Dollar Rent A Car 2011 Annual Report Download - page 60

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 (Note 8). A portion of these funds is restricted due to the Like-Kind Exchange Program
(hereinafter defined) 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. Interest earned on restricted cash and investments was $0.4 million, $0.7 million and $3.2 million, for 2011, 2010 and 2009,
respectively, and remains in restricted cash and investments.
Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of
cash and cash equivalents, cash and cash equivalents – required minimum balance, restricted cash and investments, interest rate swaps and caps,
vehicle manufacturer receivables and trade receivables. The Company limits its exposure on cash and cash equivalents, cash and cash equivalents –
required minimum balance and restricted cash and investments by investing in Aaa or P-1 rated funds and short-term time deposits with a diverse
group of high quality financial institutions. The Company’s exposure relating to interest rate swaps and caps is mitigated by diversifying the financial
instruments among various counterparties, which consist of major financial institutions. Receivables from vehicle manufacturers consist primarily of
amounts due under guaranteed residual, buyback, incentive and promotion programs. The Company’s financial condition and results of operations
could be adversely affected if one or more of its primary vehicle manufacturers were unable to meet their obligations to the Company. Concentrations of
credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their
dispersion across different geographic areas. Additionally, the Company limits its exposure to credit risk through performing credit reviews and
monitoring the financial strength of its significant accounts.
Allowance for Doubtful Accounts – An allowance for doubtful accounts is generally established during the period in which receivables are recorded.
The allowance is maintained at a level deemed appropriate based on loss experience and other factors affecting collectability.
Financing Issue Costs – Financing issue costs related to vehicle debt and the Senior Secured Credit Facilities are deferred and amortized to interest
expense over the term of the related debt using the effective interest method.
Revenue-Earning Vehicles and Related Vehicle Depreciation Expense – Revenue-earning vehicles are stated at cost, net of related discounts. At
December 31, 2011, Non-Program Vehicles accounted for approximately 96% of the Company’s total fleet.
The Company must estimate the expected residual values of Non-Program Vehicles at the expected time of disposal to determine monthly depreciation
rates. The estimation of residual values requires the Company to make assumptions regarding the age and mileage of the car at the time of disposal, as
well as the general used vehicle market conditions at the time of sale, including the impact of seasonality on vehicle residuals. The Company evaluates
estimated residual values at least quarterly, and adjusts depreciation rates accordingly, on a prospective basis. Differences between actual residual
values and those estimated by the Company result in a gain or loss on disposal and are recorded as an adjustment to depreciation expense. Actual
timing of disposal either shorter or longer than the life used for depreciation purposes could result in a loss or gain on sale. Vehicle rental companies
bear residual value risk for these vehicles, which are referred to as “Non-Program Vehicles”. Generally, the average holding term for Non-Program
Vehicles is approximately 18 to 22 months.
The Company is required to depreciate the vehicle according to the terms of the guaranteed depreciation or repurchase program (“Program Vehicles”)
and in doing so is guaranteed to receive the full net book value in proceeds upon the sale of the vehicle.
- 59 -