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EX-31.66 - EXHIBIT 31.66 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit3166.htm
EX-31.65 - EXHIBIT 31.65 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit3165.htm
EX-32.65 - EXHIBIT 32.65 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit3265.htm
EX-32.66 - EXHIBIT 32.66 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit3266.htm
EX-15.37 - EXHIBIT 15.37 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit1537.htm
EX-10.235 - EXHIBIT 10.235 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit10235.htm
EX-10.234 - EXHIBIT 10.234 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit10234.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
____________________

FORM 10-Q

[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010

OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________to______________

Commission file number 1-13647
____________________


DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
73-1356520
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

5330 East 31st Street, Tulsa, Oklahoma  74135
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code:  (918) 660-7700


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   X        No____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes____     No____
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer              Accelerated filer     X          Non-accelerated filer              Smaller reporting company          
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes              No   X     

The number of shares outstanding of the registrant’s Common Stock as of April 30, 2010 was 28,644,652.
 


 
 
 
 
 
Page
 

 
 
           
26
 
 
           
34
 

 

 
37


 
 
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” about our expectations, plans and performance, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Outlook for 2010” and “Liquidity and Capital Resources.”  These statements use such words as “may,” “will,” “expect,” “believe,” “intend,” “should,” “could,” “anticipate,” “estimate,” “forecast,” “project,” “plan” and similar expressions.  These statements do not guarantee future performance and Dollar Thrifty Automotive Group, Inc. assumes no obligation to update them.  Risks and uncertainties that could materially affect future results include:
 
 
·
the impact of our pending acquisition by Hertz Global Holdings, Inc. (“Hertz”) or developments relating to the proposed transaction, including, among other things, diversion of management’s attention from day-to-day operations, a loss of key personnel, disruption of our operations, an inability to obtain regulatory and stockholder approvals on the terms and schedule contemplated, and the impact of pending or future litigation relating to the proposed transaction;
 
·
the impact of persistent pricing and demand pressures, particularly in light of the continuing volatility in the global financial and credit markets and concerns about global economic prospects and the timing and strength of a recovery, and whether consumer confidence and spending levels will continue to improve;
 
·
whether ongoing governmental and regulatory initiatives in the United States and elsewhere to stimulate economic growth will be successful;
 
·
the impact of pricing and other actions by competitors, particularly as they increase fleet sizes in anticipation of seasonal activity;
 
·
our ability to manage our fleet mix to match demand and meet our target for vehicle depreciation costs, particularly in light of the significant increase in the level of risk vehicles (i.e., those vehicles not acquired through a guaranteed residual value program) in our fleet and our exposure to the used vehicle market;
 
2

 
 
·
the cost and other terms of acquiring and disposing of automobiles and the impact of conditions in the used vehicle market on our ability to reduce our fleet capacity as and when projected by our plans;
 
·
whether efforts to revitalize the U.S. automotive industry are successful, particularly in light of our dependence on vehicle supply from U.S. automotive manufacturers;
 
·
the effectiveness of actions we take to manage costs and liquidity and whether further reductions in the scope of our operations will be necessary in light of the economic environment;
 
·
our ability to obtain cost-effective financing as needed (including replacement of asset backed notes and other indebtedness as it comes due) without unduly restricting operational flexibility;
 
·
our ability to comply with financial covenants or to obtain necessary amendments or waivers, and the impact of the terms of any required amendments or waivers, such as potential reductions in lender commitments;
 
·
our ability to manage the consequences under our financing agreements of an event of bankruptcy with respect to any of the monoline insurers that provide credit support for our asset backed financing structures, including our ability to obtain any necessary waivers or consents with respect to recent developments involving Ambac;
 
·
the potential for significant cash tax payments in 2010 as a result of the reduction in our fleet size and the resulting impact of our inability to defer gains on the disposition of our vehicles under our like-kind exchange program;
 
·
airline travel patterns, including disruptions or reductions in air travel resulting from airline bankruptcies, industry consolidation, capacity reductions and pricing actions or other events;
 
·
local market conditions where we and our franchisees do business, including whether franchisees will continue to have access to capital as needed;
 
·
volatility in gasoline prices;
 
·
access to reservation distribution channels;
 
·
disruptions in the operation or development of information and communication systems that we rely on, including those relating to methods of payment;
 
·
the cost of regulatory compliance, costs and other effects of potential future initiatives, including those directed at climate change and its effects, and the costs and outcome of pending litigation; and
 
·
the impact of natural catastrophes and terrorism.
 
3

 
PART I – FINANCIAL INFORMATION
 


ITEM 1.                   FINANCIAL STATEMENTS


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Dollar Thrifty Automotive Group, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Dollar Thrifty Automotive Group, Inc. and subsidiaries (the “Company”) as of March 31, 2010, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2010 and 2009.  These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Dollar Thrifty Automotive Group, Inc. and subsidiaries as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated March 4, 2010, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



/s/ DELOITTE & TOUCHE LLP

Tulsa, Oklahoma
May 5, 2010
 
4

 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
           
             
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
     
(In Thousands Except Per Share Data)
           
             
   
Three Months
 
   
Ended March 31,
 
   
(Unaudited)
 
             
   
2010
   
2009
 
REVENUES:
           
  Vehicle rentals
  $ 332,484     $ 345,313  
  Other
    15,846       17,109  
Total revenues
    348,330       362,422  
                 
COSTS AND EXPENSES:
               
  Direct vehicle and operating
    179,858       185,016  
  Vehicle depreciation and lease charges, net
    59,034       119,984  
  Selling, general and administrative
    48,350       46,887  
  Interest expense, net of interest income of $231 and $3,334
    21,408       26,154  
  Long-lived asset impairment
    -       261  
Total costs and expenses
    308,650       378,302  
                 
  Increase in fair value of derivatives
    (7,370 )     (5,045 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    47,050       (10,835 )
                 
INCOME TAX EXPENSE (BENEFIT)
    19,758       (1,895 )
                 
NET INCOME (LOSS)
  $ 27,292     $ (8,940 )
                 
                 
BASIC INCOME (LOSS) PER SHARE
  $ 0.96     $ (0.42 )
                 
DILUTED INCOME (LOSS) PER SHARE
  $ 0.91     $ (0.42 )
                 
See notes to condensed consolidated financial statements.
               
 
5

 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
           
             
CONSOLIDATED BALANCE SHEETS
           
MARCH 31, 2010 AND DECEMBER 31, 2009
 
(In Thousands Except Share and Per Share Data)
           
             
   
March 31,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
             
Cash and cash equivalents
  $ 352,074     $ 400,404  
Cash and cash equivalents-required minimum balance
    100,000       100,000  
Restricted cash and investments
    146,507       622,540  
Receivables, net
    116,191       104,645  
Prepaid expenses and other assets
    71,268       63,377  
Revenue-earning vehicles, net
    1,565,479       1,228,637  
Property and equipment, net
    93,966       96,198  
Income taxes receivable
    -       4,065  
Intangible assets, net
    25,394       26,071  
                 
Total assets
  $ 2,470,879     $ 2,645,937  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES:
               
Accounts payable
  $ 49,061     $ 48,366  
Accrued liabilities
    190,375       204,340  
Income taxes payable
    5,749       -  
Deferred income tax liability
    170,493       162,923  
Vehicle insurance reserves
    109,258       108,584  
Debt and other obligations
    1,522,833       1,727,810  
     Total liabilities
    2,047,769       2,252,023  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $.01 par value:
    -       -  
   Authorized 10,000,000 shares; none outstanding
               
Common stock, $.01 par value:
               
Authorized 50,000,000 shares;
               
   35,055,205 and 34,951,351 issued, respectively, and
               
   28,629,652 and 28,536,445 outstanding, respectively
    350       349  
Additional capital
    934,022       932,693  
Accumulated deficit
    (265,893 )     (293,185 )
  Accumulated other comprehensive loss
    (17,473 )     (18,374 )
  Treasury stock, at cost (6,425,553 and 6,414,906 shares, respectively)
    (227,896 )     (227,569 )
Total stockholders' equity
    423,110       393,914  
                 
   Total liabilities and stockholders' equity
  $ 2,470,879     $ 2,645,937  
                 
See notes to condensed consolidated financial statements.
               
 
6

 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
           
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
           
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 
(In Thousands)
           
             
   
Three Months
 
   
Ended March 31,
 
   
(Unaudited)
 
             
   
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 27,292     $ (8,940 )
Adjustments to reconcile net income (loss) to
               
   net cash provided by operating activities:
               
     Depreciation:
               
       Vehicle depreciation
    84,689       119,662  
       Non-vehicle depreciation
    4,813       5,340  
     Net (gains) losses from disposition of revenue-earning vehicles
    (25,673 )     149  
     Amortization
    1,832       1,998  
     Performance share incentive, stock option and restricted stock plans
    684       1,118  
     Interest income earned on restricted cash and investments
    (137 )     (1,551 )
     Long-lived asset impairment
    -       261  
     Provision for (recovery of) losses on receivables
    (406 )     1,340  
     Deferred income taxes
    7,361       (11,795 )
     Change in fair value of derivatives
    (7,370 )     (5,045 )
     Change in assets and liabilities:
               
       Income taxes payable/receivable
    9,814       4,957  
       Receivables
    4,882       13,399  
       Prepaid expenses and other assets
    (5,513 )     2,161  
       Accounts payable
    2,981       786  
       Accrued liabilities
    (6,856 )     25,924  
       Vehicle insurance reserves
    674       (1,684 )
       Other
    654       (703 )
                 
           Net cash provided by operating activities
    99,721       147,377  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Revenue-earning vehicles:
               
  Purchases
    (610,614 )     (230,386 )
  Proceeds from sales
    198,719       665,427  
Change in cash and cash equivalents - required minimum balance
    -       (100,000 )
Net change in restricted cash and investments
    476,170       23,878  
Property, equipment and software:
               
  Purchases
    (6,337 )     (1,764 )
  Proceeds from sales
    461       -  
Acquisition of businesses, net of cash acquired
    -       (8 )
                 
           Net cash provided by investing activities
    58,399       357,147  
                 
           
(Continued)
 
 
7

 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
           
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
           
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 
(In Thousands)
           
             
   
Three Months
 
   
Ended March 31,
 
   
(Unaudited)
 
             
   
2010
   
2009
 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Debt and other obligations:
           
  Proceeds from vehicle debt and other obligations
    2,513       619  
  Payments of vehicle debt and other obligations
    (204,993 )     (617,370 )
  Payments of non-vehicle debt
    (2,500 )     (20,000 )
Issuance of common shares
    1,320       1  
Excess tax benefit on share-based awards
    (327 )     -  
Financing issue costs
    (2,463 )     (4,409 )
                 
           Net cash used in financing activities
    (206,450 )     (641,159 )
                 
CHANGE IN CASH AND CASH EQUIVALENTS
    (48,330 )     (136,635 )
                 
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    400,404       229,636  
                 
End of period
  $ 352,074     $ 93,001  
                 
                 
See notes to condensed consolidated financial statements, including Note 14 for supplemental cash flow information.
 
 
8

 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
                     
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
                 


1.
BASIS OF PRESENTATION

 
The accompanying condensed consolidated financial statements include the accounts of Dollar Thrifty Automotive Group, Inc. (“DTG”) and its subsidiaries.  DTG’s significant wholly owned subsidiaries include DTG Operations, Inc., Thrifty, Inc., Dollar Rent A Car, Inc., Rental Car Finance Corp. (“RCFC”) and Dollar Thrifty Funding Corp.  Thrifty, Inc. is the parent company of Thrifty Rent-A-Car System, Inc., which is the parent company of Dollar Thrifty Automotive Group Canada Inc. (“DTG Canada”).  The term the “Company” is used to refer to DTG and its subsidiaries, individually or collectively, as the context may require.

 
The accounting policies set forth in Item 8 - Note 1 of notes to the consolidated financial statements contained in DTG’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on March 4, 2010, have been followed in preparing the accompanying condensed consolidated financial statements.

 
The condensed consolidated financial statements and notes thereto for interim periods included herein have not been audited by an independent registered public accounting firm.  The condensed consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the Company’s opinion, it made all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented.  Results for interim periods are not necessarily indicative of results for a full year.

2.
CASH AND INVESTMENTS

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with initial maturities of three months or less.

Cash and Cash Equivalents - Required Minimum Balance – In 2009, the Company amended its senior secured credit facilities (the “Senior Secured Credit Facilities”).  Under the terms of this amendment, the Company is required to maintain a minimum of $100 million at all times with $60 million in separate accounts with the Collateral Agent pledged to secure payment of amounts outstanding under the Term Loan and letters of credit issued under the Revolving Credit Facility (each as hereinafter defined).  Due to the minimum cash requirement covenant, the Company is required to separately identify the $100 million of cash on the face of the Condensed Consolidated Balance Sheet.  These funds are primarily held in highly rated money market funds with investments primarily in government and corporate obligations.

Restricted Cash and Investments – Restricted cash and investments are restricted for the acquisition of vehicles and other specified uses under the rental car asset backed note indenture and other agreements.  A portion of these funds is restricted due to the like-kind exchange tax program for deferred tax gains on eligible vehicle remarketing.  As permitted by the indenture, these funds are primarily held in highly rated money market funds with investments primarily in government and corporate obligations.  Restricted cash and investments are excluded from Cash and Cash Equivalents.
 
9

 
3.
SHARE-BASED PAYMENT PLANS

Long-Term Incentive Plan

At March 31, 2010, the Company’s common stock authorized for issuance under the long-term incentive plan (“LTIP”) for employees and non-employee directors was 3,015,617 shares.  The Company has 460,636 shares available for future LTIP awards at March 31, 2010 after reserving for the maximum potential shares that could be awarded under existing LTIP grants.  The Company issues new shares of remaining authorized common stock to satisfy LTIP awards.

Compensation cost for performance shares, non-qualified option rights and restricted stock awards is recognized based on the fair value of the awards granted at the grant-date and is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods. The Company recognized compensation costs of $0.7 million and $1.1 million during the three months ended March 31, 2010 and 2009, respectively, for such awards.  The total income tax benefit recognized in the statements of operations for share-based compensation payments was $0.3 million and $0.2 million for the three months ended March 31, 2010 and 2009, respectively.

Option Rights Plan – Under the LTIP, the Human Resources and Compensation Committee may grant non-qualified option rights to key employees and non-employee directors.

The Company recognized $0.4 million and $0.9 million in compensation costs (included in the $0.7 million and $1.1 million discussed above, respectively) for the three months ended March 31, 2010 and 2009, respectively.  No awards were granted in 2010.  The Black-Scholes option valuation model was used to estimate the fair value of the options at the date of the grant.  The assumptions used to calculate compensation expense relating to the stock option awards granted during 2009 were as follows: weighted-average expected life of the awards of five years, volatility factor of 80.24%, risk-free rate of 2.36% and no dividend payments.  The weighted average grant-date fair value of these options was $2.97.  The options vest in installments over three years with 20% exercisable in each of 2010 and 2011 and the remaining 60% exercisable in 2012.  Expense is recognized over the service period which is the vesting period.  Unrecognized expense remaining at March 31, 2010 and 2009 for the options is $2.5 million and $1.8 million, respectively.
 
10

 
The following table sets forth the non-qualified option rights activity under the LTIP for the three months ended March 31, 2010:
 
               
Weighted-
       
         
Weighted-
   
Average
   
Aggregate
 
   
Number of
   
Average
   
Remaining
   
Intrinsic
 
   
Shares
   
Exercise
   
Contractual
   
Value
 
   
(In Thousands)
   
Price
   
Term
   
(In Thousands)
 
                         
Outstanding at January 1, 2010
    2,451     $ 6.55       8.11     $ 46,702  
                                 
Granted
    -       -                  
Exercised
    (71 )     18.66                  
Canceled
    -       -                  
                                 
Outstanding at March 31, 2010
    2,380     6.19       8.09     61,725  
                                 
Fully vested options at:
                               
  March 31, 2010
    412     $ 6.66       6.32     $ 10,509  
Outstanding Options at March 31, 2010
                               
  expected to vest
    1,968      6.10         8.76      51,216  
 
 
The total intrinsic value of options exercised during the three months ended March 31, 2010 was $­­­­­­0.6 million.  Total cash received for non-qualified option rights exercised during the three months ended March 31, 2010 totaled $1.3 million.  No options were exercised during the three months ended March 31, 2009.  The Company deems a tax benefit to be realized when the benefit provides incremental benefit by reducing current taxes payable that it otherwise would have had to pay absent the share-based compensation deduction (the “with-and-without” approach).  Under this approach, share-based compensation deductions are, effectively, always considered last to be realized.  The Company realized $0.2 million in tax benefits from the options exercised during the three months ended March 31, 2010.

The following table summarizes information regarding fixed non-qualified option rights that were outstanding at March 31, 2010:
 
     
Options Outstanding
 
Options Exercisable
           
Weighted-Average
 
Weighted-
         
Weighted-
 
Range of
   
Number
   
Remaining
 
Average
   
Number
   
Average
 
Exercise
   
Outstanding
   
Contractual Life
 
Exercise
   
Exercisable
   
Exercise
 
Prices
   
(In Thousands)
   
(In Years)
 
Price
   
(In Thousands)
   
Price
 
                                 
$0.77 - $0.97       843       8.54     $ 0.95       281     $ 0.95  
                                           
$4.44 - $11.45       1,121       9.01       4.54       16       11.45  
                                           
$13.98 - $24.38       416       4.69       21.26       115       19.87  
                                           
$0.77 - $24.38       2,380       8.09     $ 6.19       412     $ 6.66  
 

Performance Shares – Performance shares are granted to Company officers and certain key employees. The Company recognized $0.2 million and $0.1 million in compensation costs (included in the $0.7 million and $1.1 million discussed above, respectively) for the three months ended March 31, 2010 and 2009, respectively.  No performance shares have been granted in 2010 or 2009.  The awards granted in 2008 established a target number of shares that generally vest at the end of a three-year requisite service period following the grant-date.  
 
11

 
In March 2010, the 2007 grant of performance shares earned from January 1, 2007 through December 31, 2009, net of forfeitures, net of approximately 11,000 shares withheld for the payment of taxes owed by the recipient, totaling approximately 22,000 shares vested were settled through the issuance of common stock totaling approximately $1.5 million.  The Company paid taxes on behalf of the recipients and designated the shares withheld as treasury shares.  In March 2009, the 2006 grant of performance shares earned from January 1, 2006 through December 31, 2008, net of forfeitures, totaling approximately 61,000 shares vested and approximately 3,000 shares vested under the 2007 grant of performance shares for certain participants pursuant to separation or retirement arrangement were settled through the issuance of common stock totaling approximately $0.1 million.  The number of performance shares ultimately earned will range from zero to 200% of the target award, depending on the level of corporate performance over each of the three years, which is considered the performance period.

The following table presents the status of the Company’s nonvested performance shares as of March 31, 2010 and any changes during the three months ended March 31, 2010:

         
Weighted-Average
 
   
Shares
   
Grant-Date
 
Nonvested Shares
 
(In Thousands)
   
Fair Value
 
             
                 
Nonvested at January 1, 2010
    188     39.75  
Granted
    -       -  
Vested
    (33 )     56.60  
Forfeited
    (57 )     56.60  
Nonvested at March 31, 2010
    98     $ 24.39  
 
 
At March 31, 2010, the total compensation cost related to nonvested performance share awards not yet recognized is estimated at approximately $0.2 million, depending upon the Company’s performance against targets specified in the performance share agreement.  This estimated compensation cost is expected to be recognized over the weighted average period of 0.75 years.  Values of the performance shares earned will be recognized as compensation expense over the requisite service period.  The total intrinsic value of vested and issued performance shares during the three months ended March 31, 2010 and 2009 was $1.0 million and $0.1 million, respectively. The maximum amount for which performance shares may be granted under the LTIP during any year to any participant is 160,000 common shares.

Restricted Stock Units – Under the LTIP, the Company may grant restricted stock units to key employees and non-employee directors.  The Company recognized $0.1 million in compensation costs (included in the $0.7 million and $1.1 million discussed above), in each of the three months ended March 31, 2010 and 2009.  The grant-date fair value of the award is based on the closing market price of the Company’s common shares at the date of grant.  In January 2010, non-employee directors were granted 17,800 shares with a grant-date fair value of $25.28 per share that fully vest on December 31, 2010. In January 2009, non-employee directors were granted 95,812 shares with a grant-date fair value of $1.23 per share and 56,910 shares that had the right to receive cash payments at the settlement date price.  The grants fully vested on December 31, 2009.  An employee director was also granted 50,000 shares in May 2009 with a grant-date fair value of $4.44 per share, that vest in installments over three years with 20% vesting in each of 2010 and 2011 and the remaining 60% vesting in 2012.  At March 31, 2010, the total compensation cost related to nonvested restricted stock unit awards not yet recognized is approximately $0.5 million, which is expected to be recognized on a straight-line basis over the vesting period of the restricted stock units.
 
12

 
The following table presents the status of the Company’s nonvested restricted stock units as of March 31, 2010 and any changes during the three months ended March 31, 2010:
 
         
Weighted-Average
 
   
Shares
   
Grant-Date
 
Nonvested Shares
 
(In Thousands)
   
Fair Value
 
             
                 
Nonvested at January 1, 2010
    94     4.24  
Granted
    18       25.28  
Vested
    -       -  
Forfeited
    -       -  
Nonvested at March 31, 2010
    112     $ 7.62  
 

4.
VEHICLE DEPRECIATION AND LEASE CHARGES, NET

Vehicle depreciation and lease charges include the following (in thousands):

   
Three Months
 
   
Ended March 31,
 
             
   
2010
   
2009
 
             
Depreciation of revenue-earning vehicles
  $ 84,689     $ 119,662  
Net (gains) losses from disposal of revenue-earning vehicles
    (25,673 )     149  
Rents paid for vehicles leased
    18       173  
                 
    $ 59,034     $ 119,984  


5.
EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is based on the combined weighted average number of common shares and dilutive potential common shares outstanding which include, where appropriate, the assumed exercise of options.  In computing diluted earnings per share, the Company utilizes the treasury stock method.  Because the Company incurred a loss from continuing operations in the first quarter of 2009, outstanding stock options, performance awards and employee and director compensation shares deferred are anti-dilutive.  Accordingly, basic and diluted weighted average shares outstanding are equal for the quarterly period ended March 31, 2009.
 
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The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share (“EPS”) is shown in the following table (in thousands, except share and per share data):

   
Three Months
 
   
Ended March 31,
 
             
   
2010
   
2009
 
             
Net income (loss)
  $ 27,292     $ (8,940 )
                 
Basic EPS:
               
   Weighted-average common shares
    28,522,616       21,483,042  
                 
Basic EPS
  $ 0.96     $ (0.42 )
                 
Diluted EPS:
               
   Weighted-average common shares
    28,522,616       21,483,042  
                 
Shares contingently issuable:
               
  Stock options
    1,150,858       -  
  Performance awards
    86,091       -  
  Employee compensation shares deferred
    49,774       -  
  Director compensation shares deferred
    217,462       -  
                 
Shares applicable to diluted
    30,026,801       21,483,042  
                 
Diluted EPS
  $ 0.91     $ (0.42 )

For the three months ended March 31, 2010, all options to purchase shares of common stock were included in the computation of diluted earnings per share because no exercise price was greater than the average market price of the common shares.

For the three months ended March 31, 2009, outstanding common stock equivalents that were anti-dilutive and therefore excluded from the computation of diluted EPS totaled 828,278.
 
14

 
6.
RECEIVABLES

Receivables consist of the following (in thousands):

   
March 31,
   
December 31,
 
   
2010
   
2009
 
             
Trade accounts receivable and other
  $ 70,400     $ 76,304  
Vehicle manufacturer receivables
    40,313       30,194  
Car sales receivable
    12,557       5,677  
      123,270       112,175  
Less:  Allowance for doubtful accounts
    (7,079 )     (7,530 )
    $ 116,191     $ 104,645  


Trade accounts receivable and other include primarily amounts due from rental customers, franchisees and tour operators arising from billings under standard credit terms for services provided in the normal course of business.

Vehicle manufacturer receivables include primarily amounts due under guaranteed residual, buyback and Non-Program Vehicle (hereinafter defined) incentive programs, which are paid according to contract terms and are generally received within 60 days.  This receivable does not include expected payments on Program Vehicles (hereinafter defined) remaining in inventory as those residual value guarantee obligations are not triggered until the vehicles are sold.

Car sales receivable include primarily amounts due from car sale auctions for the sale of both Program Vehicles and Non-Program Vehicles.  Vehicles purchased by vehicle rental companies under programs where either the rate of depreciation or the residual value is guaranteed by the manufacturer are referred to as “Program Vehicles.”  Vehicles not purchased under these programs and for which rental companies therefore bear residual value risk are referred to as “Non-Program Vehicles” or “risk vehicles.”

Allowance for doubtful accounts represents potentially uncollectible amounts owed to the Company from franchisees, tour operators, corporate account customers and others.
 
15

 
7.
DEBT AND OTHER OBLIGATIONS

Debt and other obligations as of March 31, 2010 and December 31, 2009 consist of the following (in thousands):

   
March 31,
   
December 31,
 
   
2010
   
2009
 
Vehicle debt and other obligations
           
Asset backed medium term notes:
           
  Series 2007-1 notes (matures July 2012)
  $ 500,000     $ 500,000  
  Series 2006-1 notes (matures May 2011)
    600,000       600,000  
  Series 2005-1 notes (matures June 2010)
    200,000       400,000  
      1,300,000       1,500,000  
       Discounts on asset backed medium term notes
    (2 )     (5 )
       Asset backed medium term notes, net of discount
    1,299,998       1,499,995  
                 
Limited partner interest in limited partnership
               
   (Canadian fleet financing)
    67,210       69,690  
                 
   Total vehicle debt and other obligations
    1,367,208       1,569,685  
                 
Non-vehicle debt
               
Term Loan
    155,625       158,125  
   Total non-vehicle debt
    155,625       158,125  
                 
Total debt and other obligations
  $ 1,522,833     $ 1,727,810  

The scheduled amortization of the Series 2005-1 notes began during the first quarter with $200 million of principal payments made during the quarter.  The remaining principal balance of the Series 2005-1 notes will be amortized monthly through June 2010.

In March 2010, the Company made its minimum quarterly principal payment of $2.5 million under the Term Loan. The Company will continue to make minimum quarterly principal payments of $2.5 million through the maturity of the Term Loan in June 2013, when the remaining balance will be paid in full.

The Series 2005-1 notes, Series 2006-1 notes and Series 2007-1 notes are insured by Syncora Guarantee Inc., Ambac Assurance Corporation and Financial Guaranty Insurance Company, respectively.


8.
DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to market risks, such as changes in interest rates.  Consequently, the Company manages the financial exposure as part of its risk management program by striving to reduce the potentially adverse effects that the volatility of the financial markets may have on the Company’s operating results.  The Company has used interest rate swap agreements, for each related asset backed medium term note issuance in 2005 through 2007, to effectively convert variable interest rates on a total of $1.25 billion in asset backed medium term notes to fixed interest rates.  These swaps have termination dates through July 2012.
 
16

 
The fair values of derivatives outstanding at March 31, 2010 and December 31, 2009 are as follows (in thousands):
 
 
Fair Value of Derivative Instruments
                                 
 
Asset Derivatives
 
Liability Derivatives
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
2010
 
2009
 
2010
 
2009
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments
                               
Interest rate contracts
Receivables
  $ -  
Receivables
  $ -  
Accrued Liabilities
  $ 40,915  
Accrued Liabilities
  $ 40,639  
                                         
Total derivatives designated as hedging instruments
                                       
      $ -       $ -       $ 40,915       $ 40,639  
                                         
Derivatives not designated as hedging instruments
                                       
                                         
Interest rate contracts
Receivables
  $ -  
Receivables
  $ 16  
Accrued Liabilities
  $ 27,346  
Accrued Liabilities
  $ 34,732  
                                         
Total derivatives not designated as hedging instruments
                                       
      $ -       $ 16       $ 27,346       $ 34,732  
                                         
Total derivatives
    $ -       $ 16       $ 68,261       $ 75,371  
 

The interest rate swap agreements related to the Series 2005-1 notes and Series 2006-1 notes do not qualify for hedge accounting treatment. The (gain) loss recognized in income on derivatives not designated as hedging instruments for the three months ended March 31, 2010 and 2009 is as follows (in thousands):
 
 
   
Amount of (Gain) or Loss Recognized in Income on Derivative
 
Location of (Gain) or Loss Recognized in Income on Derivative
   
Three Months Ended
   
   
March 31,
   
Derivatives Not Designated as Hedging Instruments
 
2010
   
2009
   
             
Net increase in fair
Interest rate contracts
  $ (7,370 )   $ (5,045 )
value of derivatives
                   
Total
  $ (7,370 )   $ (5,045 )  

 
17

 
The interest rate swap agreement entered into in May 2007 related to the Series 2007-1 notes (“2007 Swap”) constitutes a cash flow hedge and satisfies the criteria for hedge accounting under the “long-haul” method.  The amount of gain (loss) recognized on derivatives in other comprehensive income (loss) (“OCI”) and the amount of the gain (loss) reclassified from Accumulated OCI (“AOCI”) into income (loss) for the three months ended March 31, 2010 and 2009 are as follows (in thousands):

   
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
   
Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Location of (Gain) or Loss Reclassified from AOCI in Income (Effective Portion)
               
   
Three Months Ended
March 31,
   
Three Months Ended
March 31,
   
Derivatives in Cash Flow Hedging Relationships
 
2010
   
2009
   
2010
   
2009
   
                           
Interest rate contracts
  $ 297     $ 963     $ (3,392 )   $ (3,324 )
Interest expense, net of interest income
                                   
Total
  $ 297     $ 963     $ (3,392 )   $ (3,324 )  

Note: Amount of Gain or (Loss) Reclassified from AOCI into income, which was disclosed without the tax effect in the condensed
          consolidated financial statements for the period ended March 31, 2009, has been modified to conform to the presentation
          for the period ended March 31, 2010 on a net of tax basis.

 
At March 31, 2010, the Company’s interest rate contracts related to the 2007 Swap were effectively hedged, and no ineffectiveness was recorded in income.  Based on projected market interest rates, the Company estimates that approximately $13.6 million of net deferred loss related to the 2007 Swap will be reclassified into earnings within the next 12 months.

9.
FAIR VALUE MEASUREMENTS

Financial instruments are presented at fair value in the Company’s balance sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. These categories include (in descending order of priority): Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
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The following tables show assets and liabilities measured at fair value as of March 31, 2010 and December 31, 2009 on the Company’s balance sheet, and the input categories associated with those assets and liabilities:
 

         
Fair Value Measurements at Reporting Date Using
 
   
Total Fair
   
Quoted Prices in
   
Significant Other
   
Significant
 
(in thousands)
 
Value Assets
   
Active Markets for
   
Observable
   
Unobservable
 
   
(Liabilities)
   
Identical Assets
   
Inputs
   
Inputs
 
Description
 
at 3/31/10
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Derivative Liabilities
  (68,261 )   -     (68,261 )   -  
Marketable Securities  (available for sale)
    438       438       -       -  
Deferred Compensation Plan Assets (a)
    2,661       -       2,661       -  
                                 
Total
  $ (65,162 )   $ 438     $ (65,600 )   $ -  
                                 
   
(a)
The Company also has an offsetting liability related to the Deferred Compensation Plan, which is not disclosed in the table as it is not independently measured at fair value. The liability was not reported at fair value as of the transition, but rather set to equal fair value of the assets held in the related rabbi trust.

 
         
Fair Value Measurements at Reporting Date Using
 
   
Total Fair
   
Quoted Prices in
   
Significant Other
   
Significant
 
(in thousands)
 
Value Assets
   
Active Markets for
   
Observable
   
Unobservable
 
   
(Liabilities)
   
Identical Assets
   
Inputs
   
Inputs
 
Description
 
at 12/31/09
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Derivative Assets
  $ 16     $ -     $ 16     $ -  
Derivative Liabilities
    (75,371 )     -       (75,371 )     -  
Marketable Securities  (available for sale)
    424       424       -       -  
Deferred Compensation Plan Assets (a)
    1,546       -       1,546       -  
                                 
Total
  $ (73,385 )   $ 424     $ (73,809 )   $ -  
                                 
(a)
The Company also has an offsetting liability related to the Deferred Compensation Plan, which is not disclosed in the table as it is not independently measured at fair value. The liability was not reported at fair value as of the transition, but rather set to equal fair value of the assets held in the related rabbi trust.
 
 
The fair value of derivative assets and liabilities, consisting primarily of interest rate swaps as discussed above, is calculated using proprietary models utilizing observable inputs as well as future assumptions related to interest rates and other applicable variables.  These calculations are performed by the financial institutions that are counterparties to the applicable swap agreements and reported to the Company on a monthly basis.   The Company uses these reported fair values to adjust the asset or liability as appropriate.  The Company evaluates the reasonableness of the calculations by comparing similar calculations from other counterparties for the applicable period.  There were no transfers into or out of Level 1 or Level 2 measurements for the three months ended March 31, 2010 or the twelve months ended December 31, 2009. The Company had no Level 3 investments at any time during the three months ended March 31, 2010 or the twelve months ended December 31, 2009.
 
19

 
Cash and Cash Equivalents, Cash and Cash Equivalents – Required Minimum Balance, Restricted Cash and Investments, Receivables, Accounts Payable, Accrued Liabilities and Vehicle Insurance Reserves – The carrying amounts of these items are a reasonable estimate of their fair value. The Company maintains its cash and cash equivalents in accounts that may not be federally insured.  The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk.

Letters of Credit and Surety Bonds – The letters of credit and surety bonds of $136.2 million and $41.1 million, respectively, have no fair value as they support the Company's corporate operations and are not anticipated to be drawn upon.

Foreign Currency Translation Risk  A portion of the Company’s debt is denominated in Canadian dollars, thus its carrying value is impacted by exchange rate fluctuations.  However, this foreign currency risk is mitigated by the underlying collateral, which is the Company’s Canadian fleet.

Debt and Other Obligations – The fair values of the asset backed medium term notes were developed using a valuation model that utilizes current market and industry conditions, assumptions related to the Monolines providing financial guaranty policies on those notes and the limited market liquidity for such notes.  Additionally, the fair value of the Term Loan was similarly developed using a valuation model and current market conditions.  The following tables provide information about the Company’s market sensitive financial instruments valued at March 31, 2010 and December 31, 2009:

 
Debt and other obligations
 
Carrying
   
Fair Value
 
at March 31, 2010
 
Value
   
at 3/31/10
 
(in thousands)
           
             
Debt:
           
             
Vehicle debt and obligations-floating rates (1)
  $ 1,245,000     $ 1,193,662  
                 
Vehicle debt and obligations-fixed rates
  $ 55,000     $ 54,998  
                 
Vehicle debt and obligations-Canadian dollar denominated
  $ 67,210     $ 67,210  
                 
Non-vehicle debt - Term Loan
  $ 155,625     $ 147,844  
 
(1) Includes $145 million relating to the Series 2005-1 notes, the $600 million Series 2006-1 notes and the $500 million Series 2007-1 notes swapped from floating interest rates to fixed interest rates.
 

Debt and other obligations
 
Carrying
   
Fair Value
 
at December 31, 2009
 
Value
   
at 12/31/09
 
(in thousands)
           
             
Debt:
           
             
Vehicle debt and obligations-floating rates (1)
  $ 1,390,000     $ 1,307,100  
                 
Vehicle debt and obligations-fixed rates
  $ 110,000     $ 110,408  
                 
Vehicle debt and obligations-Canadian dollar denominated
  $ 69,690     $ 69,690  
                 
Non-vehicle debt - Term Loan
  $ 158,125     $ 143,894  
 
(1) Includes $290 million relating to the Series 2005-1 notes, the $600 million Series 2006-1 notes and the $500 million Series 2007-1 notes swapped from floating interest rates to fixed interest rates.

 
20

 
10.
COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of the following (in thousands):
   
Three Months
 
   
Ended March 31,
 
             
   
2010
   
2009
 
             
Net income (loss)
  $ 27,292     $ (8,940 )
                 
Interest rate swap adjustment on 2007 swap
    297       963  
Foreign currency translation adjustment
    604       (614 )
                 
Comprehensive income (loss)
  $ 28,193     $ (8,591 )

 
11.
INCOME TAXES

The Company has provided for income taxes in the U.S. and in Canada based on taxable income or loss and other tax attributes separately for each jurisdiction.  The Company has established tax provisions separately for U.S. taxable income and Canadian losses, for which no income tax benefit was recorded.  Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities.  A valuation allowance is recorded for deferred income tax assets when management determines it is more likely than not that such assets will not be realized.

For the three months ended March 31, 2010, the overall effective tax rate of 42.0% differed from the U.S. statutory rate due primarily to the state and local taxes and losses relating to DTG Canada for which no benefit was recorded due to full valuation allowance.  For the three months ended March 31, 2009, the overall effective tax rate of 17.5% differed from the U.S. statutory rate due primarily to the state and local taxes and losses relating to DTG Canada for which no benefit was recorded due to full valuation allowance.

As of March 31, 2010, the Company had no material liability for unrecognized tax benefits and no material adjustments to the Company’s opening financial position were required under Accounting Standards Codification (“ASC”) Topic 740.  There are no material tax positions for which it is reasonably possible that unrecognized tax benefits will significantly change in the 12 months subsequent to March 31, 2010.

The Company files income tax returns in the U.S. federal and various state, local and foreign jurisdictions.  In the Company’s significant tax jurisdictions, the tax years 2006 and later are subject to examination by U.S. federal taxing authorities and the tax years 2005 and later are subject to examination by state and foreign taxing authorities.

The Company accrues interest and penalties on underpayment of income taxes related to unrecognized tax benefits as a component of income tax expense in the condensed consolidated statement of operations.  No amounts were recognized for interest and penalties under ASC Topic 740 during the three months ended March 31, 2010 and 2009.

12.
COMMITMENTS AND CONTINGENCIES

On April 28, 2010, a purported class action complaint relating to the proposed transaction with Hertz was filed in Oklahoma state court against the Company, its directors, certain of its officers and Hertz by Marc S. Henzel, individually and on behalf of all of the Company’s stockholders, excluding the defendants and their affiliates.  
 
21

 
The complaint alleges that the consideration that the Company’s stockholders will receive in connection with the proposed transaction is inadequate and that the Company’s directors breached their fiduciary duties to stockholders in negotiating and approving the Merger Agreement (hereinafter defined).  The complaint further alleges that the Company and Hertz aided and abetted the alleged breaches by the Company’s directors.  The complaint seeks various forms of relief, including injunctive relief that would, if granted, prevent the proposed transaction from being consummated in accordance with the agreed-upon terms.  The case is styled Henzel v. Dollar Thrifty Automotive Group, Inc., et al. (No. CJ-2010-02761, Dist. Ct. Tulsa County).  Two other purported class actions have been filed asserting substantially identical claims and seeking similar relief against the Company, its directors, certain of its officers and Hertz.  The first of these is styled Rosendale v. Dollar Thrifty Automotive Group, Inc., et al. (No. CJ-2010-02893, Dist. Ct. Tulsa County) and was filed on May 4, 2010 in Oklahoma state court by Michael Rosendale individually and on behalf of all of the Company's stockholders, excluding the defendants and their affiliates.  The second is styled Sinclair v. Dollar Thrifty Automotive Group, Inc., et al. (No. 5456, Del. Ch. Ct.) and was filed on May 5, 2010 in Delaware state court by Cynthia Sinclair, individually and on behalf of all of the Company's stockholders, excluding the defendants and their affiliates.  The Company believes that these complaints are without merit and intends to defend them vigorously.

Various other legal actions, claims and governmental inquiries and proceedings have been in the past, or may be in the future, asserted or instituted against the Company, including other purported class actions or proceedings relating to the Hertz transaction, and some that may demand large monetary damages or other relief which could result in significant expenditures.  Litigation is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance.  The Company is also subject to potential liability related to environmental matters.  The Company establishes reserves for litigation and environmental matters when the loss is probable and reasonably estimable.  It is reasonably possible that the final resolution of some of these matters may require the Company to make expenditures, in excess of established reserves, over an extended period of time and in a range of amounts that cannot be reasonably estimated.  The term “reasonably possible” is used herein to mean that the chance of a future transaction or event occurring is more than remote but less than likely.  Although the final resolution of any such matters could have a material effect on the Company’s consolidated operating results for the particular reporting period in which an adjustment of the estimated liability is recorded, the Company believes that any resulting liability should not materially affect its consolidated financial position.

13.
NEW ACCOUNTING STANDARDS

In May 2009, the FASB issued guidance related to subsequent events, which is included in ASC topic 855, “Subsequent Events” ("ASC Topic 855”) and is effective for interim periods ending after June 15, 2009.  In February 2010, the FASB amended ASC Topic 855 for clarification of disclosure requirements for subsequent events.  The provisions require Company management to evaluate events or transactions occurring subsequent to the balance sheet date but prior to the issuance of the financial statements for potential recognition or disclosure in the financial statements and to disclose the results of management’s findings in the financial statements.  In addition, the provisions identify the circumstances under which an entity must recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures of such events.  The Company adopted the provisions as required beginning with the period ended June 30, 2009.  See Note 15 for required disclosure.

In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations (ASC Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”), which is effective for annual periods beginning after November 15, 2009.  ASU 2009-17 requires Company management to consider a variable entity’s purpose and design and the Company’s ability to direct the activities of the variable interest entity that most significantly impact such entity’s economic performance when determining whether such entity should be consolidated.  The Company adopted the provisions of ASU 2009-17 as required on January 1, 2010. The provisions had no impact on the Company’s consolidated financial position or results of operations upon adoption.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements” which amends ASC Subtopic 820, “Fair Value Measurements and Disclosures” (“ASU 2010-06”) to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements.  ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The Company adopted the provisions of ASU 2010-06 as required on January 1, 2010.  See Note 9 for required disclosure.
 
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14.
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
   
Three Months
 
   
Ended March 31,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Cash paid for:
           
  Income taxes to taxing authorities
  $ 2,572     $ 4,930  
  Interest
  $ 19,767     $ 25,573  
                 
                 
SUPPLEMENTAL DISCLOSURES OF INVESTING AND FINANCING
               
  NONCASH ACTIVITIES:
               
Sales and incentives related to revenue-earning vehicles
               
  included in receivables
  $ 49,741     $ 64,631  
Purchases of property, equipment and software included
               
  in accounts payable
  $ 628     $ 755  
 

Restatement of Cash Flow Statement Presentation Related to Purchases and Sales of Revenue-Earning Vehicles

In connection with the Company’s preparation of its Annual Report on Form 10-K for the year ended December 31, 2009, management concluded that the appropriate presentation of sales of revenue-earning vehicles and incentives related to vehicle purchases for which cash has not been received is to exclude them from both the operating and investing sections of the cash flow statement, with supplemental disclosure of such amounts reported in the footnotes.  These amounts were properly reported in the consolidated statement of cash flows for the year ended December 31, 2009, and the 2009 quarterly amounts that are required to be restated in 2010 quarterly periods were disclosed in Item 8-Note 18 of notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The Company has restated its condensed consolidated statement of cash flows for the three months ended March 31, 2009 to exclude the impact of sales of revenue-earning vehicles for which proceeds had not yet been received, as well as changes in certain vehicle-related incentives due from manufacturers, both of which were included in cash flow from operating activities as a change in receivables at the end of that period.  These amounts were directly offset by corresponding amounts reported in proceeds from sales of revenue-earning vehicles and purchases of revenue-earning vehicles in the investing section of the statement of cash flows.  The impact of the restatement on amounts reported in the operating and investing sections of the cash flow statements are equal in amount and fully offset.  There is no impact on the Company’s previously reported results of operations or financial position for the quarterly period ended March 31, 2009 and this restatement does not affect the Company’s previously reported disclosures relating to liquidity or its compliance with debt covenants for this period.
 
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A summary of the cash flow amounts affected by the restatement are as follows:
 
   
Three Months
 
   
Ended March 31, 2009
 
   
As Previously
         
As
 
   
Reported
   
Adjustment
   
Restated
 
      (In Thousands)  
                   
Net cash provided by operating activities
  $ 241,698     $ (94,321 )   $ 147,377  
                         
Net cash provided by investing activities
    262,826       94,321       357,147  
                         
CHANGE IN CASH AND CASH EQUIVALENTS
    (136,635 )     -       (136,635 )


15.
SUBSEQUENT EVENTS

In preparing the accompanying condensed consolidated financial statements, the Company has reviewed events that have occurred after March 31, 2010 through the issuance of the financial statements. The Company noted no reportable subsequent events other than the subsequent events noted below.
 
On April 8, 2010, RCFC issued $200 million of rental car asset backed variable funding notes (the “Series 2010-1 notes”) which may be repaid and redrawn in whole or in part at any time during the Series 2010-1 notes’ two-year revolving period.  RCFC’s initial borrowing under the Series 2010-1 notes on April 9, 2010 was $200 million.  At the end of the revolving period, the then-outstanding principal amount of the Series 2010-1 notes will be repaid monthly over a six-month period, beginning in April 2012, with the final payment in September 2012.  The Series 2010-1 notes bear interest at a spread of 275 basis points above the weighted-average commercial paper rate offered by the commercial paper conduit purchaser or purchasers from time to time funding advances under the Series 2010-1 notes, or at 475 basis points over the affiliated bank’s base rate or a Eurodollar rate in the event that the conduit purchaser is not at such time funding amounts outstanding under the Series 2010-1 notes.  There were no upfront fees associated with the issuance and sale of the Series 2010-1 notes.

On April 8, 2010, RCFC entered into an interest rate cap agreement for a term of 30 months with a notional amount of $200 million to limit the Series 2010-1 notes’ floating rate to a maximum of 5%.
 
On April 25, 2010, the Company, Hertz and HDTMS, Inc., a wholly owned subsidiary of Hertz (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Hertz to acquire the Company for a purchase price of $41.00 per share.  Under the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Hertz.

Under the Merger Agreement, the Company’s stockholders will receive cash and shares of Hertz common stock.  The Company has agreed in the Merger Agreement to declare and pay a $200 million special cash dividend, expected to be approximately $6.88 per share of its common stock (the “Special Dividend Per Share Amount”), to its stockholders of record immediately prior to the effective time of the merger.  At the effective time and as a result of the merger, each outstanding share of the Company’s common stock will be converted into the right to receive the merger consideration (the “Merger Consideration”), consisting of (x) 0.6366 of a share of Hertz common stock and (y) a cash payment by Hertz equal to $32.80 less the Special Dividend Per Share Amount.
 
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At the effective time of the merger, each outstanding option to purchase shares of the Company’s common stock under its employee stock plans will be converted into an option to purchase shares of Hertz common stock, on the same terms and conditions as applicable to the options to purchase the Company’s common stock, except that the number of shares of Hertz common stock and the exercise price per share will be adjusted based on the Merger Consideration and the Special Dividend Per Share Amount.  All outstanding awards of restricted stock units or performance awards will vest and be converted into a right to receive a lump sum cash payment equal to the product of (x) the number of shares of the Company’s common stock subject to such award (in the case of a performance awards, at the target level) and (y) the sum of (i) $32.80, representing the sum of (A) the Special Dividend Per Share Amount and (B) the amount per share of the Company’s common stock payable by Hertz as the cash portion of the Merger Consideration, and (ii) the value of the stock portion of the Merger Consideration, valued at the price per share of Hertz common stock on the closing date of the merger (or if not a trading day, the last trading day prior to the merger).

The transaction is subject to customary closing conditions, including, among others, adoption of the Merger Agreement by the Company’s stockholders, regulatory approvals, absence of any law or order prohibiting the transaction, effectiveness of the registration statement for the shares of Hertz common stock to be issued in the merger and the listing of such shares on the New York Stock Exchange, accuracy of certain representations and warranties and material compliance with covenants, absence of any Material Adverse Effect (as defined) with respect to the Company or Hertz and payment by the Company of the $200 million special dividend.  The transaction is not conditioned on receipt of financing by Hertz.

The Merger Agreement contains certain termination rights for both the Company and Hertz and further provides that, upon termination of the Merger Agreement, under specified circumstances, either the Company or Hertz may be required to pay the other party a termination fee of $44,600,000, plus reimbursement of up to $5,000,000 of such party’s reasonable out-of-pocket transaction expenses.

Pending litigations relating to the merger are described in Note 12 to the condensed consolidated financial statements and under Part II, Item 1 – Legal Proceedings. Further information regarding this proposed transaction can be found in the Company’s current report on Form 8-K filed with the SEC on April 29, 2010.  See also Part II, Item 1A – Risk Factors.

On May 3, 2010, the Company completed a new CAD $150 million (US $148.5 million) Canadian fleet securitization program. This program has a term of one year and requires an upfront fee of 0.50% of the program amount, a program fee of 225 basis points above the weighted-average commercial paper rate offered by the purchaser or purchasers, and a utilization fee of 100 basis points on the unused program amount.


*******


 
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ITEM 2.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations

The following table sets forth certain selected operating data of the Company:

   
Three Months
       
   
Ended March 31,
       
               
Percentage
 
U.S. and Canada
 
2010
   
2009
   
Change
 
                   
Vehicle Rental Data:
                 
                   
Average number of vehicles operated
    94,641       99,875       (5.2% )
Number of rental days
    6,837,738       7,382,178       (7.4% )
Vehicle utilization
    80.3%       82.1%    
(1.8) p.p.
 
Average revenue per day
  $ 48.62     $ 46.78       3.9%  
Monthly average revenue per vehicle
  $ 1,171     $ 1,152       1.6%  
Average depreciable fleet
    95,646       101,933       (6.2% )
Monthly avg. depreciation (net) per vehicle
  $ 206     $ 392       (47.4% )
 

Use of Non-GAAP Measures For Measuring Results

Non-GAAP pretax income (loss), non-GAAP net income (loss) and non-GAAP EPS exclude the impact of the (increase) decrease in fair value of derivatives and the impact of long-lived asset impairments, net of related tax impact (as applicable), from the reported GAAP measure.  Due to volatility resulting from the mark-to-market treatment of the derivatives and the nature of the non-cash impairments, which are both non-operating items, the Company believes these non-GAAP measures provide an important assessment of year-over-year operating results.
 
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See the following table for a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measure.

Reconciliation of reported GAAP pretax income (loss) per the
           
income statement to non-GAAP pretax income (loss):
           
     
Three Months
 
     
Ended March 31,
 
     
2010
   
2009
 
     
(in thousands)
 
               
Income (loss) before income taxes - as reported
  $ 47,050     $ (10,835 )
                   
(Increase) decrease in fair value of derivatives
    (7,370 )     (5,045 )
                   
Long-lived asset impairment
    -       261  
                   
Pretax income (loss) - non-GAAP
  $ 39,680     $ (15,619 )
                   
                   
Reconciliation of reported GAAP net income (loss) per the
               
income statement to non-GAAP net income (loss):
               
                   
Net income (loss) - as reported
  $ 27,292     $ (8,940 )
                   
(Increase) decrease in fair value of derivatives, net of tax (a)
    (4,322 )     (2,967 )
                   
Long-lived asset impairment, net of tax (b)
    -       114  
                   
Net income (loss) - non-GAAP
  $ 22,970     $ (11,793 )
                   
                   
Reconciliation of reported GAAP diluted earnings (loss)
               
per share ("EPS") to non-GAAP diluted EPS:
               
                   
EPS, diluted - as reported
  $ 0.91     $ (0.42 )
                   
EPS impact of (increase) decrease in fair value of derivatives, net of tax
    (0.14 )     (0.14 )
                   
EPS impact of long-lived asset impairment, net of tax
    -       0.01  
                   
EPS, diluted - non-GAAP (c)
  $ 0.76     $ (0.55 )
                   
                   
(a)
The tax effect of the (increase) decrease in fair value of derivatives is calculated using the entity-specific, U.S. federal and blended state tax rate applicable to the derivative instruments which amounts are ($3,048,000) and ($2,078,000) for the three months ended March 31, 2010 and 2009, respectively.
 
 
 
 
(b)
The tax effect of the long-lived asset impairment is calculated using the tax-deductible portion of the impairment and applying the entity-specific, U.S. federal and blended state tax rate which amount is $147,000 for the three months ended March 31, 2009.
 
 
 
 
(c)
 
Since each category of earnings per share is computed independently for each period, total per share amounts may not equal the sum of the respective categories.
 
 

Corporate Adjusted EBITDA means earnings, excluding the impact of the (increase) decrease in fair value of derivatives, before non-vehicle interest expense, income taxes, non-vehicle depreciation, amortization, and certain other items as recapped below. The Company believes Corporate Adjusted EBITDA is important as it provides investors with a supplemental measure of the Company's liquidity by adjusting earnings to exclude non-cash items.  
 
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The items excluded from Corporate Adjusted EBITDA but included in the calculation of the Company’s reported net income are significant components of the accompanying condensed consolidated statements of operations, and must be considered in performing a comprehensive assessment of overall financial performance.  Corporate Adjusted EBITDA is not defined under GAAP and should not be considered as an alternative measure of the Company's net income, operating performance, cash flow or liquidity.  Corporate Adjusted EBITDA amounts presented may not be comparable to similar measures disclosed by other companies.  See table below for a reconciliation of Corporate Adjusted EBITDA to the most directly comparable GAAP financial measures.
 
   
Three Months
 
   
Ended March 31,
 
   
2010
   
2009
 
   
(in thousands)
 
Reconciliation of net income (loss) to
           
Corporate Adjusted EBITDA
           
             
Net income (loss) - as reported
  $ 27,292     $ (8,940 )
                 
(Increase) decrease in fair value of derivatives
    (7,370 )     (5,045 )
Non-vehicle interest expense
    2,427       4,754  
Income tax expense (benefit)
    19,758       (1,895 )
Non-vehicle depreciation
    4,813       5,340  
Amortization
    1,832       1,998  
Non-cash stock incentives
    684       1,118  
Long-lived asset impairment
    -       261  
Other
    (12 )     -  
                 
Corporate Adjusted EBITDA
  $ 49,424     $ (2,409 )
                 
                 
Reconciliation of Corporate Adjusted EBITDA
               
to Cash Flows From Operating Activities
               
                 
Corporate Adjusted EBITDA
  $ 49,424     $ (2,409 )
                 
Vehicle depreciation, net of gains/losses from disposal
    59,016       119,811  
Non-vehicle interest expense
    (2,427 )     (4,754 )
Change in assets and liabilities, net of acquisitions, and other
    (6,292 )     34,729  
     Net cash provided by operating activities
  $ 99,721     $ 147,377  
                 
Memo:
               
Net cash provided by investing activites
  $ 58,399     $ 357,147  
Net cash used in financing activities
  $ (206,450 )   $ (641,159 )
 

Three Months Ended March 31, 2010 Compared with Three Months Ended March 31, 2009

Operating Results

During the first quarter of 2010, the Company’s revenues declined primarily due to a 7.4% reduction in the number of rental days, of which approximately 3.9% resulted from company-owned stores closed in 2009, with the remainder due to ongoing weakness in overall travel demand.  Transaction declines were partially offset by a 3.9% increase in average revenue per day.  In addition to a decline in rental volume and fleet size, which lowered vehicle depreciation and direct vehicle and operating expenses during the first quarter of 2010, the Company continued to benefit from a strong used car market and continued focus on cost efficiency.  The Company had income before income taxes of $47.1 million for the first quarter of 2010, compared to a loss before income taxes of $10.8 million in the first quarter of 2009. Additionally, the Company experienced increases in the fair value of derivatives in the first quarters of 2010 and 2009.
 
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Revenues

   
Three Months
             
    Ended March 31,    
$ Increase/
   
% Increase/
 
   
2010
   
2009
   
(decrease)
   
(decrease)
 
   
(in millions)
 
                         
Vehicle rentals
  $ 332.5     $ 345.3     $ (12.8 )     (3.7% )
Other
    15.8       17.1       (1.3 )     (7.4% )
  Total revenues
  $ 348.3     $ 362.4     $ (14.1 )     (3.9% )
                                 
Vehicle rental metrics:
                               
Number of rental days
    6,837,738       7,382,178