<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1999
REGISTRATION NO. 1-15421
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
AMENDMENT NO. 2
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------
ANC RENTAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 65-0957875
(State or Other Jurisdiction of (I.R.S. Employer Identification
No.)
Incorporation or Organization)
110 S.E. 6TH STREET 33301
FORT LAUDERDALE, FL (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
(954) 769-7000
(Registrant's Telephone Number, Including Area Code)
---------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAMES OF EACH EXCHANGE ON
TITLE OF CLASS TO BE SO REGISTERED WHICH CLASS IS TO BE REGISTERED
---------------------------------- -------------------------------
<S> <C>
Common Stock ($.01 Par Value) New York Stock Exchange
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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<PAGE> 2
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
<TABLE>
<CAPTION>
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- ---- ------------ ---------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 3
15. Financial Statements and Exhibits.
(a) Financial Statements and Financial Statement Schedules.
The following financial statements are included or incorporated by
reference 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;
(2) Consolidated Financial Statements of ANC Rental; and
(3) Financial Statements of Value Rent-A-Car, Inc. as of and for the
year ended December 31, 1996.
The following financial statement schedule for the years ended December 31,
1998, 1997 and 1996 is filed with this report:
II -- Valuation and Qualifying Accounts
(b) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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* By-laws 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)
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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)
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
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 Nine Months Ended September
30, 1999 (For SEC use only)
27.2* Financial Data Schedule for the Nine Months Ended September
30, 1998 (For SEC use only)
27.3* Financial Data Schedule for the Year Ended December 31, 1998
(For SEC use only)
27.4* Financial Data Schedule for the Year Ended December 31, 1997
(For SEC use only)
27.5* Financial Data Schedule for the Year Ended December 31, 1996
(For SEC use only)
99.1 Information Statement dated as of , 1999 attached
to this Registration Statement as Annex A
99.2 Financial Statements of Value Rent-A-Car, Inc. as of and for
the year ended December 31, 1996 (incorporated by reference
to pages F-29 to F-47 of Exhibit 99 to Current Report on
Form 8-K dated as of September 15, 1997 filed by AutoNation,
Inc.)
</TABLE>
- -------------------------
*Previously filed
** To be filed by amendment
<PAGE> 5
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
October 15, 1999. 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
October 15, 1999.
<PAGE> 6
ANC RENTAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE
AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
CLASSIFICATIONS OF YEAR INCOME DEDUCTIONS OTHER OF YEAR
- --------------- --------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
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
1996..................................... 6.0 3.7 (.5)(2) -- 9.2
Restructuring reserves(3):
1998..................................... 41.9 -- (18.7)(5) (3.7)(4) 19.5
1997..................................... 9.5 78.0 (28.1)(5) (17.5)(4) 41.9
1996..................................... -- 13.5 -- (4.0)(4) 9.5
</TABLE>
- ---------------
(1) Allowance of acquired businesses.
(2) Accounts written off.
(3) Included under the caption "Accrued Liabilities" in the Company's
Consolidated Balance Sheets.
(4) Primarily asset write-offs.
(5) Primarily cash payments of costs associated with restructuring activities.
<PAGE> 7
III. SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 2 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: December 17, 1999
<PAGE> 8
AutoNation(TM) LOGO
Dear AutoNation Stockholder:
AutoNation, Inc. is continuing to take actions to create greater value for
its stockholders. As part of these actions, AutoNation announced a plan to
establish its automotive rental business as an independent public company under
the name ANC Rental Corporation through a spin-off of all the outstanding shares
of ANC Rental common stock to AutoNation stockholders. In the spin-off, you will
receive one share of ANC Rental common stock for every [six to eight] shares of
AutoNation common stock that you hold at the close of business on
. The shares of AutoNation common stock which you own on that
date will continue to represent your ownership interest in AutoNation.
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.
Very truly yours,
H. Wayne Huizenga
Chairman
AutoNation, Inc.
<PAGE> 9
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 [six to eight]
shares of AutoNation, Inc. common stock that you own at the close of business on
. 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 replacement rental market principally from
locations in suburban areas. Combined, our operations generated approximately
$3.5 billion in revenue in 1998.
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
<PAGE> 10
ANNEX A
PRELIMINARY AND SUBJECT TO COMPLETION, DATED DECEMBER 17, 1999
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 [six to eight] shares of AutoNation that you
hold at the close of business on , 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's common
stock which you own.
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 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 6.
---------------------
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 ;
AutoNation first mailed this document to its stockholders on .
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Summary Historical and Pro Forma Financial Data............. 5
Risk Factors................................................ 6
The Spin-off................................................ 12
Capitalization.............................................. 21
Selected Financial Data..................................... 22
Unaudited Consolidated Pro Forma Financial Statements....... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 28
Business.................................................... 39
Management.................................................. 50
Security Ownership of Certain Beneficial Owners and
Management................................................ 54
Certain Relationships and Related Transactions.............. 54
Description of Capital Stock................................ 55
Validity of Securities...................................... 56
Incorporation By Reference.................................. 56
Where You Can Find More Information......................... 56
Index to Consolidated Financial Statements.................. F-1
</TABLE>
i
<PAGE> 12
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
retail and rental businesses. 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 and
operates AutoNation's automotive rental business. Our rental operations maintain
a strong presence in all three markets of the automotive rental industry:
leisure travel, business travel, and vehicle replacement. In 1998, AutoNation
operated an average worldwide fleet of 331,000 cars, one of the largest in the
rental car industry. Alamo and National serve the daily rental needs of both
business and leisure travelers from a network of 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, Australia, Africa and the
Middle East. CarTemps USA serves the domestic vehicle replacement market and
operates in over 400 locations throughout the United States.
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
1
<PAGE> 13
the companies. AutoNation has received a letter ruling from the Internal
Revenue Service to the effect that the spin-off will be tax-free to
AutoNation and its stockholders for federal income tax purposes.
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 their core business:
- ANC Rental -- a leading automotive rental business operating under the
Alamo, National and CarTemps USA brand names; and
- AutoNation -- the largest automotive retailer in the United States with
over 400 dealerships.
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 [six to eight] shares of AutoNation common stock held as of the
close of business on . 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 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 stockholders will continue to own all of AutoNation's
current businesses, but they will own these businesses through their
ownership of stock in each of 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, at
, telephone number: .
2
<PAGE> 14
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 -- ANC
Rental and AutoNation. 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, ANC
Rental will be an independent public company.
Securities to Be
Distributed................ shares of ANC Rental common stock
(based on shares of AutoNation
common stock outstanding as of , 1999).
Distribution Ratio......... One share of ANC Rental common stock for every [six
to eight] shares of AutoNation common stock held as
of the close of business on the record date.
Record Date................ Close of business on .
Spin-off Date.............. On or about , 2000.
Tax Treatment.............. Tax-free to AutoNation and its stockholders, except
that the cash received in lieu of fractional shares
may be taxable.
Distribution Agent.........
Distribution and Other
Agreements............... Before the spin-off, AutoNation and ANC Rental will
enter into a distribution agreement which will set
forth the terms and conditions of the spin-off.
AutoNation and ANC Rental will also enter into a
transitional services agreement and a tax sharing
agreement to facilitate the separation of the
automotive rental business from the automotive
retail business as well as the operation of
AutoNation and ANC Rental as independent public
companies. ANC Rental and AutoNation will enter
into agreements with each other that provide for
some on-going arm's-length business relationships.
In addition, ANC Rental may 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 ANC Rental common stock on
the New York Stock Exchange under the symbol "ANR."
We expect that "when-issued" trading for ANC Rental
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 ANC Rental 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
3
<PAGE> 15
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) AutoNation's and ANC Rental's lenders and other
third parties provide necessary approvals; and
(2) there has not been a change of facts which
would negate the effectiveness of the IRS
letter ruling as to the tax-free nature of the
spin-off.
4
<PAGE> 16
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, 5 and 10 of Notes to Consolidated Financial Statements
for a discussion of business combinations, other debt and restructuring and
other charges 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------- --------------------------------------------
PRO FORMA PRO FORMA
1999 1999 1998 1998 1998 1997 1996
--------- -------- -------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................... $2,707.1 $2,707.1 $2,646.1 $3,453.6 $3,453.6 $3,055.1 $2,699.4
Income (loss) before
extraordinary charges... 17.8 24.5 100.5 95.1 108.8 53.7 (49.9)
Net income (loss)......... 17.8 24.5 100.5 95.1 108.8 51.2 (80.4)
Pro forma basic and
diluted earnings per
share(a)................
Pro forma weighted average
shares outstanding......
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ---------------------------------
1999 1999 1998 1997 1996
------------- ------------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $7,229.1 $7,020.4 $6,252.6 $5,870.3 $4,669.4
Revenue earning vehicle debt........... 5,169.5 5,169.5 4,377.9 4,172.1 3,380.4
Other debt............................. 106.1 106.1 132.0 90.8 71.4
Shareholders' equity................... 845.6 800.7 738.7 526.2 330.9
</TABLE>
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(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.
5
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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
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 expectations
may not prove to be correct. Because these forward-looking statements are also
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 the ability to obtain debt financing to
operate our business. AutoNation has provided guaranties in support of our debt
financing, as well as capital funding to enable us to operate without our own
working capital facility. Following the spin-off from AutoNation, some of this
credit support may remain in place until we make a transition to financing our
business without credit support from AutoNation. The underlying interest rates
on our existing vehicle debt will not change as a result of our separation from
AutoNation since the interest rates on this debt have been established and are
not re-negotiable. However, the all-in-cost of this financing may change as
certain credit enhancement or credit support providers may seek to negotiate
higher fees as a result of the spin-off. We reflect this possible change in the
all-in-cost of our financing in our unaudited consolidated pro forma financial
statements which begin on page 23 of this Information Statement. We expect our
interest rate on a new working capital facility 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 September 30, 1999, our debt to
equity ratio was approximately 6.6:1. We cannot assure you that we will be able
to refinance or restructure our existing debt or obtain additional debt
financing on favorable terms or that we will be able to access the capital
markets by issuing equity securities for cash.
As part of AutoNation, we also have benefited from the investment grade
terms and conditions which have applied to our debt. As an independent company
without credit support from AutoNation, we expect that our future borrowings and
credit facilities are likely to contain non-investment grade financial covenants
and operating restrictions which could 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, the inability to borrow
additional sums and other material adverse effects on our financial condition
and results of operations.
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, our ratio of fixed interest rate debt to total debt
outstanding was 76% as of September 30, 1999. Nevertheless, a substantial
increase in interest rates would adversely affect our cost of indebtedness and
results of operations.
Competition in the Automotive Rental Industry May Impact Our Prices or Market
Share.
We operate in a highly competitive industry, particularly with respect to
price and service. Most of the major domestic automotive rental companies were
formerly owned and/or operated by domestic vehicle manufacturers. At present, no
domestic rental companies are wholly-owned by vehicle manufacturers, and
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almost all domestic rental companies have publicly owned securities. These
recent changes in the ownership of our major competitors in the domestic
automotive rental industry are further intensifying competition, as the
companies are now being operated with a view toward maximizing market share,
revenue, net income and stockholder value, as opposed to providing the
manufacturers with a means to absorb excess production capacity. 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, our
competitors, some of which have access to substantial capital, may attempt to
compete aggressively by lowering rental prices. To the extent that we match
competitors' price reductions to retain market share, it may adversely affect
our financial condition and results of operations. Conversely, if we opt not to
match competitors' price reductions, we may lose market share and corporate
accounts, which could also adversely affect our financial condition and results
of operations.
We Have Experienced Difficulty with Our New Computer Operating System.
In November 1998, National converted to a new computer system called Global
Odyssey. Global 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 Global
Odyssey adversely impacted customer volume at National during the first half of
1999. We believe most of the significant issues relating to Global Odyssey were
resolved by the end of the second quarter of 1999. Since that time we believe
that customer service has improved and volume at National has substantially
returned to historic levels. However, if volume at National does not continue at
historic levels or if these technical issues associated with Global Odyssey
recur at National, it could have a material adverse effect on our financial
condition and results of operations.
Changes in Manufacturers' Repurchase Programs May Affect Our Business.
At September 30, 1999, we operated a combined fleet of approximately
349,000 owned and leased vehicles, of which approximately 75% were covered by
vehicle manufacturers' repurchase programs. Under these 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 cost component of our operations. We could be adversely affected 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 Corporation, would
significantly affect our continued ability to obtain needed financing on
favorable terms.
Some Of Our Rental Fleet Is Subject To Residual Value Risk Upon Disposition.
As of September 30, 1999, we were subject to residual value risk on
approximately 18% of our rental fleet which was not covered by manufacturers'
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. Because it is
difficult to predict future vehicle resale values, we may not be able to manage
effectively the residual value risk on our non-program vehicles. If the residual
value of our rental fleet decreased it could adversely effect our financial
condition and results of operation.
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<PAGE> 19
Cost of Vehicle Rental Fleet May Increase.
In recent 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 rental customers.
Dependence 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 domestic vehicle
rental fleet from General Motors. In model year 2000, we expect to purchase
approximately 77% of our domestic vehicle 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 company's domestic fleet
consist of General Motors vehicles. Shifting significant portions of our fleet
purchases to other manufacturers would require lead time. As a result, General
Motors's inability to supply us with the planned number and type of vehicles
could have a material adverse effect on our financial condition and results of
operations. 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. If we are unable
to pass these costs on to our customers through rental rate increases then it
could have a material adverse effect on our financial condition and results of
operations.
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 have a material adverse effect on our financial condition and results
of operations.
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 have a material adverse effect on our financial condition
and results of operations. The first and fourth quarters for our operations are
generally the weakest because there is limited leisure travel and a greater
potential for adverse weather conditions. In these periods, many of our
operating expenses, including rent, general insurance and administrative
personnel, remain fixed. As a result we cannot assure you that we will have the
liquidity to conduct our operations effectively at all times during a year.
A Decrease In Air Travel Could Impact Our Business.
In 1998, we generated approximately 90% of our domestic operations' revenue
at airport rental locations. We also expect to generate a significant portion of
our 1999 domestic operations revenue at airport rental locations. A sustained
material decrease in airline passenger traffic in the United States could have a
material adverse effect on our results of operations. 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.
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<PAGE> 20
Fluctuations in Fuel Costs or Reduced Fuel Supplies Could Harm Our Business.
Our operations could be adversely affected by limitations on fuel supplies
caused by, among other things, the imposition of mandatory allocations or
rationing of fuel or increases in fuel price.
The Costs of Accidents Involving Our Vehicles Could Exceed Our Liability
Insurance.
Our business exposes us to claims for personal injury, death and property
damage resulting from the use of the vehicles rented by us. We have insurance
programs in place to protect us against liability arising from these types of
claims; however, we may still be exposed to uninsured liability resulting from
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 operating in
their territories. If we are forced to change the way we operate our three
brands, it could have a material adverse effect on our financial condition and
results of operations.
We May Have Clean-up Costs Relating to Petroleum Storage.
Our domestic and international service facilities contain tanks for the
storage of petroleum products such as gasoline, diesel fuel, motor oil and waste
oil. At many of these locations, one or more of these tanks are located
underground. We cannot assure you that these tank systems will at all times
remain free from releases or that the use of these tanks will not result in
surface spills. In addition, historical operations at some of our properties,
including activities relating to automobile and bus maintenance, may have
resulted in releases or surface spills into soil or groundwater. Any such
release or surface spill, depending on factors such as the material involved,
quantity and environmental setting, could result in expenditures and
interruptions to our operations that could have a material adverse effect on our
financial condition and results of operations.
The Year 2000 Issue May Adversely Affect Our Computer Systems and Operations.
The Year 2000 issue arises primarily from computer programs, commercial
systems and embedded chips that will be unable to properly interpret dates
beyond 1999. This could result in system failures or miscalculations. We utilize
software and related technologies throughout our business that will be affected
by the date change in the year 2000. We are addressing the issue of computer
programs, embedded chips and third-party suppliers that Y2K may impact. We have
developed a dedicated Y2K Project Office to coordinate compliance efforts and
ensure that the project status is monitored and reported throughout the
organization. If we do not complete our compliance efforts in a timely manner,
we may experience a delay or disruption in the delivery of products, including
the supply of new vehicles and/or original equipment manufacturer replacement
parts or a failure in one or more travel reservation systems. Either of these
conditions could have a material adverse impact on our financial condition and
results of operations including loss of revenue, increased operating costs, loss
of customers or suppliers, or other significant disruptions to our business.
Determining the Y2K readiness of third party products and business
dependencies requires pursuit, collection and appraisal of voluntary statements
made or provided by those parties, if available, together with independent
factual research. Although we have taken, and will continue to take, reasonable
efforts to gather information to determine and verify the readiness of products
and dependencies, we cannot assure you that reliable information will be offered
or otherwise available. In addition, verification methods may not be
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<PAGE> 21
reliable or fully implemented. Accordingly, notwithstanding our foregoing
efforts, we cannot assure you that third party products or business dependencies
will be Y2K ready.
We Do Not Expect To Pay Dividends.
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.
We Have No Operating History as an Independent Public Company and Need to Add
Personnel.
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, perform our own administrative functions, to the extent that
these functions are not provided for in the transitional services agreement, and
employ senior executives to manage ANC Rental. As a result, we will need to hire
additional personnel to fill both administrative and executive positions. We
cannot assure you that qualified personnel or executives will be available to
meet our administrative and executive 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 acquire 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 any
corporate income tax.
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
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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 extreme
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 Distinct Businesses
The spin-off is designed to separate AutoNation's automotive rental
business from its automotive retail business, each of which have 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
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
Investors should be better able to evaluate the financial performance,
strategies and other characteristics of each company. This will permit investors
to make investment decisions based on each company's separate 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
, 1999, 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
[six to eight] 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 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 AFTER THE SPIN-OFF
The relationship between us and AutoNation after the spin-off will be
governed by the distribution agreement and other agreements which we will enter
into in connection with the spin-off. We describe each of these agreements
below. These agreements are intended to facilitate the separation of
AutoNation's
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<PAGE> 24
automotive rental business from its automotive retail business and the operation
of AutoNation and ANC Rental as separate companies.
Separation and Distribution Agreement
Before the spin-off we will enter into a 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 and automotive retail business,
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 business will be owned by us or our subsidiaries and (2) the
assets and liabilities of its automotive retail business 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 September 30, 1999, (b)
those assets acquired and liabilities incurred or accrued after September 30,
1999 which we would have included on the September 30, 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, 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. Following the effective date of our
Registration Statement on Form 10, AutoNation's board of directors will have the
sole discretion to set a record date for the spin-off and to determine the
spin-off date. AutoNation must complete the spin-off within three months of the
satisfaction or waiver of all of the conditions to the spin-off. AutoNation has
agreed to complete the spin-off no later than June 30, 2000, subject to the
satisfaction or waiver by AutoNation's board of directors, in its sole
discretion, of 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;
- 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;
- approval of our common stock for listing on the NYSE;
- registration of our common stock under the 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; and
- no other events or developments shall have occurred after the effective
date of this Registration Statement that, in the sole judgment of
AutoNation's board of directors, would result in the spin-off having a
material adverse effect on 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. 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.
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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 and AutoNation,
including in connection with the transactions and all other activities to
implement the spin-off, except as described in the distribution 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 and (2) 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.
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) any breach by AutoNation of the distribution
agreement or any of the other related agreements and (3) any untrue statement of
a material fact or omission to state a material fact, or alleged untrue
statements or omissions, with respect to certain information relating to
AutoNation contained in the registration statement which we are filing to
register our common stock with the commission.
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
14
<PAGE> 26
to our best interests, and that AutoNation will have no liability to any person
as a result of any determination of this kind.
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.
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 if the spin-off does not
occur on or before June 30, 2000, unless both parties agree to extend the date.
Transitional Services Agreement
Before the spin-off we will enter into a transitional services agreement
with AutoNation. Under this agreement, AutoNation will provide us with support
of our benefit plan administration, information systems, telecommunications and
legal services. In exchange for the provision of these services, we will pay to
AutoNation up to $541,200 per month beginning on the day of the spin-off.
Also under this agreement, we will provide AutoNation with services to
support its payroll processing, information technology and legal advice and
counsel. In exchange for these services, AutoNation will pay us up to $186,500
per month beginning on the date of the spin-off.
Each party will pay its services fees monthly in arrears, 15 days after the
close of each month. We believe that the fees for services that we will pay and
receive under the services agreement will be no less favorable to us than we
could have obtained from unaffiliated third parties.
The services agreement has an initial term expiring one year from the
spin-off date. At the end of the one-year term, if we have not terminated the
agreement earlier, we may seek to renew or extend the term; however, neither we
nor AutoNation have any obligation to renew or extend the term or if renewed or
extended, to accept the services fees established in the initial term of the
agreement. 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, adjust the monthly fees payable
under the services agreement on terms mutually acceptable to us and AutoNation.
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, provided that the price we pay or receive for non-covered
services will be established on a negotiated basis which is no less favorable to
us than the charges for comparable services from unaffiliated third parties.
Tax Sharing Agreement
After the spin-off, we will no longer be included in AutoNation's
consolidated group for United States 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 before the
spin-off, 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 the ANC Rental Corporation;
- 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;
15
<PAGE> 27
- 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 and after 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.
After the spin-off, 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 as
part of a plan that included the spin-off, AutoNation would recognize gain on
the shares of our common stock that it distributes in the spin-off. Other
transactions could also jeopardize the tax-free nature of the spin-off. To
minimize these 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; or
- an opinion of counsel recognized as an expert in federal income tax
matters is received and is acceptable to AutoNation to the same effect.
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 granting or 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.
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.
Lease
Before the spin-off we will enter into two leases with AutoNation: (1) a
lease for approximately 155,000 square feet of office space to serve as our
corporate headquarters and (2) a lease for approximately 38,000 square feet of
computer data center space at AutoNation's data center. Both properties are
located in Fort Lauderdale, Florida.
We expect that payments due under the lease for our corporate headquarters
will total approximately $1,860,000 per year ($12 per square foot) for a term
yet to be determined. In addition, we will pay for all operating costs of the
facility. The lease will have an option to extend the term for two additional
periods of
16
<PAGE> 28
five years each. The lease payments may be increased on the fifth and eighth
anniversaries of the start of the lease using a factor based on the consumer
price index, but in no event can the increase exceed 3% per year.
We expect that payments due under the lease for the computer data center
space will total approximately $1,040,000 per year ($27.50 per square foot)
which includes our proportionate share of the operating expenses 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.
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
For a transition period following the spin-off, AutoNation may provide
guaranties in support of our debt financing until we amend or restructure our
existing facilities. We will pay AutoNation a fee for any credit support which
they provide in an amount to be determined based on the level of support
required.
TRADING OF ANC RENTAL AND AUTONATION COMMON STOCK
A regular public market for our common stock has not existed before the
date of this Information Statement. 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 regular way trading in our common stock will begin
on the first business day following the completion of the spin-off. In addition,
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, when regular way trading in our
common stock has begun. If the spin-off does not occur, all when-issued trading
will be canceled.
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 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 "affiliates" of ANC Rental under the
Securities Act. Persons who are affiliates of ANC Rental 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
17
<PAGE> 29
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.
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 detailed
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
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<PAGE> 30
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 would 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 the company making the
distribution or of the spun-off subsidiary, or issuances or redemptions of the
stock of the distributing company or of the spun-off subsidiary. 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.
The proposed regulations are proposed to be effective for spin-offs
occurring after the regulations become final. It is not clear 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%
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<PAGE> 31
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.
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<PAGE> 32
CAPITALIZATION
(IN MILLIONS)
The following table presents as of September 30, 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.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------
ACTUAL PRO FORMA
-------- ---------
<S> <C> <C>
Debt:
Revenue earning vehicle debt.............................. $5,169.5 $5,169.5
Other debt................................................ 106.1 106.1
-------- --------
Total debt........................................ 5,275.6 5,275.6
-------- --------
Shareholders' equity:
Investment by Parent...................................... 809.6 --
Preferred stock........................................... -- --
Common stock.............................................. --
Additional paid-in capital................................ -- 854.5
Accumulated other comprehensive loss...................... (8.9) (8.9)
-------- --------
Total shareholders' equity........................ 800.7 845.6
-------- --------
Total capitalization.............................. $6,076.3 $6,121.2
======== ========
</TABLE>
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<PAGE> 33
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 full fiscal years
1998, 1997 and 1996, and the selected balance sheet data at December 31, 1998
and 1997, presented below, from our Consolidated Financial Statements included
elsewhere in this Information Statement, which have been audited by Arthur
Andersen LLP, independent certified public accountants. We derived our selected
income statement data for each of the full fiscal years 1995 and 1994, and the
selected balance sheet data at December 31, 1996, 1995 and 1994 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. We derived the selected income
statement data for the nine months ended September 30, 1999 and 1998 and the
selected balance sheet data at September 30, 1999 from our Unaudited Interim
Consolidated Financial Statements included elsewhere in this Information
Statement. The Unaudited Interim Consolidated Financial Statements include all
material adjustments, consisting only of normal recurring adjustments, which we
consider necessary for a fair presentation of our financial position and results
of operations for these periods. Operating results for the nine months ended
September 30, 1999 are not necessarily indicative of the results that you may
expect for a full year. You should read the selected consolidated financial data
below in conjunction with our Consolidated Financial Statements and notes
thereto as of September 30, 1999 (unaudited) and December 31, 1998 and 1997 and
for the nine months ended September 30, 1999 and 1998 (unaudited) and for each
of the three years in the period ended December 31, 1998 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, 5 and
10 of Notes to Consolidated Financial Statements for a discussion of business
combinations, other debt 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.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue...................... $2,707.1 $2,646.1 $3,453.6 $3,055.1 $2,699.4 $1,992.8 $1,245.2
Income (loss) before
extraordinary charges...... 24.5 100.5 108.8 53.7 (49.9) (16.2) 14.1
Net income (loss)............ 24.5 100.5 108.8 51.2 (80.4) (16.2) 14.1
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................... $7,020.4 $6,252.6 $5,870.3 $4,669.4 $3,906.5 $2,352.5
Revenue earning vehicle debt....... 5,169.5 4,377.9 4,172.1 3,380.4 2,961.2 1,829.2
Other debt......................... 106.1 132.0 90.8 71.4 210.3 117.3
Shareholder's equity............... 800.7 738.7 526.2 330.9 76.3 86.6
</TABLE>
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<PAGE> 34
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, Consolidated Financial Statements and other financial
information included elsewhere in this Information Statement.
The following Unaudited Consolidated Pro Forma Income Statements for the
Nine Months Ended September 30, 1999, and for the Year Ended December 31, 1998,
give effect to the following transactions and events as if they occurred at the
beginning of the periods 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 reclassification of the investment by AutoNation in our company
to million shares of common stock and additional paid-in
capital; and
(5) 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) and (4) as if they
occurred on September 30, 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.
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<PAGE> 35
UNAUDITED CONSOLIDATED PRO FORMA INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Revenue.................................................... $2,707.1 $ 2,707.1
Expenses:
Cost of operations....................................... 2,081.1 $ 13.3(a) 2,094.4
Selling, general and administrative...................... 579.0 1.5(b) 580.5
-------- ------- ----------
Operating income........................................... 47.0 (14.8) 32.2
Interest income............................................ .5 5.2(c) 5.7
Interest expense........................................... (10.3) (.9)(a) (11.2)
Other income (expense), net................................ 1.1 1.1
-------- ------- ----------
Income before income taxes................................. 38.3 (10.5) 27.8
Provision for income taxes................................. 13.8 (3.8)(d) 10.0
-------- ------- ----------
Net income................................................. $ 24.5 $ (6.7) $ 17.8
======== ======= ==========
Pro forma basic and diluted earnings per share.............
==========
Pro forma weighted average shares outstanding..............
==========
</TABLE>
The accompanying notes are an integral part of this statement.
24
<PAGE> 36
UNAUDITED CONSOLIDATED PRO FORMA INCOME
STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenue..................................................... $3,453.6 $3,453.6
Expenses:
Cost of operations........................................ 2,622.9 $ 16.1(a) 2,639.0
Selling, general and administrative....................... 651.8 6.0(b) 657.8
-------- ------ --------
Operating income............................................ 178.9 (22.1) 156.8
Interest income............................................. 1.4 2.0(c) 3.4
Interest expense............................................ (8.0) (1.3)(a) (9.3)
Other income (expense), net................................. (2.2) (2.2)
-------- ------ --------
Income before income taxes.................................. 170.1 (21.4) 148.7
Provision for income taxes.................................. 61.3 (7.7)(d) 53.6
-------- ------ --------
Net income.................................................. $ 108.8 $(13.7) $ 95.1
======== ====== ========
Pro forma basic and diluted earnings per share..............
========
Pro forma weighted average shares outstanding...............
========
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE> 37
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 62.3 $ 62.3
Restricted cash and cash equivalents........................ 102.4 102.4
Short term investments...................................... -- $126.5(e) 126.5
Receivables, net............................................ 556.9 8.4(e) 565.3
Prepaid expenses............................................ 45.4 45.4
Revenue earning vehicles, net............................... 5,221.6 5,221.6
Property and equipment, net................................. 612.7 612.7
Intangible assets, net...................................... 369.5 369.5
Other assets................................................ 49.6 73.8(e) 123.4
-------- ------ --------
Total assets...................................... $7,020.4 $208.7 $7,229.1
======== ====== ========
Accounts payable............................................ $ 179.8 $ .2(e) $ 180.0
Accrued liabilities......................................... 240.4 240.4
Insurance reserves.......................................... 130.7 170.2(e) 300.9
Revenue earning vehicle debt................................ 5,169.5 5,169.5
Other debt.................................................. 106.1 106.1
Deferred income taxes....................................... 98.9 (6.6)(e) 92.3
Other liabilities........................................... 294.3 294.3
-------- ------ --------
6,219.7 163.8 6,383.5
-------- ------ --------
Shareholders' Equity:
Investment by AutoNation............................... 809.6 44.9(e) --
(854.5)(f)
Preferred stock........................................ -- --
Common stock........................................... -- (f)
Additional paid-in capital............................. -- 854.5(f) 854.5
Accumulated other comprehensive loss................... (8.9) (8.9)
-------- ------ --------
800.7 44.9 845.6
-------- ------ --------
Total liabilities and shareholders' equity........ $7,020.4 $208.7 $7,229.1
======== ====== ========
</TABLE>
The accompanying notes are an integral part of this statement.
26
<PAGE> 38
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 additional vehicle and non-vehicle interest expense, assuming
the refinancing of our vehicle and other debt occurred at the beginning of
the periods presented. Refinancing our vehicle and other debt will result
in a higher cost of capital due to the loss, following the spin-off, of
various credit enhancements provided by AutoNation before the spin-off.
Pro forma interest expense is calculated assuming all-in interest costs
for non-investment grade companies of similar credit quality. Interest
expense would increase approximately $3 million on an annualized basis for
a change in interest rate of 25 basis points. Historical and pro forma
all-in weighted average interest rates for the nine months ended September
30, 1999 and the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Vehicle debt interest rate......... 6.15% 6.48% 6.54% 6.87%
Other debt interest rate........... 5.80% 6.95% 6.74% 7.87%
</TABLE>
(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 periods 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
periods presented.
(d) Recognize income taxes on the pro forma adjustments described above.
(e) Record the contribution of AutoNation's insurance subsidiary,
assuming the contribution of the insurance subsidiary occurred as of
September 30, 1999.
(f) 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.
27
<PAGE> 39
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 notes thereto included elsewhere herein.
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 in 2000,
subject to conditions and consents described in the distribution agreement. We
have entered 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 has also provided us with the services of a number of its
executives and employees. In consideration for these services, AutoNation has
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 1998, we purchased approximately 75% of our rental fleet under
repurchase programs with various vehicle manufacturers.
28
<PAGE> 40
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.
During the year ended December 31, 1996, AutoNation issued 22.6 million
shares of its common stock to acquire Alamo which was accounted for under the
pooling of interests method of accounting. In addition, National acquired
certain assets and assumed certain liabilities of The Tilden Corporation, Inc.,
Tilden Car Rental, Inc. and Tilden Rent-A-Car System, Ltd., three Canadian
rental car businesses, for approximately $13.7 million in cash in a transaction
accounted for under the purchase method of accounting.
See Note 3, Business Combinations, of Notes to Consolidated Financial
Statements, for further discussion of business combinations.
CONSOLIDATED RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 and 1998
A summary of our operating results is as follows for the periods indicated
(in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1999 % 1998 %
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Revenue............................................. $2,707.1 100.0 $2,646.1 100.0
Expenses:
Cost of operations................................ 2,081.1 76.9 1,991.1 75.3
Selling, general and administrative............... 567.0 21.0 481.3 18.2
AutoNation incremental overhead allocations....... 12.0 .4 11.1 .4
-------- ------ -------- -----
Operating income.................................... $ 47.0 1.7 $ 162.6 6.1
======== ====== ======== =====
</TABLE>
Revenue was $2.71 billion for the nine months ended September 30, 1999
versus $2.65 billion for the comparable 1998 period, an increase of 2.3%. The
increase is primarily attributable to increased volume in our CarTemps and
international operations. Technical issues associated with our Global Odyssey
operating system adversely impacted customer volume and ancillary product
revenue at our National operations during
29
<PAGE> 41
the first half of 1999. The principal issue encountered was a temporary
degradation of system performance levels and response times at our reservation
centers. As a result, our ability to answer calls at our reservation centers, to
process rental agreements promptly at the airport rental counters and to
expedite customer car returns was adversely affected and greatly diminished the
quality of our customer service. Consequently, many customers who may have
otherwise selected us as their rental car provider, chose our competitors
instead.
We believe most significant issues relating to Global Odyssey were resolved
by the end of the second quarter of 1999. Since that time we believe that
customer service has improved and volume has substantially returned to
historical levels.
Cost of operations was $2.08 billion for the nine months ended September
30, 1999 versus $1.99 billion for the comparable 1998 period. The increase in
aggregate dollars is primarily due to higher fleet costs. Cost of operations as
a percentage of revenue was 76.9% for the nine months ended September 30, 1999
versus 75.3% for the comparable 1998 period. The increase in these costs as a
percentage of revenue is primarily due to higher fleet costs.
Selling, general and administrative expenses were $567.0 million for the
nine months ended September 30, 1999 versus $481.3 million for the comparable
1998 period. Selling, general and administrative expenses as a percentage of
revenue were 21.0% for the nine months ended September 30, 1999 versus 18.2% for
the comparable 1998 period. The increase in these costs in aggregate dollars and
as percentages of revenue is due to higher marketing costs, volume related
selling expenses, costs associated with the Global Odyssey system and other
system related costs.
AutoNation incremental overhead allocations include allocations of
AutoNation's general and administrative expenses not specifically attributable
to its operating subsidiaries. These allocations are based upon the ratio of our
invested capital to AutoNation's consolidated invested capital and were $12.0
million during the nine months ended September 30, 1999 and $11.1 million during
the nine months ended September 30, 1998. In addition to these allocations,
AutoNation has allocated some of its corporate general and administrative costs
for various centralized functions using various proportional cost allocation
methods. These allocations totaled approximately $13.5 million during the nine
months ended September 30, 1999 and $10.0 million during the nine months ended
September 30, 1998, and these allocations 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.
Interest Expense
Interest expense was $10.3 million for the nine months ended September 30,
1999 and $5.0 million for the nine months ended September 30, 1998. The increase
is primarily due to borrowings under various credit facilities to fund expansion
of our international operations.
Income Taxes
The provision for income taxes was $13.8 million for the nine months ended
September 30, 1999 and $56.6 million for the nine months ended September 30,
1998. The effective income tax rate was 36% for both periods. We anticipate that
our effective income tax rate will increase to approximately 38% to 39% in 2000
primarily due to foreign income taxes and other factors.
30
<PAGE> 42
Years Ended December 31, 1998, 1997 and 1996
A summary of our operating results is as follows for the years ended
December 31 (in millions):
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. $3,453.6 100.0 $3,055.1 100.0 $2,699.4 100.0
Expenses:
Cost of operations................. 2,622.9 76.0 2,337.5 76.5 2,167.2 80.3
Selling, general and
administrative.................. 637.0 18.4 543.9 17.8 547.1 20.3
AutoNation incremental overhead
allocations..................... 14.8 .4 9.6 .3 -- --
Restructuring and other charges.... -- -- 78.0 2.6 13.5 .5
-------- ----- -------- ----- -------- -----
Operating income (loss).............. $ 178.9 5.2 $ 86.1 2.8 $ (28.4) (1.1)
======== ===== ======== ===== ======== =====
</TABLE>
Revenue was $3.45 billion for the year ended December 31, 1998, $3.06
billion for the year ended December 31, 1997 and $2.70 billion for the year
ended December 31, 1996. The increase in 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%. The increase in 1997 over 1996 of $355.7
million, or 13.2%, is a result of volume which accounted for 4.6%, price which
accounted for 4.4% and acquisitions which accounted for 4.2%.
Cost of operations was $2.62 billion for the year ended December 31, 1998,
$2.34 billion for the year ended December 31, 1997 and $2.17 billion for the
year ended December 31, 1996, or, as a percentage of automotive rental revenue,
76.0% for the year ended December 31, 1998, 76.5% for the year ended December
31, 1997 and 80.3% for the year ended December 31, 1996. The increases in
aggregate dollars for 1998 and 1997 are primarily due to acquisitions,
maintaining a larger fleet and, in 1997, higher rental volume. The decreases in
such expenses as percentages of revenue are primarily a result of revenue
improvement from rental rate increases.
Selling, general and administrative expenses were $637.0 million for the
year ended December 31, 1998, $543.9 million for the year ended December 31,
1997 and $547.1 million for the year ended December 31, 1996, or, as a
percentage of automotive rental revenue, 18.4% for the year ended December 31,
1998, 17.8% for the year ended December 31, 1997, and 20.3% for the year ended
December 31, 1996. The 1998 increase in aggregate dollars over 1997 is primarily
due to acquisitions and costs associated with implementing Global Odyssey. The
1998 increase in selling, general and administrative expenses as a percentage of
revenue versus 1997 is primarily due to costs associated with implementing
Global Odyssey and higher selling costs. The 1997 decrease as a percentage of
revenue versus 1996 is primarily due to the reduction of selling and
administrative expenses of acquired businesses.
AutoNation incremental overhead allocations include allocations 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 $14.8
million during the year ended December 31, 1998 and $9.6 million during the year
ended December 31, 1997. AutoNation did not incur any material corporate
overhead costs attributable to us during the year ended December 31, 1996, and
therefore it did not allocate any overhead to us during this period. In addition
to these allocations, during the year ended December 31, 1998 AutoNation
allocated costs specifically related to us from certain of its centralized
corporate functions totaling approximately $15.2 million. 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.
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 were 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 September
30, 1999, we have spent approximately $44.7 million related to restructuring
31
<PAGE> 43
activities and have recorded $21.2 million of these restructuring charges
against certain assets. As of September 30, 1999, approximately $12.1 million
remained in accrued liabilities related to these charges. We expect to utilize
the majority of these reserves during the remainder of 1999. However, some of
our contractual obligations extend through 2002.
During the year ended December 31, 1996, we recorded restructuring charges
of approximately $13.5 million related to the integration of the operations of
Alamo into our operations. These costs primarily include severance benefits. We
substantially completed the activities associated with these charges during
1997.
Interest Income
Interest income was $1.4 million for the year ended December 31, 1998, $7.9
million for the year ended December 31, 1997 and $13.2 million for the year
ended December 31, 1996. The decreases in interest income are primarily due to
lower average cash balances on hand during 1998 and 1997.
Interest Expense
Interest expense was $8.0 million for the year ended December 31, 1998,
$6.6 million for the year ended December 31, 1997 and $30.3 million for the year
ended December 31, 1996. The decrease in 1998 and 1997 versus 1996 is primarily
due to the repayment of debt. 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 for income taxes was $61.3 million for the year ended
December 31, 1998, $31.8 million for the year ended December 31, 1997 and $5.0
million for the year ended December 31, 1996. The effective income tax rate was
36.0% for the year ended December 31, 1998, 37.2% for the year ended December
31, 1997 and 11.1% for the year ended December 31, 1996. The decrease in the
1998 effective tax rate compared to 1997 is primarily due to an increase in
foreign tax benefits. The 1996 income tax provision is primarily due to our
providing valuation allowances on certain deferred tax assets.
Extraordinary Charges
In connection with refinancing debt at substantially lower interest rates,
we recorded extraordinary charges, net of income taxes, of approximately $2.5
million for the year ended December 31, 1997 and $30.5 million for the year
ended December 31, 1996. Included in these charges are bond redemption premiums,
the write-off of debt issue costs, prepayment penalties and other related fees.
FINANCIAL CONDITION
We finance vehicle purchases for our domestic automotive rental operations
primarily through commercial paper and medium-term note financings. Our $2.39
billion commercial paper program consists of a $1.99 billion single-seller
program and a $400.0 million bank-sponsored multi-seller commercial paper
conduit facility. Borrowings under this program are secured by eligible vehicle
collateral and bear interest at market-based commercial paper rates. As of
September 30, 1999, we had approximately $451.4 million available under this
program. In February 1999, we issued $1.8 billion of rental vehicle asset-backed
medium-term notes consisting of $550.0 million floating rate notes maturing
through 2003; $750.0 million 5.88% fixed rate notes maturing through 2003; and
$500.0 million 6.02% fixed rate notes maturing through 2005. In May 1999, we
issued $700.0 million of floating rate asset-backed medium-term notes maturing
through 2005. We fixed the effective interest rate on the $1.25 billion floating
rate notes at 6.03% through the use of derivative transactions further described
below. We expect to continue to fund our revenue earning vehicle purchases with
secured vehicle financings.
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 will be required to
32
<PAGE> 44
modify existing financing programs or enter into new financing programs
resulting in the eventual removal of AutoNation's credit enhancements. 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 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 are likely to contain non-investment grade
financial covenants and operating restrictions which have not applied to us as
part of AutoNation.
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 September 30, 1999, notional principal amounts related to
interest rate swaps (variable to fixed rate) were $1.0 billion. As of September
30, 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 September 30, 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 6.03% as of September 30, 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
76.0% as of September 30, 1999.
We historically have received services from AutoNation supporting 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. Before the spin-off,
we will enter into an agreement with AutoNation under which AutoNation will
continue to provide some of these services to us for a period of one year from
the spin-off date. In exchange for the provision of these services, fees will be
payable to AutoNation in the amount of up to $541,200 per month beginning with
the date of the spin-off, subject to review and adjustment as we reduce the
amount of services we obtain from AutoNation from time to time. After the
initial term of the agreement, we will either extend the term of this agreement,
engage others to perform these services or perform these services internally. We
cannot assure you that AutoNation will continue to provide us these services
after the initial term of the agreement, or that the cost of these services will
not be higher if we purchase these services from unaffiliated providers or
employ staff to handle these functions internally.
We believe that 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. Historically, AutoNation has provided funding for
working capital requirements through capital contributions. As a result of the
separation, we will need to obtain our own working capital facilities. We intend
to enter into a new working capital credit facility in the amount of
approximately $300 million to $500 million, from which we can borrow from time
to time for our working capital requirements and which will result in additional
interest expense for us. We expect the closing of this credit facility to occur
on or before the spin-off date, but we cannot assure you that this financing
will occur. We expect this credit facility to be on terms less favorable to us
than the terms historically provided by AutoNation. We also believe that we will
be able to procure bid and performance bonds, to arrange for other financing as
necessary, and to engage in hedging transactions, on commercially acceptable
terms.
33
<PAGE> 45
CASH FLOWS
We discuss below the major components of changes in cash flows for the nine
months ended September 30, 1999 and 1998 and for the years ended December 31,
1998, 1997, and 1996.
Cash Flows from Operating Activities
Cash used in operating activities was $588.8 million during the nine months
ended September 30, 1999 and $524.9 million during the nine months ended
September 30, 1998, and $143.3 million during the year ended December 31, 1998,
$399.3 million during the year ended December 31, 1997 and $466.2 million during
the year ended December 31, 1996. Cash used in operating activities includes
purchases of revenue earning vehicles, net of sales and depreciation which
totaled $696.8 million for the nine months ended September 30, 1999, $515.4
million for the nine months ended September 30, 1998, $288.9 million for the
year ended December 31, 1998, $503.1 million for the year ended December 31,
1997 and $591.0 million for the year ended December 31, 1996. Revenue earning
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 $117.5 million for the nine months
ended September 30, 1999, $161.4 million for the nine months ended September 30,
1998, $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 $136.7 million during the nine months ended
September 30, 1999, $158.5 million during the nine months ended September 30,
1998, $193.5 million during the year ended December 31, 1998, $84.5 million
during the year ended December 31, 1997 and $37.8 million during the year ended
December 31, 1996. The increases in capital additions during the years ended
December 31, 1998 and 1997 are primarily a result of the development of Global
Odyssey and, in 1997, airport facility improvements.
We intend to finance capital expenditures through cash on hand and other
financings.
Cash Flows from Financing Activities
Cash flows from financing activities during the nine months ended September
30, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996 consisted
primarily of revenue earning vehicle and working capital financing.
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
34
<PAGE> 46
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
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.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE FAIR VALUE
-------------------------------------------------------- SEPTEMBER 30,
SEPTEMBER 30, 1999: 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999
- ------------------- ------ -------- ------ ----- ------ ---------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Asset)/Liability
Variable rate debt........ $201.6 $2,025.5 $ 3.2 $35.0 $550.0 $700.0 $3,515.3 $3,515.3
Average interest
rates................. 4.33% 5.46% 6.50% 5.56% 5.64% 5.63% -- --
Interest rate swaps....... 400.0 300.0 100.0 -- 200.0 -- 1,000.0 (2.1)
Average pay rate........ 5.79% 5.96% 5.63% -- 5.59% -- -- --
Average receive rate.... 5.61% 5.85% 6.24% -- 6.38% -- -- --
Interest rate caps........ -- -- -- -- 550.0 700.0 1,250.0 (54.8)
Average rate............ -- -- -- -- 5.73% 6.26% -- --
Interest rate floors...... -- -- -- -- 550.0 700.0 1,250.0 24.1
Average rate............ -- -- -- -- 5.73% 6.26% -- --
</TABLE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE FAIR VALUE
---------------------------------------------------------- DECEMBER 31,
DECEMBER 31, 1998: 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
- ------------------ -------- -------- ------ ----- ------ ---------- -------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(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% -- -- --
</TABLE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE FAIR VALUE
---------------------------------------------------------- DECEMBER 31,
DECEMBER 31, 1997: 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
- ------------------ -------- ------ -------- ------ ----- ---------- -------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Asset)/Liability
Variable rate debt........ $2,241.4 $153.7 $1,072.7 $ -- $35.0 $-- $3,502.8 $3,502.8
Average interest
rates................. 6.13% 6.20% 5.86% -- 6.28% -- -- --
Interest rate swaps....... 300.0 650.0 1,000.0 150.0 150.0 -- 2,250.0 8.0
Average pay rate........ 5.85% 5.81% 5.95% 6.50% 5.88% -- -- --
Average receive rate.... 5.50% 5.50% 5.50% 5.50% 5.50% -- -- --
</TABLE>
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 adverse weather conditions. Many of the
operating expenses such as rent, general insurance and administrative personnel
remain fixed during periods of decreased rental demand.
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<PAGE> 47
YEAR 2000
We utilize software and related technologies throughout our business that
will be affected by the date change in the year 2000. We are addressing the
issue of computer programs, embedded chips and third party suppliers that may be
impacted by Y2K. We have developed a dedicated Y2K Project Office to coordinate
compliance efforts and ensure that the project status is monitored and reported
throughout the organization.
We have identified four core phases in preparing for Y2K:
Assessment. In the assessment phase, we perform an inventory of
software, hardware, telecommunications equipment, facilities, and embedded
chip technology. Also, we identify and prioritize critical systems and
vendors.
Analysis. In the analysis phase, we review each system or item assessed
as critical to determine Y2K compliance. We also evaluate key vendors at
this time to determine their compliance status.
Remediation. In the remediation phase, we make modifications or
replacements to critical systems and equipment to make them Y2K compliant,
or we replace the systems and/or vendors with compliant systems or vendors.
We also make decisions as to whether changes are necessary or feasible for
key third-party suppliers.
Testing and Validation. In the testing and validation phase, we
prepare, execute and verify the testing of critical systems.
We have developed plans to correct Y2K issues and, to date, have made
progress as described below:
For several years, we, in conjunction with external consultants, have been
developing the Global Odyssey system. The Global Odyssey system currently has
three major components: a reservation system, an operating system and a fleet
management system. National's reservations unit utilizes the Global Odyssey
system. In addition, Alamo and National in Canada and Australia and National in
the United States currently utilize Global Odyssey's operating and fleet
management system. The Global Odyssey system was designed to be Y2K compliant
and testing confirming Y2K compliance was completed prior to these
implementations of the Global Odyssey system.
Alamo has completed remediation of all of its existing systems and National
has remediated all those systems that were not Y2K compliant. Testing confirming
Y2K compliance of both Alamo's and National's systems is substantially complete
but will continue through the remainder of 1999.
We have assessed the majority of our North American rental locations to
identify other critical business systems, products and vendors, including
embedded chip issues. Remediation is ongoing to modify or replace business
systems, products and vendors that are not Y2K compliant. Remediation was
substantially complete as of September 1999. We have also developed a plan for
our European operations, some of which are supported by Alamo. The remaining
European operations are supported by systems developed and supported by the
United Kingdom headquarters. Analysis and testing of these systems was
substantially completed in October 1999.
CarTemps USA has only one automated mission critical application. Analysis
and testing confirming Y2K compliance was completed in October 1999.
Costs To Address Y2K
As of September 30, 1999, we have spent approximately $10.8 million on Y2K
efforts across all areas. We currently expect to spend a total of approximately
$10.9 million when our Y2K efforts are complete. These amounts exclude costs
associated with replacing our systems with Global Odyssey since the Global
Odyssey implementation was planned in advance and not accelerated as a result of
Y2K. We expect to fund Y2K costs through operating cash flow. Y2K expenditures
vary significantly in project phases and vary depending on remedial methods
used. Past expenditures in relation to total estimated costs should not be
considered or relied on as a basis for estimating progress to completion for any
element of the Y2K project.
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Risks and Contingency Plans
We presently believe that, upon remediation of our business software
applications, embedded technology and compliance by key vendors, the Y2K issue
will not present a materially adverse risk to our future consolidated results of
operations, liquidity and capital resources. However, if we do not complete this
remediation in a timely manner, we believe that the most likely worst case
scenario would be either a delay or disruption in the delivery of products,
including the supply of new vehicles and/or original equipment manufacturer
replacement parts or a failure in one or more travel reservation systems. Either
of these conditions could have a material adverse impact on our operations
including loss of revenue, increased operating costs, loss of customers or
suppliers, or other significant disruptions to our business.
We have developed comprehensive business contingency plans for all mission
critical business processes. We will modify and update these plans throughout
the remainder of 1999.
Determining the Y2K readiness of third party products and business
dependencies requires pursuit, collection and appraisal of voluntary statements
made or provided by those parties, if available, together with independent
factual research. We have identified our material third-party relationships and
we have surveyed these parties. We are analyzing the results as we receive the
surveys. Although we have taken, and will continue to take reasonable efforts to
gather information to determine and verify the readiness of products and
dependencies, there can be no assurances that reliable information will be
offered or otherwise available. In addition, verification methods (including
testing methods) may not be reliable or fully implemented. Accordingly,
notwithstanding the foregoing efforts, there are no assurances that we are
correct in our determination or belief that a product (information technology
and other computerized equipment) or a business dependency (including a
supplier, distributor or ancillary industry group) is Y2K ready.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. We adopted
SOP 98-1 prospectively beginning January 1, 1999. Adoption of this Statement did
not impact our consolidated financial position or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. Our accounting policies conform with the requirements of
SOP 98-5, therefore, adoption of this Statement does not impact our consolidated
financial position or results of operations.
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 this Registration Statement
constitute "forward-looking statements" within the meaning of the Federal
Private Securities Litigation Reform Act of 1995. These statements contain
statements of our intentions, beliefs, expectations, or predictions for the
future, including statements regarding:
- our ability as an independent company to obtain credit facilities and
other services and the financial terms of these facilities and services;
- the continued growth of demand for rental vehicles;
- our ability to achieve operating leverage and economics of scale;
- our belief that the technical issues associated with Global Odyssey have
been resolved; and
- the cash flow that will be generated 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 the spin-off and our operation as an independent public
company;
- our substantial debt and increased cost of capital following the
spin-off;
- risks relating to demand for rental vehicles, including seasonality,
decreases in air travel and fuel costs and supply;
- the impact of problems we have experienced with our computer operating
system;
- the continued availability of repurchase programs and the ability of the
manufacturers to fulfill their obligations under these programs;
- the adoption of federal, state or local regulations including those that
restrict our ability to sell optional products; and
- the risks and costs associated with complying with the date change in the
year 2000.
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<PAGE> 50
BUSINESS
INDUSTRY OVERVIEW
According to independent market research publications, in 1998 the global
automotive rental industry exceeded $25 billion, with the domestic market
estimated at $17.2 billion and the European market, the principal component of
the international market, estimated at $8.1 billion. The industry has less than
ten significant global competitors.
North American Market
The North American market is mature, consisting of seven major competitors
conducting business in two principal markets, the $13.1 billion daily rental
market, which includes both leisure and business, and the $4.0 billion
replacement market.
- 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. Along with
ANC Rental's Alamo and National operations, the significant companies in the
daily rental market include Hertz, Avis, Budget, and Dollar/Thrifty.
Since 1996, market fundamentals have improved steadily in the daily rental
market, marked by increasing yields, solid transaction growth and declining
fleet costs. According to information provided by major U.S. airports, vehicle
rental industry revenue has increased at a compound annual rate of approximately
10% since 1992. We believe that factors such as increases in airline passenger
traffic, increased business travel and demographic trends, among others, may
continue to increase the demand for rental vehicles. Our network of airport
rental locations accounted for approximately 97% of our domestic revenue in
1998.
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.
- Replacement Rental
The replacement rental market is nearly exclusively off-airport, deriving
its business from two principal sources:
(1) the short term replacement of a person's primary vehicle while it is
out of service for extended repair; and
(2) discretionary short term rentals for local business or leisure
travel.
Along with ANC Rental's CarTemps USA operations, the significant companies
in the replacement rental market include Enterprise Rent-A-Car and the key
participants in the daily rental market.
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<PAGE> 51
The replacement rental market is characterized by relatively low revenue
per day and long rental periods. With the principal revenue stream from
insurance company collision claim centers, many transactions are directed to a
specific rental car company by way of a corporately negotiated standard rental
contract. 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, each of the major participants in the on-airport rental business has
reconsidered their position and has begun to enter the generally off-airport
replacement rental market.
International Market
The international market can be divided into two categories: (1) the $8.1
billion European market and (2) 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 U.K., France, Spain,
Germany and Italy. We participate in all five of these markets with corporate
operations in the U.K. and Germany and franchised operations in France, Italy
and Spain.
Our participation in foreign markets outside of Europe primarily consists
of our corporate operations in Australia, which contributed approximately $10
million in revenue for the year ended December 31, 1998, and franchised
operations in other non-European foreign markets, which contributed
approximately $5 million of license fees.
Changes in Ownership
Significant changes in the ownership of participants in the vehicle rental
industry have occurred since 1996. AutoNation acquired Alamo and National from
private owners. Team Rental Group, Inc., a large, publicly owned franchisee of
Budget, acquired control of Budget from Ford. Hertz, Avis and Dollar-Thrifty,
which previously were privately owned by Ford, Cendant and Chrysler,
respectively, have each conducted an initial public offering of their shares. We
believe that these companies, now all directly publicly owned, will increasingly
focus on profitability.
COMPANY OVERVIEW
Our company serves both the daily rental market, including the leisure and
business sub-markets, and the replacement rental market. In 1998 we operated an
average worldwide fleet of 331,000 cars, which we believe is one of the largest
fleets in the automotive rental industry. Our Alamo and National brands 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, Australia, Africa and the Middle East. Alamo operates only
through corporate-owned locations in the United States and through both
corporate-owned and franchised locations internationally. National operates
through both corporate-owned and franchised locations in the United States and
internationally. CarTemps USA serves the domestic replacement rental market,
operating in over 400 locations throughout the United States. We intend to
achieve operating leverage and economies of scale in fleet financing, fleet
utilization, revenue management and reservations inherent in a company of our
size. To this end, we have already begun to integrate some of the common
business functions of Alamo, National and CarTemps such as information systems
and fleet management and we may integrate other common business functions if
management deems it economically beneficial.
ANC Rental was incorporated in Delaware in October 1999 by AutoNation, and
owns all of AutoNation's interests in its vehicle rental subsidiaries, including
Alamo Rent-A-Car, Inc., National Car Rental Systems, Inc. and CarTemps USA, Inc.
Alamo was acquired by AutoNation in 1996, and National was acquired by
AutoNation in 1997. The CarTemps brand was launched by AutoNation in January
1998 and its operations represent the consolidated businesses of Spirit
Rent-A-Car and Snappy Car Rental, both of which were acquired by AutoNation in
1997, along with the Alasys replacement rental business owned by Alamo.
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OPERATIONS
Combined, Alamo, National and CarTemps make us one of the largest rental
car providers in the world. We intend as our business strategy to leverage the
strengths of our brands including the significant name recognition of Alamo and
National.
Daily Rental Operations
Alamo has been in business for more than 25 years and has built a
reputation as a leader in the leisure rental market. 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 are renting 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's advertising and marketing efforts are geared primarily toward
reaching the leisure customer. ANC Rental recently engaged the services of a
consumer research firm which conducted observational research to determine if
leisure car rental customers have different needs than customers who are renting
a car for a business trip. From these observations, a number of needs were
identified relative to the physical demands of traveling with families,
especially children and additional luggage, the need for elimination of
confusion in the rental process and the need to provide more information to our
customers. Alamo intends to make enhancements to its major facilities designed
to aid families in meeting these needs with children's play areas, kiosks which
will provide information about local area attractions and events, luggage
handling, better signage and more information about the process of renting a
car. These enhancements should contribute to improving the experience of renting
a car, in particular for leisure customers, many of whom are infrequent car
rental customers. ANC Rental's goal is to make the Alamo rental experience part
of the leisure traveler's vacation by meeting these needs and thereby gaining
loyalty to the brand.
Full service facilities will be in place in three of Alamo's locations by
February 2000. Other major locations will roll out full service facilities
through 2000 and 2001. Travel kiosks and improved signage will be implemented
throughout the entire network in 2000 and 2001. Alamo operates in 35 states in
the United States and in Canada, Mexico and Europe.
Because the Alamo brand primarily targets the leisure traveler,
approximately 25% of its business comes from the direct consumer sub-market and
demand is driven in large part by our direct advertising and promotional
efforts. Additional market strongholds, which account for 60% of revenue, are 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.
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.
A significant portion of the Alamo brand's business is booked in advance
through calls to its reservations centers. In the last two years, Alamo's
Internet on-line reservation system has been favorably received in the
marketplace, with on-line reservations in 1999 up nearly 200% over 1998, and is
currently generating approximately 6% of Alamo's total bookings.
National and its predecessors have been operating under the "National" name
since 1947. National has built its reputation in the automotive rental industry
as a provider of high quality rental vehicles, targeting the demanding needs of
the frequent traveler. National's vehicle rental business operates in all 50
states of the United States, as well as in Canada, the Caribbean, Latin America,
Asia, the Pacific, Australia, Europe, Africa and the Middle East. 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
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<PAGE> 53
to operate, and in some cases license, locations in each of these markets.
EuroDollar operations in Europe were rebranded as National operations in 1998.
The National brand offers the renter a quick, simple and efficient rental
process tailored to meet the requirements of the sophisticated and frequent
renter. The National brand's Emerald Aisle service offering most clearly
reflects its approach to the rental process and customer experience. A customer
enrolled in the brand's proprietary Emerald Club program is neither required to
make an advanced reservation nor visit the rental counter to complete the
transaction. Rather, the customer may proceed directly to the Emerald Aisle,
select the car of his or her choice and proceed to the exit gate where the
transaction is completed in a matter of minutes. Speed, choice and simplicity
are all goals of the National brand guarantee.
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.
With the National brand's focus on the frequent traveler, its business base
is more diverse than Alamo's. 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.
To maintain and enhance its reputation in the business travel market,
National has implemented programs to improve the rental experience for its
customers. For example, National's Emerald Aisle "pick your own" vehicle
approach has significantly increased the speed of the rental process. To improve
customer service, National built 200 additional exits in 1997 to allow customers
to leave rental locations with a minimum of time and hassle.
During 1999, National launched and upgraded its Internet on-line
reservations system. Initial acceptance of the site has been positive and
National anticipates that over time the Internet on-line reservations system
will increase in importance as a rental reservation medium.
Within our North American daily rental business, we intend to maximize the
benefits of the brand name recognition of both Alamo and National while
realizing economies of scale through the consolidation of some of their common
business functions.
Organizationally, both the Alamo and National business units remain
stand-alone operations responsible for all activities directly affecting the
customer such as airport relations and sales, marketing and counter operations.
We anticipate that our shared services organization will provide operating and
administrative services to our business units including fleet management and
maintenance, reservations, revenue management, accounting, legal, risk
management and human resource services.
We operate five reservations centers used primarily for bookings by
business and leisure travelers. The reservation system reroutes calls to less
utilized centers so that customers get the best and quickest service. In
addition, the reservation systems used by Alamo and National are linked so that
if one is sold out the customer will be rerouted to the other for service. A
large percentage of Alamo's and National's bookings are also made through an
automated global distribution system.
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
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
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<PAGE> 54
USA has expanded its business by opening new locations, particularly within the
network of service, repair and collision center operations in AutoNation's
automotive retail business.
We intend to expand CarTemps USA's presence in the replacement rental
market through geographic expansion, further development of relationships with
insurance companies and arrangements with AutoNation and other automotive
dealerships as additional sources of replacement rental business.
International Operations
Our international operations consist of corporate-owned and franchise
operations in Europe, Africa, the Middle East, Asia, the Pacific, Latin America
and the Caribbean. The majority of our international revenue is generated in the
United Kingdom.
Until October 1997 our corporate-owned operations consisted solely of Alamo
locations in the U.K., Germany and several smaller continental European
countries. In October 1997, we significantly increased our presence with the
acquisition of EuroDollar plc. which moved us into a market leadership role in
the U.K. Commencing in February 1998, we began the consolidation and expansion
of operations, combining the acquired EuroDollar operations with Alamo Europe
and some existing EuroDollar licensees and joint ventures. 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. Since that time we have focused our efforts on re-branding the
businesses and developing the network for both the Alamo and National brands.
Today we operate the Alamo and National brands in 67 countries outside the
USA and Canada. Internationally, we have over 2,000 locations consisting of both
on-airport and city operations. We operate an international fleet of
approximately 120,000 rental vehicles, of which approximately 45,000 are within
our corporate-owned locations.
Within Europe, the business market accounts for 47% of our total revenue,
the leisure market accounts for 45% of our total revenue and the replacement
market accounts for 8% of our total revenue.
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 U.S. 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.
Systems
For several years, we, in conjunction with external consultants, have been
developing the Global Odyssey system. The Global Odyssey system currently has
three major components: a reservation system, an operating system and a fleet
management system. National's reservations unit utilizes the Global Odyssey
system. In addition, Alamo and National in Canada and Australia and National in
the United States currently utilize Global Odyssey's operating and fleet
management system. Although we may implement some components of Global Odyssey
at a future date at Alamo or in connection with certain of our other operations,
we have no current intention to further implement any of the components of
Global Odyssey during the next fiscal year. Any future implementation will
depend upon an analysis of the costs and benefits involved in such
implementation.
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Additional Products and Services
In addition to basic vehicle rental charges, the sale of rental related
products generates a significant percentage of our revenue. These rental related
products include collision damage waivers, additional liability protection,
personal accident and personal effects protection, other travel related
insurance coverage and travel related products such as vehicle upgrades,
gasoline services, inter-city drop-off charges, and miscellaneous items such as
child restraint seats, ski racks, cellular phones and additional driver fees.
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
repurchase programs. Repurchase prices under the repurchase 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. vehicle rental
companies that participate in the daily rental market are these "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 September 30, 1999, approximately 75% of our fleet purchases are
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
95% 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 cost component of
our 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.
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 95% 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
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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
In 1998, no one customer accounted for more than 10% of our total revenue.
BUSINESS STRATEGY
Our strategy is to be the global automotive rental provider of choice,
achieving consistent, sustainable and profitable growth through the strategic
positioning of our brands in the vehicle rental market. Toward this end we seek
to improve stockholder value by:
- establishing brand value by providing a consistently superior rental
experience to our customers;
- achieving sustainable and profitable growth;
- achieving a competitive cost structure; and
- increasing operating margins.
We believe we are a uniquely positioned business. We operate under three
independent and distinct brands in the vehicle rental market. We believe our
multi-brand business model will allow us to achieve consistent and sustainable
growth in the market by better serving the needs of the individual car renter.
Additionally, we believe that the sharing of common administrative support
operations among the brands will allow us to achieve the economies of scale we
believe are inherent in a business of our size.
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, Inc., Budget Rent-A-Car Corporation, The Hertz Corporation,
and, in certain locations, Dollar-Thrifty Rent-A-Car and, in the replacement
rental market, these companies along with Enterprise Rent-A-Car Company. 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
are 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 believe that our facilities are sufficient for our needs. We own office
facilities in Minneapolis, Minnesota and Fort Lauderdale, Florida, as well as a
reservations center in Charleston, South Carolina. 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, 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 revenues 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.
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 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
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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, airport facility charges and
transportation surcharges.
ENVIRONMENTAL MATTERS
The operation of our business is subject to a variety of federal, state and
local requirements which regulate health, safety, the environment, zoning and
land use. Each state 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, federal, state or
local governmental authorities 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.
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 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 the management of hazardous materials, 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, along with related regulations, establish a
framework for regulating the handling, transportation, treatment and disposal of
hazardous and non-hazardous solid wastes. 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 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.
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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 up to 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 September 30, 1999, we employed approximately 23,000 associates
worldwide, approximately 2,600 of whom were covered by collective bargaining
agreements. 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.
SEASONALITY
Our business, and particularly the leisure travel market, is 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, we increase our vehicle rental fleet and workforce to
accommodate increased rental activity. As a result, any development that
disrupts travel patterns during the summer period could have a material adverse
effect on our financial condition and results of operations. The first and
fourth quarters are generally the weakest, because during this time there is
limited leisure travel and a greater potential for adverse weather conditions.
In these slower periods, many of our expenses, including rent, general insurance
and administrative personnel, remain fixed.
TRADEMARKS
We own a number of registered trademarks and service marks, including
Alamo(R), Alamo Rent a Car(R), National Car Rental(R), Emerald Club(R) and
CarTemps USA(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.
LEGAL PROCEEDINGS
We are a party to various legal proceedings which have arisen in the
ordinary course of our business. While the results of these matters cannot be
predicted with certainty, we believe that losses, if any, resulting
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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 46,
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 have been appointed by AutoNation, and will serve until our
first annual meeting of stockholders in 2001. Directors will be elected
annually. Our directors and executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael S. Egan........................... 59 Chairman of the Board
H. Wayne Huizenga......................... 61 Director
[Name].................................... [ ] Director
[Name].................................... [ ] Director
[Name].................................... [ ] Director
Michael S. Karsner........................ 41 President and Chief Executive Officer
Karen Beard............................... 50 President, North America Alamo and
National
Dennis M. Custage......................... 54 President, International Alamo and
National
Todd Faver................................ 37 President, CarTemps USA
Cheryl Budd............................... 47 Senior Vice President, Corporate
Communications
MacDonald Clark........................... 60 Senior Vice President
Kathleen Hyle............................. 41 Senior Vice President and Chief Financial
Officer
Edward L. Jones........................... 51 Senior Vice President, Human Resources
Howard Schwartz........................... 50 Senior Vice President, General Counsel and
Secretary
Mary Wood................................. 44 Senior Vice President, Shared Services
</TABLE>
MICHAEL S. EGAN joined our company as Chairman in November 1999. 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 Lowestfare.com, Inc., a discount travel
company, and 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 during this period until he bought a controlling
interest in 1986.
H. WAYNE HUIZENGA joined our company as a director in October 1999. 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 September 1994 until October
1995, Mr. Huizenga served as the Vice Chairman of Viacom Inc., a diversified
entertainment and communications company. During the same period, Mr. Huizenga
also served as the Chairman of the Board of Blockbuster Entertainment Group, a
division of Viacom. 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. 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 also owns the Miami Dolphins professional sports franchise, as well
as Pro Player 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.
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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 Inc., 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 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 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 FAVER has served as our President, CarTemps USA since November 1999.
From December 1998 until November, 1999, Mr. Faver served as President, Canadian
Operations of AutoNation 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 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 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, an 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 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
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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.
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.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------------
ANNUAL COMPENSATION IN 2000 SECURITIES
----------------------------------- UNDERLYING OPTIONS
OTHER ANNUAL TO PURCHASE ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS(2) COMPENSATION COMMON STOCK(3) COMPENSATION
--------------------------- --------- -------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Michael S. Karsner.......................... $ $-- $ * -- --
President and Chief Executive Officer
Karen Beard................................. 400,000 -- * -- --
President, North America Alamo and
National
MacDonald Clark
Senior Vice President..................... 375,000 -- * -- --
Kathleen Hyle............................... 350,000 -- * -- --
Senior Vice President and Chief Financial
Officer
Dennis M. Custage........................... 330,000 (4) (5) -- --
President, International Alamo and
National
</TABLE>
- ---------------
* 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) Each Named Officer may be eligible for a performance bonus in 2000.
(3) We anticipate that upon the completion of the spin-off, each Named Officer
will be granted an appropriate number of stock options, as determined by the
compensation committee of our Board of Directors, at an exercise price not
less than the fair market value at the time of the grant.
(4) In addition to any performance bonus for which Mr. Custage may otherwise be
eligible, according to his employment agreement, Mr. Custage is eligible to
receive a bonus of up to 50% of his annual pay based upon personal
performance objectives and divisional and company performance.
(5) 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. See "--Employment Agreement."
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Employment Agreement
In June 1998 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 $330,000 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 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 to either 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.
Committees of the Board of Directors
Our board will have an audit committee, consisting entirely of independent
directors, which will review the results and scope of the audit and other
services provided by our independent accountants. In addition, our board will
have a compensation committee, comprised of two or more members of our board who
qualify as "outside directors" within the meaning of Section 162(m) of the Code
and "non-employee directors" within the meaning of Rule 16b-3(3)(i) under the
Exchange Act. The compensation committee will determine the compensation,
including salaries, bonuses, restricted stock and option grants, for our
executive officers.
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 adjusted 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
53
<PAGE> 65
for a breach of fiduciary duty as a director, except for liabilities arising (i)
from any breach of the director's 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 directors, (3) each Named Officer and (4) all of
our directors and executive officers as a group. We base the share amounts on
each persons beneficial ownership of AutoNation at the date of this document,
unless we indicate some other basis for the share amounts. We have 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 and warrants exercisable within 60 days
of the completion of the spin-off.
<TABLE>
<CAPTION>
SHARES TO BE
BENEFICIALLY OWNED
--------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------ ---------- -------
<S> <C> <C>
H. Wayne Huizenga(1)........................................ 8.0
110 S.E. 6th Street
Fort Lauderdale, Florida 33301
Huizenga Investments Limited Partnership.................... 6.1
P.O. Box 50102
Henderson, NV 89106
Michael S. Egan.............................................
[Director].................................................. [] []
[Director].................................................. [] []
[Director].................................................. [] []
Michael S. Karsner.......................................... *
Karen Beard................................................. *
MacDonald Clark............................................. []
Kathleen Hyle............................................... *
Dennis M. Custage........................................... *
All directors and executive officers as a group (14
persons).................................................. []
</TABLE>
- ---------------
* Less than one percent
(1) The shares to be beneficially owned by Mr. Huizenga consist of (1)
shares owned by Huizenga Investments Limited Partnership, a Nevada limited
partnership controlled by Mr. Huizenga; (2)
shares owned directly by Mr. Huizenga; and (3) shares owned indirectly
through his wife. Mr. Huizenga disclaims beneficial ownership of the shares
owned by his wife.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of agreements and transactions among us and
certain related parties. 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.
54
<PAGE> 66
Pro Player Stadium, a professional sports stadium in South Florida which is
owned and controlled by Mr. Huizenga, 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 1998 we paid $500,000 for signage at the Arena and
approximately $400,000 for tickets, sponsorship and the use of executive suites.
During 1998, 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. Huizenga, a director, is also the Chairman of AutoNation.
Mr. Egan has a beneficial ownership interest in Certified Vacations, Inc.,
a domestic tour operator that has conducted business with us. Total gross
revenue recognized by us from Certified Vacations was approximately $10.8
million for the year ended December 31, 1998.
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 402,895,436 shares as of November 4,
1999.
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
liquidations 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.
55
<PAGE> 67
TRANSFER AGENT AND REGISTRAR
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.
INCORPORATION BY REFERENCE
We incorporate by reference the financial statements of Value Rent-A-Car,
Inc. as of and for the year ended December 31, 1996 included in AutoNation's
Current Report on Form 8-K at Exhibit 99, pages F-29 to F-47, dated September
15, 1997, filed with the Securities and Exchange Commission under the Exchange
Act.
WHERE YOU CAN FIND MORE INFORMATION
Upon effectiveness of this registration statement, 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 filed 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 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. 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.
56
<PAGE> 68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1998 and 1997................ F-3
Consolidated Statements of Income and Comprehensive Income
for the Nine Months Ended September 30, 1999 and 1998
(Unaudited) and for Each of the Three Years Ended December
31, 1998.................................................. F-4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited) and for Each
of the Three Years Ended December 31, 1998................ F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
F-1
<PAGE> 69
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, 1998 and 1997, 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, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida
October 15, 1999.
F-2
<PAGE> 70
ANC RENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 62.3 $ 33.6 $ 44.9
Restricted cash and cash equivalents....................... 102.4 14.5 15.0
Receivables, net........................................... 556.9 638.9 533.0
Prepaid expenses........................................... 45.4 59.4 61.3
Revenue earning vehicles, net.............................. 5,221.6 4,588.7 4,466.5
Property and equipment, net................................ 612.7 522.0 382.7
Intangible assets, net..................................... 369.5 376.8 352.0
Other assets............................................... 49.6 18.7 14.9
-------- -------- --------
$7,020.4 $6,252.6 $5,870.3
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable........................................... $ 179.8 $ 190.2 $ 164.2
Accrued liabilities........................................ 240.4 248.7 284.8
Insurance reserves......................................... 130.7 164.5 260.5
Revenue earning vehicle debt............................... 5,169.5 4,377.9 4,172.1
Other debt................................................. 106.1 132.0 90.8
Deferred income taxes...................................... 98.9 86.7 17.9
Other liabilities.......................................... 294.3 313.9 353.8
Commitments and contingencies
Shareholder's equity:
Investment by Parent..................................... 809.6 743.2 529.1
Accumulated other comprehensive loss..................... (8.9) (4.5) (2.9)
-------- -------- --------
800.7 738.7 526.2
-------- -------- --------
$7,020.4 $6,252.6 $5,870.3
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 71
ANC RENTAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE........................................ $2,707.1 $2,646.1 $3,453.6 $3,055.1 $2,699.4
EXPENSES:
Cost of operations........................... 2,081.1 1,991.1 2,622.9 2,337.5 2,167.2
Selling, general and administrative.......... 579.0 492.4 651.8 553.5 547.1
Restructuring and other charges.............. -- -- -- 78.0 13.5
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)........................ 47.0 162.6 178.9 86.1 (28.4)
INTEREST INCOME................................ .5 .6 1.4 7.9 13.2
INTEREST EXPENSE............................... (10.3) (5.0) (8.0) (6.6) (30.3)
OTHER INCOME (EXPENSE), NET.................... 1.1 (1.1) (2.2) (1.9) .6
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.............. 38.3 157.1 170.1 85.5 (44.9)
PROVISION FOR INCOME TAXES..................... 13.8 56.6 61.3 31.8 5.0
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGES..... 24.5 100.5 108.8 53.7 (49.9)
-------- -------- -------- -------- --------
EXTRAORDINARY CHARGES RELATED TO EARLY
EXTINGUISHMENT OF DEBT, NET OF BENEFIT FOR
INCOME TAXES OF $1.5 IN 1997 AND $14.5 IN
1996......................................... -- -- -- (2.5) (30.5)
-------- -------- -------- -------- --------
NET INCOME (LOSS).............................. 24.5 100.5 108.8 51.2 (80.4)
-------- -------- -------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments..... (4.4) 4.4 (1.6) (4.7) (.8)
-------- -------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS).................... $ 20.1 $ 104.9 $ 107.2 $ 46.5 $ (81.2)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 72
ANC RENTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1999 1998 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES:
Net income (loss)............................ $ 24.5 $ 100.5 $ 108.8 $ 51.2 $ (80.4)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Purchases of revenue earning vehicles...... (5,675.3) (5,155.2) (6,974.6) (5,227.3) (4,695.3)
Sales of revenue earning vehicles.......... 4,185.7 3,969.8 5,780.1 3,892.3 3,356.4
Depreciation of revenue earning vehicles... 792.8 670.0 905.6 831.9 747.9
Depreciation and amortization of property
and equipment............................ 47.9 42.8 52.3 39.5 37.3
Amortization of intangible assets.......... 13.7 9.8 14.0 7.3 4.5
Deferred income tax provision (benefit).... 13.8 56.6 68.8 (34.1) 26.2
Parent overhead and insurance charges...... 117.5 161.4 204.6 9.6 --
Non-cash restructuring and other charges... -- -- -- 67.4 13.5
Extraordinary charges, net of income
taxes.................................... -- -- -- 2.5 30.5
Changes in assets and liabilities, net of
effects from business acquisitions:
Receivables.............................. 82.1 (171.5) (104.2) (68.2) (74.8)
Prepaid expenses and other assets........ 4.1 3.8 (3.9) 47.1 (41.9)
Accounts payable and accrued
liabilities........................... (18.9) 54.3 (16.0) (163.6) 132.9
Other liabilities........................ (176.7) (267.2) (178.8) 145.1 77.0
---------- ---------- ---------- ---------- ----------
(588.8) (524.9) (143.3) (399.3) (466.2)
---------- ---------- ---------- ---------- ----------
CASH USED IN INVESTING ACTIVITIES:
Cash acquired (paid) for business
acquisitions............................... -- -- 2.1 3.9 (13.7)
Purchases of property and equipment.......... (136.7) (158.5) (193.5) (84.5) (37.8)
Other........................................ 4.6 (4.1) (2.5) (9.1) 42.3
---------- ---------- ---------- ---------- ----------
(132.1) (162.6) (193.9) (89.7) (9.2)
---------- ---------- ---------- ---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from revenue earning vehicle
financing.................................. 64,908.3 32,532.7 46,950.4 29,103.7 17,802.7
Payments on revenue earning vehicle
financing.................................. (64,138.4) (31,797.5) (46,578.3) (28,728.9) (17,452.0)
Net (payments) proceeds from other debt...... (25.1) (9.1) 41.9 (23.4) (147.9)
Increase (decrease) in investment by
Parent..................................... (73.0) (152.3) (98.0) (139.4) 402.7
Subsidiary limited partner contributions..... 118.7 79.1 13.3 79.1 --
Debt costs................................... (33.0) -- -- -- --
Other........................................ (7.9) .8 (3.4) 10.7 (57.4)
---------- ---------- ---------- ---------- ----------
749.6 653.7 325.9 301.8 548.1
---------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 28.7 (33.8) (11.3) (187.2) 72.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD....................................... 33.6 44.9 44.9 232.1 159.4
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..... $ 62.3 $ 11.1 $ 33.6 $ 44.9 $ 232.1
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 73
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABLES IN MILLIONS)
(INFORMATION RELATED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED)
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 Inc. ("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.
In the opinion of management, the Unaudited Consolidated Financial
Statements contain all material adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the consolidated financial position of
the Company at September 30, 1999 and the consolidated results of operations and
cash flows for the nine months ended September 30, 1999 and 1998. Income taxes
during these interim periods have been provided for based upon the Company's
anticipated annual effective income tax rate. Operating results for these
interim periods are not necessarily indicative of the results that can be
expected for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash
Restricted cash 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:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------
1999 1998 1997
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables........................................ $265.6 $244.6 $187.2
Vehicle manufacturer receivables......................... 231.3 372.1 326.8
Other.................................................... 91.9 50.7 47.8
------ ------ ------
588.8 667.4 561.8
Less: allowance for doubtful accounts.................... (31.9) (28.5) (28.8)
------ ------ ------
$556.9 $638.9 $533.0
====== ====== ======
</TABLE>
F-6
<PAGE> 74
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenue earning vehicles.............................. $6,046.0 $5,062.8 $4,980.1
Less: accumulated depreciation........................ (824.4) (474.1) (513.6)
-------- -------- --------
$5,221.6 $4,588.7 $4,466.5
======== ======== ========
</TABLE>
Revenue earning vehicles with a net book value of approximately $3.73
billion at December 31, 1998 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:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1999 1998 1997
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Land............................................. $ 138.6 $ 128.5 $ 115.0
Furniture, fixtures and equipment................ 331.0 211.5 129.2
Buildings and improvements....................... 368.2 365.7 299.4
------- ------- -------
837.8 705.7 543.6
Less: accumulated depreciation and
amortization................................... (225.1) (183.7) (160.9)
------- ------- -------
$ 612.7 $ 522.0 $ 382.7
======= ======= =======
</TABLE>
F-7
<PAGE> 75
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
Intangible Assets
Intangible assets consists 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 $19.4 million and $8.7 million at December
31, 1998 and 1997, 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
measuring their recoverability.
Liability Insurance
Commencing in 1998 (for claims occurring after November 30, 1997), the
Company began purchasing insurance from Parent's wholly-owned 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 Parent 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 Parent. Insurance reserves associated with these coverages
totaled approximately $170.2 million at September 30, 1999. Prior to the
Distribution, as defined in Note 16, Subsequent Events, Parent intends to
contribute its 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. In 1996,
the Company changed its method of accounting for certain of its insurance
reserves by no longer discounting such liabilities. The effect of this change
totaled approximately $13.5 million and is included as a component of selling,
general and administrative expenses.
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
<PAGE> 76
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Liabilities
A summary of other liabilities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------
1999 1998 1997
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Minority interest........................................ $211.1 $ 92.4 $ 79.1
Vehicle payables......................................... 46.2 196.3 203.3
Other miscellaneous...................................... 37.0 25.2 71.4
------ ------ ------
$294.3 $313.9 $353.8
====== ====== ======
</TABLE>
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 $4.6 million and
$4.3 million for the nine months ended September 30, 1999 and 1998 (unaudited),
respectively, and $5.9 million and $2.4 million for the years ended December 31,
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)
During the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in a financial statement that
is displayed with the same prominence as other financial statements. 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 $(4.5) million and $(2.9) million at
December 31, 1998 and 1997, 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, 1998
were not significant.
Income Taxes
The Company is included in the consolidated federal income tax return of
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.
Alamo, which was acquired in 1996 and accounted for under the pooling of
interests method of accounting, was a subchapter S corporation for income tax
purposes. Alamo's subchapter S corporation status was terminated effective with
the closing date of the acquisition. For purposes of these Consolidated
Financial Statements, federal and state income taxes have been recorded as if
Alamo had filed subchapter C corporation tax returns for the pre-acquisition
periods, and the current income tax expense is reflected in shareholder's
equity. Pre-acquisition income taxes related to Alamo recorded in the
consolidated financial statements were $6.7 million during the year ended
December 31, 1996.
F-9
<PAGE> 77
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Parent. Immediately prior
to the Distribution (as defined in Note 16, Subsequent Events), 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 Parent will be converted into shares of Company common
stock, which will constitute 100% of the outstanding shares of Common Stock
which will be distributed to Parent's stockholders.
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, 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 swap 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 swap. If all or part of an
underlying position is terminated, the related pro-rata portion of any
unrecognized gain or loss on the swap 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,
1998 or 1997.
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, 1998 or 1997. Advertising expense was $125.1 million, $134.4
million and $120.6 million for the years ended December 31, 1998, 1997 and 1996,
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 transactions
during the years ended December 31, 1998, 1997 and 1996.
The Company made interest payments of approximately $192.3 million, $210.0
million and $257.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively, including interest on revenue
F-10
<PAGE> 78
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earning vehicle debt. The Company made income tax payments of approximately $0,
$79.0 million and $6.2 million for the years ended December 31, 1998, 1997 and
1996, respectively, including amounts paid to Parent.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
adopted SOP 98-1 prospectively beginning January 1, 1999. Adoption of this
Statement did not impact the Company's consolidated financial position or
results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company's accounting policies conform with the
requirements of SOP 98-5, therefore adoption of this Statement does not impact
the Company's consolidated financial position or results of operations.
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 Parent to the Company subsequent to their acquisition. The
Company has applied the same accounting method used by 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, Parent acquired certain automotive
rental businesses which were contributed to the Company. The aggregate purchase
price paid by Parent in transactions accounted for under the purchase method of
accounting was $11.1 million in cash.
F-11
<PAGE> 79
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1997, 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 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, 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.
During the year ended December 31, 1996, Parent issued 22.6 million shares
of Parent Common Stock to acquire Alamo which was accounted for under the
pooling of interests method of accounting. In addition, National acquired
certain assets and assumed certain liabilities of The Tilden Corporation, Inc.,
Tilden Car Rental, Inc. and Tilden Rent-A-Car System, Ltd., three Canadian
rental car businesses, for approximately $13.7 million in cash in a transaction
accounted for under the purchase method of accounting.
The assets and liabilities contributed by 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Revenue earning vehicles.................................... $ 26.8 $ 415.3 $ 78.9
Property and equipment...................................... .3 33.4 7.3
Intangible and other assets................................. 12.9 374.3 1.3
Working capital............................................. (2.1) (136.6) 2.0
Debt assumed................................................ (27.8) (475.0) (72.7)
Other liabilities........................................... (1.1) (9.9) (3.1)
Cash acquired (paid)........................................ 2.1 3.9 (13.7)
------ ------- ------
Investment by Parent........................................ $ 11.1 $ 205.4 $ --
====== ======= ======
</TABLE>
The pro forma effect of 1998 and 1996 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 assuming 1997 acquisitions
accounted for under the purchase method of accounting had occurred as of the
beginning of the periods presented are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue..................................................... $3,344.6 $3,140.7
Income (loss) before extraordinary charge................... 48.6 (64.5)
Net income (loss)........................................... 46.1 (95.0)
</TABLE>
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 periods
presented.
F-12
<PAGE> 80
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:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Amounts under various commercial paper programs
secured by eligible vehicle collateral; interest based
on market-dictated commercial paper rates; weighted
average interest rates of 5.43%, 5.54% and 5.85% at
September 30, 1999, December 31, 1998 and 1997,
respectively.......................................... $1,923.2 $3,363.2 $2,919.4
Amounts under various medium-term note programs
secured by eligible vehicle collateral:
Fixed rate component; weighted average interest
rates of 6.41%, 7.12% and 7.09% at September 30,
1999, December 31, 1998 and 1997, respectively;
maturities through 2003.......................... 1,749.8 655.9 736.3
Floating rate component based on a spread over 3
month LIBOR; weighted average interest rates of
5.64%, 5.80% and 6.28% at September 30, 1999,
December 31, 1998 and 1997, respectively;
maturities through 2001.......................... 1,250.0 143.7 166.5
Other uncommitted secured vehicle financings primarily
with financing institutions in the United Kingdom;
LIBOR based interest rates; weighted average
interest rates of 4.81%, 6.16% and 6.99% at
September 30, 1999, December 31, 1998 and 1997,
respectively........................................ 246.5 215.1 349.9
-------- -------- --------
$5,169.5 $4,377.9 $4,172.1
======== ======== ========
</TABLE>
At December 31, 1998, the Company had commercial paper programs aggregating
$3.55 billion comprised of a $2.3 billion single-seller commercial paper program
and three bank-sponsored multi-seller commercial paper conduit facilities
totaling $1.25 billion. Bank lines of credit of $2.07 billion provide liquidity
backup for the facilities. Letters of credit totaling $335.0 million provide
credit enhancement and additional liquidity backup for the facilities. The
weighted average interest rate on total revenue earning vehicle debt was 5.82%
and 6.17% at December 31, 1998 and 1997, 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.
In January 1999, the Company increased the commercial paper programs to
$3.9 billion through an increase in the conduit facilities from $1.25 billion to
$1.6 billion. In February 1999, the Company issued $1.8 billion of rental
vehicle asset-backed medium-term notes consisting of $550.0 million floating
rate notes maturing through 2003; $750.0 million 5.88% fixed rate notes maturing
through 2003; and $500.0 million 6.02% fixed rate notes maturing through 2005.
In May 1999, the Company issued $700.0 million of floating rate asset-backed
medium-term notes maturing through 2005 (collectively, the "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. Letters of credit
totaling $250.0 million provide credit enhancement for the Notes. Proceeds from
the Notes were used to refinance amounts outstanding under the Company's
commercial paper programs. As a result of the refinancing, the Company has
reduced its commercial paper programs from $3.9 billion to $2.39 billion,
comprised of a $1.99 billion single-seller program and a bank-sponsored
multi-seller commercial paper conduit facility totaling $400.0 million. Bank
lines of credit of $1.79 billion terminating
F-13
<PAGE> 81
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 2000 provide liquidity backup for these facilities. Letters of credit
totaling $240.0 million provide credit enhancement and additional liquidity
backup for the facilities.
At September 30, 1999, aggregate maturities of revenue earning vehicle debt
were as follows:
<TABLE>
<S> <C>
October through December 1999............................... $ 201.7
2000........................................................ 1,964.8
2001........................................................ 3.2
2002........................................................ 324.8
2003........................................................ 1,475.0
Thereafter.................................................. 1,200.0
--------
$5,169.5
========
</TABLE>
5. OTHER DEBT
Other debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------
1999 1998 1997
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to vehicle manufacturer; weighted average
interest rates of 6.26%, 6.12% and 6.43% at September 30,
1999, December 31, 1998 and 1997, respectively; matures
2002..................................................... $ 45.5 $ 45.5 $ 55.3
Notes payable to former owners of acquired business;
interest payable using LIBOR based rates; weighted
average interest rates of 5.12%, 7.02% and 6.94% at
September 30, 1999, December 31, 1998 and 1997,
respectively; redeemable at the option of the holder
through maturity in 2003............................... 12.2 25.3 32.0
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other uncommitted credit facilities and other notes;
interest ranging from 3% to 7%; maturing through 2000;
guaranteed by Parent..................................... 48.4 61.2 3.5
------ ------ ------
$106.1 $132.0 $ 90.8
====== ====== ======
</TABLE>
In December 1996, the Company completed a tender offer and consent
solicitation resulting in the repurchase of approximately $100.0 million
aggregate principal amount 11.75% senior notes due 2006 ("Senior Notes"), which
were issued in February 1996. The Company recorded an extraordinary charge of
$30.5 million, net of income taxes, during 1996 related to the early
extinguishment of the Senior Notes. Included in this charge are bond redemption
premiums, the write-off of debt issue costs, prepayment penalties and other fees
related to the tender offer.
At September 30, 1999, aggregate maturities of notes payable and long-term
debt are as follows: $10.5 million for the remainder of 1999, $60.6 million in
2000 and $35.0 million in 2002.
F-14
<PAGE> 82
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Current:
Federal............................................... $(7.1) $ 61.6 $(19.3)
State................................................. (.4) 4.3 (1.9)
Federal and state deferred.............................. 78.7 (29.7) 16.9
Foreign deferred........................................ (9.9) (4.4) (8.8)
Change in valuation allowance........................... -- -- 18.1
----- ------ ------
Provision for income taxes.............................. $61.3 $ 31.8 $ 5.0
===== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% (35.0)%
Non-deductible expenses..................................... 1.2 1.7 4.8
State income taxes, net of federal benefit.................. 2.2 2.5 3.1
Foreign income tax benefit at other than U.S. rates......... (2.4) (1.1) (2.2)
Change in valuation allowance............................... -- -- 40.4
Other, net.................................................. -- (.9) --
---- ---- -----
Effective tax rate.......................................... 36.0% 37.2% 11.1%
==== ==== =====
</TABLE>
Components of the net deferred income tax liability at December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred income tax liabilities:
Book basis in property over tax basis..................... $ 289.6 $ 235.6
Deferred income tax assets:
Net operating losses...................................... (75.4) (63.7)
Accruals not currently deductible......................... (143.5) (170.0)
Valuation allowance......................................... 16.0 16.0
------- -------
Net deferred income tax liability........................... $ 86.7 $ 17.9
======= =======
</TABLE>
At December 31, 1998, the Company had available domestic net operating loss
carryforwards of approximately $57.6 million which begin to expire in the year
2009 and foreign net operating loss carryforwards of approximately $89.4
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, 1998, 1997 and 1996 were $(28.8)
million, $(11.5) million and $(22.0) million, respectively.
F-15
<PAGE> 83
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENT BY PARENT
The changes in the investment by Parent are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
NINE MONTHS ENDED -------------------------
SEPTEMBER 30, 1999 1998 1997 1996
------------------ ------ ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period............. $743.2 $529.1 $ 329.1 $ 73.8
Net income (loss).......................... 24.5 108.8 51.2 (80.4)
Capital transactions by former owners of
pooled companies......................... -- -- -- (32.5)
Transactions with Parent:
Parent overhead allocations.............. 25.5 30.0 9.6 --
Insurance and benefit charges............ 92.0 174.6 -- --
Intercompany purchases................... -- (4.9) 7.3 --
Income taxes............................. (2.6) (7.5) 65.9 (34.5)
Cash transfers........................... (73.0) (98.0) (139.4) 402.7
Business acquisitions contributed by
Parent................................ -- 11.1 205.4 --
------ ------ ------- ------
41.9 105.3 148.8 368.2
------ ------ ------- ------
Balance at end of period................... $809.6 $743.2 $ 529.1 $329.1
====== ====== ======= ======
</TABLE>
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 September 30, 1999, approximately 6.0 million outstanding
options to acquire shares of Parent Common Stock were held by employees of the
Company, approximately 1.3 million of which were vested.
Vested options to acquire Parent Common Stock held by employees of the
Company as of the Distribution date will remain outstanding and exercisable
pursuant to the grant terms under Parent's stock option plans. Unvested options
to acquire Parent Common Stock held by employees of the Company as of the
Distribution date will be cancelled.
The Company currently intends to adopt a stock option plan on or prior to
the Distribution date to provide for the grant of options to purchase shares of
the Company's common stock to eligible employees. Future grants under the
Company's stock option plan will be granted at the fair market value of the
Company's common stock on the date of grant.
F-16
<PAGE> 84
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and pro forma weighted average fair value of options granted, with
related assumptions, are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Pro forma net income (loss)............................... $ 95.6 $ 45.8 $ (80.4)
Pro forma weighted average fair value of options
granted................................................. 13.87 10.03 9.80
Risk free interest rates.................................. 4.76% 5.74% 5.98%
Expected lives............................................ 5 years 5 years 5 years
Expected volatility....................................... 40% 40% 40%
</TABLE>
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.
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:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Real property............................................... $ 58.3 $ 51.1 $ 38.0
Equipment and software...................................... 24.0 38.9 20.5
Airport concession and permit fees:
Minimum fixed obligations................................. 79.3 86.3 89.6
Additional amounts, based on revenue from vehicle
rentals................................................ 96.4 110.0 94.5
------ ------ ------
Total............................................. $258.0 $286.3 $242.6
====== ====== ======
</TABLE>
F-17
<PAGE> 85
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 are as follows:
<TABLE>
<S> <C>
Year Ending December 31:
1999........................................................ $118.6
2000........................................................ 76.4
2001........................................................ 60.3
2002........................................................ 50.4
2003........................................................ 31.9
Thereafter.................................................. 102.4
------
$440.0
======
</TABLE>
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, 1998, surety bonds and letters
of credit totaling $82.7 million expire through 2012.
10. RESTRUCTURING AND OTHER CHARGES
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 September
30, 1999, the Company has spent approximately $44.7 million related to
restructuring activities and has recorded $21.2 million of these restructuring
charges against certain assets. As of September 30, 1999, approximately $12.1
million remained in accrued liabilities related to these charges. The Company
expects the majority of these reserves to be utilized during the remainder of
1999, however, certain contractual obligations for closed locations extend
through 2002.
During the year ended December 31, 1996, the Company recorded pre-tax
charges of approximately $13.5 million related primarily to the integration of
the operations of Alamo into those of the Company. These costs primarily include
severance benefits. The activities associated with these charges were
substantially completed during 1997.
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 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
F-18
<PAGE> 86
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of derivatives. The Company's credit exposure on its interest rate
derivatives was not material at December 31, 1998 or 1997.
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 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, 1998 and 1997, notional principal amounts related to interest rate
swaps (variable to fixed rate) were $2.45 billion and $2.25 billion,
respectively. The swap portfolio maturities are as follows at December 31, 1998:
$650.0 million in 1999; $1.0 billion in 2000; $250.0 million in 2001; $150.0
million in 2002; and $400.0 million in 2003. At December 31, 1998, the weighted
average fixed rate payment on variable to fixed rate swaps was 5.88%. Variable
rates received are indexed to the Commercial Paper Nonfinancial 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, 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: 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
<PAGE> 87
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:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
-------------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Medium-term notes payable......................... $(799.6) $(813.6) $(902.8) $(917.7)
Other fixed rate debt............................. (10.5) (10.5) (23.8) (23.8)
Interest rate swaps............................... -- (45.3) -- (8.0)
</TABLE>
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 40% of Alamo's business is concentrated at its top ten rental
locations which are located in major tourist destinations in Florida,
California, Nevada, Arizona and Hawaii. Approximately 30% of National's business
is concentrated at its top ten rental locations which are located in business
travel destinations such as Los Angeles, Atlanta, Chicago, San Francisco,
Newark, Dallas and Orlando.
The Company enters into vehicle repurchase programs with one principal
vehicle manufacturer, as well as other vehicle manufacturers. At December 31,
1998 and 1997, the Company had vehicle receivables from manufacturers of $372.1
million and $326.8 million, respectively. During model year 1998, the Company
purchased approximately 57% of its 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,
1998, 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 Parent's consolidated
invested capital. Such allocations are included in the Company's selling,
general and administrative expenses and were approximately $12.0 million and
$11.1 million for the nine months ended September 30, 1999 and 1998 (unaudited),
respectively, and $14.8 million, $9.6 million and $0 for the years ended
December 31, 1998, 1997 and 1996, respectively. In addition, 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 $13.5 million and $10.0 million during the nine
months ended September 30, 1999 and 1998 (unaudited), respectively, and $15.2
million during the year ended December 31, 1998. These combined allocations
approximate management's estimate of 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 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
<PAGE> 88
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company purchased revenue earning vehicles from certain franchised
automotive dealerships owned by Parent totaling approximately $3.5 billion and
$915.9 million during the years ended December 31, 1998 and 1997, respectively.
The Company has corporate rental car contracts with 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 Parent. The Company was charged
premiums of approximately $138.5 million during the year ended December 31, 1998
related to these programs. In addition, in 1998 the Company began participating
in Parent's health insurance programs. The Company was charged premiums of
approximately $36.1 million during the year ended December 31, 1998 related to
these programs. As noted in Note 7, Investment by Parent, these charges have
been reflected as a contribution from Parent in the accompanying Consolidated
Financial Statements.
Pro Player Stadium, a professional sports stadium in South Florida which is
owned and controlled by a 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 Chairman of the Board is a director
of Boca Resorts, and a director of the Company is the Chairman of the Board of
Boca Resorts. In addition, a 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
1998 the Company paid $500,000 for signage at the Arena and approximately
$400,000 for tickets, sponsorship and the use of executive suites. During 1998,
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 Chairman of the Board 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 $10.8 million for the year ended December 31, 1998.
The Company intends to enter into two leases with Parent: (1) a lease for
office space to serve as the Company's headquarters and (2) a lease for computer
data center space. Both properties are located in Fort Lauderdale, Florida.
Payments due under the lease for the corporate headquarters are expected to be
approximately $1,860,000 per year for a term yet to be determined. The Company
will pay for all operating costs of the facility. The lease will have an option
to extend the term for two additional periods of five years each. The lease
payments may be increased on the fifth and eighth anniversaries of the start of
the lease using a factor based on the consumer price index, but in no event can
the increase exceed 3% per year. Payments due under the lease for the computer
data center space are expected to be approximately $1,040,000 per year which
includes a proportionate share of operating expenses for 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 lease payments reflect fair market value and in
management's opinion are on terms no less favorable than could be obtained from
unrelated third parties.
F-21
<PAGE> 89
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1998
---------------------------------------
DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------
<S> <C> <C> <C>
Revenue.............................................. $3,015.6 $438.0 $3,453.6
Total assets......................................... 5,658.4 594.2 6,252.6
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------
DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------
<S> <C> <C> <C>
Revenue.............................................. $2,767.0 $288.1 $3,055.1
Total assets......................................... 5,068.8 801.5 5,870.3
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------
<S> <C> <C> <C>
Revenue.............................................. $2,500.5 $198.9 $2,699.4
Total assets......................................... 4,319.6 349.8 4,669.4
</TABLE>
16. SUBSEQUENT EVENTS
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 in January 2000,
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 this Information Statement for
description of agreements related to sharing of
F-22
<PAGE> 90
ANC RENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 is
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, when there is limited leisure travel and a greater potential for
adverse weather conditions. Many of the operating expenses such as rent, general
insurance and administrative personnel are fixed and cannot be reduced during
periods of decreased rental demand.
The second quarter of 1997 includes restructuring and other pre-tax charges
of approximately $78.0 million, as described in Note 10, Restructuring and Other
Charges.
The following is an analysis of certain items in the Consolidated
Statements of Operations by quarter for 1998 and 1997.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenue............................... 1998 $775.7 $864.8 $1,005.6 $807.5
1997 641.3 739.5 905.3 769.0
Operating income (loss)............... 1998 15.4 41.4 105.8 16.3
1997 (2.7) (40.9) 112.6 17.1
Net income (loss)..................... 1998 9.2 25.8 65.5 8.3
1997 -- (27.7) 70.2 8.7
</TABLE>
F-23
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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* By-laws 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)
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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
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 Nine Months Ended September
30, 1999 (For SEC use only)
27.2* Financial Data Schedule for the Nine Months Ended September
30, 1998 (For SEC use only)
27.3* Financial Data Schedule for the Year Ended December 31, 1998
(For SEC use only)
27.4* Financial Data Schedule for the Year Ended December 31, 1997
(For SEC use only)
27.5* Financial Data Schedule for the Year Ended December 31, 1996
(For SEC use only)
99.1 Information Statement dated as of , 1999 attached
to this Registration Statement as Annex A
99.2 Financial Statements of Value Rent-A-Car, Inc. as of and for
the year ended December 31, 1996 (incorporated by reference
to pages F-29 to F-47 of Exhibit 99 to Current Report on
Form 8-K dated as of September 15, 1997 filed by AutoNation,
Inc.)
</TABLE>
- -------------------------
*Previously filed
** To be filed by amendment
