UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER
For the fiscal year ended December 31, 2002, OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 2003, or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-7541

THE HERTZ CORPORATION (Exact

(Exact Name of Registrant as Specified in its Charter) 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
Delaware
(State of Incorporation)
13-1938568
(I.R.S. Employer Identification No.)
225 Brae Boulevard,
Park Ridge, New Jersey

(Address of Principal Executive Offices)
07656-0713
(Zip Code)

Registrant’s telephone number, including area code: 201-307-2000

Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class On Which Registered 7% Junior Subordinated Notes due July 15, 2003 New York Stock Exchange

None

Securities Registered Pursuant to Section 12(g) of the Act: NONE THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION

None

The Registrant meets the conditions set forth in General Instruction I(1)(A) AND (B) OF FORM(a) and (b) of Form 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT AS PERMITTED. 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 |X|x No | | o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes | |o No |X| x

State the aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant: None (As of March 18, 2003,15, 2004, all of the common stock of the Registrant is owned by anits affiliate, Ford FSG, Inc.)Holdings LLC).

Indicate the number of shares outstanding of each of the Registrant'sRegistrant’s classes of common stock, as of March 18, 2003:15, 2004: Common Stock, $0.01 par value per share - 100 shares.

Documents Incorporated By Reference NONE

None


TABLE OF CONTENTS

PART I
ITEM 1. Business
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission Of Matters To A Vote Of Security Holders
PART II
ITEM 5. Market For Registrant’s Common Equity and Related Stockholder Matters
ITEM 6. Selected Financial Data
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF OPERATIONS
CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
ITEM 13. Certain Relationships and Related Transactions
ITEM 14. Principal Accounting Fees and Services
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
BY-LAWS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
CONSENT OF INDEPENDENT AUDITORS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER


PART I

ITEM 1. BUSINESS. GENERAL Business.

General

The Hertz Corporation (together with its subsidiaries, referred to herein as "Hertz"“Hertz” or the "Company"“Company”) is an indirect wholly owned subsidiary of Ford Motor Company ("Ford"(“Ford”). Ford first acquired an ownership interest in the Company in 1987. 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. On April 30, 1997, Hertz completed a public offering of approximately 50.6% of its Class A Common Stock (the "Class“Class A Common Stock"Stock”), which represented approximately 19.1% of the economic interest in Hertz.

On March 9, 2001, Ford FSG, Inc. ("FSG"(“FSG”), an indirect wholly owned subsidiary of Ford that owned an approximate 81.5% economic interest in the Company, completed its acquisition of all of the Company'sCompany’s outstanding Class A Common Stock that FSGit did not already own for $35.50 per share, or approximately $735 million. The acquisition was accomplished through a cash tender offer followed by a merger of a wholly owned subsidiary of FSG with and into the Company, with the Company surviving the merger (the "Merger"“Merger”). After the Merger, all outstanding shares of Class A Common Stock of the Company were owned by FSG, and all shares of Class A Common Stock of the Company previously held by Hertz as treasury stock, along with all shares of Class B Common Stock of the Company owned by a wholly owned subsidiary of FSG were cancelled. The Merger had no effect on the outstanding obligations (including debt obligations, leases and guarantees) of Hertz.

As a result of FSG'sFSG’s acquisition, the Company'sCompany’s Class A Common Stockcommon stock was no longer traded on the New York Stock Exchange. However, because certain of the Company'sCompany’s debt securities were sold through public offerings, the Company continues to file periodic reports under the Securities Exchange Act of 1934.

In May 2001, the Company amended its certificate of incorporation to change the shares of stock it is authorized to issue to a single class of common stock and changedexchanged the outstanding shares of Class A Common Stock into an equalfor the same number of shares of the newly authorized common stock.

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 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'sCompany’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 approximately 7,0007,200 locations throughout the United States and in over 150 foreign countries and jurisdictions. For the year ended December 31, 2002,2003, the Company generated revenues, income before income taxes and net income of $5.2 billion, $237.5 million and $158.6 million, respectively. On the basis of income before cumulative effect of change in accounting principles of $5.0 billion, $216.4 million and $144.0 million, respectively. Before the cumulative change in accounting principle in 2002, the Company and its predecessors have been profitable in every year since 1952, when one of the Company'sCompany’s predecessors first became a public company. See Note 2 to the Notes to the Company'sCompany’s consolidated financial statements included in this Report.

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. Prior to December 1987, when Ford first acquired an ownership interest in the Company, the Company had been a subsidiary of UAL Corporation (formerly Allegis Corporation) ("UAL"(“UAL”), which had acquired the Company'sCompany’s outstanding capital stock from RCA Corporation ("RCA"(“RCA”) in 1985. See Note 1 to the Notes to the Company'sCompany’s consolidated financial statements included in this Report.

The Company'sCompany’s principal executive offices are located at 225 Brae Boulevard, Park Ridge, New Jersey 07656. The Company'sCompany’s telephone number is (201) 307-2000 and its web sitewebsite is www.hertz.com. Access to

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the Company'sCompany’s periodic reports filed with the Securities and Exchange Commission is available through the Company's web site. "Hertz," "HERC," "TheCompany’s website.

“Hertz,” “HERC,” “The Source," "Hertz” “Hertz Local Edition," "Hertz” “Hertz #1 Club Gold," "The” “The Hertz #1 Club," and "Hertz NeverLost"“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"“Business” and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations”, including, without limitation, those concerning (i) the Company'sCompany’s outlook and (ii) the Company'sCompany’s liquidity and capital expenditures,resources, contain forward-looking statements concerning the Company'sCompany’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'sCompany’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'sCompany’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'sCompany’s businesses; and Ford'sFord’s continued control of the Company. 1 CAR RENTAL

Car Rental

The Company maintains a substantial network of Company-ownedcompany-owned 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, pricing and service worldwide. The Company derives approximately 77%74% of its car rental revenues from on-airport locations.

The Company'sCompany’s Hertz #1 Club Gold service provides an expedited rental service to members worldwide. Through its many travel industry relationships with airlines and hotels, the Company has targeted the most frequent travelers to become Hertz #1 Club Gold members.

The Company'sCompany’s worldwide car rental operations and certain other related activities generated $4.1$4.3 billion in revenue and $264$279 million in income before income taxes during 2002. INDUSTRIAL AND CONSTRUCTION EQUIPMENT RENTAL 2003.

Industrial and Construction Equipment Rental

The Company, through its wholly owned subsidiary, Hertz Equipment Rental Corporation ("HERC"(“HERC”), maintains a 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. The Company currently operates what it believes to be the third largest equipment rental business in Spain and the thirdfourth largest in France based upon revenues.

The Company'sCompany’s worldwide industrial and construction equipment rental operations generated $893$905 million in revenue and $38$22 million in losses before income taxes during 2002. OTHER ACTIVITIES 2003.

Other Activities

Other activities of the Company include self-insurance operations for both its car rental and industrial and construction equipment rental businesses, the sale of its used cars and equipment and third-party claim management services. BUSINESS SEGMENTS

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Business Segments

The Company'sCompany’s business consists of two significant segments, the rental of cars and light trucks ("(“car rental"rental”), and the rental of industrial, construction and material handling equipment ("(“industrial and construction equipment rental"rental”). Set forth below is certain information with respect to these segments, as well as "corporate“corporate and other," for the year ended December 31, 2002.2003. 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'sCompany’s consolidated financial statements included in this Report.
Year Ended December 31, 2002 --------------------------------------------------------- Industrial and Construction Equipment Corporate Car Rental Rental and Other Total ---------- -------------- ---------- ------ Dollars in millions Revenues ..................................... $4,066 $ 893 $ 9 $4,968 Operating income (pre-tax income before interest) .................................. 530 52 1 583 Income (loss) before income taxes ............ 264 (38) (10) 216 Revenue earning equipment, net, at end of year 5,998 1,428 -- 7,426

                 
  Year Ended December 31, 2003
  
      Industrial and        
      Construction        
      Equipment Corporate    
  Car Rental Rental and Other Total
  
 
 
 
  Dollars in millions
Revenues $4,296  $905  $7  $5,208 
Operating income (loss) (pre-tax income (loss) before interest)  551   54   (12)  593 
Income (loss) before income taxes  279   (22)  (20)  237 
Revenue earning equipment, net, at end of year  6,462   1,331      7,793 

Set forth below is certain information with respect to the Company'sCompany’s U.S. and foreign operations for the year ended December 31, 20022003 (substantially all of the Company'sCompany’s foreign operations consist of car rental and industrial and construction equipment rental operations).
Year Ended December 31, 2002 -------------------------------------- U.S. Foreign Total ------ ------- ------ Dollars in millions Revenues................................................... $3,748 $1,220 $4,968 Operating income (pre-tax income before interest).......... 461 122 583 Income before income taxes................................. 131 85 216 Revenue earning equipment, net, at end of year............. 5,908 1,518 7,426
2 WORLDWIDE CAR RENTAL

             
  Year Ended December 31, 2003
  
  U.S. Foreign Total
  
 
 
  Dollars in millions
Revenues $3,769  $1,439  $5,208 
Operating income (pre-tax income before interest)  449   144   593 
Income before income taxes  132   105   237 
Revenue earning equipment, net, at end of year  5,873   1,920   7,793 

Worldwide Car Rental

U.S. OPERATIONS CAR RENTAL. Operations

Car Rental.The Company provides car rental services throughout the United States in or around all major U.S. cities and operates a nationwide, toll-free reservations system. Car rentalthrough facilities are operated at all major airports and in the central business districts and key suburban commercial centers in major U.S. cities. 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 current year or the previous year'syear’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'sCompany’s rates vary at different locations depending on local market, competitive and cost factors, and virtually all rentals are made utilizing rate plans under which the customer is responsible for gasoline used during the rental. While cars are often returned to the location from which they are rented, the Company also allows one-way rentals of its cars under its Rent It Here – Leave It There program. In addition to car rentals and licensee fees, the Company generates revenues from providing customers with ancillary products and services such as Hertz #1 Club Gold, the Company's Rent It Here - Leave It There program, supplemental equipment (child seats and ski racks), loss or collision damage waiver, liability insurance and personal effects coverage, Hertz NeverLost navigationalnavigation system and gasoline payment options.

The Company conducts operations in the United States through company-owned and licensee operated locations. Company-owned locations are those locations through which the Company rents cars that it owns, as compared to licensee locations through which licensees rent cars that they own. The Company believes that its extensive worldwide ownership of its operations contributes to the consistency of its high-quality service, strict cost control, fleet utilization, yield management, competitive pricing and the Company's Company’s

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ability to offer one-way rentals through its Rent It Here - Leave It There program. However, in certain smaller domestic markets, the Company has found it more efficient to operate through licensees. At December 31, 2002,2003, the Company owned 95% of all the cars in the combined Company-ownedcompany-owned and licensee fleet.

The Company maintains automobile maintenance centers at certain airports and in certain urban and suburban areas, providing maintenance facilities for the Company'sCompany’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.

Airport Operations.The Company has 349 concession agreements at 338 airports in the United States. These agreements are entered into with airport authorities, through either negotiation or a bidding process, for a fixed number of car rental counter positions. The agreements typically provide for concession payments based upon a specified percentage of revenue generated at the airport, subject to a minimum annual fee, and sometimes include fixed rent for terminal counters or other leased properties and facilities. SUBURBAN OPERATIONS.

Suburban Operations.The Company'sCompany’s expanding suburban operations include locations that offer a range of services which may include customer pickup and delivery, insurance replacement, automobile dealer service loaner programs and local use commercial and leisure car rental services. These services are available in major commercial centers and other suburban communities in the United States. The services provided include renting replacement vehicles when customers'customers’ personal vehicles are out of service, generally due to an accident, theft or mechanical problem. A significant percentage of these rentals are referrals from insurance companies and car dealerships, which generally pay for all or a significant portion of the costs of such rentals. INTERNATIONAL OPERATIONS

International Operations

At December 31, 2002,2003, 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'sCompany’s U.S. operations, it continues to conduct its operations primarily through Company-ownedcompany-owned locations in the major European markets. The international car rental operations of the Company that generated the highest volumes of business in 20022003 were those conducted in France, Germany, Italy, the United Kingdom, Italy, Canada, Australia, Spain, Thethe Netherlands and Switzerland. In addition, the Company owns operations in Puerto Rico, St. Thomas (USVI), Brazil, New Zealand, Belgium and Luxembourg.

As in the United States, the Company offers Hertz #1 Club Gold service at most major airport locations in all countries with Company-owned operations.company-owned locations. The Company'sCompany’s global reservations system allowsand website allow customers worldwide to book reservations in any of the Company'sCompany’s worldwide markets. Additionally, a local or toll-free telephone number is offered in all major foreign countries which provides access to the Company'sCompany’s global car rental reservations system. CAR ACQUISITION

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-owned locations, through local 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 website, which also allows customers to enroll in its loyalty programs, obtain copies of bills for past transactions and obtain information about the Company’s rental offerings, has grown significantly in importance as a reservations channel in recent years.

Car Acquisition

The Company believes it is one of the largest private purchasers of new cars in the world. Consequently, the acquisition and disposition of cars are important activities for the Company and have a significant impact on profitability. The Company acquires, subject to availability, a majority of its cars pursuant to

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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 capitalization cost less a set daily depreciation amount. These repurchase programs limit the Company'sCompany’s residual risk with respect to cars 3 purchased under the programs. For this reason, cars purchased by car rental companies under repurchase programs are sometimes referred to by industry participants as "non-risk"“non-risk” cars. Conversely, those cars not purchased under repurchase programs for which the car rental company is exposed to residual risk are sometimes referred to as "at-risk"“at-risk” cars. During 2002,2003, non-risk cars as a percentage of all cars purchased by the Company'sCompany’s U.S. operations and international operations were approximately 80%83% and 74%78%, respectively.

Over the five years ended December 31, 2002,2003, on a weighted-average basis, approximately 62%60% of the cars acquired by the Company for its U.S. car rental fleet, and approximately 27% of the cars acquired by the Company for its international fleet, were manufactured by Ford. During 2002, approximately 57% of the cars acquired by the Company domestically were manufactured by Ford and approximately 29%28% of the cars acquired by the Company for its international fleet, were manufactured by Ford and its subsidiaries. During 2003, approximately 55% of the cars acquired by the Company domestically were manufactured by Ford and its subsidiaries and approximately 33% 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.

Purchases of cars are financed through funds provided from operations and by active and ongoing global borrowing programs. See "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." LICENSEES

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'sCompany’s licensees operate in over 150 countries and jurisdictions worldwide. The Company believes that its licensee arrangements are important to the Company'sCompany’s business because they enable the Company to offer expanded national and international service and a broader Rent It Here - Leave It Thereone-way rental program. Licenses are issued principally by the Company'sCompany’s wholly owned subsidiaries, Hertz System, Inc. ("System"(“System”) and Hertz International, Ltd. ("(“Hertz International"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 revenues. The operations of all licensees, including the purchase and ownership of vehicles, are financed independently by the licensee with the Company having no investment interest in the licensee or in the licensee'slicensee’s fleet. Licensees also share in the cost of the Company'sCompany’s advertising program, reservations system, sales force and certain other services. In return, licensees are provided with the use of the Hertz brand name, management and administrative assistance training,and training. In return, licensees are provided the availabilityuse of the Company's charge cards, TheHertz brand name, management and administrative assistance and training, reservations through the Company’s reservations channels, the Hertz #1 Club reservations service,and #1 Club Gold expedited rental programs, the Rent It Here - Leave It There one-way rental program and other services. System, which owns the Company's service marks and trademarks and certain proprietary know-how used by licensees, establishes the uniform standards and procedures under which all such licensees operate.

System licenses ordinarily are limited as to transferability without the Company'sCompany’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'days notice to System. Initial license fees or the price for the sale to a licensee of a Company-ownedcompany-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

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”), 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 of the net assets of its leasing operations in Australia, New Zealand and the United Kingdom to Axus International, Inc. ("Axus"), a wholly owned, vehicle leasing subsidiary of Ford Motor Credit Company ("Ford Credit") for $99.2 million. Effective January 1, 2000, Hertz International entered into a license agreement and management services agreement with Axus, whereby Hertz International has licensed the Hertz name and provides management services to Axus under a five-year contract covering select international markets. Through the third quarter of 2002, Axus operated throughout Europe and in New Zealand and Australia. In the fourth quarter of 2002, Ford Credit sold the Axus operations in Australia

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and New Zealand and announced an agreement to sell the Axus operations in Europe. In the first quarter of 2003, Ford Credit completed the sale of the Axus operations in Europe. The CompanyEurope were sold. Hertz International continued to license the Hertz name and provide management services relating tountil the European operations through the completiondates of the sale. During 2003, 2002 and 2001, fees earned by the Company from these agreements were approximately $1.8 million, $11.5 million. INDUSTRIAL AND CONSTRUCTION EQUIPMENT RENTAL HERC'smillion and $8.7 million, respectively.

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, compaction equipment and construction-related trucks. HERC expanded its operations, mainly as a result of acquisitions, from 1998 through 2000. See Note 5 to the Notes to the Company's consolidated financial statements included in this Report.

HERC is one of the largest sellers of used industrial and construction equipment in the United States. It has developed an extensive used equipment sales program. HERC has a dedicated used equipment sales force and has also developed an export market through its overseas contacts. Additionally, HERC in the past has employed and may, from time to time in the future, employ a broker network in the United States to dispose of its used equipment. 4 HERC's

HERC’s comprehensive line of equipment enables HERC to supply equipment to a wide range of customers from the local contractor 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

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 and includes a customer service center, an equipment service area and storage facilities for equipment. The branches are built or conformed to the specifications of the HERC prototype branch, which stresses efficiency, safety and environmental compliance. Most branches have stand-alone maintenance and fueling facilities and showrooms. HERC's

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 single or limited number of customers in the same business. HERC primarily targets customers in medium to large metropolitan markets. OTHER OPERATIONS OF THE COMPANY CLAIM MANAGEMENT

Other Operations of the Company

Claim Management

The Company'sCompany’s wholly owned subsidiary, Hertz Claim Management Corporation ("HCM"(“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. INSURANCE

Insurance

For its domestic operations, the Company is, where permitted by applicable local law, a qualified self-insurer against liability resulting from accidents under certificates of self-insurance for financial responsibility in all states where its vehicles are registered. The Company also self-insures general public liability and property damage for all domestic operations. Effective December 15, 2002, all claims have been retained and borne by the Company up to a limit of $10 million for each occurrence ($5 million prior to December 15, 2002), and the Company maintains insurance with unaffiliated carriers in excess of $10 million up to $695 million per occurrence (in excess of $5 million up to $725 million from January 1, 2001 to December 15, 2002 and up to $450 million prior to 2001) per occurrence.. HCM administers this public liability and property damage program through a network of eight regional offices throughout the United States.

For its international operations, the Company purchases insurance to comply with local legal requirements. VehicleFor most countries throughout Europe, vehicle liability insurance is purchased from the Company'sCompany’s wholly owned subsidiary, Probus Insurance Company Europe Limited ("Probus"(“Probus”), a direct

6


writer domiciled in Dublin, Ireland. In Italy, a fronted policy was purchased from an unaffiliated carrier effective October 1, 2003, which is reinsured through Hertz International RE Limited, (“HIRE”), a wholly owned subsidiary of the Company. HIRE operates as a reinsurer in Dublin, Ireland. Effective December 15, 2002,2003, Probus underwrites the Company'sCompany’s Pan European motor vehicle liability program up to $5$10 million per occurrence ($15 million from December 15, 2002 to December 15, 2003 and $1 million prior to December 15, 2002) per occurrence.. Probus reinsures this risk through Hertz International RE Limited, a wholly owned subsidiary of the Company, operating as a reinsurer in Dublin, Ireland.HIRE. Excess coverage for claims that exceed $5$10 million per occurrence is maintained with unaffiliated carriers. InEffective December 15, 2003, in foreign operations outside Europe, the Company is self-insured at various amounts up to $317,000$10 million per occurrence ($317,000 prior to December 15, 2003) and maintains with unaffiliated carriers excess liability insurance coverage up to $695 million per occurrence ($725 million from January 1, 2001 to December 15, 2002 and up to $450 million prior to 2001) per occurrence with unaffiliated carriers. .

Provisions for public liability and property damage on self-insured domestic and foreign claims are made by charges to expense based upon evaluations of estimated ultimate liabilities on reported and unreported claims. At December 31, 2002,2003, this liability was estimated at $353.5$398.8 million for combined domestic and foreign operations.

Ordinarily, collision damage costs and the costs of stolen or unaccounted for cars are carried on a self-insured basis, with such costs being charged to expense as incurred. HERC generally requires its customers to provide their own liability insurance on rented equipment with HERC held harmless under various agreements.

Other types of insurance usually carried by business organizations, such as worker'sworker’s compensation (i.e., on a fronted basis up to $5 million per occurrence), property (including boiler and machinery and business interruption), commercial crime and fidelity, performance bonds and directors'directors’ and officers'officers’ liability insurance, are purchased from various insurance companies in amounts deemed adequate by the Company for the respective hazards. The Company and its directors and officers participate as additional insureds in certain insurance policies maintained by Ford. COMPETITION

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'sCompany’s principal competitors in the businessairport car rental market are Avis Rent ACendant Corporation, which operates the “Avis” and “Budget” brands, Vanguard Car Systems,Rental USA Inc. ("Avis") and ANC Rental Corporation ("ANC"), which operates the "National“National Car Rental"Rental” and "Alamo" brands. In the leisure car rental market, the Company's principal competitors are Avis, ANC,“Alamo” brands and Dollar Thrifty Automotive Group, Inc., which operates the “Dollar” and Budget Group, Inc. ("Budget"“Thrifty” brands. Enterprise Rent-A-Car Company (“Enterprise”). Budget has recently been acquired by Cendant Corporation, which also owns Avis, ANC and certain of its subsidiariescompetes in the U.S. are operating under bankruptcy court protection pursuant to Chapter 11 ofairport car rental market, is the U.S. Bankruptcy Code. 5 Company’s principal competitor in the suburban local use and insurance replacement markets in the United States. In Europe, the Company'sCompany’s principal competitors in the car rental market are Avis Europe plc, Europcar, Sixt, and National Car Rental.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. The Company is expanding its presence in the suburban local use and insurance replacement markets in the United States where Enterprise Rent-A-Car Company is the Company's major competitor. HERC's

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 Inc., to many small regional businesses. HERC'sHERC’s competitive success is, in part, due to 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'sCompany’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'sCompany’s results of operations as the Company may lose market share. EMPLOYEES

7


Employees

On December 31, 2002,2003, the Company employed approximately 28,90029,300 persons in its domestic and foreign operations. Labor contracts covering the terms of employment of approximately 6,2007,300 employees in the United States are presently in effect under 148145 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 2,1002,500 of these employees will expire during 2003.2004. 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

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'sCompany’s operations, as well as those of its competitors, could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing regulations. In the event of a severe disruption of fuel supplies, the operations of all car and industrial and construction equipment renting and leasing companies could be adversely affected. Historically, there has been no material disruption of operations resulting from lack of fuel availability.

The environmental legal and regulatory requirements applicable to the Company'sCompany’s operations pertain to (i) the operation and maintenance of automobiles, 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 automobiles 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 1,600 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 has established aCompany’s compliance program for its tanks to ensureensures that (i) the tanks are properly registered with the state in which the tanks are located; and (ii) the tanks have been either upgraded or replaced to meet federal and state leak detection and spill, overfill and corrosion protection requirements. The Company spent approximately $1.7$2.1 million in 20022003 to register, upgrade or replace tanks requiring such action. 6

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'sCompany’s wastes have reportedly been identified. With respect to cleanup expenditures for the discharge of petroleum substances at the Company'sCompany’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. The Company expects to continue to receive reimbursement for cleanup costs incurred due to releases from certain of its tanks. With respect to off-site locations at which the Company'sCompany’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

8


several cleanup liability imposed by the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and comparable state superfund statutes. The Company has recovered a substantial amount of such costs incurred through settlements with its insurance carriers.

Environmental legislation and regulations and related administrative policies have changed rapidly in recent years. There is a risk that governmental environmental requirements, or enforcement thereof, may become more stringent in the future and that the Company may be subject to legal proceedings brought by government agencies or private parties with respect to environmental matters. In addition, with respect to cleanup of contamination, additional locations at which wastes generated by the Company may have been released or disposed, and of which the Company is currently unaware, may in the future become the subject of cleanup for which the Company may be liable, in whole or part. 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'sCompany’s future environmental liabilities will not be material to the Company'sCompany’s consolidated financial position or results of operations or cash flows.

ITEM 2. PROPERTIES. Properties.

The Company'sCompany’s owned operations are carried on at 2,9163,405 locations worldwide, including rental and sales offices, car sales locations and service facilities located on or near airports and in central business districts in major cities and suburban areas. Most of theseThese premises are leased, except for 198190 that are owned. The Company has various concession agreements with governmental authorities and private companies charged with the operation of airports under arrangements generally providing for payment of rents and a percentage of revenues with a guaranteed annual minimum fee. See Note 10 to the Notes to the Company'sCompany’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 worldwide car rental operations are processed, global strategic information systems are serviced and major domestic and international accounting functions are performed. The Company maintains its executive offices in an owned facility in Park Ridge, New Jersey. The Company also has an owned reservation and financial center near Dublin, Ireland, for centralized European reservation operations and accounting functions, and leases a reservation center in Mobile,Saraland (Mobile County), Alabama to supplement the capacity of its Oklahoma City reservation center.

ITEM 3. LEGAL PROCEEDINGS. 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. On October 3, 1997, Shannon Leonard, Theresa Moore and Coley Whetsone, Jr. v. Enterprise Rent A Car, The Hertz Corporation, et al. was commenced in Circuit Court of Coosa County, Alabama. Leonard purports to be a class action on behalf of all persons in the United States who rented from the defendant car rental companies and, as part of that rental, purchased optional insurance products. The Company and the other defendants removed the action to the United States District Court for the Middle District of Alabama, Northern Division (Montgomery). The Company and the other defendants then filed a series of motions which sought dismissal of the various causes of action based upon the judge's initial ruling that a private right of action does not exist under Alabama law for the alleged unlicensed sale of insurance. A final order of dismissal was entered in January 2000, and the plaintiffs subsequently appealed to the United States Court of Appeals for the Eleventh Circuit in Atlanta, Georgia. In January 2002, the Court of Appeals vacated the District Court's judgment and directed the District Court to remand the case to the court from which it had been removed (Circuit Court of Coosa County, Alabama). Following the remand, the Company and the other defendants filed a motion to dismiss. Oral arguments were heard on that motion on August 20, 2002, but the court has not yet rendered its decision.

On March 1, 2002,Bowdoin Square, L.L.C. vv. 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'splaintiff’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, for use as a reservation call center.Alabama. The complaint also alleges that the Company and other defendants negligently and wantonly injured the value of plaintiff'splaintiff’s interest in the shopping center. A motion to transfer the case to the Circuit Court for Mobile County Alabama, was granted in September 2002, and the Company has now filed its answer to the complaint. 7 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 anticipated during the summer of 2004.

On July 29, 2002,James Han, individually and on behalf of all otherothers similarly situated, v. The Hertz Corporationwas commenced in the Supreme Court of the State of New York, County of New York.Han purportspurported to be a class action on behalf of persons who rented private passenger vehicles from the Company in New York under rental agreements containing provisions which allegedly violate the express provisions of Section 396-z of the General Business Law of New York and New York'sYork’s consumer fraud statute (i.e., Section 349 of the General Business Law). More specifically, it isthe complaint alleged that rental agreements used by the Company in New York included provisions that imposeimposed liability upon

9


renters beyond the statutorily permitted amounts and that the rental agreements failed to disclose to renters their rights and responsibilities concerning vehicle damage. The parties have agreed to bifurcate class discovery and damages discovery and have engaged in a limited amount of class discovery. The Company has filed aOn July 29, 2003, the Company’s motion for summary judgment was granted and thean order of dismissal was thereafter entered. The plaintiff has filed a motion for class certification. Reply briefs are to be filed shortly. notice of appeal.

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“opt-in collective action"action” on behalf of all Senior Station Managers, Station Managers and "B"“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.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. In the interim, the plaintiffs have been permitted to amend their complaint to include an allegation of pay docking of managers. Additional depositions have been taken concerning this new allegation. The Company will be filing a motion for summary judgment in the near future.

On August 22, 2002,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. On November 25, 2003, the Company served its answer to the amended complaint, and denied the substantive allegations. Discoverydiscovery has now commenced.

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. On January 29, 2004, the Company’s motion to dismiss was granted and an order of dismissal was thereafter entered.

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. The Company has not yet filed an answer to the complaint.

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 arising from the operation of motor vehicles and equipment rented from the Company and its licensees. Such actions and claims are provided for within the Company’s public liability and property damage (“PL/PD”) program. In aggregate, the Company can be expected to expend material sums to defend and settle those actions and claims or to pay judgments resulting from them. Within the PL/PD program, HERC has been named as a co-defendant in over 100 multi-plaintiff lawsuits filed in Mississippi and Texas seeking damages for injuries (silicosis) which the plaintiffs allegedly sustained from the use of equipment rented from HERC. In all of these lawsuits, HERC is named as a co-defendant with a

10


minimum of 80 other co-defendants, including the equipment manufacturers. HERC is continuing its attempt to tender the defense of these lawsuits to the equipment manufacturers.

The Company believes it has meritorious defenses in the foregoing matters and will defend itself vigorously.

ITEM 4. SUBMISSION OF MATTERS TOSubmission Of Matters To A VOTE OF SECURITY HOLDERS.Vote Of Security Holders.

     Omitted. 8

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market For Registrant’s Common Equity and Related Stockholder Matters.

All shares of the Company'sCompany’s Common Stock at December 31, 20022003 were owned by Ford FSG, Inc., a wholly owned subsidiary ofand Ford Holdings LLC and, as such, there is no market for the Company'sCompany’s Common Stock. In February 2004, Ford Holdings LLC became the sole owner of the Company’s Common Stock.

The Company did not pay any dividends in 2003 and 2002. In 2001,

Based on the Company paid cash dividends in the aggregateterms of $21.6 million. Certain debt instrumentsan indenture dated April 1, 1986, under which the Company has issuedoutstanding debt securities, restrict the Company'sCompany’s ability to pay dividends.dividends is restricted. Such restrictions generally providerestriction provides that the Company may not pay dividends, invest in its own shares or permit investments by certain subsidiaries of the Company ("(“Restricted Subsidiaries"Subsidiaries”) in the Company'sCompany’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, 2002,2003, approximately $1,008$1,029 million of consolidated stockholder'sstockholder’s equity was free of such limitations. 9

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ITEM 6. SELECTED FINANCIAL DATA. Selected Financial Data.

The selected consolidated income statement data for each of the years in the three-year period ended December 31, 2002,2003, and consolidated balance sheet data as of December 31, 20022003 and 20012002 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 income statement data for each of the years in the two-year period ended December 31, 1999,2000, and consolidated balance sheet data as of December 31, 2001, 2000, 1999 and 19981999 presented below (other than the ratio of earnings to fixed charges) were derived from audited consolidated financial statements of the Company and the related notes thereto not included in this Report. The financial data presented below and the related notes thereto should be read in conjunction with the consolidated financial statements of the Company and the related notes thereto included in this Report.

                        
     Years ended, or at December 31,
     
     2003 2002 2001 2000 1999
     
 
 
 
 
         Dollars in millions    
Income Statement Data
                    
 Revenues                    
  Car rental $4,239.2  $4,005.6  $3,823.9  $3,980.6  $3,728.5 
  Industrial and construction equipment rental  904.6   892.6   1,003.4   969.6   842.9 
  Other (a)  64.1   69.9   88.5   123.3   144.3 
     
   
   
   
   
 
   Total revenues  5,207.9   4,968.1   4,915.8   5,073.5   4,715.7 
     
   
   
   
   
 
 Expenses                    
  Direct operating  2,596.7   2,428.8   2,574.1   2,303.3   2,133.5 
  Depreciation of revenue earning equipment (b)  1,523.4   1,499.5   1,462.3   1,323.5   1,228.0 
  Selling, general and administrative  495.3   457.0   472.0   451.0   452.4 
  Interest, net of interest income of $17.9, $10.3, $9.0, $13.5 and $12.2  355.0   366.4   404.7   414.8   341.4 
     
   
   
   
   
 
   Total expenses  4,970.4   4,751.7   4,913.1   4,492.6   4,155.3 
     
   
   
   
   
 
 Income before income taxes  237.5   216.4   2.7   580.9   560.4 
 Provision (benefit) for taxes on income (c)  78.9   72.4   (20.6)  222.5   224.4 
     
   
   
   
   
 
 Income before cumulative effect of change in accounting principle  158.6   144.0   23.3   358.4   336.0 
 Cumulative effect of change in accounting principle (d)     (294.0)         
     
   
   
   
   
 
 Net income (loss) $158.6  $(150.0) $23.3  $358.4  $336.0 
     
   
   
   
   
 
 Ratio of earnings to fixed charges (e)  1.5   1.4   1.0   2.1   2.3 
     
   
   
   
   
 
Balance Sheet Data
                    
 Revenue earning equipment, net                    
  Cars $6,462.0  $5,998.3  $5,220.4  $5,186.2  $4,762.3 
  Other equipment  1,331.3   1,427.6   1,631.3   1,736.3   1,501.4 
 Total assets  12,579.0   11,128.9   10,158.4   10,620.0   10,136.7 
 Total debt  7,627.9   7,043.2   6,314.0   6,676.0   6,602.2 
 Stockholder’s equity  2,225.4   1,921.9   1,984.4   1,984.1   1,674.0 

Years ended, or at December
(a)Includes fees from licensees (other than expense reimbursements) 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.
(b)For 2003, 2002, 2001, 2000 and 1999, 1998 --------- --------- --------- --------- --------- Dollarsdepreciation of revenue earning equipment includes a net loss of $0.8 million, net gain of $10.8 million, a net loss of $1.6 million, and net gains of $54.5 million and $42.3 million, respectively, from the disposal of revenue earning equipment. Effective January 1, 2000, certain estimated useful lives being used to compute the provision for depreciation of revenue earning equipment used in millions INCOME STATEMENT DATA Revenues Car rental ........................................ $ 4,005.6 $ 3,823.9 $ 3,980.6 $ 3,728.5 $ 3,484.8 Industrialthe industrial and construction equipment rental ...... 892.6 1,003.4 969.6 842.9 631.3 Other (a) ......................................... 69.9 88.5 123.3 144.3 122.2 --------- --------- --------- --------- --------- Total revenues ............................... 4,968.1 4,915.8 5,073.5 4,715.7 4,238.3 --------- --------- --------- --------- --------- Expenses (b) Direct operating .................................. 2,428.8 2,574.1 2,303.3 2,133.5 1,958.4 Depreciationbusiness were increased to reflect changes in the estimated residual values to be realized upon disposal of the equipment. As a result of this change, depreciation of revenue earning equipment for the year 2000 decreased by $12.9 million.
(c) ..... 1,499.5 1,462.3 1,323.5 1,228.0 1,068.4 Selling, generalIncludes benefits of $30.2 million in 2001 and administrative ............... 457.0 472.0 451.0 452.4 439.8 Interest, net of interest income of $10.3, $9.0, $13.5, $12.2 and $11.5 ................ 366.4 404.7 414.8 341.4 306.3 --------- --------- --------- --------- --------- Total expenses ............................... 4,751.7 4,913.1 4,492.6 4,155.3 3,772.9 --------- --------- --------- --------- --------- Income before income taxes ............................ 216.4 2.7 580.9 560.4 465.4 Provision (benefit) for taxes on income (d) ........... 72.4 (20.6) 222.5 224.4 188.4 --------- --------- --------- --------- --------- Income before cumulative effect of change$3.8 million in accounting principle .......................................... 144.0 23.3 358.4 336.0 277.0 2000 from certain foreign tax credits.
(d)Cumulative effect of change in accounting principle (e) (294.0) -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) ..................................... $ (150.0) $ 23.3 $ 358.4 $ 336.0 $ 277.0 ========= ========= ========= ========= ========= Ratiorepresents a non-cash charge in 2002, related to impairment of earnings to fixed charges (f) ................ 1.4 1.0 2.1 2.3 2.2 ========= ========= ========= ========= ========= BALANCE SHEET DATA Revenue earning equipment, net Cars .............................................. $ 5,998.3 $ 5,220.4 $ 5,186.2 $ 4,762.3 $ 4,472.5 Other equipment ................................... 1,427.6 1,631.3 1,736.3 1,501.4 1,309.5 Total assets .......................................... 11,128.9 10,158.4 10,620.0 10,136.7 8,872.6 Total debt ............................................ 7,043.2 6,314.0 6,676.0 6,602.2 5,759.8 Stockholder's equity .................................. 1,921.9 1,984.4 1,984.1 1,674.0 1,393.8
(a) Includes fees from licensees (other than expense reimbursements) 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. (b) Certain prior year amounts have been reclassified to conform with current reporting. (c) For 2002, 2001, 2000, 1999 and 1998, depreciation of revenue earning equipment includes a net gain of $10.8 million, a net loss of $1.6 million, and net gains of $54.5 million, $42.3 million and $24.0 million, respectively, from the disposal of revenue earning equipment. Effective January 1, 2000, certain estimated useful lives being used to compute the provision for depreciation of revenue earning equipment used in the industrial and construction equipment rental business were increased to reflect changes in the estimated residual values to be realized upon disposal of the equipment. As a result of this change, depreciation of revenue earning equipment for the year 2000 decreased by $12.9 million. (d) Includes benefits of $30.2 million in 2001 and $3.8 million in 2000 from certain foreign tax credits. (e) Cumulative effect of change in accounting principle represents the after-tax, non-cash charge in 2002, related to impairment of goodwill in the Company'sgoodwill in the Company’s industrial and construction rental business, recognized in accordance with the adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets.”(e)Earnings have been calculated by adding interest expense and the portion of rentals estimated to represent the interest factor to income before income taxes. Fixed charges include interest charges (including capitalized interest) and the portion of rentals estimated to represent the interest factor.

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ITEM 7. Management’s Discussion and Analysis of Financial Accounting Standards No. 142 "GoodwillCondition and Other Intangible Assets." (f) Earnings have been calculated by adding interest expense and the portionResults of rentals estimated to represent the interest factor to income before income taxes. Fixed charges include interest charges (including capitalized interest) and the portion of rentals estimated to represent the interest factor. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Operations.

General

The Company is engaged principally in the business of renting cars and renting industrial and construction equipment.

The Company'sCompany’s revenues principally are derived from rental and related charges and consist of: - Car rental revenues (revenues from all owned car operations, including loss or collision damage waivers, liability insurance and other products); - Industrial and construction equipment rental revenues; and - Other revenues (fees from the Company's licensees, revenues from the Company's claim management services and, prior to 2002, from telecommunications services).

Car rental revenues (revenues from all owned car operations, including loss or collision damage waivers, liability insurance and other products);
Industrial and construction equipment rental revenues; and
Other revenues (fees from the Company’s licensees, revenues from the Company’s claim management services and, prior to 2002, from telecommunications services).

The Company'sCompany’s expenses consist of: - Direct operating expenses (primarily wages and related benefits; concessions and commissions paid to airport authorities, travel agents and others; and other costs relating to the operation and rental of the revenue earning equipment, such as maintenance and reservations); - Depreciation expense relating to revenue earning equipment (including net gains or losses on the disposal of such equipment). Revenue earning equipment includes cars and industrial and construction equipment; - Selling, general and administrative expenses (including advertising); and - Interest expense relating primarily to the funding of the acquisition of revenue earning equipment.

Direct operating expenses (primarily wages and related benefits; concessions and commissions paid to airport authorities, travel agents and others; and other costs relating to the operation and rental of the revenue earning equipment, such as maintenance and reservations);
Depreciation expense relating to revenue earning equipment (including net gains or losses on the disposal of such equipment). Revenue earning equipment includes cars and industrial and construction equipment;
Selling, general and administrative expenses (including advertising); and
Interest expense relating primarily to the funding of the acquisition of revenue earning equipment.

The Company'sCompany’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'sCompany’s profitability depending on the ability of the Company to adjust pricing for these changes. The Company'sCompany’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'sCompany’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'sCompany’s consolidated financial statements included in this Report. CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical Accounting Policies and Estimates

The Company'sCompany’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. 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. For additional discussion of the Company'sCompany’s accounting policies, see Note 1 to the Notes to the Company'sCompany’s consolidated financial statements included in this Report. REVENUE EARNING EQUIPMENT

Revenue Earning Equipment

The Company'sCompany’s principal assets are Revenue Earning Equipment ("REE"(“REE”), which represents 67%62% of total assets at December 31, 2002.2003. REE consists of vehicles utilized in car rental operations and industrial and

13


construction equipment rented by HERC. During 2002, 78%2003, 81% of the vehicles purchased for the Company'sCompany’s U.S. and international car rental fleet were subject to repurchase by automobile manufacturers under contractual guaranteed repurchase programs, subject to certain manufacturers'manufacturers’ car condition and mileage requirements, at a specific price during a specified time period. These programs limit the Company'sCompany’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 from the sale 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. 11 PUBLIC LIABILITY AND PROPERTY DAMAGE

Public Liability and Property Damage

The obligation for public liability and property damage on self-insured domestic and foreign vehicles and equipment represents an estimate for both reported accident claims not yet paid, and claims incurred but not yet reported. 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'sCompany’s recorded liability is adjusted to reflect these results. PENSIONS

Pensions

The Company'sCompany’s employee pension costs and obligations are dependent on the Company'sCompany’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'sCompany’s assumptions are accumulated and amortized over future periods and, therefore, generally affect the Company'sCompany’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'sCompany’s pension costs and obligations. See Note 6 to the Notes to the Company'sCompany’s consolidated financial statements included in this Report. GOODWILL

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"(“SFAS”) No. 142, "Goodwill“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'sCompany’s consolidated financial statements included in this Report. RESULTS OF OPERATIONS

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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'sCompany’s consolidated statement of operations:
Percentage of Revenues --------------------------- Years
              
   Percentage of Revenues
   
   Years Ended
   December 31,
   
   2003 2002 2001
   
 
 
Revenues:            
 Car rental  81.4%  80.6%  77.8%
 Industrial and construction equipment rental  17.4   18.0   20.4 
 Other  1.2   1.4   1.8 
   
   
   
 
   100.0   100.0   100.0 
   
   
   
 
Expenses:            
 Direct operating  49.9   48.9   52.4 
 Depreciation of revenue earning equipment  29.2   30.2   29.7 
 Selling, general and administrative  9.5   9.2   9.6 
 Interest, net of interest income  6.8   7.3   8.2 
   
   
   
 
   95.4   95.6   99.9 
   
   
   
 
Income before income taxes  4.6   4.4   0.1 
Provision (benefit) for taxes on income  1.6   1.5   (0.4)
   
   
   
 
Income before cumulative effect of change in accounting principle  3.0%  2.9%  0.5%
   
   
   
 

Year Ended December 31, 2003 Compared with Year Ended December 31, 2002

Revenues

Total revenues of $5,207.9 million in 2003 increased by 4.8% from $4,968.1 million in 2002.

Revenues from car rental operations of $4,239.2 million in 2003 increased by 5.8% from $4,005.6 million in 2002. This increase of $233.6 million was primarily the result of the effects of foreign currency translation of approximately $168.6 million and higher rental volume worldwide, partly offset by a 1.5% decrease in pricing. The impact of changes in exchange rates on net income is mitigated by the fact that not only foreign revenues but also most foreign expenses are incurred in local currencies.

Revenues from industrial and construction equipment rental operations of $904.6 million in 2003 increased by 1.3% from $892.6 million in 2002. This $11.9 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 $64.1 million in 2003 decreased by 8.3% from $69.9 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 $4,970.4 million in 2003 increased by 4.6% from $4,751.7 million in 2002, principally due to the increase in revenues.

Direct operating expenses of $2,596.7 million in 2003 increased by 6.9% from $2,428.8 million in 2002. The increase was primarily the result of the effects of foreign currency translation, increases in wages and benefits, self insurance and gasoline costs, partly offset by decreases in concession fees and commissions in car rental operations and a gain of $8.0 million from the condemnation of a car rental and support facility in Florida.

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Depreciation of revenue earning equipment for the 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 the 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 $495.3 million in 2003 increased by 8.4% from $457.0 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 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.

The tax provision of $78.9 million in 2003 increased 9.0% from $72.3 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 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.

Outlook

The Company expects an improving economic environment resulting in modest increases in demand in both the car and equipment rental businesses during the year 2004. Full year 2004 net income is anticipated to improve over 2003 levels. This assessment does not account for any impact that terrorist attacks, epidemic disease or governmental responses thereto might have on the travel or equipment rental industries or on the overall economy.

Year Ended December 31, --------------------------- 2002 2001 2000 ------ ------ ------ Revenues: Car rental .................................................... 80.6% 77.8% 78.5% Industrial and construction equipment rental .................. 18.0 20.4 19.1 Other ......................................................... 1.4 1.8 2.4 ------ ------ ------ 100.0 100.0 100.0 ------ ------ ------ Expenses: Direct operating .............................................. 48.9 52.4 45.4 Depreciation of revenue earning equipment ..................... 30.2 29.7 26.1 Selling, general and administrative ........................... 9.2 9.6 8.9 Interest, net of interest income .............................. 7.3 8.2 8.2 ------ ------ ------ 95.6 99.9 88.6 ------ ------ ------ Income before income taxes ...................................... 4.4 0.1 11.4 Provision (benefit) for taxes on income ......................... 1.5 (0.4) 4.3 ------ ------ ------ Income before cumulative effect of change in accounting principle 2.9% 0.5% 7.1% ====== ====== ======

12 YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBERCompared with Year Ended December 31, 2001 REVENUES

Revenues

Total revenues of $4,968.1 million in 2002 increased by 1.1% from $4,915.8 million in 2001.

Revenues from car rental operations of $4,005.6 million in 2002 increased by 4.8% from $3,823.9 million in 2001. This increase of $181.7 million was primarily the result of an 8.5% increase in pricing worldwide and an increase of approximately $48.3 million from the effects of foreign currency translation, which was substantially offset by a 4.1% decrease in rental transactions in the United States. The translation impact of exchange rates on net income is not significant because the majority of the Company'sCompany’s foreign expenses are also incurred in local currency.

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Revenues from industrial and construction equipment rental operations of $892.6 million in 2002 decreased by 11.0% from $1,003.4 million in 2001. This $110.8 million decrease was principally due to a decrease in rental volume resulting from unfavorable economic conditions in the equipment rental industry worldwide.

Revenues from all other sources of $69.9 million in 2002 decreased by 21.0% from $88.5 million in 2001, principally due to a decline in telecommunication revenues which resulted from the Company'sCompany’s decision, in the fourth quarter of 2001, to exit the telecommunications resale business. EXPENSES

Expenses

Total expenses of $4,751.7 million in 2002 decreased by 3.3% from $4,913.1 million in 2001, and total expenses as a percentage of revenues decreased to 95.6% in 2002 from 99.9% in 2001, principally due to an increase in revenues and cost reductions.

Direct operating expenses of $2,428.8 million in 2002 decreased by 5.6% from $2,574.1 million in 2001. The decrease was primarily the result of lower costs in car rental and equipment rental operations, including commissions, concession fees, reservation costs, other equipment rental operating costs and the elimination of costs associated with the former telecommunications resale business. The decrease also included a reduction of $29.2 million which resulted from the elimination of goodwill amortization upon the Company'sCompany’s adoption of SFAS No. 142, effective January 1, 2002. See Note 2 to the Notes to the Company'sCompany’s consolidated financial statements included in this Report.

Depreciation of revenue earning equipment for the car rental operations of $1,228.5 million in 2002 increased by 3.2% from $1,190.9 million in 2001, principally due to an increase in the cost of cars operated in the United States, partially offset by higher net proceeds received in excess of book value on the disposal of vehicles in the United States.

Depreciation of revenue earning equipment for the industrial and construction equipment rental operations of $271.0 million in 2002 remained at 2001 levels with a decrease in the size of the fleet being offset by lower net proceeds received in excess of book value on the disposal of equipment.

Selling, general and administrative expenses of $457.0 million in 2002 decreased by 3.2% from $472.0 million in 2001. The decrease was principally due to decreases in advertising and sales promotion expenses. These decreases were partly offset by an increase in administrative expenses attributable to an increase in incentive compensation expense relating to the improvement in earnings in 2002.

Interest expense of $366.4 million in 2002 decreased 9.5% from $404.7 million in 2001, primarily due to a decrease in the weighted-average interest rate in 2002 and an increase in interest income.

A tax provision of $72.4 million was provided in 2002, as compared to a tax benefit of $20.6 million recognized in 2001. The increase in the income tax provision was primarily due to higher income before income taxes in 2002 and higher foreign tax credits recorded in 2001. The effective tax rate in 2002 was 33.4%. The effective tax rate in 2001 was 31.5% after adjusting for the effects of foreign tax credits, non-deductible goodwill amortization and an increase in the valuation allowance. The increase in the effective tax rate was due primarily to the mix of pretax operating results between countries with different tax rates and restrictions in 2001 on the carryforward of certain state tax losses. See Notes 1 and 9 to the Notes to the Company'sCompany’s consolidated financial statements included in this Report. INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Income before cumulative effect of change in accounting principle

The Company had income before cumulative effect of change in accounting principle of $144.0 million in 2002, representing an increase of $120.7 million from $23.3 million in 2001. The increase was primarily due to an improved pricing environment in the Company'sCompany’s worldwide car rental business, lower interest expense and cost reductions. These increases were partly offset by continued lower car and equipment rental volumes after the terrorist attacks of September 11, 2001 and overall economic conditions, which have negatively impacted corporate spending levels in the United States and certain European countries. 13 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE The Company recorded a non-cash charge of $294 million upon the adoption of SFAS No. 142, effective January 1, 2002. The charge related to the industrial

17


Liquidity 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. OUTLOOK The Company believes that business travel and equipment rentals will remain at current levels in 2003, reflecting continued weak economic conditions and related reductions in corporate spending. The Company expects full year 2003 income before income taxes to improve over 2002 levels as the economy gradually improves. This assessment does not take into account any impact a potential war or additional terrorist attacks may have on the economy, the travel industry and the equipment rental industry. 14 YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 REVENUES Total revenues of $4,915.8 million in 2001, decreased by 3.1% from $5,073.5 million in 2000. Revenues from car rental operations of $3,823.9 million in 2001 decreased by 3.9% from $3,980.6 million in 2000. This decrease of $156.7 million was primarily the result of a 5.1% decrease in transactions and a 4.4% decrease in pricing in the United States, and a decrease of $39.1 million from the effects of foreign currency translation. These decreases were partially offset by longer length rentals primarily in the United States, and an increase in the number of transactions outside the United States. The decrease in transactions and pricing in the United States was primarily due to a decrease in demand resulting from the slowdown in the economy and its adverse impact on business travel, as well as the interruption and significant decline in air travel after the terrorist attacks of September 11, 2001. The translation impact of exchange rates on net income is not significant because the majority of the Company's foreign expenses are also incurred in local currencies. Revenues from industrial and construction equipment rental operations of $1,003.4 million in 2001 increased by 3.5% from $969.6 million in 2000. Of this $33.8 million increase, approximately $18.6 million was due to an increase in volume resulting from the inclusion of seven acquired businesses worldwide, and approximately $15.2 million was due to increased activity from existing and greenfield locations which grew 1.7%. Revenues from all other sources of $88.5 million in 2001 decreased by 28.2% from $123.3 million in 2000, primarily due to a decline in telecommunications revenues and a decrease in car leasing revenue due to the transfer of certain foreign operations to an affiliated company on August 31, 2000. EXPENSES Total expenses of $4,913.1 million in 2001 increased by 9.4% from $4,492.6 million in 2000, and total expenses as a percentage of revenues increased to 99.9% in 2001, from 88.6% in 2000, principally due to an increase in the United States of lower margin leisure business, inflationary cost factors and a precipitous decline in business as a result of the terrorist attacks of September 11, 2001. Direct operating expenses of $2,574.1 million in 2001 increased by 11.8% from $2,303.3 million in 2000. The increase was primarily due to higher wages, facility costs, self-insurance costs and vehicle damage costs in car rental operations and the expansion of suburban car rental operations and the industrial and construction equipment rental business. These increases were partly offset by foreign currency translation changes and lower commissions. The increase was also due to the recognition of a gain of $9 million in 2000 from the condemnation of a car rental and support facility in California. Depreciation of revenue earning equipment for the car rental and car leasing operations of $1,190.9 million in 2001 increased by 9.6% from $1,086.7 million in 2000, primarily due to an increase in the number of cars operated worldwide, and a decrease of $54.3 million in the net proceeds received in excess of book value on the disposal of vehicles. These increases were partly offset by a decrease due to the transfer of certain foreign car leasing operations to an affiliated company on August 31, 2000. Depreciation of revenue earning equipment for the industrial and construction equipment rental operations of $271.4 million in 2001 increased by 14.6% from $236.8 million in 2000, primarily due to acquisitions of equipment rental and sales companies, an increase in the volume of equipment operated and a decrease in the net proceeds received in excess of book value on the disposal of equipment. Selling, general and administrative expenses of $472.0 million in 2001 increased by 4.7% from $451.0 million in 2000, and increased as a percentage of revenue to 9.6% in 2001 from 8.9% in 2000. The increase in 2001 resulted from higher administrative expenses and sales promotion, including $9.7 million of expenses related to the merger of the Company with a wholly owned subsidiary of Ford. These increases were partly offset by lower advertising costs and foreign currency translation changes. Interest expense of $404.7 million in 2001 decreased 2.4% from $414.8 million in 2000, primarily due a decrease in the weighted-average interest rate in 2001. These decreases were partially offset by lower interest income in 2001. A tax benefit of $20.6 million was recognized in 2001, as compared to tax expense of $222.5 million in 2000. The decrease in income taxes was due primarily to the decrease in income before income taxes and the benefit of foreign tax credits in 2001. The effective tax rate in 2001 was 31.5% after adjusting for the effects of foreign tax credits, non-deductible goodwill amortization and an increase in the valuation allowance. The effective tax rate in 2000 was 38.3%. The decrease in the effective tax rate as adjusted was primarily due to restrictions on the carryforward of state tax losses incurred in 2001 and the mix of pretax income between countries with different tax rates. See Notes 1 and 9 to the Notes to the Company's consolidated financial statements included in this Report. 15 NET INCOME The Company had net income of $23.3 million in 2001, representing a decrease of 93.5% from $358.4 million in 2000. This decrease was primarily due to lower car rental volume in the United States, principally due to the slowdown in the economy and its adverse impact on business travel and pricing, the terrorist attacks of September 11, 2001, higher 2001 model year vehicle costs, lower proceeds received on the disposal of vehicles, and the net effect of the other contributing factors noted above. LIQUIDITY AND CAPITAL RESOURCES Capital Resources

At December 31, 2002,2003, the Company had cash and cash equivalents of $601.3$610.0 million, an increase of $387.3$8.7 million from December 31, 2001. The balance2002. In the third quarter of 2003, the Company began making 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 $500.1 million at December 31, 2002 included $424.1 million of related party investments, with $326.7 million representing short-term investments in commercial paper issued by Ford Credit2003 and its subsidiaries. These investments are beingwill be held until the funds are required for operating purposes or used to reduce indebtedness.

The Company'sCompany’s domestic and foreign operations are funded by cash provided by operating activities, and by extensive financing arrangements maintained by the Company in the United States, Europe, Australia, New Zealand, Canada and Brazil. The Company'sCompany’s primary use of funds is for the acquisition of revenue earning equipment, which consists of cars and industrial and construction equipment. Net cash provided by operating activities during 2002 decreased2003 increased approximately $577$340 million from 20012002 primarily due to the increasedecrease in net revenue earning vehicle expenditures. For the year ended December 31, 2002,2003, the Company'sCompany’s expenditures for revenue earning equipment were $9.9$9.4 billion (partially offset by proceeds from the sale of such equipment of $8.1$7.9 billion). These assets are purchased by the Company in accordance with the terms of programs negotiated with automobile and equipment manufacturers. For the year ended December 31, 2002,2003, the Company'sCompany’s capital expenditures for property and non-revenue earning equipment were $221.2$226.7 million.

Financing

To finance its domestic operations, the Company maintains active unsecured and securedasset backed commercial paper programs. The Company is also active in the domestic unsecured medium-term and long-term debt markets.

During the third quarter of 2002, the Company established an Asset Backed Securitization ("ABS"asset backed securitization (“ABS”) program for its domestic car rental fleet to reduce its borrowing costs and enhance its financing resources. The ABS program provides for the initial issuance of up to $1 billion of asset backed commercial paper and 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'sCompany’s consolidated balance sheet. 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'sMoody’s Investors Service, Inc. (“Moody’s”) and F1 by Fitch Ratings.Ratings (“Fitch”). Under certain conditions, the commercial paper notes may be repaid by draws under a related bank liquidity facility ($928814 million), which expires in September 2003,2004, or a related letter of credit issued under a letter of credit facility ($215 million), which also expires in September 2004.

All debt issued under the ABS program is collateralized by the assets ofdedicated to the ABS program, consisting of revenue earning vehicles acquired for useused by the Company in the Company'sits domestic dailycar rental fleet,business, restricted cash and investments, and certain receivables related to the revenue earning vehicles. As of December 31, 2002, $513.72003, $723.1 million of asset backed commercial paper was outstanding underoutstanding.

On September 30, 2003, the Company's ABS program. Company issued $500 million of 4.7% Senior Promissory Notes (“the Notes”) due on October 2, 2006. Effective September 30, 2003, the Company entered into interest rate swap agreements relating to the Notes. 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 with an effective interest rate at December 31, 2003 of 3.27%. See Note 3 to the Notes to the Company’s consolidated financial statements included in this Report.

As the need arises, it is the Company'sCompany’s intention to issue either 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, 20022003 was $5.1$4.9 billion with maturities ranging from 20032004 to 2028. From time to time, the Company files with the Securities and Exchange Commission 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, 2002,2003, the Company had $3 billion available for issuance under effective registration statements. At December 31, 2003, there was no securedasset backed medium-term or long-term debt outstanding.

Borrowing for the Company'sCompany’s international operations consists mainly of loans obtained from local and international banks and commercial paper programs established in Australia, Canada, Belgium, Ireland and the Netherlands. The Company guarantees only the commercial paper borrowings of its subsidiaries

18


in Belgium, Ireland and the Netherlands, and guarantees commercial paper and short-term bank loans of its subsidiaries in Australia and Canada. All borrowings by international operations are either in the international operation'soperation’s local currency or, if in non-local currency, hedged to minimize foreign exchange exposure. At December 31, 2002,2003, total debt for the foreign operations was $1,181$1,546 million, of which $1,171$1,538 million was short-term (original maturity of less than one year) and $10$8 million was long-term. At December 31, 2002,2003, the total amounts outstanding (in millions of U.S. dollars) under the commercial paper programs in Australia, Belgium, Canada, Ireland and Irelandthe Netherlands were $6, $152, $271$2, $80, $361, $582 and $290,$10, respectively.

Contractual Obligations

At December 31, 2002,2003, the Company'sCompany’s contractual cash obligations, relating to existing debt, operating leases and concession agreements, in millions, were as follows: 2003; $2,882; 2004, $1,073; 2005, $733; 2006, $356; 2007, $570; after 2007, $2,497. follows (in millions of dollars):

                        
         Payments Due by Period
         
         Less than         More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years

 
 
 
 
 
Debt(1)
 $7,628  $3,622  $1,364  $701  $1,941 
Operating leases and concession agreements(2)
  1,232   259   382   217   374 
Purchase obligations(3)
                    
   Ford and subsidiaries  2,934   2,934          
   All others  3,237   3,158   77   2    
   
   
   
   
   
 
 Total purchase obligations  6,171   6,092   77   2    
   
   
   
   
   
 
  Total $15,031  $9,973  $1,823  $920  $2,315 
   
   
   
   
   
 

(1)Amounts represent debt obligations of the Company included in “Debt” in the Company’s consolidated balance sheet and includes $2,720 million of commercial paper and other short term borrowings. 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 noncancelable 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 noncancelable 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, 2003, $5,973 million represent 2004 model year fleet purchases where contracts have been signed or are pending with committed orders under the terms of such arrangements.

Credit Facilities

At December 31, 2002,2003, the Company had committed credit facilities totaling $3.0$2.8 billion.

Currently, $1.3 billion of the committed credit facilities are represented by a combination of multi-year, and 364-day global and other committed credit facilities provided by 2624 participating banks. In addition to direct borrowings by the Company, thesethe multi-year and 364-day global facilities allow any subsidiarycertain 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, 20022003 and currently total $1,212$1,065 million with 16 expirations as follows: $137 million on June 30, 2003, $43 million on June 30, 2004, $69 million on June 30, 2005, and $963$35 million on June 30, 2007.2006, $108 million on June 30, 2007 and $810 million on June 30, 2008. The multi-year facilities that expire in 20072008 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 20, 2002,19, 2003, the 364-day global committed credit facilities, which total $115 million, were renegotiated and currently expire on June 19, 2003.17, 2004. 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 $118 million and expire at various times during 2004.

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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, 2003, $814 million is currently available which expires in September 2004. 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'sCompany’s multi-year global committed credit facilities. In exchange for this credit support, the Company agreed to reduce the bank'sbank’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, 2004.2005. 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. Obligations of the Company under this agreement would rank pari passu with the Company'sCompany’s senior debt securities. A commitment fee of .135%.2% per annum is payable on the unused available credit.

Debt Ratings

The Company'sCompany’s short- and long-term debt is rated by the four nationally-recognized statistical rating organizations: Fitch, Inc. ("Fitch"); Moody's Investors Service, Inc. ("Moody's"); Standard & Poor's Rating Services, a division of McGraw-Hill Companies, Inc. ("Fitch; Moody’s; S&P");&P and Dominion Bond Rating Service Limited ("DBRS"(“DBRS”) in Canada. 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,Moody’s, BBB-, and A3 or higher by S&P, and BBB and R-2 or higher by DBRS are considered "investment“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.

On January 11, 2002, Fitch lowered the Company's long-term debt rating from A- to BBB+ and confirmed the Company's short-term debt rating of F2. Fitch confirmed the rating outlook as negative. On October 31, 2002, Fitch affirmed the Company's long and short-term debt ratings at BBB+ and F2, respectively, with a rating outlook of negative. On January 11, 2002,November 12, 2003, S&P changeddowngraded the rating outlook forlong-term corporate credit ratings of Ford, Ford Credit and the Company to negative. On October 16, 2002,BBB- with a stable outlook from BBB with a negative outlook. S&P placedalso downgraded the short-term ratings of Ford, Ford Credit and the Company to A-3 from
A-2. This downgrade did not substantially reduce the Company’s ability to issue unsecured commercial paper, nor is it expected to materially affect the Company’s funding mix for 2004. The Company’s funding strategy continues to be focused on maintaining liquidity and diverse and competitive funding sources. The Company believes that its funding strategy will allow it to continue to fund its operations in the future.

The ratings assigned to the Company’s short- and long-term debt rating of the Company on CreditWatchby Fitch, Moody’s and DBRS are F2/BBB+ with a negative implications. At the same time, S&P affirmed the Company's A2 commercial paper rating. On October 30, 2002, S&P affirmed the Company's long-term debt ratings, including its BBB corporate credit rating, after determining the Company's stand-alone credit strength as sufficient to justify maintaining this rating. On January 16, 2002, Moody's lowered the Company's long-term debt rating from Baa1 to outlook, P2/Baa2 and confirmed the short-term debt rating of Prime-2. Moody's confirmed the ratingwith a negative outlook as negative. On December 10, 2002, Moody's confirmed the Company's long-term debt rating at Baa2, short-term debt rating at Prime-2 and its rating outlook as negative. On October 17, 2002, DBRS confirmed the Company's Canadian short-term debt rating as R-1 (low) with a stable trend and the Company's corporate and Canadian long-term debt ratings as BBB (high). / BBB(high) with a negative trend, respectively.

Other Factors

The Company's corporate and Canadian long-term debt ratings trend was changed from stable to negative. The Company'sCompany’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'sCompany’s operations as a whole.

By virtue of its indirect, 100% ownership interest in the Company, Ford has the right to make any changes that it deems appropriate in the Company'sCompany’s assets, corporate structure, capitalization, operations, properties and policies (including dividend policies).

Car rental is aand equipment rental operations are seasonal business,businesses, with decreased travel in both thelevels of business and leisure segments in the winter months and heightened activity during the spring and summer. To accommodate increased demand, the Company increases its available fleet and staff during the second and third quarters. As business demand declines, fleet and staff are decreased accordingly. However, certain operating

20


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. 17

The table below shows capital expenditures (net of proceeds received from the sale of revenue earning equipment) and financial results by quarter for 20022003 and 2001. 2002.

                       
    Capital     Operating Income    
    Expenditures     Income (Loss)    
    (Net of Sales     (Pre-Tax Before    
    Proceeds     Income Before Income Net Income
    Received) Revenues Interest)(1)(2) Taxes(1)(2) (Loss)(3)
    
 
 
 
 
            Dollars in millions        
2003                    
 First Quarter $436.4  $1,147.7  $32.1  $(56.8) $(37.7)
 Second Quarter  1,217.6   1,269.8   149.0   59.6   39.6 
 Third Quarter  (3.4)  1,489.5   276.5   187.6   126.7 
 Fourth Quarter  83.7   1,300.9   134.9   47.1   30.0 
    
   
   
   
   
 
  Total Year $1,734.3  $5,207.9  $592.5  $237.5  $158.6 
    
   
   
   
   
 
2002                    
 First Quarter $861.4  $1,088.8  $25.9  $(59.2) $(342.1)
 Second Quarter  1,160.8   1,262.5   173.2   84.0   65.5 
 Third Quarter  (185.9)  1,416.6   261.2   162.4   108.1 
 Fourth Quarter  233.3   1,200.2   122.5   29.2   18.5 
    
   
   
   
   
 
  Total Year $2,069.6  $4,968.1  $582.8  $216.4  $(150.0)
    
   
   
   
   
 

Operating Capital Income (Loss) Income Expenditures (Pre-Tax (Loss) (Net
(1)Includes a gain of Sale Income (Loss) Before Net Proceeds Before Income Income Received) Revenues Interest)(1) Taxes(1) (Loss)(2)(3) ------------ -------- ------------- -------- ------------ Dollars$8 million in millions the second quarter of 2003 from the condemnation of a car rental and support facility in Florida.
(2)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.
(3)Includes a $294 million non-cash charge in the first quarter of 2002 First Quarter................ $ 861.4 $1,088.8 $ 25.9 $ (59.2) $(342.1) Second Quarter............... 1,160.8 1,262.5 173.2 84.0 65.5 Third Quarter................ (185.9) 1,416.6 261.2 162.4 108.1 Fourth Quarter............... 233.3 1,200.2 122.5 29.2 18.5 --------- -------- ------ -------- ------- Total Year................. $ 2,069.6 $4,968.1 $582.8 $ 216.4 $(150.0) ========= ======== ====== ======== ======= 2001 First Quarter................ $ 1,177.6 $1,180.9 $ 96.0 $ (5.8) $ (3.9) Second Quarter............... 1,309.4 1,285.5 188.7 85.8 59.2 Third Quarter................ (414.1) 1,369.2 161.4 54.2 25.5 Fourth Quarter............... (397.4) 1,080.2 (38.7) (131.5) (57.5) --------- -------- ------ -------- ------- Total Year................. $ 1,675.5 $4,915.8 $407.4 $ 2.7 $ 23.3 ========= ======== ====== ======== ======= related to impairment of goodwill in the Company’s industrial and construction equipment rental segment, recognized in accordance with the adoption of SFAS No. 142.
(1) Includes $9.7 million in the first quarter of 2001 for expenses associated with the Merger. (2) Includes $294 million after tax non-cash charge in the first quarter of 2002 related to impairment of goodwill in the Company's industrial and construction equipment rental segment, in accordance with SFAS No. 142. (3) Includes credits to the "Provision (benefit) for taxes on income" of $30.2 million in the fourth quarter of 2001, from the benefit of certain foreign tax credits. MARKET RISKS

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'sCompany’s exposure to counterparty nonperformance on such instruments. For more information on these exposures see Note 14 to the Notes to the Company'sCompany’s consolidated financial statements included in this Report. INTEREST RATE RISK

Interest Rate Risk

From time to time, the Company and its subsidiaries enter into interest rate swap agreements to manage exposurestheir interest rate risk. Effective September 30, 2003, the Company entered into interest rate swap agreements relating to fluctuations in interest rates. The effectthe issuance of its 4.7% Senior Promissory notes due October 2, 2006. Under these agreements, is to make the Company less susceptible to changes inpays interest rates by effectively converting certainat a variable rate debt toin exchange for fixed rate debt.receipts, effectively transforming these notes to floating rate obligations. 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. At December 31, 2002, there were no interest rate swaps outstanding. Assuming an instantaneous increase of one percentage point in interest rates on the existing debt portfolio at December 31, 2003, the Company'sCompany’s net income would decline by approximately $16$18 million over a 12-month period. FOREIGN CURRENCY RISK

21


Foreign Currency Risk

The Company and its subsidiaries have purchased foreign exchange options to manage exposure to fluctuations in foreign exchange rates, principally 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 riskCompany’s risks with respect to currency option contracts isare limited to the premium paid for the right to exercise the option.option and the future performance of the option’s counterparty. Premiums paid for options outstanding at December 31, 2002,2003, were approximately $1.3 million. RECENT PRONOUNCEMENTS $0.4 million and the Company limits counterparties to financial institutions that have strong credit ratings.

Recently Adopted Pronouncements

In June 2001, the Financial Accounting StandardsStandard Board ("FASB"(“FASB”) issued SFASStatement of Financial Accounting Standards (“SFAS”) No. 143, "Accounting“Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or)and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The Company will adoptadopted this statement, effective January 1, 2003 and management doesit did not believe it will have a material effect on the Company'sCompany’s financial position, results of operations or cash flows. 18

In June 2002, the FASB issued SFAS No. 146, "Accounting“Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and recognition of liabilities for costs associated with exit or disposal activities, requiring that such liabilities be recognized and measured initially at fair value only when a liability is incurred. SFAS No. 146 will beis effective for disposal activities that are initiated after December 31, 2002. Management does not believe the adoption ofThe Company adopted SFAS No. 146 as of January 1, 2003 willand it did not have a material effect on the Company'sCompany’s financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45 ("(“FIN 45"45”), "Guarantor's“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also requires additional disclosure about the guarantor'sguarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable prospectively to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statements issued after December 15, 2002. Management does not believe theThe adoption of FIN 45 willdid not have a material impacteffect on the Company's consolidatedCompany’s financial position, results of operations or cash flows. The Company has included the required disclosure information inSee Note 12 to the Notes to the Company'sCompany’s consolidated financial statements included in this Report. report.

In December 2002, the FASB issued SFAS No. 148, "Accounting“Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, Accounting“Accounting for Stock-Based CompensationCompensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in both annual and interim financial statements about the effects of stock-based compensation. The annual and interim disclosure guidance of SFAS No. 148 is effective for fiscal years beginningending after December 15, 2002. The Company will adoptadopted the fair value recognition provisions of SFAS No. 123, effective January 1, 2003 prospectively to all unvested employee awards as of January 1, 2003, and to all new awards granted to employees after January 1, 2003, using2003. Under the modified prospective method of adoption under SFAS No. 148. Hadselected by the Company, stock based compensation cost ofrecognized in 2003 is the Company's stock-based compensation planssame as that which would have been determined based onrecognized had the fair value methods of SFAS No. 123 been applied from its original effective date. See Note 7 to the Company's net loss would have been $157.2 millionNotes to the Company’s consolidated financial statements included in 2002 and net income would have been $13.6 million and $347.4 million in 2001 and 2000, respectively. this report.

In January 2003, the FASB issued FIN 46, "Consolidation“Consolidation of Variable Interest Entities." This interpretationEntities, an Interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," addresses” which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and liabilitiesactivities of unconsolidated variable interest entities.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 effective for allthe 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

22


also requires disclosures about VIEs that a company is not required to consolidate but in which it has a significant variable interest entities created after January 31,interest. The Company adopted FIN 46 as of July 1, 2003 and for variable interest entities in which an enterprise obtains an interest after that date. the Revised Interpretation (“FIN 46 is effective for fiscal years or interim periods beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February46-R”) as of December 15, 2003. Management does not believe theThe adoption of FIN 46 willand FIN 46-R did not affect the Company'sCompany’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 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,” 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, is 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Quantitative and Qualitative Disclosures About Market Risk.

See Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, which appears on pages 1113 to 1923 of this Report. 19

23


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT ACCOUNTANTS AUDITORS

To The Hertz Corporation:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)1 on page 4758 present fairly, in all material respects, the financial position of The Hertz Corporation and its subsidiaries (the "Company"“Company”) at December 31, 20022003 and 2001,2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002,2003, 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 47,58 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'sCompany’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 auditing standards generally accepted in the United States of America, 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 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 Notes 1 and 7 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” effective January 1, 2003.

As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 142, "Goodwill“Goodwill and Other Intangible Assets," effective January 1, 2002. PRICEWATERHOUSECOOPERS LLP Florham Park, New Jersey January 17, 2003 20

PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
January 14, 2004

24


THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, ---------------------------- 2002 2001 ------------ ------------ Dollars in thousands ASSETS Cash and equivalents (Note 14) .......................................... $ 601,263 $ 213,997 Receivables, less allowance for doubtful accounts of $29,047 and $38,886 (Schedule II and Note 3) ...................................... 1,021,663 919,041 Due from affiliates (Note 8) ............................................ 251,299 143,302 Inventories, at lower of cost or market ................................. 71,842 65,881 Prepaid expenses and other assets (Notes 3, 4 and 5) .................... 126,180 103,727 Revenue earning equipment, at cost (Notes 3 and 8): Cars .................................................................. 6,708,139 5,821,722 Less accumulated depreciation ....................................... (709,817) (601,318) Other equipment ....................................................... 2,290,394 2,396,295 Less accumulated depreciation ....................................... (862,808) (764,975) ------------ ------------ Total revenue earning equipment ................................. 7,425,908 6,851,724 ------------ ------------ Property and equipment, at cost: Land, buildings and leasehold improvements ............................ 1,123,779 1,013,376 Service equipment ..................................................... 1,011,581 917,118 ------------ ------------ 2,135,360 1,930,494 Less accumulated depreciation ....................................... (1,023,591) (874,593) ------------ ------------ Total property and equipment .................................... 1,111,769 1,055,901 ------------ ------------ Goodwill and other intangible assets (Notes 2 and 5) .................... 519,021 804,840 ------------ ------------ Total assets .................................................... $ 11,128,945 $ 10,158,413 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable (Note 8) ............................................... $ 506,170 $ 457,991 Accrued salaries and other compensation ................................. 322,612 247,824 Other accrued liabilities ............................................... 466,752 407,464 Accrued taxes ........................................................... 52,753 72,077 Debt (Notes 3 and 14) ................................................... 7,043,197 6,314,032 Public liability and property damage (Schedule II) ...................... 353,474 315,845 Deferred taxes on income (Note 9) ....................................... 462,100 358,800 Commitments and contingencies (Notes 10, 12 and 14) Stockholder's equity (Notes 1, 3 and 5): Common Stock, $0.01 par value, 3,000 shares authorized, 100 shares issued ................................................... -- -- Additional capital paid-in ............................................ 983,132 983,132 Retained earnings ..................................................... 955,131 1,105,083 Accumulated other comprehensive loss (Note 4) ......................... (16,376) (103,835) ------------ ------------ Total stockholder's equity ...................................... 1,921,887 1,984,380 ------------ ------------ Total liabilities and stockholder's equity ...................... $ 11,128,945 $ 10,158,413 ============ ============

             
      December 31,
      
      2003 2002
      
 
      Dollars in thousands
    
ASSETS
        
Cash and equivalents (Note 14) $609,986  $601,263 
Short-term investments (Note 14)  500,108    
Receivables, less allowance for doubtful accounts of $35,758 and $29,047 (Note 3)  1,238,853   1,021,663 
Due from affiliates (Note 8)  520,842   251,299 
Inventories, at lower of cost or market  73,354   71,842 
Prepaid expenses and other assets (Notes 3, 4 and 5)  135,922   126,180 
Revenue earning equipment, at cost (Notes 3 and 8):        
  Cars  7,168,688   6,708,139 
   Less accumulated depreciation  (706,719)  (709,817)
  Other equipment  2,214,901   2,290,394 
   Less accumulated depreciation  (883,623)  (862,808)
   
   
 
    Total revenue earning equipment  7,793,247   7,425,908 
   
   
 
Property and equipment, at cost:        
  Land, buildings and leasehold improvements  1,221,423   1,123,779 
  Service equipment  1,114,875   1,011,581 
   
   
 
   2,336,298   2,135,360 
   Less accumulated depreciation  (1,166,529)  (1,023,591)
   
   
 
    Total property and equipment  1,169,769   1,111,769 
   
   
 
Goodwill and other intangible assets (Notes 2 and 5)  536,929   519,021 
   
   
 
    Total assets $12,579,010  $11,128,945 
   
   
 
    
LIABILITIES AND STOCKHOLDER’S EQUITY
        
Accounts payable (Note 8) $757,869  $506,170 
Accrued salaries and other compensation  287,676   322,612 
Other accrued liabilities  448,690   466,752 
Accrued taxes  111,432   52,753 
Debt (Notes 3 and 14)  7,627,930   7,043,197 
Public liability and property damage  398,822   353,474 
Deferred taxes on income (Note 9)  721,200   462,100 
Commitments and contingencies (Notes 10, 12 and 14)        
Stockholder’s equity (Notes 1 and 3):        
 Common Stock, $0.01 par value, 3,000 shares authorized, 100 shares issued      
  Additional capital paid-in  983,132   983,132 
  Retained earnings  1,113,746   955,131 
  Accumulated other comprehensive income (loss) (Note 4)  128,513   (16,376)
   
   
 
    Total stockholder’s equity  2,225,391   1,921,887 
   
   
 
    Total liabilities and stockholder’s equity $12,579,010  $11,128,945 
   
   
 

The accompanying notes are an integral part of this statement. 21

25


THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31, ------------ ----------- ---------- 2002 2001 2000 ----------- ----------- ---------- Dollars in thousands Revenues: Car rental .................................................... $ 4,005,620 $ 3,823,946 $3,980,627 Industrial and construction equipment rental .................. 892,646 1,003,379 969,642 Other (Note 5) ................................................ 69,873 88,466 123,249 ----------- ----------- ---------- Total revenues .......................................... 4,968,139 4,915,791 5,073,518 ----------- ----------- ---------- Expenses: Direct operating .............................................. 2,428,820 2,574,063 2,303,316 Depreciation of revenue earning equipment (Note 8) ............ 1,499,568 1,462,310 1,323,501 Selling, general and administrative ........................... 456,986 472,018 450,970 Interest, net of interest income of $10,339, $9,034 and $13,520 (Note 3) ................................................... 366,371 404,677 414,867 ----------- ----------- ---------- Total expenses .......................................... 4,751,745 4,913,068 4,492,654 ----------- ----------- ---------- Income before income taxes ...................................... 216,394 2,723 580,864 Provision (benefit) for taxes on income (Note 9) ................ 72,346 (20,544) 222,456 ----------- ----------- ---------- Income before cumulative effect of change in accounting principle 144,048 23,267 358,408 Cumulative effect of change in accounting principle (Note 2) .... (294,000) -- -- ----------- ----------- ---------- Net income (loss) (Note 7) ...................................... $ (149,952) $ 23,267 $ 358,408 =========== =========== ==========

               
    Years ended December 31,
    
    2003 2002 2001
    
 
 
    Dollars in thousands
Revenues:            
 Car rental $4,239,244  $4,005,620  $3,823,946 
 Industrial and construction equipment rental  904,582   892,646   1,003,379 
 Other (Note 5)  64,103   69,873   88,466 
   
   
   
 
  Total revenues  5,207,929   4,968,139   4,915,791 
   
   
   
 
Expenses:            
 Direct operating  2,596,727   2,428,820   2,574,063 
 Depreciation of revenue earning equipment (Note 8)  1,523,391   1,499,568   1,462,310 
 Selling, general and administrative  495,276   456,986   472,018 
 Interest, net of interest income of $17,881, $10,339 and $9,034 (Note 3)  355,043   366,371   404,677 
   
   
   
 
  Total expenses  4,970,437   4,751,745   4,913,068 
   
   
   
 
Income before income taxes  237,492   216,394   2,723 
Provision (benefit) for taxes on income (Note 9)  78,877   72,346   (20,544)
   
   
   
 
Income before cumulative effect of change in accounting principle  158,615   144,048   23,267 
Cumulative effect of change in accounting principle (Note 2)     (294,000)   
   
   
   
 
Net income (loss) $158,615  $(149,952) $23,267 
   
   
   
 

The accompanying notes are an integral part of this statement. 22

26


THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'SSTOCKHOLDER’S EQUITY
Unamortized Accumulated Additional Restricted Other Total Common Capital Stock Retained Comprehensive Treasury Stockholder's Stock Paid-In Grants Earnings Loss Stock Equity -------- ---------- ----------- ----------- -------------- ----------- ------------- Dollars in thousands Balance at DECEMBER 31, 1999 .................. $1,083 $982,298 $(3,452) $ 766,513 $ (52,499) $(19,952) $1,673,991 Comprehensive Income Net income ..................... 358,408 358,408 Translation adjustment changes (32,179) (32,179) Unrealized holding gains on securities .................... 307 307 Minimum pension liability adjustment, net of tax of $527 101 101 ---------- Total Comprehensive Income . 326,637 ---------- Adjustment for transfer of leasing operations to company under common control ......... 16,444 16,444 Cash dividends on Common Stock. (21,520) (21,520) Acquisition of Treasury Stock..... (25,124) (25,124) Exercise of stock options ........ (5,559) 13,010 7,451 Tax benefits from stock options and restricted stock ........... 3,480 3,480 Issuance of 100,000 shares of restricted stock grants ....... (556) (5,012) 5,568 -- Amortization of restricted stock grants .................. 2,710 2,710 Forfeiture of 9,862 shares of restricted stock grants ....... (236) 236 -- ------ -------- --------- ----------- ---------- --------- ---------- DECEMBER 31, 2000 .................. 1,083 995,871 (5,518) 1,103,401 (84,270) (26,498) 1,984,069 Comprehensive Income Net income ..................... 23,267 23,267 Translation adjustment changes . (19,919) (19,919) Unrealized holding losses on securities .................... (5) (5) Minimum pension liability adjustment, net of tax of $16 . 359 359 ---------- Total Comprehensive Income . 3,702 ---------- Cash dividends on Common Stock. (21,585) (21,585) Exercise of stock options ........ (5,609) 15,602 9,993 Tax benefits from stock options and restricted stock .......... 2,683 2,683 Amortization of restricted stock grants .................. 5,518 5,518 Ford acquisition of minority interest ............. (1,083) (9,813) 10,896 -- ------ -------- --------- ----------- ---------- --------- ---------- DECEMBER 31, 2001 .................. -- 983,132 -- 1,105,083 (103,835) -- 1,984,380 Comprehensive Income Net loss ....................... (149,952) (149,952) Translation adjustment changes 93,537 93,537 Unrealized holding gains on securities ................... 475 475 Minimum 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) $ -- $1,921,887 ====== ======== ========= =========== ========== ========= ==========

                                
             Unamortized     Accumulated        
         Additional Restricted     Other     Total
     Common Capital Stock Retained Comprehensive Treasury Stockholder’s
     Stock Paid-In Grants Earnings Income (Loss) Stock Equity
     
 
 
 
 
 
 
                 Dollars in thousands        
Balance at                            
DECEMBER 31, 2000 $1,083  $995,871  $(5,518) $1,103,401  $(84,270) $(26,498) $1,984,069 
 Comprehensive Income                            
  Net income              23,267           23,267 
  Translation adjustment changes                  (19,919)      (19,919)
  Unrealized holding losses on securities, net of tax of $1                  (5)      (5)
  Minimum pension liability adjustment, net of tax of $16                  359       359 
                           
 
   Total Comprehensive Income                          3,702 
                           
 
 Cash dividends on Common Stock              (21,585)          (21,585)
 Exercise of stock options      (5,609)              15,602   9,993 
 Tax benefits from stock options and restricted stock      2,683                   2,683 
 Amortization of restricted stock grants          5,518               5,518 
 Ford acquisition of minority interest  (1,083)  (9,813)              10,896    
   
   
   
   
   
   
   
 
DECEMBER 31, 2001     983,132      1,105,083   (103,835)     1,984,380 
 Comprehensive Income                            
  Net Loss              (149,952)          (149,952)
  Translation adjustment changes                  93,537       93,537 
  Unrealized holding gains on securities, net of tax of $53                  475       475 
  Minimum 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)     1,921,887 
 Comprehensive Income                            
  Net income              158,615           158,615 
  Translation adjustment changes                  149,037       149,037 
  Unrealized 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                          303,504 
   
   
   
   
   
   
   
 
DECEMBER 31, 2003 $  $983,132  $  $1,113,746  $128,513  $  $2,225,391 
   
   
   
   
   
   
   
 

The accompanying notes are an integral part of this statement. 23

27


THE HERTZ CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, ----------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Dollars in thousands Cash flows from operating activities: Net income (loss) ............................................... $ (149,952) $ 23,267 $ 358,408 Non-cash expenses: Cumulative effect of change in accounting principle ......... 294,000 -- -- Depreciation of revenue earning equipment ................... 1,499,568 1,462,310 1,323,501 Depreciation of property and equipment ...................... 155,424 166,526 137,882 Amortization of intangibles ................................. 1,346 30,697 29,842 Amortization of restricted stock grants ..................... -- 5,518 2,710 Provision for public liability and property damage .......... 145,010 136,772 108,681 Provision for losses for doubtful accounts .................. 15,570 44,316 31,893 Tax benefit from exercise of stock options and restricted stock ..................................................... -- 2,683 3,480 Deferred income taxes ....................................... 103,300 (47,700) 135,400 Revenue earning equipment expenditures .......................... (9,946,271) (9,284,021) (9,066,826) Proceeds from sales of revenue earning equipment ................ 8,065,848 7,839,440 6,972,992 Changes in assets and liabilities, net of effects of purchase and sale of operations: Receivables ................................................. (3,179) 128,837 (123,632) Due from affiliates ......................................... (107,997) 200,266 355,044 Inventories and prepaid expenses and other assets ........... (27,990) 35,869 (29,164) Accounts payable ............................................ 1,099 (77,781) 17,326 Accrued liabilities ......................................... 88,481 80,563 (13,577) Accrued taxes ............................................... (16,673) (82,786) 9,585 Payments of public liability and property damage claims and expenses ...................................................... (120,486) (90,996) (125,272) ----------- ----------- ----------- Net cash flows (used in) provided by operating activities ..... $ (2,902) $ 573,780 $ 128,273 ----------- ----------- -----------

                 
      Years ended December 31,
      
      2003 2002 2001
      
 
 
      Dollars in thousands
Cash flows from operating activities:            
 Net income (loss) $158,615  $(149,952) $23,267 
 Non-cash expenses:            
   Cumulative effect of change in accounting principle     294,000    
   Depreciation of revenue earning equipment  1,523,391   1,499,568   1,462,310 
   Depreciation of property and equipment  151,706   155,424   166,526 
   Amortization of intangibles  1,024   1,346   30,697 
   Amortization of restricted stock grants        5,518 
   Stock-based employee compensation  6,039       
   Provision for public liability and property damage  178,292   145,010   136,772 
   Provision for losses for doubtful accounts  23,053   15,570   44,316 
    Tax benefit from exercise of stock options and restricted stock        2,683 
   Deferred income taxes  260,848   106,340   (47,716)
 Revenue earning equipment expenditures  (9,436,581)  (9,946,271)  (9,284,021)
 Proceeds from sales of revenue earning equipment  7,874,414   8,065,848   7,839,440 
 Changes in assets and liabilities, net of effects of purchase and sale of operations:            
   Receivables  (95,527)  (3,179)  128,837 
   Due from affiliates  (269,543)  (107,997)  200,266 
   Inventories and prepaid expenses and other assets  (3,981)  (27,990)  35,869 
   Accounts payable  182,264   1,099   (77,781)
   Accrued liabilities  (111,439)  88,481   80,563 
   Accrued taxes  49,825   (19,713)  (82,770)
 Payments of public liability and property damage claims and expenses  (155,241)  (120,486)  (90,996)
   
   
   
 
  Net cash flows provided by (used in) operating activities $337,159  $(2,902) $573,780 
   
   
   
 

The accompanying notes are an integral part of this statement. 24

28


THE HERTZ CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, ------------------------------------- 2002 2001 2000 --------- ----------- --------- Dollars in thousands Cash flows from investing activities: Property and equipment expenditures ............................. $(221,227) $ (266,625) $(255,906) Proceeds from sales of property and equipment ................... 32,035 35,744 24,735 Available-for-sale securities: Purchases ..................................................... (4,587) (7,755) (6,584) Sales ......................................................... 4,082 6,332 6,278 Transfer of leasing operations to affiliated company, net of cash -- -- 99,167 Changes in investment in joint venture .......................... 6,560 2,160 (1,233) Purchases of various operations, net of cash (see supplemental disclosures below) ............................... -- (3,026) (111,888) --------- ----------- --------- Net cash used in investing activities ........................ (183,137) (233,170) (245,431) --------- ----------- --------- Cash flows from financing activities: Proceeds from issuance of long-term debt ........................ 809,426 1,466,614 514,734 Repayment of long-term debt ..................................... (559,858) (430,890) (303,295) Short-term borrowings: Proceeds ...................................................... 730,731 871,272 726,683 Repayments .................................................... (557,755) (865,037) (833,524) Ninety-day term or less, net .................................. 127,767 (1,361,041) 53,695 Cash dividends paid on common stock ............................. -- (21,585) (21,520) Purchase of treasury stock ...................................... -- -- (25,124) Exercise of stock options ....................................... -- 9,993 7,451 --------- ----------- --------- Net cash provided by (used in) financing activities ......... 550,311 (330,674) 119,100 --------- ----------- --------- Effect of foreign exchange rate changes on cash ................... 22,994 (2,416) (4,117) --------- ----------- --------- Net increase (decrease) in cash and equivalents during the year ............................................................ 387,266 7,520 (2,175) Cash and equivalents at beginning of year ......................... 213,997 206,477 208,652 --------- ----------- --------- Cash and equivalents at end of year ............................... $ 601,263 $ 213,997 $ 206,477 ========= =========== ========= Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest (net of amounts capitalized) ......................... $ 389,893 $ 420,026 $ 436,598 Income taxes .................................................. (3,854) 121,828 69,270

                 
      Years ended December 31,
      
      2003 2002 2001
      
 
 
      Dollars in thousands
Cash flows from investing activities:            
 Purchase of short-term investments, net $(500,108) $  $ 
 Property and equipment expenditures  (226,747)  (221,227)  (266,625)
 Proceeds from sales of property and equipment  54,638   32,035   35,744 
 Available-for-sale securities:            
  Purchases  (12,114)  (4,587)  (7,755)
  Sales  10,246   4,082   6,332 
 Changes in investment in joint venture  5,640   6,560   2,160 
 Purchases of various operations, net of cash (see supplemental disclosures below)        (3,026)
   
   
   
 
   Net cash used in investing activities  (668,445)  (183,137)  (233,170)
   
   
   
 
Cash flows from financing activities:            
 Proceeds from issuance of long-term debt  510,853   809,426   1,466,614 
 Repayment of long-term debt  (712,057)  (559,858)  (430,890)
 Short-term borrowings:            
  Proceeds  1,094,152   730,731   871,272 
  Repayments  (721,333)  (557,755)  (865,037)
  Ninety-day term or less, net  130,294   127,767   (1,361,041)
 Cash dividends paid on common stock        (21,585)
 Exercise of stock options        9,993 
   
   
   
 
   Net cash provided by (used in) financing activities  301,909   550,311   (330,674)
   
   
   
 
Effect of foreign exchange rate changes on cash  38,100   22,994   (2,416)
   
   
   
 
Net increase in cash and equivalents during the year  8,723   387,266   7,520 
Cash and equivalents at beginning of year  601,263   213,997   206,477 
   
   
   
 
Cash and equivalents at end of year $609,986  $601,263  $213,997 
   
   
   
 
Supplemental disclosures of cash flow information:            
 Cash paid (received) during the year for:            
  Interest (net of amounts capitalized) $357,585  $389,893  $420,026 
  Income taxes  31,481   (3,854)  121,828 

In connection with acquisitions made during the years 2001, and 2000, liabilities assumed were $13 million and $66 million, respectively. million.

The accompanying notes are an integral part of this statement. 25

29


THE HERTZ CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE

Note 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BACKGROUND — Summary of Significant Accounting Policies

Background

The Hertz Corporation (together with its subsidiaries, referred to herein as "Hertz"“Hertz” or the "Company"“Company”), which was incorporated in Delaware in 1967, is a successor to corporations which were engaged in the automobile and truck rental and leasing business since 1918. UAL Corporation ("UAL"(“UAL”) purchased the Company from RCA Corporation ("RCA"(“RCA”) in August 1985. Park Ridge Corporation ("(“Park Ridge"Ridge”), which was 80%-owned by Ford Motor Company ("Ford"(“Ford”), purchased the Company from UAL in December 1987. On April 29, 1994, Ford purchased all of the common stock of the Company owned by Park Ridge Limited Partnership which resulted in the Company becoming a wholly owned subsidiary of Ford.

On April 30, 1997, the Company issued and sold 20,010,000 shares of its Class A Common Stock in an initial public offering (the "Offering"“Offering”) and received net proceeds of $453 million from the sale, and redeemed its 1,290 shares of Series C Preferred Stock for $130 million. The net proceeds received from the Offering were used to pay down notes payable.

On March 9, 2001, Ford FSG, Inc., ("FSG"(“FSG”), an indirect wholly owned subsidiary of Ford that owned an approximate 81.5% economic interest in the Company, completed its acquisition of all of the Company'sCompany’s outstanding Class A Common Stock that FSGit did not already own for $35.50 per share, or approximately $735 million. The acquisition was accomplished through a cash tender offer followed by a merger of a wholly owned subsidiary of FSG with and into the Company, with the Company surviving the merger (the "Merger"“Merger”).

The Company recognized $9.7 million of expenses associated with the Merger in the first quarter of 2001. FSG'sFSG’s cost of acquiring the Company'sCompany’s minority interest and the amortization expense related to acquired intangible assets are not reflected in the accompanying consolidated financial statements. After the Merger, all outstanding shares of Class A Common Stock of the Company were owned by FSG, and all shares of Class A Common Stock of the Company previously held by the Company as treasury stock, along with all shares of Class B Common Stock of the Company owned by a wholly owned subsidiary of FSG, were cancelled. The Merger had no effect on the outstanding obligations (including debt obligations, leases and guarantees) of the Company.

As a result of the Merger, the Company became an indirect wholly owned subsidiary of Ford and the Company'sCompany’s Class A Common Stock was no longer traded on the New York Stock Exchange. However, because certain of the Company'sCompany’s debt securities were sold through public offerings, the Company continues to file periodic reports under the Securities Exchange Act of 1934. PRINCIPLES OF CONSOLIDATION

In May 2001, the Company amended its certificate of incorporation to change the shares of stock it is authorized to issue to a single class of common stock and exchanged the outstanding shares of Class A Common Stock for the same number of shares of the newly authorized common stock.

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. CONSOLIDATED STATEMENT OF CASH FLOWS

Revenue Recognition

Revenue is recognized over the period the revenue earning equipment is rented based on the terms of the rental or leasing contract.

Consolidated Statement of Cash Flows

For purposes of this statement, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. DEPRECIABLE ASSETS

30


THE HERTZ CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Depreciable Assets

The provisions for depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the respective assets, as follows:

Revenue Earning Equipment ("REE"(“REE”): Cars....................................................
  Cars3 to 6 years
  Other equipment......................................... equipment3 to 10 years Buildings.................................................
Buildings20 to 50 years
Leasehold improvements.................................... improvementsTerm of lease
Capitalized internal use software......................... software1 to 10 years
Service cars and service equipment........................ equipment3 to 25 years
Intangible assets......................................... assets5 to 15 years

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 from the sale 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. 26 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) ENVIRONMENTAL CONSERVATION

Environmental Conservation

The use of automobiles and other vehicles is subject to various governmental controls designed to limit environmental damage, including that caused by emissions and noise. Generally, these controls are met by the manufacturer, except in the case of occasional equipment failure requiring repair by Hertz. To comply with environmental regulations, measures are 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 when it is probable that obligations have been incurred and the amounts can be reasonably estimated. PUBLIC LIABILITY AND PROPERTY DAMAGE

Public Liability and Property Damage

Provisions for public liability and property damage on self-insured domestic and foreign claims are made by charges to expense based upon evaluations of estimated ultimate liabilities on reported and unreported claims. For its domestic operations, the Company is, where permitted by applicable local law, a qualified self-insurer against liability resulting from accidents under certificates of self-insurance for financial responsibility in all states where its vehicles are registered. The Company also self-insures general public liability and property damage for all domestic operations. Effective December 15, 2002, all claims have been retained and borne by the Company up to a limit of $10 million for each occurrence ($5 million prior to December 15, 2002), and the Company maintains insurance with unaffiliated carriers in excess of $10 million up to $695 million per occurrence (in excess of $5 million up to $725 million from January 1, 2001 to December 15, 2002 and up to $450 million prior to 2001) per occurrence. .

31


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For its international operations, the Company purchases insurance to comply with local legal requirements. VehicleIn Europe, vehicle liability insurance is purchased from the Company'sCompany’s wholly owned subsidiary, Probus Insurance Company Europe Limited ("Probus"(“Probus”), a direct writer domiciled in Dublin, Ireland. In Italy, a fronted policy was purchased from an unaffiliated carrier, effective October 1, 2003, which is reinsured through Hertz International RE Limited (“HIRE”), a wholly owned subsidiary of the Company. HIRE operates as a reinsurer in Dublin, Ireland. Effective December 15, 2002,2003, Probus underwrites the Company'sCompany’s Pan European motor vehicle liability program up to $5$10 million per occurrence ($15 million from December 15, 2002 to December 15, 2003 and $1 million prior to December 15, 2002) per occurrence.. Probus reinsures this risk through Hertz International RE Limited, a wholly owned subsidiary of the Company, operating as a reinsurer in Dublin, Ireland.HIRE. Excess coverage for claims that exceed $5$10 million per occurrence is maintained with unaffiliated carriers. InEffective December 15, 2003, in foreign operations outside Europe, the Company is self-insured at various amounts up to $317,000$10 million per occurrence ($317,000 prior to December 15, 2003) and maintains with unaffiliated carriers excess liability insurance coverage up to $695 million per occurrence ($725 million from January 1, 2001 to December 15, 2002 and up to $450 million prior to 2001) per occurrence with unaffiliated carriers. FOREIGN CURRENCY TRANSLATION .

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“Accumulated other comprehensive loss"income (loss)” in the stockholder'sstockholder’s equity section of the consolidated balance sheet. AtThe accumulated foreign currency translation gain was $139.6 million at December 31, 20022003 and 2001, the accumulated foreign currency translation losses were (in millions)loss was $9.4 and $103.0, respectively.million at December 31, 2002. Foreign currency gains and losses resulting from transactions are included in earnings. INCOME TAXES

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'sCompany’s right to reimbursement for foreign tax credits is determined based on the usage of such foreign tax credits by the consolidated group. As of December 31, 2002,2003, U.S. income taxes have not been provided on $328$381 million in undistributed earnings of foreign subsidiaries that have been or are intended to be permanentlyindefinitely reinvested outside the United States or are expected to be remitted free of taxes. ADVERTISING

Advertising

Advertising and sales promotion costs are expensed as incurred. Hertz is a party to a cooperative advertising agreement with Ford pursuant to which Ford participates in some of the cost of certain of Hertz'Hertz’ advertising programs in the United States and abroad which feature the Ford name or products. The amounts contributed by Ford for the years ended December 31, 2003, 2002 2001 and 20002001 were (in millions) $47.9, $48.4 $43.2 and $43.2, respectively. This program is expected to continue in the future. The Company incurred net advertising expense for the years ended December 31, 2003, 2002 2001 and 20002001 of (in millions) $123.4, $114.8 and $138.1, respectively.

Impairment of Long-Lived Assets and $140.3, respectively. IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES Intangibles

The Company evaluates the carrying value of goodwill for impairment at least annually in accordance with Financial Accounting Standards Board ("FASB"(“FASB”) Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 142 "Goodwill“Goodwill and Other Intangible Assets." See Note 2 - Accounting Change.– Goodwill and Other Intangible Assets. Long-lived assets, other than goodwill, are reviewed for impairment in accordance with SFAS No. 144, "Accounting“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 27 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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'sCompany’s adoption of SFAS No. 144 as of January 1, 2002 did not have a material effect on the Company'sCompany’s financial position, results of operations or cash flows. STOCK OPTIONS At December 31, 2002,

32


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

Certain employees of the Company hadparticipate in the stock options outstandingoption plan of Ford under stock-based compensation plans. TheFord’s 1998 Long-Term Incentive Plan. Effective January 1, 2003, the Company appliesadopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Prior to January 1, 2003, the Company applied the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting“Accounting for Stock Issued to Employees"Employees” and related Interpretations, in accounting for these plans.the plan. Prior to January 1, 2003, no stock-based employee compensation expense has been reflected in earnings as all options granted under those plans hadthe plan have an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company will adopt the fair value recognition provisionsSeeRecently Adopted Pronouncements, below.

Use of SFAS No. 123, Accounting for Stock-Based Compensation. See Recent Pronouncements, below. USE OF ESTIMATES AND ASSUMPTIONS Estimates and Assumptions

Use of estimates and assumptions as determined by management is required in the preparation of consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates and assumptions. RECLASSIFICATIONS

Reclassifications

Certain prior year amounts have been reclassified to conform with current reporting. RECENT PRONOUNCEMENTS

Recently Adopted Pronouncements

In June 2001, the FASB issued SFAS No. 143, "Accounting“Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or)and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The Company will adoptadopted this statement, effective January 1, 2003 and management doesit did not believe it will have a material effect on the Company'sCompany’s financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, "Accounting“Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and recognition of liabilities for costs associated with exit or disposal activities, requiring that such liabilities be recognized and measured initially at fair value only when a liability is incurred. SFAS No. 146 will beis effective for disposal activities that are initiated after December 31, 2002. Management does not believe the adoption ofThe Company adopted SFAS No. 146 as of January 1, 2003 willand it did not have a material effect on the Company'sCompany’s financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45 ("(“FIN 45"45”), "Guarantor's“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also requires additional disclosure about the guarantor'sguarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable prospectively to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statements issued after December 15, 2002. Management does not believe theThe adoption of FIN 45 willdid not have a material impacteffect on the Company's consolidatedCompany’s financial position, results of operations or cash flows. See Note 12 -Litigation– Litigation and Guarantees.

In December 2002, the FASB issued SFAS No. 148, "Accounting“Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, Accounting“Accounting for Stock-Based CompensationCompensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in both annual and interim financial statements about the effects of stock-based compensation. The annual and interim disclosure guidance of SFAS No. 148 is effective for fiscal years beginningending after December 15, 2002. The Company will adoptadopted the fair value recognition provisions of SFAS No. 123, effective January 1, 2003 prospectively to all unvested employee awards as of January 1, 2003, and all new awards granted to employees after January 1, 2003, using2003. Under the modified prospective method of adoption under SFAS No. 148. Hadselected by the Company, stock based employee compensation cost ofrecognized in 2003 is the Company's stock-based compensation planssame as that which would have been determined based onrecognized had the fair value methods of SFAS No. 123 the Company's net loss would have been $157.2 million in 2002 and net income would have been $13.6 million and $347.4 million in 2001 and 2000, respectively. 28 applied from its original effective date. See Note 7 – Stock Based Employee Compensation.

33


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) — (Continued)

In January 2003, the FASB issued FIN 46, "Consolidation“Consolidation of Variable Interest Entities." This interpretationEntities, an Interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," addresses” which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and liabilitiesactivities of unconsolidated variable interest entities.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 effective for allthe 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 entities created after January 31,interest. The Company adopted FIN 46 as of July 1, 2003 and for variable interest entities in which an enterprise obtains an interest after that date. the Revised Interpretation (“FIN 46 is effective for fiscal years or interim periods beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February46-R”) as of December 15, 2003. Management does not believe theThe adoption of FIN 46 willand FIN 46-R did not affect the Company'sCompany’s financial position, results of operations or cash flows. NOTE 2 -- ACCOUNTING CHANGE

In June 2001,December 2003, the FASB issued SFAS No. 142 "Goodwill132 (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 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,” 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, is effective for annual and interim periods with fiscal years ending after December 15, 2003. See Note 6 – Employee Retirement Benefits.

Note 2 — Goodwill and Other Intangible Assets."Assets

The Company accounts for its goodwill under SFAS No. 142 addresses financial accounting for acquired goodwill“Goodwill and other intangible assets and how such assets should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements.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. Adoption of the non-amortization provision of SFAS No. 142 at the beginning of the first quarter of 20002001 would have resulted in decreasesa decrease of $29.2 million and $28.0 million in amortization and increasesan increase of $27.6 million and $26.6 million in net income for the yearsyear ended December 31, 2001 and December 31, 2000, respectively. Under2001.

The Company adopted SFAS No. 142 goodwill impairment is deemed to exist if the carrying value of a reporting unit exceedsbeginning January 1, 2002. Upon its estimated fair value. Upon adoption, of SFAS No. 142, the Company recorded a one-time, non-cash charge of $294 million to reduce the carrying value of its goodwill. The Company has recognized this impairment charge effective as of January 1, 2002 as a cumulative effect of change in accounting principle. In calculating the impairment charge, the fair value of the reporting units underlying the segments was estimated as of January 1, 2002 using a discounted cash flow methodology.

The goodwill impairment charge representsrepresented 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 2002,2003, and determined that there was no additional impairment.

34


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following summarizes the changes in the Company'sCompany’s goodwill, by segment, and other intangible assets duringfor the yearyears ended December 31, 2003 and 2002 (in thousands of dollars):

                      
   Goodwill        
   
        
       Industrial and     Other    
       construction Total intangible    
   Car rental equipment rental goodwill assets Total
   
 
 
 
 
Balance December 31, 2001 $358,631  $443,040  $801,671  $3,169  $804,840 
 Transitional Impairment Loss     (294,000)  (294,000)     (294,000)
 Other changes (1)  2,288   7,014   9,302   (1,121)  8,181 
   
   
   
   
   
 
Balance December 31, 2002  360,919   156,054   516,973   2,048   519,021 
 Other changes (1)  3,241   14,912   18,153   (245)  17,908 
   
   
   
   
   
 
Balance December 31, 2003 $364,160  $170,966  $535,126  $1,803  $536,929 
   
   
   
   
   
 

Transitional January 1, 2002(1) Other(2) Impairment Loss December 31, 2002 ------------------ -------- --------------- ----------------- Goodwill Car rental $358,631 $ 2,288 $ -- $360,919 Industrial
(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 construction equipment rental 443,040 7,014 (294,000) 156,054 -------- ------- --------- -------- Total goodwill 801,671 9,302 (294,000) 516,973 Otheramortization of certain intangible assets 3,169 (1,121) -- 2,048 -------- ------- --------- -------- Total $804,840 $ 8,181 $(294,000) $519,021 ======== ======= ========= ======== assets.
(1) Reflects the reallocation of goodwill to the Company's reporting units under SFAS No. 142. (2) Comprises primarily amortization of certain intangible assets and changes in foreign currency exchange rates from January 1, 2002 to December 31, 2002. 29 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE

Note 3 -- DEBT — Debt

Debt of the Company and its subsidiaries (in thousands of dollars) consists of the following:
December 31, ----------------------- 2002 2001 ---------- ---------- Notes payable, including commercial paper, average interest rate: 2002, 1.7%; 2001, 2.9% ...................................... $ 769,045 $ 452,497 Promissory notes, average interest rate: 2002, 6.3%; 2001, 6.2% (effective average interest rate: 2002, 6.4%; 2001, 6.3%); net of unamortized discount: 2002, $13,648; 2001, $9,868; due 2003 to 2028 ................................................... 4,843,211 4,590,130 Junior subordinated promissory notes, average interest rate 7.0%; net of unamortized discount: 2002, $17; 2001, $47; due 2003 ............... 249,983 249,953 Foreign subsidiaries' debt in foreign currencies: Short-term borrowings: Banks, average interest rate: 2002, 3.8%; 2001, 4.1% ............ 452,073 437,520 Commercial paper, average interest rate: 2002, 3.3%; 2001, 3.2% . 718,786 571,586 Other borrowings, average interest rate: 2002, 10.1%; 2001, 9.1% ... 10,099 12,346 ---------- ---------- Total .................................................................. $7,043,197 $6,314,032 ========== ==========

           
    December 31,
    
    2003 2002
    
 
Notes payable, including commercial paper, average interest rate: 2003, 1.3%; 2002, 1.7% $1,187,142  $769,045 
Promissory notes, average interest rate: 2003, 6.2%; 2002, 6.3% (effective average interest rate: 2003, 6.2%; 2002, 6.4%); net of unamortized discount: 2003, $11,676; 2002, $13,648; due 2004 to 2028  4,895,180   4,843,211 
Junior subordinated promissory notes, average interest rate 7.0%; net of unamortized discount: 2002, $17     249,983 
Foreign subsidiaries’ debt in foreign currencies:        
 Short-term borrowings:        
  Banks, average interest rate: 2003, 3.6%; 2002, 3.8%  502,573   452,073 
  Commercial paper, average interest rate: 2003, 2.7%; 2002, 3.3%  1,034,912   718,786 
 Other borrowings, average interest rate: 2003, 12.7%; 2002, 10.1%  8,123   10,099 
   
   
 
Total $7,627,930  $7,043,197 
   
   
 

The aggregate amounts of maturities of debt, in millions, are as follows: 2003, $2,637.02004, $3,621.8 (including $1,934.9$2,719.6 of commercial paper, demand and other short-term borrowings); 2004, $901.5; 2005, $604.5;$606.6; 2006, $261.7;$756.9; 2007, $498.0;$501.1; 2008, $200.0; after 2007, $2,140.5. At2008, $1,941.5.

During the year ended December 31, 2002, Notes payable included a $300 million floating2003, 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 loan outstanding with Ford Motor Credit Company, a wholly owned subsidiary of Ford. Interest incurred on this loan during 2002 was $7.7 million. 2.1%) and $429.3 banks (weighted-average interest rate 3.5%).

35


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the year ended December 31, 2002, short-term borrowings, in millions, were as follows: maximum amounts outstanding $2,041.0 commercial paper and $592.9 banks; monthly average amounts outstanding $1,409.2 commercial paper (weighted-average interest rate 2.7%) and $422.0 banks (weighted-average interest rate 4.0%).

During the year ended December 31, 2001, short-term borrowings, in millions, were as follows: maximum amounts outstanding $3,119.0 commercial paper and $647.5 banks; monthly average amounts outstanding $2,187.1 commercial paper (weighted-average interest rate 4.3%) and $472.7 banks (weighted-average interest rate 5.3%). During the year ended December 31, 2000, short-term borrowings, in millions, were as follows: maximum amounts outstanding $3,219.2 commercial paper and $718.2 banks; monthly average amounts outstanding $2,721.4 commercial paper (weighted-average interest rate 6.1%) and $565.1 banks (weighted-average interest rate 4.3%).

The net amortized discount charged to interest expense for the years ended December 31, 2003, 2002 2001 and 20002001 relating to debt and other liabilities, in millions, was $2.1, $2.1 and $1.9, and $1.8, respectively. The

On September 30, 2003, the Company and its subsidiaries haveissued $500 million of 4.7% Senior Promissory Notes (“the Notes”) due on October 2, 2006. Effective September 30, 2003, the Company entered into arrangementsinterest rate swap agreements relating to manage exposuresthe Notes. Under these agreements, the Company pays interest at a variable rate in exchange for fixed rate receipts, effectively transforming these Notes to fluctuationsfloating rate obligations with an effective interest rate at December 31, 2003 of 3.27%. The swaps are designated as a fair value hedge with no ineffectiveness, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates. See Note 14 -- Financial Instruments.

During 2002, the Company established an Asset Backed Securitization ("ABS"asset backed securitization (“ABS”) program to reduce its borrowing costs and enhance financing resources for its domestic car rental fleet. The ABS program provides for the initial issuance of up to $1 billion of asset backed commercial paper and 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 consolidated balance sheet. All debt issued under the ABS program is collateralized by the assets of the ABS program,special purpose entities, consisting of revenue earning vehicles acquired for use inused by the Company's dailyCompany’s domestic car rental business, restricted cash and investments and certain receivables related to revenue earning vehicles. The asset backed note indenture provides for additional credit enhancement through letters of credit or maintenance of a liquidity reserve or through over collateralization of the vehicle fleet. The titles to all of the vehicles securingthat collateralize this funding are held in a bankruptcy remote entity and the Company acts as a servicer of the vehicles.

At December 31, 2002, $513.72003, $723.1 million of asset backed commercial paper was outstanding under the ABS program. The average interest rate as of December 31, 20022003 was 1.4%1.1%. The securedasset backed commercial paper has a maximum term at issuance of 58 days when issued.days. At December 31, 2002,2003, the outstanding commercial paper was securedcollateralized by $498.8$663.2 million of net book value of revenue earning vehicles, $7.9$88.3 million of receivables and $7.0$5.1 million of restricted cash. (Restricted cash is included in "Prepaid“Prepaid expenses and other assets"assets” in the consolidated balance sheet.) 30 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

At December 31, 2002,2003, the Company had committed credit facilities totaling $3.0$2.8 billion.

Currently, $1.3 billion of the committed credit facilities are represented by a combination of multi-year, and 364-day global and other committed credit facilities provided by 2624 participating banks. In addition to direct borrowings by the Company, thesethe multi-year and 364-day global facilities allow any subsidiarycertain 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, 20022003 and currently total $1,212$1,065 million with expirations as follows: $137 million on June 30, 2003, $43 million on June 30, 2004, $69 million on June 30, 2005, and $963$35 million on June 30, 2007.2006, $108 million on June 30, 2007 and $810 million on June 30, 2008. The multi-year facilities that expire in 20072008 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 20, 2002,19, 2003, the 364-day global committed credit facilities, which total $115 million, were renegotiated and currently expire on June 19, 2003.17, 2004. 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 facilities total $118 million and expire at various times during 2004.

36


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2003, $814 million is currently available which expires in September 2004. 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'sCompany’s multi-year global committed credit facilities. In exchange for this credit support, the Company agreed to reduce the bank'sbank’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, 2004.2005. 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. Obligations of the Company under this agreement would rank pari passu with the Company'sCompany’s senior debt securities. A commitment fee of .135%.2% per annum is payable on the unused available credit.

The Company maintains a Sales Agency Agreement with Ford Financial Services, Inc. ("FFS"(“FFS”), a NASD registered broker/dealer and an indirect wholly owned subsidiary of Ford, whereby FFS acts as a dealer for the Company'sCompany’s domestic commercial paper programs. The Company pays fees to FFS, which range from .03% to ..05%.05% per annum of commercial paper placed depending upon the monthly average dollar value of the notes outstanding in the portfolios. In 2002,2003, the Company paid FFS approximately $169,375$111,383 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'sCompany’s international operations consists mainly of loans obtained from local and international banks and commercial paper programs established in Australia, Canada, Belgium, Ireland and the Netherlands. The Company guarantees only the commercial paper borrowings of its subsidiaries in Belgium, Ireland and the Netherlands, and guarantees commercial paper and short-term bank loans of its subsidiaries in Australia and Canada. All borrowings by international operations either are in the international operation'soperation’s local currency or, if in non-local currency, hedged to minimize foreign exchange exposure. At December 31, 2002,2003, total debt for the foreign operations was $1,181$1,546 million, of which $1,171$1,538 million was short-term (original maturity of less than one year) and $10$8 million was long-term. At December 31, 2002,2003, total amounts outstanding (in millions of U.S. dollars) under the commercial paper programs in Australia, Belgium, Canada, Ireland and IrelandNetherlands were $6, $152, $271$2, $80, $361, $582 and $290,$10, respectively. Certain debt instruments

Based on the terms of an indenture dated April 1, 1986, under which the Company has issued debt securities, restrict the Company'sCompany’s ability to pay dividends.dividends is restricted. Such restrictions generally providerestriction provides that the Company may not pay dividends, invest in its own shares or permit investments by certain subsidiaries of the Company ("(“Restricted Subsidiaries"Subsidiaries”) in the Company'sCompany’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, 2002,2003, approximately $1,008$1,029 million of consolidated stockholder'sstockholder’s equity was free of such limitations. 31

37


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE— (Continued)

Note 4 -- AVAILABLE-FOR-SALE SECURITIES — Available-for-Sale Securities

As of December 31, 2003 and 2002, and 2001, "Prepaid“Prepaid expenses and other assets"assets” in the consolidated balance sheet include available-for-sale securities at fair value. The fair value is calculated using information provided by independent quotation services. These securities include various governmental and corporate debt obligations. For the years ended December 31, 2003, 2002 2001 and 2000,2001, proceeds, in millions, of $10.3, $4.1 $6.3 and $6.3, respectively, were received from the sale of available-for-sale securities, and gross realized gains, in whole dollars, of $413,302, $134,061 $218,538 and $61,192$218,538 and gross realized losses of $54,433, $29,177 $62,162 and $36,953,$62,162, 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“Accumulated other comprehensive loss"income (loss)” in the consolidated balance sheet.

The following is a summary of available-for-sale securities at December 31, 20022003 and December 31, 20012002 (in thousands):
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ------ ---------- ---------- --------- DECEMBER 31, 2002 Government debt obligations $2,528 $136 $ (2) $2,662 Corporate debt obligations 5,796 560 (1) 6,355 ------ ---- ---- ------ Total ............. $8,324 $696 $ (3) $9,017 ====== ==== ==== ====== DECEMBER 31, 2001 Government debt obligations $3,122 $ 18 $(30) $3,110 Corporate debt obligations 4,498 177 -- 4,675 ------ ---- ---- ------ Total ............. $7,620 $195 $(30) $7,785 ====== ==== ==== ======

                  
       Gross Gross Estimated
       Unrealized Unrealized Fair
   Cost Gains Losses Value
   
 
 
 
December 31, 2003
                
Government debt obligations $2,619  $15  $(44) $2,590 
Corporate debt obligations  8,068   137   (27)  8,178 
   
   
   
   
 
 Total $10,687  $152  $(71) $10,768 
   
   
   
   
 
December 31, 2002
                
Government debt obligations $2,528  $136  $(2) $2,662 
Corporate debt obligations  5,796   560   (1)  6,355 
   
   
   
   
 
 Total $8,324  $696  $(3) $9,017 
   
   
   
   
 

The amortized cost and estimated fair value of available-for-sale securities at December 31, 20022003 are as follows (in thousands):
Estimated Cost Fair Value ------ ---------- Due in one year or less........................................... $ 60 $ 59 Due after one year through five years............................. 6,431 6,931 Due after five years through ten years............................ 1,833 2,027 ------ ------ Total..................................................... $8,324 $9,017 ====== ======
NOTE

          
       Estimated
   Cost Fair Value
   
 
Due in one year or less $240  $236 
Due after one year through five years  8,542   8,614 
Due after five years through ten years  1,905   1,918 
   
   
 
 Total $10,687  $10,768 
   
   
 

Note 5 -- PURCHASES AND SALES OF OPERATIONS — Purchases and Sales of Operations

During the year ended December 31, 2001, the Company acquired one European equipment rental and sales company, one North American car rental company and one Australian car rental company. The aggregate purchase price of the acquisitions was $3.0 million, net of cash acquired, plus the assumption of $9.0 million of debt. The aggregate consideration exceeded the fair value of the net assets acquired by approximately $4.7 million, which has been recognized as goodwill. The goodwill relating to acquisitions made prior to July 1, 2001 has been amortized over periods from 25 to 40 years through December 31, 2001 (see Note 2 – Goodwill and Other Intangible Assets - Accounting Change,accounting change relating to the amortization of goodwill, effective January 1, 2002). The acquisitions were accounted for as purchases, and the results of operations have been included in the Company'sCompany’s consolidated financial statements since their respective dates of acquisition. Had the acquisitions occurred as of the beginning of the year, the effect of including their results would not be material to the results of operations of the Company. During the year ended December 31, 2000, the Company acquired four North American and three European equipment rental and sales companies. The Company also acquired one North American, one Australian and two European car rental companies. The aggregate purchase price of the acquisitions was $111.9 million, net of cash acquired, plus the assumption of $33.5 million of debt. The aggregate consideration exceeded the fair value of the net assets acquired by approximately $56.7 million, which has been recognized as goodwill and has been amortized over periods from 20 to 40 years through December 31, 2001 (see Note 2 - - Accounting Change, relating to the amortization of goodwill, effective January 1, 2002). The acquisitions were accounted for as purchases, and the results of operations have been included in the Company's consolidated financial statements since their respective dates of acquisition. Had the acquisitions occurred as of the beginning of the year of acquisition, the effect of including their results would not be material to the results of operations of the Company. 32

38


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)— (Continued)

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 of the net assets of its leasing operations in Australia, New Zealand and the United Kingdom to Axus International, Inc. ("Axus"), a wholly owned, vehicle leasing subsidiary of Ford Motor Credit Company ("Ford Credit") for $99.2 million, net of cash. The transfer was considered a transfer of net assets between companies under common control, and as such, the excess proceeds received over the net book value of $16.4 million were recorded as an adjustment to "Additional capital paid-in" in the consolidated balance sheet. Effective January 1, 2000, the Company's wholly owned subsidiary, Hertz International, Ltd., ("Hertz International"), entered into a license agreement and management services agreement with Axus, whereby Hertz International has licensed the Hertz name and provides management services to Axus under a five-year contract covering select international markets.million. Through the third quarter of 2002, Axus operated throughout Europe and in New Zealand and Australia. In the fourth quarter of 2002, Ford Credit sold the Axus operations in Australia and New Zealand and announced an agreement to sell the Axus operations in Europe. In the first quarter of 2003, Ford Credit completed the sale of the Axus operations in Europe. The Company continued to license the Hertz name and provide management services relating to the European operations through the completion of the sale. During 2003, 2002 and 2001, fees earned by the Company from these agreements were approximately $1.8 million, $11.5 million. million and $8.7 million, respectively.

In June 1999, the Company entered into a limited liability company agreementLimited Liability Company Agreement (“LLC Agreement”) with a subsidiary of Orbital Sciences Corporation ("Orbital"(“Orbital”), whereby Navigation Solutions LLC (“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'sCompany’s North American fleet. During 20022003 and 2001,2002, the Company received distributions of $6.6$5.6 million and $2.2$6.6 million, respectively, under this agreement,the LLC Agreement, which represents a 40% ownership interest. The net investment of $7.1$6.9 million as of December 31, 2002,2003, (included in "Prepaid“Prepaid expense and other assets"assets” in the consolidated balance sheet) is accounted for using the equity method of accounting. In July 2001, Orbital'sOrbital’s subsidiary sold its 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. NOTEIn 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. The increase in ownership interest will result in the consolidation of Navigation Solutions; however, the Company does not believe this will have a material effect on the Company’s financial position, results of operations or cash flows.

Note 6 -- EMPLOYEE RETIREMENT BENEFITS — Employee Retirement Benefits

Qualified domestic 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"Plan”)., a cash balance plan. Under thethis qualified Hertz Retirement Plan, the Company pays the entire cost and employees are not required to contribute. The Company's funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974. Payments are made to other non-Company sponsored retirement plans pursuant to collective bargaining agreements.

Most of the Company'sCompany’s foreign subsidiaries have defined benefit retirement plans or participate in various insured or multi-employer plans. Company plans are all funded, except in Germany, where an unfunded liability is recorded. In certain countries, when the subsidiaries make the required funding payments, they have no further obligations under such plans.

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. 33

The Company also sponsors 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.

39


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) — (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 & ----------------------------------------- Life Insurance U.S. Plans Non-U.S. Plans (U.S.) ------------------ ------------------ ------------------ 2002 2001 2002 2001 2002 2001 ------- ------- ------- ------- ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at January 1 ............. $ 197.6 $ 170.5 $ 56.3 $ 44.8 $ 8.3 $ 6.8 Service cost ................................ 16.3 15.8 2.9 2.3 .2 .2 Interest cost ............................... 14.1 12.5 3.7 3.1 .7 .6 Amendments .................................. -- -- -- .2 -- -- Employee contributions ...................... -- -- 1.1 .9 .1 .1 Benefits paid ............................... (6.8) (5.6) (1.8) (1.4) (.8) (.4) Foreign exchange translation ................ -- -- 7.5 (1.1) -- -- Actuarial loss (gain) ....................... 14.7 4.4 (.3) 7.5 1.8 1.0 ------- ------- ------- ------- ------- ------- Benefit obligation at December 31 ........... $ 235.9 $ 197.6 $ 69.4 $ 56.3 $ 10.3 $ 8.3 ======= ======= ======= ======= ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at January 1 ...... $ 128.7 $ 139.1 $ 38.5 $ 41.4 $ -- $ -- Actual return on plan assets ................ (10.8) (5.9) (7.0) (5.3) -- -- Company contributions ....................... 13.2 1.5 2.9 2.8 .7 .3 Employee contributions ...................... -- -- 1.1 .9 .1 .1 Benefits paid ............................... (6.8) (5.6) (1.8) (1.4) (.8) (.4) Foreign exchange translation ................ -- -- 4.3 (1.1) -- -- Other ....................................... (.4) (.4) .6 1.2 -- -- ------- ------- ------- ------- ------- ------- Fair value of plan assets at December 31 .... $ 123.9 $ 128.7 $ 38.6 $ 38.5 $ -- $ -- ======= ======= ======= ======= ======= ======= FUNDED STATUS OF THE PLAN Plan assets less than benefit obligation .... $(112.0) $ (68.9) $ (30.8) $ (17.8) $ (10.3) $ (8.3) Unamortized: Transition obligation ..................... -- -- .1 .1 -- -- Prior service cost ........................ 5.0 4.2 .1 .1 -- -- Net losses (gains) and other .............. 15.4 (22.7) 9.4 8.4 (.5) (2.2) ------- ------- ------- ------- ------- ------- Net amount recognized ....................... $ (91.6) $ (87.4) $ (21.2) $ (9.2) $ (10.8) $ (10.5) ======= ======= ======= ======= ======= ======= AMOUNTS RECOGNIZED IN THE BALANCE SHEET ASSETS/(LIABILITIES) Intangible assets (including prepaid assets) $ 1.7 $ 1.8 $ .3 $ .3 $ -- $ -- Accrued liabilities ......................... (96.0) (90.6) (29.9) (9.8) (10.8) (10.5) Deferred Income Tax ......................... .9 .5 2.6 .1 -- -- Accumulated other comprehensive loss ........ 1.8 .9 5.8 .2 -- -- ------- ------- ------- ------- ------- ------- Net amount recognized .................... $ (91.6) $ (87.4) $ (21.2) $ (9.2) $ (10.8) $ (10.5) ======= ======= ======= ======= ======= ======= PENSION PLANS IN WHICH ACCUMULATED BENEFIT OBLIGATION EXCEEDS PLAN ASSETS AT DECEMBER 31 Projected benefit obligation ................ $ 235.9 $ 197.6 $ 68.8 $ 11.6 Accumulated benefit obligation............... 192.7 157.2 58.1 10.2 Fair value of plan assets.................... 123.9 128.7 37.8 1.5 ASSUMPTIONS AS OF DECEMBER 31 Discount rate................................ 6.75% 7.25% 5.5%- 5.5%- 6.75% 7.25% 6.75% 7.25% Expected return on assets.................... 8.75% 9.5% 5.5%- 5.5%- N/A N/A 7.0% 7.5% Average rate of increase in compensation..... 5.5% 5.5% 2.5%- 2.5%- N/A N/A 4.5% 4.5% Initial health care cost trend rate.......... -- -- -- -- 7.5% 8.5% Ultimate health care cost trend rate......... -- -- -- -- 5.0% 5.0% Number of years to ultimate trend rate....... -- -- -- -- 4 5
34

                           
    Pension Benefits        
    
 Health Care &
    U.S. Plans Non-U.S. Plans Life Insurance (U.S.)
    
 
 
    2003 2002 2003 2002 2003 2002
    
 
 
 
 
 
Change in Benefit Obligation
                        
 Benefit obligation at January 1 $235.9  $197.6  $69.4  $56.3  $10.3  $8.3 
 Service cost  17.3   16.3   3.3   2.9   .4   .2 
 Interest cost  15.5   14.1   4.1   3.7   .8   .7 
 Amendments                  
 Employee contributions        1.2   1.1   .1   .1 
 Benefits paid  (6.9)  (6.8)  (2.2)  (1.8)  (.8)  (.8)
 Foreign exchange translation        10.0   7.5       
 Actuarial loss (gain)  14.4   14.7   11.8   (.3)  3.3   1.8 
   
   
   
   
   
   
 
 Benefit obligation at December 31 $276.2  $235.9  $97.6  $69.4  $14.1  $10.3 
   
   
   
   
   
   
 
Change in Plan Assets
                        
 Fair value of plan assets at January 1 $123.9  $128.7  $38.6  $38.5  $  $ 
 Actual return on plan assets  26.9   (10.8)  7.3   (7.0)      
 Company contributions  56.6   13.2   14.4   2.9   .7   .7 
 Employee contributions        1.2   1.1   .1   .1 
 Benefits paid  (6.9)  (6.8)  (2.2)  (1.8)  (.8)  (.8)
 Foreign exchange translation        4.4   4.3       
 Other     (.4)  .1   .6       
   
   
   
   
   
   
 
 Fair value of plan assets at December 31 $200.5  $123.9  $63.8  $38.6  $  $ 
   
   
   
   
   
   
 
Funded Status of the Plan
                        
 Plan assets less than benefit obligation $(75.7) $(112.0) $(33.8) $(30.8) $(14.1) $(10.3)
 Unamortized:                        
  Transition obligation        .2   .1       
  Prior service cost  4.6   5.0   .1   .1       
  Net losses (gains) and other  22.0   19.8   25.4   18.1   2.6   (.5)
   
   
   
   
   
   
 
 Net amount recognized $(49.1) $(87.2) $(8.1) $(12.5) $(11.5) $(10.8)
   
   
   
   
   
   
 
Amounts Recognized in the Balance Sheet Assets/(Liabilities)
                        
 Intangible assets (including prepaid assets) $3.6  $1.7  $8.5  $.3  $  $ 
 Accrued liabilities  (57.4)  (91.6)  (28.4)  (21.2)  (11.5)  (10.8)
 Deferred Income Tax  1.6   .9   3.7   2.6       
 Accumulated other comprehensive loss  3.1   1.8   8.1   5.8       
   
   
   
   
   
   
 
  Net amount recognized $(49.1) $(87.2) $(8.1) $(12.5) $(11.5) $(10.8)
   
   
   
   
   
   
 
Pension Plans in Which Accumulated Benefit Obligation Exceeds Plan Assets at December 31
                        
 Projected benefit obligation $39.0  $235.9  $93.7  $68.8         
 Accumulated benefit obligation  33.2   192.7   80.0   58.1         
 Fair value of plan assets     123.9   60.2   37.8         
Accumulated Benefit Obligation at December 31
  229.1   192.7   83.0   58.7         
Weighted-average assumptions as of December 31
                        
 Discount rate  6.25%  6.75%  5.5%  5.75%  6.25%  6.75%
 Expected return on assets  8.75%  8.75%  5.7%  5.7%  N/A   N/A 
 Average rate of increase in compensation  4.4%  5.3%  3.4%  3.0%  N/A   N/A 
 Initial health care cost trend rate              10.0%  7.5%
 Ultimate health care cost trend rate              5.0%  5.0%
 Number of years to ultimate trend rate              10   4 

40


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Assumptions used for the non-U.S. plans vary by country and are made in accordance with local conditions, but do not vary materially from those used in the U.S. plan. Pension expense for the U.S. domestic plan reflects a change in the market-related value of asset methodology made as of January 1, 2000, the effect of which was not considered material. Plan assets consist principally of investments in stocks, government bonds and other fixed income securities. At December 31, 2002, stocks represented 53% of the market value of pension assets for the Company's principal U.S. plan and fixed income securities represented 47%.
Years ended December 31, ------------------------------------------------------------------------------------------ Health Care & Life Pension Benefits Insurance (U.S.) ----------------------------------------------------------- --------------------------- 2002 2001 2000 2002 2001 2000 ----------------- ----------------- ----------------- ------ ------ ------ U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. ------ -------- ------ -------- ------ -------- Components of net periodic benefit cost: Service cost ..................... $ 16.3 $ 2.9 $ 15.8 $ 2.3 $ 13.7 $ 2.8 $ .2 $ .2 $ .1 Interest cost .................... 14.1 3.7 12.5 3.1 11.0 3.4 .7 .6 .5 Expected return on plan assets ... (13.3) (3.1) (12.7) (3.3) (11.0) (3.5) -- -- -- Amortization: Transition ..................... -- .1 -- -- .2 -- -- -- -- Amendments ..................... .4 -- .3 .1 .3 -- -- -- -- (Gains) losses and other ....... (.6) .3 (1.0) .1 (3.3) (.1) -- (.2) (1.0) ------ ------ ------ ------ ------ ------ ------ ------ ------ Net pension/post-retirement expense(income) ............. $ 16.9 $ 3.9 $ 14.9 $ 2.3 $ 10.9 $ 2.6 $ .9 $ .6 $ (.4) ====== ====== ====== ====== ====== ====== ====== ====== ====== Discount rate for expense .......... 7.25% 5.5%- 7.5% 5.5%- 7.75% 5.5%- 7.25% 7.5% 7.75% 7.25% 7.75% 7.75% Assumed long-term rate of return on assets............................ 9.5% 5.5%- 9.5% 7.0%- 9.0% 7.0%- 7.5% 8.0% 8.0% Initial health care cost trend rate -- -- -- -- -- -- 8.5% 7.0% 7.25% Ultimate health care cost trend rate -- -- -- -- -- -- 5.0% 5.0% 5.0% Number of years to ultimate trend rate.............................. -- -- -- -- -- -- 5 8 9
— (Continued)

                                       
    Years ended December 31,
    
                            Health Care & Life
    Pension Benefits Insurance (U.S.)
    
 
    2003 2002 2001 2003 2002 2001
    
 
 
 
 
 
    U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S.            
    
 
 
 
 
 
            
Components of Net Periodic Benefit Cost:
                                    
 Service cost $17.3  $3.3  $16.3  $2.9  $15.8  $2.3  $.4  $.2  $.2 
 Interest cost  15.5   4.1   14.1   3.7   12.5   3.1   .8   .7   .6 
 Expected return on plan assets  (15.9)  (2.8)  (13.3)  (3.1)  (12.7)  (3.3)         
 Amortization:                                    
  Transition     .7      .1                
  Amendments  .5      .4      .3   .1          
  Losses(gains) and other  2.1   1.2   (.6)  .3   (1.0)  .1   .1      (.2)
    
   
   
   
   
   
   
   
   
 
 Net pension/post-retirement expense $19.5  $6.5  $16.9  $3.9  $14.9  $2.3  $1.3  $.9  $.6 
    
   
   
   
   
   
   
   
   
 
Weighted-average discount rate for expense  6.75%  5.75%  7.25%  5.75%  7.5%  6.3%  6.75%  7.25%  7.5%
Weighted-average assumed long-term rate of return on assets  8.75%  5.7%  9.5%  7.4%  9.5%  6.4%            
Initial health care cost trend rate                    10.0%  8.5%  7.0%
Ultimate health care cost trend rate                    5.0%  5.0%  5.0%
Number of years to ultimate trend rate                    11   5   8 

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 Percentage Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components.......... $ 54,300 $ 46,900 Effect on postretirement benefit obligation...................... 527,400 460,300

         
  One Percentage One Percentage
  Point Increase Point Decrease
  
 
Effect on total of service and interest cost components $96,600  $84,100 
Effect on postretirement benefit obligation  926,600   810,800 

The estimated cost for postretirement health care and life insurance benefits is accrued on an actuarially determined basis. The participation assumption wasRetirement rate and salary increase assumptions were changed in 20002003 to reflect historical experience, the effect of which was not considered material. The provisions charged2003 increase in the number of years to income for the years ended December 31, 2002, 2001 and 2000 for all other pension plans were approximately (in millions) $7.2, $7.7 and $7.9, respectively. ultimate trend rate resulted from changes in trend assumptions.

The provisions charged to income for the years ended December 31, 2003, 2002 and 2001 for all other pension plans were approximately (in millions) $7.3, $7.2 and 2000$7.7, respectively.

The provisions charged to income for the years ended December 31, 2003, 2002 and 2001 for the defined contribution plans were approximately (in millions) $10.5, $9.5$12.3, $11.4 and $8.8,$10.4, respectively. NOTE

Plan Assets

The Company’s U.S. pension plan weighted-average asset allocations at December 31, 2003 and 2002, by asset category, are as follows:

          
   Plan assets for year
   ending December 31,
   
Asset Category 2003 2002

 
 
Equity securities  64.1%  52.7%
Debt securities  35.8   47.2 
Other  0.1   0.1 
   
   
 
 Total  100.0%  100.0%
   
   
 

41


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company has a long-term investment outlook for the assets held in the Hertz Retirement Plan, which is consistent with the long-term nature of the Plan’s liabilities. At year-end 2003, the target asset allocation of the Plan was 65% equity and 35% fixed income. The equity portion of the Plan is invested in professionally managed equity index funds, which are expected to track the return characteristics of the S&P 500 Index. The fixed income portion of the Plan is actively managed by a professional investment manager and is benchmarked to the Citigroup Broad Bond Index.

The assumption for the rate of return on assets represents the expected long-term annual weighted-average return for the Plan in total. The 8.75% rate of return on assets assumption is conservative when compared to the 10 year historical annual weighted average return of 9.91% actually achieved by the assets of the Plan as well as the 10 year historical returns of the Plan’s target benchmark of 10.1%.

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 2003, the Company made approximately $54 million of discretionary cash contributions to the U.S. pension plan. In 2004, the Company expects to contribute, at a minimum, approximately $5.3 million to its worldwide pension plans, including contributions required by funding regulations, discretionary contributions and benefit payments for unfunded plans.

Note 7 -- STOCK-BASED COMPENSATION — Stock-Based Employee Compensation

Certain employees of the Company participate in the stock option plan of Ford under Ford'sFord’s 1998 Long-Term Incentive Plan (the "Plan"“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. The Company previously sponsored a long-term equity compensation plan (the "LTECP") covering certain employees of the Company. The LTECP provided for the grant of incentive and nonqualified stock options, stock appreciation rights, restricted stock, performance shares and performance units ("Awards"). Prior to the Merger, Awards granted under the LTECP were options on, and restricted shares of, the Company's Class A Common Stock. As a consequence of the Merger, outstanding options to purchase the Company's Class A Common Stock under the LTECP (other than options held by non-employee directors of the Company) were converted into options to purchase shares of common stock of Ford, as determined and approved by

Effective January 1, 2003, the Company and Ford. In addition, holders of restricted stock awarded under the LTECP received the same consideration as all other holders of the Company's Class A Common Stock received in the Merger. Total compensation cost charged against income related to restricted stock awards was $5.5 million and $2.7 million in 2001 and 2000, respectively. 35 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB 25, no compensation expense is recognized for the Company's employee stock options because the exercise price of the options equals the market price of the underlying stock on the date of grant. The Company intends to adoptadopted the fair value recognition provisions of SFAS No. 123, "Accounting“Accounting for Stock-Based Compensation," prospectively to all unvested employee awardsstock options as of January 1, 2003, and all new awards granted to employees after January 1, 2003. Prior to January 1, 2003, the Company elected to follow APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APB 25, no compensation expense was recognized for the options because their exercise price equaled the market price of the underlying stock on the date of grant.

The following pro forma information regardingtable illustrates the effect on net income is required when APB 25 accounting is elected, and was determined(loss) as if the Companyfair value based method had accounted for its employeebeen applied to all outstanding and unvested stock options under the fair value method of SFAS No. 123. in each period.

               
    Years ended December 31,
    
    2003 2002 2001
    
 
 
Net income (loss), as reported $158,615  $(149,952) $23,267 
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects  3,925       
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects  (3,925)  (7,228)  (9,721)
     
   
   
 
Pro forma net income (loss) $158,615
  $(157,180)
  $13,546
 

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 2003, 2002 2001 and 2000:2001: risk-free interest rate of 5.22%3.7%, 5.16%5.22% and 6.77%5.16%, respectively; volatility factors of 35%39%, 44%35% and 42%44%, respectively; dividend yields of 2.37%5.3%, 3.97%2.37% and .48%3.97%, respectively; and an average expected life of the options of seven years for 2003 and 2002, and five years for 2001 and four years for 2000.2001. For purposes of pro forma disclosures, the estimated fair values of the options are amortized to expense over the options'options’ vesting periods. Had the compensation cost of the Company's stock-based compensation plans been determined based on the fair value methods of SFAS No. 123, the Company's net loss would have been $157.2 million in 2002 and net income would have been $13.6 million and $347.4 million in 2001 and 2000, respectively.

42


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of option transactions is presented below:

                         
  2003 2002 2001
  
 
 
      Weighted     Weighted     Weighted
      Average     Average     Average
  Number of Exercise Number of Exercise Number of Exercise
  Shares Price Shares Price Shares Price
  
 
 
 
 
 
Outstanding at January 1  5,994,339  $29.43   4,647,127  $33.46   3,446,621  $40.39 
Granted                5,000  $34.00 
Expired or canceled                (384,227) $41.05 
Exercised                (416,404) $24.00 
Ford adjustment (a)                576,245     
Ford stock options granted  1,473,625  $7.55   1,499,900  $16.91   1,581,525  $27.42 
Ford stock options cancelled  (240,147) $25.38   (152,688) $24.84   (161,633) $32.70 
   
       
       
     
Outstanding at December 31  7,227,817  $25.10   5,994,339  $29.43   4,647,127  $33.46 
   
       
       
     
Options exercisable at year-end  4,305,981  $30.57   3,015,727  $35.35   1,783,032  $37.77 
Weighted-average fair value of options granted during year     $1.90      $6.01      $8.64 

2002 2001 2000 ------------------------- ------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- --------
(a)Outstanding at January 1.............. 4,647,127 $33.46 3,446,621 $40.39 2,683,527 $39.17 Granted............................... -- 5,000 $34.00 1,107,400 $41.75 Expired or canceled................... -- (384,227) $41.05 (221,352) $41.42 Exercised............................. -- (416,404) $24.00 (122,954) $24.18 Ford adjustment (a) .................. -- 576,245 Ford stock options granted............ 1,496,975 $16.91 1,581,525 $27.42 -- Ford stock options cancelled.......... (149,763) $25.32 (161,633) $32.70 -- --------- --------- --------- Outstanding at December 31............ 5,994,339 $29.43 4,647,127 $33.46 3,446,621 $40.39 ========= ========= ========= Options exercisable at year-end....... 3,015,727 $35.35 1,783,032 $37.77 1,542,747 $37.78 Weighted-average fair value of options granted during year........ $ 6.01 $ 8.64 $18.89
(a) Outstanding HertzCompany stock option grants were converted to Ford stock option grants as a result of the Merger. The Company previously sponsored a long-term equity compensation plan (the “LTECP”) covering certain employees of the Company. The LTECP provided for the grant of incentive and nonqualified stock options, stock appreciation rights, restricted stock, performance shares and performance units (“Awards”). Prior to the Merger, Awards granted under the LTECP were options on, and restricted shares of, the Company’s Class A Common Stock. As a consequence of the Merger, outstanding options to purchase the Company’s Class A Common Stock under the LTECP (other than options held by non-employee directors of the Company) were converted into options to purchase shares of common stock of Ford, as determined and approved by the Company and Ford. In addition, holders of restricted stock awarded under the LTECP received the same consideration as all other holders of the Company’s Class A Common Stock received in the Merger. Total compensation cost charged against income related to restricted stock awards was $5.5 million in 2001.

The following table summarizes information about stock options outstanding at December 31, 2002:
Options Outstanding at Options Exercisable at December 31, 2002 December 31, 2002 ------------------------------------------- ------------------------- Weighted Weighted Weighted Average Average Number of Average Number of Remaining Exercise Shares Exercise Range of Exercise Prices Shares Contractual Life Price Exercisable Price - ------------------------ ------------ ---------------- ---------- ------------- --------- $30.19-- $42.52.............. 692,866 5.3 $41.42 692,866 $41.42 $35.19....................... 1,005,287 6.1 $35.19 1,005,287 $35.19 $30.19-- $35.77.............. 1,123,832 7.1 $35.67 752,967 $35.67 $27.42-- $30.19.............. 1,710,929 8.2 $27.79 564,607 $27.79 $16.91....................... 1,461,425 9.2 $16.91 -- --
36 2003:

                     
  Options Outstanding at Options Exercisable at
  December 31, 2003 December 31, 2003
  
 
      Weighted Weighted     Weighted
      Average Average Number of Average
  Number of Remaining Exercise Shares Exercise
Range of Exercise Prices Shares Contractual Life Price Exercisable Price

 
 
 
 
 
$30.19 — $42.52  671,232   4.3  $41.42   671,232  $41.42 
$35.19  974,617   5.1  $35.19   974,617  $35.19 
$30.19 — $35.77  1,090,226   6.1  $35.67   1,090,226  $35.67 
$27.42 — $30.19  1,646,117   7.2  $27.79   1,102,898  $27.78 
$16.91  1,415,175   8.2  $16.91   467,008  $16.91 
$7.55  1,430,450   9.2  $7.55       

43


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE— (Continued)

Note 8 -- REVENUE EARNING EQUIPMENT — Revenue Earning Equipment

Revenue earning equipment is used in theconsists of rental of cars and industrial and construction equipment and the leasing ofleased cars under closed-end leases where the disposition of the cars upon termination of the lease is for the account of Hertz. Revenue is recorded as earned under the terms of the rental or leasing contract. Revenue on open contracts is accrued to the balance sheet date based on the terms in the contracts. Expenses are recorded as incurred.Company. Over the three years ended December 31, 2002,2003, on a weighted-average basis, approximately 59%57% of the cars acquired by the Company for its U.S. car rental fleet, and approximately 27% of the cars acquired by the Company for its international fleet, were manufactured by Ford. During 2002, approximately 57% of the cars acquired by the Company domestically were manufactured by Ford and approximately 29%28% of the cars acquired by the Company for its international fleet, were manufactured by Ford and subsidiaries. During 2003, approximately 55% of the cars acquired by the Company domestically were manufactured by Ford and subsidiaries and approximately 33% 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.

Depreciation of revenue earning equipment includes the following (in thousands of dollars):
Years ended December 31, ----------------------------------------------------- 2002 2001 2000 ----------- ---------- ----------- Depreciation of revenue earning equipment ............... $ 1,492,292 $1,443,893 $ 1,364,935 Adjustment of depreciation upon disposal of the equipment (10,801) 1,610 (54,546) Rents paid for vehicles leased .......................... 18,077 16,807 13,112 ----------- ---------- ----------- Total ........................................... $ 1,499,568 $1,462,310 $ 1,323,501 =========== ========== ===========

              
   Years ended December 31,
   
   2003 2002 2001
   
 
 
Depreciation of revenue earning equipment $1,504,482  $1,492,292  $1,443,893 
Adjustment of depreciation upon disposal of the equipment  808   (10,801)  1,610 
Rents paid for vehicles leased  18,101   18,077   16,807 
   
   
   
 
 Total $1,523,391  $1,499,568  $1,462,310 
   
   
   
 

The adjustment of depreciation upon disposal of revenue earning equipment for the years ended December 31, 2003, 2002 2001 and 20002001 included (in millions) a net loss of $1.9 and net gains of $7.1 $13.0 and $14.8,$13.0, respectively, on the sale of industrial and construction equipment, and a net gaingains of $1.1 and $3.7 and a net loss of $14.6, and net gain of $39.7, respectively, on the sale of cars used in the car rental and car leasing operations.

The Company and Ford have entered into a Car Supply Agreement, which commenced on September 1, 1997 for a period of ten years. Under the Car Supply Agreement, Ford and the Company have agreed to negotiate in good faith on an annual basis with respect to the supply of cars. 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. During the years ended December 31, 2003, 2002 2001 and 2000,2001, the Company purchased cars from Ford and its subsidiaries at a cost of approximately (in billions) $4.9, $5.1 $4.4 and $4.6,$4.4, respectively and sold cars to Ford and its subsidiaries under various repurchase programs for approximately $3.8, $3.8 and $3.3, and $3.2, respectively.

As of December 31, 20022003 and 2001,2002, Ford owed the Company and its subsidiaries $520.8 million and $251.3 million, and $143.3 million, respectively, in connection withthe majority of which relates to various car repurchase and warranty programs. The balance at December 31, 2003 also includes $250.7 million which represents amounts due under a tax sharing agreement with Ford. As of December 31, 20022003 and 2001,2002, the Company and its subsidiaries owed Ford $66.0$119.9 million and $55.4$66.0 million, respectively (which amounts are included in "Accounts payable"“Accounts payable” in the consolidated balance sheet), relating to vehicles purchased, and in connection with cars purchased. NOTE2003, includes the liability for stock-based employee compensation.

44


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9 -- TAXES ON INCOME — Taxes on Income

The provision (benefit) for taxes on income consists of the following (in thousands of dollars):
Years ended December 31, --------------------------------------- 2002 2001 2000 --------- -------- -------- Current: Federal ....................... $ (34,328) $ 12,084 $ 55,642 Foreign ....................... 6,085 13,372 18,475 State and local ............... (2,711) 1,700 12,939 --------- -------- -------- Total current ............... (30,954) 27,156 87,056 --------- -------- -------- Deferred: Federal ....................... 88,900 (46,900) 100,100 Foreign ....................... 3,300 900 18,500 State and local ............... 11,100 (1,700) 16,800 --------- -------- -------- Total deferred .............. 103,300 (47,700) 135,400 --------- -------- -------- Total provision (benefit) $ 72,346 $(20,544) $222,456 ========= ======== ========
37 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

                
     Years ended December 31,
     
     2003 2002 2001
     
 
 
Current:            
 Federal $(214,487) $(37,368) $12,100 
 Foreign  22,341   6,085   13,372 
 State and local  10,175   (2,711)  1,700 
   
   
   
 
  Total current  (181,971)  (33,994)  27,172 
   
   
   
 
Deferred:            
 Federal  270,248   91,940   (46,916)
 Foreign  (6,400)  3,300   900 
 State and local  (3,000)  11,100   (1,700)
   
   
   
 
  Total deferred  260,848   106,340   (47,716)
   
   
   
 
   Total provision (benefit) $78,877  $72,346  $(20,544)
   
   
   
 

The principal items in the deferred tax provision (benefit) are as follows (in thousands of dollars):
Years ended December 31, ---------------------------------------- 2002 2001 2000 --------- -------- --------- Difference between tax and book depreciation .................... $ 464,653 $(10,284) $ 111,190 Accrued and prepaid expense deducted for tax purposes when paid or incurred ......................................... (6,118) (12,267) 30,392 Tax operating loss (carryforwards) utilized ..................... (365,982) 7,029 (1,616) Foreign tax credit utilized (carryforwards) ..................... 8,595 (30,026) (4,566) Federal alternative minimum tax credit utilized (carryforwards) . 2,152 (2,152) -- --------- -------- --------- Total deferred provision (benefit) ...................... $ 103,300 $(47,700) $ 135,400 ========= ======== =========

              
   Years ended December 31,
   
   2003 2002 2001
   
 
 
Difference between tax and book depreciation $145,208  $464,653  $(10,284)
Accrued and prepaid expense deducted for tax purposes when paid or incurred  (32,267)  (3,078)  (12,283)
Tax operating loss utilized (carryforwards)  288,783   (365,982)  7,029 
Foreign tax credit (carryforwards) utilized  (105,980)  8,595   (30,026)
Federal alternative minimum tax credit (carryforwards) utilized  (34,896)  2,152   (2,152)
   
   
   
 
 Total deferred provision (benefit) $260,848  $106,340  $(47,716)
   
   
   
 

The principal items in the deferred tax liability at December 31, 20022003 and 20012002 are as follows (in thousands of dollars):
2002 2001 ----------- --------- Difference between tax and book depreciation ............. $ 1,045,614 $ 580,961 Accrued and prepaid expense deducted for tax purposes when paid or incurred ....................................... (186,239) (180,121) Tax operating loss carryforwards ......................... (371,278) (5,296) Foreign tax credit carryforwards ......................... (25,997) (34,592) Federal alternative minimum tax credit carryforwards ..... -- (2,152) ----------- --------- Total ............................................ $ 462,100 $ 358,800 =========== =========
The tax

          
   2003 2002
   
 
Difference between tax and book depreciation $1,190,822  $1,045,614 
Accrued and prepaid expense deducted for tax purposes when paid or incurred  (220,254)  (186,239)
Tax operating loss carryforwards  (82,495)  (371,278)
Foreign tax credit carryforwards  (131,977)  (25,997)
Federal alternative minimum tax credit carryforwards  (34,896)   
   
   
 
 Total $721,200  $462,100 
   
   
 

At December 31, 2003 the Company had operating loss carryforwards at December 31, 2002for federal, state and foreign tax purposes totaling $82.5 million, of $371.3which $60.2 million relate to domestic and certain foreign operations and have the following expiration dates (in millions): $5.8 in 2006, $.1 in 2007, $1.7 in 2008, $2.7 in 2009, $71.4 in 2021, $288.5 in 2022 and $1.1 with no expiration date.expire through 2023. The remaining $22.3 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 at

45


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

December 31, 20022003 of $26.0$132.0 million expire as follows (in millions): $4.6through 2008 and are expected to be fully utilized in 2004, $4.7 in 2005, $12.4 in 2006 and $4.3 in 2007. the consolidated U.S. tax return of Ford. In connection with the filing of the 2002 consolidated tax return, net operating losses of the Company were carried back to prior periods, which increased the amount of foreign tax credit carryforwards. The federal alternative minimum tax credit carryforwards of $34.9 million may be used indefinitely to reduce federal income taxes.

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, --------------------------------------- 2002 2001 2000 -------- -------- --------- Computed tax at statutory rate .......................................... $ 75,738 $ 953 $ 203,302 State and local income taxes, net of Federal income tax benefit ......... 5,453 -- 19,330 Foreign tax credits ..................................................... -- (30,175) (3,800) Tax effect on the amortization of goodwill .............................. -- 7,482 6,881 Increase in valuation allowance ......................................... -- 6,934 -- Income taxes on foreign earnings at effective rates different from the U.S. statutory rate, including the anticipated realization of certain foreign tax benefits and the effect of subsidiaries' gains and losses and exchange adjustments with no tax effect ......................... (5,989) (3,272) (2,148) All other items, net .................................................... (2,856) (2,466) (1,109) -------- -------- --------- Total provision (benefit) ....................................... $ 72,346 $(20,544) $ 222,456 ======== ======== =========
38 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE

             
  Years ended December 31,
  2003
 2002
 2001
Computed tax at statutory rate $83,122  $75,738  $953 
State and local income taxes, net of Federal income tax benefit  4,664   5,453    
Foreign tax credits        (30,175)
Tax effect on the amortization of goodwill        7,482 
Increase in valuation allowance        6,934 
Income taxes on foreign earnings at effective rates different from the U.S. statutory rate, including the anticipated realization of certain foreign tax benefits and the effect of subsidiaries’ gains and losses and exchange adjustments with no tax effect  (9,949)  (5,989)  (3,272)
All other items, net  1,040   (2,856)  (2,466)
   
 
   
 
   
 
 
Total provision (benefit) $78,877  $72,346  $(20,544)
   
 
   
 
   
 
 

Note 10 -- LEASE AND CONCESSION AGREEMENTS — 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, ------------------------------------ 2002 2001 2000 -------- -------- -------- Rents ................................... $ 80,857 $ 76,920 $ 67,574 Concession fees: Minimum fixed obligations ........... 224,232 221,377 202,681 Additional amounts, based on revenues 131,071 125,718 140,555 -------- -------- -------- Total ........................... $436,160 $424,015 $410,810 ======== ======== ========

             
  Years ended December 31,
  2003
 2002
 2001
Rents $90,421  $80,857  $76,920 
Concession fees:            
Minimum fixed obligations  230,443   215,385   208,569 
Additional amounts, based on revenues  132,860   139,918   138,526 
   
 
   
 
   
 
 
Total $453,724  $436,160  $424,015 
   
 
   
 
   
 
 

As of December 31, 2002,2003, minimum obligations under existing agreements referred to above are approximately as follows (in thousands of dollars):
Rents Concessions ----- ----------- Years ended December 31, 2003.................................................... $66,665 $165,953 2004.................................................... 55,099 111,432 2005.................................................... 43,958 82,565 2006.................................................... 34,782 59,138 2007.................................................... 27,003 43,702 Years after 2007........................................ 97,213 259,597

         
  Rents
 Concessions
Years ended December 31,        
2004 $70,083  $174,059 
2005  57,732   146,980 
2006  47,052   117,183 
2007  38,032   94,663 
2008  29,871   54,177 
Years after 2008  100,938   273,493 

46


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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, --------------------------------- 2002 2001 2000 ------- ------- ------- Revenue earning equipment ... $18,077 $16,807 $13,112 Office and computer equipment 19,694 18,583 18,006 ------- ------- ------- Total ............... $37,771 $35,390 $31,118 ======= ======= =======

             
  Years ended December 31,
  2003
 2002
 2001
Revenue earning equipment $18,101  $18,077  $16,807 
Office and computer equipment  13,075   11,732   12,907 
   
 
   
 
   
 
 
Total $31,176  $29,809  $29,714 
   
 
   
 
   
 
 

As of December 31, 2002,2003, minimum obligations under existing agreements referred to above that have a maturity of more than one year are as follows (in thousands): 2003, $12,130; 2004, $5,127;$14,840; 2005, $1,700;$8,900; 2006, $706;$4,471; 2007, $851. 39 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE$471; 2008, $9, after 2008, $2.

Note 11 -- SEGMENT INFORMATION — Segment Information

The Company follows SFAS No. 131, "Disclosures“Disclosures about Segments of an Enterprise and Related Information"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 Company has identified two significant segments: rental of cars and light trucks ("(“car rental"rental”); and rental of industrial, construction and materials handling equipment ("(“industrial and construction equipment rental"rental”). The contribution of these segments, as well as "corporate“corporate and other," for each of the three years ended December 31, 20022003 are summarized below (in millions of dollars). Corporate and other includes general corporate expenses, principally amortization of intangibles, certain interest expense, as well as other business activities, such as claim management and, prior to 2002,2003, telecommunication services (in millions of dollars).
Years ended December 31, -------------------------------------- 2002 2001 2000 -------- -------- -------- Revenues Car rental ........................................ $ 4,066 $ 3,883 $ 4,062 Industrial and construction equipment rental ..... 893 1,004 970 Corporate and other .............................. 9 29 42 -------- -------- -------- Total .......................................... $ 4,968 $ 4,916 $ 5,074 ======== ======== ======== Income (loss) before income taxes Car rental ........................................ $ 264 $ 45 $ 554 Industrial and construction equipment rental ...... (38) (9) 47 Corporate and other ............................... (10) (33) (20) -------- -------- -------- Total .......................................... $ 216 $ 3 $ 581 ======== ======== ======== Depreciation of revenue earning equipment Car rental ........................................ $ 1,229 $ 1,191 $ 1,087 Industrial and construction equipment rental ...... 271 271 237 Corporate and other ............................... -- -- -- -------- -------- -------- Total .......................................... $ 1,500 $ 1,462 $ 1,324 ======== ======== ======== Depreciation of property and equipment Car rental ........................................ $ 116 $ 124 $ 99 Industrial and construction equipment rental ...... 35 39 35 Corporate and other ............................... 4 4 4 -------- -------- -------- Total .......................................... $ 155 $ 167 $ 138 ======== ======== ======== Amortization of intangibles Car rental ........................................ $ -- $ 3 $ 3 Industrial and construction equipment rental ...... 1 12 11 Corporate and other ............................... -- 16 16 -------- -------- -------- Total .......................................... $ 1 $ 31 $ 30 ======== ======== ======== Operating income (loss) (pre-tax income before interest) Car rental ........................................ $ 530 $ 334 $ 841 Industrial and construction equipment rental ...... 52 95 164 Corporate and other ............................... 1 (22) (9) -------- -------- -------- Total .......................................... $ 583 $ 407 $ 996 ======== ======== ======== Total assets at end of year Car rental ........................................ $ 8,354 $ 7,146 $ 7,425 Industrial and construction equipment rental ...... 1,965 2,480 2,651 Corporate and other ............................... 810 532 544 -------- -------- -------- Total .......................................... $ 11,129 $ 10,158 $ 10,620 ======== ======== ======== Revenue earning equipment, net, at end of year Car rental ........................................ $ 5,998 $ 5,221 $ 5,187 Industrial and construction equipment rental ...... 1,428 1,631 1,736 Corporate and other ............................... -- -- -- -------- -------- -------- Total .......................................... $ 7,426 $ 6,852 $ 6,923 ======== ======== ======== Revenue earning equipment and property and equipment Car rental Expenditures ................................... $ 9,891 $ 9,141 $ 8,643 Proceeds from sale ............................. (7,901) (7,700) (6,807) -------- -------- -------- Net expenditures ............................ $ 1,990 $ 1,441 $ 1,836 ======== ======== ========
40

             
  Years ended December 31,
  2003
 2002
 2001
Revenues            
Car rental $4,296  $4,066  $3,883 
Industrial and construction equipment rental  905   893   1,004 
Corporate and other  7   9   29 
   
 
   
 
   
 
 
Total $5,208  $4,968  $4,916 
   
 
   
 
   
 
 
Income (loss) before income taxes            
Car rental $279  $264  $45 
Industrial and construction equipment rental  (22)  (38)  (9)
Corporate and other  (20)  (10)  (33)
   
 
   
 
   
 
 
Total $237  $216  $3 
   
 
   
 
   
 
 
Depreciation of revenue earning equipment            
Car rental $1,258  $1,229  $1,191 
Industrial and construction equipment rental  265   271   271 
Corporate and other         
   
 
   
 
   
 
 
Total $1,523  $1,500  $1,462 
   
 
   
 
   
 
 
Depreciation of property and equipment            
Car rental $111  $116  $124 
Industrial and construction equipment rental  36   35   39 
Corporate and other  5   4   4 
   
 
   
 
   
 
 
Total $152  $155  $167 
   
 
   
 
   
 
 

47


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Years ended December 31, ----------------------------- 2002 2001 2000 ----- ----- ----- Revenue earning equipment and property and equipment Industrial and construction equipment rental Expenditures ............................... $ 272 $ 404 $ 675 Proceeds from sale ......................... (197) (175) (191) ----- ----- ----- Net expenditures ........................ $ 75 $ 229 $ 484 ===== ===== ===== Corporate and other Expenditures ............................... $ 4 $ 6 $ 5 Proceeds from sale ......................... -- -- -- ----- ----- ----- Net expenditures ........................ $ 4 $ 6 $ 5 ===== ===== =====
(Continued)

             
  Years ended December 31,
  2003
 2002
 2001
Amortization of intangibles            
Car rental $  $  $3 
Industrial and construction equipment rental  1   1   12 
Corporate and other        16 
   
 
   
 
   
 
 
Total $1  $1  $31 
   
 
   
 
   
 
 
Operating income (loss) (pre-tax income (loss) before interest)            
Car rental $551  $530  $334 
Industrial and construction equipment rental  54   52   95 
Corporate and other  (12)  1   (22)
   
 
   
 
   
 
 
Total $593  $583  $407 
   
 
   
 
   
 
 
Total assets at end of year            
Car rental $9,310  $8,354  $7,146 
Industrial and construction equipment rental  1,891   1,965   2,480 
Corporate and other  1,378   810   532 
   
 
   
 
   
 
 
Total $12,579  $11,129  $10,158 
   
 
   
 
   
 
 
Revenue earning equipment, net, at end of year            
Car rental $6,462  $5,998  $5,221 
Industrial and construction equipment rental  1,331   1,428   1,631 
Corporate and other         
   
 
   
 
   
 
 
Total $7,793  $7,426  $6,852 
   
 
   
 
   
 
 
Revenue earning equipment and property and equipment            
Car rental            
Expenditures $9,292  $9,891  $9,141 
Proceeds from sale  (7,701)  (7,901)  (7,700)
   
 
   
 
   
 
 
Net expenditures $1,591  $1,990  $1,441 
   
 
   
 
   
 
 
Revenue earning equipment and property and equipment            
Industrial and construction equipment rental            
Expenditures $368  $272  $404 
Proceeds from sale  (228)  (197)  (175)
   
 
   
 
   
 
 
Net expenditures $140  $75  $229 
   
 
   
 
   
 
 
Corporate and other            
Expenditures $3  $4  $6 
Proceeds from sale         
   
 
   
 
   
 
 
Net expenditures $3  $4  $6 
   
 
   
 
   
 
 

48


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, -------------------------------------- 2002 2001 2000 -------- -------- -------- Revenues United States ................................. $ 3,748 $ 3,765 $ 3,922 Foreign ....................................... 1,220 1,151 1,152 -------- -------- -------- Total ...................................... $ 4,968 $ 4,916 $ 5,074 ======== ======== ======== Income (loss) before income taxes United States ................................. $ 131 $ (47) $ 462 Foreign ....................................... 85 50 119 -------- -------- -------- Total ...................................... $ 216 $ 3 $ 581 ======== ======== ======== Depreciation of revenue earning equipment United States ................................. $ 1,252 $ 1,246 $ 1,117 Foreign ....................................... 248 216 207 -------- -------- -------- Total ...................................... $ 1,500 $ 1,462 $ 1,324 ======== ======== ======== Depreciation of property and equipment United States ................................. $ 124 $ 138 $ 114 Foreign ....................................... 31 29 24 -------- -------- -------- Total ...................................... $ 155 $ 167 $ 138 ======== ======== ======== Amortization of intangibles United States ................................. $ 1 $ 26 $ 25 Foreign ....................................... -- 5 5 -------- -------- -------- Total ...................................... $ 1 $ 31 $ 30 ======== ======== ======== Operating income (pre-tax income before interest) United States ................................. $ 461 $ 306 $ 821 Foreign ....................................... 122 101 175 -------- -------- -------- Total ...................................... $ 583 $ 407 $ 996 ======== ======== ======== Total assets at end of year United States ................................. $ 8,423 $ 7,878 $ 8,257 Foreign ....................................... 2,706 2,280 2,363 -------- -------- -------- Total ...................................... $ 11,129 $ 10,158 $ 10,620 ======== ======== ======== Revenue earning equipment, net, at end of year United States ................................. $ 5,908 $ 5,586 $ 5,648 Foreign ....................................... 1,518 1,266 1,275 -------- -------- -------- Total ...................................... $ 7,426 $ 6,852 $ 6,923 ======== ======== ======== Revenue earning equipment and property and equipment United States Expenditures ............................... $ 7,714 $ 7,291 $ 7,093 Proceeds from sale ......................... (5,995) (5,916) (5,261) -------- -------- -------- Net expenditures ........................ $ 1,719 $ 1,375 $ 1,832 ======== ======== ======== Foreign Expenditures ............................... $ 2,453 $ 2,260 $ 2,230 Proceeds from sale ......................... (2,103) (1,959) (1,737) -------- -------- -------- Net expenditures ........................ $ 350 $ 301 $ 493 ======== ======== ========
41

             
  Years ended December 31,
  2003
 2002
 2001
Revenues            
United States $3,769  $3,748  $3,765 
Foreign  1,439   1,220   1,151 
   
 
   
 
   
 
 
Total $5,208  $4,968  $4,916 
   
 
   
 
   
 
 
Income (loss) before income taxes            
United States $132  $131  $(47)
Foreign  105   85   50 
   
 
   
 
   
 
 
Total $237  $216  $3 
   
 
   
 
   
 
 
Depreciation of revenue earning equipment            
United States $1,241  $1,252  $1,246 
Foreign  282   248   216 
   
 
   
 
   
 
 
Total $1,523  $1,500  $1,462 
   
 
   
 
   
 
 
Depreciation of property and equipment            
United States $114  $124  $138 
Foreign  38   31   29 
   
 
   
 
   
 
 
Total $152  $155  $167 
   
 
   
 
   
 
 
Amortization of intangibles            
United States $1  $1  $26 
Foreign        5 
   
 
   
 
   
 
 
Total $1  $1  $31 
   
 
   
 
   
 
 
Operating income (pre-tax income before interest)            
United States $449  $461  $306 
Foreign  144   122   101 
   
 
   
 
   
 
 
Total $593  $583  $407 
   
 
   
 
   
 
 
Total assets at end of year            
United States $9,014  $8,423  $7,878 
Foreign  3,565   2,706   2,280 
   
 
   
 
   
 
 
Total $12,579  $11,129  $10,158 
   
 
   
 
   
 
 
Revenue earning equipment, net, at end of year            
United States $5,873  $5,908  $5,586 
Foreign  1,920   1,518   1,266 
   
 
   
 
   
 
 
Total $7,793  $7,426  $6,852 
   
 
   
 
   
 
 
Revenue earning equipment and property and equipment            
United States            
Expenditures $6,801  $7,714  $7,291 
Proceeds from sale  (5,453)  (5,995)  (5,916)
   
 
   
 
   
 
 
Net expenditures $1,348  $1,719  $1,375 
   
 
   
 
   
 
 
Foreign            
Expenditures $2,862  $2,453  $2,260 
Proceeds from sale  (2,476)  (2,103)  (1,959)
   
 
   
 
   
 
 
Net expenditures $386  $350  $301 
   
 
   
 
   
 
 
49


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE(Continued)

Note 12 -- LITIGATION AND GUARANTEES LITIGATION There are four pending legal proceedings against the Company that the Company wishes to note specifically: On October 3, 1997, Shannon Leonard, Theresa Moore— Litigation and Coley Whetsone, Jr. v. Enterprise Rent A Car, The Hertz Corporation, et al. was commenced in Circuit Court of Coosa County, Alabama. Leonard purports to be a class action on behalf of all persons in the United States who rented from the defendant car rental companies and, as part of that rental, purchased optional insurance products. The Company and the other defendants removed the action to the United States District Court for the Middle District of Alabama, Northern Division (Montgomery). The Company and the other defendants then filed a series of motions which sought dismissal of the various causes of action based upon the judge's initial ruling that a private right of action does not exist under Alabama law for the alleged unlicensed sale of insurance. A final order of dismissal was entered in January 2000, and the plaintiffs subsequently appealed to the United States Court of Appeals for the Eleventh Circuit in Atlanta, Georgia. In January 2002, the Court of Appeals vacated the District Court's judgment and directed the District Court to remand the case to the court from which it had been removed (Circuit Court of Coosa County, Alabama). Following the remand, the Company and the other defendants filed a motion to dismiss. Oral arguments were heard on that motion on August 20, 2002, but the court has not yet rendered its decision. Guarantees

Litigation

On March 1, 2002,Bowdoin Square, L.L.C. vv. 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'splaintiff’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, for use as a reservation call center.Alabama. The complaint also alleges that the Company and other defendants negligently and wantonly injured the value of plaintiff'splaintiff’s interest in the shopping center. A motion to transfer the case to the Circuit Court for Mobile County Alabama, was granted in September 2002, and the Company has now 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 anticipated during the summer of 2004.

On July 29, 2002,James Han, individually and on behalf of all otherothers similarly situated, v. The Hertz Corporationwas commenced in the Supreme Court of the State of New York, County of New York.Han purportspurported to be a class action on behalf of persons who rented private passenger vehicles from the Company in New York under rental agreements containing provisions which allegedly violate the express provisions of Section 396-z of the General Business Law of New York and New York'sYork’s consumer fraud statute (i.e., Section 349 of the General Business Law). More specifically, it isthe complaint alleged that rental agreements used by the Company in New York included provisions that imposeimposed liability upon renters beyond the statutorily permitted amounts and that the rental agreements failed to disclose to renters their rights and responsibilities concerning vehicle damage. The parties have agreed to bifurcate class discovery and damages discovery and have engaged in a limited amount of class discovery. The Company has filed aOn July 29, 2003, the Company’s motion for summary judgment was granted and thean order of dismissal was thereafter entered. The plaintiff has filed a motion for class certification. Reply briefs are to be filed shortly. notice of appeal.

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“opt-in collective action"action” on behalf of all Senior Station Managers, Station Managers and "B"“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.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. In the interim, the plaintiffs have been permitted to amend their complaint to include an allegation of pay docking of managers. The Company’s opposition to the plaintiffs’ motion for leave to amend has been filed and the Company awaits a determination. Additional depositions have been taken concerning this new allegation. The Company will be filing a motion for summary judgment in the near future.

On August 22, 2002,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. On November 25, 2003, the Company served its answer to the amended complaint, and denied the substantive allegations. Discoverydiscovery has now commenced.

50


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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. On January 29, 2004, the Company’s motion to dismiss was granted and an order of dismissal was thereafter entered.

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. The Company has not yet filed an answer to the complaint.

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 arising from the operation of motor vehicles and equipment rented from the Company and its licensees. Such actions and claims are provided for within the Company’s public liability and property damage (“PL/PD”) program. In aggregate, the Company can be expected to expend material sums to defend and settle those actions and claims or to pay judgments resulting from them. Within the PL/PD program, HERC has been named as a co-defendant in over 100 multi-plaintiff lawsuits filed in Mississippi and Texas seeking damages for injuries (silicosis) which the plaintiffs allegedly sustained from the use of equipment rented from HERC. In all of these lawsuits, HERC is named as a co-defendant with a minimum of 80 other co-defendants, including the equipment manufacturers. HERC is continuing its attempt to tender the defense of these lawsuits to the equipment manufacturers.

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 or results of operations or cash flows of the Company. 42 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) GUARANTEES AND EXTENDED SERVICE PLANS

Guarantees

At December 31, 2002,2003, the following guarantees and extended service plans were issued and outstanding:

Indemnifications:In the ordinary course of business, the Company executes contracts involving indemnifications standard in the 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:

51


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 contingent losses that the Company expects to incur in connection with many of these sites have been accrued and those losses are reflected in its financial statements in accordance with generally accepted accounting principles. The aggregate amount accrued for environmental liabilities reflected in the Company'sCompany’s consolidated balance sheet at December 31, 20022003 is $5.6$5.9 million. The accrual represents the estimated cost to study potential environmental issues at sites deemed investigation or cleanup 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'sCompany’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, tax indemnifications relate to representations or warranties given by the Company. The Company'sCompany’s liability typically is fixed when a final determination of the indemnified party'sparty’s tax liability is made. 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 numerousa 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. Extended Service Plans: Used vehicles sold in the retail market generally contain base warranty coverage supplied by the vehicle manufacturer. The Company offers extended service plans which are separate contracts with retail customers purchasing used vehicles who pay fees to extend warranty coverage beyond the base warranty period. Under these plans, contract fees are recognized in income over the contract period on a straight-line basis. The following is a tabular reconciliation of extended service plan deferred revenue accounts (in millions): January 1, 2002 beginning balance $ 25.4 Current year written revenue 11.4 Current year earned revenue (11.6) ------- December 31, 2002 ending balance $ 25.2 =======
43

52


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE(Continued)

Note 13 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) — Quarterly Financial Information (Unaudited)

A summary of the quarterly operating results during 20022003 and 20012002 were as follows (in thousands):

                 
      Operating Income Income (Loss) Net
      (Pre-tax Income Before Income Income
  Revenues
 Before Interest)(1)(2)
 Taxes(1)(2)
 (Loss)(3)
2003
                
First quarter $1,147,660  $32,052  $(56,836) $(37,692)
Second quarter  1,269,809   149,046   59,624   39,590 
Third quarter  1,489,544   276,549   187,583   126,695 
Fourth quarter  1,300,916   134,888   47,121   30,022 
   
 
   
 
   
 
   
 
 
Total Year $5,207,929  $592,535  $237,492  $158,615 
   
 
   
 
   
 
   
 
 
2002
                
First quarter $1,088,822  $25,867  $(59,240) $(342,133)
Second quarter  1,262,492   173,249   84,034   65,557 
Third quarter  1,416,605   261,157   162,436   108,095 
Fourth quarter  1,200,220   122,492   29,164   18,529 
   
 
   
 
   
 
   
 
 
Total Year $4,968,139  $582,765  $216,394  $(149,952)
   
 
   
 
   
 
   
 
 

Operating Income (Loss) Income (Loss) Net (Pre-tax Income (Loss) Before Income Income Revenues Before Interest)
(1) Taxes(1) (Loss)Includes a gain of $8 million in the second quarter of 2003 from the condemnation of a car rental and support facility in Florida.

(2)Includes a credit totaling $7.8 million in the first and second quarters of 2003 from a one time refund of Goods and Service Tax related to the Company’s Australian car rental operations.

(3) -------- ------------------- -------------- ------------ Includes a $294 million non-cash charge in the first quarter of 2002 First quarter ......... $1,088,822 $ 25,867 $ (59,240) $(342,133) Second quarter ........ 1,262,492 173,249 84,034 65,557 Third quarter ......... 1,416,605 261,157 162,436 108,095 Fourth quarter ........ 1,200,220 122,492 29,164 18,529 ---------- --------- --------- --------- Total Year .......... $4,968,139 $ 582,765 $ 216,394 $(149,952) ========== ========= ========= ========= 2001 First quarter ......... $1,180,871 $ 96,032 $ (5,805) $ (3,937) Second quarter ........ 1,285,496 188,674 85,806 59,204 Third quarter ......... 1,369,226 161,357 54,186 25,519 Fourth quarter ........ 1,080,198 (38,663) (131,464) (57,519) ---------- --------- --------- --------- Total Year .......... $4,915,791 $ 407,400 $ 2,723 $ 23,267 ========== ========= ========= ========= related to impairment of goodwill in the Company’s industrial and construction equipment rental segment, recognized in accordance with the adoption of SFAS No. 142.
(1) Includes $9.7 million in the first quarter of 2001 for expenses associated with the Merger. (2) Includes a $294 million after tax non-cash charge, in the first quarter of 2002, related to impairment of goodwill in the Company's industrial and construction equipment rental segment, in accordance with SFAS No. 142. (3) Includes credits to the "Provision (benefit) for taxes on income" of $30.2 million in the fourth quarter of 2001, from the benefit of certain foreign tax credits. NOTE

Note 14 -- FINANCIAL INSTRUMENTS — 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 subsidiariesa number of Ford and with financial institutions and limitsinvestment 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'sCompany’s customer base, and their dispersion across different businesses and geographic areas. As of December 31, 2002,2003, the Company had no significant concentration of credit risk. CASH AND EQUIVALENTS

Cash and Equivalents

Fair value approximates cost indicated on the balance sheet at December 31, 2002,2003 because of the short-term maturity of these instruments.

Short-Term Investments

Fair value approximates cost indicated on the balance sheet at December 31, 2003 because of the short-term maturity of these instruments. The balance at December 31, 2002,2003, of $601.3$500.1 million includes $424.1 millionconsists of investments with subsidiariesa related party investment fund that pools and invests excess cash balances of Ford. DEBT 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, 20022003 and December 31, 20012002 approximated $7.32$7.89 billion and $6.27$7.32 billion, respectively, compared to carrying value of $7.63 billion and $7.04 billion, and $6.31 billion, respectively. DERIVATIVE

53


THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INSTRUMENTS STATEMENTS - (Continued)

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 ("swaps"(“swaps”). The differential paid or received on these agreements is recognized as an adjustment to interest expense. These agreements are not entered into for trading purposes. The effectEffective 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. Under these agreements, is to make the Company less susceptible to changes inpays interest rates by effectively converting certainat a variable rate debt toin exchange for fixed rate debt. At December 31, 2002, the Company had no interestreceipts, effectively transforming these notes to floating rate swaps outstanding. 44 THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) obligations. See Note 3 – Debt.

The Company and its subsidiaries have entered into arrangements to manage exposure to fluctuations in foreign exchange rates, principally for selected marketing programs. These arrangements consist of the purchase of foreign exchange options. At December 31, 2002,2003, the total notional amount of these instruments was $32.5$13.0 million, maturing at various dates in 20032004 and 2004,2005, and the fair value of all outstanding contracts, was approximately $.8$.1 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 Euro's, British Pounds, Euro’s, Yen and Canadian dollars in the notional amounts of $15.7$8.0 million, $13.3$2.4 million, $3.0$1.8 million and $.5$.8 million, respectively. All borrowings by foreign operations are either in the foreign operation's local currency or, if in non-local currency, are hedged to minimize foreign exchange exposure. 45

54


SCHEDULE II

THE HERTZ CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER
For the Years Ended December 31, 2003, 2002 and 2001 AND 2000

                     
      Additions      
  Balance at 
 
  Beginning of Charged to Translation     Balance at
  Year
 Income
 Adjustments
 Deductions
 End of Year
  Dollars in thousands
2003
                    
 
                    
Allowance for doubtful accounts $29,047  $23,053  $3,646  $19,988(a) $35,758 
   
 
   
 
   
 
   
 
   
 
 
2002
                    
 
                    
Allowance for doubtful accounts $38,886  $15,570  $2,900  $28,309(a) $29,047 
   
 
   
 
   
 
   
 
   
 
 
2001
                    
 
                    
Allowance for doubtful accounts $34,788  $44,316  $(985) $39,233(a) $38,886 
   
 
   
 
   
 
   
 
   
 
 


Additions Balance at --------------------------- Beginning
(a)Amounts written off, net of Charged to Translation Balance at Year Income Adjustments Deductions End of Year ------------ ---------- ----------- ------------ ----------- Dollars in thousands 2002 Allowance for doubtful accounts .... $ 38,886 $ 15,570 $ 2,900 $ 28,309(a) $ 29,047 ======== ======== ============ ============ ======== Public liability and property damage $315,845 $145,010 $ 13,105 $ 120,486(b) $353,474 ======== ======== ============ ============ ======== 2001 Allowance for doubtful accounts .... $ 34,788 $ 44,316 $ (985) $ 39,233(a) $ 38,886 ======== ======== ============ ============ ======== Public liability and property damage $272,779 $136,772 $ (2,710) $ 90,996(b) $315,845 ======== ======== ============ ============ ======== 2000 Allowance for doubtful accounts .... $ 24,299 $ 31,893 $ (935) $ 20,469(a) $ 34,788 ======== ======== ============ ============ ======== Public liability and property damage $292,573 $108,681 $ (3,203) $ 125,272(b) $272,779 ======== ======== ============ ============ ======== recoveries.
- ---------- (a) Amounts written off, net of recoveries. (b) Payments of claims and expenses. 46

55


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

     None. PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Omitted. ITEM 11. EXECUTIVE COMPENSATION. Omitted. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Omitted. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Omitted. ITEM 14. CONTROLS AND PROCEDURES. 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"“Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission'sCommission’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'sCompany’s Chairman of the Board and Chief Executive Officer and Executive Vice President and Chief Financial Officer (the "Certifying Officers"“Certifying Officers”), as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, within the 90 days prior to the filing date of this report, the Certifying Officers carried out an evaluation of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures.procedures as of December 31, 2003. Their evaluation was carried out with the participation of other members of the Company'sCompany’s management. Based upon their evaluation, the Certifying Officers concluded that the Company'sCompany’s disclosure controls and procedures were effective.

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 transactions relating to 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. There havehas been no significant changeschange in the Company'sCompany’s internal controls,control over financial reporting that occurred in the quarter ended December 31, 2003, that has materially affected, or in other factors which could significantlyis reasonably likely to affect, the Company’s internal controls, subsequent to the datecontrol over financial reporting.

56


PART III

ITEM 10. Directors and Executive Officers of the evaluation. 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, LLC (“PwC”), the Company’s principal auditor, were as follows (in thousands of dollars):

         
  2003
 2002
Fees:        
Audit $1,933  $1,740 
Audit-related  234   312 
Tax  718   819 
All other  240   569 
   
 
   
 
 
Total $3,125  $3,440 
   
 
   
 
 

Audit-related fees were for services in connection with debt offerings, due diligence 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 from PwC in 2003.

57


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMExhibits, Financial Statement Schedules and Reports on Form 8-K.

Page
(a) 1 1.
Financial Statements:
The Hertz Corporation and Subsidiaries --
Report of Independent Accountants ....................................................... 20 Auditors24
Consolidated Balance Sheet at December 31, 20022003 and 2001 ................................ 21 200225
Consolidated Statement of Operations for the years ended December 31, 2003, 2002 2001 and 2000 22 200126
Consolidated Statement of Stockholder'sStockholder’s Equity for the years ended December 31, 2003, 2002 2001 and 2000 .................................................... 23 200127
Consolidated Statement of Cash Flows for the years ended December 31, 2003, 2002 2001 and 2000 .................................................... 24-25 200128-29
Notes to Consolidated Financial Statements .............................................. 26-45 2 30-54
2.
Financial Statement Schedules:
The Hertz Corporation and Subsidiaries --
Schedule II--II — Valuation and Qualifying Accounts for the years ended December 31, 2003, 2002 2001 and 2000 ................................................... 46 200155
3.
Exhibits:
47 3. 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).

(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.

(4)Instruments defining the rights of security holders, including indentures

(a)At December 31, 2003, 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)Car Supply Agreement between the Company and Ford.*
(b)Joint Advertising Agreement between the Company and Ford.*
(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, 2003.

(23)Consent of Independent Accountants.
(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 Registration Statement No. 333-22517 on Form S-1.

(b) By-Laws of the Company, effective January 1, 2000 (filed as Exhibit (3) (b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). (4) Instruments defining the rights of security holders, including indentures (a) At December 31, 2002, 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) Car Supply Agreement between the Company and Ford.* (b) Joint Advertising Agreement between the Company and Ford.* (c) Tax-Sharing Agreement between the Company and Ford.* (d) The Hertz Corporation Benefit Equalization Plan.* (e) The Hertz Corporation Supplemental Retirement and Savings Plan, as amended.* (f) The Hertz Corporation Executive Incentive Compensation Plan.* (g) The Hertz Corporation Long-Term Incentive Plan.* (h) Form of The Hertz Corporation Special Supplemental Executive Pension Benefit for Frank A. Olson and William Sider.* (i) Employment Agreement between the Company and Craig R. Koch.* (j) The Hertz Corporation Supplemental Executive Retirement Plan (filed as Exhibit (10)(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). (k) The Hertz Corporation Long-Term Equity Compensation Plan (incorporated herein by reference from the Company's Registration Statement No. 333-32543 on Form S-8, as amended on August 28, 1997). (l) Amendments to The Hertz Corporation Long-Term Equity Compensation Plan adopted by the Board of Directors on February 9, 2001 (filed as Exhibit (10)(q) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). (12) Computation of Consolidated Ratio of Earnings to Fixed Charges for each of the five years in the period ended December 31, 2002. (23) Consent of Independent Accountants. (99.1) Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99.2) Certification of Executive Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ---------- * Incorporated herein by reference from the Company's Registration Statement No. 333-22517 on Form S-1. (b) Reports on Form 8-K.

     None

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. 48

58


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. Siracusa -------------------------------- Paul J. Siracusa Executive Vice President and Chief Financial Officer
THE HERTZ CORPORATION
(Registrant)
By:  /s/ Paul J. Siracusa  
Paul J. Siracusa 
Executive Vice President and Chief Financial Officer

March 18, 2003 15, 2004

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, President and Chief Executive Officer - ---------------------------- (Principal Executive Officer) Craig R. Koch /s/ Frank A. Olson Director and Chairman of the Board - ---------------------------- Frank A. Olson /s/ John M. Rintamaki Director - ---------------------------- John M. Rintamaki /s/ Paul J. Siracusa Executive Vice President and Chief Financial - ---------------------------- Officer (Principal Financial Officer) Paul J. Siracusa /s/ Richard J. Foti Staff Vice President and Controller - ---------------------------- (Principal Accounting Officer) Richard J. Foti 49 CERTIFICATIONS I, Craig R. Koch, certify that: 1. I have reviewed this annual report on Form 10-K of The Hertz Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 18, 2003 By: /s/ Craig R. Koch ------------------------------------- Craig R. Koch President and Chief Executive Officer 50 I, Paul J. Siracusa, certify that: 1. I have reviewed this annual report on Form 10-K of The Hertz Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 18, 2003 By: /s/ Paul J. Siracusa --------------------------------- Paul J. Siracusa Executive Vice President and Chief Financial Officer 51

/s/ Craig R. Koch
Craig R. Koch
Director, Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ Allan Gilmour

Allan Gilmour
Director
/s/ Greg C. Smith
Greg C. Smith
Director
/s/ John M. Rintamaki
John M. Rintamaki
Director
/s/ Paul J. Siracusa
Paul J. Siracusa
Director, Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Richard J. Foti
Richard J. Foti
Staff Vice President and Controller
(Principal Accounting Officer)

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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, 2002. (23) Consent of Independent Accountants. (99.1) Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99.2) Certification of Executive Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 52

(3)(b)By-Laws of the Company, effective January 1, 2004.
(12)Computation of Consolidated Ratio of Earnings to Fixed Charges for each of the five years in the period ended December 31, 2003.
(23)Consent of Independent Accountants.
(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.

60