SECURITIES AND EXCHANGE COMMISSION
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 June 30, 2005
OR
o | 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.
Delaware (State or other jurisdiction of incorporation or organization) | 73-1356520 (I.R.S. Employer 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: Yesx Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yesx Noo
The number of shares outstanding of the registrant’s Common Stock as of July 29, 2005 was 25,377,089.
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-Q
CONTENTS
Page | ||||||||
PART I - FINANCIAL INFORMATION | ||||||||
ITEM 1. FINANCIAL STATEMENTS | 3 | |||||||
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF | ||||||||
FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 18 | |||||||
ITEM 3. QUANTITATIVE AND QUALITATIVE | ||||||||
DISCLOSURES ABOUT MARKET RISK | 27 | |||||||
ITEM 4. CONTROLS AND PROCEDURES | 28 | |||||||
PART II - OTHER INFORMATION | ||||||||
ITEM 1. LEGAL PROCEEDINGS | 28 | |||||||
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES | ||||||||
AND USE OF PROCEEDS | 28 | |||||||
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF | ||||||||
SECURITY HOLDERS | 29 | |||||||
ITEM 6. EXHIBITS | 30 | |||||||
SIGNATURES | 31 | |||||||
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
Some of the statements contained herein under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Dollar Thrifty Automotive Group, Inc. believes such forward-looking statements are based upon reasonable assumptions, such statements are not guarantees of future performance and certain factors could cause results to differ materially from current expectations. These factors include: price and product competition; economic and competitive conditions in markets and countries where the companies’ customers reside and where the companies and their franchisees operate; natural hazards or catastrophes; incidents of terrorism; airline travel patterns; changes in capital availability or cost; costs and other terms related to the acquisition and disposition of automobiles; systems or communications failures; costs of conducting business and changes in structure or operations; and certain regulatory and environmental matters and litigation risks. Should one or more of these risks or uncertainties, among others, materialize, actual results could vary from those estimated, anticipated or projected. Dollar Thrifty Automotive Group, Inc. undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
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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 June 30, 2005, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2005 and 2004 and cash flows for the six-month periods ended June 30, 2005 and 2004. 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 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, 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated March 14, 2005, we expressed an unqualified opinion on those consolidated financial statements, which opinion includes an explanatory paragraph regarding the Company's adoption of Financial Accounting Standards Board Interpretation No. 46(R), Consolidation of Variable Interest Entities. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 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
August 9, 2005
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DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Three Months | Six Months | |||||||||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
REVENUES: | ||||||||||||||||||||||
Vehicle rentals | $ | 335,562 | $ | 317,040 | $ | 648,515 | $ | 582,385 | ||||||||||||||
Vehicle leasing | 15,311 | 20,709 | 29,837 | 38,477 | ||||||||||||||||||
Fees and services | 12,454 | 14,949 | 24,730 | 27,083 | ||||||||||||||||||
Other | 4,349 | 2,242 | 7,394 | 5,703 | ||||||||||||||||||
Total revenues | 367,676 | 354,940 | 710,476 | 653,648 | ||||||||||||||||||
COSTS AND EXPENSES: | ||||||||||||||||||||||
Direct vehicle and operating | 209,934 | 180,083 | 400,611 | 336,648 | ||||||||||||||||||
Vehicle depreciation and lease charges, net | 54,236 | 64,785 | 107,823 | 133,984 | ||||||||||||||||||
Selling, general and administrative | 60,129 | 56,253 | 114,984 | 103,800 | ||||||||||||||||||
Interest expense, net of interest income | 23,518 | 23,038 | 43,012 | 42,247 | ||||||||||||||||||
Total costs and expenses | 347,817 | 324,159 | 666,430 | 616,679 | ||||||||||||||||||
INCOME BEFORE INCOME TAXES | 19,859 | 30,781 | 44,046 | 36,969 | ||||||||||||||||||
INCOME TAX EXPENSE | 8,513 | 12,873 | 19,725 | 16,304 | ||||||||||||||||||
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE | 11,346 | 17,908 | 24,321 | 20,665 | ||||||||||||||||||
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE | - | - | - | 3,730 | ||||||||||||||||||
NET INCOME | $ | 11,346 | $ | 17,908 | $ | 24,321 | $ | 24,395 | ||||||||||||||
BASIC EARNINGS PER SHARE: | ||||||||||||||||||||||
Income before cumulative effect of a change in accounting principle | $ | 0.45 | $ | 0.72 | $ | 0.97 | $ | 0.83 | ||||||||||||||
Cumulative effect of a change in accounting principle | - | - | - | 0.15 | ||||||||||||||||||
Net income | $ | 0.45 | $ | 0.72 | $ | 0.97 | $ | 0.98 | ||||||||||||||
DILUTED EARNINGS PER SHARE: | ||||||||||||||||||||||
Income before cumulative effect of a change in accounting principle | $ | 0.43 | $ | 0.68 | $ | 0.92 | $ | 0.79 | ||||||||||||||
Cumulative effect of a change in accounting principle | - | - | - | 0.14 | ||||||||||||||||||
Net income | $ | 0.43 | $ | 0.68 | $ | 0.92 | $ | 0.93 | ||||||||||||||
See notes to condensed consolidated financial statements.
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See notes to condensed consolidated financial statements. 5 6 See notes to condensed consolidated financial statements. 7 DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Dollar Thrifty Automotive Group, Inc. (“DTG”) and its subsidiaries. DTG’s significant wholly owned subsidiaries include DTG Operations, Inc., Thrifty, Inc., Dollar Rent A Car, Inc., Rental Car Finance Corp. (“RCFC”) and Dollar Thrifty Funding Corp. Thrifty, Inc. is the parent company to Thrifty Rent-A-Car System, Inc., which is the parent company to Dollar Thrifty Automotive Group Canada Inc. (“DTG Canada”). Beginning March 31, 2004, Thrifty Rent-A-Car System, Inc. National Advertising Committee (“Thrifty National Ad”) was consolidated in the financial statements of DTG under the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended in December 2003 (“FIN 46(R)”), an interpretation of Accounting Research Bulletin No. 51 (Note 15). 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 Note 2 to the consolidated financial statements contained in the Form 10-K filed with the Securities and Exchange Commission on March 14, 2005 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 Regulations 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, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods have been made. Results for interim periods are not necessarily indicative of results for a full year. 2. ACQUISITIONS During the six months ended June 30, 2005, the Company acquired certain assets and assumed certain liabilities relating to nine locations from former Thrifty franchisees in Jacksonville, Melbourne and Cape Canaveral, Florida; San Jose, California and Baton Rouge and New Orleans, Louisiana. Total cash paid during the six months ended June 30, 2005, net of cash acquired for acquisitions, was $3.5 million. Beginning January 1, 2005, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) No. 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination” (“EITF 04-1”). EITF 04-1 affirms that a business combination between two parties that have a preexisting relationship should be accounted for as a multiple element transaction. This includes determining how the cost of the combination should be allocated after considering the assets and liabilities that existed between the parties prior to the combination. Adoption of EITF 04-1 impacted the way in which the Company accounts for certain business combination transactions through establishing identifiable intangibles, other than goodwill, such as reacquired franchise rights through the Company’s acquisitions of franchisee operations. For the six months ended June 30, 2005, the Company recognized an unamortized intangible asset 8 for reacquired franchise rights totaling $2.3 million (Note 7). The Company did not recognize any goodwill related to these transactions. Each of these transactions has been accounted for using the purchase method of accounting and operating results of the acquirees from the dates of acquisition, which are individually and collectively not material to amounts presented for the three months and six months ended June 30, 2005, are included in the condensed consolidated statements of income of the Company. 3. VEHICLE DEPRECIATION AND LEASE CHARGES, NET Vehicle depreciation and lease charges includes the following (in thousands): 4. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income 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 has utilized the treasury stock method. 9 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): For the three months and six months ended June 30, 2005 and 2004, 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. 5. STOCK-BASED COMPENSATION Beginning January 1, 2003, the Company accounted for stock-based compensation plans using the fair value-based method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), and elected the prospective treatment option, which requires recognition as compensation expense for all future employee awards granted, modified or settled as allowed under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” ("SFAS No. 148"), an amendment of SFAS No. 123. Compensation cost for stock options and performance share and restricted stock awards is recognized based on the fair value of the awards granted at the grant date. 10 The following table provides pro forma results as if the fair value-based method had been applied to all outstanding and unvested awards, including stock options, performance share and restricted stock awards, using the Black-Scholes option valuation model for each of the 2004 periods presented (in thousands, except per share data): At the end of 2004, all stock options became fully vested. Therefore, the disclosure of the pro forma results as if the fair value-based methods of SFAS No. 123 had been applied is not presented for the three months and six months ended June 30, 2005. All performance share and restricted stock awards are accounted for using the fair value-based method in accordance with SFAS No. 123 for the 2005 and 2004 periods. No stock options were granted after January 1, 2003. The assumptions used to calculate compensation expense relating to the 2002 stock option awards included in the pro forma results presented in the table above were as follows: weighted-average expected life of the awards of five years, volatility factor of 54.57%, risk-free interest rate of 4.46% and no dividend payments. The Company will adopt SFAS No. 123(R), “Share-Based Payment,” (“SFAS No. 123(R)”) as required on January 1, 2006 (Note 15). 11 6. RECEIVABLES Receivables consist of the following (in thousands): Trade accounts and notes receivable 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 and amounts due from the sale of revenue-earning vehicles. Notes receivable are generally issued by certain franchisees at current market interest rates with varying maturities and are generally personally guaranteed by franchisees. Financing receivables arise from direct financing and sales-type leases of vehicles with franchisees. These receivables principally have terms up to one year and are collateralized by the vehicles. Due from DaimlerChrysler is comprised primarily of amounts due under various guaranteed residual, buyback, incentive and promotion programs, which are paid according to contract terms and are generally received within 60 days. Fair value of interest rate swap represents the fair market value on interest rate swap agreements (Note 10). Other vehicle manufacturer receivables include primarily amounts due under guaranteed residual, buyback and incentive programs, which are paid according to contract terms and are generally received within 60 days. 7. SOFTWARE AND OTHER INTANGIBLE ASSETS Software and other intangible assets consist of the following (in thousands): 12 As discussed in Note 2, the Company adopted the provisions of EITF 04-1 on January 1, 2005. In applying the provisions of EITF 04-1 to the acquisitions completed during the six months ended June 30, 2005, the Company established an unamortized separately identifiable intangible asset, referred to as reacquired franchise rights. Intangible assets with indefinite useful lives, such as reacquired franchise rights, are not amortized, but are subject to impairment testing annually, or more frequently if events and circumstances indicate there may be an impairment. Intangible assets with finite useful lives are amortized over their respective useful lives. 8. GOODWILL The Company has elected to perform the annual impairment test on goodwill during the second quarter of each year, unless circumstances arise that require more frequent testing. During the second quarter of 2005, the Company completed the annual impairment test of goodwill and concluded goodwill was not impaired. The changes in the carrying amount of goodwill for the six months ended June 30, 2005 are as follows (in thousands): 9. VEHICLE DEBT AND OBLIGATIONS Vehicle debt and obligations as of June 30, 2005 and December 31, 2004 consist of the following (in thousands): On March 30, 2005, the Company renewed its Variable Funding Note Purchase Facility (the "Conduit Facility") for another 364-day period and increased the capacity from $350 million to $375 million. 13 On March 30, 2005, the Company renewed its Commercial Paper Program for another 364-day period at a maximum size of $640 million backed by a renewal of the Liquidity Facility in the amount of $560 million. On April 5, 2005, a bank line of credit for vehicles was renewed for another year and increased from $97 million to $100 million. On April 21, 2005, RCFC issued $400 million of five-year asset backed notes (the “2005 Series Notes”) to replace maturing asset backed notes and provide for growth in the Company’s fleet. The 2005 Series Notes consist of $110 million 4.59% fixed rate notes and $290 million floating rate notes at LIBOR plus 0.17%. In conjunction with the issuance of the 2005 Series Notes, the Company also entered into interest rate swap agreements to convert $190 million of the floating rate debt to fixed rate debt at a 4.58% interest rate. On June 21, 2005, DTG Canada (the "General Partner") renewed its existing partnership agreement (the "Partnership Agreement") with an unrelated bank's conduit (the "Limited Partner") and increased the maximum available funding to CND $300 million (approximately US $245 million). The Partnership Agreement expires on May 31, 2010. 10. 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 potential volatility of the financial markets may have on the Company’s operating results. The Company has entered into interest rate swap agreements, in conjunction with each related new asset backed note issuance in 2001 through 2005, to convert variable interest rates on a total of $1.5 billion in asset backed notes to fixed interest rates. These swaps, which have termination dates through June 2010, constitute cash flow hedges and satisfy the criteria for hedge accounting. The Company reflects these swaps in its statement of financial position at fair market value, which were assets, included in receivables, of approximately $1.5 million at June 30, 2005, and were liabilities, included in accrued liabilities, of approximately $8.8 million at December 31, 2004. The Company recorded the related income of $6.3 million, which is net of income taxes, in total comprehensive income for the six-month period ended June 30, 2005 (Note 11). Deferred gains and losses are recognized in earnings as an adjustment to interest expense over the same period in which the related interest payments being hedged are recognized to earnings. Based on projected market interest rates, the Company estimates that approximately $1.1 million of net deferred loss will be reclassified into earnings within the next twelve months. 11. COMPREHENSIVE INCOME Comprehensive income is comprised of the following (in thousands): 14 12. INCOME TAXES The Company has provided for income taxes in the U.S. and in Canada based on taxable income or loss and other tax attributes separately for each jurisdiction. The Company has established tax provisions separately for U.S. taxable income and Canadian losses, for which no income tax benefit was recorded. Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. A valuation allowance is recorded for deferred income tax assets when management determines it is more likely than not that such assets will not be realized. For the three months and six months ended June 30, 2005, the effective tax rate of 42.9% and 44.8%, respectively, differed from the U.S. statutory rate due primarily to the state and local taxes, losses relating to DTG Canada for which no benefit was recorded due to full valuation allowance and, beginning April 1, 2004, the consolidation of Thrifty National Ad’s operating results into the Company’s operating results due to the adoption of FIN 46(R). Thrifty National Ad files its tax returns under the provisions applicable to a trust, thus, there is no income tax effect for its profits and losses. 13. SHARE REPURCHASE PROGRAM In July 2003, the Company announced that its Board of Directors had authorized spending up to $30 million to repurchase the Company's shares of common stock over a two-year period in the open market or in privately negotiated transactions. In December 2004, the Company expanded the share repurchase program by authorizing spending up to $100 million for share repurchases through December 2006. During the six months ended June 30, 2005, the Company repurchased 662,500 shares under its $100 million share repurchase program at an average price of $33.06 per share, totaling $21.9 million. Since the stock repurchase program began in 2003, the Company has repurchased 1,532,800 shares at an average price of $28.78 per share, totaling $44.1 million, all of which were made in open market transactions. 14. COMMITMENTS AND CONTINGENCIES Guarantees The Company may provide guarantees, including certain letters of credit or performance bonds, on behalf of franchisees to support compliance with airport concession bids. Non-performance of the obligation by the franchisee would trigger the obligation of the Company. As of June 30, 2005, there were no guarantees outstanding. Contingencies Various claims and legal proceedings have been asserted or instituted against the Company, including some purporting to be class actions, and some which 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. 15 15. NEW ACCOUNTING STANDARDS Beginning January 1, 2005, the Company adopted the provisions of EITF 04-1. EITF 04-1 affirms that a business combination between two parties that have a preexisting relationship should be accounted for as a multiple element transaction. This includes determining how the cost of the combination should be allocated after considering the assets and liabilities that existed between the parties prior to the combination. Adoption of EITF 04-1 impacted and will continue to impact the way in which the Company accounts for certain business combination transactions by establishing identifiable intangibles, other than goodwill, such as reacquired franchise rights through the Company’s acquisitions of franchisee operations (Notes 2 and 7). In December 2004, the FASB issued SFAS No. 123(R), which is a revision of SFAS No. 123. This revised statement establishes accounting standards for all transactions in which an entity exchanges its equity instruments for goods and services focusing primarily on accounting for transactions with employees and carrying forward prior guidance for share-based payments for transactions with non-employees. SFAS No. 123(R) eliminates the intrinsic value measurement method of accounting in Accounting Principles Board Opinion 25 and generally requires measuring the cost of the employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of the grant. The standard requires grant date fair value to be estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists. Such costs must be recognized over the period during which an employee is required to provide service in exchange for the award. The standard also requires estimating the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur. The effective date of SFAS No. 123(R) is the first fiscal year beginning after June 15, 2005 and the Company expects to adopt SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123(R) for all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123(R). Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123. The Company plans to adopt the “modified prospective” method under SFAS No. 123(R) as required on January 1, 2006 and does not anticipate the adoption to have a material effect on the consolidated financial statements of the Company. The Company had previously adopted the provisions of SFAS No. 123 beginning January 1, 2003 changing from the intrinsic value-based method to the fair value-based method of accounting for stock-based compensation and electing the prospective treatment option, which will require recognition as compensation expense for all future employee awards granted, modified or settled as allowed under SFAS No. 148, an amendment of SFAS No. 123. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," as amended in December 2003, which is now referred to as FIN 46(R). FIN 46(R) requires existing unconsolidated variable interest entities (“VIE’s”) to be consolidated by their primary beneficiaries if that company is subject to a majority of the risk of loss, if any, from the VIE’s activities, or entitled to receive a majority of the entity’s residual returns, or both. The Company believes that its involvement with Thrifty National Ad qualifies Thrifty National Ad as a VIE with the Company representing the primary beneficiary. Consequently, Thrifty National Ad was consolidated in the Company’s financial statements for the quarter ended March 31, 2004. The fair value of the net assets of Thrifty National Ad of approximately $3.7 million at March 31, 2004, was recorded as a cumulative effect of a change in accounting principle in the Company’s 16 condensed consolidated statements of income. Beginning April 1, 2004, the Company began consolidating the operating results of Thrifty National Ad with its operating results. Thrifty National Ad is established for the limited purpose of collecting and disbursing funds for advertising and promotion programs for the benefit of the Thrifty Car Rental corporate and franchisee network. Thrifty National Ad files its tax returns under the provisions applicable to a trust. Accordingly, there is no tax effect on the cumulative effect of the change in accounting principle or on subsequent profits or losses. The Company’s estimated maximum exposure to loss as a result of its continuing involvement with Thrifty National Ad is expected to be minimal as expenditures are managed by Thrifty National Ad based on receipts. The Company also evaluated its franchisee network as potential VIE’s subject to possible consolidation. The Company determined that its franchisees met the FIN 46(R) definition of a business; however, the Company did not provide more than half of each franchisees’ equity or other financial support, among other qualifying conditions. Therefore, the Company believes that its franchisees do not qualify as VIE’s under FIN 46(R) and are not required to be consolidated into the Company’s financial statements. 16. SUBSEQUENT EVENTS On July 8, 2005, an existing bank line of credit for vehicles was increased from $100 million to $136 million. ******* 17 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth the percentage of total revenues in the Company’s condensed consolidated statements of income: 18 The following table sets forth certain selected operating data of the Company: Three Months Ended June 30, 2005 Compared with Three Months Ended June 30, 2004 During the three months ended June 30, 2005, business and leisure travel improved, which has resulted in an increase in industry rental demand; however, the Company’s growth was negatively impacted by its decision to change to non-preferred status with Expedia. Additionally, revenue per day declined by 2.7% due to highly competitive industry conditions. The Company’s revenue growth achieved during the quarter related primarily to volume resulting from franchise acquisitions. Operating Results The Company had income of $19.9 million before income taxes for the second quarter of 2005, as compared to $30.8 million in the second quarter of 2004. The operating results for the second quarter of 2005 were negatively impacted by lower revenue per day and higher direct vehicle and operating costs. 19 Vehicle rental revenue for the second quarter of 2005 increased 5.8%, due to an 8.8% increase in rental days totaling $27.7 million, partially offset by a 2.7% decrease in revenue per day totaling $9.2 million. Vehicle rental revenue grew by 7.3% due to franchisee acquisitions that had not yet annualized and greenfield locations, partially offset by a 1.5% decrease in same store revenue. Vehicle leasing revenue for the second quarter of 2005 decreased 26.1%, due to a 31.7% decrease in the average lease fleet totaling $6.5 million, partially offset by an 8.1% increase in the average lease rate totaling $1.1 million. The decline in volume was due to fewer vehicles leased to franchisees, which is primarily attributable to the shift of several locations from franchised operations to corporate operations. Fees and services revenue decreased 16.7%, primarily due to lower revenues from franchisees due to the shift of several locations from franchised operations to corporate operations. Other revenue increased by $2.1 million primarily due to an increase in the market value of investments in the Company’s deferred compensation and retirement plans of $1.0 million in the second quarter of 2005. The revenue is attributable to mark to market valuation of the corresponding investments and is offset by a corresponding amount in selling, general and administrative expenses and, therefore, has no impact on net income. 20 Direct vehicle and operating expenses for the second quarter of 2005 increased $29.8 million due to higher fleet and transaction levels and to cost increases. This overall increase is comprised primarily of increases in vehicle related costs of $13.7 million, personnel related expenses of $9.4 million, facility and airport concession expenses of $4.7 million and commissions of $0.3 million. Direct vehicle and operating expenses were 57.1% of revenue for the second quarter of 2005, compared to 50.7% in the second quarter of 2004. Net vehicle depreciation and lease charges for the second quarter of 2005 decreased $10.6 million, which includes net vehicle gains from the disposition of non-program vehicles. Net vehicle gains were $16.4 million for the second quarter of 2005 compared to $10.2 million for the second quarter of 2004, due to a higher level of non-program vehicles in 2005, lower acquisition costs and to a strong used car market. Lease charges, for vehicles leased from third parties, decreased $2.3 million due to a decrease in the number of vehicles leased. Vehicle depreciation expenses decreased $2.1 million due to an 8.6% decrease in average depreciation rate, partially offset by a 6.2% increase in depreciable fleet. Net vehicle depreciation expense and lease charges were 14.8% of revenue for the second quarter of 2005, compared to 18.3% in the second quarter of 2004. Selling, general and administrative expenses for the second quarter of 2005 increased $3.9 million due to a $2.3 million increase in personnel related costs and a $0.9 million increase in sales and marketing costs primarily attributable to the increase in transaction volume. Additionally, the market value of investments in the Company’s deferred compensation and retirement plans increased $1.0 million in the second quarter of 2005, which is offset in other revenue. Selling, general and administrative expenses were 16.3% of revenue for the second quarter of 2005, compared to 15.8% in the second quarter of 2004. Net interest expense for the second quarter of 2005 increased $0.5 million due to an increase in average vehicle debt, partially offset by a decrease in the effective interest rate. Net interest expense was 6.4% of revenue for the second quarter of 2005, compared to 6.5% in the second quarter of 2004. The income tax provision for the second quarter of 2005 was $8.5 million. The effective income tax rate for the second quarter of 2005 was 42.9% compared to 41.8% for the second quarter of 2004. This increase in the effective tax rate was due primarily to lower U.S. pretax earnings in relationship to Canadian pretax losses. The Company reports taxable income for the U.S. and Canada in separate tax jurisdictions and establishes provisions separately for each jurisdiction. On a separate, domestic basis, the U.S. effective tax rate approximates the statutory tax rate including the effect of state income taxes. However, no income tax benefit was recorded for Canadian losses in 2004 and 2005, thus, increasing the consolidated effective tax rate compared to the U.S. effective tax rate. 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. 21 Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004 During the first half of 2005, business and leisure travel improved, which has resulted in an increase in rental demand. The Company achieved revenue growth largely from volume related to franchise acquisitions, although revenue per day declined by 0.5% due to highly competitive industry conditions. The revenue growth combined with lower vehicle costs resulted in higher profits in the first half of 2005 as compared to the first half of 2004. Operating Results The Company had income of $44.0 million before income taxes for the first half of 2005, as compared to income before income taxes and cumulative effect of a change in accounting principle of $37.0 million in the first half of 2004. The cumulative effect of the change in accounting principle recorded in the first quarter of 2004 was $3.7 million. This change in accounting principle relates to the adoption of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended in December 2003 (“FIN 46(R)”), an interpretation of Accounting Research Bulletin No. 51, by the Company effective March 31, 2004. Vehicle rental revenue for the first half of 2005 increased 11.4%, due to an 11.9% increase in rental days totaling $69.4 million, partially offset by a 0.5% decrease in revenue per day totaling $3.3 million. Vehicle rental revenue grew by 10.0% due to franchisee acquisitions that had not yet annualized and greenfield locations and by 1.4% from same store revenue. Vehicle leasing revenue for the first half of 2005 decreased 22.5%, due to a 29.6% decrease in the average lease fleet totaling $11.4 million, partially offset by a 10.0% increase in the average lease rate totaling $2.7 million. The decline in volume was due to fewer vehicles leased to franchisees, which is primarily attributable to the shift of several locations from franchised operations to corporate operations. Fees and services revenue decreased 8.7% due to lower revenues received from franchisees as the result of a shift of several locations from franchised operations to corporate operations. This decrease was partially offset by $1.6 million of additional fees and services revenue related to the first quarter of 2005 impact of consolidating Thrifty National Ad beginning April 1, 2004. 22 Direct vehicle and operating expenses for the first half of 2005 increased $63.9 million due to higher fleet and transaction levels and to cost increases. This overall increase is comprised primarily of increases in vehicle related costs of $22.3 million, personnel related expenses of $20.5 million, facility and airport concession expenses of $13.5 million and commissions of $1.9 million. Direct vehicle and operating expenses were 56.4% of revenue for the first half of 2005, compared to 51.5% in the first half of 2004. Net vehicle depreciation and lease charges for the first half of 2005 decreased $26.2 million, which includes net vehicle gains from the disposition of non-program vehicles. Net vehicle gains were $32.8 million for the first half of 2005 compared to $13.0 million for the first half of 2004, due to a higher level of non-program vehicles in 2005, lower acquisition costs and to a strong used car market. Lease charges, for vehicles leased from third parties, decreased $3.2 million due to a decrease in the number of vehicles leased. Vehicle depreciation expenses decreased $3.2 million due to an 11.0% decrease in average depreciation rate, partially offset by a 9.8% increase in depreciable fleet. Net vehicle depreciation expense and lease charges were 15.2% of revenue for the first half of 2005, compared to 20.5% in the first half of 2004. Selling, general and administrative expenses for the first half of 2005 increased $11.2 million due to a $4.2 million increase in personnel related costs and a $2.5 million increase in sales and marketing costs primarily attributable to the increase in transaction volume. Additionally, expenses related to performance based compensation plans increased $1.7 million. The first half of 2005 results include $1.8 million of additional cost relating to the consolidation of Thrifty National Ad beginning April 1, 2004. Selling, general and administrative expenses were 16.2% of revenue for the first half of 2005, compared to 15.9% in the first half of 2004. Net interest expense for the first half of 2005 increased $0.8 million due to an increase in average vehicle debt, partially offset by a decrease in the effective interest rate. Net interest expense was 6.0% of revenue for the first half of 2005, compared to 6.4% in the first half of 2004. The income tax provision for the first half of 2005 was $19.7 million. The effective income tax rate for the first half of 2005 was 44.8% compared to 44.1% for the first half of 2004. This increase in the effective tax rate was due primarily to higher U.S. pretax earnings in relationship to Canadian pretax losses. The Company reports taxable income for the U.S. and Canada in separate tax jurisdictions and establishes provisions separately for each jurisdiction. On a separate, domestic basis, the U.S. effective tax rate approximates the statutory tax rate including the effect of state income taxes. However, no income tax benefit was recorded for Canadian losses in 2004 and 2005, thus, increasing the consolidated effective tax rate compared to the U.S. effective tax rate. 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. 23 Outlook The Company expects continued growth in travel during 2005. Airline passenger enplanements, a key driver of vehicle rental demand, have increased from prior year levels. Industry vehicle rental pricing continues to be highly competitive, although early third quarter year over year trends are better than the second quarter. The Company expects vehicle manufacturers will reduce vehicle sales to the rental car industry for the 2006 model year and will increase industry vehicle costs. These cost increases would begin to impact the industry in the fourth quarter of 2005 with a more significant impact in 2006. Effective May 1, 2005, the Company decided to no longer participate as a supplier in the preferred partner program with Expedia, a third party Internet provider from whom the Company receives reservations, which has resulted in a significant reduction in reservations from this provider. The Company has since made significant progress in increasing the number of reservations from its lower cost reservation channels, particularly its two branded Web sites, dollar.com and thrifty.com. For the full year of 2004, Expedia-generated rentals represented approximately seven percent of the Company’s total revenue and approximately 11 percent of the Company’s non-tour reservations. 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. Liquidity and Capital Resources The Company’s primary uses of liquidity are for the purchase of vehicles for its rental and leasing fleets, non-vehicle capital expenditures, share repurchases and for working capital. The Company uses 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, the Revolving Credit Facility (hereinafter defined) and insurance bonds. Cash generated by operating activities of $188.3 million for the six months ended June 30, 2005, was primarily the result of net income, adjusted for depreciation. The liquidity necessary for purchasing vehicles was primarily obtained from secured vehicle financing, most of which is asset backed notes, sales proceeds from disposal of used vehicles and cash generated by operating activities. The asset backed notes require varying levels of credit enhancement or overcollateralization, which are provided by a combination of cash, vehicles and letters of credit. These letters of credit are provided under the Company’s Revolving Credit Facility. The Company believes that its cash generated from operations, availability under its Revolving Credit Facility, insurance bonding programs and secured vehicle financing programs are adequate to meet its liquidity requirements for the foreseeable future. A significant portion of the secured vehicle financing consists of asset backed notes. The Company generally issues additional notes each year to replace maturing notes and provide for growth in its fleet. The Company believes the asset backed note market continues to be a viable source of vehicle financing. Cash used in investing activities was $553.7 million during the six months ended June 30, 2005. The principal use of cash in investing activities was the purchase of revenue-earning vehicles, which totaled $2.6 billion, partially offset by $1.7 billion in proceeds from the sale of used revenue-earning vehicles and the reduction in restricted cash and investments of $0.4 billion during the six months ended June 30, 2005, due to increases in the rental fleet. The Company’s need for cash to finance vehicles is highly seasonal and typically peaks in the second and third quarters of the year when fleet levels build to meet seasonal rental demand. The Company expects to continue to fund its revenue-earning vehicles with cash provided from operations and increased secured vehicle financing. Restricted cash and investments, which totaled $102.1 million at June 30, 2005, are restricted for the acquisition of revenue-earning vehicles and other specified uses as defined under the asset backed note program, the Canadian fleet securitization program and a like-kind exchange program. The Company also used cash for non- 24 vehicle capital expenditures of $15.6 million during the first half of 2005. These expenditures consist primarily of airport facility improvements for the Company’s rental locations and investments in information technology equipment and systems. The Company also used $3.5 million of cash, net of assets acquired and liabilities assumed, for franchisee acquisitions during the first half of 2005. These expenditures were financed with cash provided from operations. Cash provided by financing activities was $345.8 million for the six months ended June 30, 2005 primarily due to the issuance of an additional $400.0 million in asset backed notes, a $232.2 million net increase in commercial paper, a $25.0 million increase in the Conduit Facility, a $34.7 million increase in all other vehicle debt categories and stock options exercises totaling $16.7 million. These increases were partially offset by the maturity of asset backed notes totaling $335.8 million and share repurchases totaling $21.9 million under the share repurchase program. The Company has significant requirements for bonds and letters of credit to support its insurance programs and airport concession commitments. At June 30, 2005, the insurance companies had issued $45.3 million in bonds to secure these obligations. Asset Backed Notes The asset backed note program at June 30, 2005 was comprised of $1.78 billion in asset backed notes with maturities ranging from 2005 to 2010. Borrowings under the asset backed notes are secured by eligible vehicle collateral. Asset backed notes totaling $1.61 billion bear interest at fixed rates ranging from 3.64% to 6.70%, including certain floating rate notes swapped to fixed rates. Asset backed notes totaling $169 million bear interest at floating rates ranging from LIBOR plus 0.17% to LIBOR plus 1.05%. On April 21, 2005, RCFC issued an additional $400 million of floating rate asset backed notes with a term of five years. In conjunction with the asset backed note issuance, the Company also entered into interest rate swap agreements to convert $190 million of the floating rate debt to fixed rate debt at a 4.58% interest rate. Conduit Facility Effective March 30, 2005, the Conduit Facility was renewed for another 364-day period and increased to $375 million from $350 million. Commercial Paper Program and Liquidity Facility On March 30, 2005, the Company renewed its commercial paper program (the “Commercial Paper Program”) for another 364-day period at a maximum size of $640 million backed by a renewal of the Liquidity Facility in the amount of $560 million. At June 30, 2005, the Company had $387.8 million in commercial paper outstanding under the Commercial Paper Program. Vehicle Debt and Obligations Vehicle manufacturer and bank lines of credit provided $390.0 million in capacity at June 30, 2005. The Company had $182.2 million in borrowings outstanding under these lines at June 30, 2005. All lines of credit are collateralized by the related vehicles. On July 8, 2005, an existing bank line of credit was increased by $36 million, thus, increasing the overall capacity provided on these lines. The Company finances its Canadian vehicle fleet through a fleet securitization program. Under this program, DTG Canada can obtain vehicle financing funded through a bank commercial paper conduit. On June 21, 2005, the Company renewed the Canadian fleet securitization program to May 31, 2010 and increased the capacity from CND $235 million to CND $300 million. At June 30, 2005, DTG Canada had approximately CND $165.5 million (US $135.1 million) funded under this program. 25 Revolving Credit Facility The Company has a $300 million five-year, senior secured, revolving credit facility (the "Revolving Credit Facility") that expires on April 1, 2009. The Revolving Credit Facility permits letter of credit usage up to $300 million and working capital borrowing up to $100 million. The availability of funds under the Revolving Credit Facility is subject to the Company's compliance with certain covenants, including a covenant that sets the maximum amount the Company can spend annually on the acquisition of non-vehicle capital assets, and certain financial covenants including a maximum leverage ratio, a minimum fixed charge coverage ratio and a limitation on cash dividends and share repurchases. As of June 30, 2005, the Company is in compliance with all covenants. The Company had letters of credit outstanding under the Revolving Credit Facility of approximately $155.8 million and no working capital borrowings at June 30, 2005. New Accounting Standards Beginning January 1, 2005, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 04-1, "Accounting for Preexisting Relationships between the Parties to a Business Combination" ("EITF 04-1"). EITF 04-1 affirms that a business combination between two parties that have a preexisting relationship should be accounted for as a multiple element transaction. This includes determining how the cost of the combination should be allocated after considering the assets and liabilities that existed between the parties prior to the combination. Adoption of EITF 04-1 impacted and will continue to impact the way in which the Company accounts for certain business combination transactions by establishing identifiable intangibles, other than goodwill, such as reacquired franchise rights through the Company’s acquisitions of franchisee operations (Notes 2 and 7). In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment” ("SFAS No. 123(R)”), which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123”). This revised statement establishes accounting standards for all transactions in which an entity exchanges its equity instruments for goods and services focusing primarily on accounting for transactions with employees and carrying forward prior guidance for share-based payments for transactions with non-employees. SFAS No. 123(R) eliminates the intrinsic value measurement method of accounting in Accounting Principles Board Opinion 25 and generally requires measuring the cost of the employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of the grant. The standard requires grant date fair value to be estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists. Such costs must be recognized over the period during which an employee is required to provide service in exchange for the award. The standard also requires estimating the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur. The effective date of SFAS No. 123(R) is the first fiscal year beginning after June 15, 2005 and the Company expects to adopt SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123(R) for all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123(R). Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123. The Company plans to adopt the “modified prospective” method under SFAS No. 123(R) as required on January 1, 2006 and does not anticipate the adoption to have a material effect on the consolidated financial statements of the Company. 26 The Company had previously adopted the provisions of SFAS No. 123 beginning January 1, 2003 changing from the intrinsic value-based method to the fair value-based method of accounting for stock-based compensation and electing the prospective treatment option, which will require recognition as compensation expense for all future employee awards granted, modified or settled as allowed under SFAS No. 148, "Accounting for Stock-Based Compensation – Transition and Disclosure" ("SFAS No. 148"), an amendment of SFAS No. 123. In January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities," as amended in December 2003, which is now referred to as FIN 46(R). FIN 46(R) requires existing unconsolidated variable interest entities (“VIE’s”) to be consolidated by their primary beneficiaries if that company is subject to a majority of the risk of loss, if any, from the VIE’s activities, or entitled to receive a majority of the entity’s residual returns, or both. The Company believes that its involvement with Thrifty National Ad qualifies Thrifty National Ad as a VIE with the Company representing the primary beneficiary. Consequently, Thrifty National Ad was consolidated in the Company’s financial statements for the quarter ended March 31, 2004. The fair value of the net assets of Thrifty National Ad of approximately $3.7 million at March 31, 2004, was recorded as a cumulative effect of a change in accounting principle in the Company’s condensed consolidated statements of income. Beginning April 1, 2004, the Company began consolidating the operating results of Thrifty National Ad with its operating results. Thrifty National Ad is established for the limited purpose of collecting and disbursing funds for advertising and promotion programs for the benefit of the Thrifty Car Rental corporate and franchisee network. Thrifty National Ad files its tax returns under the provisions applicable to a trust. Accordingly, there is no tax effect on the cumulative effect of the change in accounting principle or on subsequent profits or losses. The Company’s estimated maximum exposure to loss as a result of its continuing involvement with Thrifty National Ad is expected to be minimal as expenditures are managed by Thrifty National Ad based on receipts. The Company also evaluated its franchisee network as potential VIE’s subject to possible consolidation. The Company determined that its franchisees met the FIN 46(R) definition of a business; however, the Company did not provide more than half of each franchisees’ equity or other financial support, among other qualifying conditions. Therefore, the Company believes that its franchisees do not qualify as VIE’s under FIN 46(R) and are not required to be consolidated into the Company’s financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following information about the Company’s market sensitive financial instruments constitutes a “forward-looking” statement. 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. 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 June 30, 2005, a 50 basis point fluctuation in interest rates would have an approximate $6.0 million impact on the Company’s expected pretax income on an annual basis. This impact on pretax income is reduced 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 June 30, 2005, cash and cash equivalents totaled $184.8 million and restricted cash and investments totaled $102.1 million. The Company estimates that, for 2005, approximately 45% of its average debt will bear interest at floating rates. At June 30, 2005, there were no significant changes in the Company’s quantitative disclosures about market risk compared to December 31, 2004, which is included under Item 7A of the Company’s most recent Form 10-K, except for the addition of the derivative 27 financial instrument noted in Note 9 to the condensed consolidated financial statements. ITEM 4. CONTROLS AND PROCEDURES a) Evaluation of 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 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 a reasonable assurance level. b) Changes in internal controls There has been no change in the Company's internal control over financial reporting during the six months ended June 30, 2005 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 Various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against the Company and its subsidiaries. Litigation is subject to many uncertainties, and the outcome of the individual litigated matters is not predictable with assurance. It is possible that certain of the actions, claims, inquiries or proceedings could be decided unfavorably to the Company or the subsidiaries involved. Although the amount of liability with respect to these matters cannot be ascertained, potential liability is not expected to materially affect the consolidated financial position or results of operations of the Company. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS a) Recent Sales of Unregistered Securities None. 28 b) Use of Proceeds None. c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers In July 2003, the Company announced that its Board of Directors had authorized spending up to $30 million to repurchase the Company’s shares of common stock over a two-year period in the open market or in privately negotiated transactions. In December 2004, the Company expanded the share repurchase program by authorizing spending up to $100 million for share repurchases through December 2006. All share repurchases through June 30, 2005 have been made in open market transactions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS [a] On May 20, 2005, the 2005 Annual Meeting of Stockholders of the Company was held. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management’s director nominees. [b] The Company’s stockholders elected Molly Shi Boren, Thomas P. Capo, Maryann N. Keller, The Hon. Edward C. Lumley, Gary L. Paxton, John C. Pope, John P. Tierney and Edward L. Wax to serve as directors of the Company until the next Annual Meeting of Stockholders or until their successors have been duly elected and shall qualify. [c] The votes cast by the Company’s stockholders for the election of directors listed in paragraph (b), as determined by the final report of the inspectors, are set forth below: 29 The Company’s stockholders voted on the following proposals: Proposal 1 – Election of Directors. See paragraphs (b) and (c) above. Proposal 2 – Ratification of the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for 2005 year. A proposal to ratify the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for 2005 was adopted, with 24,141,541 votes cast for, 481,401 votes cast against and 9,454 votes withheld. Proposal 3 – Approval of the Amended and Restated Long-Term Incentive Plan of the Company. A proposal to approve the amendment and restatement of the Long-Term Incentive Plan of the Company was adopted, with 22,041,231 votes cast for, 659,184 votes cast against, 24,964 votes withheld and 1,907,017 broker non-votes. ITEM 6. EXHIBITS [a] Index of Exhibits 15.17 Letter from Deloitte & Touche LLP regarding interim financial information 31.19 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.20 Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.19 Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.20 Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 30 SIGNATURES 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. August 9, 2005 By: /s/ GARY L. PAXTON Gary L. Paxton President, Chief Executive Officer and Principal Executive Officer August 9, 2005 By: /s/ STEVEN B. HILDEBRAND Steven B. Hildebrand Senior Executive Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer 31 DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
June 30, December 31, 2005 2004 (Unaudited) Cash and cash equivalents $ 184,809 $ 204,453 Restricted cash and investments 102,067 455,215 Receivables, net 215,516 194,552 Prepaid expenses and other assets 102,674 90,030 Revenue-earning vehicles, net 3,051,966 2,267,982 Property and equipment, net 106,971 105,335 Income taxes receivable 2,472 3,757 Software and other intangible assets, net 22,944 20,020 Goodwill 279,834 279,907 $ 4,069,253 $ 3,621,251 Accounts payable $ 101,422 $ 63,109 Accrued liabilities 152,812 163,214 Deferred income tax liability 219,897 202,857 Public liability and property damage 101,741 88,176 Vehicle debt and obligations 2,856,513 2,500,426 Total liabilities 3,432,385 3,017,782 Preferred stock, $.01 par value:
Authorized 10,000,000 shares; none outstanding - - Common stock, $.01 par value:
Authorized 50,000,000 shares;
26,900,190 and 25,910,030 issued, respectively, and
25,367,390 and 25,039,730 outstanding, respectively 269 259 Additional capital 773,362 748,261 Accumulated deficit (95,836 ) (120,157 ) Accumulated other comprehensive income (loss) 3,184 (2,688 ) Treasury stock, at cost (1,532,800
and 870,300 shares, respectively) (44,111 ) (22,206 ) Total stockholders’ equity 636,868 603,469 $ 4,069,253 $ 3,621,251 DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Six Months Ended June 30, (Unaudited) 2005 2004 Net income $ 24,321 $ 24,395 Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation: Vehicle depreciation 136,218 139,368 Non-vehicle depreciation 10,055 8,432 Net gains from disposition of revenue-earning vehicles (32,752 ) (12,983 ) Amortization 2,766 2,798 Performance share incentive plan 2,604 1,753 Provision for losses on receivables 1,308 1,288 Deferred income taxes 18,832 14,360 Change in assets and liabilities, net of acquisitions: Income taxes receivable 1,285 - Receivables (21,166 ) (10,522 ) Prepaid expenses and other assets (6,985 ) (8,989 ) Accounts payable and accrued liabilities 38,559 22,622 Public liability and property damage 13,565 10,823 Other (344 ) (66 ) Net cash provided by operating activities 188,266 193,279 Revenue-earning vehicles: Purchases (2,620,553 ) (2,296,359 ) Proceeds from sales 1,732,007 1,471,402 Net change in restricted cash and investments 353,148 466,089 Property, equipment and software: Purchases (15,592 ) (11,142 ) Proceeds from sales 767 25 Acquisition of businesses, net of cash acquired (3,451 ) (45,897 ) Net cash used in investing activities (553,674 ) (415,882 ) (Continued) DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Six Months Ended June 30, (Unaudited) 2005 2004 Vehicle debt and obligations: Proceeds 2,128,067 3,582,150 Payments (1,771,935 ) (3,401,733 ) Issuance of common shares 16,705 7,863 Purchase of common stock for the treasury (21,905 ) (7,564 ) Financing issue costs (5,168 ) (9,240 ) Net cash provided by financing activities 345,764 171,476 (19,644 ) (51,127 ) Beginning of period 204,453 192,006 End of period $ 184,809 $ 140,879 Receivables from capital lease of vehicles to franchisees $ 1,106 $ 7,240 Cash paid for (refund of): Income taxes to (from) taxing authorities $ (376 ) $ 1,941 Interest $ 44,692 $ 42,468
SIX MONTHS ENDED JUNE 30, 2005 AND 2004 Three Months Six Months Ended June 30, Ended June 30, 2005 2004 2005 2004 Depreciation of revenue-earning vehicles, net $ 52,195 $ 60,468 $ 103,466 $ 126,385 Rents paid for vehicles leased 2,041 4,317 4,357 7,599 $ 54,236 $ 64,785 $ 107,823 $ 133,984 Three Months Six Months Ended June 30, Ended June 30, 2005 2004 2005 2004 Income before cumulative effect of
a change in accounting principle $ 11,346 $ 17,908 $ 24,321 $ 20,665 Basic EPS: Weighted average common shares 25,061,135 25,045,211 25,055,929 24,999,251 Basic EPS $ 0.45 $ 0.72 $ 0.97 $ 0.83 Diluted EPS: Weighted average common shares 25,061,135 25,045,211 25,055,929 24,999,251 Shares contingently issuable: Stock options 369,338 452,540 410,874 463,701 Performance awards 703,145 578,787 596,728 557,229 Shares held for compensation plans 182,424 173,030 180,522 180,250 Director compensation shares deferred 136,949 102,639 135,182 100,558 Shares applicable to diluted 26,452,991 26,352,207 26,379,235 26,300,989 Diluted EPS $ 0.43 $ 0.68 $ 0.92 $ 0.79 Three Months Six Months Ended Ended June 30, 2004 June 30, 2004 Net income, as reported $ 17,908 $ 24,395 Add: compensation expense related to
performance share and restricted stock
awards included in reported net income,
net of related tax effects 986 1,051 Deduct: compensation expense related to
stock options granted prior to January 1, 2003
and performance share and restricted stock
awards determined under fair value-based
method for all awards, net of related tax effects (1,058 ) (1,194 ) Pro forma net income $ 17,836 $ 24,252 Earnings per share: Basic, as reported $ 0.72 $ 0.98 Basic, pro forma $ 0.71 $ 0.97 Diluted, as reported $ 0.68 $ 0.93 Diluted, pro forma $ 0.68 $ 0.92 June 30, December 31, 2005 2004 Trade accounts receivable $ 111,236 $ 103,269 Notes receivable 1,486 1,910 Financing receivables, net 4,367 5,035 Due from DaimlerChrysler 60,398 88,110 Fair value of interest rate swap 1,473 - Other vehicle manufacturer receivables 52,118 12,371 231,078 210,695 Less: Allowance for doubtful accounts (15,562 ) (16,143 ) $ 215,516 $ 194,552 June 30, December 31, 2005 2004 Amortized intangible assets Software and other intangible assets $ 48,507 $ 44,867 Less accumulated amortization (27,849 ) (24,847 ) 20,658 20,020 Unamortized intangible assets Reacquired franchise rights 2,286 - Total software and other intangible assets $ 22,944 $ 20,020 Balance as of January 1, 2005 $ 279,907 Goodwill through acquisitions or purchase price adjustments during the year 64 Effect of change in rates used for foreign currency translation (137 ) Balance as of June 30, 2005 $ 279,834 June 30, December 31, 2005 2004 Asset backed notes: 2005 Series notes $ 400,000 $ - 2004 Series notes 500,000 500,000 2003 Series notes 375,000 375,000 2002 Series notes 116,666 350,000 2001 Series notes 350,000 350,000 1999 Series notes - 26,667 1997 Series notes 34,815 110,548 1,776,481 1,712,215 Discounts on asset backed notes (46 ) (1 ) Asset backed notes, net of discount 1,776,435 1,712,214 Conduit facility 375,000 350,000 Commercial paper, net of discount of $1,218 and $467 387,764 155,573 Other vehicle debt 182,170 174,594 Limited partner interest in limited partnership 135,144 108,045 Total vehicle debt and obligations $ 2,856,513 $ 2,500,426 Three Months Six Months Ended June 30, Ended June 30, 2005 2004 2005 2004 Net income $ 11,346 $ 17,908 $ 24,321 $ 24,395 Interest rate swap adjustment (4,999 ) 15,250 6,279 12,392 Foreign currency translation adjustment (180 ) (248 ) (407 ) (418 ) Comprehensive income $ 6,167 $ 32,910 $ 30,193 $ 36,369 Three Months Six Months Ended June 30, Ended June 30, (Percentage of Revenue) 2005 2004 2005 2004 Vehicle rentals 91.3 % 89.3 % 91.3 % 89.1 % Vehicle leasing 4.2 5.8 4.2 5.9 Fees and services 3.4 4.2 3.5 4.1 Other 1.1 0.7 1.0 0.9 Total revenues 100.0 100.0 100.0 100.0 Direct vehicle and operating 57.1 50.7 56.4 51.5 Vehicle depreciation and lease charges, net 14.8 18.3 15.2 20.5 Selling, general and administrative 16.3 15.8 16.2 15.9 Interest expense, net of interest income 6.4 6.5 6.0 6.4 Total costs and expenses 94.6 91.3 93.8 94.3 5.4 8.7 6.2 5.7 2.3 3.7 2.8 2.5
A CHANGE IN ACCOUNTING PRINCIPLE 3.1 5.0 3.4 3.2
ACCOUNTING PRINCIPLE 0.0 0.0 0.0 0.5 3.1 % 5.0 % 3.4 % 3.7 % Three Months Six Months Ended June 30, Ended June 30, % % U.S. and Canada 2005 2004 Change 2005 2004 Change (Company-Owned Stores)
Vehicle Rental Data:
(includes new stores) Average number of vehicles operated 114,913 103,775 10.7% 108,504 94,312 15.0% Number of rental days 8,778,176 8,068,147 8.8% 16,514,641 14,753,523 11.9% Vehicle utilization 83.9% 85.4% (1.5)p.p. 84.1% 86.0% (1.9)p.p. Average revenue per day $ 38.23 $ 39.30 (2.7% ) $ 39.27 $ 39.47 (0.5% ) Monthly average revenue per vehicle $ 973 $ 1,018 (4.4% ) $ 996 $ 1,029 (3.2% ) Same Store Vehicle Rental Data:
(excludes new stores) Average number of vehicles operated 106,578 103,775 2.7% 98,629 94,312 4.6% Number of rental days 8,109,429 8,068,147 0.5% 14,928,440 14,753,523 1.2% Vehicle Leasing Data: Average number of vehicles leased 12,288 17,988 (31.7% ) 11,925 16,938 (29.6% ) Monthly average revenue per vehicle $ 415 $ 384 8.1% $ 417 $ 379 10.0% Revenues Three Months Ended June 30, $ Increase/ % Increase/ 2005 2004 (decrease) (decrease) (in millions) Vehicle rentals $ 335.6 $ 317.1 $ 18.5 5.8% Vehicle leasing 15.3 20.7 (5.4 ) (26.1% ) Fees and services 12.5 15.0 (2.5 ) (16.7% ) Other 4.3 2.2 2.1 94.0% Total revenues $ 367.7 $ 355.0 $ 12.7 3.6% Vehicle rental metrics: Number of rental days 8,778,176 8,068,147 710,029 8.8% Average revenue per day $ 38.23 $ 39.30 $ (1.07 ) (2.7% ) Vehicle leasing metrics: Average number of vehicles leased 12,288 17,988 (5,700 ) (31.7% ) Average monthly lease revenue per unit $ 415 $ 384 $ 31 8.1% Expenses Three Months Ended June 30, $ Increase/ % Increase/ 2005 2004 (decrease) (decrease) (in millions) Direct vehicle and operating $ 209.9 $ 180.1 $ 29.8 16.6% Vehicle depreciation and lease charges, net 54.2 64.8 (10.6 ) (16.3% ) Selling, general and administrative 60.2 56.3 3.9 6.9% Interest expense, net of interest income 23.5 23.0 0.5 2.1% Total expenses $ 347.8 $ 324.2 $ 23.6 7.3% Revenues Six Months Ended June 30, $ Increase/ % Increase/ 2005 2004 (decrease) (decrease) (in millions) Vehicle rentals $ 648.5 $ 582.4 $ 66.1 11.4% Vehicle leasing 29.8 38.5 (8.7 ) (22.5% ) Fees and services 24.8 27.1 (2.3 ) (8.7% ) Other 7.4 5.7 1.7 29.7% Total revenues $ 710.5 $ 653.7 $ 56.8 8.7% Vehicle rental metrics: Number of rental days 16,514,641 14,753,523 1,761,118 11.9% Average revenue per day $ 39.27 $ 39.47 $ (0.20 ) (0.5% ) Vehicle leasing metrics: Average number of vehicles leased 11,925 16,938 (5,013 ) (29.6% ) Average monthly lease revenue per unit $ 417 $ 379 $ 38 10.0% Expenses Six Months Ended June 30, $ Increase/ % Increase/ 2005 2004 (decrease) (decrease) (in millions) Direct vehicle and operating $ 400.6 $ 336.7 $ 63.9 19.0% Vehicle depreciation and lease charges, net 107.8 134.0 (26.2 ) (19.5% ) Selling, general and administrative 115.0 103.8 11.2 10.8% Interest expense, net of interest income 43.0 42.2 0.8 1.8% Total expenses $ 666.4 $ 616.7 $ 49.7 8.1% Total Number of Maximum Shares Purchased Dollar Value of Total Number Average as Part of Publicly Shares that May Yet of Shares Price Paid Announced Plans Be Purchased under Period Purchased Per Share or Programs the Plans or Programs April 1, 2005 -
April 30, 2005 95,000 $ 33.29 95,000 $ 62,732,000 May 1, 2005 -
May 31, 2005 142,400 $ 34.71 142,400 $ 57,790,000 June 1, 2005 -
June 30, 2005 51,000 $ 37.27 51,000 $ 55,889,000 Total 288,400 288,400 NUMBER OF VOTES NOMINEE FOR WITHHELD Molly Shi Boren 24,576,809 55,587 Thomas P. Capo 24,580,617 51,779 Maryann N. Keller 24,566,648 65,748 The Hon. Edward C. Lumley 23,760,876 871,520 Gary L. Paxton 24,581,108 51,288 John C. Pope 24,367,339 265,057 John P. Tierney 24,578,425 53,971 Edward L. Wax 24,578,158 54,238