1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 2000
REGISTRATION NO. 1-15421
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 5
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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ANC RENTAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 65-0957875
(State or Other Jurisdiction of (I.R.S. Employer Identification
No.)
Incorporation or Organization)
200 SOUTH ANDREWS AVENUE 33301
FORT LAUDERDALE, FLORIDA (Zip Code)
(Address of Principal Executive Offices)
(954) 320-4000
(Registrant's Telephone Number, Including Area Code)
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAMES OF EACH EXCHANGE ON
WHICH EACH CLASS IS TO BE
TITLE OF EACH CLASS TO BE SO REGISTERED REGISTERED
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Common Stock ($.01 Par Value) New York Stock Exchange
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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ANC RENTAL CORPORATION
CROSS-REFERENCE SHEET BETWEEN THE INFORMATION STATEMENT ATTACHED TO THIS
DOCUMENT AS
ANNEX A AND ITEMS OF FORM 10
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED BY REFERENCE
INTO
THE REGISTRATION STATEMENT ON FORM 10
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- ---- ------------ ---------------------------------
1. Business................................... Summary; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; and Business
2. Financial Information...................... Summary; Capitalization; Selected Financial
Data; Unaudited Consolidated Pro Forma
Financial Statements; and Management's
Discussion and Analysis of Financial
Condition and Results of Operations
3. Properties................................. Business
4. Security Ownership of Certain Beneficial
Owners and Management...................... Management
5. Directors and Executive Officers........... Management
6. Executive Compensation..................... Management
7. Certain Relationships and Related
Transactions............................... Summary; The Spin-off; Management; and
Certain Relationships and Related
Transactions.
8. Legal Proceedings.......................... Business
9. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters........................ Summary; The Spin-off; and Description of
Capital Stock
11. Description of Registrant's Securities to
be Registered.............................. Description of Capital Stock
12. Indemnification of Directors and
Officers................................... Management
13. Financial Statements and Supplementary
Data....................................... Summary; Unaudited Consolidated Pro Forma
Financial Statements; and Consolidated
Financial Statements
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
10. Recent Sales of Unregistered Securities
None
14. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
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15. Financial Statements and Exhibits.
(a) Financial Statements and Financial Statement Schedules.
The following financial statements are included in the Information
Statement and filed as a part of this Registration Statement on Form 10:
(1) Unaudited Consolidated Pro Forma Financial Statements of ANC Rental;
and
(2) Consolidated Financial Statements of ANC Rental.
The following financial statement schedule for the years ended December 31,
1999, 1998 and 1997 is filed with this report:
II -- Valuation and Qualifying Accounts
(b) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1** Form of Separation and Distribution Agreement to be entered
into by and between AutoNation and ANC Rental.
3.1** Amended and Restated Certificate of Incorporation of ANC
Rental.
3.2** Amended and Restated Bylaws of ANC Rental.
4.1** Form of Specimen Stock Certificate of ANC Rental common
stock.
4.2 Master Motor Vehicle Lease and Servicing Agreement dated as
of February 26, 1999 among National Car Rental System, Inc.,
as lessee, National Car Rental Financing Limited
Partnership, as lessor, and AutoNation, Inc., as guarantor
(incorporated by reference to Exhibit 4.1 to AutoNation's
Quarterly Report on Form 10-Q for the Quarter Ended March
31, 1999).
4.3 Series 1999-1 Supplement dated as of February 26, 1999
between National Car Rental Financing Limited Partnership
("NFLP"), and The Bank of New York, as Trustee (the
"Trustee") to the Base Indenture, dated as of April 30,
1996, between NFLP and the Trustee, as amended by the
supplement and amendment to the Base Indenture, dated as of
December 20, 1996, between NFLP and the Trustee
(incorporated by reference to Exhibit 4.2 to AutoNation's
Quarterly Report on Form 10-Q for the Quarter ended March
31, 1999).
4.4 Base Indenture dated as of February 26, 1999 between ARG
Funding Corp. and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.3 to AutoNation's
Quarterly Report on Form 10-Q for the Quarter ended March
31, 1999).
4.5 Series 1999-1 Supplement dated as of February 26, 1999
between ARG Funding Corp. and The Bank of New York, as
Trustee, to the ARG Base Indenture (incorporated by
reference to Exhibit 4.4 to AutoNation's Quarterly Report on
Form 10-Q for the Quarter ended March 31, 1999).
4.6 Third Amended and Restated Master Collateral Agency
Agreement dated as of February 26, 1999 among National Car
Rental System, Inc., Alamo Rent-A-Car, Inc. and Spirit
Rent-A-Car, Inc. d/b/a CarTemps USA, Alamo Financing, L.P.,
National Car Rental Financing Limited Partnership and
CarTemps Financing, L.P., as lessor grantors, AutoNation,
Inc., as master servicer and Citibank, N.A., as master
collateral agent (incorporated by reference to Exhibit 4.5
to AutoNation's Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1999).
5.1** Opinion of Akerman, Senterfitt & Eidson, P.A. regarding the
validity of the securities to be distributed in the
spin-off.
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EXHIBIT
NUMBER DESCRIPTION
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10.1** Form of Tax Sharing Agreement to be entered into by and
between AutoNation and ANC Rental.
10.2** Form of Transitional Services Agreement to be entered into
by and between AutoNation and ANC Rental.
10.3 Letter Agreement between Alamo Rent-A-Car, Inc. and General
Motors Corporation dated November 18, 1997 (incorporated by
reference to Exhibit 10.25 to AutoNation's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.4 Letter Agreement between National Car Rental System, Inc.
and General Motors Corporation dated November 18, 1997
(incorporated by reference to Exhibit 10.26 to AutoNation's
Annual Report on Form 10-K for the year ended December 31,
1997).
10.5 Letter Agreement between National Car Rental System, Inc.
and General Motors Corporation dated December 16, 1998
(incorporated by reference to Exhibit 10.22 to AutoNation's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.6 Letter Agreement between Alamo Rent-A-Car, Inc. and General
Motors Corporation dated December 16, 1998 (incorporated by
reference to Exhibit 10.23 to AutoNation's Annual Report on
Form 10-K for the year ended December 31, 1998).
10.7** Form of Lease Agreement by and between ANC Rental and
AutoNation.
10.8** Form of Lease Agreement by and between ANC Rental and
AutoNation.
10.9* Employment Agreement with Dennis M. Custage.
10.10* Employment Agreement with Macdonald Clark.
10.11* Supplemental Letter regarding Employment Agreement with
Macdonald Clark.
21.1** Subsidiaries of ANC Rental.
23.1** Consent of Akerman, Senterfitt & Eidson, P.A. (included in
Exhibit 5.1 to this document).
27.1* Financial Data Schedule for the Year Ended December 31, 1999
(For SEC use only).
27.2* Financial Data Schedule for the Year Ended December 31, 1998
(For SEC use only).
27.3* Financial Data Schedule for the Year Ended December 31, 1997
(For SEC use only).
99.1 Information Statement, preliminary and subject to
completion, dated as of April 24, 2000, attached to this
Registration Statement as Annex A.
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* Previously filed
** To be filed by amendment
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To ANC Rental Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of ANC Rental Corporation and subsidiaries
included in this registration statement and have issued our report thereon dated
January 26, 2000 (except with respect to the matters discussed in the second
paragraph of Note 4 and Note 18, as to which the date is May 2, 2000). Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule included under Item 15(a) is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida
January 26, 2000 (except with
respect to the matters discussed in the
second paragraph of Note 4 and Note 18,
as to which the date is May 2, 2000).
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ANC RENTAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
(IN MILLIONS)
BALANCE
AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
CLASSIFICATIONS OF YEAR INCOME DEDUCTIONS OTHER OF YEAR
- --------------- --------- ---------- ---------- ------ -------
Allowance for doubtful accounts:
1999..................................... $28.5 $49.0 $(30.9)(2) $ -- $46.6
1998..................................... 28.8 15.0 (16.0)(2) .7(1) 28.5
1997..................................... 9.2 7.0 (3.3)(2) 15.9(1) 28.8
Restructuring reserves:
1999..................................... 19.5 40.5 (8.0)(4) (18.8)(3) 33.2
1998..................................... 41.9 -- (18.7)(4) (3.7)(3) 19.5
1997..................................... 9.5 78.0 (28.1)(4) (17.5)(3) 41.9
- ---------------
(1) Allowance of acquired businesses.
(2) Accounts written off.
(3) Primarily asset write-offs.
(4) Primarily cash payments of costs associated with restructuring activities.
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III. SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 5 to Registration
Statement on Form 10 to be signed on its behalf by the undersigned, thereunto
duly authorized.
ANC RENTAL CORPORATION
By: /s/ MICHAEL S. KARSNER
------------------------------------
Michael S. Karsner
President and Chief Executive
Officer
Date: May 3, 2000
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AutoNation(TM) LOGO
Dear AutoNation Stockholder:
In an effort to maximize stockholder value, AutoNation, Inc. intends to
focus primarily on its automotive retail business. In order to achieve this
focus, AutoNation has determined to separate its automotive rental business from
its automotive retail business. The result will be two independent public
companies: AutoNation, Inc., which will continue to own and operate the
automotive retail business, and ANC Rental Corporation, which will own and
operate Alamo-Rent-A-Car, National Car Rental and CarTemps USA.
The separation of the automotive rental business will be accomplished
through a tax-free spin-off of ANC Rental. In the spin-off, all of the
outstanding shares of ANC Rental common stock will be distributed to AutoNation
stockholders. As a result, you will receive one share of ANC Rental common stock
for every shares of AutoNation common stock that you hold at the close
of business on , 2000. The spin-off will not affect your ownership of
AutoNation common stock.
We urge you to read carefully the enclosed Information Statement that
explains the proposed spin-off in detail and provides important information
regarding ANC Rental. Please note that a stockholder vote is not required in
connection with this matter, and holders of AutoNation's common stock are not
required to take any action to participate in the spin-off. Therefore, we are
not asking you for a proxy.
We are happy to have you as a stockholder during this very exciting time
for our company. AutoNation and ANC Rental will each have great new
opportunities as independent companies and we remain committed to having each
company be a leader in its industry.
Very truly yours,
H. Wayne Huizenga
Chairman
AutoNation, Inc.
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ANC RENTAL CORPORATION LOGO
Dear ANC Rental Corporation Stockholder:
We welcome you as a "founding" stockholder of ANC Rental Corporation, which
will be publicly traded for the first time on or about , 2000. You
will become an owner of one share of our common stock for every shares
of AutoNation, Inc. common stock that you own at the close of business on
, 2000. We have applied to list our common stock on the New York Stock
Exchange, and we expect that our common stock will trade on the NYSE under the
ticker symbol "ANR."
ANC Rental owns and operates Alamo Rent-A-Car, National Car Rental, and
CarTemps USA. Alamo primarily serves the leisure traveler. National primarily
serves the frequent business traveler. Together, Alamo and National are among
the nation's largest on-airport or near-airport providers of rental vehicles.
Alamo and National also provide vehicle rental services in 69 countries
worldwide. CarTemps USA serves the domestic replacement rental market
principally from suburban locations. Combined, our worldwide operations
generated in excess of $3.5 billion in revenue in 1999.
This is a very exciting time, and we are enthusiastic about what the future
holds for our new, independent public company. Congratulations on becoming one
of the "founding" stockholders of ANC Rental Corporation.
Very truly yours,
Michael S. Egan
Chairman
ANC Rental Corporation
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ANNEX A
PRELIMINARY AND SUBJECT TO COMPLETION, DATED MAY 3, 2000
INFORMATION STATEMENT
ANC RENTAL CORPORATION LOGO
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
ANC Rental Corporation is currently a wholly-owned subsidiary of
AutoNation, Inc. AutoNation plans to spin-off ANC Rental by distributing 100% of
ANC Rental's common stock to the stockholders of AutoNation as a tax-free
dividend. As a holder of AutoNation common stock, you will receive one share of
ANC Rental common stock for every shares of AutoNation that you hold
at the close of business on , 2000, the record date for the spin-off.
We are sending you this Information Statement to describe the spin-off of our
company. We expect the spin-off to occur on or about , 2000.
Immediately after the spin-off is completed, AutoNation will not own any shares
of our common stock, and we will be an independent public company.
A STOCKHOLDER VOTE IS NOT REQUIRED FOR THE SPIN-OFF TO OCCUR. AUTONATION IS
NOT ASKING YOU FOR A PROXY, AND REQUESTS THAT YOU DO NOT SEND A PROXY.
Furthermore, to receive the shares of our common stock to which you are
entitled, you do not need to pay any cash or other consideration to AutoNation
or to us and you do not need to surrender any shares of AutoNation common stock
which you own.
Currently, there is no trading market for our common stock. However, we
expect that a limited market, commonly known as a "when issued" trading market,
for our common stock will develop on or shortly before the record date for the
spin-off, and we expect "regular way" trading of our common stock will begin the
first trading day after the spin-off. We have applied to list our common stock
on the New York Stock Exchange under the ticker symbol "ANR."
AS YOU REVIEW THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement is , 2000;
AutoNation first mailed this document to its stockholders on , 2000.
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TABLE OF CONTENTS
PAGE
----
Summary..................................................... 1
Summary Historical and Pro Forma Financial Data............. 6
Risk Factors................................................ 7
The Spin-off................................................ 14
Capitalization.............................................. 24
Selected Financial Data..................................... 25
Unaudited Consolidated Pro Forma Financial Statements....... 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Business.................................................... 41
Management.................................................. 59
Security Ownership of Certain Beneficial Owners and
Management................................................ 65
Certain Relationships and Related Transactions.............. 66
Description of Capital Stock................................ 67
Validity of Securities...................................... 67
Where You Can Find More Information......................... 67
Index to Consolidated Financial Statements.................. F-1
i
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SUMMARY
This summary highlights selected information from this document, but does
not contain all the details concerning the spin-off or ANC Rental, including
information that may be important to you. To better understand the spin-off and
ANC Rental, you should carefully review this entire document.
Unless the context otherwise requires, in this document:
- The terms "ANC Rental," "we," "us" and "our" refer to the automotive
rental business of AutoNation for periods before the spin-off. This
includes business activities conducted under the brand names of Alamo,
National and CarTemps USA. For periods after the spin-off, these terms
refer to ANC Rental Corporation and its subsidiaries.
- The term "AutoNation" refers to AutoNation, Inc. and its subsidiaries.
Before the spin-off, this term includes both AutoNation's automotive
rental business and its automotive retail business. For periods after the
spin-off, this term refers only to AutoNation's automotive retail
business.
ANC RENTAL CORPORATION
ANC Rental is currently a wholly-owned subsidiary of AutoNation. We own and
operate one of the world's largest car rental businesses under the brand names
Alamo, National and CarTemps USA. Our rental operations maintain a strong
presence in all three markets of the automotive rental industry: leisure travel,
business travel and vehicle replacement. Alamo and National serve the daily
rental needs of both leisure and business travelers from a network of
approximately 3,000 on-airport and near-airport locations in all 50 states of
the United States, as well as in Canada, Europe, the Caribbean, Latin America,
Asia, the Pacific Rim, Africa and the Middle East. CarTemps USA is our domestic
replacement rental business which operates in over 400 locations throughout the
United States. During 1999, we completed over 19 million rental transactions for
approximately 97 million rental days with a worldwide fleet that averaged
approximately 339,000 cars.
Alamo has been in business for more than 25 years and we believe that the
brand enjoys both domestic and international recognition as a leader in the
leisure rental market. In addition to a strong presence in the direct consumer
market, we believe that Alamo maintains a significant share of the domestic tour
and international tour markets, as well as the travel agent and affinity
markets. Alamo operates exclusively through company-owned locations in the
United States and through both company-owned and franchised locations
internationally. In the year ended December 31, 1999, Alamo had North American
revenue of approximately $1.4 billion.
National and its predecessors have been operating under the "National" name
since 1947. National primarily serves the business travel market and we have
designed its operations to offer a quick, simple and efficient rental process
tailored to meet the demanding requirements of the sophisticated and frequent
renter. National has contracts with more than half of the Fortune 500 companies
in the United States. National operates through both company-owned and
franchised locations in the United States and internationally. In the year ended
December 31, 1999, National had North American revenue of approximately $1.5
billion.
We operate the Alamo and National brands in over 2,000 locations outside
the United States and Canada. In 1999, the majority of our international revenue
was generated in the United Kingdom, where we believe that we have a leading
market position. In 1999, our international operations outside of North America
had revenue of approximately $370 million.
We launched the CarTemps USA brand in January 1998 by consolidating the
replacement operations of several different businesses which we owned. Since
then, CarTemps USA has grown through the addition of locations in new and
existing markets, as well as through increased development of relationships with
insurance companies, automotive dealerships and collision repair centers. Based
on revenue of approximately $283 million during 1999, CarTemps USA was one of
the three largest operators in the U.S. replacement rental market, which is led
by Enterprise Rent-A-Car.
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In the year ended December 31, 1999, on a consolidated basis, our
operations generated revenue of approximately $3.5 billion, resulting in an
operating loss of $76.3 million, which was primarily attributable to an
operating loss of $123.3 million in the fourth quarter of 1999. Our operating
loss in the first quarter of 2000 was $36.5 million.
In August 1999, AutoNation announced its intention to separate its
automotive rental business from its automotive retail business. This separation
will be accomplished through a spin-off in which AutoNation will distribute its
entire interest in ANC Rental to AutoNation's stockholders on or about
, 2000. Before the spin-off, ANC Rental and AutoNation will enter
into agreements providing for the separation of the businesses and governing
various ongoing relationships between the companies.
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF
Q: WHY IS AUTONATION SEPARATING ITS BUSINESSES?
A: AutoNation's board of directors has determined that the separation of its
automotive rental business from its automotive retail business is in the best
interests of its stockholders. AutoNation's board of directors believes that
the automotive rental and automotive retail businesses have distinct
financial and operating characteristics and that separating the businesses
will:
- enable each company's management team to focus more exclusively on
improving each company's operations, thereby maximizing stockholder value
over the long term for each of AutoNation and ANC Rental;
- separate management and ownership structures for the companies and
provide each company's management with direct incentives and
accountability to their respective public investors; and
- allow AutoNation to raise capital through an increase in its borrowing
capacity to pursue its strategic business plan.
Q: WHY IS THE SEPARATION OF THE TWO COMPANIES STRUCTURED AS A SPIN-OFF?
A: AutoNation's board of directors believes that a tax-free distribution of
shares in the rental company offers AutoNation and its stockholders the
greatest long-term value and is the most tax efficient way to separate the
companies. AutoNation has received a letter ruling from the Internal Revenue
Service to the effect that, based on the facts and representations made in
connection with obtaining the letter ruling, the spin-off will qualify as
tax-free to AutoNation and its stockholders for federal income tax purposes.
You should review the discussion of the risks relating to the tax-free
qualification of the spin-off which begins on page 12 of this document and
the discussion of the U.S. Federal Income Tax Aspects of the Spin-off which
begins on page 21 of this document.
Q: WHAT WILL THE SPIN-OFF ACCOMPLISH?
A: The spin-off will separate AutoNation's automotive rental business from its
other businesses and thereby transform AutoNation into two independent
companies, each focused on its own core business:
- AutoNation -- the largest automotive retailer in the United States with
over 400 new vehicle franchises; and
- ANC Rental -- a leading automotive rental business operating under the
Alamo, National and CarTemps USA brand names.
Q: WHAT DO STOCKHOLDERS NEED TO DO TO PARTICIPATE IN THE SPIN-OFF?
A: Nothing. To effect the spin-off, AutoNation will declare and distribute to
each of its stockholders a dividend of one share of ANC Rental common stock
for every shares of AutoNation common stock held as of the close of
business on , 2000. Because the spin-off of ANC Rental's common
stock is being made to all AutoNation stockholders, no proxy or vote is
necessary. AutoNation expects
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the spin-off to occur on or about , 2000. The spin-off will not
change the number of shares of AutoNation common stock that AutoNation
stockholders own. Immediately after the spin-off, AutoNation's stockholders
will continue to own their respective proportionate interest in AutoNation's
automotive retail and automotive rental businesses, but the stockholders will
own their interest in these businesses through their ownership of stock in
each of two independent public companies, AutoNation and ANC Rental.
Q: ARE THERE RISKS TO OWNING ANC RENTAL COMMON STOCK?
A: Yes. ANC Rental's business is subject both to general and specific business
risks relating to its operations. In addition, ANC Rental's separation from
AutoNation presents risks relating to it being an independent public company
for the first time as well as risks relating to the nature of the spin-off
transaction itself. These risks are described in the "Risk Factors" section
beginning on page 6. We encourage you to read that section carefully.
Q: WILL AUTONATION RETAIN ANY OWNERSHIP INTEREST IN ANC RENTAL AFTER THE
SPIN-OFF?
A: No. AutoNation will not own any shares of ANC Rental common stock after the
spin-off and ANC Rental will not own any shares of AutoNation common stock
after the spin-off.
Q: WHERE CAN AUTONATION STOCKHOLDERS GET MORE INFORMATION?
A: You may direct questions to 110 S.E. Sixth Street, Fort Lauderdale, Florida
33301, Attention: Investor Relations, telephone number: (954) 769-7339, or
you may contact the distribution agent for the spin-off, First Chicago Trust
Company, a Division of EquiServe, at 525 Washington Blvd., Suite 4694, Jersey
City, New Jersey 07310, telephone number: 1-800-519-3111.
3
15
TERMS OF THE SPIN-OFF
The spin-off will separate AutoNation's automotive rental business from its
automotive retail business, and create two independent public
companies -- AutoNation and ANC Rental. The following is a brief summary of the
terms of the spin-off.
Distributing Company....... AutoNation, Inc. After the spin-off, AutoNation
will not own any shares of our common stock.
Spun-off Company........... ANC Rental Corporation. After the spin-off, we will
be an independent public company.
Securities to Be
Distributed................ shares of our common stock (based on
shares of AutoNation common stock
outstanding as of , 2000).
Distribution Ratio......... One share of our common stock for every
shares of AutoNation common stock held as of the
close of business on the record date.
Record Date................ Close of business on , 2000.
Spin-off Date.............. On or about , 2000.
Tax Treatment.............. We expect that the spin-off will be tax-free to
AutoNation and its stockholders, except that the
cash received by AutoNation stockholders in lieu of
fractional shares may be taxable.
Distribution Agent......... First Chicago Trust Company, a Division of
EquiServe.
Distribution and Other
Agreements............... Before the spin-off, we will enter into a
separation and distribution agreement with
AutoNation which will set forth the terms and
conditions of the spin-off. We will also enter into
a transitional services agreement and a tax sharing
agreement with AutoNation to facilitate the
separation of the automotive rental business from
the automotive retail business and the operation of
our company and AutoNation as independent public
companies. We will also enter into agreements with
AutoNation that provide for on-going arm's-length
business relationships. In addition, we will
receive credit support from AutoNation for a
transitional period following the separation of the
companies.
Listing and Trading of ANC
Rental common stock...... We have applied to list our common stock on the New
York Stock Exchange under the symbol "ANR." We
expect that "when issued" trading for our common
stock will develop on or about the record date for
the spin-off and continue through the spin-off
date. "When issued" trades will be completed only
if our stock is issued. We expect that "regular
way" NYSE trading in our common stock will begin on
the first trading day after the spin-off.
Trading of AutoNation
common stock............... We expect that beginning on or about the record
date for the spin-off and continuing until the
spin-off date, the NYSE will permit AutoNation
common stock to be traded in two ways: (1) "when
issued" (identified by the "wi" letters next to the
listing) and (2) "regular way." AutoNation common
stock traded "when issued" will entitle the buyer
to receive only the underlying shares of AutoNation
common stock, but
4
16
not those shares of our common stock that will be
distributed in the spin-off. AutoNation common
stock traded "regular way" will entitle the buyer
to receive the shares of our common stock that will
be distributed in the spin-off as well as the
underlying shares of AutoNation common stock.
Beginning on the first NYSE trading day after the
spin-off date, AutoNation common stock will only
trade "regular way," entitling the buyer to receive
only AutoNation common stock.
Dividend Policy............ Following the spin-off date, we intend to retain
all earnings for the foreseeable future for use in
the operation of our business. Consequently, we do
not anticipate paying any cash dividends on our
common stock for the foreseeable future.
Conditions to the
Spin-off................... The spin-off will occur only if, among other
things:
(1) our and AutoNation's lenders and other third
parties provide necessary financing and
approvals to allow both companies to operate as
independent public companies; and
(2) no change of facts has occurred which would
negate the effectiveness of the IRS letter
ruling as to the tax-free nature of the
spin-off.
5
17
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
We provide below summary historical and pro forma financial data of our
company for the periods indicated. The pro forma income statement and balance
sheet data give effect to the transactions and events described in "Unaudited
Consolidated Pro Forma Financial Statements." You should read the summary
consolidated historical and pro forma financial data in conjunction with our
Consolidated Financial Statements and notes thereto included elsewhere in this
Information Statement, "Unaudited Consolidated Pro Forma Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." See Notes 3, 7, 10 and 18 of Notes to Consolidated Financial
Statements for a discussion of business combinations, shareholder's equity,
restructuring and other charges and subsequent events and their effect on
comparability of year-to-year data. The summary historical and pro forma
financial data is not necessarily indicative of the results of operations or
financial position which would have resulted had the spin-off occurred during
the periods presented.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
PRO FORMA
1999 1999 1998 1997 1996
----------- -------- -------- -------- --------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenue.......................................... $3,542.3 $3,542.3 $3,453.6 $3,055.1 $2,699.4
Income (loss) before extraordinary charges....... (80.2) (69.4) 108.8 53.7 (49.9)
Net income (loss)................................ (81.8) (71.0) 108.8 51.2 (80.4)
Pro forma basic and diluted earnings
per share(a)...................................
Pro forma weighted average shares
outstanding....................................
PRO FORMA DECEMBER 31,
DECEMBER 31, -------------------------------------------------
1999 1999 1998 1997 1996
------------ ------------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Total assets............................ $6,627.9 $6,349.5 $6,252.6 $5,870.3 $4,669.4
Revenue earning vehicle debt............ 4,250.6 4,531.6 4,377.9 4,172.1 3,380.4
Other debt.............................. 304.4 107.4 132.0 90.8 71.4
Shareholders' equity.................... 888.9 726.6 738.7 526.2 330.9
- ---------------
(a) We have not presented historical earnings per share because it would not be
meaningful to you. Before the spin-off, we had only 100 shares of common
stock outstanding, all of which AutoNation owned. Unaudited pro forma basic
and diluted earnings per share of common stock is calculated based on net
income divided by the number of shares of our common stock to be outstanding
after the spin-off.
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RISK FACTORS
In addition to the other information included in this Information
Statement, you should be aware of the following risk factors in connection with
our business, the spin-off and ownership of our shares.
We also caution you that this Information Statement contains
forward-looking statements. The words "believes," "should be," "anticipates,"
"plans," "expects," "intends" and "estimates," and similar expressions identify
these forward-looking statements. These forward-looking statements are contained
principally under the headings "Summary," "Risk Factors," "The Spin-Off,"
"Unaudited Consolidated Pro Forma Financial Statements," "Management's
Discussion and Analysis and Results of Operations," "Business," and
"Management." Although we believe that our expectations reflected in these
forward-looking statements are based on reasonable assumptions, our assumptions
may not prove to be correct. Because our assumptions and expectations are
subject to risks and uncertainties, actual results may differ materially from
the expectations expressed by these forward-looking statements. Important
factors that could cause actual results to differ materially from the
expectations reflected in our forward-looking statements include the following
risk factors:
RISKS RELATING TO OUR BUSINESS
We will have substantial debt and an increased cost of capital.
Our vehicle fleet is primarily acquired through the issuance of vehicle
secured debt, and we rely heavily on our ability to obtain debt financing to
operate our business. Before the spin-off, AutoNation has provided guarantees in
support of our debt financing, as well as capital funding to enable us to
operate without our own credit facility. After the spin-off, some of this credit
support will remain in place for a limited time. Accordingly, after the
spin-off, we will need to complete the transition to financing our business
without credit support from AutoNation. The all-in-cost of our debt financing
will be higher as certain credit enhancement or credit support providers will
seek to negotiate higher fees as a result of the spin-off. We reflect this
change in the all-in-cost of our financing in our unaudited consolidated pro
forma financial statements which are included in this Information Statement.
Before the completion of the spin-off, we will have closed on new additional
indebtedness, consisting of a secured revolving credit facility, an unsecured
revolving credit facility (which, together, we will refer to in this document as
the "new credit facilities") and senior notes. We expect the interest rates on
new credit facilities and the senior notes to be consistent with that of other
industry participants of similar credit quality although at a higher rate than
currently enjoyed by AutoNation. As of December 31, 1999, after giving effect to
senior notes which we will have outstanding, the spin-off and related
transactions, we would have had approximately $4,555.0 million of indebtedness
outstanding, consisting of $4,250.6 million of vehicle debt and $304.4 million
of non-vehicle debt. As of December 31, 1999, our debt to equity ratio was
approximately 6.4:1, and, after giving effect to our senior notes, the spin-off
and related transactions, was approximately 5.1:1. We cannot assure you that we
will be able, in a timely manner, to refinance or restructure our existing debt
or obtain additional debt financing on favorable terms or, in the alternative,
that we will be able to access the capital markets by issuing debt or equity
securities for cash.
As a subsidiary of AutoNation, we also have benefited from investment grade
terms and conditions which have applied to our debt. As an independent company,
our borrowings, including our new credit facilities and senior notes, will
contain non-investment grade financial terms, covenants and operating
restrictions which will increase our cost of financing our business, restrict
our financial flexibility and could adversely impact our ability to conduct our
business. In addition, a failure to comply with a covenant or restriction in our
debt facilities could trigger an event of default, which may result in
acceleration of our debt, higher rates of interest and the inability to obtain
additional capital.
We have experienced operating losses which may continue in future periods.
We experienced an operating loss during our most recent fiscal year. Our
operating loss for fiscal 1999 was $76.3 million, and our net loss after
interest and taxes for 1999 was $71.0 million, which includes an extraordinary
charge relating to early debt retirement. Our loss for 1999 is primarily
attributable to several events, including but not limited to, (1) provisions for
plans to restructure our operations through the consolidation of our North
American headquarters, the reduction of approximately 250 non-field personnel,
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the reduction of the size of our fleet to better match local market demand and
the consolidation of some of our unprofitable locations, (2) allowances for
doubtful accounts on certain past due receivables, (3) renegotiation of some of
our international vehicle supply agreements and (4) other operational matters
such as higher administration costs and information system costs in part
associated with the implementation and remediation of National's new computer
operating system, higher selling and marketing expenses and higher commissions.
These events contributed to a fourth quarter operating loss of $123.3 million in
1999. We incurred an operating loss in the first quarter of 2000 of $36.5
million, which significantly exceeded our operating loss of $9.0 million in the
first quarter of 1999. We cannot assure you that similar events will not occur
or that we will be able to generate operating income in the future. Continued
net losses would adversely affect our financial condition, our ability to obtain
financing and the market price of shares of our common stock.
Our new credit facilities and other debt instruments will restrict our
operating flexibility.
The governing documents for our new credit facilities and senior notes and
our other debt instruments will contain a number of significant provisions that,
among other things, restrict our ability to:
- sell assets;
- incur more indebtedness;
- grant or incur liens on our assets;
- repay certain indebtedness, including the senior notes;
- pay dividends;
- make certain investments or acquisitions;
- repurchase or redeem capital stock;
- engage in mergers or consolidations; and
- engage in certain transactions with our affiliates.
These restrictions could hurt our ability to finance our future operations
or capital needs or make acquisitions that may be in our interest. In addition,
our new credit facilities require that we satisfy several financial covenants.
Our ability to comply with these financial requirements and other restrictions
may be affected by events beyond our control, and our inability to comply with
them could result in a default under the new credit facilities, the senior note
indenture or other debt instruments. If a default occurs under our new credit
facilities, the lenders under these facilities could elect to declare all our
outstanding borrowings, as well as accrued interest and fees, to be due and
payable and require us to apply all of our available cash to repay those
borrowings. The lenders under our new secured credit facility could also proceed
against their collateral, which includes a first priority lien on substantially
all of our domestic non-vehicle assets and a pledge of the capital stock of most
of our domestic subsidiaries and 65% of the capital stock of our foreign
subsidiaries.
Competition in the automotive rental industry may impact our prices or market
share.
We operate in a highly competitive industry. We believe that price is one
of the primary competitive factors in the automotive rental industry,
particularly in the leisure market. From time to time, we or our competitors,
some of which have access to substantial capital, may attempt to compete
aggressively by lowering rental prices. To the extent that we lower prices to
attempt to enhance or retain market share, we may adversely impact our operating
margins. Conversely, if we opt not to match competitors' price reductions we may
lose market share, resulting in decreased volume and revenue.
Our newly implemented strategy for National may not improve its business.
Our newly implemented marketing strategy at National positions it as a
premium automotive rental brand with high levels of service emphasizing ease,
speed and choice. This strategy refocuses National on increasing revenue from
its corporate accounts and Emerald Club customers who are primarily frequent
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business travelers. We believe that this shift in National's strategy has caused
and will continue to cause a decline in our lower margin business volume.
However, we believe that this strategy will allow National to gain additional
market share from frequent business travelers and corporate accounts, which we
believe will be higher margin business. If National's change in strategy is not
successful, we may lose significant customer volume without a sufficient offset
from the increase in prices and margins for the targeted customers.
We have experienced difficulty with our computer operating system.
In November 1998, National converted to a new computer system called
Odyssey. Odyssey includes new hardware and proprietary software to operate our
reservation call centers, rental location terminals and fleet management and
administration systems. Technical issues associated with Odyssey adversely and
materially impacted our ability to handle and process customer calls and
reservations at National during the first half of 1999, which resulted in a
significant decrease in our rental volume, a significant loss of customers and
decreased operating performance. We believe that the technical issues related to
Odyssey were resolved by the end of the second quarter of 1999. However, if the
technical issues associated with Odyssey recur, we may not adequately be able to
handle and process customer calls and reservations and we could lose customers.
Our business is seasonal.
Our business, and particularly the leisure travel market, is highly
seasonal. Our third quarter, which includes the peak summer travel months, has
historically been the strongest quarter of the year. During the peak season, we
increase our rental fleet and workforce to accommodate increased rental
activity. As a result, any occurrence that disrupts travel patterns during the
summer period could result in a significant decrease in customer volume. The
first and fourth quarters for our operations are generally the weakest because
there is limited leisure travel and a greater potential for weather conditions,
either adverse or unseasonable, to impact our business. Moreover, many of our
operating expenses, including rent, general insurance and administrative
personnel, remain fixed throughout the year and cannot be reduced during periods
of decreased rental demand. As a result, we cannot assure you that we will have
the ability to conduct our operations efficiently or profitably at all times
during a year.
A decrease in air travel could impact our business.
In 1999, we generated approximately 90% of our revenue from domestic
operations at airport rental locations. We also expect to generate a significant
portion of our revenue from domestic operations in 2000 at airport rental
locations. A sustained material decrease in airline passenger traffic could
significantly reduce customer volume. Events that could reduce airline passenger
traffic include a general economic downturn, labor unrest, airline bankruptcies
and consolidations, substantially higher air fares, adverse weather conditions,
the outbreak of war, high-profile crimes against tourists and incidents of
terrorism.
Increases in fuel costs or reduced fuel supplies could harm our business.
We could be adversely affected by significant increases in fuel prices,
limitations on fuel supplies and the imposition of mandatory allocations or
rationing of fuel. In particular, increased fuel costs could result in increased
airline ticket prices to consumers, which could have an adverse effect on
business and leisure travel and tourism, resulting in a significant decrease in
customer volume for our businesses.
Changes in manufacturers' repurchase programs may affect our business.
As of December 31, 1999, we operated a combined fleet of approximately
308,000 owned and leased vehicles, of which approximately 73% were covered by a
vehicle manufacturer repurchase program or leased and not subject to residual
value risk. Under these manufacturers' repurchase programs, we agree to purchase
a minimum number of vehicles directly from franchised dealers of the
manufacturer at a specified price. The manufacturer, in turn, agrees to buy
those vehicles back from us at a future date at a price that is based upon the
capitalized cost of the vehicles less an agreed upon depreciation factor and, in
certain cases, an adjustment for damage and/or excess mileage. Repurchase
programs limit our risk of a decline in the residual value of our fleet and
enable us to fix our depreciation expense in advance. Vehicle depreciation is
the largest
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component of our cost of operations. We could have difficulty managing costs
relating to the acquisition and disposition of our vehicles if manufacturers
reduce the availability of repurchase programs or related incentives, or reduce
the number of vehicles available to vehicle rental companies through repurchase
programs.
We currently obtain a substantial portion of our financing in reliance on
repurchase programs. A significant adverse change in the financial condition of
the vehicle manufacturers, particularly General Motors, would make obtaining
needed vehicle-secured debt financing on favorable terms significantly more
difficult.
Some of our rental fleet is subject to residual value risk upon disposition.
As of December 31, 1999, we were subject to residual value risk on
approximately 27% of our owned vehicles which was not covered by manufacturers'
or other repurchase programs. Residual value risk is the risk that a vehicle's
market value at the time it is sold will be less than its depreciated value. The
residual value of non-program vehicles depends on factors including the general
level of pricing in the automotive industry for both new and used vehicles.
Prices for used vehicles generally decrease if the automotive manufacturers
increase the retail sales incentives they offer on new vehicles. We believe that
the record high amount of new vehicle sales the automotive industry achieved in
1999 occurred in part as a result of increased retail sales incentives offered
by manufacturers. A direct result has been that demand for used vehicles has
decreased, which has increased our residual value risk. Because it is difficult
to predict the impact or timing of future manufacturer incentive programs, used
vehicle demand and other factors that influence used vehicle resale values, we
may not be able to manage effectively the residual value risk on our non-program
vehicles which would increase our costs associated with using non-program
vehicles in our rental fleet.
Cost of our rental fleet may increase.
During the last few years, the average price of new cars has increased. The
effect on us of these price increases has been softened by periodic
manufacturers' sales incentive programs that tend to lower the average cost of
vehicles for fleet purchasers such as our company. We anticipate that new
vehicle prices will continue to increase, but we cannot assure you that the
manufacturers' sales incentive programs will remain available to keep our costs
down, nor can we assure you that we will be able to control our rental fleet
costs or selection, or to pass on any increases in vehicle cost to our
customers.
We depend on General Motors as our principal vehicle rental fleet supplier.
General Motors, through its franchised dealers, is our principal supplier
of rental fleet vehicles. The number of vehicles we purchase varies from year to
year. In model year 1999, we purchased approximately 78% of our aggregate
domestic rental fleet from General Motors. In model year 2000, we expect to
purchase approximately 77% of our domestic rental fleet from General Motors.
Alamo and National each have an agreement with General Motors through the model
year 2000 which requires that at least 51% of each brand's domestic fleet
consist of General Motors vehicles. Shifting significant portions of our fleet
purchases to other manufacturers would require significant lead time.
Separately, General Motors's inability to supply us with the planned number and
type of vehicles in a timely manner could result in our fleet being inadequate
in size or in the types of vehicles available to us to meet customers' demands,
thereby resulting in a loss of revenue. In addition, if General Motors is not
able to offer competitive terms and conditions and we are not able to purchase
sufficient quantities of vehicles from other automobile manufacturers on
competitive terms and conditions, then we may be forced to purchase vehicles at
higher prices or on otherwise less favorable terms. Such a situation could
adversely affect us through increased vehicle acquisition and depreciation costs
that we are not able to offset sufficiently through rental rate increases passed
through to our customers.
We rely on asset-backed financing to purchase vehicles.
We have relied and will continue to rely heavily on asset-backed financing
to purchase vehicles. As of December 31, 1999, after giving effect to the
spin-off and our new financings, we would have had outstanding $4,250.6 million
of asset-backed financing. If our access to asset-backed financing were reduced,
we cannot be
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sure that we would be able to obtain replacement financing on favorable terms.
As a result, any disruption in the market for asset-backed securities or in our
ability to access that market could adversely affect our ability to purchase
vehicles for our fleet.
An increase in interest rates could reduce our profitability.
We expect that a substantial portion of our debt, including our borrowings
under the new credit facilities, will be at floating interest rates. We use
interest rate derivative transactions to manage the impact of interest rate
changes on our variable rate debt. These derivative transactions consist of
interest rate swaps and interest rate caps and floors. Including our interest
rate derivatives, fixed interest rate debt was 78% of our total debt outstanding
as of December 31, 1999. Nevertheless, a substantial increase in interest rates
would significantly increase our cost of indebtedness.
Changes in governmental regulations could impact our financial results.
In connection with the rental of vehicles, we sell optional products,
including loss damage waivers and supplemental liability insurance. The sale of
these optional products is, and may in the future be further, restricted by
governmental regulation. If the price we are allowed to charge for these
products is limited, or if our sale of these products is otherwise restricted,
it could result in the loss of revenue and related profits.
The costs of accidents involving our vehicles could exceed our liability
insurance.
The automotive rental business routinely exposes rental car companies to
claims for personal injury, death and property damage resulting from the use of
rented vehicles. We have insurance programs in place that we believe reasonably
protect us against significant liability arising from these types of claims.
However, we may still be exposed to uninsured liability resulting from
extraordinary, unforeseen or multiple payouts or otherwise. Also, liabilities
arising from existing or future claims may exceed the amount of our insurance,
and we cannot assure you that we will have sufficient capital available to pay
any uninsured claims or that insurance coverage will continue to be available to
us on economically reasonable terms.
Problems may arise as a result of consolidation of our brands.
Our competitors have, on occasion, made objections to airport authorities
that Alamo and National should not both be allowed to bid for or maintain
airport concession agreements in the same airport because Alamo and National are
commonly owned and share a number of administrative functions. To date, no
airport has accepted this position. Should an airport accept this position in
the future, it could prevent either Alamo or National from doing business at
that airport. Also, some of National's licensees have, on occasion, objected to
the consolidation of administrative functions of Alamo and National and some of
National's licensees have also raised questions about CarTemps USA operating in
their territories. If we are forced to change the way we operate our three
brands, particularly by requiring that we segregate the shared administrative
services, fleet or other functions of Alamo and National, it could significantly
increase our administrative, fleet operating or other costs, or adversely impact
our ability to achieve cost savings.
We may have clean-up costs and liabilities relating to storage and handling of
petroleum and other materials.
Our domestic and international service facilities use tanks to store
petroleum products such as gasoline, diesel fuel, motor oil and waste oil and
also handle other materials that may under certain circumstances harm human
health or the environment. At many of these locations, one or more tanks
containing such materials are located underground. We cannot assure you that
these tanks or related systems or other materials will not result in soil or
groundwater contamination. In addition, historical operations, including
activities relating to automobile and bus maintenance, at some of our currently
and formerly owned or operated properties, have resulted in releases or spills
into soil or groundwater. Any such contamination, release or spill, depending on
factors such as the material involved, quantity and environmental setting, and
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impacts on third parties, could result in significant remediation expenditures,
claims, liabilities, and interruptions to our operations.
We do not expect to pay dividends.
Following the spin-off date, we intend to retain all earnings, if any, for
the foreseeable future for use in the operation of our business. Consequently,
we do not anticipate paying any cash dividends on our common stock for the
foreseeable future.
We have no operating history as an independent public company.
We do not have an operating history as an independent public company and we
have historically relied on AutoNation for various financial, administrative and
managerial assistance. To operate as an independent public company after the
spin-off, we will have to obtain our own credit facilities and banking
relationships and perform our own administrative functions, to the extent that
these functions are not provided for on a transitional basis through our
transitional services agreement with AutoNation. As a result, we will need to
hire additional administrative personnel. We cannot assure you that qualified
personnel will be available to meet our administrative needs. In addition, we
cannot assure you that, as an independent public company, our future performance
will be comparable to our reported historical results as a segment of AutoNation
before the spin-off.
RISKS RELATING TO THE SPIN-OFF
If the spin-off is taxable, you could be required to pay tax on your ANC Rental
shares and we could be adversely affected by any resulting corporate tax
liability.
AutoNation has received a letter ruling from the IRS to the effect that,
among other things, the spin-off will qualify as a tax-free distribution to
AutoNation stockholders and to AutoNation. Whether a spin-off qualifies as
tax-free depends in part upon the reasons for the spin-off and satisfaction of
numerous other fact-based requirements. The IRS letter ruling is based upon
various factual representations made by AutoNation and us. If any of those
factual representations were incorrect or incomplete in a material respect, or
if the facts upon which the letter ruling is based are materially different from
the facts at the time of the spin-off, the spin-off could become taxable to
AutoNation stockholders, AutoNation, or both.
If the spin-off fails to qualify as a tax-free distribution for U.S.
federal income tax purposes, AutoNation stockholders who receive shares of ANC
Rental common stock in the spin-off would be treated as if they had received a
taxable distribution in an amount equal to the fair market value of ANC Rental
common stock received. The amount of the taxable distribution would be taxed as
a dividend.
If the spin-off were not to qualify as a tax-free distribution for U.S.
federal income tax purposes to AutoNation stockholders, then, in general, a
corporate income tax could also be payable by the consolidated tax group of
which AutoNation is the common parent. Even if the spin-off qualifies as a
tax-free distribution to AutoNation stockholders, a corporate income tax would
also be payable if, after the spin-off, one or more persons acquires a 50% or
greater interest in AutoNation or us as part of a plan or series of related
transactions that included the spin-off. Corporate tax, if any, would be paid on
the excess, if any, as of the date of the spin-off of (1) the fair market value
of the ANC Rental common stock distributed to AutoNation's stockholders, minus
(2) AutoNation's adjusted tax basis in the ANC Rental common stock distributed.
We will enter into a tax sharing agreement with AutoNation in connection with
the spin-off regarding the allocation, and in some circumstances sharing, of
that potential corporate income tax liability. If the spin-off occurred and it
were not to qualify as a tax-free distribution or either we or AutoNation
experience a prohibited 50% or greater acquisition, we might have to pay the
resulting corporate income tax.
To minimize this and other risks, we will agree to refrain from engaging in
specified transactions unless:
- a ruling from the IRS is received to the effect that the proposed
transaction will not result in the spin-off being taxable to AutoNation
or its stockholders;
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- an opinion of counsel recognized as an expert in federal income tax
matters and designated by AutoNation is received to the same effect and
is reasonably satisfactory to AutoNation.
Transactions that may be affected by these restrictions relating to an
acquisition of a 50% or greater interest and other restrictions required to
preserve the tax-free nature of the spin-off include:
- a liquidation;
- a merger or consolidation with, or acquisition by, another company;
- issuances and redemptions of shares of our common stock;
- the exercise of stock options;
- the sale, distribution or other disposition of assets in a manner that
would adversely affect the tax consequences of the spin-off; and
- the discontinuation of material businesses.
Other transactions could also jeopardize the tax-free nature of the
spin-off.
There is no trading history for our common stock.
There has been no trading market for our common stock. However, we expect
that a limited market, commonly known as a "when issued" trading market, for our
common stock will develop on or shortly before the record date for the spin-off,
and we expect regular way trading will begin the first trading day after the
spin-off.
Once we have issued shares of our common stock in the spin-off, we do not
know how our common stock will trade. The market price of our common stock may
fluctuate significantly due to a number of factors, some of which may be beyond
our control, including:
- our business profile may not fit the investment objectives of
AutoNation's stockholders, causing some of them to sell our shares after
the spin-off;
- the potential absence of securities analysts covering our company and
distributing research and investment recommendations about our company;
- changes in earnings estimated by securities analysts or our ability to
meet those estimates;
- the operating results and stock price performance of other comparable
companies;
- overall stock market fluctuations; and
- economic conditions generally.
In particular, the realization of any of the risks described in these "Risk
Factors" could have a significant and adverse impact on the market price of our
common stock. In addition, the stock market in general has experienced
volatility that has often been unrelated or disproportionate to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the trading price of our common stock, regardless of our actual
operating performance.
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THE SPIN-OFF
REASONS FOR THE SPIN-OFF
Separate AutoNation's Distinct Businesses
The spin-off is designed to separate AutoNation's automotive rental
business from its automotive retail business, each of which has distinct
financial and operating characteristics. Separating the two business lines will
allow AutoNation to raise capital through an increase in its borrowing capacity
to pursue its strategic business plan. Following the spin-off, the two
independent companies will be able to adopt strategies and pursue objectives
appropriate to their respective needs.
Business Focus
By separating their operations, each of ANC Rental and AutoNation should be
able to focus its attention and financial resources on its own core business and
on exploring and implementing the most appropriate business opportunities.
Investor Understanding; Public Relations
Separating the operations of ANC Rental and AutoNation should enable
investors to better evaluate the financial performance, strategies and other
characteristics of each company. This will permit investors to make investment
decisions based on each company's own performance and potential, and enhance the
likelihood that the market will value each company appropriately. In addition,
each company will be able to focus its public relations efforts on cultivating a
distinct identity.
MECHANICS OF THE SPIN-OFF
AutoNation will accomplish the spin-off by distributing 100% of the shares
of ANC Rental's common stock to AutoNation's stockholders as a dividend. On
, 2000, the AutoNation board of directors formally declared the
dividend necessary to effect the spin-off. Each AutoNation stockholder as of the
close of business on , which is the record date for the spin-off,
will participate in the spin-off. On the spin-off date, those AutoNation
stockholders will each receive one share of ANC Rental common stock for every
shares of AutoNation common stock that they hold as of the record
date. We expect that the spin-off will take place on or about , 2000,
although completion of the spin-off is contingent upon the satisfaction of
conditions described in the separation and distribution agreement.
Before the spin-off date, AutoNation will deliver all of the outstanding
shares of ANC Rental common stock to the distribution agent for transfer and
distribution to AutoNation stockholders. As soon as possible on or after the
spin-off date, AutoNation will deliver to the distribution agent, as agent for
those AutoNation stockholders, certificates representing shares of ANC Rental
common stock. The distribution agent will then mail, on or about the spin-off
date, certificates representing the shares of ANC Rental common stock to
stockholders of AutoNation as of the record date. Where appropriate, these
transactions may take place as book-entry only, without the delivery of any
certificates. We will not distribute any fractional shares of our common stock.
Our distribution agent will aggregate all fractional shares, sell them on behalf
of AutoNation stockholders who would otherwise have been entitled to receive a
fractional interest in our common stock and distribute the cash proceeds to the
stockholders.
No AutoNation stockholder will be required to pay cash or other
consideration for the shares of ANC Rental common stock they will receive in the
spin-off, or to surrender or exchange shares of AutoNation common stock to
receive ANC Rental common stock.
RELATIONSHIP BETWEEN AUTONATION AND ANC RENTAL BEFORE THE SPIN-OFF
AutoNation's corporate general and administrative costs not specifically
attributable to its operating subsidiaries have been allocated to us based upon
the ratio of our invested capital to AutoNation's consolidated invested capital.
These allocations are included in our selling, general and administrative
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expenses and were approximately $16.0 million for the year ended December 31,
1999, $14.8 million for the year ended December 31, 1998 and $9.6 million for
the year ended December 31, 1997. In addition, AutoNation's corporate general
and administrative costs for certain centralized functions have been allocated
to us using various proportional cost allocation methods. These allocations are
also included in selling, general and administrative expenses and were
approximately $19.4 million for the year ended December 31, 1999 and $15.2
million for the year ended December 31, 1998. These combined allocations
approximate management's estimate of AutoNation's corporate general and
administrative costs required to support our operations. These charges have been
reflected as a contribution from AutoNation in the accompanying consolidated
financial statements. Management believes that the amounts allocated to us are
reasonable and are no less favorable to us than the expenses we would incur to
obtain such services on our own or from unaffiliated third parties.
Commencing in 1998 (for claims occurring after November 30, 1997), we began
purchasing auto liability, general liability and workers' compensation insurance
from an affiliate of AutoNation. We were charged premiums related to these
programs of approximately $111.0 million during the year ended December 31, 1999
and $138.5 million during the year ended December 31, 1998. In addition, in 1998
we began participating in AutoNation's health insurance programs. We were
charged premiums related to these programs of approximately $60.8 million during
the year ended December 31, 1999 and $36.1 million during the year ended
December 31, 1998. These charges have been reflected as a contribution from
AutoNation in the accompanying consolidated financial statements.
We purchased a portion of our vehicles, parts and services from franchised
automotive dealerships owned by AutoNation. Amounts paid for the purchases of
vehicles under manufacturers' repurchase programs are determined through our
agreements with the manufacturers. AutoNation's dealerships earn a minimal fee
per unit for processing titles and delivery of the vehicles purchased through
their dealerships. Amounts paid for parts and services are consistent with
amounts paid to unaffiliated dealerships. We have corporate rental car contracts
with AutoNation and some of its subsidiaries. Amounts charged under these
contracts are consistent with amounts charged to unaffiliated customers. We
expect these transactions to continue following the completion of the spin-off.
RELATIONSHIP BETWEEN AUTONATION AND ANC RENTAL AFTER THE SPIN-OFF
The relationship between us and AutoNation after the spin-off will be
governed by the separation and distribution agreement and other agreements which
we will enter into in connection with the spin-off. We describe the material
provisions of each of these agreements below. You may also refer to the actual
agreements, copies of which are included as exhibits to the Registration
Statement of which this document forms a part. These agreements are intended to
facilitate the separation of AutoNation's automotive rental business from its
automotive retail business and the operation of AutoNation and ANC Rental as
separate companies following the spin-off.
Separation and Distribution Agreement
Before the spin-off we will enter into a separation and distribution
agreement with AutoNation. The distribution agreement sets forth the agreements
between the parties with respect to the principal corporate transactions
required to effect the separation of the automotive rental business from the
automotive retail and related businesses, the spin-off and other agreements
governing our relationship with AutoNation after the spin-off.
In conjunction with the spin-off, AutoNation will separate its existing
businesses so that after the spin-off, (1) the assets and liabilities of its
automotive rental and related businesses will be owned by us or our subsidiaries
and (2) the assets and liabilities of its automotive retail and related
businesses will be owned by AutoNation or its subsidiaries. Specifically, our
assets and liabilities upon completion of the separation will consist of (a)
those assets and liabilities related to AutoNation's automotive rental business,
as reflected on our unaudited consolidated pro forma balance sheet as of
December 31, 1999, (b) those assets acquired and liabilities incurred or accrued
after December 31, 1999 which we would have included on the December 31,
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1999 pro forma balance sheet had they been acquired, incurred or accrued earlier
and (c) all other assets, rights and liabilities expressly allocated to us or
our subsidiaries under the distribution agreement or any ancillary agreements.
The distribution agreement provides that, subject to the terms and
conditions of the agreement, the IRS letter ruling and the facts and
representations submitted to the IRS, both we and AutoNation will take all
reasonable steps necessary and appropriate to cause all conditions to the
spin-off to be satisfied and then to effect the spin-off. AutoNation will
complete the spin-off after the satisfaction or waiver of all of the conditions
to the spin-off, as determined by AutoNation's board of directors in its sole
discretion, including the following conditions:
- the continued effectiveness of the IRS letter ruling received by
AutoNation to the effect that for federal income tax purposes the
spin-off will be tax-free to AutoNation and its stockholders under
Section 355 of the Internal Revenue Code; and the spin-off will not
result in recognition of any income, gain or loss for federal income tax
purposes to AutoNation or its stockholders;
- our credit facilities, financing programs and other indebtedness shall
have been established, restructured or assigned to the satisfaction of
AutoNation, and AutoNation shall have been released from all guarantees
and other obligations relating to our business and credit facilities,
financing programs and other indebtedness except as AutoNation otherwise
expressly agrees and approves;
- any material governmental approvals and third party consents necessary to
complete the spin-off or the related transactions shall have been
obtained and be in full force and effect;
- our common stock shall have been approved for listing on the NYSE;
- our common stock shall have been registered under the Securities Exchange
Act;
- no order, injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the
completion of the spin-off shall be in effect, and no other event outside
AutoNation's control shall have occurred or failed to occur that prevents
the completion of the spin-off;
- no other events or developments shall have occurred that, in the judgment
of AutoNation's board of directors, would result in the spin-off having a
material adverse effect on AutoNation or its stockholders; and
- AutoNation's board of directors shall not have determined that the
spin-off would not be in the best interest of AutoNation or its
stockholders.
Although AutoNation may waive the conditions described above to the extent
permitted by law, AutoNation's board of directors presently has no intention of
proceeding with the spin-off unless each of these conditions is satisfied.
We have agreed with AutoNation that neither of us will take, or permit any
of our respective affiliates to take, any action which reasonably could be
expected to prevent the spin-off from qualifying as a tax-free distribution to
AutoNation or its stockholders or which would be inconsistent with any
representation of fact or submission made in connection with or in the IRS
letter ruling. We have also agreed with AutoNation to take any reasonable
actions necessary for the spin-off to qualify as a tax-free distribution to
AutoNation and its stockholders.
Other Agreements. After the spin-off from AutoNation, we expect to
continue to purchase a portion of our vehicles, parts and services from
dealerships owned by AutoNation, lease space at some dealerships owned by
AutoNation for CarTemps USA's operations and have corporate car rental contracts
with AutoNation and some of its subsidiaries. Amounts charged and paid under
these contracts and arrangements will be consistent with amounts charged to and
paid by unaffiliated customers and suppliers.
Releases and Indemnification. The distribution agreement provides for a
full and complete release and discharge of all liabilities (including any
contractual agreements or arrangements existing or alleged to exist) existing or
arising from all acts and events occurring or failing to occur or alleged to
have occurred or to have failed to occur and all conditions existing or alleged
to have existed on or before the spin-off date, between us
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and AutoNation, including in connection with the transactions and all other
activities to implement the spin-off, except as described in the agreement.
Except as provided in the distribution agreement, we have agreed to
indemnify, defend and hold harmless AutoNation and each of its directors,
officers and employees from and against all liabilities relating to, arising out
of or resulting from (1) our failure or the failure of any other person to pay,
perform or otherwise promptly discharge any of our liabilities in accordance
with their respective terms, (2) matters relating to our automotive rental
businesses and our liabilities and contracts, (3) any breach by us of the
distribution agreement or any of the ancillary agreements entered into by the
parties in connection with the spin-off and (4) any untrue statement of a
material fact or omission to state a material fact, or alleged untrue statements
or omissions, with respect to information relating to us contained in this
Registration Statement of which this Information Statement forms a part.
Subject to exceptions provided in the distribution agreement, AutoNation
has agreed to indemnify, defend and hold us and each of our directors, officers
and employees harmless from and against all liabilities relating to, arising out
of or resulting from (1) AutoNation's failure or the failure of any other person
to pay, perform or otherwise promptly discharge any liabilities of AutoNation
other than our liabilities, (2) matters relating to AutoNation's automotive
retail and related businesses and its liabilities and contracts, (3) any breach
by AutoNation of the distribution agreement or any of the other related
agreements and (4) any untrue statement of a material fact or omission to state
a material fact, or alleged untrue statements or omissions, with respect to
information relating to AutoNation contained in this Registration Statement of
which this Information Statement forms a part.
The distribution agreement describes specific procedures with respect to
claims subject to indemnification and related matters.
Contingent Liabilities and Contingent Gains. The distribution agreement
provides for indemnification by us and AutoNation with respect to contingent
liabilities primarily relating to our respective businesses or otherwise
assigned to one of us.
The distribution agreement provides for the establishment of a contingent
claims committee comprised of one representative designated from time to time by
each of AutoNation and us that will establish procedures for resolving
disagreements between us and AutoNation as to contingent gains and contingent
liabilities.
The distribution agreement provides for the sharing of some contingent
liabilities, including (1) any contingent liabilities that do not relate to one
of our respective businesses or were not otherwise assigned to one of us and (2)
some specifically identified liabilities. We have agreed with AutoNation to
allocate responsibility for any shared contingent liability based upon our
respective market capitalizations on the spin-off date or upon another
methodology which the contingent claims committee may establish. AutoNation will
assume the defense of, and may seek to settle or compromise, any third party
claim that is a shared contingent liability, and the costs and expenses of this
action will be included in the amount to be shared by the parties.
The distribution agreement provides that we and AutoNation will have the
exclusive right to any benefit received with respect to any contingent gain that
primarily relates to the business of, or that is expressly assigned to, us or
AutoNation. Each of us and AutoNation will have sole and exclusive authority to
manage, control and otherwise determine all matters whatsoever with respect to
this type of contingent gain that primarily relates to its respective business.
We have agreed with AutoNation to share any benefit that may be received from
any contingent gain that is not related to the business of, or that is not
expressly assigned to either of us based upon our respective market
capitalizations on the spin-off date or upon another methodology to be
established by the contingent claims committee. We have agreed with AutoNation
that they will have the sole and exclusive authority to manage, control and
otherwise determine all matters whatsoever with respect to any shared contingent
gain; and we acknowledge that AutoNation may elect not to pursue any shared
contingent gain for any reason whatsoever, including a different assessment of
the merits of any action, claim or right or any business reasons that are in the
best interests of AutoNation without regard to our best interests, and that
AutoNation will have no liability to any person as a result of any determination
of this kind.
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Expenses. AutoNation has agreed to pay all third-party costs, fees and
expenses relating to the spin-off and the related transactions including all of
the costs of producing, printing, mailing and otherwise distributing this
Information Statement. The parties have also agreed that AutoNation will pay all
the fees, costs and expenses associated with obtaining the IRS letter ruling,
and ANC Rental will pay all the fees, costs and expenses associated with
obtaining debt financing to operate as an independent company.
Termination. The distribution agreement may be terminated at any time
before the spin-off date by the mutual consent of us and AutoNation. In
addition, the distribution agreement will terminate (1) upon revocation of the
IRS letter ruling, (2) if action is taken by either party that would prevent the
spin-off from qualifying as a tax-free distribution or (3) if the spin-off does
not occur on or before a date to be mutually agreed upon by us and AutoNation.
Transitional Services Agreement
Before the spin-off, we will enter into a transitional services agreement
with AutoNation. The services agreement will have an initial term expiring one
year from the spin-off date. At any time during the term of the services
agreement either AutoNation or we may reduce or completely eliminate the amount
of services obtained from the other party and, consequently, the monthly fees
payable under the services agreement would be adjusted to terms mutually
acceptable to us and AutoNation. At the end of the one-year term, if the parties
have not terminated the agreement earlier, either party may renew or extend the
term of the agreement with respect to the provision of any services that have
not previously been terminated on terms mutually acceptable to the parties. We
believe that the fees we pay and receive for these services are no less
favorable to us than we could obtain from unaffiliated third parties.
Any services rendered to us by AutoNation or any services rendered by us to
AutoNation beyond the services to be provided under the terms of the services
agreement will be billed on a cost basis, or on such other basis as we and
AutoNation may agree.
Tax Sharing Agreement
After the spin-off, we will no longer be included in AutoNation's
consolidated group for U.S. federal income tax purposes. Before the spin-off, we
will enter into a tax sharing agreement with AutoNation to reflect our
separation from AutoNation with respect to tax matters. The primary purpose of
this agreement is to reflect each party's rights and obligations relating to
payments and refunds of taxes that are attributable to periods beginning before
and including the date of the spin-off and any taxes resulting from
\transactions effected in connection with the spin-off. With respect to any
period ending on or before the spin-off or any tax period in which the spin-off
occurs, AutoNation will:
- continue to be the sole and exclusive agent for us in all matters
relating to the income, franchise, property, sales and use tax
liabilities of ANC Rental;
- bear any costs relating to tax audits, including tax assessments and any
related interest and penalties and any legal, litigation, accounting or
consulting expenses, subject to our obligation to pay for items relating
to our rental business;
- continue to have the sole and exclusive responsibility for the
preparation and filing of consolidated federal and consolidated or
combined state income tax returns; and
- generally have the powers, in AutoNation's sole discretion, to contest or
compromise any claim or refund on our behalf.
The tax sharing agreement will provide for payments between the two
companies to reflect tax liabilities which may arise before, after and because
of the spin-off. It will also cover the handling of audits, settlements,
elections, accounting methods and return filings in cases where both companies
have an interest in the results of these activities.
For periods during which we are included in AutoNation's consolidated
federal income tax return or state consolidated, combined or unitary tax
returns, which will include the tax periods ending on or before the spin-
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off, we will be required to pay an amount of income tax equal to the tax
liability attributable under the agreement to our company. We will also be
responsible in the future for any increases in tax liability attributable to us
for the prior periods. We will be responsible for our own tax liabilities that
are not determined on a consolidated or combined basis with AutoNation.
We (and our subsidiaries) will cease to be members of AutoNation's federal
consolidated group on the date of the spin-off. Each corporation that is a
member of a consolidated group during any portion of the group's tax year is
jointly and severally liable for the federal income tax liability of the group
for that year. While the tax sharing agreement allocates tax liabilities between
us and AutoNation during the periods ending on or before the spin-off in which
we are included in AutoNation's consolidated group, we could be liable in the
event federal tax liability allocated to AutoNation is incurred, but not paid,
by AutoNation or any other member of AutoNation's consolidated group for
AutoNation's tax years that include such periods. In such event, we would be
entitled to seek indemnification from AutoNation in accordance with the tax
sharing agreement.
During the four year period beginning two years prior to the spin-off,
there is a presumption that if a change-of-control occurs in which one or more
persons were to acquire a 50% or greater interest in either AutoNation or us,
the change in control is part of a plan that included the spin-off, and if such
a change of control occurs, then AutoNation would recognize gain, if any, on the
shares of our common stock that it distributes in the spin-off.
To minimize this and other risks, we will agree with AutoNation to refrain
from engaging in specified transactions unless:
- a ruling from the IRS is received to the effect that the proposed
transaction will not result in the spin-off being taxable to AutoNation
or its stockholders;
- an opinion of counsel recognized as an expert in federal income tax
matters and designated by AutoNation is received to the same effect and
is reasonably satisfactory to AutoNation.
Transactions that may be affected by these restrictions relating to an
acquisition of a 50% or greater interest and other restrictions required to
preserve the tax-free nature of the spin-off include:
- a liquidation;
- a merger or consolidation with, or acquisition by, another company;
- issuances and redemptions of shares of our common stock;
- the exercise of stock options;
- the sale, distribution or other disposition of assets in a manner that
would adversely affect the tax consequences of the spin-off; and
- the discontinuation of material businesses.
Other transactions could also jeopardize the tax-free nature of the
spin-off.
The tax sharing agreement will allocate responsibility for the possible
corporate-level tax burden resulting from the spin-off, as well as other tax
items. The tax sharing agreement does not apply to any taxes that stockholders
may incur in connection with the spin-off. If the spin-off is taxable under Code
Section 355(e) as a result of a 50% acquisition, then the resulting
corporate-level tax burden will be borne by that entity, either us or
AutoNation, with respect to which the 50% acquisition has occurred. Similarly,
if the spin-off is taxable due to any other action taken by us or AutoNation
that is inconsistent with the factual representations on which the IRS letter
ruling is based, the entity taking that action will be responsible for the
resulting corporate-level tax liability. Any corporate-level income tax
liability that results from the spin-off, but which is not due to either a 50%
acquisition or any action taken by either company that is inconsistent with the
IRS letter ruling, will be shared equally by us and AutoNation.
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Leases
Before the spin-off we, as the tenant, may enter into two leases with
AutoNation or an affiliate of AutoNation: (1) a lease for approximately 161,000
square feet of office space to serve as our corporate headquarters and (2) a
lease for approximately 31,600 square feet of computer data center space at
AutoNation's data center. Both properties are located in Fort Lauderdale,
Florida.
Payments due under the lease for the corporate headquarters will total
approximately $1,930,000 per year or approximately $12.00 per square foot, for a
10 year term. In addition, we will pay operating expenses, real estate taxes,
insurance and utilities relating to the facility. We will have an option to
extend the term for two additional periods of five years each. The lease
payments will be increased on the fifth and eighth anniversary of the start of
the lease. Increases in lease payments will be based on increases in the
Consumer Price Index. In no event will the adjusted lease payment for the fifth
year be lower than the initial rate or more than 15% higher. In no event will
the adjusted lease payment for the eighth year be lower than the seventh year or
more than 9% higher.
Payments due under the lease for the computer data center space will total
approximately $869,000 per year or approximately $27.45 per square foot, which
includes our proportionate share of the operating expenses, real estate taxes,
insurance and utilities of the facility. The lease will have an initial term of
two years, with an option to extend the term for an additional two years. If
extended, the lease payments will be increased based on increases in the
Consumer Price Index. In no event will the adjusted lease payment be more than
6% higher than the initial lease payment.
We believe that the lease payments reflect fair market value and that the
terms of the leases are no less favorable than could be obtained from persons
unrelated to our company.
Credit Support
Before the spin-off from AutoNation, AutoNation has provided guarantees in
support of our debt financing. Some of this credit support will remain in place
for a limited time following the spin-off. In particular, we expect that
AutoNation will continue to guarantee $65.0 million of our outstanding letters
of credit, $10.7 million of indebtedness owed to the former owners of an
acquired business, approximately $3.0 million of annual rent expense in
connection with various lease obligations, our vehicle lease with Mitsubishi and
our German working capital facility. We are currently negotiating with a
different lender in Germany to replace our current German working capital
facility, and the new German facility may not require an AutoNation guarantee.
We will have reimbursement obligations to AutoNation to the extent AutoNation is
required to satisfy any of these guarantees. We will pay AutoNation a fee for
any credit support which it provides in an amount to be determined based on the
level of support required and prevailing market pricing. For additional
information about this credit support, you should read the "Financial Condition"
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this Information Statement.
TRADING OF ANC RENTAL AND AUTONATION COMMON STOCK
Currently, there is no trading market for our common stock. However, we
expect that "when issued" trading in our common stock will develop on or about
the record date for the spin-off and continue through the spin-off date. "When
issued" trading means that shares are traded before the stock certificates are
actually available or issued. None of these trades, however, will settle until
after the completion of the spin-off. We expect that "regular way" trading in
our common stock will begin on the first business day following the completion
of the spin-off. If the spin-off does not occur, all "when issued" trading will
be canceled. We have applied to list our common stock on the NYSE, and we expect
that our common stock will trade on the NYSE under the symbol "ANR."
We expect that beginning on or about the record date for the spin-off and
continuing until the spin-off date, the NYSE will permit AutoNation common stock
to be traded in two ways: (1) "when issued" (identified by the "wi" letters next
to the listing) and (2) "regular way." AutoNation common stock traded "when
issued" will entitle the buyer to receive only the underlying shares of
AutoNation common stock, but
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not those shares of our common stock that will be distributed in the spin-off.
AutoNation common stock traded "regular way" will entitle the buyer to receive
the shares of our common stock that will be distributed in the spin-off as well
as the underlying shares of AutoNation common stock. Beginning on the first NYSE
trading day after the spin-off date, AutoNation common stock will only trade
"regular way," entitling the buyer to receive only AutoNation common stock.
Between the record date and the spin-off date, there may be slight
differences between the combined value of "when issued" ANC Rental common stock
and "when issued" AutoNation common stock as compared to the "regular way"
trading price of AutoNation common stock.
Shares of our common stock received by AutoNation stockholders in
connection with the spin-off will be freely transferable, except for shares
received by persons who may be deemed to be our "affiliates" under the
Securities Act. Persons who are our affiliates will be permitted to sell their
shares of our common stock only pursuant to an effective registration statement
under the Securities Act, Rule 144 of the Securities Act or another exemption
from the registration requirements of the Securities Act.
U.S. FEDERAL INCOME TAX ASPECTS OF THE SPIN-OFF
General
The following is a summary description of the material federal income tax
aspects of the spin-off. This summary is not intended as a complete description
of all of the tax consequences of the spin-off and does not discuss tax
consequences under the laws of state, local or foreign governments or any other
jurisdiction. Moreover, the tax treatment of a stockholder may vary, depending
upon his, her or its particular situation. In this regard, special rules not
discussed in this summary may apply to some of our stockholders. In addition,
this summary applies only to shares which are held as capital assets. The
following discussion may not be applicable to a stockholder who acquired his,
her or its shares by exercising stock options or otherwise as compensation.
The following discussion is based on currently existing provisions of the
Code, existing, proposed and temporary treasury regulations promulgated under
the Code and current administrative rulings and court decisions. All of the
foregoing are subject to change, which may or may not be retroactive, and any of
these changes could affect the validity of the following discussion.
Each stockholder is urged to consult his, her or its own tax advisor as to
the particular tax consequences to him, her or it of the spin-off described
herein, including the applicability and effect of any state, local or foreign
tax laws, and the possible effects of changes in applicable tax laws.
Consequences If The Spin-off Is Tax-Free
We expect that the spin-off will qualify as a tax-free distribution under
Section 355 of the Code. Assuming that the spin-off so qualifies:
- except for cash received in lieu of fractional shares, the holders of
AutoNation common stock will not recognize gain or loss upon receipt of
shares of ANC Rental common stock;
- each holder of AutoNation common stock will allocate his, her or its
aggregate tax basis in the AutoNation common stock immediately before the
spin-off among AutoNation common stock, after giving effect to the
spin-off, and ANC Rental common stock, including fractional shares, in
proportion to each of their fair market values on the spin-off date;
- the holding period for each holder of AutoNation common stock receiving
ANC Rental common stock, including fractional shares, will include the
holding period for his, her or its AutoNation common stock, provided that
AutoNation common stock is held as a capital asset at the time of the
spin-off; and
- AutoNation will not recognize any gain or loss on its distribution of ANC
Rental common stock to its stockholders.
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AutoNation has received a letter ruling from the IRS to the effect that the
spin-off will qualify as a tax-free distribution and have the federal income tax
consequences noted above. A letter ruling from the IRS, while generally binding
on the IRS, may under certain circumstances be retroactively revoked or modified
by the IRS. A letter ruling is based on the facts and representations presented
in the request for that ruling. Generally, an IRS letter ruling will not be
revoked or modified retroactively if there has been no misstatement or omission
of material facts, the facts at the time of the transaction are not materially
different from the facts upon which the IRS letter ruling was based and there
has been no change in the applicable law. We are not aware of any facts or
circumstances that would cause the representations to be untrue or incomplete in
any material respect.
Current Treasury regulations require each holder of AutoNation common stock
who receives our common stock in the spin-off to attach to his, her or its
federal income tax return for the year in which the spin-off occurs a statement
setting forth information as may be appropriate in order to show the
applicability of Section 355 of the Code to the spin-off. AutoNation will convey
the appropriate information to each holder of record of AutoNation common stock
as of the record date.
Consequences If The Spin-off Is Taxable
If the spin-off failed to qualify as a tax-free distribution under Section
355 of the Code, then each holder of AutoNation common stock who receives shares
of ANC Rental common stock in the spin-off generally would be treated as if such
stockholder received a taxable distribution in an amount equal to the fair
market value of ANC Rental common stock received, which would result in: (a) a
dividend to the extent paid out of AutoNation's current and accumulated earnings
and profits; then (b) a reduction in such stockholder's basis in AutoNation's
common stock to the extent the amount received exceeds the amount referenced in
clause (a); and then (c) gain from the sale or exchange of AutoNation common
stock to the extent the amount received exceeds the sum of the amounts
referenced in clauses (a) and (b). Each stockholder's basis in his, her or its
ANC Rental common stock would be equal to the fair market value of such stock at
the time of the spin-off.
If the spin-off failed to qualify as a tax-free distribution under Section
355 of the Code, then a corporate level federal income tax could be payable by
the consolidated group of which AutoNation is the common parent. The tax would
be based upon the gain, if any, computed as the difference between the fair
market value of the ANC Rental common stock and AutoNation's adjusted basis in
such stock. If the spin-off otherwise qualifies as a tax-free distribution under
Section 355 of the Code, this corporate income tax would also be payable if
either we or AutoNation experience a prohibited change-in-control as determined
under Section 355(e) of the Code.
Section 355(e) of the Code, which was enacted in 1997, generally provides
that a company that distributes shares of a subsidiary in a spin-off that is
otherwise tax-free will incur federal income tax liability if 50% or more, by
vote or value, of the capital stock of either the company making the
distribution or the spun-off subsidiary is acquired by one person or more than
one person pursuant to a plan or series of related transactions that includes
the spin-off. This provision can be triggered by certain reorganizations
involving the acquisition of the assets or stock of AutoNation or ANC Rental, or
issuances or redemptions of the stock of AutoNation or ANC Rental. There is a
presumption that any stock acquisition or issuance that occurs within two years
before or after the spin-off is part of a plan relating to the spin-off and one
or more of such stock acquisitions or issuances could produce a prohibited 50%
acquisition. However, the presumption may be rebutted by establishing that the
spin-off and the acquisitions are not part of a plan or series of related
transactions. In August 1999, the Treasury Department published proposed
regulations which would clarify when a spin-off is part of a plan, or series of
related transactions, where one or more persons acquire stock of the
distributing or spun-off subsidiary resulting in a 50% acquisition. The proposed
regulations rely on a variety of factors to determine the existence of such a
plan, or series of related transactions, including the following: the business
purpose or purposes for the distribution; the intentions of the parties; the
existence of agreements, understandings, arrangements or negotiations relating
to acquisitions; the timing of transactions or acquisitions; and the causal
connection or relationship between the spin-off and the acquisitions.
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The proposed regulations would be effective for spin-offs occurring after
the date the regulations become final. It is not known whether the final
regulations will contain the provisions contained in the proposed regulations or
whether the effective date of the final regulations would apply to the spin-off
of our shares of common stock to AutoNation's stockholders.
If the spin-off is taxable solely under Section 355(e) of the Code,
AutoNation will recognize gain equal to the difference between the fair market
value of ANC Rental's common stock and AutoNation's adjusted tax basis in that
stock. However, holders of AutoNation common stock who receive ANC Rental common
stock would not recognize gain or loss as a result of the spin-off if it is
taxable solely by reason of Section 355(e) of the Code.
The tax sharing agreement to be entered into between ANC Rental and
AutoNation will allocate responsibility for the possible corporate tax burden
resulting from the spin-off, as well as other tax items. For example, if the
spin-off is taxable under Section 355(e) of the Code as a result of a 50%
acquisition, then the resulting corporate tax burden will be borne by that
entity, either AutoNation or ANC Rental, with respect to which the 50%
acquisition has occurred. Similarly, if the spin-off is taxable due to any other
action taken by AutoNation or ANC Rental that is inconsistent with the factual
representations on which the IRS letter ruling is based, that entity, either
AutoNation or ANC Rental, will be responsible for the resulting tax liability.
Any income tax liability that results from the spin-off, but which is not due to
either a 50% acquisition or any action taken by either company that is
inconsistent with the IRS letter ruling, will be shared equally by AutoNation
and ANC Rental.
Back-up Withholding Requirements
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of, ANC Rental common stock
unless the stockholder: (a) is a corporation or comes within certain other
exempt categories, and, when required, demonstrates these facts; or (b) provides
a correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not supply us with his, her
or its correct taxpayer identification number may be subject to penalties
imposed by the IRS. Any amount withheld under these rules will be creditable
against the stockholder's federal income tax liability. Stockholders should
consult their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption. If information
reporting requirements apply to a stockholder, the amount of dividends paid with
respect to the stockholder's shares will be reported annually to the IRS and to
the stockholder.
23
35
CAPITALIZATION
(IN MILLIONS)
The following table presents as of December 31, 1999 (1) our total debt and
capitalization and (2) our total debt and capitalization, as adjusted to give
effect to the transactions and events described in "Unaudited Consolidated Pro
Forma Financial Statements." You should read this table in conjunction with our
Consolidated Financial Statements and "Unaudited Consolidated Pro Forma
Financial Statements" included elsewhere in this Information Statement.
DECEMBER 31, 1999
--------------------
ACTUAL PRO FORMA
-------- ---------
Debt:
Revenue earning vehicle debt.............................. $4,531.6 $4,250.6
Other debt................................................ 107.4 304.4
-------- --------
Total debt........................................ 4,639.0 4,555.0
-------- --------
Shareholders' equity:
Investment by Parent...................................... 733.0 --
Preferred stock........................................... -- --
Common stock.............................................. -- --
Additional paid-in capital................................ -- 895.3
Accumulated other comprehensive loss...................... (6.4) (6.4)
-------- --------
Total shareholders' equity........................ 726.6 888.9
-------- --------
Total capitalization.............................. $5,365.6 $5,443.9
======== ========
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36
SELECTED FINANCIAL DATA
(IN MILLIONS)
The following table presents selected consolidated income statement and
balance sheet data of our company for the periods and the dates indicated. We
derived the selected income statement data for each of the fiscal years 1999,
1998 and 1997, and the selected balance sheet data at December 31, 1999 and
1998, presented below, from our Consolidated Financial Statements included
elsewhere in this Information Statement; and we derived our selected income
statement data for fiscal year 1996 and the selected balance sheet data as of
December 31, 1997 from our consolidated financial statements for those periods,
not included herein, all of which have been audited by Arthur Andersen LLP,
independent certified public accountants. We derived our selected income
statement data for fiscal year 1995 and the selected balance sheet data at
December 31, 1996 and 1995 presented below from our unaudited consolidated
financial statements, which in our opinion reflect all adjustments (consisting
of only normal recurring adjustments) necessary for a fair presentation of this
data. You should read the selected consolidated financial data below in
conjunction with our Consolidated Financial Statements and notes thereto as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 included elsewhere in this Information Statement and our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." You should read Notes 3, 7 and 10 of Notes to Consolidated
Financial Statements for a discussion of business combinations, shareholder's
equity and restructuring and other charges and their effect on comparability of
year-to-year data. We have not presented historical earnings (loss) per share
because it would not be meaningful to you. Before the spin-off, we only had 100
shares of common stock outstanding, all of which AutoNation owned.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -----------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenue...................................... $3,542.3 $3,453.6 $3,055.1 $2,699.4 $1,992.8
Income (loss) before
extraordinary charges...................... (69.4) 108.8 53.7 (49.9) (16.2)
Net income (loss)............................ (71.0) 108.8 51.2 (80.4) (16.2)
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -----------
(UNAUDITED)
----------------------
BALANCE SHEET DATA:
Total assets................................. $6,349.5 $6,252.6 $5,870.3 $4,669.4 $3,906.5
Revenue earning vehicle debt................. 4,531.6 4,377.9 4,172.1 3,380.4 2,961.2
Other debt................................... 107.4 132.0 90.8 71.4 210.3
Shareholder's equity......................... 726.6 738.7 526.2 330.9 76.3
25
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UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Consolidated Pro Forma Financial Statements reflect
the effects of adjustments to our historical financial condition and results of
operations. You should read these Unaudited Consolidated Pro Forma Financial
Statements in conjunction with the Notes to the Unaudited Consolidated Pro Forma
Financial Statements on page 29 of this document and the Consolidated Financial
Statements and other financial information included elsewhere in this document.
The following Unaudited Consolidated Pro Forma Income Statement for the
Year Ended December 31, 1999 gives effect to the following transactions and
events as if they occurred at the beginning of the period presented:
(1) the refinancing of our existing revenue earning vehicle and other
financing programs resulting in a higher cost of capital;
(2) the spin-off from AutoNation resulting in a higher level of stand
alone general and administrative costs versus historical allocations from
AutoNation;
(3) the contribution of AutoNation's insurance subsidiary and the
recognition of investment income related to certain contributed assets;
(4) the contribution of $200.0 million in cash by AutoNation and the use
of such equity to (i) repay $100.0 million of revenue earning vehicle debt
and (ii) invest $100.0 million in restricted cash and cash equivalents to
replace letters of credit supporting revenue earning vehicle debt;
(5) the issuance of $225.0 million of senior notes and the use of such
proceeds, net of debt issue costs, to (i) replace letters of credit
supporting revenue earning vehicle financing by reducing revenue earning
vehicle debt and (ii) repay other debt;
(6) the reclassification of the investment by AutoNation in our company
to million shares of common stock and additional paid-in
capital; and
(7) the tax effect of the foregoing events.
The following Unaudited Consolidated Pro Forma Balance Sheet gives effect
to the transactions and events described in items (3) through (6) as if they
occurred on December 31, 1999.
We have decided not to present historical earnings per share because it
would not be meaningful to you. Before the spin-off, we had only 100 shares of
common stock outstanding, all of which AutoNation owned. Before we complete the
spin-off, we will amend and restate our certificate of incorporation to
authorize capital stock consisting of shares of common stock, par
value $.01 per share, and shares of preferred stock, par value $.01
per share. Also, before we complete the spin-off, all outstanding shares of our
common stock held by AutoNation will be converted into shares of
our common stock, all of which will to be distributed to AutoNation's
stockholders in the spin-off. We will not issue shares of preferred stock in the
spin-off. Unaudited pro forma basic and diluted earnings per common share is
calculated based on net income after giving effect to each of the transactions
and events described above, divided by the number of shares of our common stock
to be outstanding after the spin-off.
We believe that the assumptions we use provide a reasonable basis on which
to present the unaudited consolidated pro forma financial data. We are providing
these Unaudited Consolidated Pro Forma Financial Statements for informational
purposes only and you should not construe them to be indicative of our
consolidated financial position or results of operations had the transactions
and events described above been completed on the dates assumed. Furthermore,
these financial statements do not project our financial condition or results of
operations for any future date or period.
26
38
UNAUDITED CONSOLIDATED PRO FORMA INCOME
STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS, EXCEPT PER SHARE DATA)
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Revenue..................................................... $3,542.3 $3,542.3
Expenses:
Cost of operations........................................ 2,785.3 $(12.6)(a) 2,772.7
Selling, general and administrative....................... 792.8 0.6(b) 793.4
Restructuring and other charges........................... 40.5 40.5
-------- ------ --------
Operating income (loss)..................................... (76.3) 12.0 (64.3)
Interest income............................................. 1.3 4.1(c) 5.4
Interest expense............................................ (14.3) (32.9)(a) (47.2)
Other income (expense), net................................. 1.1 -- 1.1
-------- ------ --------
Income (loss) before income taxes........................... (88.2) (16.8) (105.0)
Provision (benefit) for income taxes........................ (18.8) (6.0)(d) (24.8)
-------- ------ --------
Income (loss) before extraordinary charges.................. (69.4) (10.8) (80.2)
-------- ------ --------
Extraordinary charges related to early extinguishment of
debt, net of benefit for income taxes of $0.9............. (1.6) -- (1.6)
-------- ------ --------
Net income (loss)........................................... $ (71.0) $(10.8) $ (81.8)
======== ====== ========
Pro forma basic and diluted earnings per share..............
========
Pro forma weighted average shares outstanding...............
========
The accompanying notes are an integral part of this statement.
27
39
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN MILLIONS)
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
Cash and cash equivalents................................... $ 17.4 $ 9.8(e) $ 27.2
Restricted cash and cash equivalents........................ 155.3 74.0(e) 329.3
100.0(f)
Investments................................................. -- 74.1(e) 74.1
Receivables, net............................................ 590.5 4.5(e) 595.0
Prepaid expenses............................................ 75.1 75.1
Revenue earning vehicles, net............................... 4,501.3 4,501.3
Property and equipment, net................................. 622.7 622.7
Intangible assets, net...................................... 358.4 358.4
Other assets................................................ 28.8 16.0(g) 44.8
-------- ------- --------
Total assets...................................... $6,349.5 $ 278.4 $6,627.9
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 250.3 $ 30.5(e) $ 280.8
Accrued liabilities......................................... 302.3 302.3
Insurance reserves.......................................... 105.6 169.6(e) 275.2
Revenue earning vehicle debt................................ 4,531.6 (100.0)(f) 4,250.6
(181.0)(g)
Other debt.................................................. 107.4 (28.0)(g) 304.4
225.0(g)
Deferred income taxes....................................... 145.0 145.0
Other liabilities........................................... 180.7 180.7
-------- ------- --------
Total liabilities................................. 5,622.9 116.1 5,739.0
-------- ------- --------
Commitments and contingencies
Shareholders' Equity:
Investment by AutoNation............................... 733.0 (37.7)(e) --
200.0(f)
(895.3)(h)
Preferred stock........................................ -- --
Common stock........................................... -- --(h) --
Additional paid-in capital............................. -- 895.3(h) 895.3
Accumulated other comprehensive loss................... (6.4) (6.4)
-------- ------- --------
726.6 162.3 888.9
-------- ------- --------
Total liabilities and shareholders' equity........ $6,349.5 $ 278.4 $6,627.9
======== ======= ========
The accompanying notes are an integral part of this statement.
28
40
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The following is a summary of the pro forma adjustments reflected in the
Unaudited Consolidated Pro Forma Financial Statements:
(a) Record net interest expense, assuming the refinancing of our vehicle
and other debt as further described below, occurred at the beginning of the
period presented. Pro forma interest expense is calculated assuming all-in
interest costs for non-investment grade companies of similar credit
quality. The all-in interest cost includes, but is not limited to, vehicle
interest savings due to the $200.0 million capital contribution by
AutoNation and related uses of proceeds described below in (f), offset by
increased interest expense on $225.0 million in aggregate principal amount
of the senior notes as further discussed in (g) below. Refinancing our
vehicle and other debt will result in a net increase in our cost of capital
due to the loss, following the spin-off, of various credit enhancements
provided by AutoNation before the spin-off. The increase will be partially
offset by the elimination of fees related to other credit enhancements made
possible by reducing our revenue earning vehicle debt and investment income
resulting from the increase in restricted cash and cash equivalents.
Interest expense would increase approximately $3.0 million on an
annualized basis for an increase in interest rates of 25 basis points.
Historical and pro forma weighted average interest rates for the year ended
December 31, 1999 are as follows:
HISTORICAL PRO FORMA
---------- ---------
Vehicle debt interest rate........................... 6.20% 6.42%
Other debt interest rate............................. 5.75 10.50%
(b) Record the excess of our expected separate company general and
administrative costs over and above historical corporate overhead
allocations from AutoNation, assuming the separation from AutoNation
occurred at the beginning of the period presented.
(c) Record investment income earned on the cash and marketable
securities held by AutoNation's insurance subsidiary, assuming the
contribution of the insurance subsidiary occurred at the beginning of the
period presented.
(d) Recognize income taxes on the pro forma adjustments previously
described.
(e) Record the net contribution of AutoNation's insurance subsidiary,
assuming the contribution of the insurance subsidiary occurred as of
December 31, 1999.
(f) Record capital contribution by AutoNation of $200.0 million which is
used to replace letters of credit supporting revenue earning vehicle
financing through a $100.0 million increase in restricted cash and cash
equivalents and a $100.0 million reduction in revenue earning vehicle debt.
In February 2000, AutoNation contributed $180.0 million of the expected
$200.0 million capital contribution and the remainder is expected to be
contributed on or prior to the completion of the spin-off.
(g) Record the issuance of $225.0 million of senior notes payable at a
fixed rate and the establishment of the new credit facilities which provide
for borrowings in an aggregate principal amount of $175.0 million. The
proceeds from the senior notes, net of debt issue costs and estimated fees
and expenses of $16.0 million, will be used to (i) replace letters of
credit supporting revenue earning vehicle financing through a $181.0
million reduction in revenue earning vehicle debt and (ii) repay $28.0
million of other debt. We believe the interest rate on the senior notes
will approximate like securities for non-investment grade companies of
similar credit quality in our industry. The specific terms of the senior
notes are yet to be set; however, we currently estimate the term not to
exceed ten years.
(h) Record the reclassification of the investment by AutoNation in our
company to million shares of common stock, par value $.01 per share,
and additional paid-in capital.
29
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
Consolidated Financial Statements and the related notes thereto included
elsewhere in this document.
OVERVIEW
In August 1999, AutoNation announced its intention to separate its
automotive rental business from its automotive retail business. In September
1999, AutoNation announced its intention to distribute its entire interest in
our company to AutoNation's stockholders on a tax-free basis, subject to
conditions and consents described in the separation and distribution agreement.
Before the spin-off, we will enter into agreements with AutoNation providing for
the separation of our businesses and governing various interim and ongoing
relationships between our companies, including an agreement between us and
AutoNation providing for our purchase of administrative support services from
AutoNation.
Prior to the spin-off, we have been a wholly owned subsidiary of
AutoNation. As a wholly owned subsidiary, we have received services from
AutoNation which support our accounting, auditing, cash management, corporate
communications, corporate development, facilities management, financial and
treasury, human resources and benefit plan administration, information
technology, insurance and risk management, legal, payroll, purchasing and tax
operations. AutoNation also provided us with the services of a number of its
executives and employees. In consideration for these services, AutoNation
allocated to us a portion of its overhead costs related to these services. These
allocations have historically been based on the proportion of invested capital
of our company as a percentage of the consolidated invested capital of
AutoNation and its subsidiaries, including our company and based upon various
proportional cost allocation methods. We believe that the amounts allocated to
us have been no less favorable than costs we would have incurred to obtain these
services on our own or from unaffiliated third parties.
The historical consolidated financial information included in this filing
does not necessarily reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.
GENERAL
We rent vehicles on a daily or weekly basis to leisure and business
travelers principally from on-airport or near-airport locations through Alamo
and National and to local customers who need replacement vehicles from locations
in suburban areas through CarTemps USA. We operate primarily in the United
States, Europe and Canada.
We generate revenue primarily from vehicle rental charges and the sale of
ancillary rental products. Approximately 87% of our revenue is derived from
vehicle rental charges with the remaining 13% derived from the sale of liability
and other accident protection products, fuel usage fees, and customer
convenience products including vehicle upgrades, additional or underage driver
privileges, inter-city privileges, infant seat rentals, cellular phone rentals
and ski rack rentals.
Cost of operations consists primarily of revenue earning vehicle
depreciation, interest on revenue earning vehicle debt and other operating
expenses including vehicle lease expense, personnel, insurance, fleet
maintenance and rental location occupancy costs. Vehicle depreciation is one of
the largest components of our cost of operations and it is materially affected
by vehicle manufacturers' repurchase programs. Repurchase prices under
repurchase programs are based on either (1) a predetermined percentage of a
vehicle's original cost and the month in which the vehicle is returned or (2)
the original cost less a set monthly depreciation amount. Repurchase programs
limit the risk of market value decline at the time of vehicle disposition.
During model year 1999, we purchased approximately 73% of our rental fleet under
repurchase programs with various vehicle manufacturers.
30
42
BUSINESS COMBINATIONS
Both our company and AutoNation make decisions to acquire or invest in
businesses based on financial and strategic considerations. AutoNation has
acquired various automotive rental businesses using cash and/or shares of its
common stock. AutoNation contributed these acquired businesses to us after their
acquisition. We have applied the same accounting method used by AutoNation in
accounting for these business combinations.
Significant businesses acquired and accounted for under the pooling of
interests method of accounting have been included retroactively in the
Consolidated Financial Statements as if the companies had operated as one entity
since inception. Businesses acquired and accounted for under the purchase method
of accounting are included in the Consolidated Financial Statements from the
date of acquisition. The value of AutoNation's common stock issued to effect
business combinations accounted for under the purchase method of accounting is
based on the average market price of the common stock over a five day period
before and after the parties have reached agreement on the purchase price and
the proposed transaction has been publicly announced, if applicable.
During the year ended December 31, 1998, AutoNation acquired certain
automotive rental businesses which it contributed to us. The aggregate purchase
price paid by AutoNation in transactions accounted for under the purchase method
of accounting was $11.1 million in cash.
During the year ended December 31, 1997, AutoNation acquired National,
Spirit Rent-A-Car, Inc., Value Rent-A-Car, Snappy Car Rental, Inc. and
EuroDollar Holdings plc, all of which it contributed to us. The aggregate
purchase price paid by AutoNation for Value, Snappy and EuroDollar, each of
which were accounted for under the purchase method of accounting, was $237.4
million consisting of $127.0 million in cash, $32.0 million in notes and 4.4
million in shares of AutoNation's common stock valued at $78.4 million. In
addition, AutoNation issued an aggregate of 24.8 million shares of its common
stock to acquire National and Spirit which were accounted for under the pooling
of interests method of accounting.
See Note 3, Business Combinations, of Notes to Consolidated Financial
Statements, for further discussion of business combinations.
CONSOLIDATED RESULTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
A summary of our operating results is as follows for each of the years
ended December 31 (in millions):
1999 % 1998 % 1997 %
-------- ----- -------- ----- -------- -----
Revenue.............................. $3,542.3 100.0 $3,453.6 100.0 $3,055.1 100.0
Expenses:
Cost of operations................. 2,785.3 78.6 2,622.9 76.0 2,337.5 76.5
Selling, general and
administrative.................. 776.8 21.9 637.0 18.4 543.9 17.8
AutoNation incremental overhead
allocations..................... 16.0 .5 14.8 .4 9.6 .3
Restructuring and other charges.... 40.5 1.1 -- -- 78.0 2.6
-------- ----- -------- ----- -------- -----
Operating income (loss).............. $ (76.3) (2.1) $ 178.9 5.2 $ 86.1 2.8
======== ===== ======== ===== ======== =====
You should also read our summary quarterly results of operations for the
years ended December 31, 1999 and 1998, which follows our discussion below.
Revenue
Revenue was $3.54 billion for the year ended December 31, 1999, $3.45
billion for the year ended December 31, 1998 and $3.06 billion for the year
ended December 31, 1997. The increase in 1999 over 1998 of $88.7 million or 2.6%
is due to a 3.2% increase in volume offset by a 0.6% reduction in price. The
increase in
31
43
1998 over 1997 of $398.5 million, or 13.0%, is a result of acquisitions which
accounted for 10.3% and volume and price which accounted for 2.7%.
Cost of Operations
Cost of operations was $2.79 billion for the year ended December 31, 1999,
$2.62 billion for the year ended December 31, 1998 and $2.34 billion for the
year ended December 31, 1997, or, as a percentage of revenue, 78.6% for the year
ended December 31, 1999, 76.0% for the year ended December 31, 1998 and 76.5%
for the year ended December 31, 1997. The increase in cost of operations for
1999 is due primarily to higher fleet costs and the recognition of certain
non-recurring expenses related to our restructuring plan discussed in the
following paragraphs. The increase in 1998 is primarily due to acquisitions and
maintaining a larger fleet. The increase in costs of operations as a percentage
of revenue in 1999 is due to higher fleet costs and the recognition of the
non-recurring restructuring expense in 1999 combined with a slightly lower
average rental rate in 1999 compared to 1998. The decrease in such expenses as a
percentage of revenue in 1998 is a result of revenue improvement from rental
rate increases over 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $776.8 million for the
year ended December 31, 1999, $637.0 million for the year ended December 31,
1998 and $543.9 million for the year ended December 31, 1997, or, as a
percentage of automotive rental revenue, 21.9% for the year ended December 31,
1999, 18.4% for the year ended December 31, 1998, and 17.8% for the year ended
December 31, 1997. The increase in 1999 over 1998 in aggregate dollars is
primarily due to provisions for allowances for doubtful accounts, increased
information system costs in part associated with the implementation and
remediation of Odyssey, higher selling and marketing expenses and higher
commissions. The 1998 increase in aggregate dollars over 1997 is primarily due
to acquisitions and costs associated with implementing Odyssey. The 1999 and
1998 increases in selling, general and administrative expenses as percentages of
revenue are primarily due to costs associated with implementing and remediating
Odyssey and higher selling costs.
AutoNation Incremental Overhead Allocation
AutoNation incremental overhead allocations include allocations to us of
AutoNation's general and administrative expenses not specifically attributable
to its operating subsidiaries. Such allocations are based upon the ratio of our
invested capital to AutoNation's consolidated invested capital and were $16.0
million for the year ended December 31, 1999, $14.8 million during the year
ended December 31, 1998 and $9.6 million during the year ended December 31,
1997. In addition to these allocations, during the years ended December 31, 1999
and 1998, AutoNation also allocated to us $19.4 million and $15.2 million,
respectively, of cost from certain centralized corporate functions. These
allocations were based on various proportional cost allocation methods and are
included in selling, general and administrative expenses. These combined
allocations approximate our estimate of AutoNation's corporate overhead required
to support our operations. We believe these allocations are reasonable.
Restructuring and Other Charges
During the year ended December 31, 1999, we approved and implemented a plan
to restructure certain of our operations. Included in the plan are actions to
(1) consolidate our North American headquarters, (2) reduce non-field headcount
as a result of the consolidation of the North American headquarters, (3)
renegotiate some of our existing international vehicle supply agreements and
reduce our fleet, (4) exit and consolidate certain unprofitable or marginally
profitable operating locations both domestically and internationally. We
anticipate substantially completing our restructuring plan prior to December 31,
2000.
In connection with this plan, we recorded a restructuring charge of $40.5
million. The primary components of this charge are: $12.8 million for severance
payments related to the closure of our Minneapolis headquarters; $5.2 million
related to asset impairments for idled and exited facilities; $3.3 million
related to non-cancelable facility leases in North America; $13.6 million
related to the closure and disposition of
32
44
certain unprofitable international operations; $4.7 million related to
non-cancelable facility leases in our international operations and $0.9 million
of other restructuring related costs. At December 31, 1999, $21.7 million of the
restructuring charge remains accrued with most of those costs to be incurred by
the end of 2000, excluding certain lease commitments.
Separately, we have incurred additional charges approximating $18.4
million. Our cost of operations includes a $14.3 million charge related to the
renegotiation of certain international supply arrangements as well as the
reduction of the size of our existing fleet and $4.1 million of costs related to
employee retention payments to be made during the restructuring plan. We expect
to continually evaluate market conditions as a basis of determining our fleet
size. We plan to accrue future employee retention charges in 2000 approximating
$8.8 million. We expect the majority of the retention payments to be made in
June and September 2000.
During the year ended December 31, 1997, we recorded approximately $78.0
million of restructuring and other charges associated with integrating our
operations. The primary components of this charge include: $25.0 million related
to elimination of redundant information systems; $18.0 million related to fleet
consolidation; and $35.0 million related to closure or sale of duplicate rental
facilities and other non-recurring expenses. Through December 31, 1999, we have
spent approximately $45.3 million related to restructuring activities and have
recorded $21.2 million of these restructuring charges against certain assets. As
of December 31, 1999, approximately $11.5 million remained in accrued
liabilities related to these charges. We expect the majority of these reserves
to be utilized during 2000, however, certain contractual obligations for closed
locations extend through 2002.
Interest Income
Interest income was $1.3 million for the year ended December 31, 1999, $1.4
million for the year ended December 31, 1998 and $7.9 million for the year ended
December 31, 1997. The decreases in interest income are primarily due to lower
average cash balances on hand during 1999 and 1998.
Interest Expense
Interest expense was $14.3 million for the year ended December 31, 1999,
$8.0 million for the year ended December 31, 1998 and $6.6 million for the year
ended December 31, 1997. The increases in 1999 and 1998 are primarily due to
borrowings under various credit facilities to fund expansion of international
operations. Interest expense related to revenue earning vehicle financing is
included in cost of operations in the accompanying Consolidated Statements of
Income and Comprehensive Income.
Income Taxes
The provision (benefit) for income taxes was $(18.8) million for the year
ended December 31, 1999, $61.3 million for the year ended December 31, 1998 and
$31.8 million for the year ended December 31, 1997. The effective income tax
rate was a benefit of 21.3% for the year ended December 31, 1999, a provision of
36.0% for December 31, 1998 and a provision of 37.2% for December 31, 1997. The
difference in our 1999 rate compared to our 1998 rate is primarily due to the
impact of non-deductible items. The decrease in the 1998 effective tax rate
compared to 1997 is primarily due to an increase in foreign tax benefits.
Extraordinary Charges
In connection with the termination of certain commercial paper programs and
other debt extinguishments, we recorded extraordinary charges, net of income
taxes, of approximately $1.6 million for the year ended December 31, 1999 and
$2.5 million for the year ended December 31, 1997. These charges include the
write-off of debt issue costs and other related fees.
33
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QUARTERLY RESULTS OF OPERATIONS
The following sets forth our summary quarterly results of operations for
the years ended December 31, 1999 and December 31, 1998 (in millions):
FIRST SECOND THIRD FOURTH FULL
QUARTER % QUARTER % QUARTER % QUARTER % YEAR %
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
1999
Revenue........................ $791.0 100.0 $892.7 100.0 $1,023.3 100.0 $ 835.3 100.0 $3,542.3 100.0
Expenses:
Cost of operations........... 633.4 80.1 683.9 76.6 763.8 74.6 704.2 84.3 2,785.3 78.6
Selling, general and
administrative............. 162.6 20.5 179.3 20.1 225.0 22.0 209.9 25.1 776.8 21.9
AutoNation incremental
overhead allocations....... 4.0 0.5 4.0 0.4 4.0 0.4 4.0 0.5 16.0 .5
Restructuring and other
charges.................... -- -- -- -- -- -- 40.5 4.9 40.5 1.1
------ ----- ------ ----- -------- ----- ------- ----- -------- -----
Operating income (loss)........ $ (9.0) (1.1) $ 25.5 2.9 $ 30.5 3.0 $(123.3) (14.8) $ (76.3) (2.1)
====== ===== ====== ===== ======== ===== ======= ===== ======== =====
1998
Revenue........................ $775.7 100.0 $864.8 100.0 $1,005.6 100.0 $ 807.5 100.0 $3,453.6 100.0
Expenses:
Cost of operations........... 605.4 78.1 664.7 76.9 721.0 71.7 631.8 78.2 2,622.9 76.0
Selling, general and
administrative............. 151.2 19.4 155.0 17.9 175.1 17.4 155.7 19.3 637.0 18.4
AutoNation incremental
overhead allocations....... 3.7 0.5 3.7 0.4 3.7 0.4 3.7 0.5 14.8 .4
------ ----- ------ ----- -------- ----- ------- ----- -------- -----
Operating income (loss)........ $ 15.4 2.0 $ 41.4 4.8 $ 105.8 10.5 $ 16.3 2.0 $ 178.9 5.2
====== ===== ====== ===== ======== ===== ======= ===== ======== =====
Seasonality.
Our business, and particularly the leisure travel market, is highly
seasonal. Our third quarter, which includes the peak summer travel months, has
historically been the strongest quarter of the year. During the peak season, we
increase our rental fleet and workforce to accommodate increased rental
activity. As a result, any occurrence that disrupts travel patterns during the
summer period could result in a significant decrease in customer volume. The
first and fourth quarters for our operations are generally the weakest because
there is limited leisure travel and a greater potential for weather conditions,
either adverse or unseasonable, to impact our business. Many of our operating
expenses such as rent, general insurance and administrative personnel remain
fixed throughout the year and cannot be reduced during periods of decreased
rental demand. Given the seasonality of our operations, our revenue and variable
operating and selling expenses are generally higher in aggregate dollars during
the second and third quarters as compared to the first and fourth quarters. In
addition, in part due to seasonality, our cost of operations as a percentage of
revenue is generally higher during the first and fourth quarters as compared to
the second and third quarters.
1999 versus 1998.
Revenue increased during each 1999 quarter versus the comparable 1998
quarter primarily due to increased volume of 0.8% in the first quarter, 3.5% in
the second quarter, 4.8% in the third quarter and 2.4% in the fourth quarter. In
addition to the volume increases is the effect of pricing increases (decreases)
of 1.0% in the first quarter, (0.6)% in the second quarter, (3.1)% in the third
quarter and 1.1% in the fourth quarter of 1999. The decreases in pricing in the
second and third quarters of 1999 as compared to the second and third quarters
of 1998 are primarily due to attempts to stimulate volume growth.
Cost of operations increased in aggregate dollars during each quarter of
1999, and as a percentage of revenue in every quarter except the second quarter,
versus each comparable quarter in 1998. The primary reason for the increase in
cost of operations is due to increased fleet costs, including depreciation and
interest expense, during 1999. Overall, fleet size grew to an average of 338,609
vehicles in 1999 from an average of 333,181 vehicles in 1998. The increase in
our interest expense is due to a substantial increase in our medium term note
program in 1999 as compared to our more extensive use of our commercial paper
program in 1998,
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which allowed us to extend the maturity dates and obtain fixed rates of
interest. The fourth quarter of 1999 includes a $14.3 million charge for the
renegotiation of certain international fleet supply agreements as well as future
reductions of existing fleet. Also, the fourth quarter of 1999 includes a $4.1
million charge related to employee retention payments to be made during our
restructuring plan.
Selling, general and administrative costs increased in aggregate dollars
and as a percentage of revenue during each quarter of 1999 versus each
comparable quarter of 1998. The overall relative increases are due to higher
information systems costs throughout all four quarters due to the implementation
and remediation of Odyssey in the first and second quarters of 1999 and
operation of Odyssey in the third and fourth quarters of 1999. We expect ongoing
costs of operating Odyssey to be consistent with those incurred in the second
half of 1999. In addition we recorded incremental provisions for allowances for
doubtful accounts on certain past due receivables of $20.0 million in the third
quarter and $15.0 million in the fourth quarter of 1999. Finally, we increased
sales and marketing spending in the second, third and fourth quarters of 1999.
As previously discussed in the Consolidated Results of Operations for the
years ended December 31, 1999, 1998 and 1997, we recorded a restructuring charge
of $40.5 million in the fourth quarter of 1999.
Our revenue was $810.6 million for the three months ended March 31, 2000
and $791.0 million for the three months ended March 31, 1999. The increase in
revenue of $19.6 million or 2.5% is primarily due to a 4.3% increase in average
total revenue per day offset by a decrease in volume of 1.5%. The increase in
average total revenue per day is primarily the result of repositioning our
brands and management pricing decisions. The decline in volume was a result of
weak volume during the early part of January 2000. Our operating loss was $36.5
million for the three months ended March 31, 2000 and $9.0 million for the three
months ended March 31, 1999. Our operating loss increased due primarily to
higher fleet costs and fleet reductions primarily incurred in January, which
were undertaken to reduce the fleet size in light of the weak volumes, increased
operating expenses, including higher facility and fixed costs, and increased
selling, general and administrative costs, including higher sales and marketing
expenditures. Additionally, we incurred approximately $7.0 million of charges
primarily related to temporary employee retention and relocation costs in
connection with our 1999 restructuring plan.
FINANCIAL CONDITION
We finance vehicle purchases for our domestic automotive rental operations
primarily through commercial paper and medium-term note financings. We have had
a $1.89 billion commercial paper program. This program was supported by bank
lines of credit of $1.69 billion terminating in April 2000 which provide
liquidity back-up for the facility, as well as letters of credit of $200.0
million, which provide credit enhancement and additional liquidity back-up for
the facilities. We have reduced our commercial paper program to approximately
$1.69 billion and have received commitments to extend $1.49 billion of bank
lines of credit supporting our commercial paper program to the earlier of July
2000 or the consummation of the spin-off. Concurrent with the spin-off we expect
to revise our commercial paper program to approximately $1.1 billion. Borrowings
under this program are secured by eligible vehicle collateral and bear interest
at market-based commercial paper rates. As of February 29, 2000, we had
approximately $547.2 million available under this program. We expect to continue
to fund our revenue earning vehicle purchases with secured vehicle financings.
In 1999, we issued $2.5 billion of rental vehicle asset-backed medium-term
notes, including $1.25 billion in the form of floating rate notes, $750.0
million at a rate of 5.88% and $500.0 million at a rate of 6.02%. We fixed the
effective interest rate on the $1.25 billion floating rate notes at 6.03%
through the use of certain derivative transactions. Currently, letters of credit
totaling $70.0 million provide credit enhancement for the notes. We expect that
these letters of credit will be replaced with restricted cash in connection with
the spin-off.
We historically have received various credit enhancements from AutoNation
in connection with our revenue earning vehicle financing programs. Due to our
separation from AutoNation, we have modified and will continue to modify our
existing financing programs and enter into new financing programs. These changes
to our financing programs will result in a higher cost of capital following the
separation. You should read our Unaudited Consolidated Pro Forma Financial
Statements, which we have included in this Information
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Statement, for the expected pro forma impact of these changes on our operating
results. We cannot assure you that we will be able to modify our existing
financing programs or enter into new ones on terms as favorable as we have
estimated in the pro forma financial statements. In addition, as an independent
public company, as we transition away from the AutoNation credit support, we
expect that our future borrowings and credit facilities will contain
non-investment grade financial terms, covenants and operating restrictions which
have not applied to us as part of AutoNation.
In conjunction with the spin-off from AutoNation, a financing commitment
has been negotiated, which, if completed, will provide funds to be available for
general corporate purposes and to modify existing revenue earning vehicle
financing programs by replacing letters of credit with restricted cash or
vehicle collateral for credit enhancement purposes. We currently plan to enter
into a three-year secured revolving credit facility of up to $175.0 million at a
floating rate, initially based upon a spread above LIBOR. The secured credit
facility will be subject to certain eligible receivable and real estate
collateral limits and the results of an independent third-party review of these
and other assets. We also expect to enter into an unsecured revolving credit
facility with availability of the lesser of (1) $40.0 million and (2) an amount
equal to $175.0 million less the borrowing base of the secured credit facility.
In addition, we plan to issue $225.0 million of senior notes at terms that have
yet to be set, however we believe the interest rate will approximate like
securities for non-investment grade companies of similar credit quality in our
industry. We currently estimate that the term will not exceed ten years. We
expect the closing of the new credit facilities and of the sale of the senior
notes to occur before the spin-off date, but we cannot assure you that either
financing will occur. The closing of the currently proposed financings is
subject to, among other customary conditions for financings of these types,
meeting certain profitability measures, the infusion of equity from AutoNation,
the continued support of AutoNation in the form of guarantees and/or letters of
credit, and the absence of any material adverse change in the financial or
capital markets generally or in the markets for high yield debt securities in
particular.
In addition to the debt financing previously discussed, AutoNation is
contributing $200.0 million of cash equity to us to be used to replace existing
letters of credit supporting revenue earning vehicle debt through restricted
cash deposits and/or reductions in revenue earning vehicle debt. In February
2000, AutoNation contributed $180.0 million of the expected $200.0 million. We
expect the remainder of the cash equity infusion from AutoNation to be funded on
or before the spin-off date.
We use interest rate derivative transactions to manage the impact of
interest rate changes on our variable rate debt. These derivative transactions
consist of interest rate swaps and interest rate caps and floors. The amounts
exchanged by the counterparties to interest rate derivatives are based upon the
notional amounts and other terms, generally related to interest rates, of the
derivatives. While notional amounts of interest rate derivatives form part of
the basis for the amounts exchanged by the counterparties, the notional amounts
are not themselves exchanged, and therefore, these notional amounts do not
represent a measure of our exposure as an end user of derivative financial
instruments. At December 31, 1999, notional principal amounts related to
interest rate swaps (variable to fixed rate) were $600.0 million. As of December
31, 1999, the weighted average fixed rate payment on variable to fixed rate
swaps was 5.78%. Variable rates received on interest rate swaps are indexed to
the Commercial Paper Nonfinancial Rate. Notional principal amounts related to
interest rate caps and floors as of December 31, 1999 were both $1.25 billion.
The interest rate caps and floors effectuate a variable to fixed rate swap at a
weighted average rate of 5.77% as of December 31, 1999. Variable rates on the
interest rate caps and floors are indexed to LIBOR. Including our interest rate
derivatives, our ratio of fixed interest rate debt to total debt outstanding was
78% as of December 31, 1999.
We believe that, following the AutoNation equity infusion, our cash flow
from operations and contemplated short-term and long-term debt financings will
be sufficient to satisfy our future working capital requirements, revenue
earning vehicle purchases, capital expenditures and debt service requirements
for the next twelve months and for the foreseeable future thereafter.
CASH FLOWS
We discuss below the major components of changes in cash flows for the
years ended December 31, 1999, 1998, and 1997.
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Cash Flows from Operating Activities
Cash provided by (used in) operating activities was $150.5 million during
the year ended December 31, 1999, $(143.3) million during the year ended
December 31, 1998 and $(399.3) million during the year ended December 31, 1997.
The increase in cash provided by operating activities in 1999 as compared to
1998 is primarily due to net changes in working capital items. Cash provided by
(used in) operating activities includes purchases and sales of revenue earning
vehicles, and depreciation which totaled $0.3 million for the year ended
December 31, 1999, $(288.9) million for the year ended December 31, 1998 and
$(503.1) million for the year ended December 31, 1997. Revenue earning vehicle
purchases are financed through secured vehicle financings, proceeds from which
are included as components of cash flows from financing activities. Cash flows
from operating activities also includes non-cash parent overhead allocations and
insurance charges that have been historically paid by AutoNation. Non-cash
parent overhead and insurance charges were $207.2 million for the year ended
December 31, 1999, $204.6 million for the year ended December 31, 1998 and $9.6
million for the year ended December 31, 1997. Following the separation from
AutoNation, we will be required to pay our corporate overhead and insurance
claims.
Cash Flows from Investing Activities
Cash flows from investing activities consist primarily of capital
additions. Capital additions were $192.7 million during the year ended December
31, 1999, $204.1 million during the year ended December 31, 1998 and $94.8
million during the year ended December 31, 1997. The decrease in capital
additions during the year ended December 31, 1999 is primarily due to completion
of the implementation and remediation of the Odyssey program during the year.
The increase in capital additions during the year ended December 31, 1998 is
primarily a result of the development of Odyssey.
We intend to finance future capital expenditures primarily through
operating cash flow.
Cash Flows from Financing Activities
Cash flows from financing activities during the years ended December 31,
1999, 1998 and 1997 consisted primarily of revenue earning vehicle and working
capital financing. The decrease in 1999 as compared to 1998 is primarily the
result of the timing of payments and proceeds under our revenue earning vehicle
financing arrangements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The tables below provide information about our market sensitive financial
instruments and constitute "forward-looking statements." All items described are
non-trading.
Our major market risk exposure is changing interest rates, primarily in the
United States. Due to our limited foreign operations, we do not have material
market risk exposures relative to changes in foreign exchange rates. Our policy
is to manage interest rates through the use of a combination of fixed and
floating rate debt. We use interest rate derivatives to adjust interest rate
exposures when appropriate, based upon market conditions. These derivatives
consist of interest rate swaps, caps and floors which we enter into with a group
of financial institutions with investment grade credit ratings, thereby
minimizing the risk of credit loss. We use variable to fixed interest rate swap
agreements and interest rate caps and floors to manage the impact of interest
rate changes on our variable rate debt. Expected maturity dates for variable
rate debt and interest rate swaps, caps and floors are based upon contractual
maturity dates. Average pay rates under interest rate swaps are based upon
contractual fixed rates. Average variable receive rates under interest rate
swaps are based on implied forward rates in the yield curve at the reporting
date. Average rates under interest rate caps and floors are based upon
contractual rates.
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Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment. The fair value of variable rate debt approximates the carrying value
since interest rates are variable and, thus, approximate current market rates.
The fair value of interest rate swaps, caps and floors is determined from dealer
quotations and represents the discounted future cash flows through maturity or
expiration using current rates, and is effectively the amount we would pay or
receive to terminate the agreements.
EXPECTED MATURITY DATE FAIR VALUE
----------------------------------------------------------- DECEMBER 31,
DECEMBER 31, 1999: 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
- ------------------ -------- -------- ------ ------ ------ ---------- -------- -------------
(IN MILLIONS)
(Asset)/Liability
Variable rate debt...... $1,600.8 $ 3.2 $ 35.0 $550.0 $ -- $700.0 $2,889.0 $2,889.0
Average interest
rates............... 6.00% 6.50% 5.56% 6.72% -- 6.71% -- --
Interest rate swaps..... 300.0 100.0 -- 200.0 -- -- 600.0 (6.8)
Average pay rate...... 5.96% 5.63% -- 5.59% -- -- -- --
Average receive
rate................ 6.67% 7.32% -- 7.50% -- -- -- --
Interest rate caps...... -- -- -- 550.0 -- 700.0 1,250.0 (66.4)
Average rate.......... -- -- -- 5.73% -- 6.26% -- --
Interest rate floors.... -- -- -- 550.0 -- 700.0 1,250.0 15.2
Average rate.......... -- -- -- 5.73% -- 6.26% -- --
EXPECTED MATURITY DATE FAIR VALUE
---------------------------------------------------------- DECEMBER 31,
DECEMBER 31, 1998: 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
- ------------------ -------- -------- ------ ----- ------ ---------- -------- ------------
(IN MILLIONS)
(Asset)/Liability
Variable rate debt........ $2,548.6 $1,259.9 $ -- $35.0 $ -- $-- $3,843.5 $3,843.5
Average interest
rates................. 5.60% 5.55% -- 5.88% -- -- -- --
Interest rate swaps....... 650.0 1,000.0 250.0 150.0 400.0 -- 2,450.0 45.3
Average pay rate........ 5.83% 5.94% 6.15% 5.88% 5.64% -- -- --
Average receive rate.... 5.19% 5.41% 5.53% 5.53% 5.53% -- -- --
NEW ACCOUNTING PRONOUNCEMENT
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 amends FASB Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") by deferring the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. We will adopt
SFAS 133 beginning January 1, 2001. We have not yet quantified the impact of
adopting SFAS 133 on our consolidated financial statements. However, SFAS 133
could increase volatility in earnings and other comprehensive income.
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FORWARD-LOOKING STATEMENTS
Certain statements and information included in the Registration Statement
of which this Information Statement forms a part constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements contain or express our intentions, beliefs,
expectations, strategies or predictions for the future. In addition, from time
to time we or our representatives may make forward-looking statements, orally or
in writing. Furthermore, such forward-looking statements may be included in our
filings with the Securities and Exchange Commission or press releases or oral
statements made by or with the approval of one of our executive officers.
Forward-looking statements in this Information Statement include, among others,
statements regarding:
- our ability as an independent company to obtain credit facilities and
other services and the costs and other financial terms of these
facilities and services;
- the continued growth of demand for our rental vehicles and our ability to
adjust the size of our fleet to meet demand;
- our ability to achieve operating leverage and economies of scale in our
business;
- our belief that the technical issues associated with Odyssey, National's
computer operating system, have been resolved;
- our expectation that our newly implemented pricing and marketing strategy
at National will be successful;
- our ability to achieve cost savings through the consolidation of our
business in certain areas; and
- our ability to generate cash flow from operations.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance,
or achievements to be materially different from any future results, performance,
or achievements expressed or implied by these forward-looking statements. These
factors include, among other things:
- risks relating to our separation from AutoNation and our operation as an
independent public company;
- risks relating to the qualification of the spin-off as a tax-free
distribution;
- our substantial debt and increased cost of capital and the restrictions
which our indebtedness will impose on our operations following the
spin-off;
- risks that our operating losses may continue;
- the impact of competition in the automotive rental industry;
- the possibility that our newly implemented strategy at National may not
improve its business and the impact of problems we have experienced with
Odyssey;
- the seasonal nature of our business;
- the effects of decreases in air travel;
- increases in fuel costs or reduced fuel supplies and their effects on air
travel;
- the continued availability of repurchase programs, the ability of the
manufacturers to fulfill their obligations under these programs and the
increasing cost of our vehicle fleet;
- a percentage of our rental fleet is subject to residual value risk upon
disposition;
- risks relating to our dependence on General Motors as our principal
vehicle supplier;
- risks relating to our reliance on asset-backed financing and the risk to
our business of an increase in interest rates;
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- the adoption of federal, state or local regulations including those that
restrict our ability to sell optional products;
- the cost of accidents involving our vehicles could exceed our liability
insurance;
- problems that may arise as a result of the consolidation of our brands;
and
- potential clean-up costs relating to petroleum storage.
We undertake no obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, future events or otherwise,
other than as required by law. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained in this
Information Statement.
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BUSINESS
COMPANY OVERVIEW
We own and operate one of the world's largest car rental businesses under
the brand names Alamo, National and CarTemps USA. Our rental operations maintain
a strong presence in all three markets of the automotive rental industry:
leisure travel, business travel and vehicle replacement. Alamo and National
serve the daily rental needs of both leisure and business travelers from a
network of approximately 3,000 on-airport and near-airport locations in all 50
states of the United States, as well as in Canada, Europe, the Caribbean, Latin
America, Asia, the Pacific Rim, Africa and the Middle East. CarTemps USA is our
domestic replacement rental business which operates in over 400 locations
throughout the United States. During 1999, we completed over 19 million rental
transactions for approximately 97 million rental days with a worldwide fleet
that averaged approximately 339,000 cars.
Alamo has been in business for more than 25 years and we believe that the
brand enjoys both domestic and international recognition as a leader in the
leisure rental market. In addition to a strong presence in the direct consumer
market, we believe that Alamo maintains a significant share of the domestic tour
and international tour markets, as well as the travel agent and affinity
markets. Alamo operates exclusively through company-owned locations in the
United States and through both company-owned and franchised locations
internationally. In the year ended December 31, 1999, Alamo had North American
revenue of approximately $1.4 billion.
National and its predecessors have been operating under the "National" name
since 1947. National primarily serves the business travel market and we have
designed its operations to offer a quick, simple and efficient rental process
tailored to meet the demanding requirements of the sophisticated and frequent
renter. National has contracts with more than half of the Fortune 500 companies
in the United States. National operates through both company-owned and
franchised locations in the United States and internationally. In the year ended
December 31, 1999, National had North American revenue of approximately $1.5
billion.
We operate the Alamo and National brands in over 2,000 locations outside
the United States and Canada. In 1999, the majority of our international revenue
was generated in the United Kingdom, where we believe that we have a leading
market position. In 1999, our international operations outside of North America
had revenue of approximately $370 million.
We launched the CarTemps USA brand in January 1998 by consolidating the
replacement operations of several different businesses which we owned. Since
then, CarTemps USA has grown through the addition of locations in new and
existing markets, as well as through increased development of relationships with
insurance companies, automotive dealerships and collision repair centers. Based
on revenue of approximately $283 million in 1999, CarTemps USA was one of the
three largest operators in the U.S. replacement rental market, which is led by
Enterprise.
In the year ended December 31, 1999, on a consolidated basis, our
operations generated total revenue of approximately $3.5 billion, resulting in
an operating loss of $76.3 million, which was primarily attributable to an
operating loss of $123.3 million in the fourth quarter of 1999. Our operating
loss in the first quarter of 2000 was $36.5 million.
ANC Rental was incorporated in Delaware in October 1999 as a wholly owned
subsidiary of AutoNation.
AUTONATION OVERVIEW
Before 1995, AutoNation was known as Republic Waste Industries, Inc. and
its subsidiaries operated solely in the solid waste services business. In late
1995 and 1996, AutoNation entered the electronic security services, automotive
retail and car rental industries through numerous acquisitions, and changed its
corporate name to Republic Industries, Inc. In 1997, AutoNation sold the
electronic security services business to a third party. In 1998, AutoNation's
solid waste services business, which was organized under the corporate name
Republic Services, Inc., completed an initial public offering of approximately
36% of its common stock. In 1999, AutoNation completed the separation of the
solid waste services business by selling substantially all
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of its remaining interest in Republic Services in a secondary public offering.
AutoNation also changed its corporate name to AutoNation, Inc. in April 1999.
Upon completion of the proposed separation and distribution of ANC Rental from
AutoNation, AutoNation will operate only in the automotive retail business. With
approximately 400 franchised automotive dealerships, AutoNation is the largest
automotive retailer in the United States. AutoNation's common stock trades under
the symbol "AN" on the New York Stock Exchange.
OUR INDUSTRY
The U.S. automotive rental industry had revenue of $18.3 billion in 1999,
an increase of 6.4% over the $17.2 billion of revenue recorded in 1998,
according to Auto Rental News. Domestic industry revenue has increased every
year since 1985 and grew at a compound annual growth rate, or CAGR, of 10.7%
between 1985 and 1999.
(U.S. Automotive Rental Industry Revenue Bar Chart)
[U.S. Automotive Rental Industry Revenue] [5-Year CAGR 7.6%]
[(dollars in billions)] [9-Year CAGR 7.9%]
[14-Year CAGR 10.7%]
[$4.4 $9.2 $9.7 $10.5 $11.1 $12.7 $13.0 $14.6 $15.6 $17.2 $18.3]
[1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999]
Source: Auto Rental News 2000 Fact Book
Significant changes in the ownership of existing participants in the
vehicle rental industry have occurred since 1996. AutoNation acquired Alamo in
1996 and National in 1997, each from private owners. Team Rental Group, Inc., a
large, publicly owned franchisee of Budget Group, Inc., acquired control of
Budget from Ford Motor Company in 1997. The Hertz Corporation, which was
previously owned by Ford, Avis Group Holdings, Inc., which was previously owned
by Cendant Corporation, and Dollar Thrifty Automotive Group, Inc., which was
previously owned by Chrysler Corporation, each conducted an initial public
offering of its common stock in 1997. As a result of these changes in ownership,
we believe that the industry is increasingly characterized by more disciplined
and generally higher pricing, better fleet management, improved overall service
and facilities and a greater focus on profitability. Car rental companies with
on-airport locations are also benefiting from a recent trend whereby an
increasing percentage of airport concession fees, which historically have been
absorbed by the car rental company, are being passed through to the customer.
We believe that the industry can be divided into two principal markets, the
$13.8 billion daily rental market and the $4.5 billion replacement rental
market. The daily rental market consists of two principal sub-markets, business
and leisure, each representing approximately 50% of the overall daily rental
market. We believe that the U.S. daily car rental industry will continue to
grow, principally due to continued increases in airline passenger traffic,
increased business travel and the trend toward shorter, more frequent vacations.
In particular, we believe that leisure travel will increase as a result of the
growing number of households with two wage earners and the demographic trend
toward older, affluent Americans, many of whom are frequent travelers.
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Daily Rental
The daily rental market consists of two principal sub-markets, business and
leisure rentals, each representing approximately 50% of the total market. Our
management believes that our mix of business and leisure rentals is consistent
with the industry mix. We derive most of our daily rental market revenue from
deplaning passengers, primarily at on-airport or near-airport sites. Customers
in the daily rental market are generally:
(1) business travelers renting under negotiated contractual arrangements
between their employers and the rental company;
(2) business and leisure travelers who may receive discounts through
travel, professional or other organizations;
(3) small corporate accounts that are provided with a rate and benefits
package that does not require a contractual commitment; or
(4) leisure travelers with no organizational or corporate affiliation.
Travelers who do not have the benefits of negotiated contractual
arrangements generally are influenced by price, advertising and reputation for
reliability and service.
As shown below, the significant brands in the daily U.S. rental market
include Alamo, National, Hertz, Avis, Budget, Enterprise, Dollar and Thrifty.
(RENTAL DAYS MARKET SHARE PIE CHART)
(Rental Days Market Share in U.S. Travel
Market by Brand in Daily Rental Market)
[Other 6%] [Alamo 11%]
[Enterprise 8%] [National 13%]
[Thrifty 3%] [Avis 20%]
[Dollar 4%] [Budget 12%]
[Hertz 23%]
Source: Auto Rental News 2000 Fact Book (based on D.K. Shifflet & Associates
Ltd. DIRECTIONS(R) Performance/Index Survey)(based on data from July 1, 1998 to
June 30, 1999)
(REVENUE MARKET SHARE IN TOP 50 AIRPORTS PIE CHART]
(Revenue Market Share in Top 50 Airport Markets)
[Other 4%] [Alamo 15%]
[Dollar 8%] [National 15%]
[Hertz 27%] [Avis 21%]
[Budget 10%]
Source: Auto Rental News 2000 Fact Book (based on data from July 1, 1998 to June
30, 1999)
Replacement Rental
The replacement rental market is nearly exclusively off-airport, deriving
its business from two principal sources: the temporary replacement of a person's
primary vehicle while it is out of service for extended repair, and
discretionary rentals for local business or leisure travel.
The replacement rental market is characterized by relatively low revenue
per day and long rental periods compared to the daily rental market. With the
principal revenue stream from insurance company collision claim centers, many
transactions are directed to an approved list of specific rental car companies
by way of standard rental contracts under terms negotiated with the insurance
companies. Because of this and other unique service delivery requirements, until
recent years, the major on-airport rental businesses have not actively
participated in the replacement market. Over the last two to three years,
however, a number of the major participants in the on-airport rental business
have reconsidered their position and have begun to enter the replacement rental
market.
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International Market
The international market can be divided into the $8.6 billion European
market and other, less developed automotive rental markets, including Australia,
Latin America, Africa, Japan and the Far East. A significant portion of the
international market revenue is concentrated in the top five European rental
markets, comprised of the United Kingdom, France, Spain, Germany and Italy.
COMPETITIVE STRENGTHS
We believe that our principal competitive strengths consist of the
following:
- THREE BRANDS FOCUSED ON DIFFERENT SUB-MARKETS. We are uniquely
positioned in the automotive rental industry with three distinct
brands - Alamo, National and CarTemps USA - each focused on a different
sub-market of the auto rental industry. We believe that our multi-brand
business model positions us to achieve consistent and sustainable growth
in the market and better serve the needs of the individual car renter.
Alamo's focus on the leisure market results in longer average rentals and
its fleet utilization is significantly higher on weekends. In contrast,
National's focus on the business or frequent traveler results in shorter
average rentals and increased rental transactions during the workweek.
CarTemps USA targets the replacement rental market, which is
characterized by relatively low revenue per day but long rental periods
as compared to the daily rental market. Our three brands provide revenue
diversification which allows us to participate in positive developments
in each industry sub-market while also reducing the potential adverse
impact of negative factors which may impact any single industry
sub-market. Our multi-brand business model has enabled us to implement
fleet sharing, improve revenue management and capitalize on cost saving
opportunities.
- STRONG MARKET POSITION. We believe that we benefit from a leading
position in the automotive rental industry. On a combined basis, Alamo
and National represent approximately 24% of the overall U.S. travel
market based on revenue days, positioning us as the largest market
participant. We are also the leader within the top 50 domestic airport
locations, where Alamo and National focus the majority of their efforts,
with a combined market share of approximately 30%. We believe that we
maintain a leading market position in the United Kingdom, and our brands
are represented in many other international markets. In addition, during
1999 CarTemps USA was one of the three largest operators in the U.S.
replacement rental market, which is led by Enterprise.
- ESTABLISHED CUSTOMER BASE. Alamo, National and CarTemps USA each have
long-standing relationships with many leading customers in their
respective sub-markets. For example, National has contracts with more
than half the Fortune 500 companies in the United States, as well as with
numerous small- and medium-sized businesses. Alamo, on the other hand,
has contracts with many leading tour operators and we believe that Alamo
maintains an excellent position in the travel agent and affinity markets.
We maintain a database containing the profiles of more than 700,000 Alamo
QuickSilver members and more than three million National Emerald Club
members. In addition, CarTemps USA has contractual relationships with
many leading insurance companies, automotive dealerships and collision
repair centers.
- A LEADING INTERNET PRESENCE. We have invested in the development of
leading web sites for our Alamo, National and CarTemps USA brands. We
believe that Alamo's web site is viewed as a leader among car rental web
sites in terms of customer awareness, ease-of-use and functionality. An
independent study conducted by Forrester Research recognized Alamo's web
site for having the highest loyalty rating of any car rental company.
Alamo's on-line reservations in 1999 increased nearly 200% over 1998 and
approximately 10% of Alamo's total bookings currently are generated from
its web site or through our relationships with on-line travel marketers.
National's web site bookings grew from approximately 7,700 bookings
during the first quarter of 1999 to approximately 123,000 bookings during
the first quarter of 2000. National expects to provide the same premium
expedited service on-line as it provides off-line. CarTemps USA is
currently introducing a web-based product to the insurance industry which
will provide a comprehensive, real-time claims management tool for the
insurance adjuster. Alamo and National have recently implemented a number
of new Internet
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applications to facilitate communication, administration and direct
reservations with our business partners.
- STRONG MANAGEMENT TEAM. Our management team was appointed in November
1999. Management immediately initiated a comprehensive review of the
business and developed numerous strategic, financial and operational
initiatives which are being implemented. Many of our key operational
personnel have in excess of 15 years of experience in the auto rental
industry, in many cases at either Alamo or National. Other members of our
management have extensive strategic, brand management, financial and
cost-cutting expertise developed outside of the auto rental industry but
with broad applicability and relevance to our initiatives.
BUSINESS STRATEGY
Our strategy is to be the automotive rental provider of choice, achieving
consistent, sustainable and profitable growth through the strategic positioning
of our brands in the vehicle rental market. Key elements of our strategy consist
of the following:
- CLARIFY BRAND MANAGEMENT AND POSITIONING. We have implemented numerous
marketing and other initiatives aimed at clarifying and strengthening the
position of Alamo and National in their respective sub-markets. We
recently consolidated our marketing department to ensure that each
brand's attributes are appropriately communicated to their targeted
customer bases.
- Alamo. Alamo is focused on increasing its presence in major tourist
destinations such as Florida, California, Nevada, Arizona and Hawaii.
In 1998, we closed 23 domestic Alamo locations which were not major
leisure travel destinations and were thus inconsistent with Alamo's
focus and strategic objectives. Alamo's "Drive Happy" marketing
campaign is targeted at leisure travelers, particularly families, and
aims to associate Alamo with the vacation experience.
- National. National seeks to improve its position as a premium brand
which is focused on the business or frequent traveler. National's new
marketing programs are designed to educate travelers about National's
strong service offerings, emphasizing ease, speed and choice as
positive brand attributes.
- CarTemps USA. CarTemps USA continues to build its brand identity with
its key customers in the insurance and collision repair industries.
CarTemps USA's slogan, "On the Road Again," carries a dual meaning.
Consumers who have temporarily lost use of their vehicles can get on
the road again with a CarTemps USA replacement vehicle, and CarTemps
USA personnel will themselves be on the road again delivering vehicles
to the homes, workplaces or body shops of choice for customers in
need.
- PROVIDE A SUPERIOR CUSTOMER EXPERIENCE. Alamo, National and CarTemps USA
have recently tailored their approach and service offerings to target
their respective customer bases.
- Alamo. We recently engaged the services of the Doblin Group, a
consumer research firm, to identify the primary unmet needs of leisure
travelers. In response to this study, we are implementing a number of
enhancements to our major Alamo facilities. These enhancements include
changing areas, play centers for children, kiosks that provide
information about local area attractions and events, the sale of
convenience foods and personal items, luggage handling, better signage
and brightly colored buses. Our goal is to make Alamo part of the
leisure traveler's vacation experience by meeting the renter's needs
and thereby increasing brand loyalty.
Facilities with these enhancements were put in place in the first
quarter of 2000 in Fort Lauderdale, Florida and Dallas/Fort Worth,
Texas. We expect to roll out enhanced facilities at other major
locations throughout the remainder of 2000 and 2001. We also plan to
add travel kiosks and improved signage throughout the entire network
in 2000 and 2001.
- National. We believe that the frequent or business traveler seeks
rapid, simple, efficient service with limited required interaction
with employees of the rental car company. National's Emerald
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Aisle service allows a customer enrolled in the brand's proprietary
Emerald Club program to complete the rental transaction without having
to make an advance reservation or visit the rental counter. The
customer proceeds directly to the Emerald Aisle, selects the car of his
or her choice and proceeds to the exit gate where the transaction is
completed in a matter of minutes. We believe that National will benefit
as travelers become more aware of the brand's service attributes. In
particular, National is targeting inactive Emerald Club accounts with a
direct marketing campaign aimed at increasing awareness of Emerald
Aisle service.
- CarTemps USA. We believe that the insurance replacement customer
desires a fast, efficient and low-cost solution for placing its
policyholders or claimants in clean, well-maintained vehicles.
CarTemps USA's mission is to make the vehicle replacement rental part
of the insurance claim process one that reflects positively on it and
its insurance partner.
- IMPROVE PROFITABILITY. We are focused on increasing our profitability
and operating margins through the following initiatives:
- Improved Revenue Management. We manage revenue centrally for Alamo
and National. Our focus is on fleet size, fleet sharing and relative
pricing levels consistent with each brand's service attributes.
National's pricing levels are targeted to be consistent with those
offered by its principal competitors in the business or frequent
traveler market. National's rates will typically be above those
offered by Alamo, which will offer prices in line with those of its
principal competitors in the leisure rental market. We have integrated
our revenue management with our operations and fleet management to
determine daily city-by-city demand and fleet sharing opportunities.
This allows us to increase profitability through greater control of
vehicle availability and rate changes.
- Shared Services and Integration Opportunities. We believe that
opportunities exist to further integrate and derive additional
efficiencies from the consolidation of certain functions of Alamo and
National. In addition to revenue management, shared services will
include fleet management and maintenance, reservations, accounting,
legal, risk management and human resources. In November 1999, Alamo
and National began to share their fleets, which has resulted in an
improvement in the overall fleet utilization rate and lower vehicle
costs per rental than would have been recorded without such
initiatives. In addition to joint contract negotiations for purchasing
fleet and fuel, we also expect to derive savings from joint purchases
of media and other common goods and services. In addition to cost
reductions, we are focused on joint marketing and information sharing
among our brands.
- Cost Savings. We implemented a cost reduction program in the fourth
quarter of 1999 which is expected to result in approximately $30.0
million of annual cost savings. Approximately $23.0 million of savings
is expected to result from the consolidation of National's former
headquarters in Minneapolis, Minnesota into our corporate headquarters
in Fort Lauderdale, Florida as a result of lower headcount and reduced
facilities and operating expenses. International restructuring
activities, which include the divestiture or closing of unprofitable
operations, as well as the renegotiation of certain vehicle supply
contracts in the United Kingdom, are expected to result in annual
savings of approximately $7.0 million. We will continue to evaluate
unprofitable or marginally profitable operations.
- Other Initiatives. We recently changed our operating structure to
place more focus and accountability at the local level. We have
developed impact plans on a city-by-city basis that establish
benchmarks for key operating, financial and customer service
measurements. The impact plans are used to measure and motivate
performance, providing monthly feedback on action items. Compensation
has been realigned to provide attractive incentives to city managers
who are successful in meeting or exceeding defined benchmarks. We are
also focused on reducing the amount of working capital which is
employed in our business by maximizing supplier relationships and
targeting asset management by improving our technology to allow for
faster billing and collection of our customer accounts.
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- EXPAND PRESENCE IN REPLACEMENT RENTAL MARKET. We intend to expand
CarTemps USA through a combination of geographic expansion, greater
penetration of existing served markets and increased development of
relationships with insurance companies, automotive dealerships and
collision repair centers. We believe that the replacement rental business
offers the potential for high returns on invested capital and operating
margins in excess of those generally attainable in the daily rental
market. We also believe that many insurance companies seek to utilize
more than one replacement vehicle provider. We intend to open
approximately 30 new CarTemps USA locations annually for the next three
years, which will require a limited capital investment.
- UTILIZE THE INTERNET TO FUEL ORGANIC GROWTH. We expect to continue to
improve the functionality of our web sites by leveraging our Internet
expertise, technology and research across all of our brands. We are also
expanding business-to-business connectivity between our web sites and
corporate accounts, travel agents and tour operators in order to
facilitate communication, administration and information and data flow.
We have developed strategic alliances with numerous on-line travel
companies, airlines, hotel operators and other travel industry
participants to encourage on-line reservations. In addition to customer
and potential revenue enhancement benefits, on-line reservations allow us
to reduce the costs of generating and processing reservations.
OPERATIONS
We serve two markets: the North American market and the international
market. Within the North American market, we provide both daily rental
operations, through our Alamo and National brands, and vehicle replacement
rental services through our CarTemps USA brand. Within the international market,
we provide daily rental operations through our Alamo and National brands.
We generate revenue primarily from renting automobiles to business and
leisure customers on a daily, weekend, weekly or monthly basis as well as the
sale of ancillary rental products. Approximately 87% of our revenue is derived
from vehicle rental charges with the remaining 13% derived from the sale of
liability and other accident protection products, fuel usage fees, and customer
convenience products including vehicle upgrades, additional or underage driver
privileges, inter-city privileges, infant seat rentals, cellular phone rentals
and ski rack rentals.
NORTH AMERICAN DAILY RENTAL OPERATIONS
Organizationally, both the Alamo and National business units remain
stand-alone operations responsible for all activities directly affecting the
customer such as airport relations, sales and marketing and counter operations.
One of the key components of our business strategy is to achieve operating
leverage and economies of scale in fleet financing, fleet utilization and
maintenance, revenue management and reservations. In addition, we anticipate
that our shared services organization will provide administrative services to
our business units, including accounting, legal, risk management and human
resources. To this end, we have already commenced integration of some of the
common business functions of Alamo, National and CarTemps USA such as
information systems and fleet management and we are developing plans to further
integrate additional common business functions if management deems it
economically beneficial.
ALAMO RENTAL OPERATIONS
We believe that the Alamo brand enjoys both domestic and international
recognition for meeting the needs of leisure travelers concerned with obtaining
the best value for their dollars. The Alamo brand has historically served a
large number of discretionary travelers who rent cars for leisure purposes. Also
important to the Alamo brand are small business customers, as well as customers
who have selected Alamo as a secondary supplier for commercial travel. Alamo,
through approximately 100 company-owned rental locations, operates in 36 states
in the United States and in Canada and Mexico.
With the brand's leisure focus, Alamo's top ten rental locations, which
generate in excess of 40% of its total revenue, are in major tourist
destinations in Florida, California, Nevada, Arizona and Hawaii. Because the
Alamo brand primarily targets the leisure traveler, approximately 25% of its
business comes from the
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direct consumer sub-market and demand is driven in large part by our direct
advertising and promotional efforts. In addition, approximately 60% of its
revenue in 1999 was generated in the domestic tour, international tour, travel
agent and affinity markets. The affinity markets include customers affiliated
with travel clubs, airlines, hotels, professional and trade associations and
credit cards. Ancillary markets include small corporate travelers where value is
the critical buying factor.
National Rental Operations
National has built its reputation in the automotive rental industry as a
provider of high quality vehicle rental services, targeting the demanding needs
of the frequent traveler. National, through approximately 740 company-owned and
franchised rental locations, operates in all 50 states of the United States,
Canada and the Caribbean.
National's business base is more diverse than Alamo's as a result of the
brand's focus on the frequent traveler. National's top ten rental locations,
which generate approximately 30% of its total revenue, are comprised of business
travel destinations, such as Los Angeles, Atlanta, Chicago, San Francisco,
Newark, Dallas and Orlando.
The National brand has found success positioning itself in the business
travel market. Accordingly, its core sub-markets are medium and large corporate
accounts representing in excess of 50% of its revenue. Its remaining revenue
comes from the leisure travel market through sources such as travel agents and
affinity groups.
Sales and Marketing
The sales and marketing efforts of the Alamo and National brands in the
United States are tailored to the separate sub-markets that each brand serves.
Alamo focuses its sales and marketing activities on the following customer
segments:
- Domestic and international tour operators. Tour operators create package
tours by assembling various components of travel such as airfare, hotel,
car rental and other needs. Our sales force contracts with tour
operators, typically for one year and in certain cases pursuant to
multi-year agreements, to be a primary or secondary provider of car
rental services for these tour operators' packaged vacations.
- Travel agencies. Alamo enjoys preferred relationships with large
consortia groups such as American Express, Vacation.com and Carlson
Wagonlit who offer our car rental services through their extensive travel
agency networks. Alamo markets to front-line travel agents through its
proprietary Alamo CASH-IN Club program whereby travel agents can become
members and earn CASH-IN club points redeemable for merchandise at
numerous retailers such as Home Depot, Sharper Image, Sam's Club and
Wal-Mart. There are over 50,000 travel agents enrolled in this program.
Telesales and direct marketing efforts are used to reach small and
independent agencies. All travel agents can obtain Alamo information and
products at our TA.Alamo.com web site.
- Direct consumers. Alamo markets to consumers using television,
newspapers, specialized seasonal product offerings (such as ski
products), targeted direct mail and e-mail and partnership efforts.
Alamo's "Drive Happy" campaign includes a product-based marketing
proposition that offers leisure travelers value and a unique leisure
renter experience at Alamo. We believe that a large portion of the
success of our direct marketing is based on strong customer relationship
management with customized product offerings enhanced by the use of
customized segmentation tools. The direct consumer is served through
Alamo's customer reservation centers and our Alamo.com web site.
National focuses its sales and marketing activities on the following
customer segments:
- Corporate accounts. National has had a strong presence in the corporate
market for over 50 years and primarily serves its corporate renters via
its Emerald Aisle product. Emerald Club membership offers corporate
renters an expeditious, paperless rental and their choice of vehicle at
the Emerald Aisle. Emerald Club members are served through a dedicated
communication area at our reservation centers
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and through special booking paths at our Nationalcar.com web site. In
addition, National uses telesales and direct marketing efforts to reach
and service small and mid-size accounts which are an important component
of its mix of corporate business.
- Other frequent renters. National markets its products to frequent
renters through television, newspapers, trade publications and direct
marketing and partnership efforts. Frequent renters are offered the
unique features and benefits of the Emerald Club through enrollment as
unaffiliated corporate members.
Both Alamo and National contract with and participate in association and
affinity programs, including travel clubs, trade and professional associations
and conventions, in order to reach members with special benefits and promotions.
In addition, several of the programs provide renters with discounts and rewards
at retail outlets, restaurants and travel clubs.
Alamo and National participate in many airline frequent flyer and loyalty
programs whereby renters can be rewarded with points, credits and rewards from
travel partners such as American Airlines, Inc., Delta Air Lines, Inc., United
Air Lines, Inc. and Hyatt Hotels. These relationships also provide Alamo and
National with cooperative marketing opportunities. Additionally, both brands
participate in certain credit card membership programs that provide special
benefits to card members and joint marketing opportunities for the credit card
issuer and our brands.
Reservations
We operate four reservations centers used primarily for bookings by leisure
and business travelers located in Charlotte, North Carolina, Charleston, South
Carolina, Boca Raton, Florida and Salt Lake City, Utah. The reservation system
routes calls to all centers for optimal utilization so that customers get the
best and quickest service. In addition, the reservation centers used by Alamo
and National are linked so that if one brand is sold out the customer will be
rerouted to the other for service. A large percentage of Alamo's and National's
bookings are directed to our reservation system through airline and other
third-party reservation systems, including systems operated by Sabre Holdings
Corp. and Galileo International, Inc.
We believe that Alamo's web site is viewed as a leader among car rental web
sites in terms of customer awareness, ease-of-use and functionality. An
independent study conducted by Forrester Research recognized Alamo's web site
for having the highest loyalty rating of any car rental company. Alamo's on-line
reservations in 1999 increased nearly 200% over 1998, and currently
approximately 10% of Alamo's total bookings are generated from Alamo's web site
or through our relationships with on-line travel marketers. Alamo is the only
car rental company that provides a complete comparison vehicle-shopping screen
based on true availability of all car types and related prices for the
customer's selected rental location and dates. Additionally, Alamo maintains
separate travel agent and tour operator sites in order to facilitate
communication, administration and reservations directly with travel agents and
tour operators.
National's web site bookings have grown from approximately 7,700 bookings
during the first quarter of 1999 to approximately 123,000 bookings in the first
quarter of 2000. National's web site strategy is to provide the same premium
expedited service on-line as it provides off-line. National is currently
relaunching its reservation process to allow any reservation to be completed in
three clicks. Additionally, Emerald Club members will be recognized, profile
data pre-filled and reservation completed in an innovative one-click process.
The new reservation process creates a leading site for reservation speed and
ease. We also expect that National's web site will be able to dynamically offer
products to Emerald Club members who elect on-line personalization membership
based on profile data, preferences, location, vehicle availability and dates to
best suit their frequent travel needs.
REPLACEMENT RENTAL OPERATIONS
We serve the replacement rental market through our CarTemps USA operating
subsidiary. We launched the CarTemps USA brand in January 1998 by consolidating
the operations of Spirit Rent-A-Car, Snappy Car Rental and Alasys replacement
rental businesses. In the first quarter of 1998, we consolidated Spirit, Snappy
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and some of our Alasys rental locations on a city-by-city basis, maximizing our
presence in each of the then existing markets. We simultaneously focused on
consolidating the administrative activities of our replacement rental operations
in Solon, Ohio under one management team. We completed these consolidation
activities within the CarTemps USA business in the first half of 1998. Since
then, CarTemps USA has expanded its business by opening new locations, including
within the network of service, repair and collision center operations in
AutoNation's automotive retail business.
We intend to expand CarTemps USA through a combination of geographic
expansion, greater penetration of existing served markets and increased
development of relationships with insurance companies, automotive dealerships
and collision repair centers. In particular, we intend to open approximately 30
new CarTemps USA locations annually for the next three years, which will require
a limited capital investment.
INTERNATIONAL OPERATIONS
Our international operations consist of company-owned and franchise
operations in Europe, Africa, the Middle East, Asia, the Pacific, Latin America
and the Caribbean. Our operations outside North America accounted for 10.4% of
our 1999 revenue. The majority of this international revenue was generated in
the United Kingdom. As part of our restructuring plan, we are in the process of
exiting certain unprofitable or marginally profitable international locations.
Until October 1997 our company-owned operations consisted solely of Alamo
locations in the United Kingdom, Germany and several smaller continental
European countries. In October 1997, we significantly increased our presence
with the acquisition of EuroDollar p1c which moved us into a market leadership
role in the United Kingdom. Commencing in February 1998, we began the
consolidation and expansion of operations, combining the acquired EuroDollar
operations with Alamo's European operations and some existing EuroDollar
licensees and joint ventures. Since that time we have focused our efforts on
re-branding the businesses and developing the network for both the Alamo and
National brands. In April 1998, we formed a joint venture with Macquarie Bank
Limited and acquired a controlling interest in the Australian car rental
business operated under the name of DASFLEET Rentals.
National serves its customers in Japan and other parts of the Pacific
through a marketing affiliation with Nippon-Rent-A-Car. Before February 1, 1998,
National served its customers in Europe, Africa and the Middle East through a
marketing affiliation with Europcar/Interrent. Beginning February 1, 1998, as a
result of our acquisition of EuroDollar plc in the fourth quarter of 1997,
National began to operate, and in some cases license, locations in each of these
markets. EuroDollar operations in Europe were rebranded as National operations
in 1998.
Today we operate the Alamo and National brands in 67 countries outside the
United States and Canada. Internationally, we have over 2,000 locations
consisting of both on-airport and city operations. National operates through
both company-owned and franchised locations internationally. We operate an
international fleet of approximately 120,000 rental vehicles, of which
approximately 36,000 are within our company-owned locations.
Within Europe, the business market accounts for 47% of our revenue, the
leisure market accounts for 45% of our revenue and the replacement market
accounts for 8% of our revenue.
Internationally, Alamo's market strength is in the leisure rental market.
Traditionally we have focused on generating inbound leisure business to the
United States from tour operators, car rental brokers and retail travel
agencies. In 1999 we expanded our sales force to focus more heavily on the
previously underserved Pan-European and United States to Europe leisure travel
markets, capitalizing globally on the strength of the Alamo brand name.
National supports its local country sales forces in Europe with a newly
formed pan-European sales force in all major countries. The pan-European sales
force is geographically based at the point of decision for each multi-national
account, creating a seamless global account management system to benefit our
multi-national corporate customers. The efforts of the sales force are supported
through our global reservations and distribution capabilities.
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INFORMATION TECHNOLOGY
A comprehensive network of hardware and software applications support our
rental operations. Key systems applications include reservations, rental
operations, fleet management, third-party reservation systems and tour operator
links, Internet web sites, commission processing, billing, accident claims,
financial and human resources. Our information technology infrastructure, which
provides service on four continents, allows us to manage our operations on a
real-time basis and quickly respond to changing market dynamics.
Our Odyssey information system, which was developed over the course of
several years, currently has three main components: a reservation system, an
operating system and a fleet management system. Odyssey is used to support
National in the United States, Canada and Australia. Alamo operations in the
United States, Canada and continental Europe use Alamo's legacy systems, which
are fully integrated information systems that include reservations, rental
operations and fleet management. National's UK operations use a fully integrated
separate stand-alone system, with interfaces to Odyssey and Alamo's systems.
Although we may implement some components of Odyssey at a future date at
Alamo or in connection with certain of our other operations, we do not expect to
further implement any of the components of Odyssey in the current fiscal year.
We have developed interfaces between Odyssey and Alamo's legacy systems which
allow our brands to share certain critical information about our operations,
particularly with respect to the size, composition and location of each brand's
fleet. This information has allowed us to share fleet among our brands.
Our systems capabilities are the foundation for many of our customer
service initiatives, including:
- Emerald Aisle, which allows National's Emerald Club members to obtain the
car of their choice and quickly checkout;
- QuickSilver, an expedited rental service that provides Alamo customers
with a "QuickSilver" rental record and a fast convenient check-out;
- handheld return service, which permits rental agents to meet our
customers as they return their cars and immediately produce charge
records and receipts;
- QSP, a customer quality service feature that enables rental agents to
make customer service adjustments and track all service issues to ensure
satisfactory transaction resolution for our customers;
- sophisticated rental readyline capability, which allows rental agents to
view all available cars in order to give our customers the best car to
meet their needs; and
- integrated reservation/rental notes that help all agents (from
reservation through rental transaction) enhance customer service
throughout the entire rental process.
We believe that our systems offer leading-edge customer-intake
capabilities, including:
- on-line real-time interfaces with all of the major third party
reservation systems such as SABRE and Galileo, which help take
reservations, verify car availability and display rates and products;
- direct links with our major tour operators and travel agencies;
- web sites for each of our brands that offer a high level of functionality
to reserve and rent cars;
- reservation capability that allows us to serve our customers'
reservations needs on a global basis; and
- direct connections with the major car insurance companies which are
served by CarTemps USA.
Our systems also enhance our fleet management capabilities by providing us:
- fleet accounting systems that track all vehicles through the entire life
cycle of planning and acquisition, operations and disposal; and
- a state-of-the-art car maintenance system that aids our mechanics in the
maintenance, repair and warranty work necessary on each vehicle.
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In addition to our operating systems, additional information systems assist
us in the management of our business. These systems consist of leading software
packages and proprietary applications such as accounting applications, human
resource management software and related programs that we believe are highly
complementary to our operating systems. For example, our revenue management
department utilizes a collection of applications that help maximize profits by
providing recommendations on vehicle availability and rate levels at individual
rental locations. This system also monitors market conditions and allows our
businesses to adjust to competitive situations quickly.
We have also developed a sophisticated data warehouse that enables our
sales and marketing groups to meet unique customer needs. The database provides
customer specific reports (itemizing, for example, the top renting locations,
historical and current rental history and rates) which our salesforce uses to
help customers manage their travel budgets. Our marketing department receives
customer segmentation reports that reveal trends and changes in customer
behavior, which enables us to modify existing programs and introduce new
products and services to meet emerging customer needs.
FLEET ACQUISITION AND MANAGEMENT
The single largest cost to a rental car company is its fleet. Since the
late 1980s, vehicle rental companies have acquired vehicles primarily through
manufacturer repurchase programs. Repurchase prices under these programs are
based on either a specified percentage of original vehicle cost determined in
the month the vehicle is returned or the original capitalization cost less a set
daily depreciation amount. These repurchase programs limit a vehicle rental
company's residual risk with respect to vehicles purchased under the programs.
This enables vehicle rental companies to determine depreciation expense in
advance. We believe that most vehicles in the fleets of U.S. rental companies
that participate in the daily rental market are "non-risk" vehicles.
Vehicle Supply
General Motors has been the principal supplier of rental vehicles to Alamo
and National for many years. In model year 1999, vehicles manufactured by
General Motors made up approximately 78% of our domestic rental fleet purchases.
As of December 31, 1999, approximately 73% of our fleet purchases were
subject to manufacturer repurchase programs under which either the manufacturer
is obligated to repurchase vehicles within designated periods of time or has
guaranteed that the vehicles will not depreciate more than a specified amount
compared to actual auction prices. Using manufacturer repurchase programs, Alamo
and National acquired approximately 94% of their combined U.S. rental fleet in
model year 1997, 91% of their combined U.S. rental fleet in model year 1998 and
91% of their combined U.S. rental fleet in model year 1999. For model year 2000,
we anticipate that approximately 95% of the combined U.S. rental fleet of Alamo
and National will be acquired under repurchase programs. We may, at our option,
require the manufacturers to repurchase vehicles under the repurchase programs
at any time during allowable periods. If we return vehicles subject to
repurchase programs earlier than originally anticipated, we typically will incur
additional depreciation expense for the period during which these vehicles were
in service. Vehicle depreciation expense is the single largest component of our
cost of operations, and vehicle manufacturers' repurchase programs materially
affect this expense.
Under repurchase programs with General Motors, the rental fleets of Alamo
and National must consist of specified minimum percentages of General Motors
vehicles. Through model year 2000, at least 51% of the vehicles in the
respective fleets of Alamo and National must come from General Motors if Alamo
and National are to remain eligible for incentives under the repurchase
programs. In return, General Motors has agreed to make available a specified
minimum number of vehicles each model year.
Purchases outside of repurchase programs come from a number of sources,
including vehicle manufacturers, private and public auctions, wholesalers and
automotive dealerships.
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Vehicle Disposition
Our current operating strategy is to hold vehicles in our daily rental
fleet for not more than 12 months, with the average fleet age being less than
six months. Our current operating strategy is to hold vehicles in our
replacement rental fleet for not more than 24 months, with the average fleet age
being less than 12 months. Approximately 92% of the vehicles acquired for our
North American daily rental fleet during the 1999 model year, including most
General Motors vehicles, were eligible for repurchase programs. These programs
impose return conditions, including those related to mileage and repair
condition over specified allowances. Less than 3.4% of the repurchase program
vehicles purchased by us in 1998 were ineligible for return. Upon return of a
repurchase program vehicle, we receive a price guaranteed at the time of
purchase and are thus protected from a decrease in prevailing used car prices in
the wholesale market. We also dispose of our used vehicles that repurchase
programs do not cover at dealers in the United States through informal
arrangements or at auctions. The future percentage of repurchase program
vehicles in our fleet will depend on the continued availability of repurchase
programs, over which we have no control.
Maintenance
We place a strong emphasis on vehicle maintenance since quick and proper
repairs are critical to fleet utilization. To accomplish this task we employ
full-time National Institute for Automotive Service Excellence fully certified
technician instructors. In addition, we have entered into agreements with
numerous AutoNation dealerships under which they agree to maintain and service
our local fleet vehicles. These arrangements provide us with qualified and
experienced technicians with established manufacturer relationships.
CUSTOMERS
Alamo, National and CarTemps USA each have long-standing relationships with
many leading customers in their respective sub-markets. For example, National
has contracts with more than half the Fortune 500 companies in the United
States, as well as numerous small- and medium-sized businesses. Alamo, on the
other hand, has contracts with many leading tour operators and we believe Alamo
maintains an excellent position in the travel agent and affinity markets. We
maintain a database of more than 700,000 Alamo QuickSilver members and more than
three million National Emerald Club members. CarTemps USA has relationships with
many leading insurance companies, automotive dealerships and collision repair
centers. In 1999, no one customer accounted for more than 10% of our total
revenue.
COMPETITION
The automotive rental industry is characterized by intense price and
service competition. We compete through a competitive pricing structure,
increased service levels, better vehicle quality, availability and value, and
convenient rental locations maintained in good condition. In any given location,
we may encounter competition from national, regional and local vehicle rental
companies. Our main domestic competitors in the business and leisure travel
markets are Avis Group Holdings, Inc., Budget Group, Inc., The Hertz
Corporation, and, in certain locations, Dollar Thrifty Automotive Group, Inc.
and, in the replacement rental market, certain of these companies along with
Enterprise Rent-A-Car, which dominates the replacement rental market. In Europe
and other foreign markets, our vehicle rental business competes with the
companies listed above, as well as with their international affiliates and
licensees and other national and local vehicle rental companies. At times,
industry-wide price pressures have adversely affected the major vehicle rental
companies, and our vehicle rental business has, on such occasions, priced its
product in response to these pressures. Moreover, at times when the vehicle
rental industry has experienced vehicle oversupply, competitive pressure has
intensified, with a negative impact on the industry's rental rates. Over time we
have focused on optimizing our cost structure to improve our overall competitive
position. Among the most significant of the initiatives are the integration of
some administrative functions and the implementation of common operating systems
and technologies where integration is practical.
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PROPERTIES
We currently own office facilities in Minneapolis, Minnesota and Fort
Lauderdale, Florida, as well as a reservations center in Charleston, South
Carolina. We are in the process of selling our former Minneapolis headquarters
and certain surplus Fort Lauderdale facilities. We lease reservation and data
centers in Charlotte, North Carolina, Boca Raton and Fort Lauderdale, Florida
and Salt Lake City, Utah, and office facilities in Fort Lauderdale, Florida and
Solon, Ohio.
We conduct our system-wide operations at over 3,000 locations throughout
the world, of which approximately 1,000 are located within the United States and
approximately 2,000 are located outside the United States. These locations
include rental and sales offices and rental and service facilities located on or
near airports and in central business districts in major U.S. cities and
suburban areas. We lease most of these premises.
Our facilities serving airport locations are located on airport property or
near the airport in locations convenient for bus transport of customers to the
airport. We lease nearly all of these airport locations from governmental
authorities charged with the operation of the airports under arrangements
generally providing for either the payment of a fixed rent or the payment of
rent based on a percentage of revenue at a location with a guaranteed annual
minimum payment. Most of our other facility leases provide for fixed rental
payments. Each of the airport facilities in the metropolitan areas we serve
includes, in addition to concession space, vehicle storage and maintenance
areas, as well as rental and return facilities. The typical airport facility
leases may not necessarily have the same duration as our local airport
concession agreement. Most of our airport facility leases expire at varying
times over the next ten years. Some of these leases include purchase options at
the end of their terms.
We lease our city and suburban rental locations from third parties,
including some dealerships owned by AutoNation, under lease agreements which
expire at various times over the next ten years.
We believe that our facilities are sufficient for our needs.
AUTOMOTIVE REGULATIONS
Our operations generally are subject to various federal, state and local
laws and regulations including those relating to taxing and licensing of
vehicles, consumer protection, finance, insurance, advertising, currency
controls, used vehicle sales, zoning and land use, environmental and labor
matters. In addition, a majority of states have considered legislation affecting
the sale of loss damage waiver products. To date, approximately half of the
states have enacted legislation requiring disclosure to each customer at the
time of rental that the customer's personal automobile insurance may cover
damage to the rental vehicle and therefore purchase of a collision damage waiver
may be unnecessary. In addition, adoption of national or state legislation
limiting the sale or capping the rates of collision damage waiver products could
further restrict sales of this product and additional limitations of potential
customer liability could increase the cost of our operations. During the past
two years, however, one state enacted legislation to rescind the price control
of collision damage waivers, and another state has enacted legislation to
partially rescind renter immunity from liability and permit the sale of
collision damage waivers.
As a result of private and past governmental regulatory legal proceedings
in some states regarding the sale of loss damage waivers and other optional
service items at the rental counter, including liability insurance, personal
accident coverage, personal effects coverage and other travel related coverages,
the vehicle rental industry has requested regulatory agencies and legislative
bodies to provide affirmative authorization for the sale of these services and
products. To date, several states have either adopted clarifying legislation to
fully exempt the industry from licensing requirements or enacted special or
limited licenses to specifically cover the sale of insurance products incidental
to the vehicle rental. However, the outcome of the legal proceedings and the
initiation of any future governmental regulatory proceedings could negatively
impact the revenue generated from the sale of these services and products.
Our operations are also subject to various federal, state and local
consumer protection laws and regulations including those relating to advertising
and disclosure of charges to customers. The National
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Association of Attorneys General has promulgated suggested guidelines for
vehicle rental advertisements. Alamo and two other industry participants are
subject to substantially similar consent decrees resulting from Federal Trade
Commission inquiries initiated in 1989, which consent decrees require certain
disclosures to customers at each stage of the rental transaction, including in
advertisements, of charges that are mandatory and not otherwise reasonably
avoidable. The rental car industry has sought and obtained legislation in
numerous states which expressly permits the separate itemization of vehicle
registration fees and other charges.
TRADEMARKS
We own a number of registered trademarks and service marks, including
Alamo(R), Alamo Rent A Car(R), National Car Rental(R), CarTemps USA(R), Emerald
Club(R) and QuickSilver(R). We also have a number of applications pending to
register other marks. The current registrations of our service marks and
trademarks in the United States and foreign countries are effective for varying
periods of time, and may be renewed periodically provided that we comply with
all applicable laws.
ENVIRONMENTAL MATTERS
The operation of our business is subject to a variety of requirements of
national, state/provincial and local governments which regulate health, safety,
the environment, zoning and land use. Each nation, state and province in which
we operate has its own laws and regulations governing the management of
hazardous materials, water and air emissions, solid waste disposal, and, in most
cases, the release and cleanup of regulated substances, and liability for these
matters. In addition, governmental authorities at all levels may require permits
for some activities at our facilities, and these permits may be subject to
renewal, modification or revocation. These governmental authorities can enforce
compliance with these regulatory requirements, and may seek to obtain
injunctions or impose fines and other sanctions, including criminal penalties,
for alleged violations.
We strive to conduct our operations in compliance with applicable laws and
regulations. Our business involves the use, handling, storage, and/or
contracting for recycling or disposal of materials such as used motor oil and
filters, transmission fluids, antifreeze, refrigerants, paints, thinners,
batteries, cleaning solvents, lubricants, degreasing agents and fuel. In
response to the trend in many states toward waste reduction and recycling
programs, we are reviewing additional opportunities to implement different
applications, for example, airbrush painting, and to use alternative products,
thereby reducing waste generation and related disposal or recycling costs. Laws
such as the Comprehensive Environmental Response, Compensation and Liability Act
in the United States impose liability, without regard to fault or whether
conduct complied with applicable laws, for the investigation and/or clean-up,
and damages to natural resources arising from releases, of hazardous substances.
Such liability may apply to parties who arranged for the disposal of hazardous
substances, as well as to owners or operators of affected properties.
In the United States, water quality protection programs under the Federal
Water Pollution Control Act of 1972, as amended and other federal laws such as
the Safe Drinking Water Act, as amended, affect our operations. Similarly, our
U.S. operations are subject to the federal Clean Air Act, and related state and
local laws regarding air emissions. The Occupational Safety and Health Act of
1970, as amended, authorizes the Occupational Safety and Health Administration
of the U.S. Department of Labor to promulgate occupational safety and health
standards. Various standards, including those requiring that employees receive
information and training regarding hazardous materials we use, apply to our
business operations. We do not expect that the costs of complying with
applicable water and air quality programs and OSHA regulations will have a
material adverse effect on us.
The Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), along with related regulations,
establish a framework for regulating the handling, transportation, treatment and
disposal of hazardous and non-hazardous solid wastes in the United States. In
addition, a subchapter of RCRA regulates underground storage tanks. Many of our
operations operate underground storage tanks, which we use primarily to store
petroleum-based products. RCRA and various
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federal, state and local laws and regulations mandate periodic testing,
upgrading, closure and/or removal of underground storage tanks and, in the event
of leaks from these tanks, require clean-up of the affected groundwater and
soils. We have a number of underground storage tanks that have been, or are
being upgraded, removed or closed in place. If underground storage tanks owned
or operated by us leak, and the leak migrates onto the property of third
parties, we could be subject to liability for response costs, and other damages
to these third parties. Compliance with regulations related to underground
storage tanks has not had, and is not expected to have, a material adverse
effect on us.
LIABILITY INSURANCE AND BONDING
The nature of our business exposes us to the risk of liabilities arising
out of our operations. These potential liabilities could involve, for example,
claims of employees, customers or third parties for personal injury or property
damage occurring in the course of our operations, claims for remediation costs,
personal injury, property damage, and damage to the environment in cases where
we may be held responsible for the escape of harmful materials. We could also be
subject to fines and civil and criminal penalties in connection with alleged
violations of regulatory requirements.
The nature of our business also exposes us to significant risk of liability
for damages arising primarily out of accidents involving automobiles rented from
our vehicle rental fleet. Laws in some states impose vicarious liability on
automotive rental companies, which increases our risk. Subject to the risk
levels discussed below, we manage our exposure through a combination of
qualified self insurance and risk transfer to insurance companies which are
rated as financially sound by insurance rating agencies. We carry substantial
liability coverage, but catastrophic losses may occur which exceed the amount of
our coverage limits.
We either purchase commercial insurance or act as our own qualified
self-insurer for automobile liability, general liability, workers' compensation
and employer's liability claims. We retain up to $1.0 million of risk per claim,
plus claims handling expense under our various property and liability insurance
programs. Commencing in 1998, for claims occurring after November 30, 1997, we
began purchasing insurance from AutoNation's insurance subsidiary for auto
liability, general liability and workers compensation risks in excess of our
$1.0 million retention. AutoNation will contribute the insurance subsidiary and
the related insurance risks to us before the spin-off. We purchase umbrella
liability insurance to provide insurance in excess of the primary liability
insurance policies and/or retained losses. The level of risk we retain may
change in the future as insurance market conditions or other factors affecting
the economics of our insurance purchasing change. Although we strive to operate
safely and prudently and have, subject to certain limitations and exclusions,
substantial liability insurance, we may be exposed to uninsured or underinsured
losses that could have a material adverse effect on our results of operations
and financial condition.
Provisions for retained or self-insured claims are made by charges to
expense based upon periodic evaluations of the estimated ultimate liabilities on
reported and unreported claims. We have collateral requirements that are set by
insurance companies which underwrite our insurance programs. Our collateral
requirements may change from time to time, based on, among other things, our
claims experience.
EMPLOYEES
At December 31, 1999, we employed approximately 23,000 associates
worldwide, approximately 2,800 of whom were covered by 46 collective bargaining
agreements. Currently, National is in the process of negotiating two collective
bargaining agreements which have expired and three agreements whose
certification occurred this year. Fifteen additional National agreements will
expire in 2000. National's collective bargaining agreements which have expired
or will expire in 2000 cover approximately 570 employees. We have no collective
bargaining agreements outside of North America. We also employ a substantial
number of temporary and seasonal workers, and we engage outside services, as is
customary in the industry, principally for the non-revenue movement of the
rental fleet between locations. We believe that we have good relations with our
employees.
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SEASONALITY
Our business, and particularly the leisure travel market, is highly
seasonal. Our third quarter, which includes the peak summer travel months, has
historically been the strongest quarter of the year. During the peak season, we
increase our 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. The first and fourth
quarters for our operations are generally the weakest because of limited leisure
travel and a greater potential for weather conditions, either adverse or
unseasonable, to impact our business. Many of the operating expenses such as
rent, general insurance and administrative personnel remain fixed throughout the
year and cannot be reduced during periods of decreased rental demand.
LEGAL PROCEEDINGS
We are currently a defendant in three purported class actions that have
been brought in two states in which the plaintiffs seek unspecified damages and
injunctive relief arising out of our allegedly improper sale of optional
insurance products in connection with vehicle rentals. A common feature of the
three actions is a claim that applicable insurance laws were violated in the
sale of the optional insurance products (Liability Insurance Supplement and
Personal Accident Insurance/Personal Effects Coverage) because our counter sales
representatives were not licensed insurance salespersons. Details of those
actions appear below. A final order of dismissal has been entered in two of the
actions, both of which are pending in Alabama. Both of these cases are now on
appeal. The remaining case, pending in Illinois, has been stayed until
resolution of an appeal following a dismissal of a similar claim brought against
another rental car company. Other similar actions in Alabama and Wisconsin have
been concluded and/or dismissed with no finding of liability to our company.
In September 1997, Ben C. Martin, Archie Powell, William Johnson,
individually and on behalf of all others similarly situated v. Alamo Rent-A-Car,
Inc., National Car Rental Systems, Inc. and certain other car rental companies
was commenced in Circuit Court of Mobile County, Alabama. This case purports to
be a class action on behalf of all persons in the United States who rented from
defendants and, as part of that rental, purchased optional insurance products.
We and the other defendant car rental companies removed the action to the United
States District Court for the Southern District of Alabama (Mobile). The
plaintiffs moved to remand and, after a court-imposed stay of the proceedings,
the case was remanded to the Circuit Court of Mobile County, Alabama. In
December 1999, we filed a Motion For Judgment on the Pleadings -- similar to a
motion previously filed and granted in the Leonard case, described below. In
February 2000, the Court dismissed the plaintiffs' case with prejudice. The
plaintiffs subsequently filed a Notice of Appeal.
In October 1997, Shannon Leonard, Theresa Moore and Coley Whetstone, Jr. v.
National Car Rental Systems, Inc. and certain other car rental companies was
commenced in Circuit Court of Coosa County, Alabama. We and the other defendant
car rental companies removed the action to the United States District Court for
the Middle District of Alabama, Northern Division (Montgomery). Leonard purports
to be a class action on behalf of all persons in the United States who rented
from the defendants and, as part of that rental, purchased optional insurance
products. We and the other defendant car rental companies filed a series of
motions which sought dismissal of the various causes of action based upon the
judge's initial ruling that a private right of action does not exist under
Alabama law for the alleged unlicensed sale of insurance. A final order of
dismissal was entered in January of 2000 and the plaintiffs subsequently filed a
Notice of Appeal to the U.S. Court of Appeals for the Eleventh Circuit in
Atlanta, Georgia.
In April 1998, Angela Godfrey, individually and on behalf of all others
similarly situated v. Alamo Rent-A-Car, Inc. and a company that issued the
subject insurance policy was commenced in the Circuit Court of Cook County,
Illinois. The case purports to be a class action on behalf of all persons in
Illinois who rented from Alamo and who purchased optional insurance products. We
removed the action to the United States District Court for the Northern District
of Illinois. In September 1999, the case was remanded to the Circuit Court of
Cook County, Illinois following the granting of plaintiff's motion to remand.
The Circuit Court has stayed further proceedings pending the outcome on appeal
of a similar case brought against another car rental
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company in which another judge in the Circuit Court of Cook County had granted
that company's motion to dismiss.
In March 2000, National Car Rental Systems, Inc. and another car rental
company were sued in a class action in a California state court under
California's Private Attorney General statute. The suit contends that the
vehicle refueling provisions in National's rental agreement that set forth the
renter's fuel options are materially misleading. In a similar case brought
against another rental car company in 1998, the California Court of Appeals,
First Appellate District in March 2000 sustained in part and reversed in part
the trial court's entry of judgment in favor of that rental car company and
ordered the matter remanded with respect to the plaintiff's challenge of the
manner in which that company discloses and explains its fuel service charge, but
upheld the trial court's ruling that such refueling charges were permissible
under California law if properly disclosed.
In February 2000, a patent infringement suit was filed in the U.S. District
Court for the Eastern District of Texas by Allan Konrad who holds three patents
allegedly covering certain aspects of client service technology and a fourth
patent allegedly covering e-commerce. Thirty-eight other companies are co-
defendants in this litigation. Mr. Konrad contends that the defendants are
violating his four patents through their Internet/Intranet applications and
e-commerce initiatives. Konrad is seeking damages in the form of reasonable
royalties and/or licensing fees from defendants for their past alleged
infringement and an injunction against defendants from further infringement. We
are seeking a defense and indemnity from the suppliers who provided the
allegedly infringing products and services. The technology covered in the Konrad
patents relates to computer system configuration and a method of using that
configuration. More specifically, a local host (personal workstation), remote
host (server), a network connecting the local host to the remote host, and
various computer service functionalities are claimed to be covered by these
patents. Technology of this type is widely used by all e-commerce providers,
including our company, and continued use is required.
We believe we have meritorious defenses in the foregoing actions and will
defend ourselves vigorously.
In addition to the matters described above, we are a party to various legal
proceedings which have arisen in the ordinary course of our business. While we
cannot predict the results of any of these matters with certainty, we believe
that losses, if any, resulting from the ultimate resolution of these matters
will not have a material adverse effect on our results of operations or
financial condition. However, an unfavorable resolution of any matter
individually or any number of matters in the aggregate could materially,
adversely affect our results of operations or cash flows for the quarterly
periods in which they are resolved.
In addition, as discussed in the section titled Automotive Regulations
beginning on page 54, Alamo is subject to a consent decree with the Federal
Trade Commission that requires certain disclosures to customers at each stage of
the rental transaction.
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MANAGEMENT
Our directors will be appointed by AutoNation prior to the spin-off, and
will serve until our first annual meeting of stockholders in 2001. Directors
will be elected annually. Upon completion of the spin-off, our directors and
executive officers will be:
NAME AGE POSITION
- ---- --- --------
Michael S. Egan........................... 59 Chairman
H. Wayne Huizenga......................... 62 Director
Gordon M. Bethune......................... 58 Director
J.P. Bryan................................ 60 Director
John O. Grettenberger, Sr................. 62 Director
William N. Plamondon, III................. 51 Director
Michael S. Karsner........................ 41 President, Chief Executive Officer and
Director
Karen L. Beard............................ 50 President, North America Alamo and
National
Dennis M. Custage......................... 54 President, International Alamo and
National
Todd M. Faver............................. 37 President, CarTemps USA
Cheryl L. Budd............................ 47 Senior Vice President, Corporate
Communications
Macdonald Clark........................... 60 Senior Vice President
Kathleen W. Hyle.......................... 41 Senior Vice President and Chief Financial
Officer
Edward L. Jones........................... 51 Senior Vice President, Human Resources
Howard D. Schwartz........................ 50 Senior Vice President, General Counsel and
Secretary
Mary E. Wood.............................. 44 Senior Vice President, Shared Services
MICHAEL S. EGAN will join our company as a director and Chairman prior to
the spin-off. Mr. Egan currently serves as Chairman and Chief Executive Officer
of Certified Vacations, Inc., a wholesale tour operator. Mr. Egan has been the
controlling investor of Dancing Bear Investments, a privately held investment
company, since 1996. Mr. Egan also serves as a director of Boca Resorts, Inc.
("Boca Resorts"), a leisure, recreation and entertainment company which owns and
operates several luxury resort hotels and the Florida Panthers professional
sports franchise. In addition, Mr. Egan has served as Chairman of the Board of
theglobe.com, Inc., an online community site, since August 1997. Mr. Egan was
the majority owner and Chairman of Alamo Rent-A-Car, Inc. from 1986 until Alamo
was acquired by AutoNation in November 1996. Mr. Egan began his career with
Alamo in 1976 and held various management and ownership positions until he
bought a controlling interest in 1986.
H. WAYNE HUIZENGA will join our company as a director prior to the
spin-off. Since August 1995, Mr. Huizenga has served as Chairman of the Board of
AutoNation. From August 1995 until October 1999, Mr. Huizenga served as Chief
Executive Officer or Co-Chief Executive Officer of AutoNation. Since May 1998,
Mr. Huizenga has served as Chairman of the Board of Republic Services, Inc., a
leading provider of non-hazardous solid waste collection and disposal services.
From May 1998 to December 1998, Mr. Huizenga also served as the Chief Executive
Officer of Republic Services. Since September 1996, Mr. Huizenga has served as
the Chairman of the Board of Boca Resorts. Since January 1995, Mr. Huizenga also
has served as the Chairman of the Board of Extended Stay America, Inc., an
operator of extended stay lodging facilities. From April 1987 through September
1994, Mr. Huizenga served as the Chairman of the Board and Chief Executive
Officer of Blockbuster Entertainment Corporation, during which time he helped
build Blockbuster from a 19-store chain to the world's largest video rental
company. In September 1994, Blockbuster merged into Viacom Inc., a diversified
entertainment and communications company. From September 1994 until October
1995, Mr. Huizenga served as the Vice Chairman of Viacom, and also served as the
Chairman of the Board of Blockbuster Entertainment Group, a division of Viacom.
In 1971, Mr. Huizenga co-founded Waste Management, which he helped build into
the world's largest integrated solid waste services company, and he served in
various capacities, including President, Chief Operating Officer and a director
from its inception until 1984. Mr. Huizenga owns the Miami Dolphins professional
sports franchise, as well as Pro Player
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Stadium in South Florida. He is director of theglobe.com and is a director of
NationsRent, Inc., a national chain providing heavy equipment and rental
services.
GORDON M. BETHUNE will join our company as a director prior to the
spin-off. Since September 1996, Mr. Bethune has served as Chairman of the Board
and Chief Executive Officer of Continental Airlines, Inc., the nation's fifth
largest passenger airline carrier. Mr. Bethune also served as Continental's
President and Chief Executive Officer from November 1994 until September 1996
and as its President and Chief Operating Officer from February 1994 until
November 1994. Mr. Bethune has been a director of Continental since August 1994.
Mr. Bethune also serves on the board of directors of Honeywell International
Inc., an international developer and supplier of advanced-technology products,
systems and services, and Sysco Corporation, the largest food service marketing
and distributing organization in North America.
J.P. BRYAN will join our company as a director prior to the spin-off. From
January 1995 until February 1998, Mr. Bryan served as President and Chief
Executive Officer of Gulf Canada Resources, Ltd., which is engaged in oil and
gas exploration and production. Since 1981, Mr. Bryan has served as the Chairman
of the Board of Torch Energy Advisors, Inc., an outsourcing and service provider
to the oil and gas industry, and served as its Chief Executive Officer from 1981
until 1996. From 1990 until 1995, Mr. Bryan served as Chairman and Chief
Executive Officer of Nuevo Energy Company, a company involved in the oil and gas
industry. From 1990 until 1996, Mr. Bryan served as Chairman and Chief Executive
Officer of Bellwether Exploration Company, an oil and gas exploration company.
Mr. Bryan also serves on the Board of Directors of Bellwether Exploration and
AutoNation.
JOHN O. GRETTENBERGER, SR. will join our company as a director prior to the
spin-off. Since February 1997, Mr. Grettenberger has served as the President for
LorAnn Oils, Inc., a privately held essential oils company. In 1984, Mr.
Grettenberger was named a Vice President of General Motors Corporation, the
world's largest automobile manufacturer, and he served General Motors in various
capacities, most recently as the General Manager of Cadillac Motor Car Division,
until February 1997.
WILLIAM N. PLAMONDON, III will join our company as a director prior to the
spin-off. Mr. Plamondon founded R.I. Heller Company LLC, a management consulting
firm, in April 1998 and serves as its President and Chief Executive Officer.
Prior to founding R.I. Heller, Mr. Plamondon served as President and Chief
Executive Officer of First Merchants Acceptance Corporation, a national
financing company, from April 1997 until April 1998, and served as a director of
First Merchants from March 1995 until April 1998. From June 1992 until February
1997, Mr. Plamondon was the President of Budget Rent-A-Car Corporation and held
other management positions with Budget from 1978 until 1992.
MICHAEL S. KARSNER has served as our Chief Executive Officer since August
1999. Mr. Karsner previously served as Senior Vice President and Chief Financial
Officer of AutoNation, a position he held since October 1996. From May 1998
until August 1998, Mr. Karsner also served as Senior Vice President and Chief
Financial Officer of Republic Services, Inc. Prior to joining AutoNation, Mr.
Karsner served as Senior Vice President and Chief Financial Officer of Dole Food
Company, Inc., a multinational packaged food company, from May 1996 until
September 1996. From February 1995 until May 1996 Mr. Karsner served as Vice
President, Chief Financial Officer and Treasurer of Dole, and from January 1994
until February 1995 Mr. Karsner served as Vice President and Treasurer of Dole.
KAREN L. BEARD has served as our President, North America Alamo and
National since November 1999. From November 1998 until November 1999 she served
as President of Alamo. Before her appointment as President, she served as Senior
Vice President of Sales Marketing and Advertising from October 1997 until
November 1998. Ms. Beard is a 19 year veteran of Alamo and has held a variety of
positions including Senior Vice President of Sales Marketing and Revenue
Management from February 1997 until September 1997, Senior Vice President of
North American Operations from January 1995 until February 1997 and Vice
President of North American Sales from January 1994 until January 1995.
DENNIS M. CUSTAGE is President, International Alamo and National and Chief
Operating Officer of our International Operations, a position he has held with
our company and with AutoNation's Rental Group since June 1999. Prior to joining
AutoNation, Mr. Custage was employed by Ryder System, Inc. from 1994 to 1998 in
a variety of positions and most recently as Senior Vice President and General
Manager of Ryder
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International from 1996 until 1998. From 1992 until 1994, Mr. Custage served as
Vice President Marketing and Business Development of Nortel (CALA) Corp., a
subsidiary of Nortel, a supplier of telecommunications equipment.
TODD M. FAVER has served as President, CarTemps USA since November 1999.
From December 1998 until November, 1999, Mr. Faver served as President, Canadian
Operations of AutoNation's Car Rental Division and from June 1996 until December
1998 he served as President of National Car Rental, Canada, a wholly-owned
subsidiary of AutoNation. From 1993 until 1996, Mr. Faver served as Director,
Florida Operations of National.
CHERYL L. BUDD has served as our Senior Vice President, Corporation
Communications since November 1999. From May 1999 until November 1999, Ms. Budd
served Director of Corporate Communications at Alamo, a wholly-owned subsidiary
of AutoNation. Prior to joining AutoNation, Ms. Budd was the founder and
President of Budd Communications, Inc., a marketing, advertising and public
relations company, from September 1993 until May 1999. Ms. Budd has been
involved in the public relations industry for over 20 years.
MACDONALD CLARK has served as our Senior Vice President since November
1999. From June 1996 until November 1999 he served as Vice Chairman and Chief
Marketing Officer of Alamo. Mr. Clark is a 16 year veteran of Alamo and has held
a variety of positions including President, North American Operations from
January 1995 until June 1996 and Executive Vice President of Sales and Marketing
from 1985 until 1996.
KATHLEEN W. HYLE has served as our Senior Vice President and Chief
Financial Officer since November 1999. Ms. Hyle previously served as Vice
President, Finance and Treasurer for AutoNation, a position she held since April
1997. Prior to joining AutoNation, Ms. Hyle served as Vice President and
Treasurer of Black and Decker Corporation, a multinational manufacturer of
hardware products, from June 1994 until March 1997.
EDWARD L. JONES has served as our Senior Vice President, Human Resources
since November 1999. From January 1999 until November 1999, Mr. Jones served as
Vice President, Human Performance Organization for AutoNation's North American
Rental Group and from August 1997 until January 1999 he served as Corporate Vice
President, Human Performance Organization for AutoNation. Prior to joining
AutoNation, Mr. Jones served as Director, Human Resources for Express, Inc., a
national clothing retailer and wholly-owned subsidiary of Limited, Inc., from
January 1991 until July 1997.
HOWARD D. SCHWARTZ has served as our Senior Vice President and General
Counsel since November 1999. From October 1997 until November 1999, Mr. Schwartz
served as Vice President and Deputy General Counsel of AutoNation and from
January 1997 until September 1997, he served as Senior Vice President and
General Counsel of Alamo, a wholly-owned subsidiary of AutoNation, and as Chief
Litigation Counsel of AutoNation. Prior to joining AutoNation, Mr. Schwartz was
with the national law firm of Eckert Seamans Cherin & Mellott, LLC from 1974,
where he served as the partner-in-charge of the firm's Florida operations, a
member of the Executive Committee and Co-Chairman of the Litigation department.
MARY E. WOOD has served as our Senior Vice President, Shared Services since
November 1999. Ms. Wood previously served as Vice President and Corporate
Controller of AutoNation, a position she held since April 1998. From July 1997
until April 1998, Ms. Wood served as Vice President of Internal Audit of
AutoNation. Ms. Wood was Chief Financial Officer of AutoNation's Alamo
Rent-A-Car, Inc. subsidiary from December 1996 until July 1997. Prior to
AutoNation's acquisition of Alamo in November 1996, Ms. Wood served as Alamo's
Executive Vice President of Business Services from April 1995 until December
1996. Prior to joining Alamo, Ms. Wood was a partner with KPMG Peat Marwick in
Fort Lauderdale, Florida for eight years.
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EXECUTIVE COMPENSATION
Compensation Tables
The following table presents information with respect to those persons who
we expect to serve as our Chief Executive Officer and our four other most highly
compensated executive officers following the spin-off. In this document, we
refer to these executive officers as the "Named Officers." We are presenting
executive compensation on a prospective basis. The compensation received by the
Named Officers while employees of AutoNation was based on substantially
different executive responsibilities and is not indicative of the compensation
policies of our company, and we have therefore excluded that information from
this table.
LONG-TERM
COMPENSATION
------------------
AWARDS
------------------
ANNUAL COMPENSATION IN 2000 SECURITIES
----------------------------------- UNDERLYING OPTIONS
OTHER ANNUAL TO PURCHASE ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION COMMON STOCK(2) COMPENSATION
--------------------------- --------- -------- ------------ ------------------ ------------
Michael S. Karsner.......................... $520,000 (3) $ * -- --
President and Chief Executive Officer
Karen L. Beard.............................. 400,000 (3) * -- --
President, North America Alamo and
National
Macdonald Clark
Senior Vice President..................... 375,000 (3) * -- --
Kathleen W. Hyle............................ 350,000 (3) * -- --
Senior Vice President and Chief Financial
Officer
Dennis M. Custage........................... 325,000 (3) (4) -- --
President, International Alamo and
National
- ---------------
* Value of perquisites and other personal benefits paid does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for
the executive officer and, therefore is not required to be disclosed
pursuant to Securities and Exchange Commission rules.
(1) Represents currently approved salaries for the year 2000. Individuals may be
eligible for an annual increase sometime during the year 2000.
(2) On the distribution date, each Named Officer will be granted an appropriate
number of stock options, as determined by the Compensation Committee, at an
exercise price not less than the fair market value at the time of the grant.
(3) This Named Officer may be eligible for an annual bonus of up to 50% of his
or her base salary if we exceed our operating budget or the particular
business unit in which the Named Officer works achieves certain performance
criteria established by the Compensation Committee, except for Mr. Clark who
is eligible for an annual bonus of up to 25% of his base salary in
accordance with his employment agreement, as discussed under the heading
"Employment Agreements" below.
(4) According to Mr. Custage's employment agreement, while Mr. Custage is on
assignment in the United Kingdom he will be eligible to receive various
perquisites which we describe under the heading "Employment Agreements"
below.
Employment Agreements
In May 1999 Mr. Custage entered into an employment agreement with
AutoNation to serve as President -- International Operations, on assignment in
Uxbridge, United Kingdom. Pursuant to this agreement, which has been assigned to
us, Mr. Custage's base salary will be $325,000 and he will be eligible to
receive an annual performance based bonus of up to 50% of his annual base salary
based on personal performance objectives and divisional and company performance.
In addition to his domestic compensation, Mr. Custage will be eligible to
receive certain additional benefits, pursuant to our Expatriate Allowances
Policy, while he is located in the United Kingdom, including the following: (1)
a monthly cost of living allowance, currently set at $240,500 annually; (2) a
monthly foreign service premium equal to 10% of base
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salary; (3) a housing allowance that covers rental costs, local taxes and
reasonable utilities; and (4) provision of two cars for personal use. In the
event that Mr. Custage's employment is terminated for any reason other than for
cause or due to a voluntary termination, then, upon execution of a Separation
Agreement and Release of Claims, we will pay Mr. Custage 12 months of base
salary and provide medical/dental coverage during this 12-month period. In
addition, in the event Mr. Custage ceases to be an employee due to a change in
control or sale of the business, then he would be entitled either to accept the
above payment and benefits or accept any alternative severance package presented
by the new entity. The spin-off of our common stock to AutoNation stockholders
will not trigger the change of control provision of Mr. Custage's employment
agreement.
In December 1996 Mr. Clark entered into a four-year employment agreement
with Alamo to serve as its Vice Chairman and Chief Marketing Officer. Pursuant
to this employment agreement, Mr. Clark's base salary is $375,000 and he is
eligible to receive an annual performance bonus of up to 25% of his annual base
salary depending upon his achievement of certain performance objectives. In the
event that Mr. Clark's employment is terminated for any reason other than for
"cause," as defined in the employment agreement, before December 31, 2000, then
he will continue to receive his base salary until December 31, 2000 or until he
engages in conduct that constitutes "cause" as defined in the employment
agreement, whichever occurs first. Mr. Clark will also be eligible to receive
additional salary payments of $100,000 per year starting January 1, 2001 and
continuing for ten years. If Mr. Clark dies during this ten-year period, his
spouse will continue to receive the additional salary payments for the remainder
of the ten-year period. However, Mr. Clark will not be entitled to receive the
additional salary payments in any year during the ten year term in which he
receives at least $100,000 in compensation from Alamo or any successor company.
All additional salary payments will also cease in the event Mr. Clark engages in
conduct that constitutes cause under his employment agreement.
STOCK OPTION PLAN
We intend to adopt the ANC Rental Corporation Stock Option Plan, subject to
approval of our board of directors and our sole stockholder, which will become
effective only upon completion of the spin-off. We intend that the plan will
encourage our key employees, through their individual efforts, to improve our
overall performance and to promote profitability by providing them an
opportunity to participate in the increased value they help create. Options
granted under the plan may be in the form of "incentive stock options" as
defined under section 422 of the Internal Revenue Code of 1986, as amended, or
options that are not incentive stock options. The plan will be administered by
the compensation committee of the board of directors.
An appropriate number of shares of our common stock, depending on the
distribution ratio, will be reserved for issuance under the plan. In general,
all options granted under the plan will lapse ten years from the date of grant
(five years in the case of a 10% stockholder of our company, our parent or one
of our subsidiaries). In general, the exercise price of an option will be
determined by the compensation committee at the time the option is granted and
will not be less than 100% of the fair market value of a share of our common
stock on the date the option is granted (110% in the case of a 10% shareholder
of our company, our parent or one of our subsidiaries). The compensation
committee may provide in the option agreement that an option may be exercised in
whole immediately or is exercisable in increments.
The plan will expire in January 2010.
EMPLOYEE BENEFIT PLANS
We have established a health and welfare benefits plan for our employees
which we have been operating under since January 2000.
Our employees currently participate in AutoNation's 401(k) program. Upon
completion of the spin-off, we intend to establish our own 401(k) program, at
which time AutoNation will transfer the assets and account balances of the
AutoNation 401(k) relating to our employees to our 401(k).
DIRECTOR COMPENSATION
We intend to approve a compensation plan for our non-employee directors
which will become effective only upon completion of the spin-off. Under the
compensation plan, each director will receive an initial grant
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of options to purchase a number of shares of common stock to be determined with
an effective grant date on the distribution date for the spin-off. These options
will vest immediately and will be subject to the terms set forth in the
applicable stock option agreement. In addition, beginning the second year of the
compensation plan, each non-employee director may elect to receive an annual
retainer of $25,000 per year or options to purchase a number of shares of common
stock to be determined. Non-employee directors who chair a committee of the
board of directors will receive an annual retainer of $2,500 for each committee
chairmanship held. Mr. Egan, as Chairman of the Board, will receive in lieu of
salary, upon completion of the spin-off, a grant of options to purchase a number
of shares of common stock to be determined at an exercise price not less than
100% of the fair market value of a share of our common stock on the date the
option is granted. These options will vest immediately.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of the spin-off, we will establish three committees of the
board of directors, an executive committee, a compensation committee and an
audit committee.
Upon completion of the spin-off, the executive committee will consist of
Messrs. Egan, Huizenga and Karsner, and have the authority to approve a number
of the functions of the board of directors in order to facilitate the taking of
corporate action without the need to call a meeting of the full board of
directors.
Upon completion of the spin-off, the compensation committee will consist of
our "non-employee directors," as that term is defined in Rule 16b-3(3)(i) under
the Exchange Act. The compensation committee will be responsible for determining
the compensation payable to our executive officers and for administering and
making grants under our stock option plan. We expect that Messrs. Bethune,
Grettenberger and Plamondon will be our non-employee directors and serve on our
compensation committee.
Upon completion of the spin-off, the audit committee will consist of our
"independent directors." The audit committee will be responsible for considering
the independence of our independent auditor and for performing various oversight
roles in connection with our operations as described in the Commission's
regulations. We expect that Messrs. Bethune, Grettenberger and Plamondon will be
our independent directors and serve on our audit committee.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended and Restated Certificate of Incorporation provides that we
shall indemnify, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, each person who is involved in any litigation or other
proceeding because of their position as a director or officer of our company,
against all expense, loss or liability reasonably incurred or suffered in
connection with that litigation. Our amended Bylaws provide that we may pay a
director or officer expenses incurred in defending any proceeding in advance of
its final disposition upon our receipt of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that the director or officer is not entitled to indemnification.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding brought by reason of the fact
that the person is or was a director or officer of the corporation, if the
person acted in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, if he had no reason to believe his conduct
was unlawful. In a derivative action, indemnification may be made only for
expenses, actually and reasonably incurred by any director or officer in
connection with the defense or settlement of an action or suit, if the person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
shall be made if the person shall have been adjudicated to be liable to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines that the defendant is fairly and reasonably entitled
to indemnify for these expenses despite an adjudication of liability.
As provided for in Section 102(b)(7) of the DGCL, our Amended and Restated
Certificate of Incorporation eliminates the liability of a director to the
corporation or its stockholders for monetary damages for a breach of fiduciary
duty as a director, except for liabilities arising (i) from any breach of the
director's
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duty of loyalty to the corporation or its stockholders, (ii) from acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, or (iv) from any
transaction from which the director derived an improper personal benefit.
At present, there is no pending or threatened litigation or proceeding
involving any of our directors or officers, employees or agents where
indemnification will be required or permitted.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information with respect to the anticipated
beneficial ownership of ANC Rental common stock by (1) each of our stockholders
who we believe will be a beneficial owner of more than 5% of our outstanding
common stock, (2) each of our proposed directors, each of whom will be appointed
before the spin-off, (3) each Named Officer and (4) all of our proposed
directors and executive officers as a group. We base the share amounts on each
person's beneficial ownership of AutoNation at the date of this document, unless
we indicate some other basis for the share amounts. We have not adjusted the
share amounts and percentages shown for each person in the table to give effect
to shares of our common stock that are not outstanding but may be acquired by
the person upon exercise of all options exercisable within 60 days of the
completion of the spin-off.
SHARES TO BE
BENEFICIALLY OWNED
--------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT
- --------------------------------------- ---------- -------
H. Wayne Huizenga(2)........................................ 6.9%
110 S.E. 6th Street
Fort Lauderdale, FL 33301
Subsidiaries of FMR Corp.(3)................................ 8.3
82 Devonshire Street
Boston, MA 02109
Subsidiaries of Capital Group International, Inc.(4)........ 7.0
11100 Santa Monica Blvd
Los Angeles, CA 90025
Harris W. Hudson(5)......................................... 5.2
1080 SE Third Ave.
Fort Lauderdale, FL 33316
Michael DeGroote(6)......................................... 5.5
Victoria Hall
11 Victoria Street
P.O. Box HM 1065
Hamilton, HMEX
Bermuda
Michael S. Egan(7).......................................... 5.7
Gordon M. Bethune........................................... *
J.P. Bryan.................................................. *
John O. Grettenberger, Sr................................... *
William W. Plamondon, III................................... *
Michael S. Karsner.......................................... *
Karen L. Beard.............................................. *
Macdonald Clark............................................. *
Kathleen W. Hyle............................................ *
Dennis M. Custage........................................... *
All directors and executive officers as a group (15
persons).................................................. *
- ---------------
* Less than one percent
(1) Except as otherwise indicated, the mailing address of each person or entity
named in the table is 200 South Andrews Avenue, Fort Lauderdale, FL 33301.
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(2) The shares to be beneficially owned by Mr. Huizenga consist of (a)
shares owned by Huizenga Investments Limited Partnership, a Nevada limited
partnership controlled by Mr. Huizenga (6.9%); and (b) shares owned
directly (less than 0.1%).
(3) Includes: (a) shares owned by Fidelity Management & Research
Company, Fidelity Management Trust Company and Fidelity International
Limited. Fidelity Management & Research and Fidelity Management Trust are
wholly-owned subsidiaries of FMR Corp. This information is based on a
Schedule 13G filed by FMR Corp. with respect to its holdings of AutoNation
common stock.
(4) Includes shares owned by Capital Guardian Trust Company, Capital
International Limited, Capital International S.A. and Capital International
Research and Management, Inc. d/b/a Capital International, Inc., each of
which is a wholly-owned subsidiary of Capital Group International, Inc.,
Capital Group International disclaims beneficial ownership of any of the
shares. This information is based on the Schedule 13G filed by Capital Group
International, Inc. with respect to its holdings of AutoNation common stock.
(5) All of the shares to be beneficially owned by Mr. Hudson will be held by
Harris W. Hudson Limited Partnership, a Nevada limited partnership
controlled by him. This information is based on a Schedule 13D filed by Mr.
Hudson with respect to his holdings of AutoNation common stock.
(6) All of the shares to be beneficially owned by Mr. DeGroote will be held in
the name of Westbury (Bermuda) Ltd., a Bermuda corporation, of which he is
the sole shareholder. This information is based on a Schedule 13D filed by
Mr. DeGroote with respect to his holdings of AutoNation common stock.
(7) The shares to be beneficially owned by Mr. Egan consist of (a) shares
owned directly (less than 0.1%); (b) shares owned by the Michael
S. Egan Living Trust, of which Mr. Egan is the sole trustee (4.7%); (c) an
aggregate of shares owned by certain trusts established for the
benefit of members of Mr. Egan's family (1.0%). This information is based on
a Schedule 13D filed by Mr. Egan with respect to his holdings of AutoNation
common stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of agreements and transactions among us and
certain related parties other than AutoNation. For a description of the
agreements and transactions between us and AutoNation, you should review the
section of this document titled "The Spin-Off -- Relationship between AutoNation
and ANC Rental before the spin-off," and "-- Relationship between AutoNation and
ANC Rental after the spin-off." Mr. Huizenga is the Chairman of AutoNation. It
is our policy that transactions with related parties must be on terms that, on
the whole, are no less favorable than those that would be available from
unrelated parties. Based on our experience in the industries in which we operate
and the terms of our transactions with unrelated parties, it is our belief that
all of the transactions described below met that standard at the time the
transactions were effected.
Pro Player Stadium, a professional sports stadium in South Florida which is
owned and controlled by Mr. Huizenga, in 1999 provided signage within Pro Player
Stadium to subsidiaries of our company with a fair market value of approximately
$140,000 at no cost to these subsidiaries.
In September 1998, National entered into an agreement to purchase the
naming rights to the Broward County Arena for $2.2 million per year. The Arena
is owned by Boca Resorts, Inc. Mr. Egan is a director of Boca Resorts, and Mr.
Huizenga is the Chairman of the Board of Boca Resorts. In addition, Mr. Huizenga
beneficially owns approximately 17.9% of Boca Resorts' outstanding stock and
controls a majority of its voting interests. The Arena agreement has a term of
ten years and provides that the fees will increase at a rate of 3% a year. In
addition, during 1999 we paid approximately $450,000 for tickets, sponsorship
and the use of executive suites at the Arena. During 1999, we utilized some of
the hotel facilities owned by Boca Resorts. The amounts paid for the use of
these facilities were at market rates and, in the aggregate, were not material
to us.
Mr. Egan has a beneficial ownership interest in Certified Vacations, Inc.,
a domestic tour operator that has conducted business with us. Mr. Egan also
serves as Certified Vacations' Chairman and Chief Executive Officer. Total gross
revenue recognized by us from Certified Vacations was approximately $9.3 million
for
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the year ended December 31, 1999. In addition, we made marketing payments of
approximately $170,000 to Certified Vacations during 1999.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summary description of our capital stock is qualified by
reference to the provisions of our certificate of incorporation and bylaws.
Before the spin-off date, we will amend and restate our certificate of
incorporation to authorize capital stock consisting of shares of
common stock, par value $0.01 per share, and shares of preferred
stock, par value $0.01 per share. No shares of our preferred stock will be
distributed in the spin-off. On the distribution date, we will have
approximately million shares of our common stock outstanding, based on
AutoNation's outstanding common stock of shares as of ,
2000.
COMMON STOCK
Subject to the prior rights of stockholders of our preferred stock, the
stockholders of our common stock:
- are entitled to dividends if they are declared by our board of directors
out of funds legally available therefor;
- are entitled to one vote per share on all matters brought before them,
voting is noncumulative;
- have no preemptive or conversion rights;
- are not subject to, or entitled to the benefits of, any redemption or
sinking fund provision; and
- are entitled upon liquidation to receive the remainder of our assets
after the payment of corporate debts and the satisfaction of the
liquidation preference of our preferred stock.
PREFERRED STOCK
Our board of directors is empowered, without approval of the stockholders,
to cause shares of preferred stock to be issued in one or more series, with the
number of shares of each series and the rights, preferences and limitations of
each series to be determined by it at the time of issuance. Among the specific
matters that our board of directors may determine are the rate of dividends,
redemption and conversion prices and terms and amounts payable in the event of
liquidation and special voting rights. The board of directors' ability to issue
preferred stock on the terms it determines may be viewed as having an
anti-takeover effect.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company, a Division of EquiServe, will be the
distribution agent for the spin-off and will be the transfer agent and registrar
for our common stock following the spin-off.
VALIDITY OF SECURITIES
The law firm of Akerman, Senterfitt & Eidson, P.A., Miami, Florida, has
provided us an opinion that all shares of our common stock outstanding on the
distribution date will be validly issued, fully paid and non-assessable. Certain
attorneys at Akerman, Senterfitt & Eidson, P.A. own shares of AutoNation common
stock and, upon completion of the spin-off, will own shares of ANC Rental common
stock.
WHERE YOU CAN FIND MORE INFORMATION
Upon effectiveness of the registration statement of which this Information
Statement forms a part, we will be subject to the informational requirements of
the Exchange Act. Under the Exchange Act, we will file reports, proxy statements
and other information with the Commission. The reports, proxy statements and
other information we file with the Commission may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at
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the Commission's Regional Offices, including the following: Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such information
may be obtained by mail at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or accessed
electronically on the Commission's Web site at (http://www.sec.gov). We have
applied to list our common stock on the NYSE. Once we are approved for listing
on the NYSE, reports and other information concerning us may be inspected at
their offices at 20 Broad Street, New York, New York, 10005.
We intend to furnish holders of our common stock with annual reports
containing consolidated financial statements prepared in accordance with United
States generally accepted accounting principles and audited and reported on,
with an opinion expressed, by an independent public accounting firm.
WE HAVE FILED WITH THE COMMISSION A REGISTRATION STATEMENT ON FORM 10 UNDER
THE EXCHANGE ACT COVERING OUR COMMON STOCK. THIS INFORMATION STATEMENT DOES NOT
CONTAIN ALL OF THE INFORMATION IN THAT REGISTRATION STATEMENT AND THE RELATED
EXHIBITS AND SCHEDULES. STATEMENTS IN THIS INFORMATION STATEMENT AS TO THE
CONTENTS OF ANY CONTRACT, AGREEMENT OR OTHER DOCUMENT ARE SUMMARIES ONLY AND ARE
NOT NECESSARILY COMPLETE. FOR COMPLETE INFORMATION AS TO THESE MATTERS, REFER TO
THE APPLICABLE EXHIBIT OR SCHEDULE TO THE REGISTRATION STATEMENT. THE
REGISTRATION STATEMENT AND THE RELATED EXHIBITS FILED BY US WITH THE COMMISSION
MAY BE INSPECTED AT THE PUBLIC REFERENCE FACILITIES OF THE COMMISSION LISTED
ABOVE.
No person is authorized to give any information or to make any
representations with respect to the matters described in this Information
Statement other than those contained in this Information Statement or in the
documents incorporated by reference in this Information Statement and, if given
or made, such information or representation must not be relied upon as having
been authorized by us or AutoNation. Neither the delivery of this Information
Statement nor consummation of the spin-off contemplated hereby shall, under any
circumstances, create any implication that there has been no change in our
affairs or those of AutoNation since the date of this Information Statement, or
that the information in this Information Statement is correct as of any time
after its date.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Income and Comprehensive Income
for Each of the Three Years Ended December 31, 1999....... F-4
Consolidated Statements of Cash Flows for Each of the Three
Years Ended December 31, 1999............................. F-5
Notes to Consolidated Financial Statements.................. F-6
F-1
81
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To ANC Rental Corporation:
We have audited the accompanying consolidated balance sheets of ANC Rental
Corporation (a Delaware corporation and wholly owned subsidiary of AutoNation,
Inc.) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income and comprehensive income and cash flows for
each of the years in the three-year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ANC Rental
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida
January 26, 2000 (except with respect to
the matters discussed in the second paragraph
of Note 4 and Note 18, as to which the
date is May 2, 2000).
F-2
82
ANC RENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
DECEMBER 31,
---------------------
1999 1998
-------- --------
ASSETS
Cash and cash equivalents................................... $ 17.4 $ 33.6
Restricted cash and cash equivalents........................ 155.3 14.5
Receivables, net............................................ 590.5 638.9
Prepaid expenses............................................ 75.1 59.4
Revenue earning vehicles, net............................... 4,501.3 4,588.7
Property and equipment, net................................. 622.7 522.0
Intangible assets, net...................................... 358.4 376.8
Other assets................................................ 28.8 18.7
-------- --------
Total assets...................................... $6,349.5 $6,252.6
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable............................................ $ 250.3 $ 190.2
Accrued liabilities......................................... 302.3 248.7
Insurance reserves.......................................... 105.6 164.5
Revenue earning vehicle debt................................ 4,531.6 4,377.9
Other debt.................................................. 107.4 132.0
Deferred income taxes....................................... 145.0 86.7
Other liabilities........................................... 180.7 313.9
-------- --------
Total liabilities................................. 5,622.9 5,513.9
-------- --------
Commitments and contingencies
Shareholder's equity:
Investment by Parent...................................... 733.0 743.2
Accumulated other comprehensive loss...................... (6.4) (4.5)
-------- --------
726.6 738.7
-------- --------
Total liabilities and shareholder's equity........ $6,349.5 $6,252.6
======== ========
The accompanying notes are an integral part of these statements.
F-3
83
ANC RENTAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
REVENUE..................................................... $3,542.3 $3,453.6 $3,055.1
EXPENSES:
Cost of operations........................................ 2,785.3 2,622.9 2,337.5
Selling, general and administrative....................... 792.8 651.8 553.5
Restructuring and other charges........................... 40.5 -- 78.0
-------- -------- --------
OPERATING INCOME (LOSS)..................................... (76.3) 178.9 86.1
INTEREST INCOME............................................. 1.3 1.4 7.9
INTEREST EXPENSE............................................ (14.3) (8.0) (6.6)
OTHER INCOME (EXPENSE), NET................................. 1.1 (2.2) (1.9)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (88.2) 170.1 85.5
PROVISION (BENEFIT) FOR INCOME TAXES........................ (18.8) 61.3 31.8
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGES.................. (69.4) 108.8 53.7
-------- -------- --------
EXTRAORDINARY CHARGES RELATED TO EARLY EXTINGUISHMENT OF
DEBT, NET OF BENEFIT FOR INCOME TAXES OF $0.9 IN 1999 AND
$1.5 IN 1997.............................................. (1.6) -- (2.5)
-------- -------- --------
NET INCOME (LOSS)........................................... (71.0) 108.8 51.2
-------- -------- --------
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustments.................. (1.9) (1.6) (4.7)
-------- -------- --------
COMPREHENSIVE INCOME (LOSS)................................. $ (72.9) $ 107.2 $ 46.5
======== ======== ========
The accompanying notes are an integral part of these statements.
F-4
84
ANC RENTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)......................................... $ (71.0) $ 108.8 $ 51.2
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Purchases of revenue earning vehicles................... (7,040.2) (6,974.6) (5,227.3)
Sales of revenue earning vehicles....................... 5,950.6 5,780.1 3,892.3
Depreciation of revenue earning vehicles................ 1,089.9 905.6 831.9
Depreciation and amortization of property and
equipment............................................. 72.3 52.3 39.5
Amortization of intangible assets and debt issue
costs................................................. 18.7 14.0 7.3
Income tax provision (benefit).......................... (18.8) 68.8 (34.1)
Parent overhead and insurance charges................... 207.2 204.6 9.6
Non-cash restructuring and other charges................ 40.5 -- 67.4
Provision for asset impairments......................... 14.3 -- --
Extraordinary charges, net of income taxes.............. 1.6 -- 2.5
Changes in assets and liabilities, net of effects from
business acquisitions:
Receivables........................................... 47.8 (104.2) (68.2)
Prepaid expenses and other assets..................... (7.7) (3.9) 47.1
Accounts payable and accrued liabilities.............. 57.4 (16.0) (163.6)
Other liabilities..................................... (212.1) (178.8) 145.1
---------- ---------- ----------
150.5 (143.3) (399.3)
---------- ---------- ----------
CASH USED IN INVESTING ACTIVITIES:
Cash acquired in business acquisitions.................... -- 2.1 3.9
Purchases of property and equipment....................... (192.7) (204.1) (94.8)
Proceeds from sale of property and equipment.............. 19.9 10.6 10.3
Other..................................................... 4.6 (2.5) (9.1)
---------- ---------- ----------
(168.2) (193.9) (89.7)
---------- ---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from revenue earning vehicle financing........... 72,262.9 46,950.4 29,103.7
Payments on revenue earning vehicle financing............. (72,160.2) (46,578.3) (28,728.9)
Net (payments) proceeds from other debt................... (22.4) 41.9 (23.4)
Cash transfers to Parent.................................. (61.3) (98.0) (139.4)
Subsidiary limited partner contributions.................. 22.9 13.3 79.1
Debt costs................................................ (33.0) -- --
Other..................................................... (7.4) (3.4) 10.7
---------- ---------- ----------
1.5 325.9 301.8
---------- ---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (16.2) (11.3) (187.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 33.6 44.9 232.1
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 17.4 $ 33.6 $ 44.9
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-5
85
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABLES IN MILLIONS)
1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements include the accounts of
ANC Rental Corporation and its subsidiaries (the "Company"). The Company is a
wholly owned subsidiary of AutoNation, Inc. ("Parent"). The Company rents
vehicles on a daily or weekly basis through Alamo Rent-A-Car LLC ("Alamo"),
National Car Rental, Inc. ("National") and CarTemps USA ("CarTemps") primarily
in the United States, Europe and Canada. Alamo operates only through
corporate-owned locations in the United States and through both corporate-owned
and franchised locations internationally. National operates both corporate-owned
and franchised locations in the United States and internationally.
The accompanying Consolidated Financial Statements reflect the accounts of
the Company as a subsidiary of Parent subject to corporate general and
administrative expense allocations as described in Note 14, Related Party
Transactions. Such information does not necessarily reflect the financial
position or results of operations of the Company as a separate, stand-alone
entity.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consists of highly liquid investments that have
an original maturity of three months or less at the date of purchase.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents consists of amounts held in trust for
payment and as security under the Company's revenue earning vehicle debt
programs as well as amounts on deposit for insurance claims.
Receivables
The components of receivables, net of allowance for doubtful accounts, are
as follows:
DECEMBER 31,
---------------
1999 1998
------ ------
Trade receivables........................................... $247.2 $244.6
Vehicle manufacturer receivables............................ 302.6 372.1
Other....................................................... 87.3 50.7
------ ------
637.1 667.4
Less: allowance for doubtful accounts....................... (46.6) (28.5)
------ ------
$590.5 $638.9
====== ======
Revenue Earning Vehicles
Revenue earning vehicles are stated at cost less accumulated depreciation.
The straight-line method is used to depreciate revenue earning vehicles to their
estimated residual values over periods typically ranging from 3 to 24 months.
Depreciation expense includes gains and losses on revenue earning vehicle sales
in the
F-6
86
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ordinary course of business and is included as a component of cost of operations
in the accompanying Consolidated Statements of Income and Comprehensive Income.
A summary of revenue earning vehicles is as follows:
DECEMBER 31,
-------------------
1999 1998
-------- --------
Revenue earning vehicles.................................... $5,207.9 $5,062.8
Less: accumulated depreciation.............................. (706.6) (474.1)
-------- --------
$4,501.3 $4,588.7
======== ========
During 1999 the Company recorded asset impairment charges of $14.3 million
related to the renegotiation of certain international vehicle supply agreements
as well as the reduction of fleet. These charges have been included in cost of
operations for the year ended December 31, 1999.
Revenue earning vehicles with a net book value of approximately $4.12
billion and $3.73 billion at December 31, 1999 and 1998, respectively, were
acquired under programs that allow the Company to require counterparties to
repurchase vehicles held for periods of up to twenty-four months. The agreements
contain varying mileage and damage limitations.
The Company also leases vehicles under operating lease agreements which
require the Company to provide normal maintenance and liability coverage. The
agreements generally have terms of four to thirteen months. Many agreements
provide for an option to terminate the leases early and allow for the purchase
of leased vehicles subject to certain restrictions.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, while minor replacements,
maintenance and repairs are charged to expense as incurred. When property is
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in the
Consolidated Statements of Income and Comprehensive Income.
The Company revises the estimated useful lives of property and equipment
acquired through its business acquisitions to conform with its policies
regarding property and equipment. Depreciation is provided over the estimated
useful lives of the assets involved using the straight-line method. The
estimated useful lives are: twenty to forty years for buildings and
improvements, three to fifteen years for equipment, including computer hardware
and software, and five to ten years for furniture and fixtures.
A summary of property and equipment is as follows:
DECEMBER 31,
------------------
1999 1998
------- -------
Land........................................................ $ 131.5 $ 128.5
Furniture, fixtures and equipment........................... 390.8 211.5
Buildings and improvements.................................. 337.0 365.7
------- -------
859.3 705.7
Less: accumulated depreciation and amortization............. (236.6) (183.7)
------- -------
$ 622.7 $ 522.0
======= =======
The Company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of property and
equipment or whether the remaining balance of property
F-7
87
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and equipment should be evaluated for possible impairment. The Company uses an
estimate of the related undiscounted cash flows over the remaining life of the
property and equipment in assessing their recoverability. The Company measures
impairment loss as the amount by which the carrying amount of the asset exceeds
the fair value of the asset. The Company primarily employs two methodologies for
determining the fair value of an asset. Fair value is either the amount at which
the asset could be bought or sold in a current transaction between willing
parties or the present value of estimated expected future cash flows grouped at
the lowest level for which there are identifiable independent cash flows.
Intangible Assets
Intangible assets consist of the cost of acquired businesses in excess of
the fair value of net assets acquired. The cost in excess of the fair value of
net assets is amortized over forty years on a straight-line basis. Accumulated
amortization of intangible assets was $29.1 million and $19.4 million at
December 31, 1999 and 1998, respectively.
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of intangible
assets or whether the remaining balance of intangible assets should be evaluated
for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the intangible assets in
assessing their recoverability. The Company measures impairment loss as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. Fair value is the present value of estimated expected future cash flows
grouped at the lowest level for which there are identifiable independent cash
flows.
Liability Insurance
Commencing in 1998 (for claims occurring after November 30, 1997), the
Company began purchasing insurance from the Parent's wholly-owned insurance
subsidiary ("Insurance Subsidiary") for automobile liability, general liability
and workers compensation risks up to $1.0 million per occurrence. Costs in
excess of these amounts are insured under various contracts with third party
commercial insurance companies. Premiums charged by the Insurance Subsidiary are
determined through actuarial evaluation based upon historical claims experience,
adjusted for current trends and changes in claims handling procedures. The
Company retains no risk associated with these coverages insured by the Insurance
Subsidiary. Insurance reserves associated with these coverages totaled
approximately $169.6 million at December 31, 1999. Prior to the Distribution, as
defined in Note 16, Separation from Parent, Parent intends to contribute the
Insurance Subsidiary and the related automotive rental insurance risks to the
Company.
For claims occurring prior to December 1, 1997, the Company retains up to
$1.0 million of risk per claim plus claims handling expense for its automobile
liability, general liability and workers compensation risks. Costs in excess of
this retained risk per claim are insured under various contracts with insurance
carriers. The ultimate costs of these retained insurance risks are estimated by
management and by actuarial evaluation based upon historical claims experience,
adjusted for current trends and changes in claims handling procedures.
The Company believes its insurance liability reserves are adequate to cover
future claims payments. Adjustments, if any, to estimated reserves resulting
from ultimate claim payments will be reflected in operations in the periods in
which such adjustments are known.
F-8
88
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Liabilities
A summary of other liabilities is as follows:
DECEMBER 31,
---------------
1999 1998
------ ------
Minority interest........................................... $112.1 $ 92.4
Vehicle payables............................................ 27.3 196.3
Other miscellaneous......................................... 41.3 25.2
------ ------
$180.7 $313.9
====== ======
Minority interest represents the limited partnership interest in a
subsidiary of the Company which was formed in 1997. Minority interest in the
subsidiary's income is included in cost of operations and was $6.8 million, $5.9
million and $2.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Vehicle payables represent amounts to be financed after period end
for vehicles acquired under the Company's revenue earning vehicle financing
programs.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of foreign currency translation
adjustments. The assets and liabilities of foreign subsidiaries are translated
at period end exchange rates. Results of operations are translated at the
average rates of exchange in effect during the period. Accumulated foreign
currency translation adjustments were $(6.4) million and $(4.5) million at
December 31, 1999 and 1998, respectively.
Revenue Recognition
Revenue consists primarily of fees from rentals and the sale of related
rental products. The Company recognizes revenue over the period in which
vehicles are rented. The Company also receives franchise fees which are
recognized in the period in which the fee is earned from the franchisee.
Franchise fees recognized for each of the three years ended December 31, 1999
were not significant.
Income Taxes
The Company is included in the consolidated federal income tax return of
the Parent. All tax amounts have been recorded as if the Company filed a
separate federal tax return. The Company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes." Accordingly, deferred income
taxes have been provided to show the effect of temporary differences between the
recognition of revenue and expenses for financial and income tax reporting
purposes and between the tax basis of assets and liabilities and their reported
amounts in the financial statements.
Earnings Per Share
Historical earnings per share has not been presented because it would not
be meaningful. The Company currently has 100 shares of common stock, par value
$.01 per share outstanding, all of which are owned by the Parent. Immediately
prior to the Distribution (as defined in Note 16, Separation from Parent), the
Company will amend and restate its certificate of incorporation to authorize a
new class of common stock. Prior to the Distribution, all outstanding shares of
common stock of the Company held by the Parent will be converted into new shares
of Company common stock, which will constitute 100% of the outstanding shares of
common stock and which will be distributed to the Parent's stockholders.
F-9
89
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Derivative Financial Instruments
The Company utilizes interest rate protection agreements with several
counterparties to manage the impact of interest rate changes on the Company's
revenue earning vehicle debt obligations. The Company does not use derivative
financial instruments for trading purposes. Under interest rate swaps, caps and
floors, the Company agrees with other parties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate interest amounts
calculated by reference to an agreed notional principal amount. Income or
expense on derivative financial instruments used to manage interest rate
exposure is recorded on an accrual basis as an adjustment to the yield of the
underlying exposures over the periods covered by the contracts. If an interest
rate derivative is terminated early, any resulting gain or loss is deferred and
amortized as an adjustment of the cost of the underlying exposure position over
the remaining periods originally covered by the terminated derivative. If all or
part of an underlying position is terminated, the related pro-rata portion of
any unrecognized gain or loss on the derivative is recognized in income at that
time as part of the gain or loss on the termination. Amounts receivable or
payable under the agreements are included in other assets or accrued liabilities
in the accompanying Consolidated Balance Sheets and were not material at
December 31, 1999 or 1998.
Advertising
The Company expenses the cost of advertising as incurred or when such
advertising initially takes place. No advertising costs were capitalized at
December 31, 1999 or 1998. Advertising expense was $134.2 million, $125.1
million and $134.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Environmental Costs
The Company's operations involve the storage and dispensing of petroleum
products, primarily gasoline. The Company records as expense, on a current
basis, costs associated with remediation of environmental pollution. The Company
also accrues for its proportionate share of costs associated with the
remediation of environmental pollution when it becomes probable that a liability
has been incurred and the amount can be reasonably estimated. Estimated costs
include anticipated site testing, consulting, remediation, disposal, post-
remediation monitoring and legal fees, as appropriate. The liability does not
reflect possible recoveries from insurance companies or reimbursement of
remediation costs.
Statements of Cash Flows
The Company considers all highly liquid investments with purchased
maturities of three months or less to be cash equivalents unless the investments
are legally or contractually restricted for more than three months. The effect
of non-cash transactions related to business combinations, as discussed in Note
3, Business Combinations, is excluded from the accompanying Consolidated
Statements of Cash Flows. There were no other significant non-cash investing and
financing transactions during the years ended December 31, 1999, 1998 and 1997.
The Company made interest payments of approximately $339.5 million, $299.7
million and $210.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively, including interest on revenue earning vehicle debt. The Company
made income tax payments of approximately $79.0 million for the year ended
December 31, 1997, including amounts paid to the Parent, and made no income tax
payments for the years ended December 31, 1999 and 1998.
Cash flows from operating activities also includes non-cash Parent overhead
allocations and insurance charges that have been historically paid by
AutoNation. Non-cash Parent overhead and insurance charges were $207.2 million
for the year ended December 31, 1999, $204.6 million for the year ended December
31,
F-10
90
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 and $9.6 million for the year ended December 31, 1997. Following the
separation from the Parent, the Company will be required to pay its corporate
overhead and insurance claims.
New Accounting Pronouncement
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 amends FASB Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") by deferring the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. The Company will
adopt SFAS 133 beginning January 1, 2001. The Company has not yet quantified the
impact of adopting SFAS 133 on the Company's consolidated financial statements.
However, SFAS 133 could increase volatility in earnings and other comprehensive
income.
3. BUSINESS COMBINATIONS
Parent has acquired various automotive rental businesses using cash and/or
shares of its common stock ("Parent Common Stock"). These businesses were
contributed by the Parent to the Company subsequent to their acquisition. The
Company has applied the same accounting method used by the Parent in accounting
for business combinations.
Significant businesses acquired and accounted for under the pooling of
interests method of accounting have been included retroactively in the
Consolidated Financial Statements as if the companies had operated as one entity
since inception. Businesses acquired and accounted for under the purchase method
of accounting are included in the Consolidated Financial Statements from the
date of acquisition. The value of the Parent Common Stock issued to effect
business combinations accounted for under the purchase method of accounting is
based on the average market price of Parent Common Stock over a five day period
before and after the parties have reached agreement on the purchase price and
the proposed transaction has been publicly announced, if applicable.
During the year ended December 31, 1998, the Parent acquired certain
automotive rental businesses which were contributed to the Company. The
aggregate purchase price paid by the Parent in transactions accounted for under
the purchase method of accounting was $11.1 million in cash.
During the year ended December 31, 1997, the Parent acquired National,
Spirit Rent-A-Car, Inc. ("Spirit"), Value Rent-A-Car ("Value"), Snappy Car
Rental, Inc. ("Snappy") and EuroDollar Holdings plc ("EuroDollar"), all of which
were contributed to the Company. The aggregate purchase price paid by the Parent
for Value, Snappy and EuroDollar, which were accounted for under the purchase
method of accounting, was $237.4 million consisting of $127.0 million in cash,
$32.0 million in notes and 4.4 million shares of Parent Common Stock valued at
$78.4 million. In addition, the Parent issued an aggregate of 24.8 million
shares of Parent Common Stock to acquire National and Spirit which were
accounted for under the pooling of interests method of accounting.
F-11
91
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assets and liabilities contributed by the Parent to the Company based
upon the preliminary purchase price allocations for business combinations
accounted for under the purchase method of accounting were as follows:
YEARS ENDED
DECEMBER 31,
-----------------
1998 1997
------ -------
Revenue earning vehicles.................................... $ 26.8 $ 415.3
Property and equipment...................................... .3 33.4
Intangible and other assets................................. 12.9 374.3
Working capital............................................. (2.1) (136.6)
Debt assumed................................................ (27.8) (475.0)
Other liabilities........................................... (1.1) (9.9)
Cash acquired............................................... 2.1 3.9
------ -------
Investment by Parent........................................ $ 11.1 $ 205.4
====== =======
The pro forma effect of 1998 acquisitions accounted for under the purchase
method of accounting on the Company's results of operations is not material and
therefore has not been presented herein. The Company's unaudited pro forma
consolidated results of operations for the year ended December 31, 1997 assuming
acquisitions accounted for under the purchase method of accounting had occurred
as of the beginning of the period is as follows:
Revenue..................................................... $3,344.6
Income before extraordinary charge.......................... 48.6
Net income.................................................. 46.1
The unaudited pro forma results of operations are presented for
informational purposes only and may not necessarily reflect the future results
of the Company or what the results of operations would have been had the Company
owned and operated these businesses as of the beginning of the period.
F-12
92
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. REVENUE EARNING VEHICLE DEBT
Parent has guaranteed the Company's performance under its revenue earning
vehicle debt. Revenue earning vehicle debt is as follows:
DECEMBER 31,
--------------------
1999 1998
-------- --------
Amounts under various commercial paper programs secured by
eligible vehicle collateral; interest based on
market-dictated commercial paper rates; weighted average
interest rates of 6.14% and 5.54% at December 31, 1999 and
1998, respectively........................................ $1,358.8 $3,363.2
Amounts under various medium-term note programs secured by
eligible vehicle collateral:
Fixed rate component; weighted average interest rates of
6.30% and 7.12% at December 31, 1999 and 1998,
respectively; maturities through 2005.................. 1,750.0 655.9
Floating rate component based on a spread over LIBOR;
weighted average interest rates of 6.72% and 5.80% at
December 31, 1999 and 1998, respectively; maturities
through 2005........................................... 1,250.0 143.7
Other uncommitted secured vehicle financings primarily with
financing institutions in the United Kingdom; LIBOR based
interest rates; weighted average interest rates of 4.99%
and 6.16% at December 31, 1999 and 1998, respectively..... 172.8 215.1
-------- --------
$4,531.6 $4,377.9
======== ========
At December 31, 1999, the Company had commercial paper programs aggregating
$1.99 billion. The $1.99 billion program is supported by bank lines of credit of
$1.79 billion terminating in February 2000 which provide liquidity backup for
the facility, as well as letters of credit totaling $200.0 million, which
provide credit enhancement and additional liquidity backup for the facilities.
In February 2000, the commercial paper program was reduced from $1.99 billion to
$1.89 billion, as the bank lines of credit supporting the program were reduced
to $1.69 billion, with termination extended to April 2000. As of April 24, 2000,
the Company received commitments from lenders to extend the termination date of
$1.42 billion of lines of credit to the earlier of July 2000 or the consummation
of the separation from the Parent. These commitments, together with $200 million
letters of credit, result in a commercial paper program currently aggregating
$1.62 billion.
In 1999, the Company issued $2.5 billion of rental vehicle asset-backed
medium-term notes. The Company fixed the effective interest rate on the $1.25
billion floating rate notes at 6.03% through the use of certain derivative
transactions. At December 31, 1999, letters of credit totaling $250.0 million
provided credit enhancement for the notes.
The weighted average interest rate on total revenue earning vehicle debt
was 6.32% and 5.82% at December 31, 1999 and 1998, respectively. Interest
expense on revenue earning vehicle debt is included as a component of cost of
operations in the accompanying Consolidated Statements of Income and
Comprehensive Income.
F-13
93
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, aggregate maturities of revenue earning vehicle debt
were as follows:
2000........................................................ $1,528.4
2001........................................................ 3.2
2002........................................................ 325.0
2003........................................................ 1,475.0
2004........................................................ 0.0
Thereafter.................................................. 1,200.0
--------
$4,531.6
========
5. OTHER DEBT
Other debt is as follows:
DECEMBER 31,
----------------
1999 1998
------ ------
Notes payable to vehicle manufacturer; weighted average
interest rates of 5.56% and 6.12% at December 31, 1999 and
1998, respectively; matures 2002.......................... $ 35.0 $ 45.5
Notes payable to former owners of acquired business;
interest payable using LIBOR based rates; weighted average
interest rates of 5.12% and 7.02% at December 31, 1999 and
1998, respectively; redeemable at the option of the holder
through maturity in 2003.................................. 11.9 25.3
Other uncommitted credit facilities and other notes;
interest ranging from 2.5% to 6.5%; maturing through 2000;
guaranteed by Parent...................................... 60.5 61.2
------ ------
$107.4 $132.0
====== ======
At December 31, 1999 aggregate maturities of other debt are as follows:
$72.4 million in 2000 and $35.0 million in 2002.
6. INCOME TAXES
The components of the provision (benefit) for income taxes for the years
ended December 31 are as follows:
1999 1998 1997
------ ------ ------
Current:
Federal.............................................. $(60.3) $ (7.1) $ 61.6
State................................................ (6.3) (.4) 4.3
Foreign.............................................. 1.2 -- --
Federal and state deferred............................. 56.2 78.7 (29.7)
Foreign deferred....................................... (9.6) (9.9) (4.4)
------ ------ ------
Provision (benefit) for income taxes................... $(18.8) $ 61.3 $ 31.8
====== ====== ======
F-14
94
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate for the years ended December 31 is as follows:
1999 1998 1997
----- ---- ----
Statutory federal income tax rate........................... (35.0)% 35.0% 35.0%
Non-deductible expenses..................................... 14.9 1.2 1.7
State income taxes, net of federal benefit.................. (1.8) 2.2 2.5
Foreign income tax provision (benefit) at other than U.S.
rates..................................................... 0.6 (2.4) (1.1)
Other, net.................................................. -- -- (.9)
----- ---- ----
Effective tax rate.......................................... (21.3)% 36.0% 37.2%
===== ==== ====
Components of the net deferred income tax liability at December 31 are as
follows:
1999 1998
------- -------
Deferred income tax liabilities:
Book basis in property over tax basis..................... $ 334.5 $ 289.6
Deferred income tax assets:
Net operating losses and carryforwards.................... (69.5) (75.4)
Accruals not currently deductible......................... (136.0) (143.5)
Valuation allowance......................................... 16.0 16.0
------- -------
Net deferred income tax liability........................... $ 145.0 $ 86.7
======= =======
At December 31, 1999, the Company had available domestic net operating loss
carryforwards of approximately $10.7 million which begin to expire in the year
2009 and foreign net operating loss carryforwards of approximately $125.9
million, the majority of which have an indefinite carryforward. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The Company provides valuation allowances to offset portions of
deferred tax assets due to uncertainty surrounding the future realization of
such deferred tax assets. The Company adjusts the valuation allowance in the
period management determines it is more likely than not that deferred tax assets
will or will not be realized.
The foreign losses included in income before income taxes and extraordinary
charges for the years ended December 31, 1999, 1998 and 1997 were $(61.8)
million, $(28.8) million and $(11.5) million, respectively.
7. INVESTMENT BY PARENT
The changes in the investment by Parent are as follows:
1999 1998 1997
------ ------ -------
Balance at beginning of period.............................. $743.2 $529.1 $ 329.1
Net income (loss)........................................... (71.0) 108.8 51.2
Transactions with Parent:
Parent overhead allocations............................... 35.4 30.0 9.6
Insurance and benefit charges............................. 171.8 174.6 --
Intercompany purchases.................................... 6.9 (4.9) 7.3
Income taxes.............................................. (92.0) (7.5) 65.9
Cash transfers............................................ (61.3) (98.0) (139.4)
Business acquisitions contributed by Parent............... -- 11.1 205.4
------ ------ -------
60.8 105.3 148.8
------ ------ -------
Balance at end of period.................................... $733.0 $743.2 $ 529.1
====== ====== =======
F-15
95
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS
Parent has various stock option plans under which shares of Parent Common
Stock may be granted to key employees of the Company. Options granted under the
plans are non-qualified and are granted at a price equal to the quoted market
price of the Parent Common Stock at the date of grant. Generally, options
granted will have a term of ten years from the date of grant, and will vest in
increments of 25% per year over a four year period on the yearly anniversary of
the grant date. As of December 31, 1999, approximately 6.4 million outstanding
options to acquire shares of Parent Common Stock were held by employees of the
Company. None of the options to purchase Parent Common Stock will be converted
into options to purchase shares of Company Common Stock.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for stock-based employee
compensation arrangements whereby no compensation cost related to stock options
is deducted in determining net income. Had compensation cost for stock option
grants under the Parent's stock option plans been determined pursuant to SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income
would have decreased accordingly. Using the Black-Scholes option pricing model
for all options granted after December 31, 1994, the Company's pro forma net
income (loss) and pro forma weighted average fair value of options granted, with
related assumptions, are as follows for the years ended December 31:
1999 1998 1997
-------- ------- -------
Pro forma net income (loss).............................. $ (84.6) $ 95.6 $ 45.8
Pro forma weighted average fair value of options
granted................................................ 7.15 13.87 10.03
Risk free interest rates................................. 6.34% 4.76% 5.74%
Expected lives........................................... 5 years 5 years 5 years
Expected volatility...................................... 40% 40% 40%
The ANC Rental Corporation Stock Option Plan is subject to approval of the
Company's Board of Directors and sole stockholder and will become effective only
upon completion of the spin-off. The Company expects to receive shareholder
approval from Parent prior to the Distribution date to provide for the grant of
options to purchase shares of the Company's common stock to eligible employees.
Grants under the Company's stock option plan will be granted with an exercise
price equal to the fair market value of the Company's common stock on the date
of grant.
9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is a party to various legal proceedings which have arisen in
the ordinary course of business. While the results of these matters cannot be
predicted with certainty, the Company believes that losses, if any, resulting
from the ultimate resolution of these matters will not have a material adverse
effect on the Company's consolidated results of operations, cash flows or
financial position. However, unfavorable resolution could affect the
consolidated results of operations or cash flows for the quarterly periods in
which they are resolved.
Lease Commitments
The Company and its subsidiaries lease real property, equipment and
software under various operating leases with terms from 1 to 25 years. The
Company has also entered into various airport concession and permit agreements
which generally provide for payment of a percentage of revenue from vehicle
rentals with a guaranteed minimum lease obligation.
F-16
96
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Expenses under real property, equipment and software leases and airport
concession and permit agreements (excluding amounts charged through to
customers) for the years ended December 31 are as follows:
1999 1998 1997
------ ------ ------
Real property............................................... $ 56.6 $ 58.3 $ 51.1
Equipment and software...................................... 16.6 24.0 38.9
Airport concession and permit fees:
Minimum fixed obligations................................. 102.7 79.3 86.3
Additional amounts, based on revenue from vehicle
rentals................................................ 85.7 96.4 110.0
------ ------ ------
Total............................................. $261.6 $258.0 $286.3
====== ====== ======
Future minimum lease obligations under noncancelable real property,
equipment and software leases and airport agreements with initial terms in
excess of one year at December 31, 1999 are as follows:
Year Ending December 31:
2000........................................................ $152.6
2001........................................................ 94.0
2002........................................................ 72.2
2003........................................................ 50.7
2004........................................................ 31.5
Thereafter.................................................. 118.1
------
$519.1
======
Other Matters
In the normal course of business, the Company is required to post
performance and surety bonds, letters of credit, and/or cash deposits as
financial guarantees of the Company's performance. To date, the Company has
satisfied financial responsibility requirements for regulatory agencies and
insurance companies by making cash deposits, obtaining surety bonds or by
obtaining bank letters of credit. At December 31, 1999, the Company had
outstanding surety bonds and letters of credit totaling $138.5 million which
expire through 2012.
10. RESTRUCTURING AND OTHER CHARGES
During the fourth quarter of 1999, the Company approved and announced plans
to significantly restructure its operations. The restructuring plan (the "Plan")
includes provisions for the consolidation of the North American headquarters,
headcount reductions, and the closure of certain marginally profitable or
unprofitable domestic and international locations, as well as the reduction of
fleet.
F-17
97
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Plan, the Company recorded a pre-tax restructuring
charge of $40.5 million in the fourth quarter of 1999 consisting of the
following:
Restructuring North American Operations:
Severance and severance related costs (for approximately
500 employees)......................................... $12.8
Facility impairments...................................... 5.2
Contractual facility lease payments....................... 3.3
Other restructuring related costs......................... .7
-----
Total restructuring North American Operations..... $22.0
-----
Restructuring International Operations:
Asset impairments for goodwill, fleet, and other assets
for exited foreign operations.......................... $13.6
Contractual facility lease payments....................... 4.7
Other restructuring related costs......................... .2
-----
Total restructuring International Operations...... $18.5
-----
Total restructuring............................... $40.5
=====
In addition to the North American charge for severance, the Company plans
to incur future retention charges to terminated employees during the transition
period, approximating $8.8 million. The Company expects the majority of the
retention payments to be paid in June and September 2000. The contractual
facility lease payments in North America primarily relate to leases for two
separate locations; $2.0 million of which related to a lease terminating in 2006
and $1.1 million of which relates to a lease terminating in 2003. The Company
expects the lease payments to be incurred evenly for the remainder of the
respective leases.
International contractual facility payments cover a number of locations
with varied lease terms ranging from 2 to 15 years.
Overall the Company expects to be substantially completed with all of its
restructuring activities by the end of 2000, except for those payments remaining
under non-cancelable agreements.
During the year ended December 31, 1997, the Company recorded pre-tax
charges of approximately $78.0 million associated with integrating the Company's
operations. The primary components of this charge are as follows: $25.0 million
related to elimination of redundant information systems; $18.0 million related
to fleet consolidation; and $35.0 million related to closure or sale of
duplicate rental facilities and other non-recurring expenses. Through December
31, 1999, the Company has spent approximately $45.3 million related to
restructuring activities and has recorded $21.2 million of these restructuring
charges against certain assets. As of December 31, 1999, approximately $11.5
million remained in accrued liabilities related to these charges. The Company
expects the majority of these reserves to be utilized during 2000, however,
certain contractual obligations for closed locations extend through 2002.
11. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risks arising from changes in interest
rates. Due to its limited foreign operations, the Company does not have material
market risk exposures relative to changes in foreign exchange rates.
Credit Exposure
The Company is exposed to credit related losses in the event of
non-performance by counterparties to certain derivative financial instruments.
The Company monitors the credit worthiness of the counterparties
F-18
98
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and presently does not expect default by any of the counterparties. The Company
does not obtain collateral in connection with its derivative financial
instruments.
The credit exposure that results from interest rate contracts is
represented by the fair value of contracts with a positive fair value as of the
reporting date. See Note 12, Fair Value of Financial Instruments, for the fair
value of derivatives. The Company's credit exposure on its interest rate
derivatives was not material at December 31, 1999 or 1998.
Interest Rate Risk Management
The Company uses interest rate swap agreements and interest rate caps and
floors to manage the impact of interest rate changes on the Company's variable
rate revenue earning vehicle debt. The amounts exchanged by the counterparties
to interest rate swap agreements and interest rate caps and floors are based
upon the notional amounts and other terms, generally related to interest rates,
of the derivatives. While notional amounts of interest rate swaps, caps and
floors form part of the basis for the amounts exchanged by the counterparties,
the notional amounts are not themselves exchanged and, therefore, do not
represent a measure of the Company's exposure as an end user of derivative
financial instruments. At December 31, 1999 and 1998, notional principal amounts
related to interest rate swaps, caps and floors (variable to fixed rate) were
$1.85 billion and $2.45 billion, respectively. The aggregate swap, cap and floor
portfolio notional maturities are as follows at December 31, 1999: $300.0
million in 2000; $100.0 million in 2001; $750.0 million in 2003; and $700.0
million in 2005. At December 31, 1999 the weighted average fixed rate payment on
variable to fixed rate swaps, caps and floors was 5.78%. At December 31, 1999
approximately 32.4% of variable rates received are indexed to the Commercial
Paper Nonfinancial Rate and approximately 67.6% are indexed to the One-Month
LIBOR Rate.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. The assumptions
used have a significant effect on the estimated amounts reported.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
- Cash and cash equivalents, restricted cash and cash equivalents, trade
and manufacturer receivables, other assets, accounts payable, accrued
liabilities, other liabilities and variable rate debt: The amounts
reported in the accompanying Consolidated Balance Sheets approximate fair
value.
- Medium-term notes payable: The fair value of medium-term notes payable is
estimated based on the quoted market prices for the same or similar
issues.
- Other fixed rate debt: The fair value of other fixed rate debt is based
upon the discounted expected cash flows at rates then offered to the
Company for debt of similar terms.
- Interest rate swaps, caps and floors: The fair value of interest rate
swaps is determined from dealer quotations and represents the discounted
future cash flows through maturity or expiration using current rates, and
is effectively the amount the Company would pay or receive to terminate
the agreements.
F-19
99
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the carrying amounts and fair values of the
Company's financial instruments, except for those noted above for which carrying
amounts approximate fair value, as of December 31:
1999 1998
--------------------- ------------------
CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
-------------------- --------- --------- -------- -------
Medium-term notes payable...................... $(3,000.0) $(2,944.3) $(799.6) $(813.6)
Other fixed rate debt.......................... -- -- (10.5) (10.5)
Interest rate swaps............................ -- 6.8 -- (45.3)
Interest rate caps............................. -- 66.4 -- --
Interest rate floors........................... -- (15.2) -- --
13. BUSINESS AND CREDIT CONCENTRATIONS
The Company owns and operates vehicle rental facilities primarily in the
United States, Europe and Canada. The automotive rental industry in which the
Company operates is highly seasonal.
Approximately 29% of the domestic business is concentrated at its top ten
rental locations which are located in major tourist and business travel
destinations including Orlando, Los Angeles, Miami, Atlanta, San Francisco, Fort
Lauderdale, Las Vegas, Chicago, Boston and Detroit.
The Company enters into vehicle repurchase programs with one principal
vehicle manufacturer, as well as other vehicle manufacturers. At December 31,
1999 and 1998, the Company had vehicle receivables from manufacturers of $302.6
million and $372.1 million, respectively. During model year 1999, the Company
purchased approximately 62% of its world-wide vehicle fleet under repurchase
programs with one vehicle manufacturer.
Concentrations of credit risk with respect to non-vehicle manufacturer
receivables are limited due to the wide variety of customers and markets in
which services are provided as well as their dispersion across many different
geographic areas primarily in the United States. Consequently, at December 31,
1999, the Company does not consider itself to have any significant non-vehicle
manufacturer receivable concentrations of credit risk.
14. RELATED PARTY TRANSACTIONS
Parent's corporate general and administrative costs not specifically
attributable to its operating subsidiaries have been allocated to the Company
based upon the ratio of the Company's invested capital to the Parent's
consolidated invested capital. Such allocations are included in the Company's
selling, general and administrative expenses and were approximately $16.0
million, $14.8 million and $9.6 million for the years ended December 31, 1999,
1998 and 1997, respectively. In addition, the Parent's corporate general and
administrative costs for certain centralized functions have been allocated to
the Company using various proportional cost allocation methods. These
allocations are also included in selling, general and administrative expenses
and were approximately $19.4 million and $15.2 million during the years ended
December 31, 1999 and 1998, respectively. These combined allocations approximate
management's estimate of the Parent's corporate general and administrative costs
required to support the Company's operations. As noted in Note 7, Investment by
Parent, these charges have been reflected as a contribution from the Parent in
the accompanying Consolidated Financial Statements. Management believes that the
amounts allocated to the Company are reasonable and are no less favorable to the
Company than the expenses the Company would incur to obtain such services on its
own or from unaffiliated third parties.
F-20
100
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company purchased revenue earning vehicles from certain franchised
automotive dealerships owned by the Parent totaling approximately $4.0 billion,
$3.5 billion and $915.9 million during the years ended December 31, 1999, 1998
and 1997, respectively.
The Company has corporate rental car contracts with the Parent and certain
of its subsidiaries. Amounts charged under these contracts are consistent with
amounts charged to unaffiliated customers and are not material to the Company's
financial position, results of operations or cash flows.
Commencing in 1998 (for claims occurring after November 30, 1997), the
Company began purchasing auto liability, general liability and workers'
compensation insurance from an affiliate of the Parent. The Company was charged
premiums of approximately $111.0 million and $138.5 million during the years
ended December 31, 1999 and 1998, respectively, related to these programs. In
addition, in 1998 the Company began participating in the Parent's health
insurance programs. The Company was charged premiums of approximately $60.8
million and $36.1 million during the years ended December 31, 1999 and 1998,
respectively, related to these programs. As noted in Note 7, Investment by
Parent, these charges have been reflected as a contribution from the Parent in
the accompanying Consolidated Financial Statements.
Pro Player Stadium, a professional sports stadium in South Florida which is
owned and controlled by a proposed director of the Company, provided signage
within Pro Player Stadium to subsidiaries of the Company with a fair market
value of approximately $140,000 at no cost to these subsidiaries.
In September 1998, National entered into an agreement to purchase the
naming rights to the Broward County Arena for $2.2 million per year. The Arena
is owned by Boca Resorts, Inc. The Company's proposed Chairman of the Board is a
director of Boca Resorts, and a proposed director of the Company is the Chairman
of the Board of Boca Resorts. In addition, a proposed director of the Company
beneficially owns approximately 17.9% of Boca Resorts' outstanding stock and
controls a majority of its voting interests. The Arena agreement has a term of
ten years and provides that the fees will increase at a rate of 3% a year. In
addition, during 1999 the Company paid approximately $450,000 for tickets,
sponsorship and the use of executive suites. During 1999, the Company utilized
certain hotels owned by Boca Resorts. The amounts paid for the use of these
facilities were at market rates and, in the aggregate, were not material to the
Company's financial position, results of operations, or cash flows.
The Company's proposed Chairman has a beneficial ownership interest in
Certified Vacations, Inc., a domestic tour operator that has conducted business
with the Company. Total gross revenue recognized from Certified Vacations was
approximately $9.3 million for the year ended December 31, 1999. In addition,
the Company made marketing payments of approximately $170,000 to Certified
Vacations during 1999.
Before the spin-off the Company may enter into two leases with Parent or an
affiliate of Parent: (1) a lease for approximately 161,000 square feet of office
space to serve as the Company's corporate headquarters and (2) a lease for
approximately 31,600 square feet of computer data center space at Parent's data
center. Both properties are located in Fort Lauderdale, Florida.
Payments due under the lease for the corporate headquarters will total
approximately $1,930,000 per year, or approximately $12.00 per square foot, for
a 10 year term. In addition, the Company will pay operating expenses, real
estate taxes, insurance and utilities of the facility. The Company will have an
option to extend the term for two additional periods of five years each. The
lease payments will be increased on the fifth and eighth anniversary of the
start of the lease. Increases in lease payments will be based on increases in
the Consumer Price Index. In no event will the adjusted lease payment for the
fifth year be lower than the initial rate or more than 15% higher. In no event
will the adjusted lease payment for the eighth year be lower than the seventh
year or more than 9% higher.
Payments due under the lease for the computer data center space will total
approximately $869,000 per year or $27.45 per square foot, which includes the
Company's proportionate share of the operating expenses,
F-21
101
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
real estate taxes, insurance and utilities of the facility. The lease will have
an initial term of two years, with an option to extend the term for an
additional two years.
The Company believes that both lease payments approximate fair market value
and that the terms of the leases are no less favorable than could be obtained
from persons unrelated to the Company.
Before the spin-off, the Company will enter into a transitional services
agreement with Parent. The services agreement will have an initial term expiring
one year from the spin-off date. At any time during the term of the services
agreement either Parent or the Company may reduce or completely eliminate the
amount of services obtained from the other party and, consequently, the monthly
fees payable under the services agreement would be adjusted to terms mutually
acceptable to the Company and Parent. At the end of the one-year term, if the
parties have not terminated the agreement earlier, either party may renew or
extend the term of the agreement with respect to the provision of any services
that have not previously been terminated on terms mutually acceptable to the
parties. The Company believes that the fees it will pay and receive for the
services received and provided will be no less favorable than the Company could
obtain from persons unrelated to the Company.
15. SEGMENT INFORMATION
The Company follows Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," ("SFAS
131") which requires certain segment financial information to be disclosed on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources. Management reviews its operating results and
makes resource allocation decisions based primarily upon geographic regions. The
Company's management segments are defined as (1) North American-Rental Group,
comprising Alamo and National operations in the United States and Canada, (2)
International, comprising Alamo and National operations located primarily in
Europe and (3) CarTemps USA, primarily operating in the United States. The
Company believes its management segments exhibit similar economic
characteristics, share the same product, types of customers and points of
service. Accordingly, as permitted under SFAS 131, for financial reporting
purposes the Company has aggregated its management segments into one segment,
automotive rental.
The Company operates primarily in the United States, Europe and Canada.
Revenue generated from company-owned automotive rental locations is recorded in
the country in which the vehicle is rented. Revenue generated from licensees is
recognized in the country in which the revenue is received. The accounting
policies of each geographic area are the same as those described in the summary
of significant accounting policies (see Note 2). The following table presents
geographic financial information as of and for the years ended December 31:
1999
---------------------------------------
DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------
Revenue.............................................. $3,073.7 $468.6 $3,542.3
Total assets......................................... 5,831.6 517.9 6,349.5
1998
---------------------------------------
DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------
Revenue.............................................. $3,015.6 $438.0 $3,453.6
Total assets......................................... 5,658.4 594.2 6,252.6
F-22
102
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997
---------------------------------------
DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------
Revenue.............................................. $2,767.0 $288.1 $3,055.1
Total assets......................................... 5,068.8 801.5 5,870.3
16. SEPARATION FROM PARENT
In August 1999, Parent announced its intention to separate the automotive
rental businesses and operations that comprise the Company, and the associated
assets and liabilities of such businesses and operations (the "Separation"). In
September 1999, Parent announced its intention to distribute its entire interest
in the Company on a tax-free basis to Parent's shareholders, subject to certain
conditions and consents (the "Distribution"). The Company and Parent have
entered into or will, prior to the Distribution, enter into certain agreements
providing for the Separation and governing various interim and ongoing
relationships between the companies, including an agreement between the Company
and Parent providing for the purchase by the Company of certain services from
Parent, and for the purchase by Parent of certain services from the Company.
Reference is made to the discussion under "Relationship Between AutoNation
and ANC Rental after the Spin-off" elsewhere in the Company's Registration
Statement on Form 10 for a description of agreements related to sharing of
contingent liabilities, tax allocation and indemnification matters, and other
matters arising out of the Separation and Distribution.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's operations, and particularly the leisure travel market, are
highly seasonal. In these operations, the third quarter, which includes the peak
summer travel months, has historically been the strongest quarter of the year.
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.
The first and fourth quarters for the Company's operations are generally the
weakest, because of limited leisure travel and a greater potential for adverse
or unseasonable weather conditions to impact the Company's operations. Many of
the operating expenses such as rent, general insurance and administrative
personnel remain fixed throughout the year and cannot be reduced during periods
of decreased rental demand.
The fourth quarter of 1999 includes restructuring charges relative to the
Plan of approximately $40.5 million.
The following is an analysis of certain items in the Consolidated
Statements of Operations by quarter for 1999 and 1998.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------
Revenue.............................. 1999 $791.0 $892.7 $1,023.3 $ 835.3
1998 775.7 864.8 1,005.6 807.5
Operating income (loss).............. 1999 (9.0) 25.5 30.5 (123.3)
1998 15.4 41.4 105.8 16.3
Net income (loss).................... 1999 (7.7) 13.8 18.5 (95.6)
1998 9.2 25.8 65.5 8.3
F-23
103
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENTS
In conjunction with the spin-off from the Parent, a financing commitment
has been negotiated, which, if completed, will be available for general
corporate purposes and to modify existing revenue earning vehicle financing
programs by replacing letters of credit with cash and/or repayment of
outstanding revenue earning vehicle financing. The Company currently plans to
enter into a three-year secured revolving credit facility of up to $175.0
million at a floating rate initially based upon a spread above LIBOR. The
secured credit facility will be subject to certain eligible receivable and real
estate collateral limits and the results of an independent third party review of
these and other assets. The Company also expects to enter into a one-year
unsecured credit facility with availability of the lesser of (1) $40.0 million
and (2) an amount equal to $175.0 million less the borrowing base of the secured
credit facility. In addition, the Company plans to issue approximately $225.0
million of senior notes at terms that have yet to be set, however the Company
believes the interest rate will approximate like securities for non-investment
grade companies of similar credit quality in our industry. The Company currently
estimates that the term will not exceed ten years. The Company expects the
closing of the revolving credit facility and of the sale of the senior notes to
occur before the spin-off date. The closing of the currently proposed financings
is subject to, among other customary conditions for financings of these types,
meeting certain profitability measures, infusion of equity from the Parent, the
continued support of the Parent in the form of guarantees and/or letters of
credit and the absence of any material adverse change in the financial or
capital markets generally or in the markets for high yield debt securities in
particular.
In addition to the debt financing previously discussed, the Parent plans to
contribute $200.0 million of cash equity to be used to replace existing letters
of credit supporting revenue earning vehicle financing through restricted cash
deposits and/or reductions in revenue earning vehicle debt. In February 2000,
the Parent contributed $180.0 million of the expected $200.0 million. The
Company expects the remainder of the cash equity infusion from the Parent to be
funded on or before the spin-off date.
F-24
104
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1** Form of Separation and Distribution Agreement to be entered
into by and between AutoNation and ANC Rental.
3.1** Amended and Restated Certificate of Incorporation of ANC
Rental.
3.2** Amended and Restated Bylaws of ANC Rental.
4.1** Form of Specimen Stock Certificate of ANC Rental common
stock.
4.2 Master Motor Vehicle Lease and Servicing Agreement dated as
of February 26, 1999 among National Car Rental System, Inc.,
as lessee, National Car Rental Financing Limited
Partnership, as lessor, and AutoNation, Inc., as guarantor
(incorporated by reference to Exhibit 4.1 to AutoNation's
Quarterly Report on Form 10-Q for the Quarter Ended March
31, 1999).
4.3 Series 1999-1 Supplement dated as of February 26, 1999
between National Car Rental Financing Limited Partnership
("NFLP"), and The Bank of New York, as Trustee (the
"Trustee") to the Base Indenture, dated as of April 30, 1996
between NFLP and the Trustee, as amended by the supplement
and amendment to the Base Indenture, dated as of December
20, 1996, between NFLP and the Trustee (incorporated by
reference to Exhibit 4.2 to AutoNation's Quarterly Report on
Form 10-Q for the Quarter ended March 31, 1999).
4.4 Base Indenture dated as of February 26, 1999 between ARG
Funding Corp. and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.3 to AutoNation's
Quarterly Report on Form 10-Q for the Quarter ended March
31, 1999).
4.5 Series 1999-1 Supplement dated as of February 26, 1999
between ARG Funding Corp. and The Bank of New York, as
Trustee to the ARG Base Indenture (incorporated by reference
to Exhibit 4.4 to AutoNation's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1999).
4.6 Third Amended and Restated Master Collateral Agency
Agreement dated as of February 26, 1999 among National Car
Rental System, Inc., Alamo Rent-A-Car, Inc. and Spirit
Rent-A-Car, Inc. d/b/a CarTemps USA, Alamo Financing, L.P.,
National Car Rental Financing Limited Partnership and
CarTemps Financing, L.P., as lessor grantors, AutoNation,
Inc., as master servicer and Citibank, N.A., as master
collateral agent (incorporated by reference to Exhibit 4.5
to AutoNation's Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1999).
5.1** Opinion of Akerman, Senterfitt & Eidson, P.A. regarding the
validity of the securities to be distributed in the
spin-off.
10.1** Form of Tax Sharing Agreement to be entered into by and
between AutoNation and ANC Rental.
10.2** Form of Transitional Services Agreement to be entered into
by and between AutoNation and ANC Rental.
10.3 Letter Agreement between Alamo Rent-A-Car, Inc. and General
Motors Corporation dated November 18, 1997 (incorporated by
reference to Exhibit 10.25 to AutoNation's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.4 Letter Agreement between National Car Rental System, Inc.
and General Motors Corporation dated November 18, 1997
(incorporated by reference to Exhibit 10.26 to AutoNation's
Annual Report on Form 10-K for the year ended December 31,
1997).
105
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.5 Letter Agreement between National Car Rental System, Inc.
and General Motors Corporation dated December 16, 1998
(incorporated by reference to Exhibit 10.22 to AutoNation's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.6 Letter Agreement between Alamo Rent-A-Car, Inc. and General
Motors Corporation dated December 16, 1998 (incorporated by
reference to Exhibit 10.23 to AutoNation's Annual Report on
Form 10-K for the year ended December 31, 1998).
10.7** Form of Lease Agreement by and between ANC Rental and
AutoNation.
10.8** Form of Lease Agreement by and between ANC Rental and
AutoNation.
10.9* Employment Agreement with Dennis M. Custage.
10.10* Employment Agreement with Macdonald Clark.
10.11* Supplemental Letter regarding Employment Agreement with
Macdonald Clark.
21.1** Subsidiaries of ANC Rental.
23.1 Consent of Akerman, Senterfitt & Eidson, P.A. (included in
Exhibit 5.1 to this document).
27.1* Financial Data Schedule for the Year Ended December 31, 1999
(For SEC use only).
27.2* Financial Data Schedule for the Year Ended December 31, 1998
(For SEC use only).
27.3* Financial Data Schedule for the Year Ended December 31, 1997
(For SEC use only).
99.1 Information Statement, preliminary and subject to
completion, dated as of April 24, 2000, attached to this
Registration Statement as Annex A.
- -------------------------
* Previously filed
** To be filed by amendment