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EX-32.69 - EXHIBIT 32.69 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit3269.htm
EX-31.70 - EXHIBIT 31.70 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit3170.htm
EX-4.226 - EXHIBIT 4.226 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit4226.htm
EX-4.229 - EXHIBIT 4.229 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit4229.htm
EX-4.227 - EXHIBIT 4.227 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit4227.htm
EX-15.39 - EXHIBIT 15.39 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit1539.htm
EX-32.70 - EXHIBIT 32.70 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit3270.htm
EX-4.225 - EXHIBIT 4.225 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit4225.htm
EX-4.228 - EXHIBIT 4.228 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit4228.htm
EX-31.69 - EXHIBIT 31.69 - DOLLAR THRIFTY AUTOMOTIVE GROUP INCexhibit3169.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 September 30, 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 October 29, 2010 was 28,738,372.
 
 



 
 
 
 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-Q
CONTENTS
 
Page
 
PART I - FINANCIAL INFORMATION
 

 
 
           
27
 
 
           
40
 
 
PART II - OTHER INFORMATION
 
 
 
 
46


 

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 on our results and liquidity if we become obligated to pay a termination fee to Hertz Global Holdings, Inc. (“Hertz”), which will depend on whether we complete a qualifying business combination transaction within 12 months of the October 1, 2010 termination date of our merger agreement with Hertz, and whether and the extent to which the relevant third party would bear all or any portion of that fee;
 
·
whether Avis Budget Group, Inc. (“Avis”) would obtain regulatory approval to engage in a business combination transaction with us and, if so, the conditions upon which such approval would be granted (including potential divestitures of assets or businesses of either company), whether we and Avis would reach agreement on the terms of such a transaction, whether our stockholders would approve the transaction and whether other conditions to consummation of the transaction would be satisfied or waived;
 
·
the risks to our business and prospects pending any future business combination transaction, diversion of management’s attention from day-to-day operations, a loss of key personnel, disruption of our operations, and the impact of pending or future litigation relating to any business combination transaction;
 
 
2

 
 
 
·
the risks to our business and growth prospects as a stand-alone company, in light of our dependence on future growth of the economy as a whole to achieve meaningful revenue growth in the key airport and local markets we serve, high barriers to entry in the insurance replacement market, and the impact of our limited financial resources on our ability to finance growth through acquisitions or to expand internationally;
 
·
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 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;
 
·
the cost and other terms of acquiring and disposing of automobiles and the impact of conditions in the used vehicle market on our vehicle cost, including the impact on our results of expected increases in our vehicle depreciation costs in 2011 based on our current expectations with respect to the used vehicle market, and our ability to reduce our fleet capacity as and when projected by our plans;
 
·
the timing and strength of a recovery in the U.S. automotive industry, 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;
 
·
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 Financial Guaranty Insurance Company, which has indicated that it has not satisfied the conditions for effectuating its surplus restoration plan as required by the New York State Insurance Department;
 
·
the potential for significant cash tax payments in 2011 and beyond as a result of the reduction in our fleet size, our use of bonus depreciation methods 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 industry consolidation, capacity reductions, pricing actions or other events, such as airline bankruptcies;
 
·
local market conditions where we and our franchisees do business, including whether franchisees will continue to have access to capital as needed;
 
·
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 other events that can disrupt consumer travel, such as natural and man-made catastrophes, pandemics and actual and perceived threats or acts of 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 September 30, 2010, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2010 and 2009, and cash flows for the nine-month periods ended September 30, 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
November 2, 2010

 
4

 
 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
 
                         
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
   
(In Thousands Except Per Share Data)
 
                         
   
Three Months
   
Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
(Unaudited)
 
                         
   
2010
   
2009
   
2010
   
2009
 
REVENUES:
                       
  Vehicle rentals
  $ 425,467     $ 418,665     $ 1,138,029     $ 1,143,172  
  Other
    18,077       20,227       50,072       57,755  
         Total revenues
    443,544       438,892       1,188,101       1,200,927  
                                 
COSTS AND EXPENSES:
                               
  Direct vehicle and operating
    204,207       213,412       577,430       590,102  
  Vehicle depreciation and lease charges, net
    85,732       102,968       208,060       345,206  
  Selling, general and administrative
    59,359       54,746       162,841       153,751  
  Interest expense, net of interest income of
     22,335        24,554        65,392        73,630  
     $472, $691, $965 and $5,414, respectively
                               
  Long-lived asset impairment
    703       383       942       644  
         Total costs and expenses
    372,336       396,063       1,014,665       1,163,333  
                                 
  (Increase) decrease in fair value of derivatives
    (6,464 )     (5,569 )     (21,338 )     (20,023 )
                                 
INCOME BEFORE INCOME TAXES
    77,672       48,398       194,774       57,617  
                                 
INCOME TAX EXPENSE
    28,507       18,304       76,054       24,059  
                                 
NET INCOME
  $ 49,165     $ 30,094     $ 118,720     $ 33,558  
                                 
                                 
                                 
BASIC EARNINGS PER SHARE
  $ 1.72     $ 1.38     $ 4.15     $ 1.55  
                                 
DILUTED EARNINGS PER SHARE
  $ 1.62     $ 1.29     $ 3.93     $ 1.47  
                                 
See notes to condensed consolidated financial statements.
                         

 
5

 

DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
 
             
CONDENSED CONSOLIDATED BALANCE SHEETS
 
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
 
(In Thousands Except Share and Per Share Data)
 
             
   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS:
  (Unaudited)  
             
Cash and cash equivalents
  $ 419,007     $ 400,404  
Cash and cash equivalents-required minimum balance
    100,000       100,000  
Restricted cash and investments
    289,602       622,540  
Receivables, net
    116,846       104,645  
Prepaid expenses and other assets
    68,542       63,377  
Revenue-earning vehicles, net
    1,468,017       1,228,637  
Property and equipment, net
    91,409       96,198  
Income taxes receivable
    32,963       4,065  
Intangible assets, net
    24,297       26,071  
                 
Total assets
  $ 2,610,683     $ 2,645,937  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES:
               
Accounts payable
  $ 51,355     $ 48,366  
Accrued liabilities
    188,300       204,340  
Deferred income tax liability
    202,487       162,923  
Vehicle insurance reserves
    117,504       108,584  
Debt and other obligations
    1,530,329       1,727,810  
Total liabilities
    2,089,975       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;
               
35,162,725 and 34,951,351 issued, respectively, and
               
28,737,172 and 28,536,445 outstanding, respectively
    352       349  
Additional capital
    938,993       932,693  
Accumulated deficit
    (174,465 )     (293,185 )
Accumulated other comprehensive loss
    (16,276 )     (18,374 )
Treasury stock, at cost (6,425,553 and 6,414,906 shares, respectively)
    (227,896 )     (227,569 )
  Total stockholders' equity
    520,708       393,914  
                 
Total liabilities and stockholders' equity
  $ 2,610,683     $ 2,645,937  
                 
See notes to condensed consolidated financial statements.
 
 
6

 

DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
 
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 
(In Thousands)
 
             
   
Nine Months
 
   
Ended September 30,
 
   
(Unaudited)
 
             
   
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 118,720     $ 33,558  
Adjustments to reconcile net income to
               
   net cash provided by operating activities:
               
     Depreciation:
               
       Vehicle depreciation
    271,232       363,622  
       Non-vehicle depreciation
    15,108       15,058  
     Net gains from disposition of revenue-earning vehicles
    (63,214 )     (18,879 )
     Amortization
    5,472       6,155  
     Performance share incentive, stock option and restricted stock plans
    3,254       3,618  
     Interest income earned on restricted cash and investments
    (371 )     (2,859 )
     Long-lived asset impairment
    942       644  
     Provision for (recovery of) losses on receivables
    (743 )     2,371  
     Deferred income taxes
    39,089       (19,694 )
     Change in fair value of derivatives
    (21,338 )     (20,023 )
     Change in assets and liabilities:
               
       Income taxes payable/receivable
    (28,813     25,528  
       Receivables
    4,044       13,008  
       Prepaid expenses and other assets
    (309 )     8,234  
       Accounts payable
    6,202       (1,633 )
       Accrued liabilities
    9,084       11,893  
       Vehicle insurance reserves
    8,920       1,841  
       Other
    424       2,440  
                 
           Net cash provided by operating activities
    367,703       424,882  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Revenue-earning vehicles:
               
  Purchases
    (1,122,825 )     (746,084 )
  Proceeds from sales
    659,566       1,098,685  
Change in cash and cash equivalents - required minimum balance
    -       (100,000 )
Net change in restricted cash and investments
    333,309       37,708  
Property, equipment and software:
               
  Purchases
    (18,046 )     (6,902 )
  Proceeds from sales
    461       102  
Acquisition of businesses, net of cash acquired
    -       (8 )
                 
           Net cash provided by (used in) investing activities
    (147,535 )     283,501  
                 
           
(Continued)
 
                 

 
7

 

DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
 
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 
(In Thousands)
 
             
   
Nine Months
 
   
Ended September 30,
 
   
(Unaudited)
 
             
   
2010
   
2009
 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Debt and other obligations:
           
  Proceeds from vehicle debt and other obligations
    299,980       43,279  
  Payments of vehicle debt and other obligations
    (489,966 )     (750,916 )
  Payments of non-vehicle debt
    (7,500 )     (20,000 )
Issuance of common shares
    2,964       2,045  
Excess tax benefit on share-based awards
    (327 )     -  
Financing issue costs
    (6,716 )     (6,441 )
                 
           Net cash used in financing activities
    (201,565 )     (732,033 )
                 
CHANGE IN CASH AND CASH EQUIVALENTS
    18,603       (23,650 )
                 
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    400,404       229,636  
                 
End of period
  $ 419,007     $ 205,986  
                 
                 
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
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
       


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 
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 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.  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 September 30, 2010, the Company’s common stock authorized for issuance under the long-term incentive plan (“LTIP”) for employees and non-employee directors was 2,920,385 shares.  The Company has 468,200 shares available for future LTIP awards at September 30, 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 $0.8 million and $3.2 million during the three and nine months ended September 30, 2010, respectively, and $2.4 million and $4.7 million during the three and nine months ended September 30, 2009, respectively, for such awards.  The total income tax benefit recognized in the statements of income for share-based compensation payments was $0.3 million and $1.3 million for the three and nine months ended September 30, 2010, respectively, and $0.9 million and $2.0 million for the three and nine months ended September 30, 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 $0.5 million and $1.3 million in compensation costs (included in the $0.8 million and $3.2 million discussed above) for the three and nine months ended September 30, 2010, respectively, and $0.7 million and $2.0 million (included in the $2.4 million and $4.7 million discussed above) for the three and nine months ended September 30, 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 September 30, 2010 and 2009 for the options issued is $1.6 million and $3.2 million, respectively.
 
 
10

 

The following table sets forth the non-qualified option rights activity under the LTIP for the nine months ended September 30, 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
    (165 )     17.96                  
Canceled
    (1     19.38                  
                                 
Outstanding at September 30, 2010
    2,285     $ 5.72       7.86     $ 101,449  
                                 
Fully vested options at:
                               
September 30, 2010
    551     $ 4.05       7.81     $ 25,372  
Outstanding options at September 30,
                               
2010 expected to vest
    1,734     $ 6.25       7.88     $ 76,077  
                                 
The total intrinsic value of options exercised during the three and nine months ended September 30, 2010 was $2.0 million and $3.5 million, respectively, and for both the three and nine months ended September 30, 2009 was $0.6 million.  Total cash received for non-qualified option rights exercised during the three and nine months ended September 30, 2010 totaled $0.9 million and $3.0 million, respectively, and for both the three and nine months ended September 30, 2009 was $2.0 million.  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 did not realize a tax benefit for the options exercised during the three months ended September 30, 2010; however, the Company realized $0.8 million in tax benefits for the options exercised during the nine months ended September 30, 2010.

The following table summarizes information regarding fixed non-qualified option rights that were outstanding at September 30, 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       836       8.04     $ 0.95       274     $ 0.95  
                                           
$4.44 - $11.45       1,113       8.53       4.52       229       4.84  
                                           
$13.98 - $24.38       336       5.20       21.61       48       18.29  
                                           
$0.77 - $24.38       2,285       7.86     $ 5.72       551     $ 4.05  
                                           
 
Performance Shares – Performance shares have historically been granted to Company officers and certain key employees on an annual basis, although no performance shares were granted in 2010 or 2009.  The Company granted performance shares in 2008 that established a target number of shares that will vest at the end of the three year requisite service period following the grant date.  The number of performance shares ultimately earned under a grant will range from zero to 200% of the target award, depending on the level of corporate performance over each of the three years in the performance period.  
 
 
11

 
 
The maximum number of performance shares that may be granted under the LTIP during any year to any participant is 160,000 common shares.  The Company recognized $0.2 million and $1.6 million in compensation costs (included in the $0.8 million and $3.2 million discussed above) for the three and nine months ended September 30, 2010, respectively, and $1.0 million and $1.5 million (included in the $2.4 million and $4.7 million discussed above) for the three and nine months ended September 30, 2009, respectively.

In March 2010, 33,000 performance shares, net of forfeitures, from the 2007 grant earned from January 1, 2007 through December 31, 2009 vested, with a total value to the recipients of approximately $1.5 million.  The Company withheld approximately 11,000 of these shares for the payment of taxes owed by the recipients, and designated the shares withheld as treasury shares.  In March 2009, 61,000 performance shares, net of forfeitures, from the 2006 grant earned from January 1, 2006 through December 31, 2008 vested, in addition to approximately 3,000 shares vested under the 2007 grant of performance shares for certain participants pursuant to separation or retirement arrangement.  These vested grants were settled through the issuance of common stock totaling approximately $0.1 million.

The following table presents the status of the Company’s nonvested performance shares as of September 30, 2010 and any changes during the nine months ended September 30, 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
    (58 )     56.35  
Nonvested at September 30, 2010
    97     $ 24.38  
                 
 
At September 30, 2010, the total compensation cost related to nonvested performance share awards not yet recognized is estimated at approximately $0.1 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 remaining three months of 2010.  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 nine months ended September 30, 2010 and 2009 was $1.0 million and $0.1 million, respectively.

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 and $0.3 million in compensation costs (included in the $0.8 million and $3.2 million discussed above) for the three and nine months ended September 30, 2010, respectively, and $0.7 million and $1.2 million (included in the $2.4 million and $4.7 million discussed above) for the three and nine months ended September 30, 2009, respectively.  These grants generally vest at the end of the fiscal year in which the grants were made.  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, the Company granted 95,812 shares with a grant-date fair value of $1.23 per share and granted 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 September 30, 2010, the total compensation cost related to nonvested restricted stock unit awards not yet recognized is approximately $0.2 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 September 30, 2010 and changes during the nine months ended September 30, 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
    (14 )     (6.85 )
Forfeited
    -       -  
Nonvested at September 30, 2010
    98     $ 7.71  
                 
 
4.
VEHICLE DEPRECIATION AND LEASE CHARGES, NET

Vehicle depreciation and lease charges include the following (in thousands):
 
   
Three Months
   
Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
                         
   
2010
   
2009
   
2010
   
2009
 
                         
Depreciation of revenue-earning vehicles
  $ 95,714     $ 119,708     $ 271,232     $ 363,622  
Net gains from disposal of revenue-earning vehicles
    (9,991 )     (16,773 )     (63,214 )     (18,879 )
Rents paid for vehicles leased
    9       33       42       463  
                                 
    $ 85,732     $ 102,968     $ 208,060     $ 345,206  
                                 

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.

 
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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 below (in thousands, except share and per share data):
 
   
Three Months
   
Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
                         
   
2010
   
2009
   
2010
   
2009
 
                         
Net income
  $ 49,165     $ 30,094     $ 118,720     $ 33,558  
                                 
Basic EPS:
                               
   Weighted average common shares
    28,644,859       21,729,092       28,592,794       21,592,137  
                                 
Basic EPS
  $ 1.72     $ 1.38     $ 4.15     $ 1.55  
                                 
Diluted EPS:
                               
   Weighted average common shares
    28,644,859       21,729,092       28,592,794       21,592,137  
                                 
Shares contingently issuable:
                               
  Stock options
    1,227,828       1,060,374       1,224,370       647,196  
  Performance awards
    174,926       257,682       121,816       227,501  
  Employee compensation shares deferred
    49,061       66,870       49,440       124,252  
  Director compensation shares deferred
    222,802       141,092       221,042       160,504  
                                 
Shares applicable to diluted
    30,319,476       23,255,110       30,209,462       22,751,590  
                                 
Diluted EPS
  $ 1.62     $ 1.29     $ 3.93     $ 1.47  
 
For the three and nine months ended September 30, 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 and nine months ended September 30, 2009, outstanding common stock equivalents that were anti-dilutive and therefore excluded from the computation of diluted EPS totaled 165,491 and 410,220, respectively.

6.
RECEIVABLES

Receivables consist of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Trade accounts receivable and other
  $ 71,602     $ 76,304  
Vehicle manufacturer receivables
    46,798       30,194  
Car sales receivable
    4,068       5,677  
      122,468       112,175  
Less:  Allowance for doubtful accounts
    (5,622 )     (7,530 )
    $ 116,846     $ 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.
 
 
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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.

7.
DEBT AND OTHER OBLIGATIONS

Debt and other obligations as of September 30, 2010 and December 31, 2009 consist of the following (in thousands):
 
     
September 30,
     
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 (matured June 2010)
   
                   -
     
           400,000
 
     
        1,100,000
     
        1,500,000
 
Discounts on asset backed medium term notes
 
                   -
     
                   (5
Asset backed medium term notes, net of discount
 
        1,100,000
     
        1,499,995
 
                 
Series 2010-1 variable funding note (matures September 2012)
           200,000
     
                   -
 
CAD Series 2010-1 Note (Canadian fleet financing)
   
            79,704
     
                   -
 
Limited partner interest in limited partnership
               
  (Canadian fleet financing)
   
                   -
     
            69,690
 
                 
  Total vehicle debt and other obligations
   
        1,379,704
     
        1,569,685
 
                 
Non-vehicle debt
               
Term Loan
   
           150,625
     
           158,125
 
    Total non-vehicle debt
   
           150,625
     
           158,125
 
                 
Total debt and other obligations
  $
1,530,329
   
      1,727,810
 
                 
 
The Series 2006-1 notes and the Series 2007-1 notes will begin scheduled amortization in December 2010 and February 2012, respectively, and each will amortize over a six-month period.  These scheduled amortization periods may be accelerated under certain circumstances, including an Event of Bankruptcy with respect to the applicable monoline or bond insurer (each, a “Monoline”).  The Series 2006-1 notes and Series 2007-1 notes are insured by Ambac Assurance Corporation (“AMBAC”) and Financial Guaranty Insurance Company (“FGIC”), respectively.  On October 25, 2010, FGIC indicated that it had not received sufficient participation in its offer to exchange certain residential mortgage-backed securities and asset-backed securities insured by it, and that, consequently, FGIC had not satisfied the conditions for successfully effectuating its surplus restoration plan as required by the New York State Insurance Department (“NYID”).  
 
 
15

 
 
As of November 2, 2010, the NYID has taken no further public action with respect to FGIC, but may at any time seek an order of rehabilitation or liquidation of FGIC.  Depending on the circumstances, such action by the NYID and/or the issuance of such order would result, immediately or after a period of time, in an event of bankruptcy with respect to FGIC under the terms of the Series 2007-1.  On November 1, 2010, AMBAC’s parent company, Ambac Financial Group, Inc., announced that it had determined not to make a regularly scheduled interest payment on certain of its debt securities and that, because it has been unable to raise capital as an alternative to bankruptcy protection, it is pursuing a restructuring of its outstanding debt through a prepackaged bankruptcy proceeding.   The timing of any restructuring and its potential effect on AMBAC and its obligations under outstanding financial insurance policies, including with respect to the Series 2006-1 notes, is uncertain.  See Item 2 - Liquidity and Capital Resources for further discussion.

During 2010, the Company added $950 million of U.S. fleet financing capacity, of which $750 million is intended to provide a funding source for future debt maturities, including any future rapid amortization event that would occur as a  result of an event of bankruptcy with respect to a Monoline.  Of this new capacity, $450 million was completed through a note issuance on October 28, 2010 (see Note 16 for further discussion), and the remaining $500 million of capacity was added in April and June 2010 as outlined below.

In April 2010, RCFC completed a $200 million asset-backed variable funding note facility (the “Series 2010-1 VFN”) which may be repaid and redrawn in whole or in part at any time during the Series 2010-1 VFN’s two-year revolving period.  Upon issuance, the Series 2010-1 VFN was fully drawn at $200 million.  At the end of the revolving period, the then-outstanding principal amount of the Series 2010-1 VFN will be repaid monthly over a six-month period, beginning in April 2012, with the final payment in September 2012.  The Series 2010-1 VFN bears 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 VFN, 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 VFN.  The 2010-1 VFN has a facility fee commitment rate of up to 1.5% per annum on any unused portion of the facility.  In connection with this financing, RCFC entered into an interest rate cap agreement for a term of 30 months with a notional amount of $200 million to effectively limit the Series 2010-1 VFN’s floating rate to a maximum of 5%.
 
In May 2010, the Company completed a new CAD $150 million Canadian fleet securitization program. This program has a term of one year and requires 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.  In connection with the new Canadian fleet securitization program, the Company paid off the remaining outstanding principal balance under the limited partner interest in limited partnership.

In June 2010, RCFC completed a $300 million asset-backed variable funding note facility (the “Series 2010-2 VFN”), which may be drawn and repaid from time to time in whole or in part at any time during the Series 2010-2 VFN’s three-year revolving period. The Series 2010-2 VFN was undrawn at September 30, 2010.   At the end of the revolving period, the then-outstanding principal amount of the Series 2010-2 VFN will be repaid monthly over a six-month period, beginning in July 2013, with the final payment in December 2013.  The Series 2010-2 VFN bears interest at a spread of 375 basis points above one-month LIBOR when drawn.  The 2010-2 VFN has a facility fee commitment rate of up to 1.5% per annum on any unused portion of the facility.  In connection with this financing, RCFC entered into an interest rate cap agreement for a term of 42 months with a notional amount of $300 million to effectively limit the Series 2010-2 VFN’s floating rate to a maximum of 5%.  On October 22, 2010, the Company utilized $225 million of the Series 2010-2 VFN.

In each of March, June and September 2010, the Company made a minimum quarterly principal payment of $2.5 million under the Term Loan. The Company expects to 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.

 
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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 2006 and 2007, to effectively convert variable interest rates on a total of $1.1 billion in asset-backed medium-term notes to fixed interest rates.  These swaps have termination dates through July 2012.  The Company has also used interest rate cap agreements for its 2010-1 and 2010-2 asset-backed variable funding notes, to effectively limit the variable interest rates on a total of $500 million in asset-backed variable funding notes.  These caps have termination dates through December 2013.

The fair value of derivatives outstanding at September 30, 2010 and December 31, 2009 are as follows (in thousands):
 
 
Fair Values of Derivative Instruments
                                 
 
Asset Derivatives
 
Liability Derivatives
 
September 30,
 
December 31,
 
September 30,
 
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
Prepaid expenses and other assets
  $ 379  
Prepaid expenses and other assets
  $ -  
Accrued
liabilities
  $ 37,335  
Accrued
liabilities
  $ 40,639  
                                         
Total derivatives
designated as hedging
instruments
    $ 379       $ -       $ 37,335       $ 40,639  
                                         
Derivatives not designated
as hedging instruments
                                       
                                         
Interest rate contracts
Prepaid expenses and other assets
  $ 128  
Receivables
  $ 16  
Accrued
liabilities
  $ 12,913  
Accrued
liabilities
  $ 34,732  
                                         
Total derivatives not
designated as hedging
instruments
                                       
      $ 128       $ 16       $ 12,913       $ 34,732  
                                         
Total derivatives
    $ 507       $ 16       $ 50,248       $ 75,371  
 
The interest rate swap agreements related to the Series 2006-1 notes and the interest rate cap agreement related to the Series 2010-1 VFN do not qualify for hedge accounting treatment.  The (gain) loss recognized in income on derivatives not designated as hedging instruments for the three and nine months ended September 30, 2010 and 2009 is as follows (in thousands):

 
17

 
 
 
 
Amount of (Gain) or Loss Recognized in Income on Derivative
 
Location of (Gain) or Loss
Recognized in Income on
Derivative
   
Three Months Ended
   
Nine Months Ended
   
   
September 30,
   
September 30,
   
Derivatives Not Designated as Hedging Instruments  
2010
   
2009
   
2010
   
2009
   
                         
Net increase in fair value of
Interest rate contracts
  $ (6,464 )   $ (5,569 )   $ (21,338 )   $ (20,023 ) derivatives 
                                   
Total
  $ (6,464 )   $ (5,569 )   $ (21,338 )   $ (20,023 )  
                                   
The interest rate swap agreement entered into in May 2007 related to the Series 2007-1 notes (“2007 Swap”) and the interest rate cap agreement entered into in June 2010 related to the Series 2010-2 VFN (“2010-2 Cap”) both constitute cash flow hedges and satisfy 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 and nine months ended September 30, 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)
Derivatives in Cash Flow Hedging Relationships
 
2010
   
2009
   
2010
   
2009
   
                           
Three Months Ended
                         
September 30,
                       
Interest expense, net of
Interest rate contracts
  $ 1,211     $ (555 )   $ (3,602 )   $ (3,553 ) interest income 
                                   
Total
  $ 1,211     $ (555 )   $ (3,602 )   $ (3,553 )  
                                   
                                   
                                   
Nine Months Ended
                                 
September 30,
                               
Interest expense, net of
Interest rate contracts
  $ 1,695     $ 6,579     $ (10,540 )   $ (10,327 ) interest income 
                                   
Total
  $ 1,695     $ 6,579     $ (10,540 )   $ (10,327 )  
                                   
                                   
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 three and nine months ended September 30, 2009, has been
          modified to conform to the presentation for the three and nine months ended September 30, 2010 on a net of tax basis.
                                   
At September 30, 2010, the Company’s interest rate contracts related to the 2007 Swap and the 2010-2 Cap were effectively hedged, and no ineffectiveness was recorded in income.  Based on projected market interest rates, the Company estimates that approximately $14.0 million of net deferred loss related to the 2007 Swap and 2010-2 Cap 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.  
 
 
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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.

The following tables show assets and liabilities measured at fair value as of September 30, 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 9/30/10
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Derivative Assets     507      -       507      -  
Derivative Liabilities
    (50,248 )     -       (50,248 )     -  
Marketable Securities  (available for sale)
    296       296       -       -  
Deferred Compensation Plan Assets (a)
    3,775       -       3,775       -  
                                 
Total
  $ (45,670 )   $ 296     $ (45,966 )   $ -  
                                 
   
(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 and caps as discussed above, is calculated using proprietary models utilizing observable inputs as well as future assumptions related to interest rates, credit risk and other variables.  These calculations are performed by the financial institutions that are counterparties to the applicable swap and cap 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.  
 
 
19

 
 
There were no transfers into or out of Level 1 or Level 2 measurements for the nine months ended September 30, 2010 or the twelve months ended December 31, 2009.  The Company had no Level 3 financial instruments at any time during the nine months ended September 30, 2010 or the twelve months ended December 31, 2009.

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 $134.9 million and $41.3 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, the Company’s credit risk and 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 September 30, 2010 and December 31, 2009:
 
   
 
       
Debt and other obligations
 
Carrying
   
Fair Value
 
at September 30, 2010
 
Value
   
at 9/30/10
 
(in thousands)
           
             
Debt:
           
             
Vehicle debt and obligations-floating rates (1)
  $ 1,300,000     $ 1,279,668  
                 
Vehicle debt and obligations-Canadian dollar denominated
   79,704      79,704  
                 
Non-vehicle debt - Term Loan
  $ 150,625     $ 148,366  
                 
(1) Includes $600 million relating to the Series 2006-1 notes and the $500 million Series 2007-1 notes swapped from floating interest rates to fixed interest rates.  Also includes $200 million relating to the Series 2010-1 VFN.

 
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 (2)
  $ 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  

(2) 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

Comprehensive income is comprised of the following (in thousands):

   
Three Months
   
Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
                         
   
2010
   
2009
   
2010
   
2009
 
                         
Net income
  $ 49,165     $ 30,094     $ 118,720     $ 33,558  
                                 
Interest rate swap adjustment on 2007-1 Swap, net of tax
    1,380       (555     2,397       6,579  
Interest rate cap adjustment on 2010-2 Cap, net of tax
    (169 )     -       (702 )     -  
Foreign currency translation adjustment
    574       1,332       403       1,978  
                                 
Comprehensive income
  $ 50,950     $ 30,871     $ 120,818     $ 42,115  
                                 
During the third quarter of 2010 and 2009, the Company recorded a deferred tax liability on cash flow hedges of $0.8 million and a deferred tax asset of $0.4 million, respectively, and in the nine months ended September 30, 2010 and 2009, a deferred tax liability of $0.4 million and $4.6 million, respectively.  These cash flow hedges are related to the derivatives used to manage the interest rate risk associated with the Company’s vehicle-related debt.

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.

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, thereby deferring taxable gains from vehicle dispositions.  In addition, the Company has historically elected to utilize accelerated or “bonus” depreciation methods on its vehicle inventories in order to defer its cash liability for U.S. income taxes.

As a result of significant reductions in vehicle inventory levels during 2009 and 2010, and low tax basis in existing vehicle inventories as a result of accelerated depreciation in prior periods, the Company expected to realize a reversal of prior income tax deferrals during 2010, and accordingly, made estimated income tax payments during the nine months ended September 30, 2010 totaling $65.9 million.  On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 (the “Act”) into law extending bonus depreciation allowances for assets placed in service in 2010.  With the enactment of the Act, the Company’s 2010 cash tax liability is substantially reduced and the Company has a refundable overpayment for the excess estimated tax payments made in 2010.  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 tax payments in 2011 and beyond.
 
 
21

 
 
For the three and nine months ended September 30, 2010, the overall effective tax rate of 36.7% and 39.0%, respectively, 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 and nine months ended September 30, 2009, the overall effective tax rate of 37.8% and 41.8%, respectively, differed from the U.S. statutory rate due primarily to state and local taxes, and losses relating to DTG Canada for which no benefit was recorded due to full valuation allowance.

As of September 30, 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 September 30, 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 2007 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 income.  No amounts were recognized for interest and penalties under ASC Topic 740 during the three and nine months ended September 30, 2010 and 2009.

12.
COMMITMENTS AND CONTINGENCIES

Various class action complaints relating to the now terminated proposed merger transaction with Hertz have been filed in Oklahoma state court, Oklahoma federal court, and Delaware Chancery Court against the Company, its directors, and Hertz by various plaintiffs, for themselves and on behalf of the Company's stockholders, excluding defendants and their affiliates.  These complaints allege that the consideration the Company's stockholders would have received in connection with the proposed transaction with Hertz was inadequate and that the Company's directors breached their fiduciary duties to stockholders in negotiating and approving the Merger Agreement (hereinafter defined).  These complaints also allege that the proxy materials that were sent to the Company's stockholders to approve the Merger Agreement are materially false and misleading.  The cases and their current status are as follows:  1) Henzel v. Dollar Thrifty Automotive Group, Inc., et al. (Consolidated Case No. CJ-2010-02761, Dist. Ct. Tulsa County, Oklahoma) – the hearing on the Company’s motion for reconsideration of the Company’s motion to dismiss was set for September 28, 2010, but the parties agreed that it would not go forward on that day and no new date for the hearing has yet been set; 2) In Re: Dollar Thrifty Shareholder Litigation (Consolidated Case No. 5458-VCS, Delaware Court of Chancery) - the Court denied the motion for preliminary injunction on September 8, 2010; and 3) Rice v. Dollar Thrifty Automotive Group, Inc., et al. (Consolidated Case No. 10-CV-0294-CVE-FHM, U.S. Dist. Ct. for the Northern Dist. of Oklahoma) - the parties filed a stipulation of dismissal of this action on October 15, 2010, and the court has dismissed the action.  The Company believes that these complaints are without merit and have been rendered moot as a result of the termination of the Merger Agreement. 

The Company is a defendant in several class action lawsuits in California and one in Colorado.  The California lawsuits allege that the pass through of the California trade and tourism commission and airport concession fees violate antitrust laws and various other rights and laws by compelling out-of-state visitors to subsidize the passenger car rental tourism assessment program, violation of the California Business and Professions Code breach of contract, and the Colorado lawsuit alleges violation of the Colorado Consumer Protection Act.  The lawsuit in Colorado was dismissed in July 2010 and the plaintiffs filed a notice of appeal on August 19, 2010.  The Company intends to vigorously defend these matters.  Given the inherent uncertainties of litigation, the Company cannot predict the ultimate outcome or reasonably estimate the amount of ultimate loss that may arise from these lawsuits.
 
 
22

 
 
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 16 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.

 
23

 

14.
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
   
Nine Months
 
   
Ended September 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       
Cash paid for:
           
  Income taxes to taxing authorities
  $ 65,932     $ 18,042  
  Interest
  $ 61,262     $ 73,682  
                 
                 
SUPPLEMENTAL DISCLOSURES OF INVESTING AND FINANCING
               
  NONCASH ACTIVITIES:
               
Sales and incentives related to revenue-earning vehicles
               
  included in receivables
  $ 49,988     $ 44,559  
Purchases of property, equipment and software included
               
  in accounts payable
  $ 43     $ 751  
Purchases of revenue-earning vehicles included in
               
  in accounts payable
  $ 27     $ -  
                 
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 nine months ended September 30, 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 three and nine months ended September 30, 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.

 
24

 

A summary of the cash flow amounts affected by the restatement are as follows:
                   
   
Nine Months
 
   
Ended September 30, 2009
 
   
As Previously
         
As
 
   
Reported
   
Adjustment
   
Restated
 
    (In Thousands)  
                   
Net cash provided by operating activities
  $ 539,276     $ (114,394 )   $ 424,882  
                         
Net cash provided by investing activities
    169,107       114,394       283,501  
                         
CHANGE IN CASH AND CASH EQUIVALENTS
    (23,650 )     -       (23,650 )
                         
 
15.
MERGER AND RELATED MATTERS

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.

The transaction was subject to customary closing conditions, including, among others, adoption of the Merger Agreement by the Company’s stockholders. On September 30, 2010, the Company held its special meeting of stockholders, wherein the necessary majority of the outstanding shares of the Company did not vote in favor of adopting the Merger Agreement or in favor of approving the adjournment of the meeting to solicit additional proxies in favor of adopting the Merger Agreement.  Subsequently, on October 1, 2010, Hertz notified the Company that it had terminated the Merger Agreement, as amended, by and among Hertz, Merger Sub and the Company.

Following the termination of the Merger Agreement, the Company agreed to cooperate with respect to Avis’ efforts to pursue antitrust clearance in conjunction with a potential acquisition of the Company. Avis may not be able to obtain such approval on reasonable terms and, even if it does, the Company may not be able to reach agreement with Avis on the terms of a merger or other business combination transaction.  Avis demonstrated its interest in a potential acquisition of the Company in August of 2010 while the Company was under the Merger Agreement with Hertz.  The Company has not entered into any definitive agreement with Avis.  Any such agreement would be subject to the approval of the Company’s stockholders and could also be subject to other material conditions, such as potential divestitures of assets or businesses of either or both of the Company and Avis, or the approval of Avis’ stockholders.

Under the Merger Agreement, in the event the Company enters into a definitive agreement with respect to a “Company Takeover Transaction” (hereinafter defined) with a third party, including Avis, or the Board of Directors recommends a “Company Takeover Transaction” within 12 months of October 1, 2010, the Merger Agreement termination date, the Company could be liable to Hertz for a termination fee of approximately $44.6 million, plus reimbursement of up to $5 million of Hertz’s transaction expenses.  A Company Takeover Transaction includes (i) a proposal for the merger, consolidation, share exchange, business combination, reorganization, recapitalization or similar transaction involving more than 50% of the assets of the Company and its subsidiaries; (ii) the direct or indirect acquisition of assets or businesses representing 50% or more of the assets of the Company and its subsidiaries, whether pursuant to an acquisition of securities, assets or otherwise; or (iii) the acquisition of 50% or more of any class of the issued and outstanding equity or voting securities of the Company.

Pending litigation relating to the now terminated Merger Agreement is described in Note 12 and under Part II, Item 1 – Legal Proceedings.

 
25

 
 
16.
SUBSEQUENT EVENTS

In preparing the accompanying condensed consolidated financial statements, the Company has reviewed events that have occurred after September 30, 2010 through the issuance of the financial statements.  The Company noted no reportable subsequent events other than the subsequent event noted below and the subsequent events disclosed in Notes 7 and 15.

On October 28, 2010, RCFC completed a $450 million asset-backed variable funding note facility (the “Series 2010-3 VFN”), which may be drawn and repaid from time to time in whole or in part at any time during the Series 2010-3 VFN’s one-year revolving period.  The Series 2010-3 VFN is currently undrawn.  At the end of the revolving period, the then-outstanding principal amount of the Series 2010-3 VFN will be repaid monthly over a six-month period, beginning in November 2011, with the final payment in April 2012.  The Series 2010-3 VFN bears interest at a spread of 125 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 2010-3 VFN, or at 325 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 2010-3 VFN.  The Series 2010-3 VFN has a facility fee commitment rate of up to 0.8% per annum on any unused portion of the facility.  In connection with this financing, RCFC entered into an interest rate cap agreement for a term of 25 months with a notional amount of $450 million to effectively limit the Series 2010-3 VFN’s floating rate to a maximum of 5%.


*******
 

 
26

 
 
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
         
Nine Months
       
   
Ended September 30,
         
Ended September 30,
       
               
%
               
%
 
U.S. and Canada
 
2010
   
2009
   
Change
   
2010
   
2009
   
Change
 
                                     
                                     
Vehicle Rental Data:
                                   
                                     
Average number of vehicles operated
    108,042       106,245       1.7%       103,781       105,186       (1.3% )
Number of rental days
    8,346,616       8,231,903       1.4%       23,160,428       23,633,380       (2.0% )
Vehicle utilization
    84.0%       84.2%    
(0.2) p.p.
      81.7%       82.3%    
(0.6) p.p.
 
Average revenue per day
  $ 50.97     $ 50.86       0.2%     $ 49.14     $ 48.37       1.6%  
Monthly average revenue per vehicle
  $ 1,313     $ 1,314       (0.1%   $ 1,218     $ 1,208       0.8%  
Average depreciable fleet
    109,129       109,105       0.0%       104,749       107,615       (2.7% )
Monthly avg. depreciation (net) per vehicle
  $ 262     $ 315       (16.8% )   $ 221     $ 356       (37.9% )
                                                 
 
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 and is further adjusted to exclude merger-related expenses.  Due to volatility resulting from the mark-to-market treatment of the derivatives and the non-operating nature of the non-cash impairments and merger-related expenses, the Company believes these non-GAAP measures provide an important assessment of year-over-year operating results.

 
27

 
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 per the
                       
income statement to non-GAAP pretax income:
                       
     
Three Months
   
Nine Months
 
     
Ended September 30,
   
Ended September 30,
 
     
2010
   
2009
   
2010
   
2009
 
     
(in thousands)
   
(in thousands)
 
                           
Income before income taxes - as reported
  $ 77,672     $ 48,398     $ 194,774     $ 57,617  
                                   
(Increase) decrease in fair value of derivatives
    (6,464 )     (5,569 )     (21,338 )     (20,023 )
                                   
Long-lived asset impairment
    703       383       942       644  
                                   
Pretax income - non-GAAP
  $ 71,911     $ 43,212     $ 174,378     $ 38,238  
                                   
Merger-related expenses       11,937        -        20,459        -  
                                   
Non-GAAP pretax income, excluding merger-related expenses     83,848      43,212      194,837      38,238  
                                   
Reconciliation of reported GAAP net income per the
                               
income statement to non-GAAP net income:
                               
                                   
Net income  - as reported
  $ 49,165     $ 30,094     $ 118,720     $ 33,558  
                                   
(Increase) decrease in fair value of derivatives, net of tax (a)
    (3,791 )     (3,467 )     (12,513 )     (11,967 )
                                   
Long-lived asset impairment, net of tax (b)
    429       174       575       288  
                                   
Net income - non-GAAP
  $ 45,803     $ 26,801     $ 106,782     $ 21,879  
                                   
Merger-related expenses, net of tax (c)       6,956        -        11,921        -  
                                   
Non-GAAP net income, excluding merger-related expenses     52,759      26,801      118,703      21,879  
                                   
Reconciliation of reported GAAP diluted earnings
                               
per share ("EPS") to non-GAAP diluted EPS:
                               
                                   
EPS, diluted - as reported
  $ 1.62     $ 1.29     $ 3.93     $ 1.47  
                                   
EPS impact of (increase) decrease in fair value of derivatives, net of tax
    (0.13 )     (0.15 )     (0.41 )     (0.53 )
                                   
EPS impact of long-lived asset impairment, net of tax
    0.01       0.01       0.02       0.01  
                                   
EPS, diluted - non-GAAP (d)
  $ 1.51     $ 1.15     $ 3.53     $ 0.96  
                                   
EPS impact of merger-related expenses, net of tax       0.23        -        0.39        -  
                                   
Non-GAAP diluted EPS, excluding merger-related expenses (d)     1.74      1.15      3.93      0.96  
                                   
(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 ($2,673,000) and ($2,102,000) for the three months ended September 30, 2010 and 2009, respectively, and ($8,825,000) and ($8,056,000) for the nine months ended September 30, 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 $274,000 and $209,000 for the three months ended September 30, 2010 and 2009, respectively, and $367,000 and $356,000 for the nine months ended September 30, 2010 and 2009, respectively.
 
                                   
(c)  Merger-related expenses include legal, litigation, advisory and other fees related to a potential merger transaction.  The tax effect of the merger-related expenses is calculated using the entity-specific, U.S. federal and blended state tax rate applicable to the merger-related expenses which amounts are $4,981,000 and $8,538,000 for the three months and nine months ended September 30, 2010, respectively.  
                                   
(d)
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.
 
28

 
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 certain non-cash items, in addition to its relevance as a measure of operating performance.  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 income, 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, 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
   
Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands)
   
(in thousands)
 
Reconciliation of net income to
                       
Corporate Adjusted EBITDA
                       
                         
Net income - as reported
  $ 49,165     $ 30,094     $ 118,720     $ 33,558  
                                 
(Increase) decrease in fair value of derivatives
    (6,464 )     (5,569 )     (21,338 )     (20,023 )
Non-vehicle interest expense
    2,464       2,734       7,301       10,153  
Income tax expense
    28,507       18,304       76,054       24,059  
Non-vehicle depreciation
    4,782       4,887       15,108       15,058  
Amortization
    1,771       2,135       5,472       6,155  
Non-cash stock incentives
    842       1,712       3,254       3,618  
Long-lived asset impairment
    703       383       942       644  
Other
    -       3       (22 )     (5 )
                                 
Corporate Adjusted EBITDA
  $ 81,770     $ 54,683     $ 205,491     $ 73,217  
                                 
                                 
Reconciliation of Corporate Adjusted EBITDA
                               
to Cash Flows From Operating Activities
                               
                                 
Corporate Adjusted EBITDA
  $ 81,770     $ 54,683     $ 205,491     $ 73,217  
                                 
Vehicle depreciation, net of gains/losses from disposal
    85,723       102,935       208,018       344,743  
Non-vehicle interest expense
    (2,464 )     (2,734 )     (7,301 )     (10,153 )
Change in assets and liabilities, net of acquisitions, and other
    19,130       10,484       (38,505 )     17,075  
     Net cash provided by operating activities
  $ 184,159     $ 165,368     $ 367,703     $ 424,882  
                                 
Memo:
                               
Net cash provided by (used in) investing activites
  $ (15,373 )   $ (40,339 )   $ (147,535 )   $ 283,501  
Net cash used in financing activities
  $ (19,655   $ (81,551 )   $ (201,565 )   $ (732,033 )
                                 
Three Months Ended September 30, 2010 Compared with Three Months Ended September 30, 2009

Operating Results

During the third quarter of 2010, the Company’s revenues increased primarily due to an increase in rental days, coupled with a slight increase in revenue per day.  This increase in rental revenue was partially offset by a decrease in vehicle leasing revenue.  The Company continued to benefit from a strong used car market and continued focus on cost efficiency.  Additionally, the Company incurred $11.9 million in merger-related expenses during the quarter resulting in an increase in selling, general and administrative expenses.  The Company had income before income taxes of $77.7 million for the third quarter of 2010, compared to income before income taxes of $48.4 million in the third quarter of 2009.
 
29

 
Revenues
   
Three Months
             
    Ended September 30,    
$ Increase/
   
% Increase/
 
   
2010
   
2009
   
(decrease)
   
(decrease)
 
   
(in millions)
 
                         
Vehicle rentals
  $ 425.5     $ 418.7     $ 6.8       1.6%  
Other
    18.0       20.2       (2.2 )     (10.6% )
  Total revenues
  $ 443.5     $ 438.9     $ 4.6       1.1%  
                                 
Vehicle rental metrics:
                               
Number of rental days
    8,346,616       8,231,903       114,713       1.4%  
Average revenue per day
  $ 50.97     $ 50.86     $ 0.11       0.2%  
                                 
 
Vehicle rental revenue for the third quarter of 2010 increased 1.6%, due to a 1.4% increase in the number of rental days totaling $5.9 million, coupled with an increase of 0.2% in revenue per day totaling $0.9 million.

Other revenue declined $2.2 million primarily due to a decrease of $2.9 million in leasing revenue attributable to the termination of a substantial portion of the licensee vehicle leasing program during 2009, partially offset by a $0.7 million increase in all other revenue.


Expenses
   
Three Months
             
    Ended September 30,    
$ Increase/
   
% Increase/
 
   
2010
   
2009
   
(decrease)
   
(decrease)
 
   
(in millions)
 
                         
Direct vehicle and operating
  $ 204.2     $ 213.4     $ (9.2     (4.3%
Vehicle depreciation and lease charges, net
    85.7       102.9       (17.2 )     (16.7% )
Selling, general and administrative
    59.4       54.8       4.6       8.4%  
Interest expense, net of interest income
    22.3       24.5       (2.2 )     (9.0%
Long-lived asset impairment
    0.7       0.4       0.3       83.6%  
  Total expenses
  $ 372.3     $ 396.0     $ (23.7 )     (6.0% )
                                 
(Increase) decrease in fair value of derivatives
  $ (6.5 )   $ (5.6 )   $ (0.9     (16.1%
                                 
 
Direct vehicle and operating expenses for the third quarter of 2010 decreased $9.2 million.  As a percent of revenue, direct vehicle and operating expenses were 46.0% in the third quarter of 2010, compared to 48.6% in the third quarter of 2009.

The decrease in direct vehicle and operating expense in the third quarter of 2010 primarily resulted from the following:

 
Ø
Personnel-related expenses decreased $3.8 million.  Approximately $1.6 million of the decrease resulted from a reduced number of employees driven by cost reduction efforts, while the Company also realized a $1.1 million decrease in group insurance expenses due to favorable claims experience and lower personnel levels.  In addition, there was $1.1 million of lower incentive compensation expense in the third quarter of 2010 compared to the third quarter of 2009 due to a difference in the timing of the incentive compensation accrual resulting from a lower proportion of income in the third quarter of 2010 compared to the third quarter of 2009.
 
 
30

 
 
 
Ø
Communications and computer expenses decreased $1.6 million due to cost reduction initiatives.
 
 
Ø
Vehicle-related expenses decreased $1.3 million resulting primarily from a decrease in maintenance expenses of $4.7 million due to a newer fleet in 2010 compared to 2009 and a $0.6 million reduction in vehicle shuttling expenses. These decreases were partially offset by a $2.0 million increase in tag and tax expenses due to purchases of new vehicles in 2010, a $1.4 million increase in net damages and a $0.9 million increase in gasoline expense resulting from higher average gas prices. This increased gasoline expense is generally recovered in revenues from customers.  All other vehicle-related expenses decreased $0.3 million.
 
 
Ø
Bad debt expense decreased $0.6 million due to improved collection experience in 2010.

 
Ø
Facility and airport concession expenses decreased $0.5 million.  This decrease resulted from lower airport concession fees.

 
Ø
All other direct vehicle and operating expenses decreased $1.4 million.

Net vehicle depreciation and lease charges for the third quarter of 2010 decreased $17.2 million.  As a percent of revenue, net vehicle depreciation and lease charges were 19.3% in the third quarter of 2010, compared to 23.5% in the third quarter of 2009.

The decrease in net vehicle depreciation and lease charges resulted from the following:

 
Ø
Vehicle depreciation expense decreased $24.0 million, primarily resulting from a 16.8% decrease in the average depreciation rate due to significantly improved conditions in the used car market, extended vehicle holding periods, more diversified fleet mix, and process improvements made by the Company in vehicle remarketing practices.  The average depreciable fleet for the third quarter of 2010 remained consistent with the third quarter of 2009.

 
Ø
Net vehicle gains on disposal of risk vehicles (reductions to net vehicle depreciation and lease charges), which effectively represent revisions to previous estimates of vehicle depreciation charges by reducing vehicle depreciation and lease charges, decreased $6.8 million from a $16.8 million gain in the third quarter of 2009 to a $10.0 million gain for the third quarter of 2010.  This decrease in gains on vehicle dispositions resulted primarily from significantly fewer units sold during the third quarter of 2010 and a slightly lower average gain per unit as compared to the third quarter of 2009.

 
Ø
Lease charges for vehicles leased from third parties remained consistent during the third quarters of 2010 and 2009.

Selling, general and administrative expenses for the third quarter of 2010 increased $4.6 million. As a percent of revenue, selling, general and administrative expenses were 13.4% of revenue in the third quarter of 2010, compared to 12.5% in the third quarter of 2009.

The increase in selling, general and administrative expenses in the third quarter of 2010 primarily resulted from the following:

 
Ø
Merger-related costs incurred in the third quarter of 2010 totaled $11.9 million.

 
Ø
Personnel-related expenses decreased $4.1 million primarily related to a $2.2 million decrease in incentive compensation expense due to a difference in the timing of the incentive compensation accrual, and a $1.3 million decrease in performance share expense in 2010 due to the elimination of performance share grants during 2009 and 2010.  All other personnel-related expenses decreased $0.6 million.
 
 
31

 
 
 
Ø
Outsourcing expenses decreased $1.6 million due to fewer IT-related projects in 2010.

 
Ø
Outside services expense decreased $0.9 million primarily due to reduced consulting expense.

 
Ø
The change in the market value of investments in the Company’s deferred compensation and retirement plans decreased selling, general and administrative expenses by $0.5 million due to a reduction in the gain on these plans compared to the same period in 2009, which was offset by a corresponding reduction in those investments that is recognized in other revenue and, therefore, did not impact net income.

 
Ø
All other selling, general and administrative expenses decreased by $0.2 million.

Net interest expense for the third quarter of 2010 decreased $2.2 million due to lower average vehicle debt, partially offset by reduced interest income as the Company used excess restricted cash on hand in 2009 to reduce indebtedness and to reinvest in the rental fleet.  Net interest expense was 5.0% of revenue in the third quarter of 2010, compared to 5.6% in the third quarter of 2009.

Long-lived asset impairment expense increased $0.3 million in 2010, due to higher write-offs of software no longer in use in the third quarter of 2010 compared to the third quarter of 2009.

The change in fair value of the Company’s derivative agreements was an increase of $6.5 million for the third quarter of 2010 compared to an increase of $5.6 million for the third quarter of 2009, resulting in a quarter-over-quarter increase of $0.9 million.

Income tax expense for the third quarter of 2010 was $28.5 million.  The effective income tax rate in the third quarter of 2010 was 36.7% compared to 37.8% in the third quarter of 2009.  The effective income tax rate for the third quarter of 2010 and 2009 was higher than the statutory rates principally due to state income taxes. Interim reporting requirements for applying separate, annual effective income tax rates to U.S. and Canadian operations, combined with the seasonal impact of Canadian operations, generally causes significant variations in the Company’s quarterly consolidated effective income tax rates.

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

Operating Results

During the nine months ended September 30, 2010, the Company’s decline in revenues primarily resulted from lower vehicle leasing revenue attributable to the termination of a substantial portion of the licensee vehicle leasing program during 2009, coupled with reduced vehicle rental revenues due to a 2.0% reduction in the number of rentals days.  This volume decline was partially offset by a 1.6% increase in average revenue per day.  The Company continued to benefit from a strong used car market and continued focus on cost efficiency.  The Company incurred $20.4 million in merger-related expenses during the nine months ended September 30, 2010 resulting in an increase in selling, general and administrative expenses.  During the nine months ended September 30, 2010, income before income taxes was $194.8 million, compared to $57.6 million for the nine months ended September 30, 2009.
 
 
32

 
 
Revenues
   
Nine Months
             
    Ended September 30,    
$ Increase/
   
% Increase/
 
   
2010
   
2009
   
(decrease)
   
(decrease)
 
   
(in millions)
 
                         
Vehicle rentals
  $ 1,138.0     $ 1,143.2     $ (5.2 )     (0.4% )
Other
    50.1       57.7       (7.6 )     (13.3% )
  Total revenues
  $ 1,188.1     $ 1,200.9     $ (12.8 )     (1.1% )
                                 
Vehicle rental metrics:
                               
Number of rental days
    23,160,428       23,633,380       (472,952 )     (2.0% )
Average revenue per day
  $ 49.14     $ 48.37     $ 0.77       1.6%  
                                 
 
Vehicle rental revenue for the nine months ended September 30, 2010 decreased 0.4%, due to a 2.0% decrease in rental days totaling $22.9 million, partially offset by a 1.6% increase in revenue per day totaling $17.7 million.

Other revenue decreased $7.6 million primarily due to a decrease of $7.7 million in leasing revenue attributable to the termination of a substantial portion of the licensee vehicle leasing program during 2009.

Expenses
   
Nine Months
             
    Ended September 30,    
$ Increase/
   
% Increase/
 
   
2010
   
2009
   
(decrease)
   
(decrease)
 
   
(in millions)
 
                         
Direct vehicle and operating
  $ 577.4     $ 590.1     $ (12.7 )     (2.1% )
Vehicle depreciation and lease charges, net
    208.1       345.2       (137.1 )     (39.7% )
Selling, general and administrative
    162.9       153.8       9.1       5.9%  
Interest expense, net of interest income
    65.4       73.6       (8.2 )     (11.2% )
Long-lived asset impairment
    0.9       0.6       0.3       46.3%  
  Total expenses
  $ 1,014.7     $ 1,163.3     $ (148.6 )     (12.8% )
                                 
(Increase) decrease in fair value of derivatives
  $ (21.3 )   $ (20.0 )   $ (1.3     (6.6%
                                 
 
Direct vehicle and operating expenses for the nine months ended September 30, 2010 decreased $12.7 million, primarily due to lower transaction levels, as well as an ongoing focus on cost reduction initiatives.  As a percent of revenue, direct vehicle and operating expenses were 48.6% for the nine months ended September 30, 2010, compared to 49.1% for the nine months ended September 30, 2009.

The decrease in direct vehicle and operating expense during the nine months ended September 30, 2010 resulted from the following:

 
Ø
Communications and computer expenses decreased $4.6 million due to cost reduction initiatives.

 
Ø
Personnel-related expenses decreased $4.2 million.  Approximately $3.7 million of the decrease resulted from a reduced number of employees driven by cost reduction efforts, while the Company also realized a $3.2 million decrease in group insurance expense due to favorable claims and lower personnel expenses. These decreases were partially offset by a $2.0 million increase in the vacation accrual due to a related policy change beginning in the first quarter of 2010, coupled with a $0.7 million increase in 2010 incentive compensation expense.
 
 
33

 
 
 
Ø
Bad debt expense decreased $2.9 million due to improved collection experience in 2010 and the bankruptcy of one of the Company’s tour operators during the first quarter of 2009.

 
Ø
Facility and airport concession expenses decreased $0.9 million.  This decrease resulted from decreases in rent expense of $1.5 million primarily due to company-owned store closures, offset by a $0.6 million increase in airport concession fees.

 
Ø
Vehicle-related expenses increased $1.4 million.  This increase resulted from a $7.0 million increase in gasoline expense resulting from higher average gas prices, which is generally recovered in revenues from customers, a $4.6 million increase in vehicle insurance expense primarily due to an increase in expense of $3.0 million related to an unfavorable judgment on a vicarious liability claim that the Company is appealing and an increase of $4.0 million for tag and tax due to purchases of new vehicles in 2010.   These increases were partially offset by an $8.5 million decrease in vehicle maintenance expense primarily resulting from a newer and slightly reduced fleet, a $2.1 million decrease in costs related to the Company’s insurance premium expense, a $2.0 million reduction in vehicle shuttling expenses and a $1.2 million decrease in net vehicle damages resulting from improved damage recovery collections.

 
Ø
All other direct vehicle and operating expenses decreased $1.5 million.

Net vehicle depreciation and lease charges for the nine months ended September 30, 2010 decreased $137.1 million.  As a percent of revenue, net vehicle depreciation and lease charges were 17.5% for the nine months ended September 30, 2010, compared to 28.7% for the nine months ended September 30, 2009.

The decrease in net vehicle depreciation and lease charges resulted from the following:

 
Ø
Vehicle depreciation expense decreased $92.4 million, primarily resulting from a 37.9% decrease in the average depreciation rate due to significantly improved conditions in the used car market, extended vehicle holding periods, more diversified fleet mix, and process improvements made by the Company in vehicle remarketing practices, coupled with a 2.7% decrease in the average depreciable fleet.

 
Ø
Net vehicle gains on disposal of risk vehicles (reductions to net vehicle depreciation and lease charges), which effectively represent revisions to previous estimates of vehicle depreciation charges by reducing vehicle depreciation and lease charges, increased $44.3 million from an $18.9 million gain for the nine months ended September 30, 2009 to a $63.2 million gain for the nine months ended September 30, 2010.  This increase in gains on vehicle dispositions resulted from significantly more units sold during the nine months ended September 30, 2010 and a higher average gain per unit as compared to the nine months ended September 30, 2009.

 
Ø
Lease charges for vehicles leased from third parties decreased $0.4 million for the third quarter of 2010.

Selling, general and administrative expenses for the nine months ended September 30, 2010 increased $9.1 million.  As a percent of revenue, selling, general and administrative expenses were 13.7% of revenue for the nine months ended September 30, 2010, compared to 12.8% for the nine months ended September 30, 2009.

The increase in selling, general and administrative expenses in the nine months ended September 30, 2010 resulted from the following:

 
Ø
Merger-related costs incurred in 2010 totaled $20.4 million.
 
 
34

 
 
 
Ø
Outsourcing expenses decreased $4.6 million due to fewer IT-related projects in 2010.

 
Ø
Outside services expense decreased $2.3 million primarily due to reduced consulting expense.

 
Ø
The change in the market value of investments in the Company’s deferred compensation and retirement plans decreased selling, general and administrative expenses by $1.7 million due to a reduction in the gain on these plans compared to the same period in 2009, which was offset by a corresponding gain on those investments that is recognized in other revenue and, therefore, did not impact net income.

 
Ø
Personnel-related expenses decreased $0.2 million due to a $0.6 million decrease in group insurance, a $0.7 million decrease in performance share expense, and a $0.7 million decrease in stock option expense, offset by a $1.2 million increase in the vacation accrual and a $0.6 million increase in 2010 incentive compensation expense.

 
Ø
All other selling, general and administrative expenses decreased by $2.5 million.

Net interest expense for the nine months ended September 30, 2010 decreased $8.2 million due to lower average vehicle debt, partially offset by reduced interest income as the Company used excess restricted cash on hand in 2009 to reduce indebtedness, and to reinvest in the rental fleet.  Net interest expense was 5.5% of revenue during the nine months ended September 30, 2010, compared to 6.2% during the nine months ended September 30, 2009.

Long-lived asset impairment expense increased $0.3 million in 2010 due to higher write-offs of software no longer in use during the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

The change in fair value of the Company’s derivative agreements was an increase of $21.3 million during the nine months ended September 30, 2010 compared to an increase of $20.0 million during the nine months ended September 30, 2009, resulting in a period-over-period increase of $1.3 million.

Income tax expense for the nine months ended September 30, 2010 was $76.1 million.  The effective income tax rate for the nine months ended September 30, 2010 was 39.0% compared to 41.8% for the nine months ended September 30, 2009.  The effective income tax rate for the nine months ended September 30, 2010 and 2009 was higher than the statutory rates principally due to state income taxes and the full valuation allowance for the tax benefit of Canadian operating losses.  Interim reporting requirements for applying separate, annual effective income tax rates to U.S. and Canadian operations, combined with the seasonal impact of Canadian operations, will cause significant variations in the Company’s quarterly consolidated effective income tax rates.

Seasonality

The Company’s business is subject to seasonal variations in customer demand, with the summer vacation period representing the peak season for vehicle rentals.  During the peak season, the Company increases its rental fleet and workforce to accommodate increased rental activity.  As a result, any occurrence that disrupts travel patterns during the summer period could have a material adverse effect on the annual performance of the Company.  The first and fourth quarters for the Company’s rental operations are generally the weakest, when there is limited leisure travel and a greater potential for adverse weather conditions.  Many of the operating expenses such as rent, general insurance and administrative personnel are fixed and cannot be reduced during periods of decreased rental demand.

 
35

 
 
Outlook for 2010

The Company is providing the guidance below with respect to its fourth quarter outlook and reaffirms its previously announced guidance for fleet costs for 2011.

The Company noted that it expects rental revenue for the fourth quarter of 2010 to increase 2% to 4% compared to the fourth quarter of 2009, primarily as a result of increased transaction days. The Company noted that gains from vehicle dispositions are expected to continue to decline in the fourth quarter, and as a result, the Company expects depreciation per unit per month to be within a range from $295 to $305 per unit per month during the fourth quarter of 2010.

Based on year-to-date results through September and the outlook for the fourth quarter, the Company reaffirmed that it expects Corporate Adjusted EBITDA, excluding merger-related expenses, to be within a range of $240 million to $260 million for the full year of 2010.  The Company’s 2009 Corporate Adjusted EBITDA was $99.4 million.

The Company reaffirmed its expected fleet cost for 2011 to be within a range of $300 to $310 per unit per month.

See below for the reconciliation of estimated Corporate Adjusted EBITDA for the full year of 2010.

   
Full Year
 
   
2010
   
2009
 
   
(in millions)
 
Reconciliation of Pretax income to
 
(forecasted)
   
(actual)
 
Corporate Adjusted EBITDA
           
             
Pretax income (net income plus income tax expense)
    $195 - $215     $ 81  
                 
(Increase) decrease in fair value of derivatives (2010 amount is YTD September 2010)
    (21 )     (29 )
Non-vehicle interest expense
    10       13  
Non-vehicle depreciation
    20       19  
Amortization
    7       8  
Non-cash stock incentives
    4       5  
Long-lived asset impairment
    1       2  
Merger-related expenses (a)
    24       -  
                 
Corporate Adjusted EBITDA, excluding merger-related expenses
    $240-$260     $ 99  
                 
                 
(a)  Merger-related expenses include legal, litigation, advisory and other fees related to a potential merger transaction.
 
                 
 
Liquidity and Capital Resources

The Company’s primary uses of liquidity are for the purchase of vehicles for its rental fleet, including required collateral enhancement under its fleet financing structures, non-vehicle capital expenditures and working capital.  The Company uses both cash and letters of credit to support asset-backed vehicle financing programs.  The Company also uses letters of credit or insurance bonds to secure certain commitments related to airport concession agreements, insurance programs and for other purposes.  The Company’s primary sources of liquidity are cash generated from operations, secured vehicle financing, sales proceeds from disposal of used vehicles, letters of credit provided under the Senior Secured Credit Facilities (hereinafter defined) and amounts payable under insurance bonds.

Cash generated by operating activities of $367.7 million for the nine months ended September 30, 2010 was primarily the result of net income, adjusted for depreciation.  The liquidity necessary for purchasing vehicles is primarily obtained from secured vehicle financing, sales proceeds from disposal of used vehicles and cash generated by operating activities.  The secured vehicle financing facilities require varying levels of credit enhancement or overcollateralization, which are provided by a combination of cash, vehicles and letters of credit.  
 
 
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Enhancement levels vary based on the source of debt used to finance the vehicles.  Additionally, enhancement levels are seasonal and increase significantly during the second quarter when the fleet is at peak levels.  Enhancement requirements under asset-backed financing sources have increased significantly for the rental car industry as a whole over the past two years, and as a result, enhancement levels under the new series 2010 notes are approximately 55%, compared to 30% on the Series 2006-1 notes and Series 2007-1 notes.  Based on expected future peak fleet levels and the scheduled amortization of the Series 2006-1 notes beginning in December 2010 which will be refinanced with borrowings under the Series 2010-3 VFN, the Company expects to provide up to $200 million of additional enhancement in 2011 compared to September 30, 2010 levels.

The Company believes that its cash generated from operations, cash balances and existing secured vehicle financing programs are adequate to meet its liquidity requirements during 2010 and early 2011.  During 2010, the Company added $950 million of fleet financing capacity, of which $750 million is intended to provide a funding source for future debt maturities, including any future rapid amortization event that would occur as a result of an event of bankruptcy with respect to Monolines.  If both series of Monoline-supported medium-term notes were to undergo amortization concurrently, (e.g., due to simultaneous rapid amortizations, or rapid amortization under one series occurring during another series scheduled amortization period) the Company believes that it would need approximately $200 million of additional fleet financing to retire the affected notes and meet peak summer fleet levels in 2011.  The Company believes that it would be able to access the asset-backed credit market to obtain sufficient financing to meet its cash requirements.  See Part II, Item 1A - Risk Factors, “Event of Bankruptcy with Respect to One or More  Monolines.”

Cash used in investing activities was $147.5 million.  The principal expenditure of cash from investing activities during the nine months ended September 30, 2010 was for purchases of new revenue-earning vehicles, which totaled $1.1 billion, partially offset by $0.7 billion in proceeds from the sale of used revenue-earning vehicles.  In addition, at September 30, 2010, restricted cash and investments decreased $333.3 million from December 31, 2009 primarily due to the payoff of the Series 2005-1 notes.  The Company’s need for cash to finance vehicles is seasonal and typically peaks in the second and third quarters of the year when fleet levels build to meet seasonal rental demand.  Fleet levels are the lowest in the first and fourth quarters when rental demand is at a seasonal low.  The Company expects to continue to fund its revenue-earning vehicles with borrowings under its vehicle financing programs, cash provided from operations and from disposal of used vehicles.  The Company also used cash for non-vehicle capital expenditures of $18.0 million.  These expenditures consist primarily of airport facility improvements for the Company’s rental locations and information technology-related projects.

Cash used in financing activities was $201.6 million primarily due to the $400 million of scheduled debt repayments on the Series 2005-1 notes, partially offset by the issuance of the Series 2010-1 VFN totaling $200 million.

The Company has significant requirements to maintain letters of credit and surety bonds to support its insurance programs and airport concession commitments.  At September 30, 2010, the Company had $60.0 million in letters of credit, including $54.7 million in letters of credit issued under the Revolving Credit Facility (hereinafter defined), and $41.3 million in surety bonds to secure these obligations.

Asset-Backed Medium-Term Note and Variable Funding Note Programs

The asset-backed medium-term note program at September 30, 2010 was comprised of $1.1 billion in asset-backed medium-term notes with maturities in 2011 and 2012.  Borrowings under the asset-backed medium-term notes are secured by eligible vehicle collateral, among other things, and bear interest at fixed rates of 5.27% for the Series 2006-1 notes and 5.16% for the Series 2007-1 notes including floating rate notes swapped to fixed rates.  Proceeds from the asset-backed medium-term notes and variable funding notes that are temporarily not utilized for financing vehicles and certain related receivables are maintained in restricted cash and investment accounts and are available for the purchase of vehicles.  These amounts totaled approximately $253.0 million at September 30, 2010.
 
 
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The Series 2006-1 notes and the Series 2007-1 notes will begin scheduled amortization in December 2010 and February 2012, respectively, and each will amortize over a six-month period.  These scheduled amortization periods may be accelerated under certain circumstances, including an event of bankruptcy with respect to the applicable Monolines.  The Series 2006-1 notes and Series 2007-1 notes are insured by AMBAC and FGIC, respectively.  On October 25, 2010, FGIC indicated that it had not received sufficient participation in its offer to exchange certain residential mortgage-backed securities and asset-backed securities insured by it, and that, consequently, FGIC had not satisfied the conditions for successfully effectuating its surplus restoration plan as required by the NYID.  As of November 2, 2010, NYID has taken no further public action with respect to FGIC, but may at any time seek an order of rehabilitation or liquidation of FGIC.  Depending on the circumstances, such action by NYID and/or the issuance of such order would result, immediately or after a period of time, in an event of bankruptcy with respect to FGIC under the terms of the Series 2007-1 notes.  On November 1, 2010, AMBAC’s parent company, Ambac Financial Group, Inc., announced that it had determined not to make a regularly scheduled interest payment on certain of its debt securities and that, because it has been unable to raise capital as an alternative to bankruptcy protection, it is pursuing a restructuring of its outstanding debt through a prepackaged bankruptcy proceeding.   The timing of any restructuring and its potential effect on AMBAC and its obligations under outstanding financial insurance policies, including with respect to the Series 2006-1 notes, is uncertain. The period during which the consequence of any future rapid amortization event would occur would generally overlap with the scheduled amortization period, for which the Company has completed replacement financing as discussed elsewhere in this report.  See Part II, Item 1A - Risk Factors, “Event of Bankruptcy with Respect to One or More Monolines.”

In April 2010, RCFC issued a $200 million Series 2010-1 VFN which may be repaid and redrawn in whole or in part at any time during the Series 2010-1 VFN’s two-year revolving period.  Upon issuance, the Series 2010-1 VFN was fully drawn at $200 million.  At the end of the revolving period, the then-outstanding principal amount of the Series 2010-1 VFN will be repaid monthly over a six-month period, beginning in April 2012, with the final payment in September 2012.  The Series 2010-1 VFN bears 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 VFN, 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 VFN.  The 2010-1 VFN has a facility fee commitment rate of up to 1.5% per annum on any unused portion of the facility.  In connection with this financing, RCFC entered into an interest rate cap agreement for a term of 30 months with a notional amount of $200 million to effectively limit the Series 2010-1 VFN’s floating rate to a maximum of 5%.

In June 2010, RCFC completed a $300 million Series 2010-2 VFN which may be drawn and repaid from time to time in whole or in part at any time during the Series 2010-2 VFN’s three-year revolving period.  The Series 2010-2 VFN was undrawn at September 30, 2010; however, $225 million was drawn in October 2010.  At the end of the revolving period, the then-outstanding principal amount of the Series 2010-2 VFN will be repaid monthly over a six-month period, beginning in July 2013, with the final payment in December 2013.  The Series 2010-2 VFN bears interest at a spread of 375 basis points above one-month LIBOR.  The 2010-2 VFN has a facility fee commitment rate of up to 1.5% per annum on any unused portion of the facility.  In connection with this financing, RCFC entered into an interest rate cap agreement for a term of 42 months with a notional amount of $300 million to effectively limit the Series 2010-2 VFN’s floating rate to a maximum of 5%.

On October 28, 2010, RCFC completed a $450 million Series 2010-3 VFN, which may be drawn and repaid from time to time in whole or in part at any time during the Series 2010-3 VFN’s one-year revolving period.  The Series 2010-3 VFN is currently undrawn.  At the end of the revolving period, the then-outstanding principal amount of the Series 2010-3 VFN will be repaid monthly over a six-month period, beginning in November 2011, with the final payment in April 2012.  The Series 2010-3 VFN bears interest at a spread of 125 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 2010-3 VFN, or at 325 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 2010-3 VFN.  The Series 2010-3 VFN has a facility fee commitment rate of up to 0.8% per annum on any unused portion of the facility.  In connection with this financing, RCFC entered into an interest rate cap agreement for a term of 25 months with a notional amount of $450 million to effectively limit the Series 2010-3 VFN’s floating rate to a maximum of 5%.
 
 
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Vehicle Debt and Obligations

In May 2010, the Company paid in full its Canadian fleet securitization program and completed a new CAD $150 million Canadian fleet securitization program. This program has a term of one year and requires 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.  At September 30, 2010, DTG Canada had approximately CAD $82.0 million (US $79.7 million) funded under this program.

Senior Secured Credit Facilities

At September 30, 2010, the Company’s senior secured credit facilities (the “Senior Secured Credit Facilities”) were comprised of a $231.3 million Revolving Credit Facility and a $150.6 million Term Loan, both of which expire on June 15, 2013.  The Senior Secured Credit Facilities contain certain financial and other covenants, including a covenant to maintain a minimum adjusted tangible net worth of $150 million, and a minimum of $100 million of unrestricted cash and cash equivalents including $60 million held in separate accounts with the collateral agent to secure payment of amounts outstanding under the Term Loan and letters of credit issued under the Revolving Credit Facility.  The Senior Secured Credit Facilities contain certain other restrictive covenants, including annual limitations on non-vehicle capital expenditures and a prohibition against cash dividends and share repurchases.  The Senior Secured Credit Facilities are collateralized by a first priority lien on substantially all material non-vehicle assets and certain vehicle assets not pledged as collateral under a vehicle financing facility.  As of September 30, 2010, the Company is in compliance with all covenants.

The Revolving Credit Facility expires on June 15, 2013, and is restricted to use for letters of credit.  The Revolving Credit Facility contains sub-limits of $40 million and $100 million for letters of credit to be used as vehicle enhancement in both its Canadian and U.S. operations, respectively.  The Company had letters of credit outstanding under the Revolving Credit Facility of $39.8 million for U.S. enhancement, $27.1 million for Canadian enhancement and $62.7 million in general purpose enhancements, with remaining available capacity of $101.7 million at September 30, 2010.

In each of March, June and September 2010, the Company made a $2.5 million principal payment on its Term Loan and expects to continue to make minimum quarterly principal payments of $2.5 million until the maturity of the Term Loan on June 15, 2013, at which time the remaining principal balance will be repaid.

Income Taxes

The Company utilizes a Like-Kind Exchange Program for its vehicles whereby tax basis gains on disposal of eligible revenue-earning vehicles are deferred. 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, thereby deferring taxable gains from vehicle dispositions.  In addition, the Company has historically elected to utilize accelerated or “bonus” depreciation methods on its vehicle inventories in order to defer its cash liability for U.S. taxes.
 
 
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As a result of significant reductions in vehicle inventory levels during 2009 and 2010, and low tax basis in existing vehicle inventories as a result of accelerated depreciation in prior periods, the Company expected to realize a reversal of prior period income tax deferrals during 2010, and accordingly, made estimated income tax payments during the nine months ended September 30, 2010 totaling $65.9 million.  On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 (the “Act”) into law extending bonus depreciation allowances for assets placed in service in 2010.  With the enactment of the Act, the Company’s 2010 cash tax liability is substantially reduced and the Company has a refundable overpayment for the excess estimated tax payments made in 2010.  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 tax payments in 2011 and beyond. See Part II, Item 1A - Risk Factors, “Event of Bankruptcy with Respect to One or More Monolines.”

New Accounting Standards

For a discussion on new accounting standards refer to Note 13 of the Notes to condensed consolidated financial statements in Item 1 – Financial Statements.

ITEM 3.                   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s primary market risk exposure is changing interest rates, primarily in the United States.  The Company manages interest rates through use of a combination of fixed and floating rate debt and interest rate swap agreements.  All items described are non-trading and are stated in U.S. dollars.  Because a portion of the Company’s debt is denominated in Canadian dollars, its carrying value is impacted by exchange rate fluctuations.  However, this foreign currency risk is mitigated by the underlying collateral which is the Canadian fleet.  Other foreign exchange risk is immaterial to the consolidated results and financial condition of the Company.  The fair value of the interest rate swaps is calculated using projected market interest rates over the term of the related debt instruments as provided by the counter parties.

Based on the Company’s level of floating rate debt (excluding notes with floating interest rates swapped into fixed rates) at September 30, 2010, a 50 basis point fluctuation in interest rates would have an approximate $2 million impact on the Company’s expected pretax income on an annual basis.  This impact on pretax income would be modified by earnings from cash and cash equivalents and restricted cash and investments, which are invested on a short-term basis and subject to fluctuations in interest rates.  At September 30, 2010, cash and cash equivalents totaled $419.0 million, cash and cash equivalents – required minimum balance totaled $100.0 million and restricted cash and investments totaled $289.6 million.

At September 30, 2010, there were no significant changes in the Company’s quantitative disclosures about market risk compared to December 31, 2009, which is included under Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, except for the net change of the derivative financial instruments noted in Notes 8 and 9 to the condensed consolidated financial statements, and except for the change in fair value since December 31, 2009 for the tabular entries, (i) “Vehicle Debt and Obligations - Floating Rates,” from $1,307.1 million at December 31, 2009 to $1,279.7 million at September 30, 2010, which reduction includes the payoff of the variable-rate portion of the Series 2005-1 notes of $290.0 million offset by the issuance of the Series 2010-1 VFN of $200.0 million and an increase in fair market value of the asset-backed medium-term notes of $62.6 million and (ii) “Vehicle Debt and Obligations – Fixed Rates,” from $110.4 million at December 31, 2009 to a zero balance at September 30, 2010, due to the  payoff of the fixed-rate portion of the Series 2005-1 notes of $110.0 million.

 
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ITEM 4.                   CONTROLS AND PROCEDURES
Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms.  The disclosure controls and procedures are also designed with the objective of ensuring such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.  In designing and evaluating the disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Additionally, in designing the disclosure controls and procedures, the Company’s management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report.  Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the quarter covered by this report.
 
Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act, identified in connection with the evaluation of the Company’s internal control performed during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
PART II - OTHER INFORMATION

ITEM 1.                   LEGAL PROCEEDINGS
The following information supplements and amends our discussion set forth under Part I, Item 3 – Legal Proceedings in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009:

Various class action complaints relating to the now terminated proposed merger transaction with Hertz have been filed in Oklahoma state court, Oklahoma federal court, and Delaware Chancery Court against the Company, its directors, and Hertz by various plaintiffs, for themselves and on behalf of the Company's stockholders, excluding defendants and their affiliates.  These complaints allege that the consideration the Company's stockholders would have received in connection with the proposed transaction with Hertz inadequate and that the Company's directors breached their fiduciary duties to stockholders in negotiating and approving the Merger Agreement.  These complaints also allege that the proxy materials that were sent to the Company's stockholders to approve the Merger Agreement are materially false and misleading.  The cases and their current status are as follows:  1) Henzel v. Dollar Thrifty Automotive Group, Inc., et al. (Consolidated Case No. CJ-2010-02761, Dist. Ct. Tulsa County, Oklahoma) - the hearing on the Company’s motion for reconsideration of the Company’s motion to dismiss was set for September 28, 2010, but the parties agreed that it would not go forward on that day and no new date for the hearing has yet been set; 2) In Re: Dollar Thrifty Shareholder Litigation (Consolidated Case No. 5458-VCS, Delaware Court of Chancery) - the Court denied the motion for preliminary injunction on September 8, 2010; and 3) Rice v. Dollar Thrifty Automotive Group, Inc., et al. (Consolidated Case No. 10-CV-0294-CVE-FHM, U.S. Dist. Ct. for the Northern Dist. of Oklahoma) – the parties filed a stipulation of dismissal of this action on October 15, 2010, and the court has dismissed the action.  The Company believes that these complaints are without merit. 
 
 
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The Company is a defendant in several class action lawsuits in California and one in Colorado.  The California lawsuits allege that the pass through of the California trade and tourism commission and airport concession fees violate antitrust laws and various other rights and laws by compelling out-of-state visitors to subsidize the passenger car rental tourism assessment program, violation of the California Business and Professions Code, breach of contract, and the Colorado lawsuit alleges violation of the Colorado Consumer Protection Act.  The lawsuit in Colorado was dismissed in July 2010 and the plaintiffs filed a notice of appeal on August 19, 2010.  The Company intends to vigorously defend these matters.  Given the inherent uncertainties of litigation, the Company cannot predict the ultimate outcome or reasonably estimate the amount of ultimate loss that may arise from these lawsuits.
 
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.

ITEM 1A.                   RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 with the exception of the following:
 
Certain Transactions or Events Could Make Us Liable for a $44.6 Million Termination Fee, Plus Reimbursement of Transaction Expenses
 
Because our stockholders did not approve the proposed acquisition of the Company by Hertz at a time when a competing takeover proposal had been announced and had not been withdrawn, we could be liable to Hertz for a termination fee of approximately $44.6 million, plus reimbursement of up to $5 million of Hertz’s transaction expenses, if, within 12 months after the October 1, 2010 termination date of our Merger Agreement with Hertz, we enter into a definitive agreement with a third party with respect to the consummation of a “Company Takeover Transaction”, our Board of Directors recommends to our stockholders a Company Takeover Transaction, or a Company Takeover Transaction is consummated.  A Company Takeover Transaction includes (i) a proposal for the merger, consolidation, share exchange, business combination, reorganization, recapitalization or similar transaction involving more than 50% of the assets of the Company and its subsidiaries; (ii) the direct or indirect acquisition of assets or businesses representing 50% or more of the assets of the Company and its subsidiaries, whether pursuant to an acquisition of securities, assets or otherwise; or (iii) the acquisition of 50% or more of any class of the issued and outstanding equity or voting securities of the Company.  In the event that such termination fee were to become payable, there can be no assurance that the relevant third party will agree to bear all or any portion of such fee.

 
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Cooperation with Avis in Seeking Regulatory Approval of a Possible Merger Transaction and Risks to the Company Whether or Not We Enter into a Definitive Agreement with Avis
 
As previously announced, we have agreed to cooperate with Avis in seeking regulatory approval of a possible business combination transaction with Avis, but we have not entered into any definitive agreement with Avis.  Avis may not be able to obtain such approval on reasonable terms and, even if it does, we may not be able to reach agreement with Avis on the terms of a merger or other business combination transaction.  Any such agreement would be subject to the approval of our stockholders and possibly other material conditions, such as potential divestitures of assets or businesses of either or both of the Company and Avis, or the approval of Avis’ stockholders.  Our efforts to cooperate with Avis in seeking regulatory approval and any proposed business combination transaction with Avis or any other third party, whether or not consummated, may result in a diversion of management’s attention from day-to-day operations, a loss of key personnel, and a disruption of our operations.  Any proposed transaction with Avis could also affect our relationships with third parties.  Any definitive agreement with respect to a business combination transaction would also likely impose customary restrictions on the conduct of our business outside of the ordinary course prior to the closing of the transaction or the termination of the agreement, which may also adversely affect our ability to manage our operations effectively in light of changes in economic or market conditions or to execute our business strategy and meet our financial goals. 
  
We will also face risks to our business and prospects if we continue as a stand-alone company, including constraints on our ability to increase revenues and operating income, given the challenges we face in increasing our market share in the key airport and local markets we serve, high barriers to entry in the insurance replacement market, our limited capital resources to finance growth through acquisitions or to expand internationally and the challenges we would face in further reducing our expenses. 

Event of Bankruptcy with Respect to One or More Monolines

Our obligations under our asset-backed medium-term notes total $1.1 billion in principal amount and are supported by note guaranty insurance policies issued by AMBAC and FGIC, both of which have been facing significant financial challenges.  These Monolines have undertaken significant restructuring actions to meet these challenges, but the financial guaranty industry as a whole continues to face substantial pressures.  An event of bankruptcy with respect to either of these Monolines could trigger an amortization of our obligations under the affected medium-term notes, which would require a more rapid repayment (or refinancing) of those notes and would cause a suspension of our Like-Kind Exchange Program with respect to all vehicles serving as collateral for the medium-term notes, and could also (subject to certain conditions) result in cross-defaults under certain of our other financing agreements or a liquidation of collateral.

FGIC is the Monoline that has provided financial insurance with respect to our Series 2007-1 notes.  On October 25, 2010, FGIC indicated that it had not received sufficient participation in its offer to exchange certain residential mortgage-backed securities and asset-backed securities insured by it, and that, consequently, FGIC had not satisfied the conditions for successfully effectuating its surplus restoration plan as required by the NYID.  As of November 2, 2010, the NYID has taken no further public action with respect to FGIC, but may at any time seek an order of rehabilitation or liquidation of FGIC.  Depending on the circumstances, such action by the NYID and/or the issuance of such order would result, immediately or after a period of time, in an event of bankruptcy with respect to FGIC under the terms of the Series 2007-1 notes.  We have received a letter from certain entities asserting their beneficial ownership of more than 50% of the Series 2007-1 notes and contending that an amortization event occurred under the related indenture as a result of, among other things, the NYID order, dated November 24, 2009, suspending payments by FGIC under its policies pending the removal of FGIC’s capital impairment.  We believe this assertion is completely without merit and, in our capacity as master servicer, we have so directed the trustee. There is, however, no assurance that these entities will not pursue their claim seeking to establish that the notes are currently subject to a rapid amortization event, which, if successful, could have the consequences described above.
  
 
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AMBAC is the Monoline providing financial insurance with respect to our Series 2006-1 notes.  On March 24, 2010, the Office of the Commissioner of Insurance of the State of Wisconsin (the “OCIW”) filed a petition in state court to rehabilitate a segregated group of insurance policies underwritten by AMBAC.  The rehabilitation order pertained solely to the segregated policies, and AMBAC is currently continuing operations and paying claims in the ordinary course of business on policy obligations not included in the segregated account.  The Series 2006-1 notes are not included in the segregated account.  There is no assurance that the OCIW will not take further action in the future with respect to rehabilitation of AMBAC as an entity, which could result in a rapid amortization under our Series 2006-1 notes.   Moreover, on November 1, 2010, AMBAC’s parent company, Ambac Financial Group, Inc., announced that it had determined not to make a regularly scheduled interest payment on certain of its debt securities and that, because it has been unable to raise capital as an alternative to bankruptcy protection, it is pursuing a restructuring of its outstanding debt through a prepackaged bankruptcy proceeding.   The timing of any restructuring and its potential effect on AMBAC and its obligations under outstanding financial insurance policies, including with respect to the Series 2006-1 notes, is uncertain. The Series 2006-1 notes will begin scheduled amortization in December of 2010, with repayment in full due in May 2011.  Accordingly, the period during which the consequence of any future rapid amortization event would occur would generally overlap with the scheduled amortization period, for which we have completed replacement financing as discussed elsewhere in this report.

During 2010, we added $950 million of fleet financing capacity, of which $750 million is intended to provide a funding source for future debt maturities, including any future rapid amortization event that would occur as a result of an event of bankruptcy with respect to a Monoline.  If both series of Monoline-supported medium-term notes were to undergo amortization concurrently (e.g., due to simultaneous rapid amortizations, or rapid amortization under one series occurring during another series scheduled amortization period), we believe we would need approximately $200 million of additional fleet financing to retire the affected notes while maintaining peak summer fleet levels in 2011. If we were unable to access the asset-backed financing markets in a timely manner, we believe that we would be able to meet our repayment obligations using our existing available fleet financing capacity and cash on hand, although our ability to finance peak fleet levels during the second and third quarters of 2011 could be impaired.  A reduction in fleet levels during the peak season could have an adverse effect on our results of operations and cash flow.  In order to minimize the financial impact of a reduced fleet, we would need to further extend the holding period of our vehicles, and could also need to take other actions, such as further reductions of our operations and workforce.

ITEM 5.                   OTHER INFORMATION
Entry into a material definitive agreement – Series 2010-3 VFN

On October 28, 2010, RCFC completed the issuance and sale of RCFC’s Series 2010-3 VFN.  The aggregate principal amount of the Series 2010-3 VFN is $450 million, which may be drawn and repaid from time to time in whole or in part by RCFC at any time during the Series 2010-3 VFN’s one-year revolving period.   After the end of the revolving period, the then-outstanding principal amount of the Series 2010-3 VFN is scheduled to be repaid in six monthly amortization payments, beginning in November 2011, with the final principal payment scheduled for April 2012.  The Series 2010-3 VFN was undrawn upon issuance.

The Series 2010-3 VFN bears interest at a spread of 125 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 2010-3 VFN, or at 325 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 2010-3 VFN.  The Series 2010-3 VFN has a facility fee commitment rate of up to 0.8% per annum on any unused portion of the facility.  In connection with this financing, RCFC entered into an interest rate cap agreement for a term of 25 months with a notional amount of $450 million to effectively limit the Series 2010-3 VFN’s floating rate to a maximum of 5%.

The Series 2010-3 VFN is secured by, among other things, a pledge of certain collateral owned by RCFC, including (i) a segregated group of rental vehicles that the Company uses in its daily vehicle rental operations (the “Group VII Vehicles”), (ii) all rights of RCFC under a master motor vehicle lease and servicing agreement, dated as of October 28, 2010, among RCFC, as lessor, the Company, as guarantor and master servicer, DTG Operations, Inc., an Oklahoma corporation and wholly owned subsidiary of the Company, as lessee and servicer, and those other affiliates of the Company that may become lessees and servicers thereunder from time to time (the “Group VII Lease”), (iii) all monies on deposit from time to time in certain collection and cash collateral accounts and (iv) all proceeds of the foregoing.
 
 
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RCFC is subject to numerous restrictive covenants under the Indenture (as defined below) and related agreements, including restrictive covenants with respect to liens, indebtedness, mergers and consolidations, disposition of assets, acquisition of assets, dividends, officers’ compensation, amendments of its organizational documents, investments, agreements, the types of business it may conduct and other customary covenants for a bankruptcy-remote special purpose entity such as RCFC.
 
The Series 2010-3 VFN is subject to certain amortization events, including (among others) non-payment of principal or interest, violation of covenants, certain insolvency or bankruptcy events with respect to RCFC or the Company, occurrence of an event of default under the Group VII Lease, failure to maintain certain enhancement levels, minimum asset amounts and letter of credit and/or cash liquidity amounts, failure to maintain an interest rate cap, certain changes in control relating to RCFC or the Company and certain other adverse events relating to the Company, including non-compliance with certain financial covenants.  The occurrence of an amortization event would terminate the revolving period and result in the rapid amortization of the Series 2010-3 VFN and, in certain cases, could result in the liquidation of the Group VII Vehicles.
 
RCFC sold the Series 2010-3 VFN to Deutsche Bank AG, New York Branch, The Bank of Nova Scotia, JPMorgan Chase Bank N.A., and The Royal Bank of Scotland plc, as managing agents (collectively, the “Managing Agents”), pursuant to a note purchase agreement, dated as of October 28, 2010, among RCFC, the Company, the Managing Agents, Saratoga Funding Corp., LLC, Liberty Street Funding LLC, Jupiter Securitization Company LLC, and Windmill Funding Corp, as conduit purchasers, and Deutsche Bank AG, New York Branch, The Bank of Nova Scotia, JPMorgan Chase Bank, N.A., and The Royal Bank of Scotland plc, as committed purchasers (such conduit purchasers and committed purchasers together, the “Funding Sources”), and Deutsche Bank AG, New York Branch, as administrative agent.  The Series 2010-3 VFN was issued to the Managing Agents, as Noteholders on behalf of the Funding Sources, pursuant to the Series 2010-3 Supplement, dated as of October 28, 2010, between RCFC and Deutsche Bank Trust Company Americas, as trustee (the “Trustee”), to the Amended and Restated Base Indenture, dated as of February 14, 2007, between RCFC and the Trustee (collectively, the “Indenture”).  The Series 2010-3 VFN has not been, and will not be, registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.  The Funding Sources and the Trustee, or their respective affiliates, with the exception of The Royal Bank of Scotland plc, are also participants in other credit facilities of the Company and its subsidiaries.

 
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ITEM 6. EXHIBITS
2.1
Amendment No. 1, dated September 10, 2010, to the Agreement and Plan of Merger, dated as of April 25, 2010, by and among Hertz Global Holdings, Inc., HDTMS, Inc. and Dollar Thrifty Automotive Group, Inc., filed as the same numbered exhibit with DTG’s Form 8-K, filed September 13, 2010, Commission File No. 1-3647*
 
4.225
Collateral Assignment of Exchange Agreement, dated as of October 28, 2010, among Rental Car Finance Corp., DTG Operations, Inc. and Deutsche Bank Trust Company Americas, as master collateral agent**
 
4.226
Note Purchase Agreement, dated as of October 28, 2010, among Rental Car Finance Corp., as seller, Dollar Thrifty Automotive Group, Inc., as master servicer, Saratoga Funding Corp., LLC, Liberty Street Funding LLC, Jupiter Securitization Company LLC, and Windmill Funding Corp, as conduit purchasers, Deutsche Bank AG, New York Branch, The Bank of Nova Scotia, JPMorgan Chase Bank, and The Royal Bank of Scotland plc, as committed purchasers and managing agents, and Deutsche Bank AG, New York Branch, as administrative agent**
 
4.227
Series 2010-3 Supplement to the Amended and Restated Base Indenture, dated as of October 28, 2010, between Rental Car Finance Corp. and Deutsche Bank Trust Company Americas, as trustee**
 
4.228
Master Motor Vehicle Lease and Servicing Agreement (Group VII), dated as of October 28, 2010, among Rental Car Finance Corp., as lessor, Dollar Thrifty Automotive Group, Inc., as guarantor and master servicer, DTG Operations, Inc., as lessee and servicer, and those subsidiaries of Dollar Thrifty Automotive Group, Inc. becoming lessees and servicers thereunder**
 
4.229
 
Amendment No. 2 effective October 28, 2010, to Master Exchange and Trust Agreement dated as of July 23, 2001 among Rental Car Finance Corp., DTG Operations, Thrifty, DB Like-Kind Exchange Services Corp., VEXCO, LLC and Deutsche Bank Trust Company Americas**
 
15.39
Letter from Deloitte & Touche LLP regarding interim financial information**
 
31.69
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**
 
31.70
 
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**
 
32.69
 
Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.70
 
Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
_____________________

*Incorporated by reference
**Filed herewith

 
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Table of Contents
Pursuant to the requirements 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.


   
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
     
     
November 2, 2010
By:
/s/  SCOTT L. THOMPSON
 
   
Scott L. Thompson
President, Chief Executive Officer and Principal
Executive Officer
 
 
November 2, 2010
By:
/s/  H. CLIFFORD BUSTER III
 
   
H. Clifford Buster III
Senior Executive Vice President, Chief Financial Officer
and Principal Financial Officer
 
 
 
 
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Exhibit Number                                                      Description
 
4.225
Collateral Assignment of Exchange Agreement, dated as of October 28, 2010, among Rental Car Finance Corp., DTG Operations, Inc. and Deutsche Bank Trust Company Americas, as master collateral agent
 
4.226
Note Purchase Agreement, dated as of October 28, 2010, among Rental Car Finance Corp., as seller, Dollar Thrifty Automotive Group, Inc., as master servicer, Saratoga Funding Corp., LLC, Liberty Street Funding LLC, Jupiter Securitization Company LLC, and Windmill Funding Corp, as conduit purchasers, Deutsche Bank AG, New York Branch, The Bank of Nova Scotia, JPMorgan Chase Bank, and The Royal Bank of Scotland plc, as committed purchasers and managing agents, and Deutsche Bank AG, New York Branch, as administrative agent
 
4.227
Series 2010-3 Supplement to the Amended and Restated Base Indenture, dated as of October 28, 2010, between Rental Car Finance Corp. and Deutsche Bank Trust Company Americas, as trustee
 
4.228
Master Motor Vehicle Lease and Servicing Agreement (Group VII), dated as of October 28, 2010, among Rental Car Finance Corp., as lessor, Dollar Thrifty Automotive Group, Inc., as guarantor and master servicer, DTG Operations, Inc., as lessee and servicer, and those subsidiaries of Dollar Thrifty Automotive Group, Inc. becoming lessees and servicers thereunder
 
4.229
 
Amendment No. 2 effective October 28, 2010, to Master Exchange and Trust Agreement dated as of July 23, 2001 among Rental Car Finance Corp., DTG Operations, Thrifty, DB Like-Kind Exchange Services Corp., VEXCO, LLC and Deutsche Bank Trust Company Americas
 
15.39
Letter from Deloitte & Touche LLP regarding interim financial information
 
31.69
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.70
 
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.69
 
Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.70
 
Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
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