1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
-----------------------------
COMMISSION FILE NUMBER 0-30776
-----------------------------
ANC RENTAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-0957875
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 SOUTH ANDREWS AVENUE,
FORT LAUDERDALE, FLORIDA 33301
(Address of principal executive offices) (Zip Code)
(954) 320-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] (#1) No [X] (#2)
As of July 31, 2000, the registrant had outstanding 45,142,728 shares of Common
Stock, par value $0.01 per share.
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ANC RENTAL CORPORATION
INDEX
PAGE
----
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and
December 31, 1999.......................... 1
Unaudited Condensed Consolidated Statements
of Income and Comprehensive Income for the
Three Months and Six Months Ended June 30,
2000 and 1999................................. 2
Unaudited Condensed Consolidated Statement of
Shareholders' Equity for the Six Months Ended
June 30, 2000................................. 3
Unaudited Condensed Consolidated Statements
of Cash Flows for the Six Months Ended June
30, 2000 and 1999............................. 4
Notes to Condensed Consolidated Financial
Statements.................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................... 19
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.................................. 20
Item 2. Changes in Securities and Use of Proceeds.......... 20
Item 3. Defaults Upon Senior Securities.................... 20
Item 4. Submission of Matters to Vote of Security
Holders.......................................... 20
Item 5. Other Information.................................. 20
Item 6. Exhibits and Reports on Form 8-K................... 20
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANC RENTAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 10.3 $ 17.4
Restricted cash and cash equivalents........................ 273.1 155.3
Receivables, net............................................ 433.7 590.5
Prepaid expenses............................................ 79.4 75.1
Revenue earning vehicles, net............................... 5,583.2 4,501.3
Investments................................................. 45.9 --
Property and equipment, net................................. 591.3 622.7
Intangible assets, net...................................... 353.2 358.4
Other assets................................................ 75.4 28.8
-------- --------
Total assets...................................... $7,445.5 $6,349.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 338.4 $ 277.6
Accrued liabilities......................................... 254.0 302.3
Insurance reserves.......................................... 286.8 105.6
Revenue earning vehicle debt................................ 4,939.0 4,531.6
Other debt.................................................. 332.8 107.4
Deferred income taxes....................................... 134.1 145.0
Other liabilities........................................... 266.1 153.4
-------- --------
Total liabilities................................. 6,551.2 5,622.9
-------- --------
Commitments and contingencies
Shareholders' equity:
Investment by Parent................................... -- 733.0
Preferred stock, par value $.001 per share; 10,000,000
shares authorized; none issued........................ -- --
Common stock, par value $.01 per share; 250,000,000
shares authorized; 45,142,728 issued and
outstanding........................................... .5 --
Additional paid-in capital............................. 897.5 --
Accumulated other comprehensive loss................... (3.7) (6.4)
-------- --------
894.3 726.6
-------- --------
Total liabilities and shareholders' equity........ $7,445.5 $6,349.5
======== ========
The accompanying notes are an integral part of these statements.
1
4
ANC RENTAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
2000 1999 2000 1999
------- ------- -------- --------
Revenue............................................ $910.6 $892.7 $1,721.2 $1,683.8
Expenses:
Cost of operations............................... 686.1 684.0 1,341.0 1,317.3
Selling, general and administrative.............. 193.5 183.2 385.7 350.0
------ ------ -------- --------
Operating income (loss)............................ 31.0 25.5 (5.5) 16.5
Interest income.................................... .5 .4 .6 .4
Interest expense................................... (3.5) (4.3) (7.0) (7.6)
Other income (expense), net........................ (2.6) (.1) (2.9) .2
------ ------ -------- --------
Income (loss) before income taxes.................. 25.4 21.5 (14.8) 9.5
Provision (benefit) for income taxes............... 9.9 7.7 (5.8) 3.4
------ ------ -------- --------
Net income (loss).................................. 15.5 13.8 (9.0) 6.1
------ ------ -------- --------
Other comprehensive income (loss):
Foreign currency translation adjustments...... 1.5 (.7) 2.7 (1.1)
------ ------ -------- --------
Comprehensive income (loss)........................ $ 17.0 $ 13.1 $ (6.3) $ 5.0
====== ====== ======== ========
Basic and diluted earnings (loss) per share........ $ .34 $ .31 $ (.20) $ .14
====== ====== ======== ========
Weighted average common shares outstanding......... 45.1 45.1 45.1 45.1
====== ====== ======== ========
The accompanying notes are an integral part of these statements.
2
5
ANC RENTAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
INVESTMENT ---------------- PAID-IN COMPREHENSIVE SHAREHOLDERS'
BY PARENT SHARES AMOUNT CAPITAL INCOME (LOSS) EQUITY
---------- ------ ------ ---------- ------------- -------------
BALANCE AT DECEMBER 31, 1999........................ $ 733.0 -- $ -- $ -- $(6.4) $726.6
Net loss........................................ (9.0) -- -- -- -- (9.0)
Other comprehensive income:
Foreign currency translation adjustments...... -- -- -- -- 2.7 2.7
Net contribution from Parent.................... 174.0 -- -- -- -- 174.0
Transfer to common stock and additional
paid-in capital............................... (898.0) -- .5 897.5 -- --
Distribution of shares.......................... -- 45.1 -- -- -- --
------- ---- ----- ------ ----- ------
BALANCE AT JUNE 30, 2000............................ $ -- 45.1 $ .5 $897.5 $(3.7) $894.3
======= ==== ===== ====== ===== ======
The accompanying notes are an integral part of this statement.
3
6
ANC RENTAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
CASH AND CASH EQUIVALENTS USED IN OPERATING ACTIVITIES:
Net income (loss)......................................... $ (9.0) $ 6.1
Adjustments to reconcile net income (loss) to net cash and
cash equivalents used in operating activities:
Purchases of revenue earning vehicles................ (4,532.9) (4,160.3)
Sales of revenue earning vehicles.................... 2,947.0 2,863.2
Depreciation of revenue earning vehicles............. 440.1 487.0
Depreciation and amortization of property and
equipment........................................... 38.4 29.5
Gain on sale of property and equipment............... (1.1) --
Amortization of intangible assets and debt issue
costs............................................... 10.2 8.5
Income tax provision (benefit)....................... (5.8) 3.4
Parent overhead and insurance charges................ -- 73.5
Changes in assets and liabilities, net:
Receivables....................................... 163.1 103.6
Prepaid expenses and other assets................. (2.2) 4.8
Accounts payable and accrued liabilities.......... 14.8 (191.2)
Other liabilities................................. 47.2 (3.3)
---------- ----------
(890.2) (775.2)
---------- ----------
CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....................... (41.4) (103.0)
Proceeds from sale of property and equipment.............. 32.2 10.5
Other..................................................... -- 4.6
---------- ----------
(9.2) (87.9)
---------- ----------
CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from revenue earning vehicle financing........... 33,666.7 39,912.9
Payments on revenue earning vehicle financing............. (33,291.0) (39,048.3)
Proceeds from issuance of other debt...................... 284.4 99.6
Payments on other debt.................................... (54.0) (111.3)
Cash transfers from (to) Parent........................... 209.0 (39.2)
Subsidiary limited partner contributions.................. 102.1 90.5
Debt issue costs.......................................... (24.2) (35.6)
Other..................................................... (.7) (2.6)
---------- ----------
892.3 866.0
---------- ----------
Increase (decrease) in cash and cash equivalents............ (7.1) 2.9
Cash and cash equivalents at beginning of period............ 17.4 33.6
---------- ----------
Cash and cash equivalents at end of period.................. $ 10.3 $ 36.5
========== ==========
The accompanying notes are an integral part of these statements.
4
7
ANC RENTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
1. INTERIM FINANCIAL STATEMENTS
The accompanying Condensed Consolidated Financial Statements include the
accounts of ANC Rental Corporation and its subsidiaries (the "Company") and have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). All significant intercompany
accounts and transactions have been eliminated. Certain information related to
the Company's organization, significant accounting policies and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, the Condensed Consolidated Financial Statements
contain all material adjustments, consisting of only normal recurring
adjustments, necessary to fairly state the financial position, the results of
operations and cash flows for the periods presented and the disclosures herein
are adequate to make the information presented not misleading. Income taxes
during these interim periods have been provided based upon the Company's
anticipated annual effective income tax rate.
Operating results for interim periods are not necessarily indicative of the
results that can be expected for a full year. These interim financial statements
should be read in conjunction with the Company's audited Consolidated Financial
Statements and notes thereto appearing in the Company's Registration Statement
on Form 10, as amended, filed with the SEC on June 6, 2000 (the "Registration
Statement").
Prior to June 30, 2000 the Company was a wholly owned subsidiary of
AutoNation, Inc. (former "Parent" or "AutoNation"). In August 1999, AutoNation
announced its intention to separate its automotive rental business from its
automotive retail business and in September 1999, announced its intention to
distribute its entire interest in the Company to AutoNation's stockholders on a
tax-free basis (the "Distribution"), subject to conditions and consents
described in the Separation and Distribution Agreement. On May 31, 2000 the
former Parent's board of directors approved the spin-off and set a record date
of June 16, 2000 and a distribution date of June 30, 2000. The Distribution
occurred June 30, 2000 at which point the Company became an independent,
publicly owned company. The Company has entered into agreements with AutoNation
providing for the separation of the Company's business from AutoNation and
governing various interim and ongoing relationships between the companies.
All historical share and per share data of the Company's common stock,
included in the Unaudited Condensed Consolidated Statements of Income and
Comprehensive Income, has been retroactively adjusted for the recapitalization
of the former Parent's 100 shares of common stock previously outstanding into
45,142,728 shares of Common Stock on June 30, 2000 as more fully described in
Note 11 Shareholders' Equity.
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 these estimates.
Certain prior year amounts have been reclassified to conform with current
year presentation.
5
8
ANC RENTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECEIVABLES
The components of receivables, net of allowance for doubtful accounts, are
as follows:
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Trade receivables........................................... $223.0 $247.2
Vehicle manufacturer receivables............................ 122.2 302.6
Other....................................................... 132.2 87.3
------ ------
477.4 637.1
Less: allowance for doubtful accounts....................... (43.7) (46.6)
------ ------
$433.7 $590.5
====== ======
Other receivables include approximately $35.0 million due from the
Company's former Parent. Such amounts were received in July 2000.
3. REVENUE EARNING VEHICLES
A summary of revenue earning vehicles is as follows:
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Revenue earning vehicles.................................... $6,385.5 $5,207.9
Less: accumulated depreciation.............................. (802.3) (706.6)
-------- --------
$5,583.2 $4,501.3
======== ========
Revenue earning vehicles with a net book value of approximately $4.29
billion and $4.12 billion at June 30, 2000 and December 31, 1999 respectively,
were acquired under manufacturer repurchase programs that allow the Company to
require manufacturers 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. These
agreements have terms of four to thirteen months and require the Company to
provide normal maintenance and liability coverage. In many cases these
agreements provide for the early termination of the lease and allow the Company
to purchase leased vehicles subject to certain restrictions.
4. INVESTMENTS
In connection with the separation, the Company's former Parent contributed
its insurance subsidiary to the Company, which included approximately $45.9
million of investments. Investments consist of marketable debt securities
classified as available for sale and are stated at fair value with unrealized
gains and losses included in comprehensive income. Fair value is estimated based
upon quoted market prices. A summary of investments at June 30, 2000 (unaudited)
is as follows:
U.S. government debt securities............................. $30.2
Asset-backed securities..................................... 13.1
Corporate debt securities................................... 2.6
-----
$45.9
=====
6
9
ANC RENTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 2000 aggregate maturities of investments are as follows:
FAIR VALUE
----------
Due within 1 year........................................... $ 6.9
Due after 1 year through 5 years............................ 36.0
Due after 5 years through 10 years.......................... 3.0
-----
$45.9
=====
5. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Land........................................................ $ 125.0 $ 131.5
Furniture, fixtures and equipment........................... 401.1 390.8
Buildings and improvements.................................. 323.6 337.0
------- -------
849.7 859.3
Less: accumulated depreciation and amortization............. (258.4) (236.6)
------- -------
$ 591.3 $ 622.7
======= =======
6. ACCOUNTS PAYABLE
The components of accounts payable are as follows:
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Trade payables.............................................. $120.9 $250.3
Vehicle payables............................................ 217.5 27.3
------ ------
$338.4 $277.6
====== ======
Vehicle payables represent amounts to be financed after period end for
vehicles acquired under the Company's revenue earning vehicle financing
programs. As of June 30, 2000, approximately $86.8 million of vehicle payables
is due to a subsidiary of the Company's former Parent.
7. OTHER LIABILITIES
A summary of other liabilities is as follows:
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Minority interest........................................... $214.2 $112.1
Other....................................................... 51.9 41.3
------ ------
$266.1 $153.4
====== ======
Minority interest represents the limited partnership interest in a
subsidiary of the Company. Minority interest in the subsidiary's income is
included in cost of operations and was $1.5 million, for the three months ended
June 30, 2000 and 1999, and $2.7 million for the six months ended June 30, 2000
and 1999.
7
10
ANC RENTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. REVENUE EARNING VEHICLE DEBT
Revenue earning vehicle debt is as follows:
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Amounts under various commercial paper programs secured by
eligible vehicle collateral, interest based on
market-dictated commercial paper rates; weighted average
interest rates of 7.04% and 6.14% at June 30, 2000 and
December 31, 1999, respectively........................... $1,351.9 $1,358.8
Amounts under various asset-backed medium-term note programs
secured by eligible vehicle collateral:
Fixed rate component; weighted average interest rate of
6.30% at June 30, 2000 and December 31, 1999, maturities
through 2005.............................................. 1,750.0 1,750.0
Floating rate component based on a spread over LIBOR;
weighted average interest rates of 6.90% and 6.72% at June
30, 2000 and December 31, 1999, respectively; maturities
through 2005.............................................. 1,750.0 1,250.0
Other uncommitted secured vehicle financings primarily with
financing institutions in the United Kingdom; LIBOR based
interest rates; weighted average interest rates of 5.03%
and 4.99% at June 30, 2000 and December 31, 1999,
respectively.............................................. 87.1 172.8
-------- --------
$4,939.0 $4,531.6
======== ========
At June 30, 2000, aggregate maturities of revenue earning vehicle debt were
as follows:
2000........................................................ $1,435.4
2001........................................................ 3.7
2002........................................................ 324.9
2003........................................................ 1,475.0
2004........................................................ 500.0
Thereafter.................................................. 1,200.0
--------
$4,939.0
========
As of June 30, 2000, the Company had commercial paper programs aggregating
$1.84 billion, which consisted of a $1.14 billion single seller commercial paper
program and two bank-sponsored multi-seller commercial paper conduit facilities
totaling $700.0 million. The $1.14 billion single-seller program is supported by
$1.095 billion of bank lines of credit which provide liquidity backup for the
facility, as well as $45.0 million of letters of credit, which provide credit
enhancement and additional liquidity.
The Company also has outstanding $3.50 billion of asset-backed medium-term
notes, which include $500.0 million of rental vehicle asset-backed medium-term
notes issued June 30, 2000. The Company fixed the effective interest rate on the
new $500.0 million of floating rate notes due September 2004 at 7.30% through
the use of certain derivative instruments.
The weighted average interest rate on total revenue earning vehicle debt
was 6.69% and 6.32% at June 30, 2000 and December 31, 1999, respectively.
Interest expense on revenue earning vehicle debt is included as a component of
cost of operations in the accompanying Unaudited Consolidated Condensed
Statement of Income and Comprehensive Income.
The Company historically has received, and for a limited time will continue
to receive, various credit enhancements from AutoNation in connection with the
Company's revenue earning vehicle financing
8
11
ANC RENTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
programs. The Company will have reimbursement obligations to AutoNation to the
extent AutoNation is required to satisfy any of its guarantees of any of the
Company's obligations.
9. OTHER DEBT
Other debt is as follows:
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
Interim financing fixed rate note at 13.5% due June 30,
2001...................................................... $225.0 $ --
Secured revolving credit facility; interest rate of 11.0% at
June 30, 2000............................................. 35.0 --
Notes payable to vehicle manufacturer; weighted average
interest rates of 7.45% and 5.56% at June 30, 2000 and
December 31, 1999, respectively matures 2002.............. 35.0 35.0
Notes payable to former owners of acquired business;
interest payable using LIBOR based rates; weighted average
interest of 5.95% and 5.12% at June 30, 2000 and December
31, 1999, respectively; redeemable at the option of the
holder through maturity in 2003........................... 10.3 11.9
Other uncommitted credit facilities and other notes;
interest ranging from 2.5% to 6.7%; maturing through
2000...................................................... 27.5 60.5
------ ------
$332.8 $107.4
====== ======
As of June 30, 2000 aggregate maturities of other debt are as follows:
$72.8 million in 2000, $225.0 million in 2001, and $35.0 million in 2002.
During the second quarter of 2000, the Company entered into a three-year
secured revolving credit facility of up to $175.0 million at a floating rate,
initially based upon a spread of 2.75% above LIBOR. The Company has also entered
into a supplemental secured 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 $175.0 million secured revolving credit facility. As of
June 30, 2000 the borrowing base approximated $106.0 million under the $175.0
million secured revolving credit facility. The supplemental secured revolving
credit facility has a term of one year, and will be available until no later
than May 31, 2001 to the extent there is no availability for borrowings under
the $175.0 million secured revolving credit facility. Any amounts outstanding
under the supplemental secured revolving credit facility on its one year
maturity date will be converted into a term loan maturing on the maturity date
of the three-year $175.0 million secured revolving credit facility. Interest on
the supplemental secured revolving credit facility will be payable at a floating
rate, initially based upon a spread of 4.5% above LIBOR and increasing by 50
basis points on the first day of each January, April, July and October
commencing October 1, 2000. As of June 30, 2000 no amounts were outstanding
under the supplemental secured revolving credit facility.
In addition, the Company has entered into an agreement with a lender for
interim financing of $225.0 million which was funded on June 30, 2000. The
initial term of the interim financing is 12 months. The interest rate on the
interim financing is fixed at 13.5% during the term. The interim financing
requires the Company to pay commitment fees totaling up to $22.0 million, $10.0
million of which was paid through June 30, 2000. Additional fees are due on the
following dates if any amounts under the interim loan are still outstanding on
such date: $2.0 million due September 30, 2000, $5.0 million due December 31,
2000 and $5.0 million due March 31, 2001. If the Company does not refinance the
interim financing by the one year anniversary of its funding, then the interim
financing will extend into a non-callable six year term loan and the Company
will be obligated to issue warrants representing up to 7.5% of its fully diluted
capital stock and pay a fee approximating 3.0% of the principal interim
financing remaining outstanding. The term loan would bear
9
12
ANC RENTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest at an increasing rate starting at 14.0% and increase by 50 basis points
each 90 day period up to a maximum rate of 18.0%. The term loan may, at the
option of the lender, be exchanged into a fixed rate note with similar maturity.
In connection with certain refinancings of the interim financing, the Company
also may be required, based upon market conditions, to issue the warrants
previously described. The warrants would have a term of 10 years and would have
an exercise price of $.01 per share.
10. RESTRUCTURING
During the fourth quarter of 1999, the Company approved and implemented a
plan to significantly restructure its operations which resulted in a pre-tax
restructuring charge of $40.5 million. The restructuring plan included
provisions to (1) consolidate headquarter operations in Fort Lauderdale, (2)
reduce non-field headcount as a result of consolidating headquarter operations,
(3) renegotiate certain existing international vehicle supply agreements and
reduce revenue earning vehicle fleet, and (4) exit and consolidate certain
unprofitable or marginally profitable operating locations both domestically and
internationally.
At June 30, 2000, $16.2 million remains accrued relative to the 1999
restructuring plan with most of those costs expected to be paid by the end of
2000, except for certain lease commitments. The Company charged $3.2 million
during the three months ended June 30, 2000 and $5.5 million during the six
months ended June 30, 2000 to these reserves. These charges were primarily
comprised of severance and rent paid during the applicable periods. The Company
also made additional provisions for the payment of retention bonuses. The
provision for retention bonuses, included as a component in selling, general and
administrative expenses, approximated $4.3 million for the three months ended
June 30, 2000 and approximated $8.5 million for the six months ended June 30,
2000. The Company expects the majority of the retention payments to be paid in
July and October 2000.
11. SHAREHOLDERS' EQUITY
In June 2000 the Company amended and restated its certificate of
incorporation to authorize capital stock consisting of 250,000,000 shares of
common stock, par value $0.01 per share, and 10,000,000 shares of preferred
stock, par value $.001 per share. Stock formerly held by AutoNation was
converted into 45,142,728 shares of the Company's common stock, all of which was
distributed on June 30, 2000. No preferred stock was outstanding as of June 30,
2000.
In connection with the separation from AutoNation, certain assets and
liabilities were contributed to the Company by AutoNation during the six months
ended June 30, 2000. Such contributions include but are not limited to: (i) cash
approximating $209.0 million, (ii) an insurance subsidiary with a net deficit of
$39.1 million and (iii) the current portion of taxes payable approximating $4.1
million. As a result of the Distribution, the Company has an initial
shareholders' equity balance of $894.3 million as of June 30, 2000. The
shareholders' equity balance is subject to further adjustment resulting from
changes in estimated shared assets and liabilities between AutoNation and the
Company as well as certain other matters. However, such adjustments, if any, are
not expected to be significant.
10
13
ANC RENTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assets and (liabilities) of the insurance subsidiary assumed from
AutoNation are summarized as follows:
JUNE 30,
2000
-----------
(UNAUDITED)
Cash and cash equivalents................................... $ 1.2
Restricted cash and cash equivalents........................ 19.7
Receivables, net............................................ 6.3
Investments................................................. 45.9
Other assets................................................ 29.5
Accrued liabilities......................................... (.1)
Insurance reserves.......................................... (141.6)
-------
Net deficit................................................. $ (39.1)
=======
12. STOCK OPTIONS AND WARRANTS
On June 28, 2000 the ANC Rental Corporation's Board of Directors and
AutoNation as sole shareholder approved the ANC Rental Corporation Stock Option
Plan. The total amount of shares issuable under the Plan is 9,000,000. On June
30, 2000, ANC Rental Corporation's Board of Directors approved the grant, to key
employees and directors of the Company, of options to purchase 6,695,000 shares
of Common Stock. Options granted under the plan are non-qualified and were
granted at a price equal to the average of the daily high and low market price
of the Common Stock on July 3, 2000, the date of grant. The options granted have
a term of ten years from the date of grant, and vest in equal 25% increments
over three and one-half years commencing on January 1, 2001 and annually
thereafter. As part of the initial grant each outside director received a grant
of options to purchase 100,000 shares of Common Stock which vest immediately.
Mr. Egan, the Chairman, received a grant of options to purchase 750,000 shares
of Common Stock which vest immediately.
Also on June 28, 2000 the ANC Rental Corporation's Board of Directors and
AutoNation as sole shareholder approved the ANC Rental Corporation Employee
Stock Purchase Plan. The Purchase Plan will allow employees to purchase common
stock at a discount using after-tax payroll deductions. The total amount of
shares issuable under the Purchase Plan is 2,000,000. The discount offered under
the Purchase Plan is 10% for the remainder of the calendar year 2000 with future
discounts established by the Board of Directors, not to exceed 15% of fair
market value on the date of exercise.
13. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Condensed Consolidated
Financial Statements and notes thereto under Item 1. In addition, reference
should be made to the Company's audited Consolidated Financial Statements and
notes thereto and related Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Registration
Statement on Form 10 as filed with the Securities and Exchange Commission on
June 6, 2000.
OVERVIEW
Prior to June 30, 2000 we were a wholly owned subsidiary of AutoNation,
Inc. AutoNation announced its intention to separate its automotive rental
business from its automotive retail business in August 1999, and in September
1999, announced its intention to distribute its entire interest in us to
AutoNation's stockholders on a tax-free basis (the "Distribution"). On May 31,
2000 AutoNation's board of directors approved the spin-off and set a record date
of June 16, 2000 and a distribution date of June 30, 2000. The Distribution
occurred June 30, 2000 at which point we became an independent, publicly owned
company. We have entered into agreements with AutoNation providing for the
separation of our business from AutoNation's and governing various interim and
ongoing relationships between the companies.
As a wholly owned subsidiary of AutoNation, we received services from
AutoNation which supported our accounting, auditing, cash management, corporate
communications, corporate development, facilities management, finance 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 were historically 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 in 1999
were no less favorable than costs we would have incurred to obtain these
services on our own or from unaffiliated third parties. No amounts have been
allocated in 2000.
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 our
Alamo and National brands 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 rental 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
vehicles' original cost based on 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 the vehicle
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disposition. As of June 30, 2000, approximately 87.0% of our combined fleet was
covered by repurchase programs or were leased and not subject to residual value
risk.
CONSOLIDATED RESULTS OF OPERATIONS
A summary of our operating results is as follows for the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -----------------------------------
2000 % 1999 % 2000 % 1999 %
------ ----- ------ ----- -------- ----- -------- -----
Revenue:....................................... $910.6 100.0 $892.7 100.0 $1,721.2 100.0 $1,683.8 100.0
Expenses:
Cost of operations......................... 686.1 75.4 684.0 76.6 1,341.0 77.9 1,317.3 78.2
Selling, general and administrative........ 185.2 20.3 183.2 20.5 370.0 21.5 350.0 20.8
Transition costs........................... 8.3 .9 -- -- 15.7 .9 -- --
------ ----- ------ ----- -------- ----- -------- -----
Operating income............................... $ 31.0 3.4 $ 25.5 2.9 $ (5.5) (.3) $ 16.5 1.0
====== ===== ====== ===== ======== ===== ======== =====
REVENUE
Revenue was $910.6 million for the three months ended June 30, 2000 and
$892.7 million for the three months ended June 30, 1999. The increase in revenue
in 2000 over 1999 of $17.9 million or 2.0% is primarily due to pricing increases
approximating 2.6% offset by lower rental volume.
The increase in price during the three month period is primarily due to the
repositioning of our brands as well as management pricing decisions at Alamo,
National and CarTemps USA in the North American market. The overall market
continues to be competitive and may limit our ability to retain price increases
or raise pricing in future quarters. Foreign exchange rate movements during the
three month period unfavorably impacted revenue of our international operations.
Excluding the effect of foreign exchange, revenue per day increased 3.3%
compared to the reported 2.6% increase.
Offsetting the increase in price during the three month period is a
decrease in rental days of 0.4%. The decline in rental days was primarily in
North America, in part the result of management's focus on less price sensitive,
higher margin channels of distribution.
Revenue was $1,721.2 million for the six months ended June 30, 2000 and
$1,683.8 million for the six months ended June 30, 1999. The increase in revenue
in 2000 as compared to 1999 of $37.4 million or 2.2% is primarily due to pricing
increases approximating 3.4% offset by lower rental volume.
The increase in price is primarily due to repositioning and pricing
decisions previously discussed. Foreign exchange rate movements during the six
month period unfavorably impacted our international operations. Excluding the
effect of foreign exchange, revenue per day increased 3.9% compared to the
reported 3.4%.
The decline in rental days was primarily experienced in North America with
the largest volume decrease realized early in the first quarter of 2000.
Additionally, the decline in rental days was affected by management's focus on
less price sensitive, higher margin channels of distribution.
COST OF OPERATIONS
Cost of operations was $686.1 million for the three months ended June 30,
2000 and $684.0 million for the three months ended June 30, 1999. As a percent
of revenue, cost of operations was 75.4% for the three months ended June 30,
2000 and 76.6% for the three months ended June 30, 1999. The decrease in
operating cost as a percent of revenue is primarily due to lower average fleet
costs and fleet inventory levels, the direct result of actions taken to reduce
fleet and related cost thereby improving utilization. During the second quarter
of 2000 utilization improved 60 basis points as compared to the three months
ended June 30, 1999. Offsetting the decreases in fleet cost were certain higher
operating expenses related to facilities, equipment and personnel.
Cost of operations was $1,341.0 million for the six months ended June 30,
2000 and $1,317.3 million for the six months ended June 30, 1999. As a percent
of revenue cost of operations was 77.9% for the six months
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ended June 30, 2000 and 78.2% for the six months ended June 30, 1999. The
increase in operating cost in aggregate dollars of $23.7 million is due to
higher expenses related to facilities, equipment and personnel coupled with
higher fleet cost incurred in the first quarter of 2000. The decrease in
operating cost as a percent of revenue is primarily due to higher operating
revenue coupled with increased utilization of fleet.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $185.2 million for the
three months ended June 30, 2000 and $183.2 million for the three months ended
June 30, 1999. As a percent of revenue selling, general and administrative
expenses were 20.3% for the three months ended June 30, 2000 and 20.5% for the
three months ended June 30, 1999. The increase in selling, general and
administrative expenses in aggregate dollars is primarily due to higher selling
and marketing costs.
Selling, general and administrative expenses were $370.0 million for the
six months ended June 30, 2000 and $350.0 million for the six months ended June
30, 1999. As a percent of revenue, selling, general and administrative expenses
were 21.5% for the six months ended June 30, 2000 and 20.8% for the six months
ended June 30, 1999. The increase in selling, general and administrative
expenses in aggregate dollars and as a percent of revenue is primarily due to
higher selling and marketing expenses.
Separately, in 1999 AutoNation allocated incremental overhead costs
including allocations of AutoNation general and administrative expenses not
specifically attributable to its operating subsidiaries. Such allocations were
$4.0 million for the three months ended June 30, 1999 and $8.0 million for the
six months ended June 30, 1999, and are included as a component of selling,
general and administrative expenses for the applicable period. We believe these
costs were comparable to the costs incurred in 2000 in the establishment of our
own corporate infrastructure.
TRANSITION COSTS
We incurred approximately $8.3 million of transition costs for the three
months ended June 30, 2000 and $15.7 million of transition costs for the six
months ended June 30, 2000. These costs relate to the consolidation of
headquarter operations to Fort Lauderdale and were not previously accruable as
part of the fourth quarter 1999 restructuring charge. Transition costs are
primarily comprised of employee retention bonuses, relocation of information
systems, and personnel costs related to hiring, relocation and training. We plan
to cease incurring such transition costs by the fourth quarter of 2000.
RESTRUCTURING AND OTHER CHARGES
During the fourth quarter of 1999, we approved and implemented a plan to
significantly restructure our operations which resulted in a pre-tax
restructuring charge of $40.5 million. The restructuring plan included
provisions to (1) consolidate headquarter operations to Fort Lauderdale, (2)
reduce non-field headcount as a result of the consolidation of headquarter
operations, (3) renegotiate certain existing international vehicle supply
agreements and reduce revenue earning vehicle fleet, and (4) exit and
consolidate certain unprofitable or marginally profitable operating locations
both domestically and internationally.
At June 30, 2000, $16.2 million remains accrued relative to the 1999 plan
with most of those costs expected to be incurred by the end of 2000, except for
certain lease commitments. We charged $3.2 million during the three months ended
June 30, 2000 and $5.5 million during the six months ended June 30, 2000 to
these reserves. These charges were primarily comprised of severance and rent
paid during the applicable periods. We made additional provisions for the
payment of retention bonuses. The retention bonuses, included as a component of
transition costs in selling, general and administrative expenses, approximated
$4.3 million for the three months ended June 30, 2000 and approximated $8.5
million for the six months ended June 30, 2000. We expect the majority of the
retention payments to be paid in July and October 2000.
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INTEREST EXPENSE
Interest expense was $3.5 million for the three months ended June 30, 2000
and $4.3 million for the three months ended June 30, 1999. The decrease in
interest expense is primarily due to capital contributions from AutoNation, our
former Parent, being used to repay certain working capital facilities.
Interest expense was $7.0 million for the six months ended June 30, 2000
and $7.6 million for the six months ended June 30, 1999. The decrease in
interest expense is primarily due to those reasons previously discussed.
We have modified and will continue to modify our existing financing
programs and enter into new financing programs. As a result of the proceeds from
our refinancing we expect interest expense to be higher in the third and fourth
quarters of 2000. You should read the Financial Condition section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
OTHER INCOME (EXPENSE)
Other income (expenses) was $(2.6) million for the three months ended June
30, 2000 and was $(0.1) million for the three months ended June 30, 1999. Other
income (expense) was $(2.9) million for the six months ended June 30, 2000 and
was $0.2 million for the six months ended June 30, 1999. The increase in other
expense is primarily due to charges related to our canceled bond offering in May
2000 partially offset by gains realized on the sale of certain excess
properties.
INCOME TAXES
The provision for income taxes for the three months ended June 30, 2000 was
$9.9 million and $7.7 million for the three months ended June 30, 1999. The
provision (benefit) for income taxes for the six months ended June 30, 2000 was
$(5.8) million and $3.4 million for the six months ended June 30, 1999. The
effective income tax rate was 39.0% as compared to 36.0%. The increase in our
effective rate is due to the effect of non-deductible items.
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.
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SECOND QUARTER 2000 VERSUS FIRST QUARTER 2000
A summary of our quarterly operating results for 2000 is as follows for the
periods indicated:
SECOND FIRST
QUARTER % QUARTER %
------- ----- ------- -----
Revenue................................................. $910.6 100.0 $810.6 100.0
Expenses:
Cost of operations.................................... 686.1 75.4 654.9 80.8
Selling, general and administrative................... 185.2 20.3 184.8 22.8
Transition costs...................................... 8.3 .9 7.4 .9
------ ----- ------ -----
Operating income (loss)................................. $ 31.0 3.4 $(36.5) (4.5)
====== ===== ====== =====
Revenue increased during the second quarter of 2000 versus the first
quarter of 2000 primarily due to an increase in rental days offset by a slight
decrease in pricing. The increase in rental days is primarily due to normal
effects of seasonality.
Cost of operations decreased as a percentage of revenue for the second
quarter of 2000 versus the first quarter of 2000 primarily due to improved
utilization due to seasonality. The increase in operating cost in aggregate
dollars is primarily due, as expected, to higher fleet and transaction cost.
Selling, general and administrative expenses decreased as a percentage of
revenue for the second quarter of 2000 versus the first quarter of 2000
primarily due to higher revenue levels.
Transition costs relate to the consolidation of headquarter operations to
Fort Lauderdale and are primarily comprised of employee retention bonuses,
relocation of information systems, and personnel costs relating to hiring,
relocation and training. We plan to cease incurring such transition costs by the
fourth quarter of 2000.
CASH FLOWS
We discuss below the major components of changes in cash flows for the six
months ended June 30, 2000 and 1999.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operating activities was $890.2 million during the six months
ended June 30, 2000 and $775.2 million during the six months ended June 30,
1999. The increase in cash used in operating activities in 2000 as compared to
1999 is primarily due to lower cumulative operating earnings and increased
purchases of revenue earning vehicles offset by an increase in vehicle payables.
Cash flows from operating activities for the six months ended June 30, 1999
includes non-cash parent overhead allocations and insurance charges that were
historically paid by our former Parent. During 2000 we have paid our own
corporate overhead and insurance claims from operations.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities consist primarily of capital
additions. Capital additions were $41.4 million during the six months ended June
30, 2000, and $103.0 million during the six months ended June 30, 1999. The
decrease in capital additions during the period is primarily due to completion
of the Global Odyssey program. The increase in proceeds from the sale of
property and equipment is due primarily to the disposition of our former
Minneapolis headquarters and excess property in Fort Lauderdale.
We intend to finance future capital expenditures through cash on hand and
other financings.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities was $892.3 million for the six months
ended June 30, 2000 and $866.0 million for the six months ended June 30, 1999.
The increase in cash flows from financing activities is primarily due to
proceeds of new debt and net contributions from our former Parent. Please refer
to our
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discussion of "Financial Condition", contained within the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL CONDITION
Our commercial paper program is approximately $1.84 billion consisting of a
$1.14 billion single-seller commercial paper program and a two bank-sponsored
multi-seller commercial paper conduit facilities totaling $700.0 million. The
$1.14 billion single-seller commercial paper program is supported by $1.095
billion of bank lines of credit which provide liquidity backup for the facility,
as well as $45.0 million of letters of credit, which provide credit enhancement
and additional liquidity. The $700.0 million multi-seller commercial paper
conduit facilities mature on October 31, 2000. We currently do not anticipate
needing such capacity beyond October 31, 2000 due to the seasonal nature of our
fleet size. Our medium-term note-financing totals $3.50 billion of which $500.0
million was issued on June 30, 2000. We fixed the effective interest rate of the
newly issued $500.0 million at 7.30% through the use of certain derivative
instruments.
We historically have received, and for a limited time will continue to
receive, various credit enhancements from AutoNation in connection with our
revenue earning vehicle financing programs. We will have reimbursement
obligations to AutoNation to the extent AutoNation is required to satisfy any of
its guarantees of any of our obligations. 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 higher costs of capital in future periods.
During the second quarter 2000, we entered into a three-year secured
revolving credit facility of up to $175.0 million at a floating rate, initially
based upon a spread of 2.75% above LIBOR. We also have entered into a
supplemental secured revolving credit facility with availability of the lesser
of (1) $40.0 million or (2) an amount equal to $175.0 million less the borrowing
base of the $175.0 million secured revolving credit facility. As of June 30,
2000 the borrowing base approximates $106.0 million under the $175.0 million
secured revolving credit facility. The supplemental secured revolving credit
facility has a term of one year, and will be available until no later than May
31, 2001 to the extent there is no availability for borrowings under the $175.0
million secured revolving credit facility. Any amounts outstanding under the
supplemental secured revolving credit facility on its one year maturity date
will be converted into a term loan maturing on the maturity date of the
three-year $175.0 million secured revolving credit facility. Interest on the
supplemental secured revolving credit facility will be payable at a floating
rate, initially based upon a spread of 4.5% above LIBOR and increasing by 50
basis points on the first day of each January, April, July and October
commencing October 1, 2000. As of July 31, 2000 no amounts were drawn on either
revolver.
In addition, we have entered into an agreement with a lender for interim
financing of $225.0 million which was funded on June 30, 2000. The initial term
of the interim financing is 12 months. The interest rate on the interim
financing is fixed at 13.5% during the term. The interim financing requires us
to pay commitment fees totaling up to $22.0 million, $10.0 million of which was
paid through June 30, 2000. Additional fees are due on the following dates if
any amounts under the interim loan are still outstanding on such date: $2.0
million due September 30, 2000, $5.0 million due December 31, 2000 and $5.0
million due March 31, 2001. If we do not refinance the interim financing by the
one year anniversary of its funding, then the interim financing will extend into
a non-callable six year term loan and we will be obligated to issue warrants
representing up to 7.5% of our fully diluted capital stock and pay a fee
approximating 3.0% of the principal interim financing remaining outstanding. The
term loan would bear interest at an increasing rate starting at 14.0% and
increase by 50 basis points each 90 day period up to a maximum rate of 18.0%.
The term loan may, at the option of the lender, be exchanged into a fixed rate
note with similar maturity. In connection with certain refinancings of the
interim financing, we also may be required, based upon market conditions, to
issue the warrants previously described. The warrants would have a term of 10
years and would have an exercise price of $.01 per share.
In addition, to the debt financing previously discussed certain assets and
liabilities were contributed to us by AutoNation during the six months ended
June 30, 2000. Such contributions include but are not limited to: (i) cash
approximating $209.0 million, (ii) an insurance subsidiary with a net deficit of
$39.1 million and (iii) the current portion of taxes payable approximating $4.1
million. As a result of the Distribution we have
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an initial shareholders' equity balance of $894.3 million as of June 30, 2000.
The shareholders' equity balance is subject to further adjustment resulting from
changes in estimated shared assets and liabilities between AutoNation and us as
well as certain other matters. However, such adjustments, if any, are not
expected to be significant.
Separately, we use interest rate derivative financial instruments to manage
the impact of interest rate changes on our variable rate debt. These derivative
instruments consist of interest rate swaps and interest rate caps and floors.
The amounts exchanged by the counterparties are based upon the notional amounts
and other terms, generally related to interest rates. At June 30, 2000, notional
principal amounts related to interest rate swaps used to convert variable rates
to fixed rates were $250.0 million. As of June 30, 2000, the weighted average
fixed rate payment on variable rate to fixed rate swaps was 5.92%. 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 June 30, 2000 were $1.75 billion and $800.0 million, respectively.
The interest rate caps and floors effect a weighted average interest rate of
6.15% as of June 30, 2000. 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 75% as of June 30, 2000.
As a result of our separation from AutoNation we have unwound certain
derivative instruments which were held in the name of our former Parent. The
termination of our swaps yielded approximately $7.7 million while the
termination of our floors cost us approximately $6.3 million. The proceeds and
cost of the unwinding of the derivatives was contributed by AutoNation to us as
of June 30, 2000. The proceeds of $7.7 million and cost of $6.3 million will be
amortized over the remaining life of the respective debt that was hedged.
We believe that our cash flow from operations and 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. We expect to refinance the $225.0 million interim financing, and may
refinance other credit facilities as well, in either case if more favorable
terms can be obtained by us.
NEW ACCOUNTING PRONOUNCEMENTS
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 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, as further amended by Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of FSAB Statement NO.
133" in June 2000, 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
hedge accounting criteria are met. The Company will adopt SFAS 133 beginning
January 1, 2001, and does not anticipate that it will have a material impact on
its consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Certain statements and information included in this Form 10-Q 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.
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 the forward-looking statements. These
factors include, among others, the effect of our indebtedness on our operations,
the availability and cost of capital, the impact of competition in the
automotive rental industry, costs and other factors related to the acquisition
and disposition of vehicles, including our reliance on repurchase programs and
automobile manufacturers, the seasonal nature of our business and the impact of
decreases in air travel, the effects of legal proceedings and
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regulatory matters on our business, and the impact of general economic
conditions, as well as other factors discussed in filings which we make with the
Securities and Exchange Commission.
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
filing.
ITEM 3. 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 interest rate risk due to 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.
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
judgement. 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.
The following tables set forth the expected maturity date and fair values
of our derivative instruments and corresponding hedged variable rate debt for
the applicable periods presented.
FAIR VALUE
EXPECTED MATURITY DATE JUNE 30,
-------------------------------------------------------- ------------
JUNE 30, 2000 2000 2001 2002 2003 2004 THEREAFTER TOTAL 2000
------------- -------- ------ ----- ------ ------ ---------- -------- ------------
(IN MILLIONS)
(Asset)/liability
Variable rate debt.................... $1,508.2 $ 3.7 $35.0 $550.0 $500.0 $700.0 $3,296.9 $3,296.9
Average interest rates.............. 7.02% 7.00% 7.45% 6.91% 6.89% 6.53% -- --
Interest rate swaps................... 150.0 100.0 -- -- -- -- 250.0 (1.2)
Average pay rate.................... 6.11% 5.63% -- -- -- -- -- --
Average receive rate................ 6.85% 6.98% -- -- -- -- -- --
Interest rate caps.................... -- -- -- 550.0 500.0 700.0 1,750.0 (71.1)
Average rate........................ -- -- -- 5.73% 7.30% 6.26%
Interest rate floors.................. -- -- -- -- 500.0 300.0 800.0 14.1
Average rate........................ -- -- -- -- 7.30% 6.26% -- --
FAIR VALUE
EXPECTED MATURITY DATE 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% -- --
19
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 22, 2000, the Alabama Supreme Court dismissed a purported class
action, regarding the alleged improper sale of optional insurance products,
entitled 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, with prejudice for
failure to prosecute.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 28, 2000 the Company's sole stockholder approved and ratified (1)
the Company's Amended and Restated Certificate of Incorporation, (2) the
spin-off of the Company from AutoNation, Inc., (3) the Company's 2000 Stock
Option Plan, (4) the Company's Employee Stock Purchase Plan, (5) the appointment
of Arthur Andersen LLP as the Company's independent financial auditors for the
year ending December 31, 2000 and (6) the appointment of seven directors of the
Company, including Gordon M. Bethune, J.P. Bryan, Michael S. Egan, John O.
Grettenberger, Sr., H. Wayne Huizenga, William N. Plamondon, III and Michael S.
Karsner.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 -- Employment Agreement between ANC Rental Corporation and
Michael S. Karsner
27.1 -- Financial Data Schedule
(B) REPORTS ON FORM 8-K.
Not applicable.
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23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANC RENTAL CORPORATION
Dated: August 7, 2000 By: /s/ KATHLEEN W. HYLE
--------------------------------------------------------
Kathleen W. Hyle
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
21