Dollar Rent A Car 2011 Annual Report Download - page 47

Covenant Compliance
The Company was in compliance with all covenants under its financing arrangements as of December 31, 2011.
Debt Servicing Requirements
The Company will continue to have substantial debt and debt service requirements under its financing arrangements. As of December 31, 2011, the
Company’s consolidated funded debt and other obligations totaled approximately $1.4 billion, all of which was secured debt for the purchase of vehicles. All
of the Company’s vehicle debt is issued by special purpose finance entities as described herein, all of which are fully consolidated into the Company’s
financial statements. The Company has scheduled annual principal payments for vehicle debt of $500 million in 2012, $400 million in 2014 and $500
million in 2015.
The Company intends to use existing cash resources and cash generated from operations to fund non-vehicle capital expenditures, subject to restrictions under
its debt instruments, and existing cash resources, cash generated from operations and proceeds from the sale of vehicles for debt service and vehicle
purchases. The Company has historically repaid its debt and funded its capital investments (aside from growth in its rental fleet) with cash provided from
operations and from the sale of vehicles. The Company has funded growth in its rental fleet by incurring additional secured vehicle debt and with cash
generated from operations.
The Company has significant requirements for bonds and letters of credit to support its insurance programs, airport concession and other obligations. At
December 31, 2011, various insurance companies had issued $47.4 million in surety bonds and various banks had issued $58.8 million in letters of credit
(primarily under the Senior Secured Credit Facilities) to secure these obligations. At December 31, 2011, these surety bonds and letters of credit had not been
drawn upon.
Interest Rate Risk
The Company’s results of operations depend significantly on prevailing interest rates because of the large amount of debt it incurs to purchase vehicles. In
addition, the Company is exposed to increases in interest rates because a portion of its debt bears interest at floating rates. The Company estimates that, in
2012, approximately 40% of its average debt will bear interest at floating rates. See Item 8 - Note 8 of Notes to Consolidated Financial Statements.
Like-Kind Exchange and Tax Programs
The Company utilizes a like-kind exchange program for its vehicles whereby tax basis gains on disposal of eligible revenue-earning vehicles are deferred (the
“Like-Kind Exchange Program”). To qualify for Like-Kind Exchange Program treatment, the Company exchanges (through a qualified intermediary) vehicles
being disposed of with vehicles being purchased allowing the Company to carry-over the tax basis of vehicles sold to replacement vehicles, with certain
adjustments. The Company’s ability to defer the gains on the disposition of its vehicles under its Like-Kind Exchange Program is affected by, among other
things, changes in the Company’s investment in rental fleet. Projection of the results under the Like-Kind Exchange Program is complex, requires numerous
assumptions and is not subject to precise estimation. Actual results depend upon future sale and purchase transactions extending up to 180 days after year-
end and actual results may differ from current projections. The Company’s ability to continue to defer the reversal of prior period tax deferrals will depend on
a number of factors, including the size of the Company’s fleet, as well as the availability of accelerated depreciation methods in future years. Accordingly, the
Company may make material cash federal income tax payments in future periods.
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