment
rental business, recognized in accordance with the adoption of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. 16




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(f)
    
    Earnings have been calculated by adding interest expense and the portion of rent estimated to
represent the interest factor to income before income taxes and minority interest. Fixed
charges include interest charges (including capitalized interest) and the portion of rent
estimated to represent the interest factor. 
  ITEM 7.
    Managements Discussion and Analysis of Financial Condition and Results of
Operations. Restatement of Consolidated Statements of Operations The Company is restating its previously issued consolidated statements of operations for the
years ended December 31, 2003 and 2002 and the quarters ended March 31, 2004, June 30, 2004 and
September 30, 2004 (the Restatement). The restated amounts for these quarters and the
corresponding interim periods of 2003 are presented in Note 13 to the Notes to the Companys
consolidated financial statements included in this Report. The Restatement also affects periods
prior to 2002. The Restatement corrected certain of the Companys historical accounting policies to
conform with generally accepted accounting principles (GAAP). Before the Restatement, the Companys consolidated statements of operations reflected its
historical accounting policies, under which (1) amounts charged by the Company to its car rental
customers to reimburse the Company for certain operating expenses (principally concession fees
incurred for the privilege of operating at airports and certain other locations and vehicle
licensing fees) were netted against related operating expenses, (2) amounts charged by the Company
to its car rental and industrial and construction equipment rental customers for fueling of
vehicles and equipment were netted against related operating expenses, (3) costs incurred in
connection with the sale of consumables and dealer inventory from its industrial and construction
equipment rental business were netted against revenues and (4) other, immaterial, items of revenues
and expenses were presented on a net basis. The Company has determined that the historical accounting policies described above were not in
accordance with the Financial Accounting Standards Board Emerging Issues Task Force (EITF) Issue
No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent and EITF Issue No.
01-14, Income Statement Characterization of Reimbursement Received for Out-of-Pocket Expenses
Incurred. EITF No. 99-19 and No. 01-14 employ multi-factor tests to determine whether amounts
charged to customers in respect of certain expenses incurred should be included in revenues or
netted against such expenses. Accordingly, the Company is restating its previously issued
consolidated statements of operations to reclassify revenues and expenses in accordance with GAAP,
with particular regard to the requirements of EITF No. 99-19 and No. 01-14. 17




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As a result of the Restatement, total revenues and total expenses in the previously issued
consolidated statements of operations have each been increased by $725.8 and $670.3 million for the
years ended December 31, 2003 and 2002, respectively. Because previously reported revenues and
expenses for each of the affected periods were increased by equal amounts, the Restatement has not
resulted in a change in the Companys previously reported income before income taxes and minority
interest, income before cumulative effect of change in accounting principle or net income (loss),
nor has it changed the Companys liquidity or financial condition. The Restatement had no effect
on the Companys consolidated balance sheets or consolidated statements of cash flows. A summary of
the effects of the Restatement on the previously issued consolidated statements of operations is as
follows (in thousands of dollars): Year ended December 31, 2003
    
    
    Year ended December 31, 2002As Previously
    
    
    As
    
    
    As Previously
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    RestatedRevenues:Car rental
    
    $
    4,239,244
    
    
    $
    4,819,255
    
    
    $
    4,005,620
    
    
    $
    4,537,607Industrial and construction equipment rental
    
    
    904,582
    
    
    
    1,037,754
    
    
    
    892,646
    
    
    
    1,018,759Other
    
    
    64,103
    
    
    
    76,661
    
    
    
    69,873
    
    
    
    82,076Total revenues
    
    
    5,207,929
    
    
    
    5,933,670
    
    
    
    4,968,139
    
    
    
    5,638,442Expenses:Direct operating
    
    
    2,596,727
    
    
    
    3,316,101
    
    
    
    2,428,820
    
    
    
    3,093,024Depreciation of revenue earning equipment
    
    
    1,523,391
    
    
    
    1,523,391
    
    
    
    1,499,568
    
    
    
    1,499,568Selling, general and administrative
    
    
    495,276
    
    
    
    501,643
    
    
    
    456,986
    
    
    
    463,085Interest, net of interest income of $17,881 and $10,339
    
    
    355,043
    
    
    
    355,043
    
    
    
    366,371
    
    
    
    366,371Total expenses
    
    
    4,970,437
    
    
    
    5,696,178
    
    
    
    4,751,745
    
    
    
    5,422,048Income before income taxes
    
    
    237,492
    
    
    
    237,492
    
    
    
    216,394
    
    
    
    216,394Provision for taxes on income
    
    
    (78,877
    )
    
    
    (78,877
    )
    
    
    (72,346
    )
    
    
    (72,346
    )Income before cumulative effect of change in accounting principle
    
    
    158,615
    
    
    
    158,615
    
    
    
    144,048
    
    
    
    144,048Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (294,000
    )
    
    
    (294,000
    )Net income (loss)
    
    $
    158,615
    
    
    $
    158,615
    
    
    $
    (149,952
    )
    
    $
    (149,952
    )
 All prior period amounts included in this Report affected by the Restatement are presented in
Managements Discussion and Analysis of Financial Condition and Results of Operations on a restated
basis. General The Company is engaged principally in the business of renting cars and renting industrial and construction equipment. The Companys revenues principally 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);
    Industrial and construction equipment rental revenues; and
    Other revenues (fees and certain cost reimbursements from the Companys licensees and revenues from the Companys claim management services). HERC also derives revenues from the sale of new industrial and construction equipment and consumables. 18




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The Companys expenses 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 sales; and other costs
relating to the operation and rental of the 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 industrial
and construction equipment;
    Selling, general and administrative expenses (including advertising); and
    Interest expense relating primarily to the funding of the acquisition of revenue earning equipment. The Companys profitability is primarily a function of the volume and pricing of rental
transactions and the utilization of cars and equipment. Significant changes in the purchase price
of cars and equipment or interest rates can also have a significant effect on the Companys
profitability depending on the ability of the Company to adjust pricing for these changes. The
Companys business requires significant expenditures for cars and equipment and the Company
consequently requires substantial liquidity to finance such expenditures. The following discussion and analysis provides information that management believes to be relevant
to understanding the Companys consolidated financial condition and results of operations. This
discussion should be read in conjunction with the financial statements and the related notes
thereto contained in the Companys consolidated financial statements included in this Report. Critical Accounting Policies and Estimates The Companys discussion and analysis of its financial condition and results of operations are
based upon its consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts in
the consolidated financial statements and accompanying notes. The Company believes the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of the consolidated financial statements and
changes in these judgments and estimates may impact future results of operations and financial
condition. For additional discussion of the Companys accounting policies, see Note 1 to the Notes
to the Companys consolidated financial statements included in this Report. Revenue Earning Equipment The Companys principal assets are revenue earning equipment (REE), which represents 65% of total
assets at December 31, 2004. REE consists of vehicles utilized in car rental operations and
industrial and construction equipment rented by HERC. During 2004, 81% of the vehicles purchased
for the Companys U.S. and international car rental fleet were subject to repurchase by automobile
manufacturers under contractual guaranteed repurchase programs, subject to certain manufacturers
car condition and mileage requirements, at a specific price during a specified time period. These
programs limit the Companys residual risk with respect to vehicles purchased under the programs.
For all other vehicles, as well as equipment acquired by HERC, the Company uses historical
experience and monitors market conditions to set depreciation rates. When REE is acquired, the
Company estimates the period it 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 REE. Upon disposal of the REE, depreciation expense is adjusted for the
difference between the net proceeds received and the remaining book value. As market
conditions change, the Company adjusts its depreciation rates prospectively, over the remaining
holding period, to reflect these changes in market conditions. 19




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Public Liability and Property Damage The obligation for public liability and property damage (PL/PD) on self-insured domestic 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 actual results differ from these assumptions, the amount of
the Companys recorded liability is adjusted to reflect these results. Pensions The Companys employee pension costs and obligations are dependent on the Companys 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 the Companys assumptions are accumulated and amortized over future
periods and, therefore, generally affect the Companys recognized expense and recorded obligation
in such future periods. While the Company believes that the assumptions used are appropriate,
significant differences in actual experience or significant changes in assumptions would affect the
Companys pension costs and obligations. See Note 6 to the Notes to the Companys consolidated
financial statements included in this Report. Goodwill The Company reviews goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of the goodwill may not be recoverable, and also reviews goodwill annually
in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. 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. The Company estimates the fair
value of its 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.
See Note 2 to the Notes to the Companys consolidated financial statements included in this
Report. 20




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##### Table of Contents



Results of Operations The following table sets forth for each of the years indicated, the percentage of operating
revenues represented by certain items in the Companys consolidated statement of operations: Percentage of RevenuesYears EndedDecember 31,2004
    
    
    2003
    
    
    2002Restated
    
    
    RestatedRevenues:Car rental
    
    
    81.3
    %
    
    
    81.2
    %
    
    
    80.5
    %Industrial and construction equipment rental
    
    
    17.4
    
    
    
    17.5
    
    
    
    18.1Other
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.4100.0
    
    
    
    100.0
    
    
    
    100.0Expenses:Direct operating
    
    
    55.9
    
    
    
    55.9
    
    
    
    54.9Depreciation of revenue earning equipment
    
    
    21.9
    
    
    
    25.7
    
    
    
    26.6Selling, general and administrative
    
    
    8.9
    
    
    
    8.4
    
    
    
    8.2Interest, net of interest income
    
    
    5.8
    
    
    
    6.0
    
    
    
    6.592.5
    
    
    
    96.0
    
    
    
    96.2Income before income taxes and minority interest
    
    
    7.5
    
    
    
    4.0
    
    
    
    3.8Provision for taxes on income
    
    
    (2.0
    )
    
    
    (1.3
    )
    
    
    (1.3
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    Income before cumulative effect of change in accounting principle
    
    
    5.5
    %
    
    
    2.7
    %
    
    
    2.5
    %
 Year Ended December 31, 2004 Compared with Year Ended December 31, 2003 Revenues Total revenues of $6,676.0 million in 2004 increased by 12.5% from $5,933.7 million in 2003. Revenues from car rental operations of $5,430.8 million in 2004 increased by 12.7% from $4,819.3
million in 2003. This increase of $611.5 million was primarily the result of higher car rental
volumes worldwide and the effects of foreign currency translation of approximately $143.6 million,
partly offset by a 2.6% decrease in time and mileage rates worldwide. 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. Revenues from industrial and construction equipment rental operations of $1,162.0 million in 2004
increased by 12.0% from $1,037.8 million in 2003. This $124.2 million increase was principally due
to increases in time and mileage rates in the U.S., higher equipment rental volumes worldwide, and
the effects of foreign currency translation of approximately $22.1 million. Revenues from all other sources of $83.2 million in 2004 increased by 8.5% from $76.6 million in
2003, due to an increase in licensee revenues. Expenses Total expenses of $6,173.4 million in 2004 increased by 8.4% from $5,696.2 million in 2003,
principally due to the increase in revenues, and total expenses as a percentage of revenues
decreased to 92.5% in 2004 compared to 96.0% in 2003. Direct operating expenses of $3,734.4 million in 2004 increased by 12.6% from $3,316.1 million in
2003. The increase was primarily the result of the effects of foreign currency translation,
increases in wages and benefits, commissions, concession fees, facility expense, vehicle damage
expense, and gasoline costs in car rental operations. The increase was partly offset by favorable
credit and collection and PL/PD claims 21




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experience. Current period expenses were further reduced by $7.0 million received in 2004 for
claims made by the Company on its insurance policies for business interruption losses resulting
from the terrorist attacks of September 11, 2001 and a final gain of $7.5 million in 2004 from the
condemnation of a car rental and support facility in Florida. (An initial gain of $8.0 million
related to the condemnation was recorded in 2003.) Depreciation of revenue earning equipment for car rental operations of $1,228.6 million in 2004
decreased by 2.4% from $1,258.3 million in 2003. The decrease was primarily due to the decrease in
the U.S. average cost per vehicle and higher net proceeds received in excess of book value on the
disposal of used vehicles worldwide, partly offset by the effects of foreign currency translation,
an increase in the average number of vehicles operated worldwide and a one-time refund of $7.8
million in 2003. The refund resulted from a special transitional credit for car rental companies
instituted by the Australian Taxation Office for Goods and Services Tax. Taxes paid were
previously included in the capitalized cost of the vehicles in the Companys Australian car rental
fleet. Depreciation of revenue earning equipment for industrial and construction equipment rental
operations of $234.7 million in 2004 decreased by 11.5% from $265.1 million in 2003 primarily due
to higher net proceeds received in excess of book value on the disposal of used equipment in the
U.S. Selling, general and administrative expenses of $591.3 million in 2004 increased by 17.9% from
$501.7 million in 2003. The increase was principally due to the effects of foreign currency
translation and increases in administrative and advertising expenses. The increase in
administrative expenses was attributable to increases in salaries and in incentive compensation
expense relating to the improvement in earnings in 2004. The increase in advertising was due to
expanded media advertising, primarily in television. Interest expense, net of interest income, of $384.4 million in 2004 increased 8.3% from $355.0
million in 2003, primarily due to an increase in average debt outstanding and foreign currency
translation, partly offset by a decrease in the weighted average interest rate and higher interest
income. The provision for taxes on income of $133.9 million in 2004 increased 69.7% from $78.9 million in
2003. The increase in the provision for taxes on income was primarily the result of an increase in
pre-tax income in 2004, partly offset by net favorable tax adjustments totaling $46.6 million,
principally relating to the evaluation of certain Federal and foreign tax accruals and foreign tax
credits. The effect of the net tax adjustments caused a decrease in the effective tax rate from
35.9% to 26.6% as compared to 33.2% in 2003. See Notes 1 and 9 to the Notes to the Companys
consolidated financial statements included in this Report. On July 1, 2004, the Company increased its joint venture ownership interest in Navigation
Solutions, L.L.C. (Navigation Solutions) from 40% to 65%. Minority interest of $3.2 million in
2004 represents the minority interests share (35%) of Navigation Solutions net income for the
period July 1, 2004 through December 31, 2004. See Note 5 to the Notes to the Companys
consolidated financial statements included in this Report. Income before cumulative effect of change in accounting principle The Company had income before cumulative effect of change in accounting principle of $365.5
million in 2004, representing an increase of $206.9 million from $158.6 million in 2003. The
increase reflects higher rental volume in the Companys worldwide car and industrial and
construction equipment rental businesses, lower fleet costs, higher proceeds received in excess of
book value on the disposal of used vehicles and equipment, and net favorable tax adjustments,
partly offset by lower pricing in the Companys worldwide car rental business, as well as the net
effect of other contributing factors noted above. Outlook The Company expects continued strong demand in both the car and equipment rental businesses
during the year 2005. Full year 2005 income before income taxes and minority interest is
anticipated to be similar to 2004 levels. 22




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Year Ended December 31, 2003 Compared with Year Ended December 31, 2002 Revenues Total revenues of $5,933.7 million in 2003 increased by 5.2% from $5,638.4 million in 2002. Revenues from car rental operations of $4,819.3 million in 2003 increased by 6.2% from $4,537.6
million in 2002. This increase of $281.7 million was primarily the result of the effects of
foreign currency translation of approximately $197.7 million and higher rental volume worldwide,
partly offset by a 1.5% decrease in time and mileage rates. 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. Revenues from industrial and construction equipment rental operations of $1,037.8 million in 2003
increased by 1.9% from $1,018.7 million in 2002. This $19.1 million increase was principally due
to the effects of foreign currency translation, mostly offset by a decrease in rental volume in the
United States which was the result of depressed capital spending for new non-residential
construction and its impact on the equipment rental industry. Revenues from all other sources of $76.6 million in 2003 decreased by 6.6% from $82.1 million in
2002, due to a decrease in license and management fees earned from Axus. Axus was a wholly owned
vehicle leasing subsidiary of Ford Credit to which the Company had licensed the Hertz name and
provided management services prior to the completion of the sale of Axus by Ford Credit and
termination of the Hertz license in the first quarter of 2003. Expenses Total expenses of $5,696.2 million in 2003 increased by 5.1% from $5,422.0 million in 2002,
principally due to the increase in revenues. Direct operating expenses of $3,316.1 million in 2003 increased by 7.2% from $3,093.0 million in
2002. The increase was primarily the result of the effects of foreign currency translation,
increases in wages and benefits, self insurance, concession fees, facility expense and gasoline
costs in car rental operations, partly offset by an initial gain of $8.0 million from the
condemnation of a car rental and support facility in Florida. Depreciation of revenue earning equipment for car rental operations of $1,258.3 million in 2003
increased by 2.4% from $1,228.5 million in 2002. The increase was due to the effects of foreign
currency translation. This increase was partly offset by a one-time refund of $7.8 million which
resulted from a special transitional credit for rental car companies instituted by the Australian
Taxation Office for Goods and Services Tax. Taxes paid were previously included in the capitalized
cost of the vehicles in the Companys Australian car rental fleet. Depreciation of revenue earning
equipment for industrial and construction equipment rental operations of $265.1 million in 2003
decreased by 2.2% from $271.0 million in 2002 due to a decrease in the size of the equipment rental
fleet partly offset by lower net proceeds received in excess of book value on the disposal of
equipment in the United States. Selling, general and administrative expenses of $501.7 million in 2003 increased by 8.3% from
$463.1 million in 2002. The increase was principally due to the effects of foreign currency
translation and increases in administrative and sales promotion expenses. Administrative expenses
in 2003 included $6.0 million of stock-based employee compensation expense which resulted from the
adoption of the fair value recognition provisions of SFAS No. 123, effective January 1, 2003. See
Notes 1 and 7 to the Notes to the Companys consolidated financial statements included in this
Report. Interest expense, net of interest income, of $355.0 million in 2003 decreased 3.1% from $366.4
million in 2002, primarily due to a decrease in the weighted-average interest rate and an increase
in interest income in 2003, partly offset by higher average debt levels. 23




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##### Table of Contents



The tax provision of $78.9 million in 2003 increased 9.0% from $72.4 million in 2002. The
effective tax rate in 2003 was 33.2% as compared to 33.4% in 2002. The increase in the tax
provision was primarily the result of higher income before income taxes in 2003. See Notes 1 and 9
to the Notes to the Companys consolidated financial statements included in this Report. Income before cumulative effect of change in accounting principle The Company had income before cumulative effect of change in accounting principle of $158.6
million in 2003, representing an increase of $14.6 million from $144.0 million in 2002. The
increase reflects improved car rental volume worldwide partly offset by lower pricing in the
Companys U.S. car rental business and the impact the Iraqi conflict and severe acute respiratory
syndrome, or SARS, had on the travel industry in 2003 as well as the net effect of other
contributing factors noted above. Cumulative effect of change in accounting principle The Company recorded a non-cash charge of $294.0 million upon the adoption of SFAS No. 142,
effective January 1, 2002. The charge related to the industrial and construction equipment rental
segment. The goodwill write-off was the result of a reduction in projected cash flows used to
determine fair value due to the unfavorable economic conditions as of the date of adoption, which
reduced demand for industrial and construction equipment in North America. See Notes 1 and 2 to
the Notes to the Companys consolidated financial statements included in this Report. Liquidity and Capital Resources At December 31, 2004, the Company had cash and cash equivalents of $680.9 million, an increase
of $70.9 million from December 31, 2003, which includes $2.9 million of restricted cash to be used
for the purchase of revenue earning vehicles or for the repayment of outstanding indebtedness under
the asset backed securitization (ABS) program. In addition, the Company has made short-term
investments with a related party investment fund that pools and invests excess cash balances of
certain Ford subsidiaries to maximize returns. These short-term investments totaled $557.0 million
at December 31, 2004 and will be held until the funds are required for operating purposes or used
to reduce indebtedness. The Companys domestic and foreign operations are funded by cash provided by operating activities,
and by extensive financing arrangements maintained by the Company in the United States, Europe,
Australia, New Zealand, Canada and Brazil. Net cash provided by operating activities was $2,251.4
million in 2004, an increase of $352.1 million from December 31, 2003, primarily due to the
increase in net income. Revenue earning equipment expenditures and proceeds from the disposal of such equipment have been
reclassified from operating activities to investing activities for all periods presented in the
Companys consolidated statement of cash flows. Net cash used in investing activities was $2,843.0 million in 2004, an increase of $612.4 million
from December 31, 2003. The increase is primarily due to an increase in net expenditures for
revenue earning equipment. The Companys primary use of cash in investing activities is for the
acquisition of revenue earning equipment, which consists of cars and industrial and construction
equipment. For the year ended December 31, 2004, the Companys expenditures for revenue earning
equipment was $11,310.0 million (partially offset by proceeds from the disposal of such equipment of
$8,740.9 million). These assets are purchased by the Company in accordance with the terms of
programs negotiated with car and equipment manufacturers. For the year ended December 31, 2004,
the Companys capital expenditures for property and non-revenue earning equipment were $286.4
million. For the year 2005, the Company anticipates a comparable level of net expenditures for
revenue earning equipment and property and equipment. Financing To finance its domestic operations, the Company maintains active unsecured and asset backed
commercial paper programs. The Company is also active in the domestic unsecured and asset backed
medium-term and long-term debt markets. During 2002, the Company established the ABS program for its domestic car rental fleet to reduce
its borrowing costs and enhance its financing resources for its domestic car rental fleet. All
debt issued under the ABS program is collateralized by the assets of the special purpose financing
entities, consisting of revenue earning vehicles used by the Company in its car rental business,
restricted cash and certain 24




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##### Table of Contents



receivables related to the revenue earning vehicles. The ABS program provides for the initial
issuance of asset backed commercial paper (up to $1.0 billion) and the subsequent issuance of asset
backed medium-term notes. These notes are issued by wholly owned and consolidated special purpose
financing entities and are included in Debt in the Companys consolidated balance sheet. As of
December 31, 2004, $297.6 million of asset backed commercial paper and $600.0 million of asset
backed medium-term notes were outstanding. The commercial paper notes have ratings of A-1 by Standard & Poors Rating Services, a division of
McGraw-Hill Companies, Inc. (S&P), Prime-1 by Moodys Investors Service, Inc. (Moodys) and F1
by Fitch Ratings (Fitch). Under certain conditions, the commercial paper notes may be repaid by
draws under a related bank liquidity facility ($814 million), which expires in June 2005, or a
related letter of credit issued under a letter of credit facility ($215 million), which expires in
June 2007. The Company expects to renew these facilities prior to their expiration. On September 30, 2003, the Company issued $500 million of 4.7% Senior Promissory Notes (the 4.7%
Notes) due on October 2, 2006. On June 3, 2004, the Company issued $600 million of 6.35% Senior
Promissory Notes (the 6.35% Notes) due on June 15, 2010. Effective September 30, 2003 and June
3, 2004, the Company entered into interest rate swap agreements relating to the 4.7% Notes and
6.35% Notes, respectively. Under these agreements, the Company pays interest at a variable rate in
exchange for fixed rate receipts, effectively transforming the 4.7% Notes and the 6.35% Notes to
floating rate obligations with effective interest rates at December 31, 2004 of 4.15% and 4.32%,
respectively. See Note 3 to the Notes to the Companys consolidated financial statements included
in this Report. On March 31, 2004, the Company issued $600 million of asset backed medium-term notes (the
Medium-Term Notes) under the ABS program. Of the $600 million of the Medium-Term Notes, $500
million has fixed interest rates ranging from 2.4% to 3.2% and maturities ranging from 2007 to 2009
and the remaining $100 million has a variable interest rate based on the one-month LIBOR rate plus
nine basis points and matures in 2007. Payments of principal and interest relating to the
Medium-Term Notes are insured to the extent provided in a note guaranty insurance policy issued by
MBIA Insurance Corporation. The Medium-Term Notes have ratings of AAA by S&P, Aaa by Moodys and
AAA by Fitch. On July 2, 2004, the Company established a Euro Medium-Term Note Program under which the Company
and/or Hertz Finance Centre plc (HFC), a wholly owned subsidiary of the Company, can issue up to
Euro 650 million in Medium-Term Notes (Euro Notes). On July 16, 2004, HFC issued Euro 200
million of Euro Notes under this program. The Euro Notes are fully guaranteed by the Company,
mature in July 2007, and have a variable interest rate based on the three-month EURIBOR rate plus
110 basis points. As of December 31, 2004, the interest rate on the Euro Notes was 3.25%. On August 5, 2004, the Company issued $500 million of Promissory Notes consisting of $250 million
of floating rate notes at the three-month LIBOR rate plus 120 basis points due on August 5, 2008,
and $250 million of 6.90% fixed rate notes due on August 15, 2014. As of December 31, 2004, the
interest rate on the $250 million floating rate notes was 3.40%. As the need arises, it is the Companys intention to issue unsecured senior, senior subordinated,
junior subordinated or asset backed securities on terms to be determined at the time the securities
are offered for sale. The total amount of unsecured medium-term and long-term debt outstanding as
of December 31, 2004 was $6.0 billion, with maturities ranging from 2005 to 2028. From time to
time, the Company files with the Securities and Exchange Commission (the SEC) shelf registration
statements to allow for the issuance of such debt securities on terms to be determined at the time
such securities are offered for sale. At December 31, 2004, the Company had $1.9 billion available
for issuance under effective registration statements, so long as the SECs conditions for issuance
are satisfied. Among those conditions is one that, at the time of issuance, the securities being
issued are placed in a generic rating category signifying investment grade by at least one
nationally recognized statistical rating organization (such as S&P, Moodys, Fitch and Dominion
Bond Rating Service (DBRS)). Borrowing for the Companys international operations also consists of loans obtained from local and
international banks and commercial paper programs established in Ireland, Canada, the Netherlands, 25




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##### Table of Contents



Belgium and Australia. The Company guarantees only the commercial paper borrowings of its
subsidiaries in Ireland, Canada, the Netherlands and Belgium, and guarantees commercial paper and
short-term bank loans of its subsidiary in Australia. All borrowings by international operations
are either in the international operations local currency or, if in non-local currency, hedged to
minimize foreign exchange exposure. At December 31, 2004, total debt for the foreign operations
was $1,734 million, of which $1,455 million was short-term (original maturity of less than one
year) and $279 million was long-term. At December 31, 2004, the total amounts outstanding (in
millions of U.S. dollars) under the commercial paper programs in Ireland, Canada, the Netherlands
and Belgium were $385, $321, $54 and $28, respectively. Contractual Obligations At December 31, 2004, the Companys contractual cash obligations were as follows (in millions of
dollars): Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsContractual ObligationsDebt(1)
    
    $
    8,436
    
    
    $
    3,054
    
    
    $
    1,796
    
    
    $
    1,186
    
    
    $
    2,400Operating leases and concession agreements (2)
    
    
    1,270
    
    
    
    260
    
    
    
    389
    
    
    
    198
    
    
    
    423Purchase obligations(3)Ford and subsidiaries
    
    
    2,757
    
    
    
    2,757
    
    
    
    
    
    
    
    
    
    
    
    All others
    
    
    3,704
    
    
    
    3,668
    
    
    
    36
    
    
    
    
    
    
    
    Total purchase obligations
    
    
    6,461
    
    
    
    6,425
    
    
    
    36
    
    
    
    
    
    
    
    Total
    
    $
    16,167
    
    
    $
    9,739
    
    
    $
    2,221
    
    
    $
    1,384
    
    
    $
    2,823
   (1)
    Amounts represent debt obligations of the Company included in Debt in the Companys
consolidated balance sheet and includes $2,444 million of commercial paper and other
short-term borrowings, excluding obligations for interest and estimated payments under
interest rate swap agreements. See Note 3 to the Notes to the Companys consolidated
financial statements included in this Report.  (2)
    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 10 to the Notes to the
Companys consolidated financial statements included in this Report.  (3)
    Purchase obligations represent agreements to purchase goods or services that are legally
binding on the Company 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 at December 31,
2004, $6,289 million represent 2005 model year fleet purchases where contracts have been
signed or are pending with committed orders under the terms of such arrangements. The Company
does not regard its employment relationships with its employees as agreements to purchase
services for these purposes. Credit Facilities At December 31, 2004, the Company had committed credit facilities totaling $2.8 billion. Currently, $1.3 billion of the committed credit facilities are represented by a combination of
multi-year, 364-day global and other committed credit facilities provided by 23 participating
banks. In addition to direct borrowings by the Company, the multi-year and 364-day global
facilities allow certain subsidiaries of the Company to borrow on the basis of a guarantee by the
Company. The multi-year facilities were re-negotiated effective July 1, 2004 and currently total
$999 million with expirations as follows: $46 million on June 30, 2005, $35 million on June 30,
2006, $108 million on June 30, 2007, $102 million on June 30, 2008 and $708 million on June 30,
2009. The multi-year facilities that expire in 2009 have an evergreen feature, which provides for
the automatic extension of the expiration date one year forward unless the 26




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##### Table of Contents



bank provides timely notice. Effective June 17, 2004, the 364-day global committed credit
facilities, which total $94 million, were renegotiated and currently expire on June 16, 2005.
Under the terms of the 364-day facilities, the Company is permitted to convert any amount
outstanding prior to expiration into a two-year loan. The other committed facilities total $175
million and expire at various times during 2005. Effective September 18, 2002, as part of the ABS program, the Company transferred $928 million of
the 364-day global committed credit facilities to the ABS program. As part of the agreement to
transfer these commitments, the Company has waived the right to transfer them back to the 364-day
global committed credit facilities without the consent of the participating banks. As of December
31, 2004, $814 million is currently available which expires in June 2005. In addition to the
transfer of the 364-day commitments, the Company raised $215 million of committed credit support
through an ABS letter of credit from banks that participate in the Companys multi-year global
committed credit facilities, which expires in June 2007. In exchange for this credit support, the
Company agreed to reduce the banks multi-year facility commitment by one half of the amount of its
ABS letter of credit participation. In addition to these bank credit facilities, in February 1997, Ford extended to the Company a line
of credit of $500 million, which currently expires June 30, 2006. This line of credit has an
evergreen feature that provides on an annual basis for automatic one-year extensions of the
expiration date, unless notice is provided by Ford at least one year prior to the then scheduled
expiration date. The line of credit automatically terminates however, at any time Ford ceases to
own, directly or indirectly, capital stock of the Company having more than 50% of the total voting
power of all capital stock outstanding of the Company. Obligations of the Company under this
agreement would rank pari passu with the Companys senior debt securities. A commitment fee of 0.2%
per annum is payable on the unused available credit. The Company maintains a Sales Agency Agreement with Ford Financial Services, Inc. (FFS), a NASD
registered broker/dealer and an indirect wholly owned subsidiary of Ford, whereby FFS acts as a
dealer for the Companys domestic commercial paper programs. The Company pays fees to FFS, which
range from 0.03% to 0.05% per annum of commercial paper placed depending upon the monthly average
dollar value of the notes outstanding in the portfolios. In 2004, the Company paid FFS $89,148 of
such fees. FFS is under no obligation to purchase any of the notes for its own account. The
Company, through its subsidiary Hertz Australia Pty. Limited, has a similar agreement with Ford
Credit Australia Limited, also an indirect wholly owned subsidiary of Ford. Debt Ratings The Companys short and long-term debt is rated by the four nationally-recognized statistical
rating organizations: Fitch; Moodys; S&P and DBRS. Debt ratings reflect an assessment by the
rating agencies of the credit risk associated with particular securities issued by the Company.
Lower ratings generally result in higher borrowing costs and reduced access to capital markets.
Long- and short-term debt ratings of BBB- and F3 or higher by Fitch, Baa3 and Prime-3 or higher by
Moodys, BBB- and A3 or higher by S&P, and BBB and R-2 or higher by DBRS are considered investment
grade. However, debt ratings are not recommendations to buy, sell, or hold securities and are
subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency
may have different criteria in evaluating the risk associated to a company, and therefore ratings
should be evaluated independently for each rating agency. In July 2004, DBRS affirmed the Companys long and short-term debt ratings and revised the trend
from negative to stable, similar to Ford and Ford Credit. In October 2004, Moodys and Fitch each
affirmed the long and short-term debt ratings of, and their outlook for, Ford, Ford Credit and the
Company. In the fourth quarter of 2004, S&P affirmed the long and short-term debt ratings of,
and their outlook for Ford (October), Ford Credit (October) and the Company (November). The
current ratings for the Company are as follows: Debt RatingsLong-Term
    
    Short-Term
    
    Outlook/TrendMoodys
    
    Baa2
    
    P-2
    
    NegativeS&P
    
    BBB-
    
    A-3
    
    StableFitch
    
    BBB+
    
    F2
    
    StableDBRS
    
    BBB (high)
    
    R-1 (low)
    
    Stable
 27




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##### Table of Contents



Other Factors The Companys decision to withdraw earnings or investments from foreign countries is, in some
cases, influenced by exchange controls and the utilization of foreign tax credits, and may also be
affected by fluctuations in exchange rates for foreign currencies and by revaluation of such
currencies in relation to the U.S. dollar by the governments involved. Foreign operations have been
financed to a substantial extent through loans from local lending sources in the currency of the
countries in which such operations are conducted. Car rental operations in foreign countries are,
from time to time, subject to governmental regulations imposing varying degrees of currency
restrictions. Currency restrictions and other regulations historically have not had a material
impact on the Companys operations as a whole. By virtue of its 100% ownership interest in the Company, Ford has the right to make any changes
that it deems appropriate in the Companys assets, corporate structure, capitalization, operations,
properties and policies (including dividend policies). The Company expects to begin paying
semi-annual dividends to Ford commencing in June 2005. See Item 5  Market for Registrants Common
Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities. Car rental and industrial and construction equipment rental operations are seasonal businesses,
with decreased levels of business in the winter months and heightened activity during the spring
and summer. To accommodate increased demand, the Company increases its available fleet and staff
during the second and third quarters. As business demand declines, fleet and staff are decreased
accordingly. However, certain operating expenses, including rent, insurance, and administrative
overhead, remain fixed and cannot be adjusted for seasonal demand. In certain geographic car rental
markets, the impact of seasonality has been reduced by emphasizing leisure or business travel in
the off-seasons. The table below shows capital expenditures (net of proceeds received from the disposal of revenue
earning equipment) and financial results by quarter for 2004 and 2003. No amounts listed below,
other than revenues, have been changed as a result of the Restatement. For discussion of the
Restatement, see Notes 1A and 13 to the Notes to the Companys consolidated financial statements
included in this Report. Operating Income:
    
    
    IncomeCapital
    
    
    
    
    
    
    
    
    
    
    Pre-Tax Income
    
    
    (Loss) BeforeExpenditures
    
    
    Revenues
    
    
    Before Interest
    
    
    Income Taxes
    
    
    Net(Net of Disposal
    
    
    As
    
    
    As
    
    
    Expense and
    
    
    and Minority
    
    
    IncomeProceeds)
    
    
    Reported
    
    
    Restated
    
    
    Minority Interest
    
    
    Interest
    
    
    (Loss)Dollars in millions2004First Quarter
    
    $
    1,104.9
    
    
    $
    1,278.0
    
    
    $
    1,456.3
    
    
    $
    83.0
    
    
    $
    (5.0
    )
    
    $
    (3.3
    )Second Quarter
    
    
    1,944.8
    
    
    
    1,447.7
    
    
    
    1,656.1
    
    
    
    241.5
    (1)
    
    
    146.7
    (1)
    
    
    95.5Third Quarter
    
    
    (87.6
    )
    
    
    1,661.1
    
    
    
    1,879.2
    
    
    
    353.2
    
    
    
    250.9
    
    
    
    184.4
    (5)Fourth Quarter
    
    
    (165.8
    )
    
    
    1,684.4
    
    
    
    1,684.4
    
    
    
    209.3
    (2)
    
    
    110.0
    (2)
    
    
    88.9
    (5)Total Year
    
    $
    2,796.3
    
    
    $
    6,071.2
    
    
    $
    6,676.0
    
    
    $
    887.0
    
    
    $
    502.6
    
    
    $
    365.52003First Quarter
    
    $
    436.4
    
    
    $
    1,147.7
    
    
    $
    1,306.1
    
    
    $
    32.1
    (3)
    
    $
    (56.8
    )  (3)
    
    $
    (37.7
    )Second Quarter
    
    
    1,217.6
    
    
    
    1,269.8
    
    
    
    1,453.7
    
    
    
    149.0
    (3)(4)
    
    
    59.6
    (3)(4)
    
    
    39.6Third Quarter
    
    
    (3.4
    )
    
    
    1,489.5
    
    
    
    1,686.6
    
    
    
    276.5
    
    
    
    187.6
    
    
    
    126.7Fourth Quarter
    
    
    83.7
    
    
    
    1,300.9
    
    
    
    1,487.3
    
    
    
    134.9
    
    
    
    47.1
    
    
    
    30.0Total Year
    
    $
    1,734.3
    
    
    $
    5,207.9
    
    
    $
    5,933.7
    
    
    $
    592.5
    
    
    $
    237.5
    
    
    $
    158.6
   (1)
    Includes $7.0 million received in the second quarter of 2004 regarding claims made by the
Company on its insurance policies for business interruption losses resulting from the
terrorist attacks of September 11, 2001. 28




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##### Table of Contents



(2)
    Includes a final gain of $7.5 million in the fourth quarter of 2004 from the condemnation
of a car rental and support facility in Florida.  (3)
    Includes a credit totaling $7.8 million in the first and second quarter of 2003 from a
one-time refund of Goods and Service Tax related to the Companys Australian car rental
operations.  (4)
    Includes an initial gain of $8.0 million in the second quarter of 2003 from the
condemnation of a car rental and support facility in Florida.  (5)
    Includes favorable foreign tax adjustments of $23.3 million in the third quarter of 2004
and net favorable domestic and foreign tax adjustments of $23.3 million in the fourth quarter
of 2004. Market Risks The Company is exposed to a variety of market risks, including the effects of changes in
interest rates and foreign currency exchange rates. The Company manages its exposure to these
market risks through its 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 are not 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 the Companys exposure to counterparty nonperformance on such instruments. For more
information on these exposures see Note 14 to the Notes to the Companys consolidated financial
statements included in this Report. Interest Rate Risk From time to time, the Company and its subsidiaries enter into interest rate swap agreements to
manage their interest rate risk. Effective September 30, 2003, the Company entered into interest
rate swap agreements relating to the issuance of its 4.7% Senior Promissory notes due October 2,
2006. Effective June 3, 2004, the Company entered into interest rate swap agreements relating to
the issuance of its 6.35% Senior Promissory notes due June 15, 2010. Under these agreements, the
Company pays interest at a variable rate in exchange for fixed rate receipts, effectively
transforming these notes to floating rate obligations. See Note 3 to the Notes to the Companys
consolidated financial statements included in this Report. The Company has assessed its exposure
to changes in interest rates by analyzing the sensitivity to its earnings assuming various changes
in market interest rates. Assuming a hypothetical increase of one percentage point in interest
rates on the existing debt portfolio at December 31, 2004, net of interest income on investments,
the Companys net income would decline by approximately $15.8 million over a 12-month period. Foreign Currency Risk The Company and its subsidiaries 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 the consolidated financial
position, results of operations or cash flows of the Company. The Companys 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 at
December 31, 2004, were approximately $0.7 million and the Company limits counterparties to
financial institutions that have strong credit ratings. The Company and its subsidiaries manage exposure to fluctuations in currency risk on intercompany
loans the Company makes to certain of its foreign 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 foreign subsidiaries, and as a result, the forward contracts have no impact on
earnings. Employee Retirement Benefits Pension The Company sponsors defined benefit pension plans worldwide. Pension obligations give rise to
significant expenses that are dependent on assumptions discussed in Note 6 of the Notes to the
Companys consolidated financial statements included in this Report. Based on present assumptions,
2005 worldwide pre-tax pension expense is expected to be approximately $35.1 million, which is an
increase of $4.4 million from 2004 primarily attributable to the decrease in the discount rate in
the U.S. 29




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##### Table of Contents



from 6.25% to 5.75% and in the United Kingdom from 5.50% to 5.25%, as well as the effect of foreign
currency translation. The funded status (i.e., the amount by which the present value of projected benefit obligations
exceeded the market value of pension plan assets) of the Companys U.S. qualified plan, in which
most domestic employees participate, improved as of December 31, 2004, compared with December 31,
2003. The primary factors that contributed to the improvement in the funded status was a
discretionary Company contribution of $48.0 million and an increase in the actual return on plan
assets, partly offset by a decrease in the discount rate. Included in the Companys Stockholders equity was a $15.1 million adjustment, net of tax, for
worldwide minimum pension liability as of December 31, 2004. The increase of $4.0 million in the
pension adjustment from the prior year is primarily attributable to unfunded plans in the U.S. and
Germany and decreases in the discount rates at December 31, 2004 used to calculate the present
value of benefit obligations, in each case compared with the prior year. The Company reviews its pension assumptions regularly and from time to time makes contributions
beyond those legally required. For example, discretionary contributions of $48.0 million and $54.0
million were made to the U.S. qualified plan in 2004 and 2003, respectively. Further, after giving
effect to these contributions, based on current interest rates and on the Companys return
assumptions and assuming no additional contributions, the Company does not expect to be required to
pay any variable-rate premiums to the Pension Benefit Guaranty Corporation before 2010. Other Postretirement Benefits The Company provides limited postretirement health care and life insurance for employees of its
domestic operations with hire dates prior to January 1, 1990. There are no plan assets associated
with this plan. The Company funds these postretirement costs through monthly provisions. The net
periodic postretirement benefit cost for 2004 was $1.6 million and the accumulated benefit
obligation as of December 31, 2004 was $17.3 million compared to postretirement benefit cost of
$1.3 million and an accumulated benefit obligation of $14.1 million at December 31, 2003. The
increase in cost and the accumulated benefit obligation was primarily attributable to the decrease
in the discount rate from 6.25% at December 31, 2003 to 5.75% at December 31, 2004 and higher than
expected medical cost increases. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.
46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51, which expands upon and strengthens existing accounting guidance
concerning when a company should include in its financial statements the assets, liabilities and
activities of another entity. Prior to the issuance of FIN 46, a company generally included
another entity in its consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 now requires a Variable Interest Entity (VIE), as defined in FIN 46, to
be consolidated by a company if that company is the primary beneficiary. The primary beneficiary
is the entity subject to a majority of the risk of loss from the VIEs activities or entitled to
receive a majority of the VIEs residual returns, or both. FIN 46 also requires disclosures about
VIEs that a company is not required to consolidate but in which it has a significant variable
interest. The Company adopted FIN 46 as of July 1, 2003 and the Revised Interpretation (FIN
46-R) as of December 15, 2003. The adoption of FIN 46 and FIN 46-R did not affect the Companys
financial position, results of operations or cash flows. In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132
(revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits. SFAS
No. 132, as revised, improves financial statement disclosures for defined benefit plans. The change
replaces existing SFAS No. 132 disclosure requirements for pensions and other postretirement
benefits and revises employers disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement of recognition of those plans required by SFAS No. 87,
Employers Accounting 30




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##### Table of Contents



for Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and SFAS No. 132, as revised, retains the
disclosure requirements contained in the original SFAS No. 132, but requires additional disclosures
about the plan assets, obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. SFAS No. 132, as revised, was
effective for annual and interim periods with fiscal years ending after December 15, 2003. See Note
6 to the Notes to the Companys consolidated financial statements included in this Report. In December 2004, the FASB revised its SFAS No. 123 (SFAS No. 123R), Accounting for Stock Based
Compensation. SFAS No. 123R establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, particularly transactions in which
an entity obtains employee services in share-based payment transactions. SFAS No. 123R 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. Changes
in fair value during the requisite service period are to be recognized as compensation cost over
that period. The provisions of the revised statement are effective for financial statements issued
for the first interim or annual reporting period beginning after June 15, 2005. As the Company is
currently accounting for its employee stock-based compensation awards in accordance with SFAS No.
123, adoption of the SFAS No. 123R is not expected to have a significant effect on the Companys
financial position, results of operations or cash flows. 
 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. See Managements Discussion and Analysis of Financial Condition and Results of Operations,
which appears on pages 17 to 31 of this Report. 31




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##### Table of Contents



ITEM 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM To The Hertz Corporation: In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)1 on page 69 present fairly, in all material respects, the financial position of The Hertz
Corporation and its subsidiaries (the Company) at December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period 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 on page 69 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), which 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. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, effective January 1, 2003. As discussed in Notes 1 and 2 to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. As discussed in Note 1A to the consolidated financial statements, the Company has restated its
consolidated statement of operations for the years ended December 31, 2003 and 2002. PRICEWATERHOUSECOOPERS LLP Florham Park, New Jersey
March 21, 2005 32




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET December 31,2004
    
    
    2003Dollars in thousandsASSETSCash and equivalents (Note 14)
    
    $
    680,866
    
    
    $
    609,986Short-term investments (Notes 14 and 15)
    
    
    556,997
    
    
    
    500,108Receivables, less allowance for doubtful accounts of $30,447 and
$35,758 (Note 3)
    
    
    1,282,290
    
    
    
    1,238,853Due from affiliates (Note 15)
    
    
    445,235
    
    
    
    520,842Inventories, at lower of cost or market
    
    
    83,287
    
    
    
    73,354Prepaid expenses and other assets (Notes 3, 4 and 5)
    
    
    144,168
    
    
    
    135,922Revenue earning equipment, at cost (Notes 3, 8 and 15):Cars
    
    
    8,380,688
    
    
    
    7,168,688Less accumulated depreciation
    
    
    (783,499
    )
    
    
    (706,719
    )Other equipment
    
    
    2,378,673
    
    
    
    2,214,901Less accumulated depreciation
    
    
    (852,947
    )
    
    
    (883,623
    )Total revenue earning equipment
    
    
    9,122,915
    
    
    
    7,793,247Property and equipment, at cost:Land, buildings and leasehold improvements
    
    
    1,296,196
    
    
    
    1,221,423Service equipment
    
    
    1,232,739
    
    
    
    1,114,8752,528,935
    
    
    
    2,336,298Less accumulated depreciation
    
    
    (1,292,764
    )
    
    
    (1,166,529
    )Total property and equipment
    
    
    1,236,171
    
    
    
    1,169,769Goodwill and other intangible assets (Note 2)
    
    
    544,445
    
    
    
    536,929Total assets
    
    $
    14,096,374
    
    
    $
    12,579,010LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable (Note 15)
    
    $
    786,037
    
    
    $
    757,869Accrued salaries and other compensation
    
    
    348,594
    
    
    
    287,676Other accrued liabilities (Notes 3 and 12)
    
    
    487,086
    
    
    
    448,690Accrued taxes
    
    
    130,062
    
    
    
    111,432Debt (Notes 3, 14 and 15)
    
    
    8,428,031
    
    
    
    7,627,930Public liability and property damage
    
    
    391,696
    
    
    
    398,822Deferred taxes on income (Note 9)
    
    
    849,700
    
    
    
    721,200Commitments and contingencies (Notes 10, 12 and 14)Minority interest (Note 5)
    
    
    4,921
    
    
    
    Stockholders equity (Notes 1, 3 and 15):Common Stock, $0.01 par value, 3,000 shares authorized,
100 shares issued
    
    
    
    
    
    
    Additional capital paid-in
    
    
    983,132
    
    
    
    983,132Retained earnings
    
    
    1,479,217
    
    
    
    1,113,746Accumulated other comprehensive income (Note 4)
    
    
    207,898
    
    
    
    128,513Total stockholders equity
    
    
    2,670,247
    
    
    
    2,225,391Total liabilities and stockholders equity
    
    $
    14,096,374
    
    
    $
    12,579,010
 The accompanying notes are an integral part of this statement. 33




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT
OF OPERATIONS
 Years ended December 31,2004
    
    
    2003
    
    
    2002Restated
    
    
    RestatedDollars in thousandsRevenues:Car rental
    
    $
    5,430,805
    
    
    $
    4,819,255
    
    
    $
    4,537,607Industrial and construction equipment rental
    
    
    1,161,955
    
    
    
    1,037,754
    
    
    
    1,018,759Other (Note 5)
    
    
    83,192
    
    
    
    76,661
    
    
    
    82,076Total revenues (Note 1A)
    
    
    6,675,952
    
    
    
    5,933,670
    
    
    
    5,638,442Expenses:Direct operating
    
    
    3,734,361
    
    
    
    3,316,101
    
    
    
    3,093,024Depreciation of revenue earning equipment (Note 8)
    
    
    1,463,258
    
    
    
    1,523,391
    
    
    
    1,499,568Selling, general and administrative
    
    
    591,317
    
    
    
    501,643
    
    
    
    463,085Interest, net of interest income of $23,707, $17,881 and $10,339
(Note 3)
    
    
    384,464
    
    
    
    355,043
    
    
    
    366,371Total expenses (Note 1A)
    
    
    6,173,400
    
    
    
    5,696,178
    
    
    
    5,422,048Income before income taxes and minority interest
    
    
    502,552
    
    
    
    237,492
    
    
    
    216,394Provision for taxes on income (Note 9)
    
    
    (133,870
    )
    
    
    (78,877
    )
    
    
    (72,346
    )Minority interest (Note 5)
    
    
    (3,211
    )
    
    
    
    
    
    
    Income before cumulative effect of change in accounting principle
    
    
    365,471
    
    
    
    158,615
    
    
    
    144,048Cumulative effect of change in accounting principle (Note 2)
    
    
    
    
    
    
    
    
    
    
    (294,000
    )Net income (loss)
    
    $
    365,471
    
    
    $
    158,615
    
    
    $
    (149,952
    )
 The accompanying notes are an integral part of this statement. 34




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT
OF STOCKHOLDERS EQUITY
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Capital
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Paid-In
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at:DECEMBER 31, 2001
    
    $
    
    
    
    $
    983,132
    
    
    $
    1,105,083
    
    
    $
    (103,835
    )
    
    $
    1,984,380Comprehensive IncomeNet loss
    
    
    
    
    
    
    
    
    
    
    (149,952
    )
    
    
    
    
    
    
    (149,952
    )Translation adjustment changes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,537
    
    
    
    93,537Unrealized holding gains on
securities, net of tax of $53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    475
    
    
    
    475Minimum pension liability
adjustment, net of tax of $3,040
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,553
    )
    
    
    (6,553
    )Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,493
    )DECEMBER 31, 2002
    
    
    
    
    
    
    983,132
    
    
    
    955,131
    
    
    
    (16,376
    )
    
    
    1,921,887Comprehensive IncomeNet income
    
    
    
    
    
    
    
    
    
    
    158,615
    
    
    
    
    
    
    
    158,615Translation adjustment changes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149,037
    
    
    
    149,037Unrealized holding losses on
securities, net of tax of $61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (551
    )
    
    
    (551
    )Minimum pension liability
adjustment, net of tax of $1,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,597
    )
    
    
    (3,597
    )Total Comprehensive Income
    
    

    
    
    
    
    
    
    

    
    
    
    
    
    
    
    303,504DECEMBER 31, 2003
    
    
    
    
    
    
    983,132
    
    
    
    1,113,746
    
    
    
    128,513
    
    
    
    2,225,391Comprehensive IncomeNet income
    
    
    
    
    
    
    
    
    
    
    365,471
    
    
    
    
    
    
    
    365,471Translation adjustment changes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,420
    
    
    
    83,420Unrealized 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444,856DECEMBER 31, 2004
    
    $
    
    
    
    $
    983,132
    
    
    $
    1,479,217
    
    
    $
    207,898
    
    
    $
    2,670,247
 The accompanying notes are an integral part of this statement. 35




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT
OF CASH FLOWS
 Years ended December 31,2004
    
    
    2003
    
    
    2002Dollars in thousandsCash flows from operating activities:Net income (loss)
    
    $
    365,471
    
    
    $
    158,615
    
    
    $
    (149,952
    )Non-cash expenses:Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    294,000Depreciation of revenue earning equipment
    
    
    1,463,258
    
    
    
    1,523,391
    
    
    
    1,499,568Depreciation of property and equipment
    
    
    177,597
    
    
    
    151,706
    
    
    
    155,424Amortization of intangibles
    
    
    607
    
    
    
    1,024
    
    
    
    1,346Stock-based employee compensation
    
    
    5,584
    
    
    
    6,039
    
    
    
    Provision for public liability and property damage
    
    
    153,139
    
    
    
    178,292
    
    
    
    145,010Provision for losses for doubtful accounts
    
    
    14,133
    
    
    
    23,053
    
    
    
    15,570Minority interest
    
    
    3,211
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    129,576
    
    
    
    260,848
    
    
    
    106,340Changes in assets and liabilities:Receivables
    
    
    57,303
    
    
    
    (95,527
    )
    
    
    (3,179
    )Due from affiliates
    
    
    75,607
    
    
    
    (269,543
    )
    
    
    (107,997
    )Inventories and prepaid expenses and other assets
    
    
    (20,275
    )
    
    
    (3,981
    )
    
    
    (27,990
    )Accounts payable
    
    
    (58,318
    )
    
    
    182,264
    
    
    
    1,099Accrued liabilities
    
    
    50,831
    
    
    
    (111,439
    )
    
    
    88,481Accrued taxes
    
    
    12,315
    
    
    
    49,825
    
    
    
    (19,713
    )Payments of public liability and property damage claims and
expenses
    
    
    (178,654
    )
    
    
    (155,241
    )
    
    
    (120,486
    )Net cash flows provided by operating activities (Note 1)
    
    $
    2,251,385
    
    
    $
    1,899,326
    
    
    $
    1,877,521
 The accompanying notes are an integral part of this statement. 36




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT
OF CASH FLOWS
 Years ended December 31,2004
    
    
    2003
    
    
    2002Dollars in thousandsCash flows from investing activities:Purchase of short-term investments, net
    
    $
    (56,889
    )
    
    $
    (500,108
    )
    
    $
    Revenue earning equipment expenditures
    
    
    (11,310,032
    )
    
    
    (9,436,581
    )
    
    
    (9,946,271
    )Proceeds
from disposal of revenue earning equipment
    
    
    8,740,920
    
    
    
    7,874,414
    
    
    
    8,065,848Property and equipment expenditures
    
    
    (286,428
    )
    
    
    (226,747
    )
    
    
    (221,227
    )Proceeds from disposal of property and equipment
    
    
    59,253
    
    
    
    54,638
    
    
    
    32,035Available-for-sale securities:Purchases
    
    
    (11,261
    )
    
    
    (12,114
    )
    
    
    (4,587
    )Sales
    
    
    19,448
    
    
    
    10,246
    
    
    
    4,082Changes in investment in joint venture
    
    
    2,000
    
    
    
    5,640
    
    
    
    6,560Net cash used in investing activities (Note 1)
    
    
    (2,842,989
    )
    
    
    (2,230,612
    )
    
    
    (2,063,560
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    1,985,981
    
    
    
    510,853
    
    
    
    809,426Repayment of long-term debt
    
    
    (913,635
    )
    
    
    (712,057
    )
    
    
    (559,858
    )Short-term borrowings:Proceeds
    
    
    1,382,587
    
    
    
    1,094,152
    
    
    
    730,731Repayments
    
    
    (973,659
    )
    
    
    (721,333
    )
    
    
    (557,755
    )Ninety-day term or less, net
    
    
    (846,780
    )
    
    
    130,294
    
    
    
    127,767Net cash provided by financing activities
    
    
    634,494
    
    
    
    301,909
    
    
    
    550,311Effect of foreign exchange rate changes on cash
    
    
    27,990
    
    
    
    38,100
    
    
    
    22,994Net increase in cash and equivalents during the year
    
    
    70,880
    
    
    
    8,723
    
    
    
    387,266Cash and equivalents at beginning of year
    
    
    609,986
    
    
    
    601,263
    
    
    
    213,997Cash and equivalents at end of year
    
    $
    680,866
    
    
    $
    609,986
    
    
    $
    601,263Supplemental disclosures of cash flow information:Cash paid (received) during the year for:Interest (net of amounts capitalized)
    
    $
    377,279
    
    
    $
    357,585
    
    
    $
    389,893Income taxes
    
    
    (4,149
    )
    
    
    31,481
    
    
    
    (3,854
    )
 The accompanying notes are an integral part of this statement. 37




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1  Summary of Significant Accounting Policies Background The Hertz Corporation (together with its subsidiaries, referred to herein as Hertz or the
Company) is an indirect wholly owned subsidiary of Ford Motor Company (Ford). The Company, which was incorporated in Delaware in 1967, is a successor to corporations that have
been engaged in the automobile and truck rental and leasing business since 1918. Ford first
acquired an ownership interest in the Company in 1987. Previously, the Company had been a
subsidiary of UAL Corporation (formerly Allegis Corporation), which had acquired the Company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 its Class A Common Stock (the Class A Common
Stock), which represented approximately 19.1% of the economic interest in Hertz. In March 2001,
Ford FSG, Inc. (FSG), an indirect wholly owned subsidiary of Ford that then owned an approximate
81.5% economic interest in the Company, acquired all of the Company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 FSGs acquisition, the Companys Class A Common Stock ceased to be traded on the New York Stock
Exchange. However, because certain of the Companys debt securities were sold through public
offerings, the Company continues to file periodic reports under the Securities Exchange Act of
1934. In 2003, FSG was dissolved and the shares of the Companys Common Stock owned by FSG were
distributed to Ford and Ford Holdings LLC. In February 2004, Ford Holdings LLC became the sole
owner of the Companys Common Stock. Principles of Consolidation The consolidated financial statements include the accounts of The Hertz Corporation and its
domestic and foreign subsidiaries. All significant intercompany transactions have been eliminated. Revenue Recognition Rental and rental-related revenue (including cost reimbursements from customers where the Company
considers itself 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 The Company considers all highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents. 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 (REE):Cars
    
    3 to 6 yearsOther equipment
    
    3 to 10 yearsBuildings
    
    20 to 50 yearsCapitalized internal use software
    
    1 to 10 yearsService cars and service equipment
    
    3 to 25 yearsIntangible assets
    
    5 to 15 yearsLeasehold improvements
    
    The shorter of their economic lives orthe lease term.
 38




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. When REE is
acquired, the Company estimates the period it 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 REE. Upon disposal of the REE, depreciation expense is adjusted for
the difference between the net proceeds received and the remaining book value. As market
conditions change, the Company adjusts its depreciation rates prospectively, over the remaining
holding period, to reflect these changes in market conditions. 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
Hertz. 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. Hertz also incurs and provides for expenses for the cleanup of petroleum 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 at undiscounted amounts 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 and international
claims are made by charges to expense based upon evaluations of estimated ultimate liabilities on
reported and unreported claims. 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. Pensions The Companys employee pension costs and obligations are dependent on the Companys 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 the Companys assumptions are accumulated and amortized over future
periods and, therefore, generally affect the Companys recognized expense and recorded obligation
in such future periods. While the Company believes that the assumptions used are appropriate,
significant differences in actual experience or significant changes in assumptions would affect the
Companys pension costs and obligations. 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 in the stockholders equity section of the consolidated balance sheet. The
accumulated foreign currency translation gain was $223.0 million at December 31, 2004 and the
accumulated foreign currency translation gain was $139.6 million at December 31, 2003. Foreign
currency gains and losses resulting from transactions are included in earnings. Income Taxes The Company and its domestic subsidiaries file consolidated Federal income tax returns with Ford.
The Company provides for current and deferred taxes as if it filed a separate consolidated tax
return with its domestic subsidiaries, except that under a tax sharing arrangement with Ford, the
Companys right to reimbursement for foreign tax credits is determined based on the usage of such
foreign tax credits by the 39




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) consolidated group. As of December 31, 2004, U.S. income taxes have not been provided on $502.2
million in undistributed earnings of foreign subsidiaries that have been or are intended to be
indefinitely reinvested outside the United States or are expected to be remitted free of taxes. Advertising Advertising and sales promotion costs are expensed as incurred. Impairment of Long-Lived Assets and Intangibles The Company evaluates the carrying value of goodwill for impairment at least annually in accordance
with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible Assets. See Note 2  Goodwill and Other
Intangible Assets. Long-lived assets, other than goodwill, 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 recoverability whenever events or changes in
circumstances indicate that the carrying amounts of long-lived assets exceed their fair value. The
fair values of the assets are based upon Company 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.
The Companys adoption of SFAS No. 144 as of January 1, 2002 did not have a material effect on the
Companys financial position, results of operations or cash flows. Stock Options Certain employees of the Company participate in the stock option plan of Ford under Fords 1998
Long-Term Incentive Plan. Effective January 1, 2003, the Company adopted the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under the
modified prospective method of adoption selected by the Company under the provisions of SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure, stock-based employee
compensation expense recognized in 2003 is the same as that which would have been recognized had
the fair value recognition provisions of SFAS No. 123 been applied to all awards from its original
effective date. Prior to January 1, 2003, the Company applied the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related Interpretations, in accounting for the plan. Prior to January 1, 2003, no
stock-based employee compensation expense has been reflected in earnings as all options granted
under the plan have an exercise price equal to the market value of the underlying common stock on
the date of grant. See Recent Accounting Pronouncements, below. The following table illustrates the effect on net income (loss) as if the fair value based method
had been applied to all outstanding and unvested stock options in each period (in thousands of
dollars): Years ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss), as reported
    
    $
    365,471
    
    
    $
    158,615
    
    
    $
    (149,952
    )Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
    
    
    3,630
    
    
    
    3,925
    
    
    
    Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (3,630
    )
    
    
    (3,925
    )
    
    
    (7,228
    )Pro forma net income (loss)
    
    $
    365,471
    
    
    $
    158,615
    
    
    $
    (157,180
    )
 The fair values for these options were estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions used for grants in 2004, 2003 and 2002:
risk-free interest rate of 3.4%, 3.7% and 5.22%, respectively; volatility factors of 42%, 39% and
35%, respectively; dividend yields of 3.0%, 5.3% and 2.37%, respectively; and an average expected
life of the options of seven years for 2004, 2003 and 2002. For purposes of pro forma disclosures,
the estimated fair values of the options are amortized to expense over the options vesting
periods. 40




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Use of Estimates and Assumptions Use of estimates and assumptions as determined by management is required in the preparation of
consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America. Actual results could differ from those estimates and assumptions. Reclassifications Certain prior year amounts have been reclassified to conform with current reporting. For the year
ended December 31, 2004, revenue earning equipment expenditures
and proceeds from disposals have been
reclassified from operating activities to investing activities in the Companys consolidated
statement of cash flows. A summary of the reclassifications in the consolidated statement of cash flows follows (in
thousands of dollars): Year Ended
    
    
    Year EndedDecember 31, 2003
    
    
    December 31, 2002As
    
    
    
    
    
    
    AsPreviously
    
    
    As
    
    
    Previously
    
    
    AsReported
    
    
    Reclassified
    
    
    Reported
    
    
    ReclassifiedNet cash flows provided by (used in)
operating activities
    
    $
    337,159
    
    
    $
    1,899,326
    
    
    $
    (2,902
    )
    
    $
    1,877,521Net cash used in investing activities
    
    $
    (668,445
    )
    
    $
    (2,230,612
    )
    
    $
    (183,137
    )
    
    $
    (2,063,560
    )Net increase in cash and equivalents
during the year
    
    $
    8,723
    
    
    $
    8,723
    
    
    $
    387,266
    
    
    $
    387,266
 Recent Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, which expands upon
and strengthens existing accounting guidance concerning when a company should include in its
financial statements the assets, liabilities and activities of another entity. Prior to the
issuance of FIN 46, a company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46 now requires a
Variable Interest Entity (VIE), as defined in FIN 46, to be consolidated by a company if that
company is the primary beneficiary. The primary beneficiary is the entity subject to a majority of
the risk of loss from the VIEs activities or entitled to receive a majority of the VIEs residual
returns, or both. FIN 46 also requires disclosures about VIEs that a company is not required to
consolidate but in which it has a significant variable interest. The Company adopted FIN 46 as of
July 1, 2003 and the Revised Interpretation (FIN 46R) as of December 15, 2003. The adoption of
FIN 46 and FIN 46R did not affect the Companys financial position, results of operations or cash
flows. In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132, as revised, improves financial statement
disclosures for defined benefit plans. The change replaces existing SFAS No. 132 disclosure
requirements for pensions and other postretirement benefits and revises employers disclosures
about pension plans and other postretirement benefit plans. It does not change the measurement of
recognition of those plans required by SFAS No. 87, Employers Accounting for Pensions, and SFAS
No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits. SFAS No. 132, as revised, retains the disclosure requirements
contained in the original SFAS No. 132, but requires additional disclosures about the plan assets,
obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132, as revised, was effective for annual and
interim periods with fiscal years ending after December 15, 2003. See Note 6  Employee Retirement
Benefits. 41




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In December 2004, the FASB revised its SFAS No. 123 (SFAS No. 123R), Accounting for Stock-Based
Compensation. The revision establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, particularly transactions in which
an entity obtains employee services in share-based payment transactions. 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. Changes in fair value during the requisite service period are to be recognized as
compensation cost over that period. The provisions of the revised statement are effective for
financial statements issued for the first interim or annual reporting period beginning after June
15, 2005. As the Company is currently accounting for its employee stock-based compensation awards
in accordance with SFAS No. 123, adoption of SFAS No. 123R is not expected to have a significant
effect on the Companys financial position, results of operations or cash flows. Note 1A  Restatement of Consolidated Statements of Operations The Company is restating its previously issued consolidated statements of operations for the
years ended December 31, 2003 and 2002 and the quarters ended March 31, 2004, June 30, 2004 and
September 30, 2004 (the Restatement.) The restated amounts for these quarters and the
corresponding interim periods of 2003 are presented in Note 13- Quarterly Financial Information
(Unaudited). The Restatement also affects periods prior to 2002. The Restatement corrected certain
of the Companys historical accounting policies to conform with generally accepted accounting
principles (GAAP). Before the Restatement, the Companys consolidated statements of operations reflected its
historical accounting policies, under which (1) amounts charged by the Company to its car rental
customers to reimburse the Company for certain operating expenses (principally concession fees
incurred for the privilege of operating at airports and certain other locations and vehicle
licensing fees) were netted against related operating expenses, (2) amounts charged by the Company
to its car rental and industrial and construction equipment rental customers for fueling of
vehicles and equipment were netted against related operating expenses, (3) costs incurred in
connection with the sale of consumables and dealer inventory from its industrial and construction
equipment rental business were netted against revenues and (4) other, immaterial, items of revenues
and expenses were presented on a net basis. The Company has determined that the historical accounting policies described above were not in
accordance with the Financial Accounting Standards Board Emerging Issues Task Force (EITF) Issue
No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent and EITF Issue No.
01-14, Income Statement Characterization of Reimbursement Received for Out-of-Pocket Expenses
Incurred. EITF No. 99-19 and No. 01-14 employ multi-factor tests to determine whether amounts
charged to customers in respect of certain expenses incurred should be included in revenues or
netted against such expenses. Accordingly, the Company has restated its previously issued
consolidated statements of operations to reclassify revenues and expenses in accordance with GAAP,
with particular regard to the requirements of EITF No. 99-19 and No. 01-14. 42




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As a result of the Restatement, total revenues and total expenses in the previously issued
consolidated statements of operations have each been increased by $725.8 and $670.3 million for the
years ended December 31, 2003 and 2002, respectively. Because previously reported revenues and
expenses for each of the affected periods were increased by equal amounts, the Restatement has not
resulted in a change in the Companys previously reported income before income taxes and minority
interest, income before cumulative effect of change in accounting principle or net income (loss),
nor has it changed the Companys liquidity or financial condition. The Restatement has had no
effect on the Companys consolidated balance sheets or consolidated statements of cash flows. A
summary of the effects of the Restatement on the previously issued consolidated statements of
operations is as follows (in thousands of dollars): Year ended December 31, 2003
    
    
    Year ended December 31, 2002As
    
    
    
    
    
    
    AsPreviously
    
    
    As
    
    
    Previously
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    RestatedRevenues:Car rental
    
    $
    4,239,244
    
    
    $
    4,819,255
    
    
    $
    4,005,620
    
    
    $
    4,537,607Industrial and construction equipment rental
    
    
    904,582
    
    
    
    1,037,754
    
    
    
    892,646
    
    
    
    1,018,759Other
    
    
    64,103
    
    
    
    76,661
    
    
    
    69,873
    
    
    
    82,076Total revenues
    
    
    5,207,929
    
    
    
    5,933,670
    
    
    
    4,968,139
    
    
    
    5,638,442Expenses:Direct operating
    
    
    2,596,727
    
    
    
    3,316,101
    
    
    
    2,428,820
    
    
    
    3,093,024Depreciation of revenue earning equipment
    
    
    1,523,391
    
    
    
    1,523,391
    
    
    
    1,499,568
    
    
    
    1,499,568Selling, general and administrative
    
    
    495,276
    
    
    
    501,643
    
    
    
    456,986
    
    
    
    463,085Interest, net of interest income of $17,881 and
$10,339
    
    
    355,043
    
    
    
    355,043
    
    
    
    366,371
    
    
    
    366,371Total expenses
    
    
    4,970,437
    
    
    
    5,696,178
    
    
    
    4,751,745
    
    
    
    5,422,048Income before income taxes
    
    
    237,492
    
    
    
    237,492
    
    
    
    216,394
    
    
    
    216,394Provision for taxes on income
    
    
    (78,877
    )
    
    
    (78,877
    )
    
    
    (72,346
    )
    
    
    (72,346
    )Income before cumulative effect of change in
accounting principle
    
    
    158,615
    
    
    
    158,615
    
    
    
    144,048
    
    
    
    144,048Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (294,000
    )
    
    
    (294,000
    )Net income (loss)
    
    $
    158,615
    
    
    $
    158,615
    
    
    $
    (149,952
    )
    
    $
    (149,952
    )
 Note 2  Goodwill and Other Intangible Assets The Company accounts for its goodwill under SFAS No. 142 Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is no longer amortized, but instead must be tested for
impairment at least annually. Other intangible assets continue to be amortized over their useful
lives. The Company adopted SFAS No. 142 beginning January 1, 2002. Upon its adoption, the Company
recorded a one-time, non-cash charge of $294 million to reduce the carrying value of its goodwill.
The Company recognized this impairment charge effective as of January 1, 2002 as a cumulative
effect of change in accounting principle. The goodwill impairment charge represented a portion of the goodwill of the industrial and
construction equipment rental segment. The goodwill write-off was the result of a reduction in
projected cash flows used to determine fair value due to the unfavorable economic conditions as of
the date of adoption, which reduced demand for industrial and construction equipment in North
America. The Company conducted the required annual goodwill impairment test in the second quarter
of 2004, and determined that there was no additional impairment. 43




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following summarizes the changes in the Companys goodwill, by segment, and other intangible
assets for the years ended December 31, 2004 and 2003 (in thousands of dollars): GoodwillIndustrial and
    
    
    
    
    
    
    Otherconstruction
    
    
    Total
    
    
    intangibleCar rental
    
    
    equipment rental
    
    
    goodwill
    
    
    assets
    
    
    TotalBalance December 31, 2002
    
    $
    360,919
    
    
    $
    156,054
    
    
    $
    516,973
    
    
    $
    2,048
    
    
    $
    519,021Other changes (1)
    
    
    3,241
    
    
    
    14,912
    
    
    
    18,153
    
    
    
    (245
    )
    
    
    17,908Balance December 31, 2003
    
    
    364,160
    
    
    
    170,966
    
    
    
    535,126
    
    
    
    1,803
    
    
    
    536,929Other changes (1)
    
    
    1,447
    
    
    
    6,302
    
    
    
    7,749
    
    
    
    (233
    )
    
    
    7,516Balance December 31, 2004
    
    $
    365,607
    
    
    $
    177,268
    
    
    $
    542,875
    
    
    $
    1,570
    
    
    $
    544,445
   (1)
    
    Consists of changes primarily resulting from the translation of foreign currencies at
different exchange rates from the beginning of the year to the end of the year and
amortization of certain intangible assets. Note 3  Debt Debt of the Company and its subsidiaries (in thousands of dollars) consists of the following: December 31,2004
    
    
    2003Notes payable, including commercial paper, average interest
rate: 2004, 2.4%; 2003, 1.3%
    
    $
    993,856
    
    
    $
    1,187,142Promissory notes, average interest rate: 2004, 6.1%; 2003, 6.2%
(effective average interest rate: 2004, 6.1%; 2003, 6.2%);
net of unamortized discount: 2004, $19,486; 2003, $11,676;
due 2005 to 2028
    
    
    5,700,443
    
    
    
    4,895,180Foreign subsidiaries debt in foreign currencies:Short-term borrowings:Banks, average interest rate: 2004, 3.5%; 2003, 3.6%
    
    
    667,678
    
    
    
    502,573Commercial paper, average interest rate: 2004, 2.5%; 2003, 2.7%
    
    
    787,660
    
    
    
    1,034,912Other borrowings, average interest rate: 2004, 3.3%; 2003, 12.7%
    
    
    278,394
    
    
    
    8,123Total
    
    $
    8,428,031
    
    
    $
    7,627,930
 The aggregate amounts of maturities of debt, in millions, are as follows: 2005, $3,054.3 (including
$2,444.1 of commercial paper, demand and other short-term borrowings); 2006, $757.9; 2007,
$1,037.8; 2008, $615.1; 2009, $570.5; after 2009, $2,400.2. During the year ended December 31, 2004, short-term borrowings, in millions, were as follows:
maximum amounts outstanding $2,851.8 commercial paper and $755.3 banks; monthly average amounts
outstanding $2,140.9 commercial paper (weighted-average interest rate 2.0%) and $542.4 banks
(weighted-average interest rate 3.3%). During the year ended December 31, 2003, short-term borrowings, in millions, were as follows:
maximum amounts outstanding $3,059.8 commercial paper and $528.7 banks; monthly average amounts
outstanding $2,301.2 commercial paper (weighted-average interest rate 2.1%) and $429.3 banks
(weighted-average interest rate 3.5%). The net amortized discount charged to interest expense for the years ended December 31, 2004, 2003
and 2002 relating to debt and other liabilities, in millions, was $2.3, $2.1 and $2.1,
respectively. On September 30, 2003, the Company issued $500 million of 4.7% Senior Promissory Notes (the 4.7%
Notes) due on October 2, 2006. On June 3, 2004, the Company issued $600 million of 6.35% Senior
Promissory Notes (the 6.35% Notes) due on June 15, 2010. Effective September 30, 2003 and June 3, 44




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2004, the Company entered
into interest rate swap agreements (swaps) relating to the 4.7% Notes and 6.35%
Notes, respectively. Under these agreements, the Company pays interest at a variable rate in
exchange for fixed rate receipts, effectively transforming the 4.7% Notes and the 6.35% Notes to
floating rate obligations with effective interest rates at December 31, 2004 of 4.15% and 4.32%,
respectively. The swaps are designated as fair value hedges with no ineffectiveness, as defined by
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The carrying amounts
of the interest rate swaps are adjusted to their fair value for changes in market interest rates,
with an offsetting adjustment to the fixed rate debt. As of December 31, 2004, the fair value
adjustments relating to the interest rate swaps on the 4.7% Notes and the 6.35% Notes were $7.0
million and $11.5 million, respectively. The fair value adjustment relating to the interest rate
swap on the 4.7% Notes was reflected in the consolidated balance sheet in Other accrued
liabilities with an offsetting decrease in Debt. The adjustment related to the interest rate
swap on the 6.35% Notes was reflected in the consolidated balance sheet in Prepaid expenses and
other assets with a corresponding increase in Debt. During 2002, the Company established an Asset Backed Securitization (ABS) program to reduce its
borrowing costs and enhance financing resources for its domestic car rental fleet. All debt issued
under the ABS program is collateralized by the assets of the special purpose entities consisting of
revenue earning vehicles used by the Company in its car rental business, restricted cash and
certain receivables related to revenue earning vehicles. The ABS program provided for the initial
issuance of asset backed commercial paper (up to $1.0 billion) and the subsequent issuance of asset
backed medium-term notes. These instruments are issued by wholly owned and consolidated special
purpose entities and are included in Debt in the consolidated balance sheet. On March 31, 2004, the Company issued $600 million of asset backed medium-term notes (the
Medium-Term Notes) under the ABS program. Of the $600 million of the Medium-Term Notes, $500
million has fixed interest rates ranging from 2.4% to 3.2% and maturities ranging from 2007 to 2009
and the remaining $100 million has a variable interest rate based on the one-month LIBOR rate plus
nine basis points (2.5% as of December 31, 2004) and matures in 2007. Payments of principal and
interest relating to the Medium-Term Notes are insured to the extent provided in a note guaranty
insurance policy issued by MBIA Insurance Corporation. At December 31, 2004, $297.6 million of asset backed commercial paper was outstanding under the ABS
program. The average interest rate as of December 31, 2004 was 2.3%. The collateralized
commercial paper has a maximum term of 58 days when issued. At December 31, 2004, $600.0 million
of asset backed Medium-Term Notes was outstanding. The average interest rate as of December 31,
2004 was 2.6%. At December 31, 2004, the outstanding commercial paper and Medium-Term Notes were
collateralized by $889.1 million net book value of revenue earning vehicles, $54.6 million of
receivables and $2.9 million of restricted cash. The restricted cash is to be used for the
purchase of revenue earning vehicles or for the repayment of outstanding indebtedness under the ABS
program. Restricted cash is included in Cash and equivalents in the consolidated balance sheet. On July 2, 2004, the Company established a Euro Medium-Term Note Program under which the Company
and/or Hertz Finance Centre plc (HFC), a wholly owned subsidiary of the Company, can issue up to
Euro 650 million in Medium-Term Notes (Euro Notes). On July 16, 2004, HFC issued Euro 200
million of Euro Notes under this program. The Euro Notes are fully guaranteed by the Company,
mature in July 2007, and have a variable interest rate based on the three-month EURIBOR rate plus
110 basis points. As of December 31, 2004, the interest rate on the Euro Notes was 3.25%. On August 5, 2004, the Company issued $500 million of Promissory Notes consisting of $250 million
of floating rate notes at the three-month LIBOR rate plus 120 basis points due on August 5, 2008,
and $250 million of 6.90% fixed rate notes due on August 15, 2014. As of December 31, 2004, the
interest rate on the $250 million floating rate notes was 3.40%. At December 31, 2004, the Company had committed credit facilities totaling $2.8 billion. 45




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Currently, $1.3 billion of the committed credit facilities are represented by a combination of
multi-year, 364-day global and other committed credit facilities provided by 23 participating
banks. In addition to direct borrowings by the Company, the multi-year and 364-day global
facilities allow certain subsidiaries of the Company to borrow on the basis of a guarantee by the
Company. The multi-year facilities were re-negotiated effective July 1, 2004 and currently total
$999 million with expirations as follows: $46 million on June 30, 2005, $35 million on June 30,
2006, $108 million on June 30, 2007, $102 million on June 30, 2008 and $708 million on June 30,
2009. The multi-year facilities that expire in 2009 have an evergreen feature, which provides for
the automatic extension of the expiration date one year forward unless the bank provides timely
notice. Effective June 17, 2004, the 364-day global committed credit facilities, which total $94
million, were renegotiated and currently expire on June 16, 2005. Under the terms of the 364-day
facilities, the Company is permitted to convert any amount outstanding prior to expiration into a
two-year loan. The other committed facilities total $175 million and expire at various times
during 2005. Effective September 18, 2002, as part of the ABS program, the Company transferred $928 million of
the 364-day global committed credit facilities to the ABS program. As part of the agreement to
transfer these commitments, the Company has waived the right to transfer them back to the 364-day
global committed credit facilities without the consent of the participating banks. As of December
31, 2004, $814 million is currently available which expires in June 2005. In addition to the
transfer of the 364-day commitments, the Company raised $215 million of committed credit support
through an ABS letter of credit from banks that participate in the Companys multi-year global
committed credit facilities which expires in June 2007. In exchange for this credit support, the
Company agreed to reduce the banks multi-year facility commitment by one half of the amount of
their ABS letter of credit participation. In addition to these bank credit facilities, in February 1997, Ford extended to the Company a line
of credit of $500 million, which currently expires June 30, 2006. This line of credit has an
evergreen feature that provides on an annual basis for automatic one-year extensions of the
expiration date, unless notice is provided by Ford at least one year prior to the then scheduled
expiration date. The line of credit automatically terminates however, at any time Ford ceases to
own, directly or indirectly, capital stock of the Company having more than 50% of the total voting
power of all capital stock outstanding of the Company. Obligations of the Company under this
agreement would rank pari passu with the Companys senior debt securities. A commitment fee of 0.2%
per annum is payable on the unused available credit. The Company maintains a Sales Agency Agreement with Ford Financial Services, Inc. (FFS), a NASD
registered broker/dealer and an indirect wholly owned subsidiary of Ford, whereby FFS acts as a
dealer for the Companys domestic commercial paper programs. The Company pays fees to FFS, which
range from 0.03% to 0.05% per annum of commercial paper placed depending upon the monthly average
dollar value of the notes outstanding in the portfolios. In 2004, the Company paid FFS $89,148 of
such fees. FFS is under no obligation to purchase any of the notes for its own account. The
Company, through its subsidiary Hertz Australia Pty. Limited, has a similar agreement with Ford
Credit Australia Limited, also an indirect wholly owned subsidiary of Ford. Borrowing for the Companys international operations also consists of loans obtained from local and
international banks and commercial paper programs established in Ireland, Canada, the Netherlands,
Belgium and Australia. The Company guarantees only the commercial paper borrowings of its
subsidiaries in Ireland, Canada, the Netherlands and Belgium, and guarantees commercial paper and
short-term bank loans of its subsidiary in Australia. All borrowings by international operations
either are in the international operations local currency or, if in non-local currency, hedged to
minimize foreign exchange exposure. At December 31, 2004, total debt for the foreign operations was
$1,734 million, of which $1,455 million was short-term (original maturity of less than one year)
and $279 million was long-term. At December 31, 2004 total amounts outstanding (in millions of U.S.
dollars) under the commercial paper programs in Ireland, Canada, the Netherlands and Belgium were
$385, $321, $54 and $28, respectively. Based on the terms of an indenture dated April 1, 1986, under which the Company has issued debt
securities, the Companys ability to pay dividends is restricted. Such restriction provides that
the Company may not pay dividends, invest in its own shares or permit investments by
certain subsidiaries of the Company (Restricted Subsidiaries) in the Companys shares
subsequent to a specified date if, together 46




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) with total investments by the Company and its Restricted Subsidiaries in subsidiaries that are not
Restricted Subsidiaries made subsequent to such specified date, the aggregate of any such dividends
or investments exceeds the sum of (i) a specified dollar amount, (ii) the aggregate net income of
the Company and its Restricted Subsidiaries earned subsequent to such specified date and (iii) net
proceeds received from capital stock issued subsequent to such specified date. At December 31,
2004, approximately $1,172 million of consolidated stockholders equity was free of such
limitations. The foregoing amount was not affected by the Restatement described in Note 1A 
Restatement of Consolidated Statements of Operations. Note 4  Available-for-Sale Securities As of December 31, 2004 and 2003, Prepaid expenses and other assets in the consolidated
balance sheet includes available-for-sale securities at fair value. The fair value is calculated
using information provided by independent quotation services as of December 31, 2004. These
securities consisted solely of government debt obligations whereas at December 31, 2003 corporate
debt obligations were also included. For the years ended December 31, 2004, 2003 and 2002,
proceeds, in millions, of $19.4, $10.3 and $4.1, respectively, were received from the sale of
available-for-sale securities, and in thousands of dollars, gross realized gains of $196, $413, and
$134 and gross realized losses of $193, $54 and $29, respectively, were included in earnings.
Actual cost was used in computing the realized gain and loss on the sale. Unrealized gains and
losses are included in Accumulated other comprehensive income in the consolidated balance sheet. The following is a summary of available-for-sale securities at December 31, 2004 and December 31,
2003 (in thousands): Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004Government debt obligations
    
    $
    2,795
    
    
    $
    19
    
    
    $
    (28
    )
    
    $
    2,786Total
    
    $
    2,795
    
    
    $
    19
    
    
    $
    (28
    )
    
    $
    2,786December 31, 2003Government debt obligations
    
    $
    2,619
    
    
    $
    15
    
    
    $
    (44
    )
    
    $
    2,590Corporate debt obligations
    
    
    8,068
    
    
    
    137
    
    
    
    (27
    )
    
    
    8,178Total
    
    $
    10,687
    
    
    $
    152
    
    
    $
    (71
    )
    
    $
    10,768
 The cost and estimated fair value of available-for-sale securities at December 31, 2004 are as
follows (in thousands): EstimatedCost
    
    
    Fair ValueDue in one year or less
    
    $
    276
    
    
    $
    270Due after one year through five years
    
    
    2,341
    
    
    
    2,338Due after five years through ten years
    
    
    178
    
    
    
    178Total
    
    $
    2,795
    
    
    $
    2,786
 Note 5  Purchases and Sales of Operations Effective January 1, 2000, Hertz International, Ltd., (Hertz International), entered into
license and management services agreements with Axus International, Inc. (Axus), a wholly owned
vehicle leasing subsidiary of Ford Motor Credit Company (Ford Credit), under which Hertz
International licensed the Hertz name and agreed to provide management services to Axus for a
five-year term. On August 31, 2000, the Company transferred substantially all the net assets of
its leasing operations in Australia, New Zealand and the United Kingdom to Axus for $99.2 million.
In the fourth quarter of 2002, Ford Credit sold 47




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) the Axus operations in Australia and New Zealand and in the first quarter of 2003, Axus operations
in Europe were sold. Hertz International continued to license the Hertz name and provide
management services until these operations were sold. During 2003 and 2002, fees earned by the
Company from these agreements were approximately $1.8 million and $11.5 million, respectively. The
Company continues to maintain leasing operations in Brazil. In June 1999, the Company entered into a Limited Liability Company Agreement (LLC Agreement) with
a subsidiary of Orbital Sciences Corporation (Orbital), whereby Navigation Solutions, L.L.C.
(Navigation Solutions), a limited liability company, was formed to purchase NeverLost vehicle
navigation systems from another subsidiary of Orbital for installation in selected vehicles in the
Companys North American fleet. In July 2001, Orbitals subsidiary sold its membership interest in
the limited liability company to a subsidiary of Thales North America, Inc. (Thales), which also
acquired the Orbital subsidiary from whom the NeverLost vehicle navigation systems are purchased.
During 2003 and 2002, the Company received distributions of $5.6 million and $6.6 million,
respectively, under the LLC Agreement, which represents a 40% ownership interest. The net
investment of $6.9 million as of December 31, 2003, (included in Prepaid expense and other assets
in the consolidated balance sheet) is accounted for using the equity method of accounting. In
January 2004, the Company and Thales amended the LLC Agreement to provide for the Company to
increase its ownership interest to 65% and for the limited liability company to purchase additional
NeverLost vehicle navigation systems. Prior to July 1, 2004, the Company received distributions
totaling $2.0 million. On July 1, 2004, the Company increased its ownership interest in Navigation
Solutions from 40% to 65%. This change resulted from an equity distribution by Navigation
Solutions to the other member of Navigation Solutions, effectively reducing its ownership interest
to 35%. Based upon this ownership change, the Company began consolidating 100% of Navigation
Solutions balance sheet and results of operations into its financial statements and deducting the
minority interest share relating to the 35% member. Note 6  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 (Hertz
Retirement Plan), a cash balance plan. Under this qualified Hertz Retirement Plan, the Company
pays the entire cost and employees are not required to contribute. Most of the Companys foreign subsidiaries have defined benefit retirement plans or participate in
various insured or multi-employer plans. In certain countries, when the subsidiaries make the
required funding payments, they have no further obligations under such plans. Company plans are generally funded, except for certain unqualified U.S. defined benefit plans and
in Germany, where unfunded liabilities are recorded. The Company sponsors defined contribution plans for certain eligible U.S. and non-U.S. employees.
The Company matches contributions of participating employees on the basis specified in the plans. The Company also sponsors 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. The Company uses a December 31 measurement date for the majority of its plans. 48




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##### Table of Contents



THE HERTZ CORPORATION 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 for health care and life insurance
covering domestic (U.S.) employees and the retirement plans for foreign operations (Non-U.S.),
together with amounts included in the consolidated balance sheet and statement of operations (in
millions of dollars): Pension Benefits
    
    
    Health Care &U.S. Plans
    
    
    Non-U.S. Plans
    
    
    Life Insurance (U.S.)2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Change in Benefit ObligationBenefit obligation at January 1
    
    $
    276.2
    
    
    $
    235.9
    
    
    $
    97.6
    
    
    $
    69.4
    
    
    $
    14.1
    
    
    $
    10.3Service cost
    
    
    21.1
    
    
    
    17.3
    
    
    
    5.3
    
    
    
    3.3
    
    
    
    0.4
    
    
    
    0.4Interest cost
    
    
    17.7
    
    
    
    15.5
    
    
    
    5.4
    
    
    
    4.1
    
    
    
    0.9
    
    
    
    0.8Employee contributions
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1.2
    
    
    
    1.2
    
    
    
    0.1
    
    
    
    0.1Benefits paid
    
    
    (6.6
    )
    
    
    (6.9
    )
    
    
    (2.2
    )
    
    
    (2.2
    )
    
    
    (0.4
    )
    
    
    (0.8
    )Foreign exchange translation
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    9.0
    
    
    
    10.0
    
    
    
    3⁄4
    
    
    
    3⁄4Actuarial loss
    
    
    30.8
    
    
    
    14.4
    
    
    
    15.9
    
    
    
    11.8
    
    
    
    2.2
    
    
    
    3.3Benefit obligation at December 31
    
    $
    339.2
    
    
    $
    276.2
    
    
    $
    132.2
    
    
    $
    97.6
    
    
    $
    17.3
    
    
    $
    14.1Change in Plan AssetsFair value of plan assets at January 1
    
    $
    200.5
    
    
    $
    123.9
    
    
    $
    63.8
    
    
    $
    38.6
    
    
    $
    3⁄4
    
    
    $
    3⁄4Actual return on plan assets
    
    
    27.8
    
    
    
    26.9
    
    
    
    7.1
    
    
    
    7.3
    
    
    
    3⁄4
    
    
    
    3⁄4Company contributions
    
    
    49.4
    
    
    
    56.6
    
    
    
    8.2
    
    
    
    14.4
    
    
    
    0.3
    
    
    
    0.7Employee contributions
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1.2
    
    
    
    1.2
    
    
    
    0.1
    
    
    
    0.1Benefits paid
    
    
    (6.6
    )
    
    
    (6.9
    )
    
    
    (2.2
    )
    
    
    (2.2
    )
    
    
    (0.4
    )
    
    
    (0.8
    )Foreign exchange translation
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    5.8
    
    
    
    4.4
    
    
    
    3⁄4
    
    
    
    3⁄4Other
    
    
    (0.6
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    0.1
    
    
    
    3⁄4
    
    
    
    3⁄4Fair value of plan assets at December 31
    
    $
    270.5
    
    
    $
    200.5
    
    
    $
    83.9
    
    
    $
    63.8
    
    
    $
    3⁄4
    
    
    $
    3⁄4Funded Status of the PlanPlan assets less than benefit obligation
    
    $
    (68.7
    )
    
    $
    (75.7
    )
    
    $
    (48.3
    )
    
    $
    (33.8
    )
    
    $
    (17.3
    )
    
    $
    (14.1
    )Unamortized:Transition obligation
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    3⁄4
    
    
    
    3⁄4Prior service cost
    
    
    4.1
    
    
    
    4.6
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    3⁄4
    
    
    
    3⁄4Net losses and other
    
    
    41.7
    
    
    
    22.0
    
    
    
    39.5
    
    
    
    25.4
    
    
    
    4.5
    
    
    
    2.6Net amount recognized
    
    $
    (22.9
    )
    
    $
    (49.1
    )
    
    $
    (8.5
    )
    
    $
    (8.1
    )
    
    $
    (12.8
    )
    
    $
    (11.5
    )Amounts Recognized in the Balance SheetAssets/(Liabilities)Intangible assets (including prepaid assets)
    
    $
    10.6
    
    
    $
    3.6
    
    
    $
    0.8
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4Accrued liabilities
    
    
    (40.1
    )
    
    
    (57.4
    )
    
    
    (24.2
    )
    
    
    (19.9
    )
    
    
    (12.8
    )
    
    
    (11.5
    )Deferred Income Tax
    
    
    2.3
    
    
    
    1.6
    
    
    
    4.1
    
    
    
    3.7
    
    
    
    3⁄4
    
    
    
    3⁄4Accumulated other comprehensive loss, net of tax
    
    
    4.3
    
    
    
    3.1
    
    
    
    10.8
    
    
    
    8.1
    
    
    
    3⁄4
    
    
    
    3⁄4Net amount recognized
    
    $
    (22.9
    )
    
    $
    (49.1
    )
    
    $
    (8.5
    )
    
    $
    (8.1
    )
    
    $
    (12.8
    )
    
    $
    (11.5
    )Pension Plans in Which Accumulated Benefit
Obligation Exceeds Plan Assets at December 31Projected benefit obligation
    
    $
    53.3
    
    
    $
    39.0
    
    
    $
    127.4
    
    
    $
    93.7Accumulated benefit obligation
    
    
    40.1
    
    
    
    33.2
    
    
    
    103.9
    
    
    
    80.0Fair value of plan assets
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    80.3
    
    
    
    60.2Accumulated Benefit Obligation at December 31
    
    $
    277.6
    
    
    $
    229.1
    
    
    $
    107.2
    
    
    $
    83.0Weighted-average assumptions as of December 31Discount rate
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    5.14
    %
    
    
    5.52
    %
    
    
    5.75
    %
    
    
    6.25
    %Expected return on assets
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    6.90
    %
    
    
    6.93
    %
    
    
    N/A
    
    
    
    N/AAverage rate of increase in compensation
    
    
    4.4
    %
    
    
    4.4
    %
    
    
    3.3
    %
    
    
    3.4
    %
    
    
    N/A
    
    
    
    N/AInitial health care cost trend rate
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    11.0
    %
    
    
    10.0
    %Ultimate health care cost trend rate
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    5.0
    %
    
    
    5.0
    %Number of years to ultimate trend rate
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    9
    
    
    
    10
 49




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31,Health Care & LifePension Benefits
    
    
    Insurance (U.S.)2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002U.S.
    
    
    Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.Components of Net Periodic Benefit
Cost:Service cost
    
    $
    21.1
    
    
    $
    5.4
    
    
    $
    17.3
    
    
    $
    3.3
    
    
    $
    16.3
    
    
    $
    2.9
    
    
    $
    0.4
    
    
    $
    0.4
    
    
    $
    0.2Interest cost
    
    
    17.7
    
    
    
    5.4
    
    
    
    15.5
    
    
    
    4.1
    
    
    
    14.1
    
    
    
    3.7
    
    
    
    1.0
    
    
    
    0.8
    
    
    
    0.7Expected return on plan assets
    
    
    (17.9
    )
    
    
    (4.5
    )
    
    
    (15.9
    )
    
    
    (2.8
    )
    
    
    (13.3
    )
    
    
    (3.1
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Amortization:Transition
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    0.7
    
    
    
    3⁄4
    
    
    
    0.1
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Amendments
    
    
    0.5
    
    
    
    
    
    
    
    0.5
    
    
    
    3⁄4
    
    
    
    0.4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4Losses(gains) and other
    
    
    1.8
    
    
    
    1.2
    
    
    
    2.1
    
    
    
    1.2
    
    
    
    (0.6
    )
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    3⁄4Net pension/postretirement
expense
    
    $
    23.2
    
    
    $
    7.5
    
    
    $
    19.5
    
    
    $
    6.5
    
    
    $
    16.9
    
    
    $
    3.9
    
    
    $
    1.6
    
    
    $
    1.3
    
    
    $
    0.9Weighted-average discount rate for
expense
    
    
    6.25
    %
    
    
    5.52
    %
    
    
    6.75
    %
    
    
    5.73
    %
    
    
    7.25
    %
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    7.25
    %Weighted-average assumed long-term
rate of return on assets
    
    
    8.75
    %
    
    
    6.93
    %
    
    
    8.75
    %
    
    
    6.94
    %
    
    
    9.50
    %
    
    
    7.42
    %Initial health care cost trend rate
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    10.0
    %
    
    
    10.0
    %
    
    
    8.5
    %Ultimate health care cost trend rate
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Number of years to ultimate trend
rate
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    10
    
    
    
    11
    
    
    
    5
 Changing the assumed health care cost trend rates by one percentage point is estimated to have
the following effects in whole dollars: One Percentage
    
    
    One PercentagePoint Increase
    
    
    Point DecreaseEffect on total of service and interest cost components
    
    $
    107,000
    
    
    $
    93,000Effect on postretirement benefit obligation
    
    
    1,148,000
    
    
    
    1,007,000
 The estimated cost for postretirement health care and life insurance benefits is accrued on an
actuarially determined basis. Retirement rate and salary increase assumptions were changed in
2003 to reflect historical experience, the effect of which was not considered material. The 2003
increase in the number of years to ultimate trend rate resulted from changes in trend assumptions. The provisions charged to income for the years ended December 31, 2004, 2003 and 2002 for all other
pension plans were approximately (in millions) $7.8, $7.3 and $7.2, respectively. The provisions charged to income for the years ended December 31, 2004, 2003 and 2002 for the
defined contribution plans were approximately (in millions) $13.7, $12.3 and $11.4, respectively. Plan Assets The Companys major U.S. and Non-U.S. pension plans weighted-average asset allocations at December
31, 2004 and 2003, by asset category, are as follows: Plan assetsU.S.
    
    
    Non U.S.Asset Category
    

    2004
    
    
    2003
    
    
    2004
    
    
    2003Equity securities
    
    72.4
    %
    
    
    64.1
    %
    
    
    84.6
    %
    
    
    85.0
    %Fixed income securities
    
    27.6
    
    
    
    35.8
    
    
    
    15.4
    
    
    
    15.0Other
    
    3⁄4
    
    
    
    0.1
    
    
    
    3⁄4
    
    
    
    3⁄4Total
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 50




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company has a long-term investment outlook for the assets held in its Company sponsored
plans, which is consistent with the long-term nature of each plans respective liabilities. The
Company has two major plans which reside in the U.S. and the United Kingdom. The U.S. Plan (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 a 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, 2004, was 84.6% equity and 15.4% fixed income. The U.K. Plan currently assumes a
rate of return on assets of 7.0%, which represents the expected long-term annual weighted-average
return. Contributions The Companys policy for funded plans is to contribute annually, at a minimum, amounts required by
applicable laws, regulations, and union agreements. The Company from time to time makes
contributions beyond those legally required. In 2004 and 2003, the Company made discretionary cash
contributions of $48.0 million and $54.0 million, respectively, to the U.S. pension plan. In 2005,
the Company expects to contribute, at a minimum, approximately $23.8 million to its worldwide
pension plans, 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): Healthcare & LifePension Benefits
    
    
    Insurance (U.S.)2005
    
    $
    12.5
    
    
    $
    0.62006
    
    
    14.6
    
    
    
    0.72007
    
    
    17.0
    
    
    
    0.92008
    
    
    18.4
    
    
    
    1.02009
    
    
    22.7
    
    
    
    1.12010-2014
    
    
    153.2
    
    
    
    7.0
 Note 7  Stock-Based Employee Compensation Certain employees of the Company participate in the stock option plan of Ford under Fords
1998 Long-Term Incentive Plan (the Plan). Grants may be made under the Plan through April 2008.
Options granted under the Plan become exercisable 33% after one year from the date of grant, 66%
after two years and in full after three years. Options under the Plan expire after 10 years from
the date of grant. 51




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A summary of option transactions is presented below: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at January 1
    
    
    7,227,817
    
    
    $
    25.10
    
    
    
    5,994,339
    
    
    $
    29.43
    
    
    
    4,647,127
    
    
    $
    33.46Granted
    
    
    1,490,500
    
    
    $
    13.26
    
    
    
    1,473,625
    
    
    $
    7.55
    
    
    
    1,499,900
    
    
    $
    16.91Expired or canceled
    
    
    (239,673
    )
    
    $
    23.59
    
    
    
    (240,147
    )
    
    $
    25.38
    
    
    
    (152,688
    )
    
    $
    24.84Exercised
    
    
    (41,811
    )
    
    $
    7.55
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Outstanding at December 31
    
    
    8,436,833
    
    
    $
    23.14
    
    
    
    7,227,817
    
    
    $
    25.10
    
    
    
    5,994,339
    
    
    $
    29.43Options exercisable at Dec. 31
    
    
    5,608,824
    
    
    $
    28.74
    
    
    
    4,305,981
    
    
    $
    30.57
    
    
    
    3,015,727
    
    
    $
    35.35Weighted-average fair value
of options granted during
year
    
    
    
    
    
    $
    4.62
    
    
    
    
    
    
    $
    1.90
    
    
    
    
    
    
    $
    6.01
 The following table summarizes information about stock options at December 31, 2004: Options Outstanding
    
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    
    WeightedAverage

    
    Average
    
    
    Number of
    
    
    AverageNumber of
    
    
    Remaining

    
    Exercise
    
    
    Shares
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Contractual Life

    
    Price
    
    
    Exercisable
    
    
    Price$41.40  $42.52
    
    
    651,556
    
    
    
    3.3
    
    
    $
    41.42
    
    
    
    651,556
    
    
    $
    41.42$35.66
    
    
    1,059,793
    
    
    
    5.1
    
    
    $
    35.66
    
    
    
    1,059,793
    
    
    $
    35.66$35.19
    
    
    946,887
    
    
    
    4.1
    
    
    $
    35.19
    
    
    
    946,887
    
    
    $
    35.19$27.42  $30.19
    
    
    1,598,975
    
    
    
    6.1
    
    
    $
    27.79
    
    
    
    1,598,975
    
    
    $
    27.79$16.91
    
    
    1,371,350
    
    
    
    7.2
    
    
    $
    16.91
    
    
    
    905,091
    
    
    $
    16.91$13.07  $13.26
    
    
    1,455,175
    
    
    
    9.2
    
    
    $
    13.26
    
    
    
    
    
    
    
    $7.55
    
    
    1,353,097
    
    
    
    8.2
    
    
    $
    7.55
    
    
    
    446,522
    
    
    $
    7.55
 Note 8  Revenue Earning Equipment Revenue earning equipment consists of rental cars and industrial and construction equipment
and leased cars under closed-end leases where the disposition of the cars upon termination of the
lease is for the account of the Company. Depreciation of revenue earning equipment includes the following (in thousands of dollars): Years ended December 31,2004
    
    
    2003
    
    
    2002Depreciation of revenue earning equipment
    
    $
    1,506,988
    
    
    $
    1,504,482
    
    
    $
    1,492,292Adjustment of depreciation upon disposal of the equipment
    
    
    (57,212
    )
    
    
    808
    
    
    
    (10,801
    )Rents paid for vehicles leased
    
    
    13,482
    
    
    
    18,101
    
    
    
    18,077Total
    
    $
    1,463,258
    
    
    $
    1,523,391
    
    
    $
    1,499,568
 The adjustment of depreciation upon disposal of revenue earning equipment for the years ended
December 31, 2004, 2003 and 2002 included (in millions) a net gain of $25.8, a net loss of $1.9 and
a
net gain of $7.1, respectively, on the disposal of industrial and construction equipment, and net gains
of $31.4, $1.1 and $3.7, respectively, on the disposal of cars used in the car rental and car leasing
operations. 52




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 9  Taxes on Income The provision (benefit) for taxes on income consists of the following (in thousands of
dollars): Years ended December 31,2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    (22,950
    )
    
    $
    (214,487
    )
    
    $
    (37,368
    )Foreign
    
    
    16,679
    
    
    
    22,341
    
    
    
    6,085State and local
    
    
    10,565
    
    
    
    10,175
    
    
    
    (2,711
    )Total current
    
    
    4,294
    
    
    
    (181,971
    )
    
    
    (33,994
    )Deferred:Federal
    
    
    132,877
    
    
    
    270,248
    
    
    
    91,940Foreign
    
    
    (11,801
    )
    
    
    (6,400
    )
    
    
    3,300State and local
    
    
    8,500
    
    
    
    (3,000
    )
    
    
    11,100Total deferred
    
    
    129,576
    
    
    
    260,848
    
    
    
    106,340Total provision
    
    $
    133,870
    
    
    $
    78,877
    
    
    $
    72,346
 The principal items in the deferred tax provision (benefit) are as follows (in thousands of
dollars): Years ended December 31,2004
    
    
    2003
    

    
    2002Difference between tax and book depreciation
    
    $
    489,202
    
    
    $
    145,208
    
    
    $
    464,653Accrued and prepaid expense deducted for tax purposes
when paid or incurred
    
    
    (41,640
    )
    
    
    (32,267
    )
    
    
    (3,078
    )Tax operating loss (carryforwards) utilized
    
    
    (341,090
    )
    
    
    288,783
    
    
    
    (365,982
    )Foreign tax credit (carryforwards) utilized
    
    
    (8,556
    )
    
    
    (105,980
    )
    
    
    8,595Federal and state alternative minimum tax credit
(carryforwards) utilized
    
    
    (3,288
    )
    
    
    (34,896
    )
    
    
    2,152Increase in valuation allowance
    
    
    34,948
    
    
    
    
    
    
    
    Total deferred provision
    
    $
    129,576
    
    
    $
    260,848
    
    
    $
    106,340
 The principal items in the deferred tax liability at December 31, 2004 and 2003 are as follows (in
thousands of dollars): 2004
    
    
    2003Difference between tax and book depreciation
    
    $
    1,680,024
    
    
    $
    1,190,822Accrued and prepaid expense deducted for tax purposes when
paid or incurred
    
    
    (262,970
    )
    
    
    (220,254
    )Tax operating loss carryforwards
    
    
    (423,585
    )
    
    
    (82,495
    )Foreign tax credit carryforwards, net of valuation allowance
    
    
    (105,585
    )
    
    
    (131,977
    )Federal and state alternative minimum tax credit carryforwards
    
    
    (38,184
    )
    
    
    (34,896
    )Total
    
    $
    849,700
    
    
    $
    721,200
 At December 31, 2004 the Company had operating loss carryforwards for federal, state and foreign
tax purposes totaling $423.6 million, of which $391.5 million expire through 2024. The remaining
$32.1 million may be carried forward indefinitely. It is anticipated that such operations will
become profitable in the future and the carryforwards will be fully utilized. The foreign tax
credit carryforwards, net of valuation allowance, at December 31, 2004 of $105.6 million expire
through 2014 and are expected to be fully utilized in the consolidated U.S. tax return of Ford. In
connection with the filing of the 2003 consolidated tax return, net operating losses of the Company
were carried back to prior periods, which increased the 53




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) amount of foreign tax credit carryforwards.
The federal and state alternative minimum tax credit carryforwards of $38.2 million may be used
indefinitely to reduce federal and state income taxes. In October 2004, President Bush signed the American Job Creation Act of 2004 (the Act), which
contains provisions related to the distribution of the earnings of foreign subsidiaries. There are
currently significant uncertainties as to how these provisions will actually be implemented. The
Company is in the process of evaluating the impact of the provisions of the Act. 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): Years ended December 31,2004
    
    
    2003
    
    
    2002Computed tax at statutory rate
    
    $
    175,893
    
    
    $
    83,122
    
    
    $
    75,738State and local income taxes, net of Federal income tax benefit
    
    
    12,392
    
    
    
    4,664
    
    
    
    5,453Income taxes on foreign earnings at effective rates different from
the U.S. statutory rate, including the anticipated realization of
certain foreign tax benefits and the effect of subsidiaries gains
and losses and exchange adjustments with no tax effect
    
    
    (7,529
    )
    
    
    (9,949
    )
    
    
    (5,989
    )Increase in valuation allowance
    
    
    34,948
    
    
    
    
    
    
    
    Adjustments made to Federal and foreign tax accruals in connection
with tax audit evaluations
    
    
    (69,834
    )
    
    
    
    
    
    
    Favorable foreign tax adjustments relating to tax return filings
    
    
    (11,684
    )
    
    
    
    
    
    
    All other items, net
    
    
    (316
    )
    
    
    1,040
    
    
    
    (2,856
    )Total provision
    
    $
    133,870
    
    
    $
    78,877
    
    
    $
    72,346
 Note 10  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): Years ended December 31,2004
    
    
    2003
    
    
    2002Rents
    
    $
    100,243
    
    
    $
    90,421
    
    
    $
    80,857Concession fees:Minimum fixed obligations
    
    
    227,535
    
    
    
    230,443
    
    
    
    215,385Additional amounts, based on revenues
    

    
    182,069
    
    
    
    132,860
    
    
    
    139,918Total
    
    $
    509,847
    
    
    $
    453,724
    
    
    $
    436,160
 As of December 31, 2004, minimum obligations under existing agreements referred to above are
approximately as follows (in thousands of dollars): Rents
    
    
    ConcessionsYears ended December 31,2005
    
    $
    77,994
    
    
    $
    166,1082006
    
    
    66,028
    
    
    
    140,3552007
    
    
    53,083
    
    
    
    117,0982008
    
    
    42,541
    
    
    
    74,3722009
    
    
    30,524
    
    
    
    50,564Years after 2009
    
    
    101,843
    
    
    
    321,485
 54




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Many of the Companys concession agreements and real estate leases require it 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, Hertz has various leases on revenue earning equipment and office and
computer equipment under which the following amounts were expensed (in thousands of dollars): Years ended December 31,2004
    
    
    2003
    
    
    2002Revenue earning equipment
    
    $
    13,482
    
    
    $
    18,101
    
    
    $
    18,077Office and computer equipment
    
    
    15,338
    
    
    
    13,075
    
    
    
    11,732Total
    
    $
    28,820
    
    
    $
    31,176
    
    
    $
    29,809
 As of December 31, 2004, minimum obligations under existing agreements referred to above that have
a maturity of more than one year are as follows (in thousands): 2005, $15,587; 2006, $9,905; 2007,
$2,515; 2008, $134; 2009, $81; after 2009, $29. Note 11  Segment Information The Company follows 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. The
segment revenues information below for 2003 and 2002 has been restated to reflect the effect of the
Companys Restatement as discussed in Note 1A  Restatement of Consolidated Statements of
Operations. The Company has identified two significant segments: rental of cars and light trucks (car
rental); and rental of industrial, construction and materials handling equipment (industrial and
construction equipment rental). The contribution of these segments, as well as corporate and
other, for each of the three years ended December 31, 2004 are summarized below (in millions of
dollars). Corporate and other includes general corporate expenses, certain interest expense, as
well as other business activities, such as claim management and, prior to 2003, telecommunication
services. Years ended December 31,2004
    
    
    2003
    
    
    2002Revenues (Restated)Car rental
    
    $
    5,508
    
    
    $
    4,889
    
    
    $
    4,610Industrial and construction equipment rental
    
    
    1,162
    
    
    
    1,038
    
    
    
    1,019Corporate and other
    
    
    6
    
    
    
    7
    
    
    
    9Total
    
    $
    6,676
    
    
    $
    5,934
    
    
    $
    5,638Income (loss) before income taxes and minority interestCar rental
    
    $
    438
    
    
    $
    279
    
    
    $
    264Industrial and construction equipment rental
    
    
    88
    
    
    
    (22
    )
    
    
    (38
    )Corporate and other
    
    
    (23
    )
    
    
    (20
    )
    
    
    (10
    )Total
    
    $
    503
    
    
    $
    237
    
    
    $
    216Depreciation of revenue earning equipmentCar rental
    
    $
    1,228
    
    
    $
    1,258
    
    
    $
    1,229Industrial and construction equipment rental
    
    
    235
    
    
    
    265
    
    
    
    271Corporate and other
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,463
    
    
    $
    1,523
    
    
    $
    1,500
 55




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31,2004
    
    
    2003
    
    
    2002Depreciation of property and equipmentCar rental
    
    $
    136
    
    
    $
    111
    
    
    $
    116Industrial and construction equipment rental
    
    
    37
    
    
    
    36
    
    
    
    35Corporate and other
    
    
    5
    
    
    
    5
    
    
    
    4Total
    
    $
    178
    
    
    $
    152
    
    
    $
    155Amortization of intangiblesCar rental
    
    $
    1
    
    
    $
    
    
    
    $
    Industrial and construction equipment rental
    
    
    
    
    
    
    1
    
    
    
    1Corporate and other
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1
    
    
    $
    1
    
    
    $
    1Operating income (loss): pre-tax income (loss) before
interest expense and minority interestCar rental
    
    $
    742
    
    
    $
    551
    
    
    $
    530Industrial and construction equipment rental
    
    
    160
    
    
    
    54
    
    
    
    52Corporate and other
    
    
    (15
    )
    
    
    (12
    )
    
    
    1Total
    
    $
    887
    
    
    $
    593
    
    
    $
    583Total assets at end of yearCar rental
    
    $
    10,351
    
    
    $
    9,310
    
    
    $
    8,354Industrial and construction equipment rental
    
    
    2,157
    
    
    
    1,891
    
    
    
    1,965Corporate and other
    
    
    1,588
    
    
    
    1,378
    
    
    
    810Total
    
    $
    14,096
    
    
    $
    12,579
    
    
    $
    11,129Revenue earning equipment, net, at end of yearCar rental
    
    $
    7,597
    
    
    $
    6,462
    
    
    $
    5,998Industrial and construction equipment rental
    
    
    1,526
    
    
    
    1,331
    
    
    
    1,428Corporate and other
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    9,123
    
    
    $
    7,793
    
    
    $
    7,426Revenue earning equipment and property and equipmentCar rentalExpenditures
    
    $
    10,885
    
    
    $
    9,292
    
    
    $
    9,891Proceeds from disposals
    
    
    (8,554
    )
    
    
    (7,701
    )
    
    
    (7,901
    )Net expenditures
    
    $
    2,331
    
    
    $
    1,591
    
    
    $
    1,990Industrial and construction equipment rentalExpenditures
    
    $
    708
    
    
    $
    368
    
    
    $
    272Proceeds from disposals
    
    
    (246
    )
    
    
    (228
    )
    
    
    (197
    )Net expenditures
    
    $
    462
    
    
    $
    140
    
    
    $
    75Corporate and otherExpenditures
    
    $
    3
    
    
    $
    3
    
    
    $
    4Proceeds from disposals
    
    
    
    
    
    
    
    
    
    
    Net expenditures
    
    $
    3
    
    
    $
    3
    
    
    $
    4
 56




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company operates in the United States and in foreign countries. Foreign operations are
substantially in Europe. The operations within major geographic areas are summarized as follows
(in millions of dollars): Years ended December 31,2004
    
    
    2003
    
    
    2002Revenues (Restated)United States
    
    $
    4,678
    
    
    $
    4,256
    
    
    $
    4,221Foreign
    
    
    1,998
    
    
    
    1,678
    
    
    
    1,417Total
    
    $
    6,676
    
    
    $
    5,934
    
    
    $
    5,638Income before income taxes and minority interestUnited States
    
    $
    323
    
    
    $
    132
    
    
    $
    131Foreign
    
    
    180
    
    
    
    105
    
    
    
    85Total
    
    $
    503
    
    
    $
    237
    
    
    $
    216Depreciation of revenue earning equipmentUnited States
    
    $
    1,107
    
    
    $
    1,241
    
    
    $
    1,252Foreign
    
    
    356
    
    
    
    282
    
    
    
    248Total
    
    $
    1,463
    
    
    $
    1,523
    
    
    $
    1,500Depreciation of property and equipmentUnited States
    
    $
    137
    
    
    $
    114
    
    
    $
    124Foreign
    
    
    41
    
    
    
    38
    
    
    
    31Total
    
    $
    178
    
    
    $
    152
    
    
    $
    155Amortization of intangiblesUnited States
    
    $
    
    
    
    $
    1
    
    
    $
    1Foreign
    
    
    1
    
    
    
    
    
    
    
    Total
    
    $
    1
    
    
    $
    1
    
    
    $
    1Operating income: pre-tax income before interest
expense and minority interestUnited States
    
    $
    661
    
    
    $
    449
    
    
    $
    461Foreign
    
    
    226
    
    
    
    144
    
    
    
    122Total
    
    $
    887
    
    
    $
    593
    
    
    $
    583Total assets at end of yearUnited States
    
    $
    10,099
    
    
    $
    9,014
    
    
    $
    8,423Foreign
    
    
    3,997
    
    
    
    3,565
    
    
    
    2,706Total
    
    $
    14,096
    
    
    $
    12,579
    
    
    $
    11,129Revenue earning equipment, net, at end of yearUnited States
    
    $
    6,705
    
    
    $
    5,873
    
    
    $
    5,908Foreign
    
    
    2,418
    
    
    
    1,920
    
    
    
    1,518Total
    
    $
    9,123
    
    
    $
    7,793
    
    
    $
    7,426Revenue earning equipment and property and equipmentUnited StatesExpenditures
    
    $
    7,928
    
    
    $
    6,801
    
    
    $
    7,714Proceeds from disposals
    
    
    (5,818
    )
    
    
    (5,453
    )
    
    
    (5,995
    )Net expenditures
    
    $
    2,110
    
    
    $
    1,348
    
    
    $
    1,719ForeignExpenditures
    
    $
    3,668
    
    
    $
    2,862
    
    
    $
    2,453Proceeds from disposals
    
    
    (2,982
    )
    
    
    (2,476
    )
    
    
    (2,103
    )Net expenditures
    
    $
    686
    
    
    $
    386
    
    
    $
    350
 57




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 12  Litigation and Guarantees Litigation  Pending On March 1, 2002, Bowdoin Square, L.L.C. v. Winn-Dixie Montgomery, Inc., Wal-Mart Stores East,
Inc., The Hertz Corporation, et al.was commenced in the Circuit Court for Madison County, Alabama.
The complaint alleges that the Company, Wal-Mart Stores East, Inc. and other defendants violated
certain private land use restrictions and intentionally interfered with plaintiffs contractual
relationship with its tenant, Winn-Dixie Montgomery, Inc., when the Company subleased a former
Wal-Mart store located in a shopping center in Saraland (Mobile County), Alabama. The complaint
also alleges that the Company and other defendants negligently and wantonly injured the value of
plaintiffs interest in the shopping center. A motion to transfer the case to the Circuit Court for
Mobile County was granted in September 2002, and the Company filed its answer to the complaint.
The plaintiffs claims against Winn-Dixie Montgomery, Inc. have been severed and will be tried
separately from the claims against Wal-Mart and the Company. A trial of the claims against
Wal-Mart and the Company is scheduled to begin in April 2005. On August 1, 2002, Jennifer Myers, an individual and on behalf of all others similarly situated, v.
The Hertz Corporationwas filed in the United States District Court for the Eastern District of New
York. The complaint alleges a nationwide opt-in collective action on behalf of all Senior
Station Managers, Station Managers and B Station Managers employed by the Company throughout the
United States, contesting their exempt classification and seeking payment of overtime compensation
under the federal Fair Labor Standards Act (FLSA). The complaint also contains a subclass for
all such managers employed in New York for alleged violations of state labor laws. Plaintiffs
have not yet been permitted to obtain a nationwide opt-in, as discovery has been thus far limited
to the location where the plaintiffs are employed in an effort by the court to determine the
viability of a nationwide action. To that end, depositions were completed, and in July 2004 the
Company fully briefed and filed a motion for summary judgment, which was denied in March 2005. On June 16, 2003, Wide World Tours of Mission Valley, Inc., Travel Support Systems, Inc., Vacation
Marketing Group of Hawaii., Cecilia Pedroza, and International Travel Bureau, Inc. v. Avis Rent A
Car System, Inc., Budget Rent A Car System, Inc., Dollar Rent A Car, Inc., Enterprise Rent-A-Car
Company, The Hertz Corporation, and Thrifty Rent-A-Car System, Inc.was commenced in Superior Court
of the State of California, for the County of San Diego. Wide World Tourspurports to be a class
action on behalf of certain United States travel agents and agencies that regularly book customers
with the major rental car companies. The complaint alleges that the defendant rental car companies
breached their unwritten contracts with the plaintiffs by knowingly and deliberately
under-reporting and underpaying the commissions due to the plaintiffs, that in so doing the
defendants engaged in deceit and that the defendants engaged in unfair competition by deducting
processing fees or other administrative fees from payments they make to travel agents. After the
defendants filed misjoinder motions, an amended complaint was filed against the Company with a
separate new lawsuit commenced against Avis. After a hearing in April 2004, the judge certified a
class of California only travel agencies. In November 2004, the Company and the representative
plaintiffs, following mediation, agreed to a nationwide settlement. Under the terms of the
settlement, the plaintiffs will file an amended complaint on behalf of a nationwide class of travel
agents and the Company, without admitting liability and in return for a general release, will
provide members of the settlement class with car rental certificates the majority of which, when
utilized by customers of the class members, will result in the payment of a bonus commission to the
sponsoring members. In addition, the Company has agreed to pay the fees of the plaintiffs
attorneys. In March 2005, the court granted preliminary approval to the settlement. On August 28, 2003, Naomi R. Henderson, individually and on behalf of all others similarly
situated, v. The Hertz Corporationwas commenced in the Superior Court of New Jersey, Essex County.
Hendersonpurports to be a class action on behalf of all persons who purchased optional insurance
products in the State of New Jersey or in other states from or through the Company at times that
the Company did not have required licenses to sell such insurance. In January 2004, the Companys
motion to dismiss was granted and an order of dismissal was thereafter entered. The plaintiff has
appealed the dismissal, and
that appeal has now been briefed, argued and submitted to the New Jersey Appellate Division for a
decision. 58




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On December 22, 2003, Stephen Moore, on behalf of himself and all others similarly situated, v. The
Hertz Corporationwas commenced in the Circuit Court of the Thirteenth Judicial Circuit of the
State of Florida, in and for Hillsborough County. Moorepurports to be a class action on behalf of
persons who rented vehicles from the Company in Florida and were allegedly overcharged for the
recovery of a tire and battery solid waste management fee and the recovery of registration fees for
the issuance of Florida license plates. Similar lawsuits were separately commenced by the same
plaintiff against Avis Rent A Car System Inc. and Budget Rent A Car System, Inc. In February 2004,
the plaintiff filed an amended class action complaint which alleges that, in addition to the
initial causes of action, the Company deceptively collected an improper federal excise tax on
frequent flyer mileage awards to class members. The Company answered the amended complaint and
discovery commenced. In January 2005, the Company filed a motion for summary judgment and the
plaintiff filed a revised motion for class certification. Rulings on these motions are expected in
the second quarter of 2005. On March 15, 2004, Jose M. Gomez, individually and on behalf of all other similarly situated
persons, v. The Hertz Corporationwas commenced in the 214th Judicial District Court of
Nueces County, Texas. Gomezpurports to be a class action filed alternatively on behalf of all
persons who were charged a Fuel and Service Charge (FSC) by the Company or all Texas residents
who were charged a FSC by the Company. The complaint, alleges that the FSC is an unlawful penalty
and that, therefore, it is void and unenforceable. In response to various motions by the Company,
the plaintiff has filed two amended complaints which scaled back the putative class from a
nationwide class to a class of all Texas residents who were charged a FSC by the Company or by its
Corpus Christi Licensee. A new cause of action was also added for conversion. After some limited
discovery, the Company filed a motion for summary judgment in December 2004. That motion was
denied in January 2005. More extensive discovery will now commence. On November 18, 2004, Keith Kochner, individually and on behalf of all similarly situated persons,
v. The Hertz Corporationwas commenced in the District Court in and for Tulsa County, State of
Oklahoma. As with the Gomezcase, Kochnerpurports to be a class action, this time on behalf of
Oklahoma residents who rented from the Company and incurred the Companys FSC. The petition
alleges 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.
In March 2005, the trial court granted the Companys motion to dismiss the action but also granted
the plaintiff the right to replead. In addition, the Company is currently a defendant in numerous actions and has received numerous
claims on which actions have not yet been commenced for bodily injury, including death, and
property damage (PL/PD) arising from the operation of motor vehicles and equipment rented from
the Company and its licensees. In aggregate, the Company can be expected to expend material sums
to defend and settle PL/PD actions and claims or to pay judgments resulting from them. Among the PL/PD pending actions against the Company are a total of 142 actions filed in Mississippi
on behalf of 4,176 plaintiffs seeking damages for silicosis, which the plaintiffs allegedly
sustained from the use of equipment rented from HERC. The complaints name HERC as one of
approximately 88 co-defendants. PL/PD claims and actions are provided for within the Companys
PL/PD program. The Company believes it has meritorious defenses in the foregoing matters and will defend itself
vigorously. In addition to the foregoing, various legal actions, claims and governmental inquiries and
proceedings are pending or may be instituted or asserted in the future against the Company and its
subsidiaries. Litigation is subject to many uncertainties, and the outcome of the individual
litigated matters is not predictable with assurance. It is possible that certain of the actions,
claims, inquiries or proceedings, including those discussed above, could be decided unfavorably to
the Company or the subsidiary
involved. Although the amount of liability with respect to these matters cannot be ascertained,
potential liability in excess of 59




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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) related accruals is not expected to materially affect the
consolidated financial position, results of operations or cash flows of the Company. Litigation  Recently Resolved James Han, individually and on behalf of all others similarly situated v. The Hertz Corporation.
(Previously discussed on pages 9 and 10 of the Companys Annual Report on Form 10-K for the year
ended December 31, 2003.) The Appellate Division of the New York Supreme Court, First Department,
affirmed the trial courts dismissal of Han. The time period for further appeal has now expired. Guarantees At December 31, 2004, the following guarantees were issued and outstanding. Indemnifications:In the ordinary course of business, the Company executes 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 against any of the
following: environmental and tax 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. The Company regularly evaluates the
probability of having to incur costs associated with these indemnifications and has accrued for
expected losses that are probable. The types of indemnifications for which payments are possible
include the following: Environmental:The Company has 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 costs or
damages for which the Company may be held responsible could be substantial. The probable
losses that the Company expects to incur in connection with many of these sites have been
accrued and those losses are reflected in the Companys consolidated financial statements.
At December 31, 2004, the aggregate amount accrued for environmental liabilities reflected
in the Companys consolidated balance sheet in Other accrued liabilities is $5.4 million.
The accrual represents the estimated cost to study potential environmental issues at sites
deemed investigation or clean-up activities, and the estimated cost to implement remediation
actions, including on-going 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 the Company ultimately may
be responsible cannot be reasonably estimated because of uncertainties with respect to
factors such as the Companys 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). As a result, the Company is unable to estimate a
maximum amount for costs or other damages for which it is potentially responsible in
connection with these indemnifications, which are generally uncapped. Tax:The Company provides various tax-related indemnifications as part of transactions. The
indemnified party typically is protected from certain events that result in a tax treatment
different from that originally anticipated. In some cases, a payment under a tax
indemnification may be offset in whole or in part by refunds from the applicable
governmental taxing authority. The Company is party to a number of tax indemnifications and
many of these indemnities do not limit potential payment; therefore, the Company is unable
to estimate a maximum amount of potential future payments that could result from claims made
under these indemnities. 60




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13  Quarterly Financial Information (Unaudited) The following quarterly results of operations for 2004 and 2003 have been restated to reflect
the effect of the Restatement as discussed in Note 1A  Restatement of Consolidated Statements of
Operations (in thousands of dollars): First Quarter 2004
    
    
    Second Quarter 2004 (1)
    
    
    Third Quarter 2004(5)As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    FourthPreviously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Quarter
    
    
    Year endedReported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    2004(2)(5)
    
    
    Dec. 31, 2004Revenues:Car rental
    
    $
    1,053,242
    
    
    $
    1,198,213
    
    
    $
    1,187,158
    
    
    $
    1,353,706
    
    
    $
    1,363,814
    
    
    $
    1,538,357
    
    
    $
    1,340,529
    
    
    $
    5,430,805Industrial and construction
equipment rental
    
    
    209,956
    
    
    
    240,268
    
    
    
    243,467
    
    
    
    281,989
    
    
    
    277,047
    
    
    
    316,331
    
    
    
    323,367
    
    
    
    1,161,955Other
    
    
    14,750
    
    
    
    17,763
    
    
    
    17,111
    
    
    
    20,427
    
    
    
    20,239
    
    
    
    24,509
    
    
    
    20,493
    
    
    
    83,192Total revenues
    
    
    1,277,948
    
    
    
    1,456,244
    
    
    
    1,447,736
    
    
    
    1,656,122
    
    
    
    1,661,100
    
    
    
    1,879,197
    
    
    
    1,684,389
    
    
    
    6,675,952Expenses:Direct operating
    
    
    688,436
    
    
    
    865,145
    
    
    
    709,907
    
    
    
    916,684
    
    
    
    778,384
    
    
    
    994,164
    
    
    
    958,368
    
    
    
    3,734,361Depreciation of revenue earning
equipment
    
    
    359,958
    
    
    
    359,958
    
    
    
    353,784
    
    
    
    353,784
    
    
    
    370,738
    
    
    
    370,738
    
    
    
    378,778
    
    
    
    1,463,258Selling, general and administrative
    
    
    146,587
    
    
    
    148,174
    
    
    
    142,586
    
    
    
    144,195
    
    
    
    158,742
    
    
    
    161,059
    
    
    
    137,889
    
    
    
    591,317Interest, net of interest income
    
    
    87,963
    
    
    
    87,963
    
    
    
    94,743
    
    
    
    94,743
    
    
    
    102,372
    
    
    
    102,372
    
    
    
    99,386
    
    
    
    384,464Total expenses
    
    
    1,282,944
    
    
    
    1,461,240
    
    
    
    1,301,020
    
    
    
    1,509,406
    
    
    
    1,410,236
    
    
    
    1,628,333
    
    
    
    1,574,421
    
    
    
    6,173,400Income (loss) before income taxes
and minority interest
    
    
    (4,996
    )
    
    
    (4,996
    )
    
    
    146,716
    
    
    
    146,716
    
    
    
    250,864
    
    
    
    250,864
    
    
    
    109,968
    
    
    
    502,552(Provision) benefit for taxes on income
    
    
    1,713
    
    
    
    1,713
    
    
    
    (51,250
    )
    
    
    (51,250
    )
    
    
    (64,968
    )
    
    
    (64,968
    )
    
    
    (19,365
    )
    
    
    (133,870
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,456
    )
    
    
    (1,456
    )
    
    
    (1,755
    )
    
    
    (3,211
    )Net income (loss)
    
    $
    (3,283
    )
    
    $
    (3,283
    )
    
    $
    95,466
    
    
    $
    95,466
    
    
    $
    184,440
    
    
    $
    184,440
    
    
    $
    88,848
    
    
    $
    365,471
 Year endedFirst Quarter 2003(3)
    
    
    Second Quarter 2003(3)(4)
    
    
    Third Quarter 2003
    
    
    Fourth Quarter 2003
    
    
    Dec. 31, 2003As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    AsPreviously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Previously
    
    
    As
    
    
    Previously
    
    
    AsReported
    
    
    Restated

    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    RestatedRevenues:Car rental
    
    $
    938,850
    
    
    $
    1,068,230
    
    
    $
    1,033,668
    
    
    $
    1,178,900
    
    
    $
    1,225,400
    
    
    $
    1,384,089
    
    
    $
    1,041,326
    
    
    $
    1,188,036
    
    
    $
    4,239,244
    
    
    $
    4,819,255Industrial and construction
equipment rental
    
    
    194,087
    
    
    
    220,261
    
    
    
    220,710
    
    
    
    256,000
    
    
    
    245,966
    
    
    
    280,517
    
    
    
    243,819
    
    
    
    280,976
    
    
    
    904,582
    
    
    
    1,037,754Other
    
    
    14,723
    
    
    
    17,579
    
    
    
    15,431
    
    
    
    18,815
    
    
    
    18,178
    
    
    
    21,997
    
    
    
    15,771
    
    
    
    18,270
    
    
    
    64,103
    
    
    
    76,661Total revenues
    
    
    1,147,660
    
    
    
    1,306,070
    
    
    
    1,269,809
    
    
    
    1,453,715
    
    
    
    1,489,544
    
    
    
    1,686,603
    
    
    
    1,300,916
    
    
    
    1,487,282
    
    
    
    5,207,929
    
    
    
    5,933,670Expenses:Direct operating
    
    
    621,369
    
    
    
    778,215
    
    
    
    625,522
    
    
    
    807,682
    
    
    
    690,701
    
    
    
    885,871
    
    
    
    659,135
    
    
    
    844,333
    
    
    
    2,596,727
    
    
    
    3,316,101Depreciation of revenue earning
equipment
    
    
    363,026
    
    
    
    363,026
    
    
    
    373,037
    
    
    
    373,037
    
    
    
    396,808
    
    
    
    396,808
    
    
    
    390,520
    
    
    
    390,520
    
    
    
    1,523,391
    
    
    
    1,523,391Selling, general and
administrative
    
    
    131,213
    
    
    
    132,777
    
    
    
    122,204
    
    
    
    123,950
    
    
    
    125,486
    
    
    
    127,375
    
    
    
    116,373
    
    
    
    117,541
    
    
    
    495,276
    
    
    
    501,643Interest, net of interest income
    
    
    88,888
    
    
    
    88,888
    
    
    
    89,422
    
    
    
    89,422
    
    
    
    88,966
    
    
    
    88,966
    
    
    
    87,767
    
    
    
    87,767
    
    
    
    355,043
    
    
    
    355,043Total expenses
    
    
    1,204,496
    
    
    
    1,362,906
    
    
    
    1,210,185
    
    
    
    1,394,091
    
    
    
    1,301,961
    
    
    
    1,499,020
    
    
    
    1,253,795
    
    
    
    1,440,161
    
    
    
    4,970,437
    
    
    
    5,696,178Income (loss) before income taxes
    
    
    (56,836
    )
    
    
    (56,836
    )
    
    
    59,624
    
    
    
    59,624
    
    
    
    187,583
    
    
    
    187,583
    
    
    
    47,121
    
    
    
    47,121
    
    
    
    237,492
    
    
    
    237,492(Provision) benefit for taxes on
income
    
    
    19,144
    
    
    
    19,144
    
    
    
    (20,034
    )
    
    
    (20,034
    )
    
    
    (60,888
    )
    
    
    (60,888
    )
    
    
    (17,099
    )
    
    
    (17,099
    )
    
    
    (78,877
    )
    
    
    (78,877
    )Net income (loss)
    
    $
    (37,692
    )
    
    $
    (37,692
    )
    
    $
    39,590
    
    
    $
    39,590
    
    
    $
    126,695
    
    
    $
    126,695
    
    
    $
    30,022
    
    
    $
    30,022
    
    
    $
    158,615
    
    
    $
    158,615
   (1)
    
    Includes $7.0 million received in the second quarter of 2004 regarding claims made by the
Company on its insurance policies for business interruption losses resulting from the
terrorist attacks of September 11, 2001.(2)
    
    Includes a final gain of $7.5 million in the fourth quarter of 2004 from the condemnation of
a car rental and support facility in Florida.(3)
    
    Includes a credit totaling $7.8 million in the first and second quarter of 2003 from a
one-time refund of Goods and Service Tax related to the Companys Australian car rental
operations.(4)
    
    Includes an initial gain of $8.0 million in the second quarter of 2003 from the condemnation
of a car rental and support facility in Florida.(5)
    
    Includes favorable foreign tax adjustments of $23.3 million in the third quarter of 2004 and
net favorable domestic and foreign tax adjustments of $23.3 million in the fourth quarter of
2004. 61




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 14  Financial Instruments Financial instruments, which potentially subject the Company to concentrations of credit risk,
consist principally of cash equivalents, short term investments and trade receivables. The Company
places its 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 the
Companys customer base, and their dispersion across different businesses and geographic areas. As
of December 31, 2004, the Company had no significant concentration of credit risk. Cash and Equivalents Fair value approximates cost indicated on the balance sheet at December 31, 2004 because of the
short-term maturity of these instruments. Short-Term Investments Fair value approximates cost indicated on the balance sheet at December 31, 2004 because of the
short-term maturity of these instruments. The balance at December 31, 2004, of $557.0 million
consists of investments with a related party investment fund that pools and invests excess cash
balances of Ford and certain Ford subsidiaries. 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 the Company for
loans with similar terms and average maturities. The fair value of all debt at December 31, 2004
and December 31, 2003 approximated $8.63 billion and $7.89 billion, respectively, compared to
carrying value of $8.43 billion and $7.63 billion, respectively. Derivative Financial Instruments From time to time, the Company and its subsidiaries enter into arrangements to manage exposure to
fluctuations in interest rates. These arrangements consist of interest-rate swap agreements. The differential paid or received on these agreements is recognized as an adjustment to
interest expense. These agreements are not entered into for speculative or trading purposes.
Effective September 30, 2003, the Company entered into interest rate swap agreements relating to
the issuance of its 4.7% Senior Promissory notes due October 2, 2006. Effective June 3, 2004, the
Company entered into interest rate swap agreements relating to the issuance of its 6.35% Senior
Promissory notes due June 15, 2010. Under these agreements, the Company pays interest at a
variable rate in exchange for fixed rate receipts, effectively transforming these notes to floating
rate obligations. The Company and its subsidiaries have entered into arrangements to manage exposure to fluctuations
in foreign exchange rates, for selected marketing programs. These arrangements consist of the
purchase of foreign exchange options. At December 31, 2004, the total notional amount of these
instruments was $24.9 million, maturing at various dates in 2005 and 2006, and the fair value of
all outstanding contracts, was approximately $0.3 million. The fair value of the foreign currency
instruments was estimated using market prices provided by financial institutions. Gains and
losses resulting from changes in the fair value of these instruments are included in earnings. The
total notional amount included options to sell British Pounds, Canadian dollars, Yen and Euro, in
the notional amounts of $17.5 million, $3.2 million, $2.7 million and $1.5 million, respectively. The Company and its subsidiaries manage exposure to fluctuations in currency risk on intercompany
loans the Company makes to certain of its foreign subsidiaries by entering into foreign currency
forward contracts (forwards) at the time of the loans. The forward rate is reflected in the
intercompany loan rate to the foreign subsidiaries, and as a result, the forward contracts have no
impact on earnings. At December 31, 2004, the total notional amount of these forwards was $140.3
million, maturing within one 62




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) to three months. The total notional amount includes forwards to sell Australian dollars, Euro,
Swiss Francs and British Pounds in the notional amounts of $55.2 million, $41.1 million, $23.7
million and $20.3 million, respectively. Note 15  Relationship with Ford The Company is an indirect wholly owned subsidiary of Ford. The Company and certain of its
subsidiaries have entered into contracts, or other transactions or relationships, with Ford or
subsidiaries of Ford, the most significant of which are described below. Car purchases and repurchases Over the three years ended December 31, 2004, on a weighted-average basis, approximately 51% of the
cars acquired by the Company for its U.S. car rental fleet, and approximately 31% of the cars
acquired by the Company for its international fleet, were manufactured by Ford and subsidiaries.
During 2004, approximately 41% of the cars acquired by the Company domestically were manufactured
by Ford and subsidiaries and approximately 32% of the cars acquired by the Company for its
international fleet were manufactured by Ford and subsidiaries, which represented the largest
percentage of any automobile manufacturer in that year. The Company and Ford are parties to a car supply agreement, which commenced on September 1, 1997,
for a period of ten years. Under the agreement, Ford and the Company have agreed to negotiate in
good faith on an annual basis with respect to the supply of cars. For each model year, Ford must
supply cars to the Company on terms and conditions that are no less favorable than those offered by
Ford to other daily car rental companies. Effective September 1, 2004, the Company and Ford
amended the agreement with respect to the 2005 through 2007 vehicle model years. As amended, the
agreement only applies to the Companys fleet requirements in the United States and to Ford,
Lincoln or Mercury brand vehicles. The original agreement was global in scope. As a result of
the changes that were made, on a per model year basis, the Company may purchase fewer vehicles than
it had under the original agreement. During the years ended December 31, 2004, 2003 and 2002, the Company purchased cars from Ford and
its subsidiaries at a cost of approximately (in billions) $4.4, $4.9 and $5.1, respectively, and
sold cars to Ford and its subsidiaries under various repurchase programs for approximately $3.3,
$3.8 and $3.8, respectively. Advertising The Company is a party to a joint advertising agreement with Ford, which commenced on September 1,
1997, for a period of ten years. The agreement was amended effective September 1, 2004. Pursuant
to the agreement, Ford participates in some of the cost of certain of the Companys advertising
programs featuring the Ford name or products in the United States (and abroad through August 31,
2004). The amounts contributed by Ford for the years ended December 31, 2004, 2003 and 2002 were
(in millions) $38.1, $47.9 and $48.4, respectively. Based on the changes to the advertising
agreement effective September 1, 2004, the Company anticipates that the advertising contributions
payable by Ford during the 2005 vehicle model year will be less than the advertising contributions
the Company received from Ford for the 2004 vehicle model year. The Company incurred net
advertising expense for the years ended December 31, 2004, 2003 and 2002 of (in millions) $164.0,
$123.4 and $114.8, respectively. Stock option plan Certain employees of the Company participate in the stock option plan of Ford under Fords 1998
Long-Term Incentive Plan. Financial arrangements In February 1997, Ford extended to the Company a line of credit of $500 million, which currently
expires June 30, 2006. This line of credit has an evergreen feature that provides on an annual
basis for automatic one-year extensions of the expiration date, unless notice is provided by Ford
at least one year
prior to the then scheduled expiration date. The line of credit automatically terminates however,
at any time Ford ceases to own, directly or indirectly, capital stock of the Company having more
than 50% of the total voting 63




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##### Table of Contents



THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) power of all capital stock outstanding of the Company. Obligations of
the Company under this agreement would rank pari passu with the Companys senior debt securities. A
commitment fee of 0.2% per annum is payable on the unused available credit. The Company maintains a Sales Agency Agreement with Ford Financial Services, Inc, (FFS), a NASD
registered broker/dealer and an indirect wholly owned subsidiary of Ford, whereby FFS acts as a
dealer for the Companys domestic commercial paper programs. The Company, through its subsidiary
Hertz Australia Pty. Limited, has a similar agreement with Ford Credit Australia Limited, also an
indirect wholly owned subsidiary of Ford. As of December 31, 2004 and 2003, Ford owed the Company and its subsidiaries $445.2 million and
$520.8 million, respectively, the majority of which relates to various car repurchase and warranty
programs. The balance at December 31, 2004, also includes $250.7 million which represents amounts
due under a tax sharing agreement with Ford. As of December 31, 2004, and 2003, the Company and
its subsidiaries owed Ford $76.5 million and $119.9 million, respectively (which amounts are
included in Accounts payable in the Companys consolidated balance sheet), relating to vehicles
purchased, and includes the liability for Ford stock-based employee compensation. The Company has made short-term investments with a related party investment fund that pools and
invests excess cash balances of certain Ford subsidiaries to maximize returns. These short-term
investments totaled $557.0 million at December 31, 2004 and will be held until the funds are
required for operating purposes or used to reduce indebtedness. Taxes The Company and its domestic subsidiaries file consolidated Federal income tax returns with Ford.
The Company has entered into a tax sharing agreement with Ford providing that the Company and Ford
will make payments between them such that, with respect to any period, the amount of taxes to be
paid by the Company (subject to certain adjustments) will be determined as though the Company were
to file separate federal, state and local income tax returns as the common parent of an affiliated
group of corporations filing combined, consolidated or unitary federal, state and local returns,
rather than a consolidated subsidiary of Ford, with respect to federal, state and local income
taxes. With respect to foreign tax credits, the agreement provides that the Companys right to
reimbursement will be determined based on usage of such foreign tax credits by the consolidated
group. Dividends The Company expects to begin paying semi-annual dividends to Ford, commencing in June 2005, in
aggregate amounts that would cause the Company to maintain an estimated prospective 3.5-to-1
full-year average debt-to-equity ratio, after dividend payments, computed on a monthly average
basis (with no dividends to be paid if such ratio would exceed 3.5-to-1). Other relationships The Company and Ford also engage in other transactions in the ordinary course of their respective
businesses. These include the Companys rental to Ford of cars
and industrial and construction equipment and Ford Credits financing of purchases of used cars sold by the Company at retail. In addition, the Company is named as an additional insured under certain of Fords insurance
policies, for which the Company pays its allocated portion of the premiums. 64




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##### Table of Contents



SCHEDULE II THE HERTZ CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2004, 2003 and 2002 Balance at
    
    
    AdditionsBeginning of
    
    
    Charged to
    
    
    Translation
    
    
    
    
    
    
    Balance atYear
    
    

Expense
    
    
    Adjustments
    
    
    Deductions
    
    
    End of YearDollars in thousands2004Allowance for doubtful accounts
    
    $
    35,758
    
    
    $
    14,133
    
    
    $
    1,123
    
    
    $
    20,567
    (a)
    
    $
    30,4472003Allowance for doubtful accounts
    
    $
    29,047
    
    
    $
    23,053
    
    
    $
    3,646
    
    
    $
    19,988
    (a)
    
    $
    35,7582002Allowance for doubtful accounts
    
    $
    38,886
    
    
    $
    15,570
    
    
    $
    2,900
    
    
    $
    28,309
    (a)
    
    $
    29,047
   (a)
    
    Amounts written off, net of recoveries. 65




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ITEM 9.
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. 
 ITEM 9A. 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
Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange Commission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 the Companys Chairman of the
Board and Chief Executive Officer and Executive Vice President and Chief Financial Officer (the
Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. The Companys internal control over financial reporting is a process designed by, or under the
supervision of, the Certifying Officers and effected by the Companys Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of the
Companys financial reporting and the preparation of the Companys financial statements for
external purposes in accordance with generally accepted accounting principles. Internal control
over financial reporting includes policies and procedures that pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the Companys assets; provide reasonable assurance that transactions are recorded as necessary
to permit preparation of the Companys financial statements in accordance with generally accepted
accounting principles; and that the Companys receipts and expenditures are being made only in
accordance with the authorization of the Companys Board of Directors and management; and 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 its financial statements.
The Company regards its internal control over financial reporting as an element of its disclosure
controls and procedures. As required by Rules 13a-15 and 15d-15 under the Exchange Act, the Certifying Officers carried out
an evaluation of the effectiveness of the design and operation of the Companys disclosure controls
and procedures as of December 31, 2004. Their evaluation was carried out with the participation of
other members of the Companys management. Based upon their evaluation, the Certifying Officers
concluded that the Companys disclosure controls and procedures were not effective as a result of
the material weakness described below. The Company is restating its financial statements in the manner, and for the reasons, described
generally in the Explanatory Note to this Report and in more detail in Note 1A to the Notes to the
Companys consolidated financial statements included in this Report. As explained in Note 1A, the
Restatement has been necessitated by the Companys prior presentation of certain items of revenue
and expense on a net basis in circumstances under which generally accepted accounting principles
(GAAP), and particularly those set forth in EITF No. 99-19 and No. 01-14, required presentation
on a gross basis. In view of this error in the application of GAAP, the Company has determined
that, as of December 31, 2004, a material weakness existed in the Companys internal control over
financial reporting with respect to the selection and application of GAAP to its financial
statements. The Company has considered the impact of the material weakness as of December 31, 2004, and
determined that the magnitude of any actual or potential misstatement in its financial statements
was limited to an increase by identical amounts in revenue and expense in the relevant financial
statements, with no changes to income before income taxes or net income (loss) and no effect on
consolidated balance sheets or consolidated statements of cash flows. 66




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Since December 31, 2004, the Company has taken a series of steps designed to improve the control
processes regarding the selection and application of GAAP and preparation and review of the
consolidated financial statements. Specifically, key personnel involved in the Companys financial
reporting processes have enhanced the process through which authoritative guidance will be
monitored on a regular basis. On-going reviews of authoritative guidance will be conducted in
order to ensure that new guidance is being complied with in the preparation of the financial
statements, related disclosures and periodic filings with the SEC. Additionally, when the Company
became aware of the misapplication of EITF No. 99-19 and No. 01-14, the Companys management
reviewed all applicable authoritative guidance issued since 1999 in relation to all consolidated
financial statements which had been filed with the SEC. 
 ITEM 9B. Other Information None. 67




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PART III 
 ITEM 10. Directors and Executive Officers of the Registrant. Omitted. 
 ITEM 11. Executive Compensation. Omitted. 
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Omitted. 
 ITEM 13. Certain Relationships and Related Transactions. Omitted. 
 ITEM 14. Principal Accounting Fees and Services. The aggregate fees billed by PricewaterhouseCoopers LLP (PwC), the Companys independent
registered public accounting firm, were as follows (in thousands of dollars): 2004
    
    
    2003Fees:Audit
    
    $
    3,843
    
    
    $
    1,933Audit-related
    
    
    618
    
    
    
    234Tax
    
    
    451
    
    
    
    718All other
    
    
    
    
    
    
    240Total
    
    $
    4,912
    
    
    $
    3,125
 Audit-related fees were for services in connection with debt offerings and assurance services. Tax
fees related to tax compliance, preparation of tax returns, tax planning and tax assistance for
international service employees. All other fees were principally related to actuarial services
which were transitioned away from PwC in 2003. The Companys Audit Committee has established pre-approval policies and procedures that govern the
engagement of PwC and the services provided by PwC to the Company. The policies and procedures are
detailed as to the particular services. The Companys Audit Committee is informed of the services
provided to the Company by PwC, including the audit fee requests for those services that have been
submitted to and approved by Fords Audit Committee. 68




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PART IV 
 ITEM 15. Exhibits and Financial Statement Schedules Page(a) 1.
    
    Financial Statements:The Hertz Corporation and Subsidiaries Report of Independent Registered Public Accounting Firm
    
    
    32Consolidated Balance Sheet at December 31, 2004 and 2003
    
    
    33Consolidated Statement of Operations for the years ended December 31, 2004, 2003 and 2002
    
    
    34Consolidated Statement of Stockholders Equity for the years ended
December 31, 2004, 2003 and 2002
    
    
    35Consolidated Statement of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
    
    
    36-37Notes to Consolidated Financial Statements
    
    
    38-642.
    
    Financial Statement Schedules:The Hertz Corporation and Subsidiaries Schedule II  Valuation and Qualifying Accounts for the years ended
December 31, 2004, 2003 and 2002
    
    
    653.
    
    Exhibits:(3
    )
    
    Articles of Incorporation and By-Laws(a)
    
    Restated Certificate of Incorporation of the Company (filed as Exhibit (3)(i) to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).(b)
    
    By-Laws of the Company, effective January 1, 2004 (filed as Exhibit (3)(b) to the
Companys Annual Report on Form 10-K for the year ended December 31, 2003).(4
    )
    
    Instruments defining the rights of security holders, including indentures(a)
    
    At December 31, 2004, the Company had various obligations which could be considered as
long-term debt, none of which exceeded 10% of the total assets of the Company on a
consolidated basis. The Company agrees to furnish to the Commission upon request a copy of any
such instrument defining the rights of the holders of such long-term debt.(10
    )
    
    Material Contracts.(a)
    
    Ford/Hertz Framework Supply Agreement between the Company and Ford dated February 20,
1997, as amended effective September 1, 2004.*(b)
    
    Amended and Restated Advertising Agreement between the Company and Ford dated February
20, 1997, as amended effective September 1, 2004.*(c)
    
    Tax-Sharing Agreement between the Company and Ford.**(12
    )
    
    Computation of Consolidated Ratio of Earnings to Fixed Charges for each of the five
years in the period ended December 31, 2004.(23
    )
    
    Consent of Independent Registered Public Accounting Firm.(31.1
    )
    
    Certification of the Chief Executive Officer Pursuant to Rule 15d  14(a).(31.2
    )
    
    Certification of the Chief Financial Officer Pursuant to Rule 15d 14(a).(32.1
    )
    
    Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.(32.2
    )
    
    Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
   *
    
    Incorporated herein by reference from the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, portions of which were omitted and filed separately pursuant
to a request for confidential treatment.**
    
    Incorporated herein by reference from the Companys Registration Statement No. 333-22517 on
Form S-1 dated April 24, 1997. 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. 69




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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/ Paul J. SiracusaPaul J. SiracusaExecutive Vice President and
Chief Financial Officer
 March 21, 2005 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 and on the date
indicated. /s/ Craig R. Koch
    
    Director, Chairman of the Board and Chief Executive OfficerCraig R. Koch
    
    (Principal Executive Officer)/s/ Michael E. Bannister
    
    DirectorMichael E. Bannister/s/ Greg C. Smith
    
    DirectorGreg C. Smith/s/ Donat R. Leclair
    
    DirectorDonat R. Leclair/s/ Paul J. Siracusa
    
    Director, Executive Vice President and Chief Financial OfficerPaul J. Siracusa
    
    (Principal Financial Officer)/s/ Richard J. Foti
    
    Staff Vice President and ControllerRichard J. Foti
    
    (Principal Accounting Officer)
 70




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EXHIBIT INDEX (12)
    
    Computation of Consolidated Ratio of Earnings to Fixed Charges for each of the
five years in the period ended December 31, 2004.(23)
    
    Consent of Independent Registered Public Accounting Firm.(31.1)
    
    Certification of the Chief Executive Officer Pursuant to Rule 15d  14(a).(31.2)
    
    Certification of the Chief Financial Officer Pursuant to Rule 15d  14(a).(32.1)
    
    Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.(32.2)
    
    Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
 71