Hertz 2008 Annual Report Download - page 137

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
November 21, 2006) and 800,000 shares at $20.00 per share ($14.56 after adjustment for special cash
dividends paid on June 30, 2006 and November 21, 2006). These options are subject to and governed
by the Stock Incentive Plan.
On June 12, 2006, Mr. Koch purchased 50,000 shares of the common stock of Hertz Holdings at a
purchase price of $10.00 per share and received options to purchase an additional 100,000 shares at a
purchase price of $10.00 per share ($5.68 after adjustment for the special cash dividend paid on
June 30, 2006). On August 15, 2006, the options issued to Mr. Koch in June 2006 were cancelled and he
was issued options to purchase 112,000 shares of common stock of Hertz Holdings at an exercise price
of $7.68 per share ($6.56 after adjustment for the special cash dividend paid on November 21, 2006).
Hertz Holdings made a payment to Mr. Koch in connection with his share purchase equal to $80,000.
On August 15, 2006, certain newly-hired employees purchased an aggregate of 20,000 shares at a
purchase price of $7.68 per share and were granted options to purchase 220,000 shares of Hertz
Holdings stock at an exercise price of $7.68 per share ($6.56 after adjustment for the special cash
dividend paid on November 21, 2006). Also on August 15, 2006, in accordance with the terms of his
employment agreement, Mr. Frissora purchased 1,056,338 shares of the common stock of Hertz
Holdings at a price of $5.68 per share and was granted options to purchase 800,000 shares of common
stock of Hertz Holdings at an exercise price of $7.68 per share ($6.56 after adjustment for the special
cash dividend paid on November 21, 2006), 400,000 options at an exercise price of $10.68 per share
($9.56 after adjustment for the special cash dividend paid on November 21, 2006) and 400,000 options
at an exercise price of $15.68 per share ($14.56 after adjustment for the special cash dividend paid on
November 21, 2006). All of Mr. Frissora’s options will vest 20% per year on the first five anniversaries of
the date of commencement of his employment and will have a ten year term.
During September 2006, we determined that the fair value of our common stock as of August 15, 2006
was $16.37 per share, rather than the $7.68 that had originally been determined at that time and which
we use for purposes of the Stock Incentive Plan and federal income tax purposes. Consequently, we
recognized compensation expense of approximately $13.0 million, including amounts for a tax gross-up
on the initial $2.00 discount to fair market value in accordance with Mr. Frissora’s employment
agreement, in the quarter ended September 30, 2006.
In order to assist management and the Compensation Committee of the Board of Directors in their
determination of the value of the common stock of Hertz Holdings, Hertz engaged an independent
valuation specialist to perform a valuation of the common stock of Hertz Holdings at May 15, 2006 and
June 30, 2006. The May 15th date is close to the initial stock purchase and option grant date of May 5,
2006 and the second option grant date of May 18, 2006. The June 30th date coincides with the payment
of the special cash dividend of $4.32 per share.
The independent valuation specialist weighted each of the income, market transaction and market
comparable valuation approaches equally. Management and the Compensation Committee of the
Board of Directors believe that the valuation approaches employed are appropriate for an enterprise
such as Hertz Holdings, which has an established financial history of profitable operations and
generation of positive cash flows. The results of the approaches were not significantly different from one
another.
In connection with the authorization of the special cash dividend of $4.32 per share paid on June 30,
2006, the Board of Hertz Holdings authorized the modification of the option exercise prices downward
by an amount equal to the per share amount of the special cash dividend paid on June 30, 2006, thereby
preserving the intrinsic value of the options, consistent with applicable tax law. In order to assist
117