ANC RENTAL CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________ TO ________

COMMISSION FILE NUMBER 0-30776

ANC RENTAL CORPORATION
(Debtors-in-Possession as of November 13, 2001)

(Exact name of registrant as specified in its charter)

DELAWARE 65-0957875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

200 SOUTH ANDREWS AVENUE, FORT LAUDERDALE, FLORIDA 33301
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 954-320-4000

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X](2) No [X](1)

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of April 30, 2002, the aggregate market value of Common Stock held by
non-affiliates was approximately $23,101,030. For purposes of this computation,
shares held by directors and executive officers of the registrant have been
excluded. Such exclusion of shares held by directors and executive officers is
not intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.

As of April 30, 2002, 45,296,139 shares of the registrant's common stock,
par value $0.01 per share, which is the only class of common stock of the
registrant, were outstanding. The Company's stock is traded on the NASD OTC
Bulletin Board.

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

ANC Rental Corporation ("ANC Rental") was incorporated in Delaware in
October 1999 as a wholly owned subsidiary of AutoNation, Inc. ("AutoNation" or
"our former Parent"). On June 30, 2000 AutoNation distributed all of our
outstanding common stock to its stockholders and we became an independent public
company.

We own and operate car rental businesses under the brand names Alamo and
National. Our rental operations have a presence in the airport leisure and
business travel market and a presence in the off-airport insurance replacement
and neighborhood market of the automotive rental industry. In 2001, we operated
an average worldwide fleet of approximately 310,000 cars. Alamo and National
serve the daily rental needs of both leisure and business travelers from a
network of more than 3,500 on-airport and near-airport locations in all 50
states of the United States, as well as in Canada, Mexico, Europe, the
Caribbean, Latin America, Asia, the Pacific Rim, Africa and the Middle East. Our
insurance replacement and neighborhood rental business, formerly known as
CarTemps USA and now operated under our Alamo brand name, operates in 341
locations throughout the United States. In the year ended December 31, 2001, on
a consolidated basis, our operations generated revenue of approximately $3.2
billion, which includes $359 million from operations outside of North America,
the majority of which was generated in the United Kingdom.

Alamo, our value brand, has been in business for more than 25 years.
National, our premium brand, has been operating since 1947. Alamo primarily
serves the value leisure market, while National primarily serves the airport
premium business and leisure travel market. Alamo operates exclusively through
company-owned locations in the United States and through both company-owned and
franchised locations internationally. National operates through both
company-owned and franchised locations in the United States and internationally.
In the year ended December 31, 2001, Alamo had North American revenue of
approximately $1.2 billion and National had North American revenue of
approximately $1.3 billion.

We formally established our insurance replacement division in 1997 by
consolidating the replacement operations of several different businesses. In
November 2000, we rebranded the group as Alamo from CarTemps USA in order to
leverage the Alamo brand awareness to the insurance replacement and neighborhood
markets. In the year ended December 31, 2001, the rebranded Alamo Local Market
Division had revenue of approximately $266 million.

BANKRUPTCY PROCEEDINGS

On November 13, 2001, ANC Rental Corporation and certain of our direct and
indirect U.S. subsidiaries (each, a "Debtor," and collectively, "Debtors") filed
voluntary petitions under Chapter 11 of Title 11, United States Code, in the
United States Bankruptcy Court for the District of Delaware (Case No. 01 - 11200
et al., Jointly Administered). The Debtors remain in possession of their assets
and properties, and continue to operate their businesses and manage their
properties as debtors-in-possession pursuant to the Bankruptcy Code. As a
debtor-in-possession, management is authorized to operate the business, but may
not engage in transactions outside the ordinary course of business without Court
approval. Subsequent to the filing of the Chapter 11 petitions, we obtained
several Court orders that authorized us to pay certain pre-petition liabilities
(such as employee wages and benefits) and take certain actions to preserve the
going concern value of the business, thereby enhancing the prospects of
reorganization. This annual report on Form 10-K has been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets, and payment of liabilities in the ordinary course of business. As a
result of the Chapter 11 filing, there is no assurance that the carrying amounts
of assets will be realized or that liabilities will be settled for amounts
recorded.

After negotiations with various parties in interest, we expect to present a
plan of reorganization to the Court to reorganize our business and to
restructure our obligations. This plan of reorganization could change

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the amounts reported in the financial statements and cause a material change in
the carrying amount of assets and liabilities. Under bankruptcy law, actions by
creditors to collect pre-petition indebtedness owed by the Debtors at the filing
date are stayed and other pre-petition contractual obligations may not be
enforced against the Debtors. In addition, the Debtors have the right, subject
to Court approval and other conditions, to assume or reject any pre-petition
executory contracts and unexpired leases. Parties affected by these rejections
may file claims for pre-petition damages with the Court. We prepared and
submitted the schedules setting forth the Debtors' assets and liabilities as of
the date of the petition as reflected in our accounting records. The amounts of
claims filed by creditors could be significantly different from their recorded
amounts. Due to material uncertainties, it is not possible to predict the length
of time we will operate under Chapter 11 protection, the outcome of the
proceedings in general, whether we will continue to operate under our current
organizational structure, the effect of the proceedings on our businesses or the
recovery by creditors and equity holders of ANC Rental Corporation.

ANC RENTAL BUSINESS STRATEGY

Our goal is to be the automotive rental provider of choice, achieving
consistent, sustainable and profitable growth through the strategic position of
our brands in the vehicle rental market. Broadly, we define our target market as
the airport marketplace. Secondarily, we serve the domestic insurance
replacement and neighborhood operations through our Alamo brand. Summary
elements of our overall strategy include:

- Execute a Focused Multi-Brand Strategy. We are implementing numerous
marketing and other initiatives aimed at optimizing the position of Alamo
and National as separate brands in the airport marketplace capitalizing
on their established brand equity and inherent strengths.

- Provide a Superior Customer Experience. Our brands will focus on
quality, tailoring their approach and service offerings to appeal to the
separate and distinct needs of each brand's targeted customer bases,
effectively communicating each brand's value proposition and ensuring the
consistent delivery of its product time after time.

- Improve Profitability in All Segments. Through our restructuring
efforts, we are committed to increasing profitability, operating margins
and stakeholder value through specific initiatives to lower costs,
improve fleet utilization and increase franchisee revenue.

RESTRUCTURING EFFORTS

We believe that the most effective way to improve profitability in all of
our business segments and to create stakeholder value is to fix our core
business. Management is implementing a series of restructuring plans designed to
improve the quality of customer service while lowering costs to deliver such
service. The restructuring plans can be classified into the following
categories:

Airport Location Consolidation

At most major airports in the United States, we operate Alamo and National
as stand-alone rental facilities. During 2002, we plan to consolidate up to 144
separately branded locations throughout the United States into a maximum of
seventy-two dual branded locations. We believe that by consolidating operations
into one dual branded facility we will be able to lower operating costs and
improve vehicle utilization, lower personnel expense, and incur less rent
expense. Early indications suggest that the customer experience at a combined
facility is favorable and positive. Our goal is to complete this facility
consolidation program by December 2002. However, due to material uncertainties,
negotiations with third parties, and the legal challenges of certain
competitors, it is not possible to predict the length of time it will take to
complete each location consolidation or whether all of the anticipated
consolidations will occur as planned.

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Dual Brand Existing Single Brand Cities

Certain city locations are currently single branded as either Alamo or
National. To maximize our revenue potential, we intend to dual brand many of
these facilities, by offering our customers at these facilities the brand
currently not represented at the rental counter.

Combining Information Technology Systems

Currently we operate on two separate and distinct information technology
systems. During 2002, we plan to migrate to one information system and abandon
the other. We believe that cost savings can be achieved by combining information
technology on to the existing Alamo legacy operating system. Additional benefits
of migrating to the Alamo legacy system are expected to include a reduction of
support staff, elimination of duplicative system infrastructures, improved
operational efficiency, lower cost of training, and standardization across the
organization. However, the migration to one information technology system is not
without significant risks, such as the temporary loss of business functionality,
questions regarding the scalability of existing infrastructure, and the need for
coordination with other third party vendors to accept system changes. We intend
to complete our information technology consolidation program by December 2002.
However, due to material uncertainties and negotiations with third party service
providers it is not possible to predict with certainty that the system migration
will be completed on its planned date.

Changes in Licensee Operations

We intend to modify our current franchisee structure by entering into new
"dual branded" licensing agreements that will include but not be limited to (1)
selling or transferring ownership of certain Alamo locations in existing
National licensee markets to the current National licensee, (2) increasing the
current royalty rate charged to our licensee base, and (3) licensing our Alamo
locations to current National licensees in those markets where an Alamo location
currently does not exist. Due to the nature of negotiations with our licensees
we are unable to estimate the proceeds or increased revenues, if any, from this
new licensee structure. Additionally, due to material uncertainties,
negotiations with third parties, and the potential legal challenges of certain
parties it is not possible to predict the length of time it will take to
complete this new licensee structure or whether all existing National licensees
will agree to these new arrangements. In the latter event, it may be necessary
for the company to reject the existing licensee agreement and seek new
licensees, or operate the location as a corporate-owned location rather than a
licensee location.

Closure of Alamo Local Market Locations

In the first quarter of 2002, we closed 182 unprofitable local market
locations. The majority of the locations closed had and were expected to have
significant operating losses without the potential to achieve profitability in
the near-term future. In addition, a number of marginally profitable branches
were also selected for closure due to under-performance in areas such as low
revenue per unit, lower than average vehicles on rent, and overlapping market
coverage. In some instances, operations of closed locations were folded into
remaining branches in overlapping geographic regions. The store closings were
primarily located in California, Oregon, Washington and Minnesota.

Strategic Alternatives

In addition to addressing marketing, customer service and operating issues,
we continue to assess and explore strategic alternatives that may include the
sale of all or part of our business.

AIRPORT OPERATIONS

We currently operate Alamo and National locations at on-airport and
near-airport locations on a world-wide basis through both company-owned and
licensed rental locations. Within the on-airport and near-airport segment we
operate in three separate and distinct geographic regions: the United States,
Canada and International rental operations primarily located in Europe.

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Business Strategy and Operations

The business strategy for our airport operations includes the following
principal components:

- Execute a Focused Multi-Brand Strategy. While our brands both compete in
the airport market, each executes a specific strategy targeted at its
core businesses:

-- Alamo focuses on value-oriented renters, primarily leisure and small
business travelers. Alamo markets to value oriented leisure travelers,
particularly families, and aims to associate Alamo with the vacation
experience.

-- National seeks to further improve its position as a premium brand that
is focused on business and frequent travelers. National's marketing is
designed to educate travelers about National's strong service
offerings -- particularly Emerald Club -- and emphasizes transaction
speed, ease, and vehicle choice as positive brand attributes.

- Provide a Superior Customer Experience. Each brand continually seeks
consistent delivery of its service offerings to their specific customer
bases:

-- Alamo's focus is to become the preferred value brand in the rental
market. We believe that the small business renter and the leisure
renter have similar needs making Alamo a natural fit for all value
conscious renters. Our strategy is to expand our current leisure
renting relationships to also include value conscious business travel.

-- National's focus is to provide the frequent traveler rapid and
efficient service which minimizes interaction and paperwork at our
rental facilities. National's Emerald Aisle service allows a customer
enrolled in the brand's proprietary Emerald Club program to complete
the rental transaction without having to make an advance reservation or
visit the rental counter. The customer 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 without paper in a matter
of minutes. Frequent travelers familiar with the Emerald Aisle program
have enthusiastically endorsed the service and we believe that National
will benefit as travelers become more aware of the brand's service
attributes.

- Utilize the Internet to Fuel Organic Growth. We will continue to improve
communications with our customers through the use of our web sites. We
believe this will not only help us to build customer loyalty and
satisfaction but can also provide additional opportunities to reduce our
operating transaction costs. We expect to achieve our goal of continually
improving the functionality of our web sites by leveraging our Internet
expertise, technology and research across all of our brands. We are also
expanding business-to-business connectivity between our web sites and
corporate accounts, travel agents and tour operators in order to
facilitate communication, administration, information and data flow.

U.S. Airport Operations

In 2001, organizationally both the Alamo and National business units
remained stand-alone operations responsible for all activities including airport
relations, counter operations and back office support. Going forward, one of the
key components of our business strategy is to achieve operating leverage and
economies of scale by consolidating separate stand-alone locations into one dual
branded location.

Alamo Rental Operations

We believe the Alamo brand enjoys both domestic and international
recognition for meeting the needs of travelers concerned with obtaining the best
value for their dollar. Alamo has historically served a large number of
discretionary travelers who rent cars for leisure purposes. Also important to
the Alamo brand are middle market and small business customers, as well as other
customers who have selected Alamo as a secondary supplier for commercial travel.

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Due to the brand's value-oriented leisure focus, Alamo's top ten rental
locations are located in major tourist destinations, such as Florida,
California, Nevada, Arizona and Hawaii. These top ten locations include cities
such as Orlando, Miami, Los Angeles, Las Vegas, Fort Lauderdale, San Francisco,
Maui, and Phoenix and other major markets, which collectively generate in excess
of 44% of Alamo's total domestic revenue. Because the Alamo brand primarily
targets the leisure traveler, approximately 32% of its business comes from the
direct consumer sub-market (including Internet revenues), 53% comes from
domestic and international tour, travel agent and affinity (e.g. travel clubs,
airlines, hotels, etc.) channels and the remainder comes from the value-oriented
business travel segment.

National Rental Operations

National has built its reputation in the automotive rental industry as a
provider of premium vehicle rental services, targeting the needs of the frequent
traveler. National's business base is more diverse than Alamo's as a result of
the brand's focus on the frequent premium business traveler. National's top ten
rental locations, which generate approximately 30% of its total revenue,
comprise major business travel destinations, such as Los Angeles, Atlanta,
Dallas, San Francisco, Newark, Chicago, Tampa and Detroit. The National brand
has found success positioning itself in the business travel market. Accordingly,
commercial accounts represent approximately 45% of its revenue. Its remaining
revenue comes from the leisure travel market through sources such as Emerald
Club Members, travel agents and affinity groups.

Sales and Marketing

In order to better leverage our sales and marketing efforts and thereby
lower our operating costs, we have merged our sales force into one team that has
a specifically tailored focus for each brand.

The Alamo brand focuses its sales and marketing activities on the following
customer segments:

- Domestic and International Tour Operators. Tour operators create package
tours by assembling various components of travel such as airfare, hotel,
car rental and destination features. Our sales force contracts with tour
operators, typically for one year, to be a primary or secondary provider
of car rental services for these tour operators' packaged vacations.

- Travel Agencies. Alamo enjoys preferred relationships with large
consortia groups such as Vacation.com and Carlson Wagonlit who offer our
car rental services through their extensive travel agency networks. Alamo
markets to front-line travel agents through global distribution systems
and its proprietary Alamo CASH-IN Club program whereby travel agents can
become members and earn CASH-IN club points redeemable for merchandise at
numerous retailers such as Home Depot, Sharper Image, Sam's Club and
Wal-Mart. Alamo also markets its car rental services in trade
publications and through industry trade shows such as ASTA and POW WOW.
Telesales and direct marketing efforts are used to reach small and
independent agencies.

- Direct Customers. Alamo markets to consumers using newspapers,
specialized seasonal product offerings (such as ski products), targeted
direct mail and e-mail and partnership efforts.

The National brand focuses its sales and marketing activities on the
following customer segments:

- Corporate Accounts. National has had a strong presence in the corporate
market for over 50 years and primarily serves its corporate renters via
its sales force who contract and maintain relationships with corporate
accounts. Emerald Club membership offers corporate renters a quick and
easy paperless rental and their choice of vehicle at the Emerald Aisle.

- Emerald Club. National Emerald Club members are served through a
dedicated communication area at our reservation centers and through
special booking paths at our Nationalcar.com web site. In addition,
National uses telesales and direct marketing efforts to reach and service
small and mid-size accounts which are an important component of its mix
of corporate business.

- Other Frequent Renters. National markets its products to frequent
renters through television, newspapers, trade publications and direct
marketing and partnership efforts.
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Both Alamo and National contract with, and participate in, association and
affinity programs, including travel clubs, trade and professional associations
and conventions, in order to reach their members with special benefits and
promotions. In addition, several of the programs provide renters with discounts
and rewards at retail outlets, restaurants and travel clubs.

Alamo and National participate in many airline frequent flyer and loyalty
programs whereby renters can be rewarded with points, credits and rewards from
travel partners such as American Airlines, Delta Air Lines, United Air Lines,
and Hyatt Hotels. These relationships also provide Alamo and National with
cooperative marketing opportunities. Additionally, both brands participate in
certain credit card membership programs that provide special benefits to card
members and joint marketing opportunities for the credit card issuer and our
brands.

Reservations

We operate three reservations centers located in Charleston, South
Carolina, Boca Raton, Florida and Salt Lake City, Utah. Our central reservation
system routes calls to all centers for optimal utilization so customers get the
quickest and best service. A large percentage of Alamo's and National's bookings
are directed to our reservation system through airline and other third-party
reservation systems, including systems operated by Sabre Holdings, Galileo
International, Worldspan and Amadeus. Separately, we believe the Internet is an
attractive low cost alternative to traditional reservation processes. The
Internet provides the consumer with real-time, interactive services, which tend
to be used over and over again.

International Rental Operations

We operate the Alamo and National brands in 74 countries outside the United
States and Canada. Internationally, we have over 2,300 locations consisting of
both on-airport and city operations. Alamo and National have an international
fleet of approximately 145,000 rental vehicles, of which approximately 39,000
are within company-owned locations.

With the exception of the United Kingdom, Germany, Switzerland, Belgium and
the Netherlands, we operate primarily through franchised locations in Europe,
Africa, the Middle East, Asia, the Pacific Rim, Australia, Latin America and the
Caribbean. Our operations outside North America accounted for approximately 11%
of our revenue for the year ended December 31, 2001, of which approximately 78%
was generated in the United Kingdom, where we believe we have a leading market
position.

Until October 1997, our international company-owned operations consisted
solely of Alamo locations in the United Kingdom, Germany and several smaller
continental European countries. In October 1997, we significantly increased our
international presence with the acquisition of EuroDollar plc, which moved us
into a market leadership role in the United Kingdom. Commencing in February
1998, we began the consolidation and expansion of our international operations,
combining the acquired EuroDollar operations with Alamo's European operations
and some existing EuroDollar licensees and joint ventures. Since that time, we
have focused our efforts on re-branding the businesses and developing the
network for both the Alamo and National brands.

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 the acquisition and rebranding of
EuroDollar in the fourth quarter of 1997, National began to operate, and in some
cases license, its own locations in each of these markets. National serves its
customers in Japan and others parts of the Pacific through a marketing
affiliation in Japan. In July 2000, our unprofitable Australian operations were
divested in a sale to an independent third party.

Within the European marketplace, the business market accounts for
approximately 73% of our revenue, the leisure market accounts for approximately
23% of our revenue and the insurance replacement market accounts for
approximately 4% of our revenue.

Internationally, Alamo's market strength is in the leisure rental market
with its focus on generating inbound leisure business to the United States from
tour operators, car rental brokers and retail travel agencies.
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National supports its local country sales forces in Europe with a pan-European
sales organization covering all major countries. The pan-European sales
organization is geographically based at the point of decision for each
multinational account, creating a seamless global account management system to
benefit multinational corporate customers.

Additional financial information with respect to revenues and assets of our
International operations is included in Note 16 of our Consolidated Financial
Statements included elsewhere herein.

INSURANCE REPLACEMENT AND NEIGHBORHOOD BUSINESS

Alamo Local Market Division Overview

We serve the insurance replacement rental market under the Alamo brand.
Before November 2000, our insurance replacement business was operated using the
brand name CarTemps USA. We rebranded the business as Alamo in November 2000 in
order to leverage and capitalize on Alamo's widely recognized name and value
proposition. The Local Market Division's strategy is to capitalize on Alamo's
brand recognition and its reputation for value in order to increase market share
with key customers in the insurance and collision repair industries as well as
attract the local neighborhood renter.

Business Strategy and Operations

Sales and marketing activities seek to effectively target multiple levels
and audiences for maximum impact. Account sales focuses on the insurance company
home office and ensures Alamo's participation in rental management programs of
insurers at a national level. Field sales focuses on claim centers, agents and
body shops thereby providing the pull through for maximum market share gain.
Large automotive dealerships and leisure renters are also sources of revenue.

In the first quarter of 2002, the division was restructured in response to
its weakening operating performance, which led to the closing of 182
unprofitable locations and key management changes. In order to enhance the
divisions profitability, we have initiated cost cutting measures which include
but are not limited to:

- Increased fleet sharing with nearby airport operations

- Changes in the mix of our fleet to reduce the average cost of our
inventory

- Consideration of strategic alternatives or alliances

ANC RENTAL FLEET OPERATIONS

Fleet Management Strategy for Airport Operations

The single largest cost to a rental car company is its fleet. Since the
late 1980s, vehicle rental companies have acquired vehicles primarily through
manufacturer repurchase programs. Repurchase prices under these programs are
based on either a specified percentage of original vehicle cost determined in
the month the vehicle is returned or the original capitalization cost less a set
daily depreciation amount. These repurchase programs limit a vehicle rental
company's residual value risk with respect to vehicles purchased under the
programs.

We hold vehicles in our daily rental fleet for up to fifteen months, with
the average vehicle age being less than six months. Approximately 88% of our
model year 2001 purchases for the airport operations of Alamo and National North
America were acquired under manufacturer repurchase programs and were not
subject to residual value risk. These programs allow cars conforming to the
terms of the agreement to be returned to the manufacturer at the end of their
service lives at a predetermined residual value. For the model year 2000, 4% of
the repurchase program cars returned to the manufacturer were subsequently
rejected.

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 use specific manufacturer dealerships to
maintain and

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service our vehicles. These dealerships provide us with qualified and
experienced technicians with established manufacturer relationships.

Fleet Management Strategy for Alamo Local Market Operations

Our Local Market Division's strategy is to acquire vehicles on an "at-risk"
basis and operate them for a twenty-four month period. At-risk vehicles are
vehicles which are not covered by manufacturers' repurchase programs and are
therefore subject to residual value risk. 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. Upon retirement, the vehicles are sold through a variety of different
channels such as auto auctions.

Vehicle Supply

General Motors has been the principal supplier of rental vehicles to Alamo
and National for many years. Our supply agreement with General Motors requires
us to purchase a minimum number of units spanning all the General Motors brands.
In return, General Motors has agreed to provide certain incentives as well as a
minimum number of vehicles. In model year 2001, vehicles manufactured by General
Motors made up approximately 64% of our total domestic rental fleet purchases.
In model year 2002, we may purchase a lesser percentage of our domestic rental
fleet from General Motors. The remainder of our fleet primarily includes
vehicles from Chrysler, Mitsubishi, Toyota, Isuzu, Ford, and Nissan.

Purchases outside of repurchase programs come from a number of sources,
including vehicle manufacturers, private and public auctions, wholesalers and
automotive dealerships.

INFORMATION TECHNOLOGY

A comprehensive network of hardware and software applications support our
rental operations. Key system applications include reservations, rental
operations, fleet management, third-party reservation systems and tour operator
links, Internet web sites, commission processing, billing, accident claims,
financial and human resources. We believe our information technology
infrastructure allows us to manage our operations on a real-time basis and
quickly respond to changing market dynamics.

Our Odyssey information system supports the National brand. Odyssey has
three main components: a reservation system, an operating system and a fleet
management system. Alamo operations in the United States, Canada and continental
Europe use Alamo's legacy systems, which are fully integrated information
systems that include reservations, rental operations and fleet management.

National's UK operations use a fully integrated separate system, with
interfaces to both Odyssey and Alamo's systems.

Information technology resources in direct support of the Local Market
division are located at the division headquarters in Solon, Ohio and include a
network of hardware and software applications tailored towards the local market
rental needs. Many of our operating systems have been developed internally to
respond to the unique operating requirements of the local branch, and are
integrated with key insurance trading partners.

We intend to consolidate the information technology platforms supporting
the Alamo and National airport businesses over the next twelve months. We
believe that by consolidating we will incur lower administrative costs as
operations are standardized on one common platform.

CUSTOMERS

No single customer represented greater than 10% of our total revenue during
2001.

COMPETITION

The automotive rental industry is capital intensive and is characterized by
intense price and service competition. We believe we compete through a
competitive pricing structure, increased service levels, better
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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 are Avis Group Holdings, Inc., Budget Group, Inc., Dollar
Thrifty Automotive Group, Inc., Enterprise Rent-A-Car and The Hertz Corporation.
In Europe and other foreign markets, our vehicle rental business competes with
the companies listed previously 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.
We continually focus on optimizing our cost structure to improve our overall
competitive position.

Significant changes in the ownership of existing participants in the
vehicle rental industry have occurred in 2001. During the year Ford Motor
Company and Cendant Inc. acquired the outstanding shares of Hertz and Avis,
respectively. We believe Hertz and Avis are significantly better capitalized
than most of the remaining participants in the industry and, as such, more
formidable as competitors should they gain access to wider sources of capital at
lower rates.

AUTOMOTIVE RENTAL 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, certain states such as Nevada, California and
Illinois have capped the price at which collision damage waivers can be sold.
New York has prohibited the sale of collision damage waivers and New York and
Illinois have capped the liability of the renter for damage to the vehicle.
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 recent years, however, two states enacted
legislation to rescind the price control of collision damage waivers, two others
have raised their price caps, 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 other optional service items at the rental
counter, such as liability insurance, personal accident coverage, personal
effects coverage and other travel related coverage's, 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,
a majority of 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 and not otherwise reasonably avoidable. The rental car industry
has sought and obtained legislation in

9

numerous states, which expressly permits the separate itemization of vehicle
registration fees and other charges.

TRADEMARKS

We own a number of registered trademarks including Alamo(R), Alamo
Rent-A-Car(R), National Car Rental(R), Emerald Club(R) and QuickSilver(R). We
also have a number of applications pending to register other marks. The current
registrations of our service marks and trademarks in the United States and
foreign countries are effective for varying periods of time, and may be renewed
periodically provided that we comply with all applicable laws.

ENVIRONMENTAL MATTERS

The operation of our business is subject to a variety of requirements of
national, state/provincial and local governments, which regulate health, safety,
the environment, zoning and land use. Each nation, state and province in which
we operate has its own laws and regulations governing the management of
hazardous materials, water and air emissions, solid waste disposal, and, in most
cases, the release and cleanup of regulated substances, and liability for these
matters. In addition, governmental authorities at all levels may require permits
for some activities at our facilities, and these permits may be subject to
renewal, modification or revocation. These governmental authorities can enforce
compliance with these regulatory requirements, and may seek to obtain
injunctions or impose fines and other sanctions, including criminal penalties,
for alleged violations.

We strive to conduct our operations in compliance with applicable laws and
regulations. Our business involves the use, handling, storage, and/or
contracting for recycling or disposal of materials such as used motor oil and
filters, transmission fluids, antifreeze, refrigerants, paints, thinners,
batteries, cleaning solvents, lubricants, degreasing agents and fuel. In
response to the trend in many states toward waste reduction and recycling
programs, we are reviewing additional opportunities to implement different
applications and to use alternative products, thereby reducing waste generation
and related disposal or recycling costs. Laws such as the Comprehensive
Environmental Response, Compensation and Liability Act in the United States
impose liability, without regard to fault or whether conduct complied with
applicable laws, for the investigation and/or clean-up, and damages to natural
resources arising from releases, of hazardous substances. Such liability may
apply to parties who arranged for the disposal of hazardous substances, as well
as to owners or operators of affected properties.

In the United States, water quality protection programs under the Federal
Water Pollution Control Act of 1972, as amended, and other federal laws such as
the Safe Drinking Water Act, as amended, affect our operations. Similarly, our
U.S. operations are subject to the federal Clean Air Act, and related state and
local laws regarding air emissions. The Occupational Safety and Health Act of
1970, as amended, authorizes the Occupational Safety and Health Administration
of the U.S. Department of Labor to promulgate occupational safety and health
standards. Various standards, including those requiring that employees receive
information and training regarding hazardous materials we use, apply to our
business operations. We do not expect that the costs of complying with
applicable water and air quality programs and OSHA regulations will have a
material adverse effect on us.

The Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), along with related regulations,
establish a framework for regulating the handling, transportation, treatment and
disposal of hazardous and non-hazardous solid wastes in the United States. In
addition, a subchapter of RCRA regulates underground storage tanks. Many of our
operations operate underground storage tanks, which we use primarily to store
petroleum-based products. RCRA and various 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 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.

10

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, and claims for personal
injury, property damage, and damage to the environment in cases where we may be
held responsible for the escape of harmful materials. We could also be subject
to fines and civil and criminal penalties in connection with alleged violations
of regulatory requirements.

The nature of our business also exposes us to significant risk of liability
for damages arising primarily out of accidents involving automobiles rented from
our vehicle rental fleet. Laws in some states impose vicarious liability on
automotive rental companies, which increases our risk. Subject to the risk
levels discussed below, we manage our exposure through a combination of
qualified self insurance, and risk transfer to insurance companies which are
rated as financially sound by insurance rating agencies. We are substantially
self-insured for the majority of our incurred liability. However, we carry
certain excess 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. Historically, we retained up to $1.0 million of
risk per claim, plus claims handling expense, under our various property, auto
liability and general liability insurance programs. In the fourth quarter of
2001, we raised this retention up to $5.0 million in auto liability and general
liability insurance programs. We purchase excess 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, certain excess 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, financial performance or credit quality and level of
retention.

Surety bonding is required in numerous aspects of our business. Many of our
airport concession agreements require us to obtain surety bonds for the benefit
of the airport. Similarly, bonding is required in a number of other areas
including insurance and titling. Although we currently have an agreement with a
surety to issue bonds on our behalf through 2002, the loss of our ability to
obtain surety bonds would have an adverse effect on our business and financial
condition.

Currently, our various operating subsidiaries are self-insured in 32
states. Periodically, the states review the self-insured status of those
entities. Loss of self-insurance status could have a material adverse effect on
us. Due to our Chapter 11 filing and our current financial condition we cannot
assure you that we will be able to maintain or renew our self-insurance status
in each state.

EMPLOYEES

At December 31, 2001, we employed approximately 17,000 associates
worldwide, approximately 2,300 of whom were covered by 43 collective bargaining
agreements. Currently, Alamo and National are in the process of negotiating four
collective bargaining agreements, which have expired, and 23 agreements which
will expire in 2002. The Company's collective bargaining agreements, which have
expired or will expire in 2002, cover approximately 1,200 employees. We have no
collective bargaining agreements outside of North America. We also employ a
substantial number of temporary and seasonal workers, and we engage outside
services, as is

11

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. Our third quarter, which includes the peak summer travel months, has
historically been the strongest quarter of the year. During the peak season, we
increase our rental fleet and workforce to accommodate increased rental
activity. As a result, any occurrence that disrupts travel patterns during the
summer period could have a material adverse effect. The first and fourth
quarters for our operations are generally the weakest because of limited leisure
travel and a greater potential for weather conditions, either adverse or
unseasonable, to impact our business. Many of our operating expenses such as
rent, general insurance and administrative personnel remain fixed throughout the
year and cannot be reduced during periods of decreased rental demand. Since
September 11, 2001 air travel patterns, which directly affect our business, have
changed significantly from historical norms. While we anticipate growth in
revenue for the summer months, we believe revenue will be significantly below
our previous year.

RISK FACTORS

In addition to the other information included in this Form 10-K, you should
be aware of the following risk factors in connection with our business and
ownership of shares of our common stock. We also caution that this Form 10-K
contains forward-looking statements. The words "believes," "should be,"
"anticipates," "plans," "expects," "intends" and "estimates," and similar
expressions identify these forward-looking statements. Although we believe that
our expectations reflected in these forward-looking statements are based on
reasonable assumptions, our assumptions may not prove to be correct. Because our
assumptions and expectations are subject to risks and uncertainties, actual
results may differ materially from the expectations expressed by these
forward-looking statements. Important factors that could cause actual results to
differ materially from our expectations regarding our financial condition and
reflected in our forward-looking statements include the following risk factors.
See "Forward Looking Statements" included elsewhere in this Form 10-K.

There are significant uncertainties relating to our bankruptcy proceeding.

Our future results are dependent upon the successful confirmation and
implementation of a plan of reorganization. We have not yet submitted such a
plan to the Bankruptcy Court for approval and cannot make any assurances that we
will be able to obtain any such approval in a timely manner. When proposed, our
plan of reorganization may not receive the requisite acceptance by creditors and
other parties in interest and may not be confirmed by the Bankruptcy Court. In
addition, due to the nature of the reorganization process, actions may be taken
by creditors or other parties in interest that may have the effect of preventing
or unduly delaying confirmation of a plan of reorganization in connection with
the Chapter 11 cases. Our ability to obtain financing to fund our operations and
our relations with our customers and suppliers may be harmed by protracted
bankruptcy proceedings. Further, we cannot predict the ultimate amount of our
liabilities that will be subject to a plan of reorganization.

Other negative consequences that could arise as a result of the bankruptcy
proceedings include:

- making us more vulnerable to a continued downturn in our industry or a
downturn in the economy in general;

- limiting our flexibility in planning for, or reacting to, changes in our
businesses and the industries in which we operate;

- the incurrence of significant costs associated with the reorganization;

- impacts on our relationship with suppliers and customers, including loss
of confidence in our ability to fulfill contractual obligations due to
financial uncertainty;

12

- placing us at a competitive disadvantage compared to our competitors;

- limiting our ability to borrow additional funds; and

- negatively impacting our ability to attract, retain and compensate key
executives and to retain employees generally.

Once a plan of reorganization is finalized, approved and implemented, our
operating results may be adversely affected by the possible reluctance of
prospective lenders, customers and suppliers to do business with a company that
recently emerged from bankruptcy proceedings.

Uncertainty with respect to treatment of our liabilities could negatively
affect our operations.

As of the filing of the Chapter 11 cases, in general all pending litigation
against us has been stayed and no party may take any action to realize on our
pre-petition claims except pursuant to further order of the Bankruptcy Court. In
addition, we may reject pre-petition executory contracts and unexpired lease
obligations, and parties affected by these rejections may file claims with the
Bankruptcy Court. While we anticipate substantially all liabilities as of the
petition date will be dealt with in accordance with a plan of reorganization
which will be proposed and voted on in accordance with the provisions of the
Bankruptcy Code, there can be no assurance that all the liabilities will be
handled in this manner. In addition, additional liabilities subject to the
bankruptcy proceedings may arise in the future as a result of the rejection of
executory contracts and/or unexpired leases, and from the determination of the
Bankruptcy Court (or agreement by parties in interest) of allowed claims for
contingencies and other disputed amounts. Conversely, the assumption of
executory contracts and unexpired leases may convert liabilities shown as
subject to compromise to post-petition liabilities. Due to the uncertain nature
of many of the potential claims, we are unable to project the magnitude of such
claims with any degree of certainty.

Our status as a debtor-in-possession under Chapter 11 of the Bankruptcy Code
raises "going concern" questions.

Our commencement of Chapter 11 cases in the Bankruptcy Court, and other
factors such as our recurring losses, raise substantial doubt as to our ability
to continue as a going-concern. The financial statements contained herein have
been prepared assuming that we will continue as a going-concern with the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. However, as a result of the bankruptcy cases and
circumstances relating to this event, including our leveraged financial
structure and losses from operations, such realization of assets and liquidation
of liabilities and the ability to complete our contracts and process them in an
efficient manner is subject to significant uncertainty. While in Chapter 11, we
may sell or otherwise dispose of assets (subject to Bankruptcy Court approval),
and liquidate or settle liabilities for amounts other than those reflected in
the financial statements. Further, a plan of reorganization could materially
change the amounts reported in the financial statements. Additionally, a
deadline will be established for the assertion of pre-Filing Date claims against
the Company (commonly referred to as a bar date), including contingent,
unliquidated or disputed claims, which claims could result in greater
liabilities than reported in the financial statements. Our ability to continue
as a going-concern is contingent upon, among other things, confirmation of a
plan of reorganization, future profitable operations and the ability to generate
sufficient cash flow from operations and financing arrangements to meet ongoing
obligations.

Holders of our common stock and debt may lose all or part of their investment.

You may lose all or part of your investment in our common stock. The
Bankruptcy Code requires that all debts be paid in full before stockholders can
receive any recovery in our restructuring unless otherwise agreed by the class
of unsecured creditors. We cannot assure you that our restructuring will
ultimately result in any value for our stockholders. In the event of a
liquidation, we believe that our equity would have no value. Furthermore, we
cannot predict the value of any recovery to the holders of our debt. The holders
of our unsecured debt will likely receive less than the holders of our secured
debt. All of our assets and the assets of a

13

majority of our subsidiaries are pledged to secure our debt obligations under
various secured debt facilities. Under applicable law, collateral for secured
claims must be used first to satisfy secured claims.

We have significant working capital needs.

Currently, our working capital needs are being satisfied by cash
accumulated during our bankruptcy. We have the ability to use cash collateral by
order of the Bankruptcy Court through September 22, 2002. Our ability to
continue to use this cash collateral is contingent on our meeting certain
criteria. Failure to meet these criteria will have a material adverse effect on
our financial condition. In order to meet our peak financing needs during the
fourth quarter of 2002 and the first quarter of 2003, we will need to refinance
existing fleet debt and increase the capacity of our working capital facilities
or replace such facilities. Recent and continued operating losses, our
bankruptcy, the credit quality of our debt, our status as a debtor-in-possession
under Chapter 11 and capital market conditions may adversely affect our ability
to refinance our debt or obtain additional financing. As a result, we cannot
assure you that we will be able to refinance our existing debt or increase the
capacity of our working capital funds. In addition, no assurances can be given
that our existing sources of liquidity will be adequate to fund our liquidity
needs throughout the reorganization process or, if additional sources of
liquidity become necessary during the reorganization process, that they would be
available to us or adequate. Any liquidity shortages during the reorganization
process would likely have a material adverse effect on our business and
financial condition as well as on our ability to successfully restructure and
emerge from bankruptcy.

We have substantial debt and are highly leveraged.

We have a substantial amount of debt outstanding (some of which is subject
to compromise), which could adversely affect our financial health. Our vehicle
fleet is primarily acquired through the issuance of vehicle secured debt, and we
rely heavily on our ability to obtain debt financing to operate our business.
You should read the "Financial Condition" section of "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a description
of our debt and capital structure. As of December 31, 2001, we had approximately
$4.3 billion of debt outstanding, including approximately $4.0 billion of
vehicle debt and $282.3 million of non-vehicle debt. The Debtors' filing for
Chapter 11 represented an Event of Default under each of our financing
facilities. Under bankruptcy law, the Debtors' are not permitted to make
scheduled principal and interest payments with respect to pre-petition debt
unless specifically ordered by the Court.

Depending on the resolution of our bankruptcy proceedings, we could emerge
from bankruptcy highly leveraged with substantial debt service obligations. This
leveraged position could have important consequences for you. For example, our
leverage could:

- limit our ability to obtain additional financing, if needed, for working
capital, capital expenditures, acquisitions, debt service requirements or
other purposes;

- increase our vulnerability to adverse economic and industry conditions;

- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing funds available for
operations, future business opportunities or other purposes;

- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and

- place us at a competitive disadvantage compared to our competitors that
have less debt.

We have liens on all of our revenue-earning and non-revenue-earning assets.
The presence of these liens will limit our ability to raise additional
incremental senior secured financing in the future.

We are subject to material restrictions on the conduct of our business.

We are operating most of our business as debtors-in-possession pursuant to
the Bankruptcy Code. Under applicable bankruptcy law, during the pendency of the
Chapter 11 cases, we will be required to obtain the
14

approval of the Bankruptcy Court prior to engaging in any transaction outside
the ordinary course of business. In connection with any such approval, creditors
and other parties in interest may raise objections to such approval and may
appear and be heard at any hearing with respect to any such approval.
Accordingly, although we may sell assets and settle liabilities, including for
amounts other than those reflected on our financial statements, with the
approval of the Bankruptcy Court, there can be no assurance that the Court will
approve any sales or settlements that we propose. The Bankruptcy Court also has
authority to oversee and exert control over our ordinary course operations.

In addition, to the extent we enter into debtor-in-possession financing
arrangements in the future, it is likely that such financing will contain
material restrictions on our operations. These restrictions will likely limit
our ability to, among other things, incur debt, create liens, pay dividends,
make investments, sell assets, repurchase capital stock, pledge assets, or enter
into affiliate transactions. Any such restrictions may limit our ability to
respond to changing business conditions and may prevent us from engaging in
transactions which we might otherwise consider beneficial.

We have experienced losses, which may continue in future periods.

We have experienced net losses of $606.7 million for the year ended
December 31, 2001 and $2.0 million for the year ended December 31, 2000. In
addition, for the first quarter of 2002, we anticipate that our net loss will
approximate $139.4 million before the recognition of goodwill impairments. We
can not assure you that we will be able to generate net income in the future.
Continued losses, and the resulting impact on operating cash flow, would
adversely affect our financial condition, our ability to obtain financing and
the market price of our common stock.

We primarily use one surety provider.

In the normal course of business we are required to post performance and
surety bonds as financial guarantees of our performance. Substantially all of
our surety bonding is provided by one surety. Because of our financial
performance and a difficult surety market we have provided to our surety a
security interest junior to that granted under our credit facilities. Although
we currently have an agreement with our surety to issue bonds on our behalf
through 2002, the loss of our ability to obtain surety bonds would have an
adverse effect on our business and financial condition.

We are self-insured in certain domestic locations.

Certain of our domestic operating subsidiaries are self-insured for
property, auto liability and general liability. In 2001, we have raised the risk
we retain for auto and general liability from up to $1.0 million to up to $5.0
million. There is no guarantee we will be able to renew or continue property
liability insurance at current deductible levels. Additionally, state insurance
regulatory authorities, on a periodic basis, review our self-insurance status,
which includes but is not limited to, a review of our financial condition. Due
to our Chapter 11 filing and our financial condition we cannot assure you that
we will be able to maintain or renew our self-insurance status and as such, we
may be required to obtain third party insurance at higher costs or we may be
precluded from operating in certain locations.

Competition in the automotive rental industry has and may continue to impact
our prices and/or market share.

We operate in a highly competitive industry. We believe that price is one
of the primary competitive factors in the automotive rental industry,
particularly in the leisure market. From time to time, we or our competitors,
some of which have access to substantial capital, may attempt to compete
aggressively by lowering rental prices. To the extent that we lower prices to
attempt to enhance or retain market share, we may adversely impact our operating
margins. Conversely, if we opt not to match competitors' price reductions we may
lose market share, resulting in decreased volume and revenue.

15

Our business is seasonal.

Our business, and particularly the leisure travel market, is highly
seasonal. Our third quarter, which includes the peak summer travel months, has
historically been the strongest quarter of the year. During the peak season, we
increase our rental fleet and workforce to accommodate increased rental
activity. As a result, any occurrence that disrupts travel patterns during the
summer period could result in a significant decrease in customer volume. The
first and fourth quarters for our operations are generally the weakest because
there is limited leisure travel and a greater potential for weather conditions,
either adverse or unseasonable, to impact our business. Moreover, many of our
operating expenses including rent, general insurance and administrative
personnel, remain fixed throughout the year and cannot be reduced during periods
of decreased rental demand. As a result, we cannot assure you that we will have
the ability to conduct our operations efficiently or profitably at all times
during a year.

A decrease in air travel would significantly impact our business.

In 2001, our Alamo and National on-airport and near-airport locations
generated approximately ninety percent of our total revenue from total domestic
operations. We also expect to generate a significant portion of our revenue from
Alamo and National locations on-airport or near-airport in 2002. We were
significantly adversely affected by the decrease in air travel following
September 11, 2001. A sustained material decrease in airline passenger traffic
would significantly reduce our customer volume and significantly impact our
business. 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 further incidents of terrorism.

Increases in fuel costs or reduced fuel supplies could harm our business.

We could be adversely affected by significant increases in fuel prices,
limitations on fuel supplies and the imposition of mandatory allocations or
rationing of fuel. In particular, increased fuel costs could result in increased
airline ticket prices to consumers, which could have an adverse effect on
business and leisure travel and tourism, resulting in a significant decrease in
customer volume for our businesses.

Changes in manufacturers' repurchase programs may affect our business.

During the year ended December 2001, we operated a combined fleet of
approximately 310,000 owned and leased vehicles. As of December 31, 2001
approximately 81% of our fleet was covered by a vehicle manufacturer repurchase
program or leased and not subject to residual value risk. Under these
manufacturers' repurchase programs, we agree to purchase a minimum number of
vehicles directly from franchised dealers of the manufacturer at a specified
price. The manufacturer, in turn, agrees to buy those vehicles back from us at a
future date at a price that is based upon the capitalized cost of the vehicles
less an agreed upon depreciation factor and, in certain cases, an adjustment for
damage and/or excess mileage. Repurchase programs limit our risk of a decline in
the residual value of our fleet and enable us to fix our depreciation expense in
advance. Vehicle depreciation is the largest component of our cost of
operations. We could have difficulty managing costs relating to the acquisition
and disposition of our vehicles if manufacturers reduce the availability of
repurchase programs or related incentives, or reduce the number of vehicles
available to vehicle rental companies through repurchase programs.

We currently obtain a substantial portion of our financing in reliance on
repurchase programs. A significant adverse change in our financial condition or
our relationship with investment grade vehicle manufacturers would make
obtaining needed vehicle-secured debt financing on favorable terms significantly
more difficult.

In addition, the timing of the receipt or disposition of vehicles from
automobile manufacturers can significantly impact our business and results of
operations. We incur greater expense when we receive vehicles too early from
manufacturers or when manufacturers are unable to receive returned vehicles on a
timely basis. Separately, we incur greater expense when we undertake steps to
reduce our fleet size as a result of weak market volumes. The nature of the
costs incurred during a fleet reduction primarily include, but are not
16

limited to, accelerated depreciation charges and turn-in charges imposed under
the terms of our manufacturer repurchase agreements for vehicles returned ahead
of schedule.

Some of our rental fleet is subject to residual value risk upon disposition.

As of December 31, 2001, we were subject to residual value risk on
approximately 19% of our fleet, which were not covered by manufacturers' or
other repurchase programs. Residual value risk is the risk that a vehicle's
market value at the time it is sold will be less than its depreciated value. The
residual value of non-program vehicles depends on factors including the general
level of pricing in the automotive industry for both new and used vehicles.
Prices for used vehicles generally decrease if the automotive manufacturers
increase the retail sales incentives they offer on new vehicles. Because it is
difficult to predict the impact or timing of future manufacturer incentive
programs, used vehicle demand and other factors that influence used vehicle
resale values, we may not be able to manage effectively the residual value risk
on our non-program vehicles which would increase our costs associated with using
non-program vehicles in our rental fleet.

Cost of our rental fleet may increase.

During the last few years, the average price of new cars has increased. In
December 2000, we entered into a new agreement with General Motors under which
the average price of new cars 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. We anticipate that new vehicle
prices will continue to increase, but we cannot assure you that the
manufacturers' sales incentive programs will remain available to keep our costs
down, nor can we assure you that we will be able to control our rental fleet
costs or selection, or to pass on any increases in vehicle cost to our
customers. The cost of our rental fleet is also impacted by the relative mix of
short-term vehicles, vehicles held up to seven months, versus the mix of
long-term vehicles, vehicles held up to twelve months. We expect the relative
proportion of long-term vehicles to short-term vehicles to increase, thereby
increasing our operating costs as long-term vehicles are costlier on a net after
incentives basis than short-term vehicles.

We depend on General Motors as our principal vehicle rental fleet supplier.

General Motors, through its franchised dealers, is our principal supplier
of rental fleet vehicles. The number of vehicles we purchase varies from year to
year. In model year 2001, we purchased approximately 64% of our aggregate
domestic rental fleet from General Motors. In model year 2002, we may purchase a
lesser amount of our domestic rental fleet from General Motors. The supply
agreement with General Motors requires us to purchase a minimum number of units
spanning all the General Motors brands. In return, General Motors has agreed to
provide certain incentives as well as a minimum number of vehicles. Shifting
significant portions of our fleet purchases to other manufacturers would require
significant lead-time. Separately, General Motors's inability to supply us with
the planned number and type of vehicles in a timely manner could result in our
fleet being inadequate in size or in the types of vehicles available to us to
meet customers' demands, thereby resulting in a loss of revenue. In addition, if
General Motors is not able to offer competitive terms and conditions and we are
not able to purchase sufficient quantities of vehicles from other automobile
manufacturers on competitive terms and conditions, then we may be forced to
purchase vehicles at higher prices or on otherwise less favorable terms. Such a
situation could adversely affect us through increased vehicle acquisition and
depreciation costs that we are not able to offset sufficiently through rental
rate increases passed through to our customers.

We rely on asset-backed financing to purchase vehicles.

We have relied and will continue to rely on asset-backed financing to
purchase vehicles. As of December 31, 2001, we had outstanding approximately
$4.0 billion of asset-backed indebtedness relative to our fleet. If our access
to asset-backed financing were reduced, we cannot be sure that we would be able
to obtain replacement financing on favorable terms. As a result, any disruption
in the market for asset-backed securities or in our ability to access that
market could adversely affect our liquidity and our ability to purchase vehicles
for our fleet. Our Chapter 11 filing has made it more difficult and costly to
access this market and
17

there can be no assurance we will be able to obtain the necessary financing to
purchase vehicles. You should also read the "Financial Condition" section under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a description of our asset-backed financing programs.

An increase in interest rates could reduce our profitability

A portion of our debt accrues interest at floating interest rates. We use
interest rate derivative transactions to manage the impact of interest rate
changes on our variable rate debt. These derivative transactions consist of
interest rate caps. Including our interest rate derivatives, fixed or capped
interest rate debt was 96% of our total debt outstanding as of December 31,
2001. Nevertheless, a substantial increase in interest rates would significantly
increase our cost of indebtedness.

Problems may arise as a result of consolidation of our brands.

Our competitors have made objections to airport authorities and filed legal
challenges with the U.S. Bankruptcy Court and Federal courts, arguing that we
should not be able to bid for or maintain concession agreements under which we
operate both of our brands, Alamo and National, under a single concession
agreement. To date, however, the U.S. Bankruptcy Court has rejected their
arguments. A critical component of our restructuring plan is to achieve cost
savings by consolidating airport operations. Should airports or the courts agree
with our competitors' position it could significantly affect our ability to
execute this strategy.

We may have clean-up costs and liabilities relating to storage and handling of
petroleum and other materials.

Our domestic and international service facilities use tanks to store
petroleum products such as gasoline, diesel fuel, motor oil and waste oil and
also handle other materials that may under certain circumstances harm human
health or the environment. At many of these locations, one or more tanks
containing such materials are located underground. We cannot assure you that
these tanks or related systems or other materials will not result in soil or
groundwater contamination. In addition, historical operations, including
activities relating to automobile and bus maintenance, at some of our currently
and formerly owned or operated properties, have resulted in releases into soil
or groundwater. Any such contamination, release or spill, depending on factors
such as the material involved, quantity and environmental setting, and impacts
on third parties, could result in significant remediation expenditures, claims,
liabilities, and interruptions to our operations.

Our former Parent has engaged in certain transactions that are under review by
the IRS and may have a materially adverse effect on our financial condition,
results of operations and cash flows.

Our former Parent has engaged in certain transactions that are of a type
that the Internal Revenue Service has indicated it intends to challenge. During
the time we were part of our former Parent's consolidated Federal Income Tax
Return. Generally, the transactions relate to accelerations of certain future
projected tax deductions. We understand that these transactions are currently
under review by the Internal Revenue Service. An unfavorable settlement or
adverse resolution of these matters by our former Parent, or a decision by the
Internal Revenue Service to pursue ANC, could have a materially adverse effect
on our financial condition, results of operations and cash flows.

If our spin-off is determined to be taxable, our shareholders could be
required to pay tax on any shares they received in the spin-off and we could
be adversely affected by any resulting corporate tax liability.

In connection with the spin-off our former Parent, AutoNation, received a
private letter ruling from the IRS to the effect that, among other things, the
spin-off qualified 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 private 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.

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If the spin-off fails to qualify as a tax-free distribution for U.S.
federal income tax purposes, AutoNation stockholders who received 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 fails to qualify as a tax-free distribution for U.S.
federal income tax purposes, then, in general, a corporate income tax would also
be payable by the consolidated group of corporations 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, during
the four-year period beginning two years before the spin-off, one or more
persons acquires a 50% or greater interest in AutoNation or us as part of a plan
or series of related transactions that included the spin-off. Corporate tax, if
any, would be paid on the excess, if any, as of the date of the spin-off of (1)
the fair market value of the ANC Rental common stock distributed to AutoNation's
stockholders, minus (2) AutoNation's adjusted tax basis in the ANC Rental common
stock distributed. We have entered 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 fails to qualify as a tax-free distribution or either we or AutoNation
experience a prohibited 50% or greater acquisition, we might have to pay the
resulting corporate income tax.

To minimize this and other risks, we agreed with AutoNation to refrain from
engaging in specified transactions unless we received AutoNation's prior consent
or we received:

- a ruling from the IRS 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 and designated by AutoNation to the same effect and is
satisfactory to AutoNation in its absolute discretion.

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, among others:

- a liquidation;

- a merger or consolidation with, or acquisition by, another company;

- issuance and redemption of shares of our common stock;

- the sale of equity or the exercise of stock options;

- the sale, distribution or other disposition of assets in a manner that
would adversely effect the tax consequences of the spin-off; and

- the discontinuation of a material business.

Other transactions could also jeopardize the tax-free nature of the
spin-off.

The market for our common stock is currently not liquid.

Our common stock was delisted from NASDAQ in November 2001. As a result, a
liquid public market for our common stock does not exist, which may make it
difficult for you to sell our common stock. Our common stock is traded on the
NASD OTC Bulletin Board Market. There may be very limited demand for our common
stock.

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:

- the development of our restructuring plan and our ability to emerge from
Chapter 11;

- the failure of our business profile to fit the investment objectives of
stockholders, thereby limiting demand and causing some of them to sell
our shares;

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- the potential absence of securities analysts covering our company and
distributing research and investment recommendations about our company;

- changes in earnings estimates 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 in the recent period
experienced volatility that has often been unrelated or disproportionate to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the trading price of our common stock, regardless of our
actual operating performance.

ITEM 2. PROPERTIES

Our combined rental businesses, both owned and franchised, conduct
operations at more than 3,500 locations throughout the world, of which
approximately 1,200 are located within North America and approximately 2,300 are
located outside North America. These locations include rental and sales offices
and rental and service facilities located on or near airports and in central
business districts in major U.S. cities and suburban areas. We lease most of
these premises.

Our facilities serving airport locations are located on airport property or
near the airport in locations convenient for bus transport of customers to the
airport. We lease many of these airport locations from governmental authorities
charged with the operation of the airports under arrangements generally
providing for either the payment of a fixed rent or the payment of rent based on
a percentage of revenue at a location with a guaranteed annual minimum payment.
Most of our other facility leases provide for fixed rental payments. Each of the
airport facilities in the metropolitan areas we serve includes, in addition to
concession space, vehicle storage and maintenance areas, as well as rental and
return facilities. 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. Some airport
concession agreements require us to obtain surety bonds for the benefit of the
airport. Any failure to obtain or maintain these bonds would constitute a
default under the concession agreements and could result in our loss of position
at such airport.

We lease reservation centers in Charleston, South Carolina, Boca Raton,
Florida and Salt Lake City, Utah, and office facilities in Fort Lauderdale,
Florida, Boca Raton, Florida and Solon, Ohio.

Our Local Market Division leases our neighborhood rental locations from
third parties, and our former Parent, under lease agreements, which expire at
various times over the next ten years.

We believe that our facilities are sufficient for our needs.

ITEM 3. LEGAL PROCEEDINGS

On November 13, 2001, ANC Rental Corporation (the "Company") and certain of
its direct and indirect U.S. subsidiaries (each, a "Debtor," and collectively,
"Debtors") filed voluntary petitions under chapter 11 of title 11, United States
Code, in the United States Bankruptcy Court for the District of Delaware (Case
No. 01-11200 et al., Jointly Administered). The Debtors remain in possession of
their assets and properties, and continue to operate their businesses and manage
their properties as debtors-in-possession pursuant to the Bankruptcy Code. As a
result of the bankruptcy filing, any claims involving Debtors that arose during
periods prior to November 13, 2001 are considered pre-petition claims and
ultimately will give rise to plaintiff's status as unsecured creditors in the
event plaintiffs are successful in establishing liability. Currently, much of
the pre-petition litigation brought by private parties in which Debtors are
defendants has been stayed due to the automatic stay provisions of the
Bankruptcy Code.

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We are currently a defendant in two purported class actions that have been
brought in two states in which the plaintiffs seek unspecified damages and
injunctive relief arising out of our allegedly improper sale of optional
insurance products in connection with vehicle rentals. A common feature of the
two actions is a claim that applicable insurance laws were violated in the sale
of the optional insurance products (Liability Insurance Supplement and Personal
Accident Insurance/Personal Effects Coverage) because our counter sales
representatives were not licensed insurance salespersons. Details of those
actions appear below. A final order of dismissal in the Alabama Case was
appealed to the Eleventh Circuit. The appeal as to National was stayed pursuant
to the automatic stay provision of the bankruptcy code. The remaining case,
pending in Illinois, has also been stayed pursuant to the automatic stay
provision of the Bankruptcy Code. Other similar actions in Alabama and Wisconsin
have been concluded and/or dismissed with no finding of liability to our
company.

In October 1997, Shannon Leonard, Theresa Moore and Coley Whetstone, Jr. v.
National Car Rental Systems, Inc. and certain other car rental companies was
commenced in Circuit Court of Coosa County, Alabama. We and the other defendant
car rental companies removed the action to the United States District Court for
the Middle District of Alabama, Northern Division (Montgomery). Leonard purports
to be a class action on behalf of all persons in the United States who rented
from the defendants and, as part of that rental, purchased optional insurance
products. We and the other defendant car rental companies filed a series of
motions which sought dismissal of the various causes of action based upon the
judge's initial ruling that a private right of action does not exist under
Alabama law for the alleged unlicensed sale of insurance. A final order of
dismissal was entered in January of 2000 and the plaintiffs subsequently filed a
Notice of Appeal to the U.S. Court of Appeals for the Eleventh Circuit in
Atlanta, Georgia. In January 2002, the Eleventh Circuit remanded the case to the
U.S. District Court (M.D. Ala.) with instructions to remand it to state court,
but stayed the appeal as to National.

In April 1998, Angela Godfrey, individually and on behalf of all others
similarly situated v. Alamo Rent-A-Car, Inc. and a company that issued the
subject insurance policy was commenced in the Circuit Court of Cook County,
Illinois. The case purports to be a class action on behalf of all persons in
Illinois who rented from Alamo and who purchased optional insurance products. We
removed the action to the United States District Court for the Northern District
of Illinois. In September 1999, the case was remanded to the Circuit Court of
Cook County, Illinois following the granting of plaintiff's motion to remand.
Alamo's motion to dismiss the amended complaint has been filed but the action
has been stayed pursuant to the automatic stay provision of the Bankruptcy Code.

In March 2000, National Car Rental System, Inc. and another car rental
company were sued in a class action in a California state court under
California's Private Attorney General statute. The suit contends that the
vehicle refueling provisions in National's rental agreement that set forth the
renter's fuel options are materially misleading. In a similar case brought
against another rental car company in 1998, the California Court of Appeals,
First Appellate District in March 2000 sustained in part and reversed in part
the trial court's entry of judgment in favor of that rental car company and
ordered the matter remanded with respect to the plaintiff's challenge of the
manner in which that company discloses and explains its fuel service charge, but
upheld the trial court's ruling that such refueling charges were permissible
under California law if properly disclosed. The case has been stayed pursuant to
the automatic stay provision of the Bankruptcy Code.

In May 2000, a jury returned a verdict against Alamo for approximately $5.2
million in an action brought by Gerrit Dieperink, individually and as personal
representatives of his wife's estate arising out of her murder. She and her
husband, Danish tourists, while driving an Alamo rental car, got lost and ended
up at a gas station in Liberty City (Miami). A man trying to rob her killed her.
The claim was that Alamo should have warned them to avoid Liberty City because
it was a high crime area and dangerous for tourists. The court denied Alamo's
post-trial motions and entered final judgement according to the verdict. On
January 10, 2001, the Company filed its appeal with Florida's District Court of
Appeal (Third District). The Company's appeal has not been stayed.

In November 2000, National Car Rental System, Inc. and Alamo Rent-A-Car
along with all of the major car rental companies were sued in California state
court in a class action lawsuit. The Plaintiffs allege that the rental car
companies failed to adequately display a disclaimer relating to the sale of
collision damage waiver

21

(CDW) as required by statute. The lawsuit further contends that rental car
companies have not given adequate oral disclosures at time of rental also as set
forth by statute. National and Alamo have filed demurrers requesting the matter
be dismissed on the ground that the statutes do not provide a private right of
action. The case has been stayed pursuant to the automatic stay provision of the
Bankruptcy Code.

During the acquisition of certain assets from Tilden Car Rental in 1996,
National Car Rental (Canada) (a non-debtor entity) was assigned the remaining
years on a 99 year net lease for a parking garage in downtown Montreal. The
landlord has now moved to terminate the lease and seeks National Car Rental
(Canada) and the former Tilden group to pay for the repairs. National Canada is
contesting the eviction and its responsibility to pay for structural repairs
that the landlord failed to properly disclose. Repairs are estimated between
Cnd$2 million and Cnd$5 million. This case is not stayed by the bankruptcy
filing.

In April 2001, National Car Rental Systems, Inc. and its principal auto
auction vendor in California were sued in a class action lawsuit in the Superior
Court of California. The case purports to be a class action on behalf of all
persons who are alleged to have bought National vehicles at auction, on clean
titles, which the plaintiffs contend should have been designated salvage under
California law. The case has been stayed pursuant to the automatic stay
provision of the Bankruptcy Code.

The Department of Justice ("DOJ") has commenced two separate investigations
concerning compliance by National Car Rental and Alamo Rent-A-Car with certain
provisions of the Americans With Disabilities Act. The investigation contends
National and Alamo maintain an inadequate number of 16 plus person vehicles
equipped with wheel chair lifts at certain airports. This case is not stayed by
the bankruptcy filing.

Thirty-seven former and current Somali employees filed a suit in May 2001
against ANC Rental Corporation, Alamo Rent-A-Car, LLC, and National Car Rental,
Inc. The lawsuit involves employment practices at Alamo and Nationals' rental
facilities at the Minneapolis airport. The allegations involve discrimination
based on race, color, national origin, and religion. They also allege violations
of the Fair Labor Standards Act. The case has been stayed pursuant to the
automatic stay provision of the Bankruptcy Code.

United Services Automobile Association ("USAA") and USAA Alliance Services
LP have brought a claim against National Car Rental System, Inc. for alleged
trademark infringement and unauthorized use of the USAA mark, unfair
competition, breach of contract and an accounting of profits. Plaintiffs' claims
arise out of National's practice of offering a courtesy discount to USAA
members, when contacted by them, following termination of a previously existing
marketing agreement between National and USAA. The case has been stayed pursuant
to the automatic stay provision of the Bankruptcy Code.

We believe we have meritorious defenses in the foregoing actions and will
defend ourselves vigorously.

In addition to the matters described above, we are a party to various legal
proceedings which have arisen in the ordinary course of our business. While we
cannot predict the results of any of these matters with certainty, we believe
that losses, if any, resulting from the ultimate resolution of these matters
will not have a material adverse effect on our results of operations or
financial condition. However, an unfavorable resolution of any matter
individually or any number of matters in the aggregate could materially
adversely affect our results of operations or cash flows for the quarterly
periods in which they are resolved.

In addition, as discussed in the section titled Automotive Regulations,
Alamo and a number of our competitors are subject to a consent decree with the
Federal Trade Commission that requires certain disclosures to customers at each
stage of the rental transaction.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders of the Company during
the fourth quarter of the fiscal year ended December 31, 2001.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

From July 3, 2000 to November 26, 2001, our common stock was traded on the
Nasdaq National Market System under the symbol "ANCX". Effective November 26,
2001 we were delisted for failure to meet minimum listing requirements and began
trading on the NASD OTC Bulletin Board under the symbol ANCXQE. Until June 30,
2000 we were a wholly owned subsidiary of AutoNation. The following table sets
forth, for the periods indicated, the high and low closing prices per share of
the common stock as reported by Nasdaq (through November 26, 2001) or the NASD
OTC Bulletin Board.

On April 30, 2002, the closing price of our common stock was $0.51 per
share as reported by the NASD OTC Bulletin Board. On April 30, 2002, we believe
there were up to approximately 45,500 stockholders.

We have not declared or paid any cash dividends on our common stock since
our spin-off from AutoNation on June 30, 2000. We currently do not anticipate
paying cash dividends in the foreseeable future. In addition, our ability to pay
dividends is limited by restrictions placed upon the debtor companies of ANC by
its Chapter 11 bankruptcy filing of November 13, 2001.

In 2001 we issued warrants to purchase approximately 3.7 million shares of
our common stock to the lender under our interim credit facility. The warrants
have a term of ten years and an exercise price of $0.01 per share. Later in 2001
we issued additional warrants to purchase approximately 1.4 million shares of
our common stock to the same lender. These warrants also have a term of ten
years and an exercise price of $0.01 per share. These warrants were issued in
accordance with the registration exemption provided by Section 4(2) under the
Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated statement of operations
and balance sheet data of our company for the periods and the dates indicated.
We derived the selected operations statement data for 2001, 2000, and 1999, and
the selected balance sheet data as of December 31, 2001 and 2000 presented
below, from our Consolidated Financial Statements included elsewhere in this
Form 10-K. We derived our selected statement of operations data for 1998 and
1997 and the selected balance sheet data as of December 31, 1999, 1998 and 1997
from our consolidated financial statements for those periods, not included
herein, all of which have been audited by Arthur Andersen LLP, independent
certified public accountants.

You should read the selected consolidated financial data below in
conjunction with our Consolidated Financial Statements and notes thereto as of
December 31, 2001 and 2000 and for each of the three years in the period ended
December 31, 2001 included elsewhere in this Form 10-K and our "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

All historical share and per share data included in the Consolidated
Statements of Operations and Comprehensive Income has been retroactively
adjusted for the recapitalization of the former Parent's 100 shares of common
stock into 45,142,728 shares of Common Stock on June 30, 2000 as more fully
described in the Notes to Consolidated Financial Statements.

Basic earnings per share is calculated based on the weighted average shares
of common stock outstanding during the period. Diluted earnings per share is
calculated based on the weighted average shares of common stock outstanding,
plus the dilutive effect of common stock purchase warrants and stock options,
calculated using the if converted and the treasury stock method, respectively.
Due to the net loss for the year ended December 31, 2001, the stock options and
common stock purchase warrants were not dilutive. Due to the net loss for the
year ended December 31, 2000, the stock options were not dilutive; there were no
common stock purchase warrants outstanding. For each of the three years in the
period ended December 31, 1999, there was no dilutive effect from stock options
and common stock purchase warrants, as there were none outstanding.

Statement of operations and balance sheet data is as follows for the
periods presented, in millions (except per share amounts):

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read the following discussion in conjunction with our
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Form 10-K.

OVERVIEW

We rent vehicles on a daily, weekly or monthly 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 or daily rental
vehicles from locations in neighborhood areas through Alamo Local Market
Division. We operate mainly in the United States, Europe and Canada. We generate
revenue primarily from vehicle rental charges and the sale of ancillary rental
products. Approximately 85% of our rental revenue is derived from vehicle rental
charges with the remaining 15% 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, infant
seat rentals, cellular phone rentals and ski rack rentals.

Prior to June 30, 2000, we were a wholly owned subsidiary of AutoNation,
Inc. ("AutoNation" or "former Parent"). AutoNation announced its intention to
separate its automotive rental business from its automotive retail business in
August 1999, and in September 1999, announced its intention to distribute its
entire interest in us to AutoNation's stockholders on a tax-free basis (the
"Distribution"). On May 31, 2000 AutoNation's board of directors approved the
spin-off and set a record date of June 16, 2000 and a distribution date of June
30, 2000. The Distribution occurred on June 30, 2000 at which point we became an
independent, publicly owned company. In connection with the Distribution we
entered into agreements with AutoNation, which provide for the separation of our
business from AutoNation's and govern various interim and ongoing relationships
between the companies.

As a wholly owned subsidiary of AutoNation, we received services from
AutoNation which supported our accounting, auditing, cash management, corporate
communications, corporate development, facilities management, finance and
treasury, human resources and benefit plan administration, information
technology, insurance and risk management, legal, payroll, purchasing and tax
operations. AutoNation also provided us with the services of a number of its
executives and employees. In consideration for these services, AutoNation
allocated to us a portion of its overhead costs related to these services. These
allocations were historically based on the proportion of our invested capital to
the consolidated invested capital of AutoNation and its subsidiaries, including
our company, and based upon various proportional cost allocation methods. We
believe that the amounts allocated to us in 1999 were no less favorable than
costs we would have incurred to obtain these services on our own or from
unaffiliated third parties. No amounts have been allocated in 2000 or 2001. As a
result of the foregoing, the historical consolidated financial information for
1999 and 2000 included in this filing does not necessarily reflect what our
consolidated financial position, results of operations and cash flows would have
been had we operated as a separate, stand-alone entity during the periods
presented.

CHAPTER 11 PROCEEDINGS

On November 13, 2001, ANC Rental Corporation and certain of our direct and
indirect U.S. subsidiaries (each, a "Debtor," and collectively, "Debtors") filed
voluntary petitions under Chapter 11 of Title 11, United States Code, in the
United States Bankruptcy Court for the District of Delaware (Case No. 01-11200
et al., Jointly Administered). The Debtors remain in possession of their assets
and properties, and continue to operate their businesses and manage their
properties as debtors-in-possession pursuant to the Bankruptcy Code. As a
debtor-in-possession, management is authorized to operate the business, but may
not engage in transactions outside the ordinary course of business without Court
approval. For example, certain types of capital expenditures, certain sales of
assets and certain requests for additional financings will require approval by
the Bankruptcy Court. There is no assurance that the Bankruptcy Court will grant
any requests for such approvals. Subsequent to the filing of the Chapter 11
petitions, we obtained several Court orders that authorized us to pay certain
pre-petition liabilities (such as employee wages and benefits) and take certain
actions to preserve the going concern value of the business, thereby enhancing
the prospects of reorganization. Our financial statements have been prepared on
a going concern basis, which contemplates continuity of

25

operations, realization of assets, and payment of liabilities in the ordinary
course of business. As a result of the Chapter 11 filing, there is no assurance
that the carrying amounts of assets will be realized or that liabilities will be
settled for amounts recorded.

The confirmation of a plan of reorganization is our primary objective.
After negotiations with various parties in interest, we expect to present a plan
of reorganization to the Court to reorganize our business and to restructure our
obligations. This plan of reorganization could change the amounts reported in
the financial statements and cause a material change in the carrying amount of
assets and liabilities. We expect that a significant portion of the liabilities
recorded are expected to be subject to compromise.

The plan of reorganization, when filed, will set forth the means for
treating claims, including liabilities subject to compromise and interests in
our company. Such means may take a number of different forms. A plan of
reorganization may result in, among other things, significant dilution or
elimination of certain classes of existing interests as a result of the issuance
of equity securities to creditors or new investors. We are in the early stages
of formulating a plan of reorganization. The confirmation of any plan of
reorganization will require creditor acceptance as required under the Bankruptcy
Code and approval of the Bankruptcy Court.

Under bankruptcy law, actions by creditors to collect pre-petition
indebtedness owed by the Debtors at the filing date, as well as most litigation
pending against us, are stayed and other pre-petition contractual obligations
may not be enforced against the Debtors. In addition, the Debtors have the
right, subject to Court approval and other conditions, to assume or reject any
pre-petition executory contracts and unexpired leases. Parties affected by these
rejections may file pre-petition damage claims with the Court. We have prepared
and submitted the schedules setting forth the Debtors' assets and liabilities as
of the date of the petition as reflected in our accounting records. The amounts
of claims filed by creditors could be significantly different from their
recorded amounts. Due to material uncertainties, it is not possible to predict
the length of time we will operate under Chapter 11 protection, the outcome of
the proceedings in general, whether we will continue to operate under our
current organizational structure, or the effect of the proceedings on our
businesses or the recovery by creditors and equity holders of the Company.

Under the Bankruptcy Code, post-petition liabilities and pre-petition
liabilities subject to compromise must be satisfied before shareholders can
receive any distribution. The ultimate recovery to shareholders, if any, will
not be determined until the end of the case when the fair value of our assets is
compared to the liabilities and claims against us. There can be no assurance as
to what value, if any, will be ascribed to our common stock in the bankruptcy
proceeding.

As a result of the bankruptcy filings and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
confirmation of a plan of reorganization, or disapproval thereof, could change
the amounts reported in our financial statements. The ability of the company to
continue as a going concern is dependent upon, among other things, (1) our
ability to generate adequate sources of liquidity, (2) our ability to generate
sufficient cash from operations, (3) the ability of our subsidiaries that are
not included in the Chapter 11 cases to obtain necessary financing, (4)
confirmation of a plan or plans of reorganization under the Bankruptcy Code, and
(5) our ability to achieve profitability following such confirmation. Because we
can give no assurance that we can achieve any of the foregoing, there is
substantial uncertainty about our ability to continue as a going concern.

Our financial statements do not include any adjustments that may result
from the resolution of these uncertainties. In particular, our financial
statements do not reflect adjustments to the carrying value of assets or the
amount and classification of liabilities that ultimately may be necessary as a
result of a plan of reorganization. Adjustments necessitated by a plan of
reorganization could materially change the amounts reported in the consolidated
financial statements included elsewhere herein.

MANAGEMENT CHANGES

In connection with our restructuring efforts we have made certain changes
to our senior management team. Lawrence Ramaekers, a veteran of numerous
restructurings and formerly president of National Car

26

Rental, joined us as President and Chief Operating Officer in late 2001. In
April 2002 Mr. Ramaekers also became our Chief Executive Officer. Michael Egan,
previously our Chief Executive Officer, continues as our non-executive Chairman
of the Board. In addition, during 2001 Bill Plamondon, formerly president of
Budget Rent-A-Car, was named our Chief Restructuring Officer, and Wayne Moor was
named our Senior Vice President and Chief Financial Officer. Also in the second
quarter of 2002, we announced that Travis Tanner would assume the role of Senior
Vice President, Sales and Marketing. We are confident that our senior management
team has the experience and industry knowledge to lead us during our
reorganization.

RESTRUCTURING EFFORTS

In an effort to return us to profitability, we are implementing a series of
restructuring plans designed to improve the quality of customer service while
lowering costs to deliver such service. The restructuring plans can be
classified into the following categories:

Airport Location Consolidation

At most major airports in the United States, we operate Alamo and National
as stand-alone rental facilities. During 2002, we plan to consolidate up to 144
separately branded locations throughout the United States into a maximum of
seventy-two dual branded locations. We believe that by consolidating operations
into one dual branded facility we will be able to lower operating costs and
improve vehicle utilization, lower personnel expense, and incur less rent
expense. Our goal is to complete the facility consolidation program by December
2002. We will amortize the net book value of the assets relative to the closure
of these facilities on a straight-line basis over the expected remaining useful
life of ten months. We estimate the excess depreciation charge will approximate
$3.1 million per month beginning in March 2002. Due to material uncertainties,
negotiations with third parties, and the legal challenges of certain
competitors, it is not possible to predict the length of time it will take to
complete each location consolidation or whether all of the anticipated
consolidations will occur as planned. As such, we may need to change our
estimate of an assets' remaining useful life and revise depreciation policies on
a prospective basis.

Dual Brand Existing Single Brand Cities

Certain city locations are currently single branded as either Alamo or
National. To maximize our revenue potential, we intend to dual brand many of
these facilities, by offering our customers at these facilities the brand
currently not represented at the rental counter.

Combining Information Technology Systems

Currently the company operates two separate and distinct information
technology systems. During 2002, we plan to migrate to one information system
and abandon the other. We believe that cost savings can be achieved by combining
information technology on to the existing Alamo legacy operating system.
Additional benefits of migrating to the Alamo legacy system are expected to
include a reduction of support staff, elimination of duplicative system
infrastructures, improved operational efficiency, lower cost of training, and
standardization across the organization. The migration to one information
technology system is not without significant risks, such as the temporary loss
of business functionality, questions regarding the scalability of existing
infrastructure, and the need for coordination with other third party vendors to
accept system changes. We will amortize the remaining net book value of assets
related to the abandoned system on a straight-line basis over the expected
remaining useful life of twelve months. We estimate the excess depreciation
charge will approximate $10.0 million per month beginning January 1, 2002.

Changes in License Operations

The Company intends to modify its current licensee structure by entering
into new "dual branded" licensing agreements that will include but not be
limited to (1) selling or transferring ownership of certain Alamo locations in
existing National licensee markets to the current National licensee, (2)
increasing our

27

current royalty rate charged to our licensee base, and (3) licensing our Alamo
locations to current National licensees in those markets where an Alamo location
currently does not exist.

Closure of Alamo Local Market Locations

In the first quarter of 2002, we closed approximately 182 unprofitable
local market locations. Costs incurred relative to these closures approximated
$5.6 million, and primarily related to disposition of fleet impaired assets and
accruals for rent and severance.

CONSOLIDATED RESULTS OF OPERATIONS

A summary of our operating results and key operating statistics is as
follows for each of the three years ended December 31, 2001 (dollars in millions
except revenue per day):

- ---------------

(1) Revenue per day represents the average revenue recorded per vehicle per day.

Years Ended December 31, 2001 and 2000

Revenue

Revenue was $3,162.9 million for the year ended December 31, 2001, and
$3,525.0 million for the year ended December 31, 2000. The decrease in revenue
of $362.1 million or 10.3% is primarily due to lower charge day volume of $302.0
million or 8.6%, lower revenue per day of $35.0 million or 1.0%, the unfavorable
effects of foreign exchange movements of $16.9 million or 0.5%, and lower
licensee revenue of $8.2 million or 0.2%.

Charge day volume declined in the year ended December 31, 2001 compared to
the same period in the prior year by approximately 8.4 million days. The
decrease was realized in North America with the Alamo brand declining 4.6
million days and the National brand declining 3.9 million days. Approximately
4.5 million charge days or 54% of the year-to-date decline in charge days
occurred in the fourth quarter in part due to the terrorist events of September
11, 2001. The balance of the decline in charge day volumes was the result of a
weak economy throughout 2001.

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The decline in revenue per day for the year ended December 31, 2001 as
compared to the same period in the prior year was the result of a weak economy
and an extremely competitive pricing environment in the domestic airport market.

Following the events of September 11, 2001 there has been a significant
decline in air travel and related car rentals at airports particularly in the
U.S. We cannot accurately predict the extent or duration of the decline in air
travel. Approximately ninety percent of our revenue is derived from airport
locations and a continued decline in air travel would have a material adverse
effect on our financial position and results of operations.

Direct Operating Costs

Direct operating costs include costs specifically related to the operation
and maintenance of the fleet, field personnel, facility costs and variable
operating costs such as insurance, agency fees, and fuel. Direct operating costs
were $1,402.8 million for the year ended December 31, 2001 and $1,404.1 million
for the year ended December 31, 2000. As a percent of revenue, direct operating
costs were 44.3% for the year ended December 31, 2001 and 39.8% for the year
ended December 31, 2000.

Fleet operating expenses increased approximately $22.4 million primarily
driven by increased damages and turn-back costs, fleet maintenance and fleet
transportation costs. These increases are the result of reducing fleet levels
beyond those of the prior year to meet lower forecasted demand. Fleet operating
expenses were also adversely impacted by the terrorist events of September 11.
As a result of September 11 we experienced a high level of one-way rentals. As
such, we realized higher than normal fleet operating costs as we incurred
additional expenses to reclaim the displaced fleet. Facility and facility
maintenance increased approximately $21.7 million due to increased rent, the
result of sale and leaseback transactions in the first and second quarters as
well as increased facility operating costs. Offsetting these increases were
lower personnel costs of approximately $24.4 million due to our cost reduction
programs in the first half of the year as well as lower variable transaction
costs of approximately $12.5 million, the result of lower overall charge day
volumes during the period. The benefits of foreign exchange rate movements
lowered our costs by approximately $8.5 million for the year ended December 31,
2001.

Vehicle Depreciation

Vehicle depreciation includes vehicle depreciation, net of manufacturer
incentives, and gains and losses on vehicle sales in the ordinary course of
business. Vehicle depreciation was $1,032.7 million for the year ended December
31, 2001 and $1,007.0 million for the year ended December 31, 2000. As a percent
of revenue, vehicle depreciation was 32.7% for the year ended December 31, 2001
and 28.6% for the year ended December 31, 2000.

The increase in vehicle depreciation of $25.7 million was primarily due to
increased depreciation of approximately $103.1 million primarily due to higher
vehicle acquisition costs, changes in the mix of our fleet, and provisions of
approximately $12.5 million incurred relative to the disposition of our
"at-risk" vehicles. Offsetting these increases were the benefits of a decreasing
fleet size, which lowered our costs by approximately $74.1 million, and the
benefits of foreign exchange rate movements, which lowered our costs by
approximately $3.3 million.

Domestically, we believe that as a result of overall declines in rental
volumes industry-wide our competitors have reduced fleet size. These reductions
coupled with a weak economy depressed the residual market values of used
vehicles. As such, we increased our fleet depreciation rates prospectively.

Selling, General and Administrative Expense

Selling, general and administrative expenses were $666.1 million for the
year ended December 31, 2001 and $699.1 million for the year ended December 31,
2000. As a percentage of revenue, selling, general and administrative expenses
were 21.0% for the year ended December 31, 2001 and 19.8% for the year ended
December 31, 2000. The decrease in selling, general and administrative expenses
of $33.0 million was due to

29

lower variable selling costs of approximately $18.5 million, the result of lower
overall charge day volumes during the period. Reduced marketing, advertising and
general overhead spending approximated $11.2 million. The benefits of foreign
exchange rate movements lowered our costs by approximately $3.3 million.

Severance/Transition Cost

During the first quarter of 2001, as part of a cost reduction plan, we
reduced our workforce in excess of 700 people with a total expected annual
expense reduction of approximately $25.0 million. The severance related to those
terminations was $2.0 million.

Transition costs were $17.7 million for the year ended December 31, 2000.
These costs related to our fourth quarter 1999 restructuring plan, and were not
previously accruable as part of the 1999 charge. Transition costs are primarily
comprised of employee retention bonuses, support for information systems, and
personnel costs related to hiring, relocation and training.

Reorganization Expenses

Reorganization expenses represent losses resulting from the reorganization
and restructuring of our business. For the quarter ended December 31, 2001 we
incurred approximately $2.1 million of professional fees for services rendered
on our behalf as well as on behalf of our creditors. We have not accrued
contractual interest expense of approximately $0.1 million related to $35.0
million of unsecured other debt from the filing date through December 31, 2001.

Impairment of Intangible Assets

During the year ended December 31, 2001 we recognized a charge of $210.8
million related to the impairment of intangible assets. As a result of
significant adverse changes in the business environment, current operating cash
flow losses and projected operating cash flow losses for the foreseeable future,
we believe certain intangible assets were no longer realizable and were
impaired.

Interest Income

Interest income was $6.3 million for the year ended December 31, 2001 and
$5.1 million for the year ended December 31, 2000. The increase in interest
income is due primarily to an overall higher invested cash balance.

Interest Expense

The components of interest expense as of December 31 are as follows:

Vehicle interest expense was $276.1 million for the year ended December 31,
2001 and $344.3 million for the year ended December 31, 2000. As a percentage of
revenue, vehicle interest expense was 8.7% for the year ended December 31, 2001
and 9.8% for the year ended December 31, 2000. The decrease in vehicle interest
expense of approximately $68.2 million or 19.8% was due primarily to lower
average vehicle debt outstanding for the comparative period coupled with lower
weighted average interest rates.

Non-vehicle interest expense was $62.8 million for the year ended December
31, 2001 and $42.8 million for the year ended December 31, 2000. As a percentage
of revenue, non-vehicle interest expense was 2.0% for the year ended December
31, 2001 and 1.2% for the year ended December 31, 2000. The increase in non-
vehicle interest expense of approximately $20.0 million or 46.7% was due
primarily to interest and debt issue costs related to our interim financing and
our revolving credit facilities. Amortization of debt issue costs and

30

note discount relative to these facilities was $15.3 million for the year ended
December 31, 2001 and $13.4 million for the year ended December 31, 2000.

Other (Income) Expense, Net

The components of other (income) expense, net as of December 31, are as
follows:

Effective January 1, 2001 we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended. For additional information regarding the
adoption of SFAS 133 please refer to Note 18 of our Notes to Consolidated
Financial Statements. The effect of applying these new standards for the year
ended December 31, 2001 was a mark-to-market loss of $2.0 million. The amounts
recognized related to the changes in fair market value of the time value
component of our stand-alone caps. Due to reductions in our fleet debt and the
termination of certain interest rate hedges we recognized deferred losses of
approximately $5.8 million.

During 2001, we entered into a series of sale and leaseback transactions,
which yielded net proceeds of approximately $110.3 million. The leases, with
terms of not less than 20 years, are treated as operating leases. Gains realized
on the sale of the properties have been deferred and are being recognized over
the life of the respective leases. Losses recognized currently in earnings
approximated $4.2 for the year ended December 31, 2001. Deferred transaction
gains that will amortize over the life of the leases approximated $34.1 million
of which $32.8 million remained as of December 31, 2001.

Other expense, net was $8.2 million for the year ended December 31, 2001
and $3.3 million for year ended December 31, 2000. The increase is due to the
higher spending on legal and bank fees to amend our various credit facilities.

Provision for Income Taxes

The provision for income taxes was $103.5 million, of which $4.5 million is
included in the cumulative effect of change in accounting principle, net of
taxes, for the year ended December 31, 2001 and $3.8 million for the year ended
December 31, 2000. During the third quarter of 2001 we recognized a charge of
$103.5 million related to the establishment of a valuation allowance for certain
tax benefits and net operating loss carry-forwards. As a result of significant
adverse changes in the present business environment, current operating cash flow
losses and projected operating cash flow losses for the foreseeable future,
management believed that it was more likely than not that the tax assets were no
longer realizable.

In 1997 and 1999 our former Parent engaged in certain transactions that are
of a type that the Internal Revenue Service has indicated it intends to
challenge. During this time we were part of our former Parent's consolidated
Federal Income Tax return. Generally, the transactions relate to the
acceleration of certain future projected tax deductions. We understand that
these transactions are currently under review by the Internal Revenue Service.
An unfavorable settlement or adverse resolution of these matters by our former
Parent, or a decision by the Internal Revenue Service to pursue ANC, could have
a material adverse effect on our financial condition, results of operations and
cash flows.

Cumulative Effect of Change in Accounting Principle

As previously discussed, on January 1, 2001 we adopted SFAS 133 and
recognized a gain upon adoption of approximately $11.6 million pre-tax or $7.1
million after-tax.

31

Years Ended December 31, 2000 and 1999

Revenue

Revenue was $3,525.0 million for the year ended December 31, 2000 and
$3,536.0 million for the year ended December 31, 1999. The decrease in revenue
of $11.0 million or 0.3% was primarily due to lower charge day volume of 0.9% or
$30.7 million, the unfavorable effect of foreign exchange movement of 0.8% or
$27.8 million and lower licensee and other changes of 0.2% or $7.6 million.
Offsetting the decreases was improved revenue per day, net of foreign exchange,
of 1.6% or $55.1 million.

The most significant declines in charge day volume for the year over year
period were primarily realized in our Alamo Local Market Division and our
National brands. The decline in our Alamo Local Market Division was due to a
loss of market share in the insurance replacement market volumes. The decline in
charge days at National largely resulted from our repositioning National as a
premium car rental brand and de-emphasizing its focus on lower margin affinity
business. Volume losses experienced by National in 2000 were anticipated as we
repositioned National from a pricing perspective.

The overall pricing environment in the domestic airport market was
extremely competitive during 2000.

Much of the price competition was in time and mileage rates, the base daily
rate a customer is charged. During 2000, the sale of incremental products and
services, such as liability and other accident protection products, fuel usage
fees, and customer convenience products, increased approximately 9% compared to
the prior year to approximately 14% of total revenue. The increase in the sale
of incremental products and services comprise a majority of the increase in
revenue per day for 2000 as compared to 1999.

Direct Operating Costs

Direct operating costs include costs specifically related to the operation
and maintenance of the fleet such as field personnel, facility costs and
variable transaction costs including, but not limited to, insurance, agency
fees, and fuel. Direct operating costs were $1,404.1 million for the year ended
December 31, 2000 and $1,417.7 million for the year ended December 31, 1999. As
a percent of revenue, direct operating costs were 39.8% for the year ended
December 31, 2000 and 40.1% for the year ended December 31, 1999.

The decrease in direct operating costs of approximately $13.6 million or
1.0% was due to the favorable effects of foreign exchange movement of
approximately $14.9 million and the result of lower transaction-related costs
including insurance and airport-agency fees offset by higher personnel cost and
facility cost. Additionally, 1999 included certain additional charges related to
our restructuring plan including a $14.3 million charge related to the
re-negotiation of certain international supply agreements and a $4.1 million
charge related to the costs of employee retention payments. Please refer to our
discussion of Transition Cost and Restructuring costs in the following
paragraphs.

Vehicle Depreciation

Vehicle depreciation includes vehicle depreciation, net of manufacturer
incentives, and gains and losses on vehicle sales in the ordinary course of
business. Vehicle depreciation was $1,007.0 million for the year ended December
31, 2000 and $1,014.3 million for the year ended December 31, 1999. As a percent
of revenue, vehicle depreciation was 28.6% for the year ended December 31, 2000
and 28.7% for the year ended December 31, 1999.

The decrease in vehicle depreciation of $7.3 million was primarily due to
increased depreciation rates partially offset by lower average fleet size on a
year over year basis. The increase in depreciation rates of approximately $9.8
million was primarily due to higher vehicle acquisition costs coupled with
changes in the mix of our fleet. Offsetting these increases were the benefits of
a decreasing fleet size, which lowered our costs by approximately $11.4 million,
decreased losses recognized on the disposition of vehicles, as well as the
benefits of foreign exchange rate movements, which lowered our costs by
approximately $5.7 million.

32

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $699.1 million for the
year ended December 31, 2000 and $770.4 million for the year ended December 31,
1999. As a percentage of revenue, selling, general and administrative expenses
were 19.8% for the year ended December 31, 2000 and 21.8% for the year ended
December 31, 1999. The lower selling, general and administrative expenses as a
percentage of revenue and in aggregate dollars of $71.3 million was due to the
benefits realized from the consolidation of our headquarters operations, coupled
with lower variable selling expenses. In addition, favorable effects of foreign
exchange movements decreased selling, general and administrative expense by
approximately $5.7 million.

In addition, the 1999 period included incremental provisions related to
allowances for doubtful accounts on certain past due receivables approximating
$35.0 million, higher than normal information system costs in part related to
the implementation and remediation of Odyssey, and higher selling and marketing
expenses for National in order to regain previously lost market share.

Restructuring

During the year ended December 31, 1999, we approved and implemented a plan
to restructure certain of our operations. Included in the plan were actions to
(1) consolidate our North American headquarters, (2) reduce non-field headcount
as a result of the consolidation of the North American headquarters, (3)
renegotiate some of our existing international vehicle supply agreements and
reduce our fleet and (4) exit and consolidate certain unprofitable or marginally
profitable operating locations both domestically and internationally.

In connection with this plan, we recorded a restructuring charge of $40.5
million during the fourth quarter of 1999. The primary components of this charge
were: $12.8 million for severance payments related to the closure of our
Minneapolis headquarters; $5.2 million related to asset impairments for idled
and exited facilities; $3.3 million related to non-cancelable facility leases in
North America; $13.6 million related to the closure and disposition of certain
unprofitable international operations; $4.7 million related to non-cancelable
facility leases in our international operations; and $0.9 million of other
restructuring related costs.

At December 31, 2000, $8.8 million was accrued relative to the 1999 plan
consisting primarily of severance and continuing lease obligations. Certain
lease commitments will extend to the remainder of the applicable lease term. We
charged $12.9 million to these reserves during the year ended December 31, 2000.
The charges were primarily comprised of severance and rent paid during the year.
During the year we made additional provisions for the payment of retention
bonuses. Retention bonuses included as a component of transition costs in
selling, general and administrative expenses approximated $8.6 million for the
year ended December 31, 2000.

During the year ended December 31, 2000, we recognized a charge to selling,
general, and administrative expenses of approximately $2.1 million, related to
the termination of certain additional executive and international management
personnel, which did not previously qualify for liability recognition as of
December 31, 1999. Separately, in 2000 we sold our ownership in the Australian
operations to an unrelated third party. The sale did not result in a significant
gain or loss. Reserves approximating $0.9 million, that were provided as part of
the fourth quarter 1999 restructuring, were reversed during 2000, reducing
selling, general and administrative expenses.

Interest Income

Interest income was $5.1 million for the year ended December 31, 2000 and
$1.3 million for the year ended December 31, 1999. The increase in interest
income is due primarily to interest bearing assets contributed as part of the
contributed insurance subsidiary from our former Parent. During the third and
fourth quarters, investments consisting of government debt securities,
asset-back securities, and corporate debt securities were converted into cash.
The conversion did not result in significant gain or loss.

33

Interest Expense

The components of interest expense as of December 31 are as follows:

Vehicle interest expense was $344.3 million for the year ended December 31,
2000 and $343.5 million for the year ended December 31, 1999. As a percentage of
revenue vehicle interest expense was 9.8% for the year ended December 31, 2000
and 9.7% for the year ended December 31, 1999. Vehicle interest expense was
relatively flat as the benefits of lower interest rates were offset by higher
weighted overage debt outstanding.

Non-vehicle interest expense was $42.8 million for the year ended December
31, 2000 and $14.3 million for the year ended December 31, 1999. As a percentage
of revenue non-vehicle interest expense was 1.2% for the year ended December 31,
2000 and 0.4% for the year ended December 31, 1999. The increase in non-vehicle
interest expense of approximately $28.5 million was due primarily to interest
and debt issue costs related to our interim financing and our revolving credit
facilities. Amortization of debt issue costs relative to these facilities
approximated $13.4 million and was incurred during the third and fourth quarters
of 2000.

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes was $3.8 million for the year
ended December 31, 2000 and $(18.8) million for the year ended December 31,
1999. The increase in tax expense is due to an increase in pre-tax income from
operations.

AutoNation Incremental Corporate Overhead Allocation

In 1999, our former Parent allocated certain general and administrative
expense to us. Such allocations were based upon the ratio of our invested
capital to our parent's consolidated invested capital and were $16.0 million for
the year ended December 31, 1999. In addition to these allocations, during the
year ended December 31, 1999, AutoNation also allocated to us $19.4 million of
cost from certain centralized corporate functions. These allocations were based
on various proportional cost allocation methods and are included in selling,
general and administrative expense for 1999. These combined allocations
approximate our estimate of AutoNation's corporate overhead required to support
our operations. We believe these allocations in 1999 were reasonable. No amounts
have been allocated in 2000.

Extraordinary Charges

In connection with the termination of certain commercial paper programs and
other debt extinguishments, we recorded extraordinary charges, net of income
taxes, of approximately $1.6 million in the fourth quarter of the year ended
December 31, 1999. These charges include the write-off of debt issue costs and
other related fees.

34

QUARTERLY RESULTS OF OPERATIONS

The following sets forth our summary quarterly results of operations for
the years ended December 31, 2001 and December 31, 2000 (dollars in millions
except revenue per day):

Seasonality

Our business, and particularly the leisure travel market, is highly
seasonal. Our third quarter, which includes the peak summer travel months, has
historically been the strongest quarter of the year. During the peak season, we
increase our rental fleet and workforce to accommodate increased rental
activity. As a result, any occurrence that disrupts travel patterns during the
summer period could result in a significant decrease in

35

customer volume. The first and fourth quarters for our operations are generally
the weakest because there is limited leisure travel and a greater potential for
weather conditions, either adverse or unseasonable, to impact our business. Many
of our operating expenses such as rent, general insurance and administrative
personnel remain fixed throughout the year and cannot be reduced during periods
of decreased rental demand. Given the seasonality of our operations, our revenue
and variable operating and selling expenses are generally higher in aggregate
dollars during the second and third quarters as compared to the first and fourth
quarters. In addition, in part due to seasonality, our cost of operations as a
percentage of revenue is generally higher during the first and fourth quarters
as compared to the second and third quarters. Charge day volumes have not fully
returned to pre-September 11 levels. As such, prior performance may not be an
indication of future seasonal results.

2001 versus 2000

Revenue, on a quarter over quarter basis, decreased 4.9% in the first
quarter, 6.4% in the second quarter, 9.5% in the third quarter and 20.9% in the
fourth quarter. The declines were driven by both lower volume of charge days and
lower revenue per day. Charge day volumes declined 3.6% in the first quarter,
4.1% in the second quarter, 8.1% in the third quarter and 19.8% in the fourth
quarter. Revenue per day declined 1.8% in the first quarter, 2.2% in the second
quarter, 1.6% in the third quarter and 1.4% in the fourth quarter. Charge day
volumes were lower in the first half of the year due to poor economic conditions
and management moving the mix of business away from lower yielding affinity
business. Charge day volume declines in the last half of the year were due to
the declines in travel, a result of the events of September 11 and poor economic
conditions. The overall pricing environment in the domestic airport market
continued to be extremely competitive during 2001 resulting in lower average
revenue per day on a quarter over quarter basis.

Direct operating costs, on a quarter over quarter basis, decreased 2.5% in
the first quarter, 0.4% in the second quarter and 2.7% in the fourth quarter.
The declines are due to cost reduction programs and lower variable transaction
costs due to lower volumes. Direct operating costs in the third quarter
increased 5.0% due to increased costs related to reductions in our fleet size.

Depreciation, on a quarter over quarter basis, increased 5.3% in the first
quarter, 13.2% in the second quarter and 5.8% in the third quarter. The increase
is due to higher vehicle acquisition costs, changes in the mix of our fleet and
provisions incurred relative to the disposition of vehicles. Offsetting these
increases were lower costs due to operating a smaller average fleet. In the
fourth quarter, vehicle depreciation decreased 13.3% due to a smaller average
fleet partially offset by higher vehicle acquisition costs.

Average fleet, on a quarter over quarter basis, decreased 1.7% in the first
quarter, 0.7% in the second quarter, 6.3% in the third quarter and 19.9% in the
fourth quarter.

Selling, general and administrative expenses, on a quarter over quarter
basis, decreased 13.8% in the first quarter, 11.5% in the second quarter and
1.3% in the fourth quarter. The declines are due to lower variable selling costs
and overhead spending. In the third quarter, selling, general and administrative
expenses increased 9.5% due to increased advertising, selling expenses and
professional fees.

Interest expense, on a quarter over quarter basis, increased 10.0% in the
first quarter, increased 1.0% in the second quarter, and decreased 23.1% in the
third quarter and decreased 30.8% in the fourth quarter. The quarter to quarter
relationship is due to interest and debt issue costs related to our interim
financing and our revolving credit facilities, offset by lower average vehicle
debt outstanding due to operating a lower average fleet.

CASH FLOWS

Following is a discussion of the major components of changes in cash flows
for the years ended December 31, 2001, 2000 and 1999.

36

For the Years Ended December 31, 2001 and 2000

Cash Flows from Operating Activities

Cash flows provided by operating activities were $1,483.8 million for the
year ended December 31, 2001, and cash flows used in operating activities were
$5.7 million for the year ended December 31, 2000. The increase in cash provided
by operating activities in 2001 as compared to 2000 is primarily due to reduced
vehicle purchases in order to operate a smaller average fleet, and changes in
working capital including lower vehicle manufacturer receivables. The decrease
in amounts due from manufacturers is primarily the result of the timing of cash
receipts from manufacturers for vehicle dispositions.

Cash Flows from Investing Activities

Cash flows provided by investing activities were $83.7 million for the year
ended December 31, 2001, and cash flows provided by investing activities were
$4.2 million for the year ended December 31, 2000. The increase in cash provided
by investing activities, as previously discussed, is due to proceeds from our
sale and leaseback transactions. Cash flows used in investing activities for
capital additions during the year ended December 31, 2001 were $35.7 million and
during the year ended December 31, 2000 were $79.4 million.

Cash Flows from Financing Activities

Cash flows used in financing activities for the year ended December 31,
2001 were $1,253.6 million, and cash flows provided by financing activities were
$7.8 million for the year ended December 31, 2000. The increase in cash flows
used in financing activities in 2001 as compared to 2000 is primarily due to
investments in restricted cash and lower overall net proceeds from other
non-vehicle financings. In addition, in the first half of 2000, we received
capital contributions from our former Parent of approximately $204.4 million.
Please refer to our discussion on Financial Condition contained within the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

For the Years Ended December 31, 2000 and 1999

Cash Flows from Operating Activities

Cash provided by (used in) operating activities was $(5.7) million during
the year ended December 31, 2000 and $159.3 million during the year ended
December 31, 1999. The decrease in cash flows from operating activities is due
to 1999 non-cash overhead and insurance charges of $207.2 million which were
historically being paid on our behalf by our former Parent. Following the
separation from AutoNation, we have been required to pay our corporate overhead
and insurance claims. Receivables increased primarily due to the timing of
vehicle sales in the fourth quarter of 2000 in order to reduce overall fleet
levels. Accounts payable and accrued liabilities also decreased due to the
timing of payments.

Cash Flows from Investing Activities

Cash provided by (used in) investing activities was $4.2 million during the
year ended December 31, 2000 and $(168.2) million during the year ended December
31, 1999. The decrease in capital additions during the year is primarily due to
completion of the Odyssey system installation during 1999. The increase in cash
proceeds from the sale of property and equipment is due to the disposition of
our former Minneapolis headquarters and other excess property. The increase in
proceeds from sale of marketable securities is due to the disposition of
marketable securities received as part of our insurance subsidiary contributed
by our former Parent. As of December 31, 2000 we converted all marketable
investments in our insurance subsidiary into cash and cash equivalents.

Cash Flows from Financing Activities

Cash provided by (used in) financing activities was $7.8 million during the
year ended December 31, 2000 and $(22.5) million during the year ended December
31, 1999. The increase in cash provided by

37

financing activities is due to lower net proceeds from vehicle debt and
increased investments in restricted cash offset by net contributions from our
former Parent and proceeds from our interim financing.

As of December 31, 2000 we had approximately $17.0 million outstanding on
our secured revolving credit facility. During the third quarter of 2000 we
repaid $25.0 million of principal outstanding under the interim financing.

FINANCIAL CONDITION

Our capital structure consists of vehicle debt, non-vehicle debt (also
referred to on our balance sheet as "Other debt"), and equity contributed to us
by our former Parent. Vehicle debt represents the debt programs used to finance
our fleet and consists of: (1) commercial paper programs; (2) asset-backed
medium-term and auction-rate note programs; and (3) various other committed and
uncommitted fleet facilities used to fund our European operations. Our
non-vehicle financing consists of: (1) a three-year secured revolving credit
facility with one year remaining; (2) a supplemental term note with one year
remaining; (3) a six year term loan; (4) notes payable to a vehicle
manufacturer; (5) a seller-financed acquisition note payable, which was repaid
in February 2002; and (6) various international working capital arrangements
related to our European and Canadian operations.

Vehicle Debt

We finance our domestic vehicle purchases through wholly-owned, fully
consolidated, special purpose financing subsidiaries. These financing
subsidiaries obtain funds by issuing medium term notes or commercial paper into
the capital markets. The financing subsidiaries in turn lease vehicles to the
domestic operating subsidiaries of Alamo, National and Alamo Local Market. Our
international operations in Europe and Canada provide their own financing for
vehicle purchases through various asset-backed financings, leases and secured
loans on a country by country basis.

The Debtors' filing for bankruptcy represented an Event of Default under
each of the domestic financing facilities and certain of our international
facilities for which the parent company is guarantor. However, in the United
States the special purpose financing subsidiaries are not Debtors and have
continued making scheduled interest payments to the third party note holders.

As of November 14, 2001 our commercial paper program was repaid with the
proceeds from our liquidity back-up facilities. As of December 31, 2001
borrowings under the liquidity back-up facilities approximated $63.8 million of
which all amounts have been subsequently repaid.

As a result of the Event of Default $175.0 million of medium-term notes
were repaid and retired on November 20, 2001. Additionally, the Event of Default
triggered provisions in the medium-term note agreements requiring an accelerated
repayment of the amounts outstanding. In the fourth quarter, MBIA, our primary
debt surety provider, agreed to delay the accelerated repayment provisions. In
February 2002, the Bankruptcy Court approved, on a final basis, a fleet
financing agreement insured by MBIA where MBIA allowed for the release of
certain restricted funds supporting the MBIA insured outstanding series of
medium-term notes for the purchase of new vehicles. The agreement makes
available up to $1.0 billion of previously frozen funds for the acquisition of
new fleet. On May 13, 2002, the agreement expired.

On May 10, 2002, the Bankruptcy Court approved, on a final basis, an
agreement with MBIA to allow us to continue to use $2.3 billion of our fleet
financing facilities on a revolving basis. As such, we will be allowed to use
proceeds received from the disposition of vehicles financed by these facilities
to purchase new vehicles. The agreement is set to expire in September 2002.
However, should certain operating or financing criteria be met the agreement
will be extended to November 2002. Additionally, we issued a $275.0 million
variable funding asset-backed note, which at our option can be increased to
$350.0 million. The note will bear interest at a variable rate based upon a
spread over LIBOR and is set to expire in September 2002.

We are currently in discussions with lenders to provide funding for
seasonal capacity, maintain existing capacity and replace maturing capacity.
However, as a result of the Chapter 11 filing and the Event of Default we cannot
provide any assurance that we will be able to obtain the needed funding or that
any funding will be
38

obtainable at an acceptable interest rate or with acceptable collateral
requirements. Additionally, the Event of Default and Chapter 11 filing have
adversely effected the financing facilities of our international operations. In
our international operations no facility has been cancelled because of our
Chapter 11 filing, but each lender is reviewing their loans with us. There is no
assurance that existing loans will not be cancelled or adversely modified.

Non-vehicle Debt

In June 2000, we entered into a three-year secured revolving credit
facility with a borrowing base capacity of up to $175.0 million at a floating
rate, currently based upon a spread of 2.75% above LIBOR. In the third quarter,
we reduced our capacity under this facility to $70.0 million. As of April 30,
2002, $63.9 million of letters of credit were secured by the secured revolving
credit facility.

In June 2000, we also entered into a supplemental secured revolving credit
facility with availability of the lesser of (1) $40.0 million and (2) an amount
equal to $175.0 million less the borrowing base of the resized $175.0 million
secured revolving credit facility. On its one year maturity date, the $40.0
million supplemental secured revolving credit facility was converted into a term
loan maturing on May 31, 2003. Interest on the supplemental secured term loan is
payable at a floating rate, initially based upon a spread of 4.5% above LIBOR
and increasing by 50 basis points on the first day of each January, April, July
and October.

On June 30, 2000 we entered into an agreement with a lender for interim
financing of $225.0 million in connection with our separation from our former
Parent. The initial term of the interim financing was 12 months. We have
extended $200.0 million of the interim financing into a six-year term loan, and
in accordance with the term of the agreement, upon conversion to the term loan
we issued warrants representing approximately 3.7 million shares and we paid a
fee of $6.0 million. The term loan bears interest at an increasing rate starting
at 14.5% as of October 1, 2001 and increases by 50 basis points each 90 day
period up to a maximum rate of 18.0%. The term loan may, at the option of the
lender, be exchanged into a fixed-rate note with a similar maturity. The
warrants have a term of 10 years and an exercise price of $0.01 per share. The
fair value of the warrants on June 30, 2001, the date of issue, was $11.0
million. The warrants are treated as a note discount, and are being amortized as
a component of interest expense, over the term of the refinancing. Upon request
of the holder of the notes and warrants we are required to file registration
statements with the Securities and Exchange Commission which will register the
fixed-rate notes referred to above and the shares of common stock issuable upon
the exercise of the warrants. To the extent we do not file these registration
statements or they are not declared effective within certain time constraints we
will be required to pay penalties. In connection with the consummation of our
sale and leaseback transactions, we were obligated to use the proceeds to
pay-down the interim financing. However, as part of an amendment to the interim
rate facility, the lender agreed that such proceeds could be used for general
corporate purposes until September 30, 2001, at which time we would be required
to pay-down the interim financing by approximately $70.0 million.

As of September 30, 2001, we further amended our financing facilities,
deferring the $70.0 million principal payment until November 30, 2001, and
suspended certain financial covenants through November 15, 2001. Concurrent with
the amendments we issued additional warrants representing approximately 1.4
million shares of common stock. These warrants also have a term of ten years
from their issue date and an exercise price of $0.01 per share. The fair value
of the additional warrants on September 30, 2001, the date of issue, was $0.7
million. The fair value of the warrants were recorded as a note discount and are
being amortized as a component of interest expense over the term of the note
using the effective interest method.

Our governing documents for our credit facilities and interim financing,
entered into during 2000 and subsequently amended, require us to maintain
certain financial ratios including, but not limited to, financial performance
measures and limits on additional indebtedness. In addition these documents
restrict our ability to: sell assets; grant or incur liens on our assets; repay
certain indebtedness; pay dividends; make certain investments or acquisitions;
issue certain guarantees; enter certain sale and leaseback transactions;
repurchase or redeem capital stock; engage in mergers or consolidations; and
engage in certain transactions with our affiliates.

39

The Debtors' filing for Chapter 11 represented an Event of Default under
each of these financing facilities. Under bankruptcy law, the Debtors are not
permitted to make scheduled principal and interest payments with respect to our
pre-petition debt unless specifically ordered by the Court.

Derivatives

Separately, we use interest rate derivative financial instruments to manage
the impact of interest rate changes on our variable-rate vehicle debt. During
the year these derivative instruments consisted of interest rate caps and
floors. Our floor agreements were terminated by our counterparty as of November
14, 2001. Accordingly, we recognized currently in earnings deferred losses of
approximately $5.8 million. Typically, the amounts exchanged by the counter
parties are based upon the notional amounts and other terms, generally related
to interest rates. Notional principal amounts related to interest rate caps as
of December 31, 2001 were $2.88 billion. The interest rate caps, floors and
swaps effected a weighted average interest rate of 6.25% for the year ended
December 31, 2001, 6.79% for the year ended December 31, 2000 and 7.22% for the
year ended December 31, 1999. Variable rates on our remaining interest rate caps
are indexed to LIBOR. Including our interest rate derivatives, our ratio of
fixed interest rate debt to total debt (with vehicle and non-vehicle debt)
outstanding was 95.9% as of December 31, 2001. As of December 31, 2001, 31.4% of
our vehicle debt is fixed while, 66.3% of our vehicle debt is capped at rates
ranging from 5.47% to 7.50%. The remaining 2.3% of our vehicle debt is variable
rate based upon a spread over LIBOR and as such subject to interest rate
changes.

Surety Bonding

In the normal course of business, we are required to post performance and
surety bonds, letters of credit, and/or cash deposits as financial guarantees of
our performance. To date, we have 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
April 30, 2002, we had outstanding surety bonds of approximately $140.1 million,
the majority of which expire during 2002. Because of our financial performance
and a difficult surety market we have provided our principle surety provider a
security interest in certain of our assets. Continued losses will adversely
affect our financial condition and our ability to maintain or renew these surety
bonds. In addition, we can not assure you that our primary surety provider will
continue to consent to maintaining these surety bonds or provide new bonds or
renew existing bonds as needed, which could have a material adverse effect on
our business, consolidated results of operations and/or our financial condition.
In the first quarter of 2002, we have entered into an agreement, approved by the
bankruptcy court, with our surety provider to post additional cash collateral in
exchange for the commitment of the surety provider to issue designated surety
bonds for the remainder of 2002. As of March 31, 2002 we have deposited $6.0
million with our surety provider and we may be required under the provisions of
our agreement to deposit up to an additional $12.0 million.

Financing Requirement

As previously discussed we are operating certain of our domestic operating
subsidiaries under Bankruptcy Court protection. The protection enabled us to
accumulate cash by not paying our obligations timely and deferring, pursuant to
the Bankruptcy Code, two of our depreciation payments on our fleet. For the
first nine months of 2002, we expect that our current liquidity needs can be
financed through operating cash flow.

In addition, we have been engaged in investigating, and are continuing to
pursue, strategic alternatives to maximize stakeholder value and strengthen our
financial condition. We have engaged investment advisors to assist us in
evaluating these options. Separately, we are working on a plan of reorganization
which we will file with the Bankruptcy Court.

Contractual Obligations and Commercial Commitments

We have various commitments primarily related to long-term debt, commercial
paper and short-term borrowings outstanding for vehicle purchases, airport
concession fee and operating lease commitments related to airport and other
facilities, and vehicle purchases. As a result of the bankruptcy we can provide
no

40

assurances that we will be able to fund these commitments in whole or in part
with cash generated from operations, sales proceeds from disposal of used
vehicles or the continuation of asset-backed notes to replace existing notes
when they mature. The following table provides details regarding our contractual
cash obligations and other commercial commitments subsequent to December 31,
2001 assuming we remain a going concern:

PAYMENTS DUE OR COMMITMENT EXPIRATION BY PERIOD

Continued Losses

Continued losses will adversely affect our financial condition and may
affect our ability to obtain incremental financing, comply with certain
covenants contained within our loan agreements and fully utilize certain
deferred tax and intangible assets. There is no assurance that we will be able
to generate sufficient operating cash flows, secure additional financing
facilities to meet our on-going financing needs, refinance existing
indebtedness, comply with covenants in future periods or fully utilize certain
deferred tax and intangible assets.

Recent Developments Concerning Profitability and Liquidity

For the three months ended March 31, 2002 our revenue was approximately
$599.6 million or approximately $169.5 million less than the equivalent quarter
in the prior year. For the three months ended March 31, 2002 our pre-tax loss
was approximately $139.4 million or approximately $73.7 million greater than our
pre-tax loss in the equivalent quarter of the prior year before considering the
impact of new accounting pronouncements. As of March 31, 2002 cash and cash
equivalents approximated $215.5 million. On April 10, 2002, the Bankruptcy court
approved the Company's use of cash collateral, subject to achieving certain cash
flow projections, as debtors-in-possession through September 22, 2002. During
this period, we plan to use this cash collateral to finance our on-going
operations.

TRANSACTION WITH FORMER PARENT

In connection with our spin-off from our former Parent, AutoNation
contributed certain assets and liabilities to us. Such contributions included
(i) cash approximating $204.4 million, (ii) an insurance subsidiary with a net
deficit of $39.1 million and (iii) the current portion of taxes payable and
certain other non-cash liabilities approximating $6.7 million. The shareholders'
equity balance is subject to further adjustment pending potential changes in
estimated shared assets and liabilities between AutoNation and us as well as
certain other matters. During the three months ended September 30, 2000 we
reimbursed AutoNation $4.6 million in cash due to changes in the estimated
shared assets and liabilities between our companies. For the three months ended
December 31, 2000 we settled certain non-cash liabilities with AutoNation
approximating $2.5 million.

CRITICAL ACCOUNTING POLICIES

General

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States assuming we are a going concern. The preparation of these
financial
41

statements requires us to make estimates and judgements that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to areas that require a significant level of
judgement or are otherwise subject to an inherent degree of uncertainty. These
areas include allowances for doubtful accounts, revenue earning vehicles,
intangible and long-lived assets, self-insured liabilities, income taxes and
commitments and contingencies. We base our estimates on historical experience,
our observance of trends in particular areas, information and/or valuations
available from outside sources and various other assumptions that we believe to
be reasonable under the circumstances and which form the basis for making
judgements about the carrying value of assets and liabilities that may not be
readily apparent from other sources. Actual amounts could differ significantly
from amounts previously estimated.

We believe that of our significant accounting policies (please refer to
Note 5 of our Consolidated Financial Statements herein), the following may
involve a higher degree of judgement and complexity.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses from the
inability or failure of our customers to make payments for rental activity,
damage reimbursement or sales of vehicles. The allowances are based on current
trends and historical collection experience and a percentage of our accounts
receivable by aging category. In determining these percentages, we look to
historical write-offs, current trends in the credit quality of our customer base
and in billing dispute resolution as well as changes in credit policy.

Revenue Earning Vehicles

We recognize depreciation on non-program vehicles in amounts expected to
result in the recovery of estimated residual values upon disposal. In
determining these depreciation rates, we look at historical disposal experience
and holding periods, trends in the wholesale and retail market for vehicles and
model specific factors where warranted. Vehicles held for disposal are evaluated
as a group and recorded at the lower of cost or market (less estimated selling
costs).

Self-Insured Liabilities

We are largely self-insured with respect to personal and property liability
claims up to specified limits. Third party insurance is maintained in limited
areas and for claims in excess of those specified limits. The liability recorded
as a result of these actuarially computed estimates may experience material
changes from year to year as incurred but not reported incidents become known
and known claims are settled.

Income Taxes

We record a valuation allowance to reduce our deferred tax assets to the
amount which, we estimate, is more likely than not to be realized. While we have
considered future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount, the resulting adjustment to deferred tax
assets would increase income in the period such determination was made.
Similarly, should we determine that we would not be able to realize all or part
of our net deferred tax assets in the future, an adjustment to deferred tax
assets would decrease income in the period such determination was made.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards No. 141, Business Combinations which
supercedes Accounting Principles Board (APB) Opinion No 16, Business
Combinations. SFAS 141 eliminates the pooling-of-interests method of accounting
for business combinations and modifies the application of the purchase
accounting method. The elimination of the pooling-of-interests method is
effective for transactions initiated after June 30, 2001. The remaining
provisions of SFAS 141 will be effective for transactions accounted for using
the purchase method
42

that completed after June 30, 2001. At this time, the Statement will not have an
impact on our consolidated financial statements.

In June 2001, FASB also released Statement of Financial Accounting
Standards No. 142, Goodwill and Intangible Assets which supercedes APB Opinion
No. 17, Intangible Assets. SFAS 142 eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition for goodwill and intangible assets. SFAS 142
will apply to goodwill and intangible assets arising from transactions completed
before and after the Statement's effective date. SFAS 142 is effective for the
Company beginning January 1, 2002 and as a result we will cease amortizing
intangible assets and we may recognize an impairment charge in 2002.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to disposal of a segment of a
business contained in Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for which control is likely to be temporary. This standard had no effect on the
Company's consolidated financial statements upon adoption.

FORWARD-LOOKING STATEMENTS

Certain statements and information included in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements contain or express our
intentions, beliefs, expectations, strategies or predictions for the future. In
addition, from time to time we or our representatives may make forward-looking
statements, orally or in writing. Furthermore, such forward-looking statements
may be included in our filings with the Securities and Exchange Commission or
press releases or oral statements made by or with the approval of one of our
executive officers. Forward-looking statements in this Form 10-K include, among
others, statements regarding:

- our ability to execute our restructuring plans and achieve the desired
financial results and cost savings;

- our ability to obtain credit facilities, surety bonds, letters of credit
and other services and the costs and other financial terms of these
facilities and services and our ability to refinance existing
indebtedness;

- the continued growth of demand for our rental vehicles and our ability to
adjust the size of our fleet to meet demand;

- our ability to successfully emerge from Chapter 11;

- our ability to achieve operating leverage and economies of scale in our
business;

- our ability to consolidate our brands at our airport locations;

- our ability to consolidate our information technology systems;

- our ability to achieve cost savings through the consolidation of our
business in certain areas; and

- our ability to generate cash flow from operations.

These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance,
or achievements to be materially different from any future results, performance,
or achievements expressed or implied by these forward-looking statements. These
factors include, among other things:

- uncertainties related to our Chapter 11 proceedings;

- our ability to obtain adequate financing and our ability to refinance
existing indebtedness;

43

- our substantial debt;

- risks that our operating losses may continue;

- risks relating to our reliance on our primary surety provider;

- the impact of competition in the automotive rental industry;

- the seasonal nature of our business;

- the effects of decreases in air travel;

- the effects of terrorism on our business;

- increases in fuel costs or reduced fuel supplies and their effects on air
travel;

- the continued availability of repurchase programs, the ability of the
manufacturers to fulfill their obligations under these programs and the
increasing cost of our vehicle fleet;

- a percentage of our rental fleet is subject to residual value risk upon
disposition;

- risks relating to our dependence on General Motors as our principal
vehicle supplier;

- risks relating to our reliance on asset-backed financing and the risk to
our business of an increase in interest rates;

- the adoption of federal, state or local regulations including those that
restrict our ability to sell optional products;

- potential legal challenges by our competitors and/or franchisees to parts
of our restructuring plan; and

- problems that may arise as a result of the consolidation of our brands at
airport locations.

We undertake no obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, future events or otherwise,
other than as required by law. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained in this Form
10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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 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. Maturity dates for variable rate debt caps and floors
are based upon expected maturity dates. 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 caps and floors is determined from valuation
models which are then compared to dealer quotations and represents the

44

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.

45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

46

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 subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations and
comprehensive loss, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ANC Rental Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced
significant losses over the last three years. In addition, as, discussed in Note
2 to the accompanying financial statements, on November 13, 2001, the Company
and certain of its direct and indirect U.S. subsidiaries filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. These
matters, among others, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters,
including its intent to file a plan of reorganization that will be acceptable to
the Court and the Company's creditors, are also described in Note 2. In the
event a plan of reorganization is accepted, continuation of the business
thereafter is dependent on the Company's ability to achieve successful future
operations. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.

As explained in Note 18 to the financial statements, effective January 1,
2001, the Company changed its method of accounting for derivatives.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the purpose 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 audits 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,
May 2, 2002
(except with respect to the matter discussed
in the last paragraph of Note 6, as to which
the date is May 10, 2002).

47

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)

The accompanying notes are an integral part of these statements.

48

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The accompanying notes are an integral part of these statements.

49

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(IN MILLIONS)

The accompanying notes are an integral part of these statements.

50

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS)

The accompanying notes are an integral part of these statements.

51

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)

1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements include the accounts of
ANC Rental Corporation and its subsidiaries (the "Company" or "ANC"). All
intercompany accounts and transactions have been eliminated. Additionally, these
Consolidated Financial Statements have been prepared on a going concern basis,
which contemplates continuity of operations, realization of assets, and payment
of liabilities in the ordinary course of business, and do not reflect
adjustments that might result if the Debtors are unable to continue as a going
concern. The Company's significant losses, and its Chapter 11 Filing raise
substantial doubt about the Company's ability to continue as a going concern.
The Company intends to file a plan or plans of reorganization with the
Bankruptcy Court. Continuing as a going concern is dependent upon, among other
things, the Company's formulation of a plan or plans of reorganization, the
success of future business operations, and the generation of sufficient cash
from operations and financing sources to meet the Company's obligations. The
Consolidated Financial Statements do not reflect: (i) the realizable value of
assets on a liquidation basis or their availability to satisfy liabilities; (ii)
aggregate pre-petition liability amounts that may be allowed for unrecorded
claims or contingencies, or their status or priority; (iii) the effect of any
changes to the Debtors' capital structure or in the Debtors' business operations
as the result of an approved plan or plans of reorganization; or (iv)
adjustments to the carrying value of asset or liability amounts that may be
necessary as a result of actions by the Bankruptcy Court.

The Company rents vehicles on a daily, weekly or monthly basis at airport
or near-airport locations through the brand names of "Alamo" and "National."
Alamo and National operate both domestically and internationally in the airport
leisure and business rental market. Alamo primarily serves the value leisure
market while National primarily serves the airport premium business and leisure
travel market. Alamo operates exclusively through company-owned locations in the
United States and through both company-owned and franchised locations
internationally. National operates through both company-owned and franchised
locations in the United States and internationally. In the year ended December
31, 2001, Alamo had North American revenue of approximately $1.2 billion and
National had North American revenue of approximately $1.3 billion. In 2001,
international operations outside of North America had revenue of approximately
$359 million, the majority of which was generated in the United Kingdom.

The Company established its insurance replacement business in 1997 by
consolidating the replacement operations of several different businesses. In
November 2000, the Company rebranded the group as Alamo from CarTemps USA. In
the year ended December 31, 2001, the rebranded Alamo Local Market Division had
revenue of approximately $266 million.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Significant estimates include but are not limited to allowances for doubtful
accounts, accumulated vehicle depreciation, insurance reserves, valuation
allowances on deferred tax assets and management's estimates of future cash
flows used to assess recoverability of long-lived assets.

Prior to June 30, 2000 the Company was a wholly owned subsidiary of
AutoNation, Inc. ("our former Parent" or "AutoNation"). In August 1999,
AutoNation announced its intention to separate its automotive rental business
from its automotive retail business and in September 1999, announced its
intention to distribute its entire interest in the Company to AutoNation's
stockholders on a tax-free basis (the "Distribution"), subject to conditions and
consents described in the Separation and Distribution Agreement. On May 31,
2000, the former Parent's board of directors approved the spin-off and set a
record date of June 16, 2000 and a distribution date of June 30, 2000. The
Distribution occurred June 30, 2000 at which
52

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

point the Company became an independent, publicly owned company. The Company
entered into agreements with AutoNation, which provided for the separation of
the Company's business from AutoNation and govern various interim and ongoing
relationships between the companies.

All historical share and per share data included in the Consolidated
Statements of Operations and Comprehensive Loss, have been retroactively
adjusted for the recapitalization of the former Parent's 100 shares of common
stock into 45,142,728 shares of Common Stock on June 30, 2000 as more fully
described in Note 9 Shareholders' Equity.

Basic earnings per share is calculated based on the weighted average shares
of common stock outstanding during the period. Diluted earnings per share is
calculated based on the weighted average shares of common stock outstanding,
plus the dilutive effect of common stock purchase warrants and stock options,
calculated using the if converted and the treasury stock method, respectively.
Due to the net loss for the year ended December 31, 2001, the stock options and
common stock purchase warrants were not dilutive. Due to the net loss for the
year ended December 31, 2000, the stock options were not dilutive; there were no
common stock purchase warrants outstanding. For the year ended December 31,
1999, there was no dilutive effect from stock options and common stock purchase
warrants, as there were none outstanding.

Certain amounts in the prior years financial statements have been
reclassified to conform to current year presentation.

2. DECLARATION OF BANKRUPTCY

On November 13, 2001, the Company and certain of its direct and indirect
U.S. subsidiaries (each, a "Debtor," and collectively, "Debtors") filed
voluntary petitions under Chapter 11 of Title 11, United States Code, in the
United States Bankruptcy Court for the District of Delaware (Case No. 01 - 11200
et al., Jointly Administered). The Debtors remain in possession of their assets
and properties, and continue to operate their businesses and manage their
properties as debtors-in-possession pursuant to the Bankruptcy Code. As a
debtor-in-possession, management is authorized to operate the business, but may
not engage in transactions outside the ordinary course of business without Court
approval. Subsequent to the filing of the Chapter 11 petitions, the Company
obtained several Court orders that authorized it to pay certain pre-petition
liabilities (such as employee wages and benefits) and take certain actions to
preserve the going concern value of the business, thereby enhancing the
prospects of reorganization. These financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets, and payment of liabilities in the ordinary course of business. As a
result of the Chapter 11 filing, there is no assurance that the carrying amounts
of assets will be realized or that liabilities will be settled for amounts
recorded. After negotiations with various parties in interest, the Company
expects to present a plan of reorganization to the Court to reorganize the
Company's businesses and to restructure its obligations. This plan of
reorganization could change the amounts reported in the financial statements and
cause a material change in the carrying amount of assets and liabilities. As
such, these financial statements have been prepared in accordance with the
AICPA's Statement of Position 90-7 Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code ("SOP 90-7"). SOP 90-7 requires
segregating pre-petition liabilities that are subject to compromise and
identifying all transactions and events that are directly associated with the
reorganization of the Company. A significant portion of the liabilities recorded
at December 31, 2001 are expected to be subject to compromise. Also in
accordance with SOP 90-7, after the filing date, interest will no longer be
accrued on any unsecured and undersecured debt. From the filing date to December
31, 2001, the amount of unaccrued interest approximated $0.1 million. Under
bankruptcy law, actions by creditors to collect pre-petition indebtedness owed
by the Debtors at the filing date are stayed and other pre-petition contractual
obligations may not be enforced against the Company. In addition, the Debtors
have the right, subject to Court approval and other conditions, to assume or
reject any pre-petition executory contracts and unexpired leases. Parties
affected by

53

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

these rejections may file pre-petition damage claims with the Court. The Company
has prepared and submitted the schedules setting forth the Debtors' assets and
liabilities as of the date of the petition as reflected in our accounting
records. The amounts of claims filed by creditors could be significantly
different from their recorded amounts. Due to material uncertainties, it is not
possible to predict the length of time the Company will operate under Chapter 11
protection, the outcome of the proceedings in general, whether the Company will
continue to operate under its current organizational structure, the effect of
the proceedings on the Company's businesses or the recovery by creditors and
equity holders of the Company.

Under the Bankruptcy Code, post-petition liabilities and pre-petition
liabilities subject to compromise must be satisfied before shareholders can
receive any distribution. The ultimate recovery to shareholders, if any, will
not be determined until the end of the case when the fair value of the Company's
assets is compared to the liabilities and claims against the Company. There can
be no assurance as to what value, if any, will be ascribed to common stock in
the bankruptcy proceeding.

3. RESTRUCTURING EFFORTS -- 2002

In an effort to return the Company to profitability, management is
implementing a series of restructuring plans designed to improve the quality of
customer service while lowering costs to deliver such service. The restructuring
plans can be classified into the following categories:

Airport Location Consolidation

At most major airports in the United States, the Company operates Alamo and
National as stand-alone rental facilities. During 2002, the Company plans to
consolidate up to 144 separately branded locations throughout the United States
into a maximum of seventy-two dual branded locations. The Company believes that
by consolidating operations into one dual branded facility it will be able to
lower operating costs and improve vehicle utilization, lower personnel expense,
and incur less rent expense. The Company plans to complete its facility
consolidation program by December, 2002. The Company will amortize the net book
value of the assets relative to the closure of these facilities on a
straight-line basis over the expected remaining useful life of ten months. The
Company estimates the excess depreciation charge to approximate $3.1 million per
month beginning in March 2002. Due to material uncertainties, negotiations with
third parties, and the legal challenges of certain competitors it is not
possible to predict the length of time it will take to complete each location
consolidation or whether all of the contemplated location consolidations will be
completed successfully. As such, the Company may need to change the estimate of
an assets' remaining useful life and revise depreciation policies on a
prospective basis.

Combining Information Technology Systems

Currently the Company operates two separate and distinct information
technology systems. During 2002, the Company plans to migrate to one information
system and abandon the other. The Company believes that by combining information
technology onto the existing Alamo legacy operating system, cost savings can be
achieved. Additional benefits of migrating to the Alamo legacy system are
expected to include, a reduction of support staff, elimination of duplicative
system infrastructures, improved operational efficiency, lower cost of training,
and standardization across the organization. The migration to one information
technology system is not without significant risks including, but not limited
to, temporary loss of business functionality, questions regarding the
scalability of existing infrastructure, and the need for coordination with other
third party vendors to accept system changes. The Company will amortize the
remaining net book value of the abandoned system on a straight-line basis over
the expected remaining useful life of twelve months. The Company estimates the
excess depreciation charge to approximate $10.0 million per month, beginning
January 1, 2002.

54

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in License Operations

The Company intends to modify its current licensee structure by entering
into new "dual branded" licensing agreements that will include but not be
limited to (1) selling or transferring ownership of certain Alamo locations in
existing National licensee markets to the current National licensee, (2)
increasing the current royalty rate charged to licensees, and (3) licensing
Alamo locations to current National licensees in those markets where an Alamo
location currently does not exist.

Closure of Alamo Local Market Locations

In the first quarter of 2002, the Company closed approximately 182
unprofitable locations. Costs incurred relative to these closures approximated
$5.6 million and primarily related to disposition of impaired fleet assets and
accruals for rent and severance.

Reorganization Expenses

Reorganization expenses represent losses resulting from the reorganization
and restructuring. For the quarter ended December 31, 2001 the Company incurred
approximately $2.1 million of professional fees for services rendered on behalf
of the Company and its creditors.

Liabilities Subject to Compromise

As of December 31, 2001, the Company has liabilities subject to compromise
of approximately $548.4 million which consists of the following:

Accounts payable............................................ $ 89.6
Unsecured debt.............................................. 35.0
Terminated interest rate hedges............................. 82.3
Insurance reserves.......................................... 251.7
Other liabilities........................................... 89.8
------
$548.4
======

4. DEBTOR AND NON-DEBTOR CONSOLIDATING BALANCE SHEETS AND CONSOLIDATING
STATEMENTS OF OPERATIONS

The following combining statements of Debtors and non-debtors as of
December 31, 2001 have been prepared assuming continuity of operations,
realization of assets and payment of liabilities. The divisions and subsidiaries
excluded from the bankruptcy proceedings relate to international subsidiaries,
an insurance captive and special purpose financing entities.

55

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments that have an
original maturity of three months or less at the date of purchase.

56

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents consists of amounts held in trust for
payment and as security under the Company's vehicle debt programs as well as
amounts on deposit for insurance claims.

Receivables

The components of receivables, net of allowance for doubtful accounts as of
December 31 are as follows:

Vehicles

Vehicles are stated at cost less accumulated depreciation. The
straight-line method is used to depreciate vehicles to their estimated residual
values over periods typically ranging from 3 to 24 months. Vehicles used in the
Company's airport operations comprise approximately 88% of the fleet as of
December 31, 2001. These vehicles are typically held up to fifteen months with
the average fleet age being less than six months. The remaining fleet is used in
the Company's insurance replacement operations where vehicles are held up to
twenty-four months. Management, on a periodic basis, reviews depreciable lives
and rates for adequacy based on a variety of factors including general economic
conditions and the estimated holding period of the vehicles. Depreciation
expense includes manufacturer incentives and gains and losses on vehicle sales
in the ordinary course of business.

A summary of vehicles, net as of December 31 is as follows:

Vehicles with a net book value of approximately $2.68 billion and $3.71
billion at December 31, 2001 and 2000, respectively, were acquired under
programs that allow the Company to require counterparties to repurchase vehicles
subject to 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.

57

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, the cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in the
Consolidated Statements of Operations and Comprehensive Loss.

Depreciation is provided over the estimated useful lives of the assets
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 as of December 31 is as follows:

During the year the Company entered into a series of sale and leaseback
transactions for some of its owned land and buildings. Sales in the first
quarter yielded net proceeds of approximately $79.0 million. During the second
quarter the Company closed additional sale and leaseback transactions yielding
net proceeds of approximately $31.3 million. The leases, with terms of not less
than 20 years, are treated as operating leases, and will result in approximately
$3.0 million per quarter of incremental rent expense over and above the amounts
incurred during 2000. Gains realized on the sale of the properties have been
deferred and are being recognized over the life of the respective leases. Such
transaction gains approximated $34.1 million. Losses recognized currently in
earnings approximated $4.2 million for the year ended December 31, 2002.

The Company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful lives 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, excluding interest, over the remaining life of the
property and equipment in assessing their recoverability. The Company measures
impairment loss as the amount by which the carrying amount of the asset exceeds
the fair value of the asset. The Company primarily employs two methodologies for
determining the fair value of an asset. Fair value is either the amount at which
the asset could be bought or sold in a current transaction between willing
parties or the present value of estimated expected future cash flows grouped at
the lowest level for which there are identifiable independent cash flows.

Other Assets

The components of other assets as of December 31 are as follows:

58

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Direct and incremental costs incurred in connection with the Company's debt
facilities have been recorded as a component of other assets and are being
amortized on a straight-line basis, which approximates the effective interest
method, over the terms of the related borrowing.

Intangible Assets

Intangible assets consist of the cost of acquired businesses in excess of
the fair value of net assets acquired (or "goodwill"). 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 $15.3 million and $38.6
million at December 31, 2001 and 2000, respectively.

The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of its
intangible assets, or whether the remaining balance of these intangible assets
should be evaluated for possible impairment. Goodwill is comprised of both
enterprise level goodwill and goodwill associated with specific long-lived
assets. Enterprise level goodwill is evaluated for impairment in accordance with
Accounting Principles Board Opinion No. 17, "Intangible Assets", while goodwill
identified with specific assets is evaluated in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." In each case,
the Company uses an estimate of the related undiscounted cash flows of
operations or assets that benefit from the goodwill, over the remaining life of
intangible assets in assessing their recoverability.

For enterprise level goodwill, the Company measures the amount of
impairment as the excess of the carrying value of the goodwill over the estimate
of undiscounted future cash flows. In September 2001, as a result of the
significant adverse changes in business environment in part due to the events of
September 11, and historical and projected cash flow losses, the Company
determined that recoverability of its enterprise level intangible assets was not
assured. As such, the Company has recognized an impairment charge for its
enterprise level intangible assets of approximately $210.8 million for the
quarter ended September 30, 2001.

For goodwill associated with specific long-lived assets, the Company
measures impairment as the excess of the carrying value of the goodwill over the
fair value of the related assets. Fair value is either the amount the asset
could be bought or sold in a current transaction between willing parties or the
present value of estimated expected future cash flows grouped at the lowest
level for which there are identifiable independent cash flows. Present value
discount rates are estimated based upon the rate that would be required for a
similar investment with similar risks.

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." However, the Company
is still evaluating the impact of adoption. The Company expects to complete Step
1 of the transition impairment test by June 30, 2002, in accordance with SFAS
142. Since this step is not completed management is unable to quantify the
impact of adoption.

Accounts Payable

The components of accounts payable as of December 31 are as follows:

59

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Vehicle payables represent amounts to be financed after period-end for
vehicles acquired under the Company's vehicle financing programs.

Liability Insurance

The nature of the Company's business exposes it to the risk of liabilities
arising out of its 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 the Company's operations, claims for
remediation costs, personal injury, property damage, and damage to the
environment in cases where the Company may be held responsible for the escape of
harmful materials. The Company could also be subject to fines and civil and
criminal penalties in connection with alleged violations of regulatory
requirements.

The nature of the Company's business also exposes it to significant risk of
liability arising primarily out of accidents involving automobiles rented from
its vehicle rental fleet. Laws in some states impose vicarious liability on
automotive rental companies, which increases the Company's risk. Subject to the
risk levels discussed below, the Company manages its exposure through a
combination of qualified self insurance and risk transfer to insurance companies
which are rated as financially sound by insurance rating agencies. The Company
is substantially self-insured for the majority of its incurred liability.
However, the Company carries certain excess liability coverage, but catastrophic
losses may occur which exceed the amount of coverage limits.

The Company either purchases commercial insurance or acts as its own
qualified self-insurer for automobile liability, general liability, workers'
compensation and employer's liability claims. Historically, the Company retained
up to $1.0 million of risk per claim, plus claims handling expense under our
various property, auto liability and general liability insurance programs. In
the fourth quarter of 2001, the Company raised this retention up to $5.0 million
in auto and general liability insurance programs. The Company purchases excess
liability insurance to provide insurance in excess of the primary liability
insurance policies and/or retained losses. The level of risk the Company retains
may change in the future as insurance market conditions or other factors
affecting the economics of its insurance purchasing change. Although the Company
strives to operate safely and prudently and has, subject to certain limitations
and exclusions, certain excess liability insurance, the company may be exposed
to uninsured or underinsured losses that could have a material adverse effect on
its results of operations and financial condition.

Provisions for retained or self-insured claims are made by charges to
expense based upon periodic evaluations by management and outside actuaries of
the estimated ultimate liabilities on reported and unreported claims.
Adjustments, if any, to the estimated reserves resulting from ultimate claim
payments will be reflected in operations in the periods in which such
adjustments become known. The Company has collateral requirements that are set
by insurance companies, which underwrite our insurance programs. The collateral
requirements may change from time to time, based on, among other things, the
Company's claims experience, financial performance or credit quality and
retention levels.

Other Liabilities

A summary of other liabilities as of December 31 is as follows:

60

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Minority interest represents the limited partnership interest in a Canadian
subsidiary of the Company, which was formed in 1997. Minority interest in the
subsidiary's earnings included in interest expense was $8.2 million, $7.4
million and $6.8 million for the years ended December 31, 2001, 2000, and 1999,
respectively.

Other Comprehensive Loss

Other comprehensive loss, net of income taxes, consists of foreign currency
translation adjustments and changes in fair value of the Company's interest rate
hedges. 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.

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 and
represent less than 1.5% of rental revenue.

Income Taxes

Prior to June 30, 2000 the Company was included in the consolidated federal
income tax return of our former 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 Statement of Financial Accounting Standards ("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.

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
variable-rate vehicle debt obligations. The Company does not use derivative
financial instruments for trading purposes. Under interest rate caps and floors,
the Company agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Cash proceeds or payments on
derivative financial instruments used to manage interest rate exposure are
recorded as a component of vehicle interest expense. On January 1, 2001 the
Company adopted a new accounting standard related to derivatives, and for a
further discussion of the Company's interest rate derivatives refer to Note 18.

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, 2001 or 2000. Advertising expense was $102.2 million, $137.0
million and $134.2 million for the years ended December 31, 2001, 2000 and 1999,
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-
61

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

remediation monitoring and legal fees, as appropriate. Provisions for
environmental costs are made by charges to expense upon periodic reviews by
management and outside legal counsel. Adjustments or recoveries from third
parties, if any, are reflected in operations in the periods in which such
adjustments are known and deemed probable.

Consolidated 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. There were
no significant non-cash investing and financing transactions during the years
ended December 31, 2001, 2000 and 1999.

The Company made interest payments of approximately $301.4 million, $358.3
million and $339.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively, including interest on vehicle debt. The Company made no tax
payments during the three years ended December 31, 2001.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations which supercedes Accounting Principles Board ("APB") Opinion No.
16, Business Combinations. SFAS 141 eliminates the pooling-of-interests method
of accounting for business combinations and modifies the application of the
purchase accounting method. The elimination of the pooling-of-interests method
is effective for transactions initiated after June 30, 2001. The remaining
provisions of SFAS 141 will be effective for transactions accounted for using
the purchase method that are completed after June 30, 2001. Adoption of SFAS 141
did not impact on the Company's consolidated financial statements because no
business combinations were consummated.

In June 2001, FASB also released SFAS No. 142, Goodwill and Intangible
Assets which supercedes APB Opinion No. 17, Intangible Assets. SFAS 142
eliminates the current requirement to amortize cost of acquired businesses in
excess of the fair value of net assets acquired (or "goodwill") and
indefinite-lived intangible assets, addresses the amortization of intangible
assets with a defined life and addresses the impairment testing and recognition
for goodwill and intangible assets. SFAS 142 applies to goodwill and intangible
assets arising from transactions completed before and after the Statement's
effective date. SFAS 142 is effective for the Company beginning January 1, 2002.
Upon adoption the Company will cease amortizing the remaining carrying value of
goodwill. Under SFAS 142, the Company will be required to evaluate goodwill for
impairment as of January 1, 2002 and annually thereafter by applying a fair
value-based test. Goodwill will be assigned to reporting units, as defined. The
fair value test consists of two steps. First, the Company will be required to
determine the fair value of its reporting units including the fair value of
recognized and unrecognized tangible and intangible assets. The fair value of
each reporting unit will be compared to its carrying value. If the carrying
value of a reporting unit exceeds its fair value, then the Company will be
required to perform the second step of the evaluation. In this step, the fair
value of the reporting unit is allocated to the assets and liabilities of the
reporting unit with any excess fair value being allocated to the "implied" fair
value of goodwill. Goodwill will be determined to be impaired to the extent that
the carrying value of goodwill exceeds the implied fair value of goodwill. The
transition provisions of SFAS 142 allow companies until June 30, 2002 to
complete step one of the test and, if step two is required, until December 31,
2002 to complete step two of the test. The Company has not completed step one of
the test, consequently, the impact of adopting the fair value based test for
goodwill is unknown at this time.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and
62

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the accounting and reporting provisions relating to disposal of a segment of a
business contained in Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No. 144 also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for which control is likely to be temporary. This standard had no effect on the
Company's consolidated financial statements upon adoption.

6. VEHICLE DEBT

Vehicle debt as of December 31 is as follows:

The Company finances its domestic vehicle purchases through wholly-owned,
fully consolidated, special purpose financing subsidiaries. These financing
subsidiaries obtain funds by issuing medium term notes, auctioned-rate notes or
commercial paper into the capital markets. The financing subsidiaries in turn
lease vehicles to the domestic operating subsidiaries of Alamo, National and
Alamo Local Market. The Company's international operations in Europe and Canada
provide their own financing for vehicle purchases through various asset-backed
financings, leases and secured loans on a country by country basis.

In the Company's international operations no facility has been cancelled
because of the Chapter 11 filing. However, each lender is reviewing their loans
with the Company. There is no assurance that existing loans will not be
cancelled or adversely modified.

The Debtors' filing for bankruptcy represented an Event of Default under
each of the domestic financing facilities and certain of the Company's
international facilities for which the parent company is guarantor. However, in
the United States the special purpose financing subsidiaries are not Debtors and
have continued making scheduled interest payments to the third party note
holders.

As of November 14, 2001 the Company's commercial paper program was repaid
with the proceeds from the liquidity back-up facilities. As of December 31, 2001
borrowings under the liquidity back-up facilities approximated $63.8 million of
which all amounts have been subsequently repaid.

63

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of the Event of Default, $175.0 million of medium-term notes
were repaid and retired on November 20, 2001. Additionally, the Event of Default
triggered provisions in the medium-term note agreements requiring an accelerated
repayment of the amounts outstanding. In the fourth quarter of 2001, MBIA, the
primary debt surety provider, agreed to delay the accelerated repayment
provisions. In February 2002, the Bankruptcy Court approved, on a final basis, a
fleet financing agreement insured by MBIA where MBIA allowed for the release of
certain restricted funds supporting the MBIA insured outstanding series of
medium-term notes for the purchase of new vehicles. The agreement makes
available up to $1.0 billion of previously frozen funds for the acquisition of
new fleet. On May 13, 2002, the agreement expired.

On May 10, 2002, the Bankruptcy Court approved, on a final basis, an
agreement with MBIA to allow the Company to continue to use $2.3 billion of its
fleet financing facilities on a revolving basis. As such, the Company will be
allowed to use proceeds received from the disposition of vehicles financed by
these facilities to purchase new vehicles. The agreement is set to expire in
September 2002 however, should certain operating or financing criteria be met
the agreement will be extended to November 2002. Additionally, the Company
issued a $275.0 million variable funding asset-backed note, which at the
Company's option can be increased to $350.0 million. The note will bear interest
at a variable rate based upon a spread over LIBOR and is set to expire in
September 2002.

At December 31, 2001, aggregate expected maturities of vehicle debt were as
follows:

2002........................................................ $1,450.7
2003........................................................ 587.4
2004........................................................ 1,417.0
2005........................................................ 300.0
2006........................................................ 222.7
--------
$3,977.8
========

7. OTHER DEBT

Other debt as of December 31 is as follows:

64

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 2001 aggregate expected maturities of other debt
exclusive of note discounts approximating $10.4 million are as follows: $122.7
million in 2002 and $40.0 million in 2003 and $130.0 million in 2007.

In June 2000, the Company entered into a three-year secured revolving
credit facility with a borrowing base capacity of up to $175.0 million at a
floating rate, currently based upon a spread of 2.75% above LIBOR. In the third
quarter of 2001 the Company reduced its capacity under this facility to $70.0
million.

The Company also entered into a supplemental secured revolving credit
facility with availability of the lesser of (1) $40.0 million and (2) an amount
equal to $175.0 million less the borrowing base of the resized $175.0 million
secured revolving credit facility. On its one year maturity date, the $40.0
million supplemental secured revolving credit facility was converted into a term
loan maturing on May 31, 2003. Interest on the supplemental secured term loan is
payable at a floating rate, initially based upon a spread of 4.5% above LIBOR
and increasing by 50 basis points on the first day of each January, April, July
and October.

On June 30, 2000 the Company entered into an agreement with a lender for
interim financing of $225.0 million in connection with its separation from its
former Parent. The initial term of the interim financing was 12 months. The
Company has extended $200.0 million of the interim financing into a six-year
term loan and, in accordance with the term of the agreement, upon conversion to
the term loan the Company issued warrants representing approximately 3.7 million
shares and paid a fee of $6.0 million. The term loan bears interest at an
increasing rate starting at 14.5% as of October 1, 2001 and increases by 50
basis points each 90 day period up to a maximum rate of 18.0%. The term loan
may, at the option of the lender, be exchanged into a fixed-rate note with a
similar maturity. The warrants have a term of 10 years and an exercise price of
$0.01 per share. The fair value of the warrants on June 30, 2001, the date of
issue, was $11.0 million. The warrants are treated as a note discount, and are
being amortized as a component of interest expense, over the term of the
refinancing. Upon request of the holder of the notes and warrants the Company is
required to file registration statements with the Securities and Exchange
Commission which will register the fixed-rate notes referred to above and the
shares of common stock issuable upon the exercise of the warrants. To the extent
the Company does not file these registration statements or they are not declared
effective within certain time constraints the Company will be required to pay
penalties.

Separately, in the first and second quarters of 2001 the Company
consummated a series of sale and leaseback transactions. As a result, the
Company was obligated to use the proceeds to pay-down the interim financing.
However, as part of an amendment to the interim note facility, the lender agreed
that such proceeds could be used for general corporate purposes until September
30, 2001 at which time the Company would be required to pay-down the interim
financing by approximately $70.0 million.

As of September 30, 2001, the Company further amended its financing
facilities, deferring a $70.0 million principal payment until November 30, 2001,
and suspending certain financial covenants through November 15, 2001. Concurrent
with the amendments the Company issued additional warrants representing
approximately 1.4 million shares of common stock. These warrants also have a
term of ten years from their issue date and an exercise price of $0.01 per
share. The fair value of the additional warrants on September 30, 2001, the date
of issue, was $0.7 million. The fair value of the warrants were recorded as a
note discount and are being amortized as a component of interest expense over
the term of the note using the effective interest method.

The Company's governing documents for its credit facilities and interim
financing, entered into during 2000 and subsequently amended, require the
Company to maintain certain financial ratios including, but not limited to
financial performance measures and limits on additional indebtedness. In
addition these documents restrict the Company's ability to: sell assets; grant
or incur liens on our assets; repay certain indebtedness; pay dividends; make
certain investments or acquisitions; issue certain guarantees; enter certain
sale and leaseback

65

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transactions; repurchase or redeem capital stock; engage in mergers or
consolidations; and engage in certain transactions with our affiliates.

The Debtors' filing for Chapter 11 represented an Event of Default under
each of these financing facilities. Under bankruptcy law, the Debtors are not
permitted to make scheduled principal and interest payments with respect to our
pre-petition debt unless specifically ordered by the Court.

8. INCOME TAXES

The components of the provision (benefit) for income taxes for the years
ended December 31 are as follows:

A reconciliation of the provision (benefit) for income taxes calculated
using the statutory federal income tax rate to the Company's provision (benefit)
for income taxes for the years ended December 31 is as follows:

Components of the net deferred income tax liability at December 31 are as
follows:

At December 31, 2001, the Company had available domestic net operating loss
carryforwards of approximately $452.3 million and foreign net operating loss
carryforwards of approximately $128.1 million, the majority of which have an
indefinite carry forward. The expiration of the domestic net operating loss
carry forwards is as follows: $10.0 million in 2011, $161.7 million in 2020 and
$280.6 million in 2021. 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
66

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

During the third quarter of 2001, the Company recorded a charge of $103.5
million related to the establishment of a valuation allowance for certain tax
benefits and net operating loss carryforwards. As a result of significant
adverse changes in the present business environment, current operating cash flow
losses and projected operating cash flow losses for the foreseeable future,
management believed that it was more likely than not that the tax assets were no
longer realizable.

The foreign losses included in income before income taxes and extraordinary
charges for the years ended December 31, 2001, 2000 and 1999 were $0.6 million,
$4.7 million and $61.8 million, respectively.

The Company entered into a tax sharing agreement with AutoNation on June
30, 2000. The primary purpose of the 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 June 30, 2000 and any taxes resulting
from transactions effected in connection with the spin-off. The agreement also
covers 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. With respect to any period ending on or before the spin-off or
any tax period in which the spin-off occurs, AutoNation will:

- continue to be the sole and exclusive agent for the Company in all
matters relating to its income, franchise, property, sales and use tax
liabilities,

- 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 the Company's obligation
to pay for items relating to the rental business,

- continue to have the sole and exclusive responsibility for the
preparation and filing of consolidated federal and consolidated or
combined state income tax returns, and

- generally have the powers, in AutoNation's sole discretion, to contest
or compromise any claim or refund on the Company's behalf.

In 1997 and 1999 our former Parent engaged in certain transactions that are
of a type that the Internal Revenue Service has indicated it intends to
challenge. The transactions generally had the effect of accelerating certain
future projected tax deductions. The Company understands that these transactions
are currently under review by the Internal Revenue Service. An unfavorable
settlement or adverse resolution of these matters by our former Parent, or a
decision by the Internal Revenue Service to pursue ANC, could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.

9. SHAREHOLDERS' EQUITY

In June 2000 the Company amended and restated its certificate of
incorporation to authorize capital stock consisting of 250,000,000 shares of
common stock, par value $0.01 per share, and 10,000,000 shares of preferred
stock, par value $0.001 per share. Stock formerly held by AutoNation was
converted into 45,142,728 shares of the Company's common stock, all of which was
distributed on June 30, 2000.

In connection with the separation from AutoNation, certain assets and
liabilities were contributed to the Company by AutoNation during the year ended
December 31, 2000. Such contributions include but are not limited to: (i) cash
approximating $204.4 million, (ii) an insurance subsidiary with a net deficit of
$39.1 million and (iii) the current portion of taxes payable and certain other
non-cash liabilities approximating $6.7 million. The shareholders' equity
balance is subject to further adjustment resulting from changes in

67

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estimated shared assets and liabilities between AutoNation and the Company as
well as certain other matters. For the quarter ended September 30, 2000 the
Company refunded AutoNation approximately $4.6 million in cash as a result of
changes in these estimated shared assets and liabilities. For the quarter ended
December 31, 2000 the Company settled certain non-cash liabilities with
AutoNation approximating $2.5 million.

The assets and (liabilities) of the insurance subsidiary assumed from
AutoNation are summarized as follows:

10. STOCK OPTIONS

On June 28, 2000 the Company's Board of Directors and AutoNation as sole
shareholder approved the ANC Rental Corporation Stock Option Plan. The total
amount of shares issuable under the Plan is 9,000,000. On June 30, 2000, the
Company's Board of Directors approved the grant, to key employees and directors
of the Company, of options to purchase 6,695,000 shares of Common Stock, at a
price equal to the average of the daily high and low market price of the Common
Stock on July 3, 2000, the date of grant. The options granted have a term of ten
years from the date of grant, and vest in equal 25% increments over three and
one-half years commencing on January 1, 2001 and annually thereafter. As part of
the initial grant each outside director received a grant of options to purchase
100,000 shares of Common Stock, which vested immediately. The Company's Chairman
received a grant of options to purchase 750,000 shares of Common Stock, which
vested immediately.

In May of 2001, the Company's Board of Directors and its shareholders
approved a plan that granted options to purchase 750,000 shares of Common Stock
to the Company's Chairman and then Chief Executive Officer and granted each
outside director options, which vested immediately, to purchase 50,000 shares of
Common Stock. One third of the Chairman's options vested immediately and one
third will vest on each of the first two anniversaries of the grant date,
subject to continued employment.

68

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of issued stock option transactions is as follows for the years
ended December 31:

A summary of outstanding and exercisable options by price range as of
December 31, 2001:

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," as amended, 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 Company's stock option plans been determined pursuant to
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss
would have increased accordingly. Using the Black-Scholes option pricing model
for all options granted after June 30, 2000, the Company's pro forma net loss
and pro forma weighted average fair value of options granted, with related
assumptions, are as follows for the years ended December 31:

69

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. 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:

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, 2001 are as follows:

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, 2001, the Company had
outstanding surety bonds of approximately $140.1 million, the majority of which
expire during 2002, and letters of credit totaling $63.9 million.

70

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the first quarter of 2002, the Company entered into a twenty-one month
employment agreement, approved by the bankruptcy court, with its President and
Chief Operating Officer. Under this agreement he will be entitled to an annual
salary of $1.8 million. Additionally, the Company could be liable for success
fees should the Company enter a plan of reorganization which is subsequently
approved and confirmed by the Bankruptcy Court or a sale of all or substantially
all of the operating assets of the Company is approved and consummated. The
success fees are variable based upon the passage of time and value realized in a
transaction.

12. RESTRUCTURING -- 1999

During the fourth quarter of 1999, the Company approved and announced a
plan to significantly restructure its operations. The restructuring plan (the
"Plan") included provisions for the consolidation of the North American
headquarters, headcount reductions, and the closure of certain marginally
profitable or unprofitable domestic and international locations, as well as the
reduction of fleet.

In connection with the Plan, the Company recorded a pre-tax restructuring
charge of $40.5 million in the fourth quarter of 1999 consisting of the
following:

Restructuring North American Operations:
Severance and severance related costs (for approximately
500 employees)......................................... $12.8
Facility impairments...................................... 5.2
Contractual facility lease payments....................... 3.3
Other restructuring related costs......................... 0.7
-----
Total restructuring North American Operations..... 22.0
-----
Restructuring International Operations:
Asset impairments for goodwill, fleet, and other assets
for exited foreign operations.......................... 13.6
Contractual facility lease payments....................... 4.7
Other restructuring related costs......................... 0.2
-----
Total restructuring International Operations...... 18.5
-----
Total restructuring............................... $40.5
=====

At December 31, 2001, $4.7 million remained accrued relative to the 1999
restructuring plan, with most of the remaining accruals being for continuing
property lease obligations. The Company charged $4.1 million and $12.9 million
to these reserves during the years ended December 31, 2001 and 2000,
respectively. The charges were primarily comprised of severance and rent paid
during the period. During the third quarter of 2001 excess severance and rent
accruals of approximately $1.4 million were reversed. Separately, the Company
increased provisions for a certain lease commitment of approximately $1.4
million due to a reduction in expected sub let income.

13. 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.

71

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:

- Cash and cash equivalents, restricted cash and cash equivalents, trade
and manufacturer receivables, other assets, accounts payable, accrued
liabilities, other liabilities and variable rate debt: The amounts
reported in the accompanying Consolidated Balance Sheets approximate fair
value assuming the Company continues as a going concern.

- 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.

- Interest rate caps and floors: The fair value of interest rate caps and
floors is determined from valuation models which are then compared to
dealer quotations and represents the discounted future cash flows through
maturity of expiration using current rates, and is effectively the amount
the Company would pay or receive to terminate the agreements. As of
December 31, 2001 all of the Company's interest rate floors were
terminated.

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:

Due to uncertainty surrounding the Chapter 11 filing, the fair value of the
interim financing and amounts due to counterparty, which are Debtor obligations,
is not determinable.

14. 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 ninety percent of the
Company's revenue is derived from airport locations.

The top ten rental locations for the Company's Alamo brand collectively
generate in excess of 44% of Alamo's total revenue. Approximately 32% of its
business comes from the direct consumer sub-market (including Internet
revenues), 53% from domestic and international tour, travel agent and affinity
(e.g. travel clubs, airlines, hotels, etc.) channels and the remainder from the
value oriented business travel segment. National's top ten rental locations
generate approximately 30% of its total revenue. Commercial accounts represent
approximately 45% of National's revenue.

As of December 31, 2001 approximately 81% of the fleet was covered by
manufacturer repurchase programs or leased and not subject to residual value
risk. At December 31, 2001 and 2000, the Company had vehicle receivables from
manufacturers of $115.5 million and $423.6 million, respectively. During model
year 2001, the Company purchased approximately 59% of its worldwide 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

72

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

different geographic areas primarily in the United States. Consequently, at
December 31, 2001, the Company does not consider itself to have any significant
non-vehicle manufacturer receivable concentrations of credit risk.

15. RELATED PARTY TRANSACTIONS

For the year ended December 31, 1999 our former Parent's corporate general
and administrative costs not specifically attributable to its operating
subsidiaries have been allocated to the Company based upon the ratio of the
Company's invested capital to the Parent's consolidated invested capital. Such
allocations are included in the Company's selling, general and administrative
expenses and were approximately $16.0 million for the year ended December 31,
1999. In addition, the Parent's corporate general and administrative costs for
certain centralized functions have been allocated to the Company using various
proportional cost allocation methods. These allocations are also included in
selling, general and administrative expenses and were approximately $19.4
million the year ended December 31, 1999. These combined allocations approximate
management's estimate of the Parent's corporate general and administrative costs
required to support the Company's operations. These charges have been reflected
as a contribution from the Parent in the accompanying Consolidated Financial
Statements. Management believes that the amounts allocated to the Company are
reasonable and are no less favorable to the Company than the expenses the
Company would incur to obtain such services on its own or from unaffiliated
third parties. Due to the establishment of the Company's own infrastructure and
decreasing reliance on support from the Parent there has been no allocation in
2000.

AutoNation distributed all of the Company's common stock to its
shareholders as of June 30, 2000. The Company's relationship with AutoNation
since the spin-off has been governed by a separation and distribution agreement
and other agreements entered into in June 2000 in connection with the spin-off.
Certain of the directors of the Company are directors of AutoNation.

Before the spin-off from AutoNation, AutoNation had provided guarantees in
support of the Company's debt financing. Pursuant to a reimbursement agreement
entered into with AutoNation before the distribution date, some of this credit
support remains in place following the spin-off. In particular, AutoNation
continues to guarantee certain annual rent expense in connection with various
real estate lease obligations and vehicle leases. The Company has reimbursement
obligations to AutoNation to the extent AutoNation is required to satisfy any of
its guarantees of any of its obligations. These reimbursement obligations are
payable upon AutoNation's demand, except in the event that certain of the
Company's loans and credit facilities remain in effect as of the date of
AutoNation's demand. Additionally, as part of the issuance in 2001 of a $29.5
million surety bond, AutoNation provided a $29.5 million back-up guarantee for
the benefit of Liberty Mutual Insurance Company, the Company's primary surety
provider. The reimbursement agreement was amended to provide for a reduction in
AutoNation's back-up guarantee over the course of the next five years. The
Company paid AutoNation $1.1 million and $0.3 million for its guarantees of the
Company's debt for the year ended December 31, 2001 and 2000, respectively.

The Company entered into a transitional services agreement with AutoNation
on June 30, 2000. The services agreement has been terminated. During 2000, the
Company paid AutoNation approximately $0.6 million under this agreement. During
2000, AutoNation paid the Company approximately $0.2 million under this
agreement. The Company believes that the fees paid and received for these
services are no less favorable than those that could be obtained from
unaffiliated third parties.

The Company entered into two leases with AutoNation: (1) a lease for
approximately 161,000 square feet of office space to serve as ANC's corporate
headquarters and (2) a lease for approximately 31,600 square feet of computer
data center space at AutoNation's data center.

73

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Payments due under the lease for the corporate headquarters total
approximately $2.0 million. ANC has an option to extend the term for two
additional periods of five years each. The lease payments will be increased on
the fifth and eighth anniversary of the start of the lease. Increases in lease
payments will be based on increases in the Consumer Price Index. In no event
will the adjusted lease payment for the fifth year be lower than the initial
rate or more than 15% higher. In no event will the adjusted lease payment for
the eighth year be lower than the seventh year or more than 9% higher. During
the fourth quarter of 2000 AutoNation transferred ownership in this property to
an unrelated third party.

Payments due under the lease for the computer data center space total
approximately $0.9 million per year. The lease has an initial term of two years,
with an option to extend the term for an additional two years. If extended, the
lease payments will be increased based on increases in the Consumer Price Index.
In no event will the adjusted lease payment be more than 6% higher than the
initial lease payment.

The Company believes 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 us.

After the spin-off from AutoNation, the Company entered into three-year
contracts with AutoNation pursuant to which ANC will purchase a substantial
portion of vehicles from certain dealerships owned by AutoNation; will source a
portion of parts at a negotiated market rate from certain dealerships owned by
AutoNation and have the right to operate replacement car rental businesses at
certain dealerships owned by AutoNation. ANC also has corporate car rental
contracts with AutoNation and some of its subsidiaries. However, during 2001 the
vehicle and parts supply agreements were terminated. Management believes amounts
that were charged and paid under these contracts and arrangements are consistent
with amounts charged to and paid by unaffiliated customers and suppliers.

The total dollar volume related to the above discussed transactions and
paid to AutoNation for each of the three years ended December 31 is as follows:
dealer mark-up paid on vehicle purchases approximated $0.3 million for 2001 and
$1.5 million for 2000 and 1999; and parts purchases approximated $2.3 million
for 2001 and $7.5 million for 2000 and 1999. Amounts related to the operation of
replacement car rental sites at AutoNation dealerships, and revenue received
from AutoNation's corporate car rental contracts were not material for each of
the three years ended December 31, 2001.

During 2001 and 2000, the Company's Chairman and Chief Executive Officer
had a beneficial ownership interest in Certified Vacations, Inc. ("Certified
Vacations"), a domestic tour operator that has conducted business with the
Company. Total gross revenue recognized by the Company from Certified Vacations
was approximately $5.7 million and $8.7 million for the years ended December 31,
2001 and 2000, respectively.

In September 1998, National entered into an agreement to purchase the
naming rights to the Broward County Arena (the "Arena") for $2.2 million per
year. The Arena at the time was owned by Boca Resorts, Inc. Certain of the
directors of the Company are directors of Boca Resorts. The Arena agreement has
a term of ten years and provides that the fees will increase at a rate of 3.0% a
year. During 2001, Boca Resorts, Inc. sold its ownership interest in the
facility to a third party.

It is the Company's 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. It is management's belief that all of the
transactions described met that standard at the time the transactions were
effected.

16. SEGMENT INFORMATION

The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," 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

74

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

its operating results and makes resource allocation decisions based primarily
upon geographic regions. The Company's management segments are defined as (1)
United States-Rental Group, comprising of both Alamo and National operations (2)
Canada, (3) International, comprising Alamo and National operations located
primarily in Europe and (4) Alamo Local Market Division, 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. The following table presents geographic
financial information as of and for the years ended December 31:

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The Company's operations, and particularly the leisure travel market, are
highly seasonal. In these operations, the third quarter, which includes the peak
summer travel months, has historically been the strongest quarter of the year.
During the peak season, the Company increases its rental fleet and workforce to
accommodate increased rental activity. As a result, any occurrence that disrupts
travel patterns during the summer period could have a material adverse effect.
The first and fourth quarters for the Company's operations are generally the
weakest, because of limited leisure travel and a greater potential for adverse
or unseasonable weather conditions to impact the Company's operations. Many of
the operating expenses such as rent, general insurance and administrative
personnel remain fixed throughout the year and cannot be reduced during periods
of decreased rental demand.

The following tables present certain of the Company's operating results for
each of the eight fiscal quarters in the two-year period ended December 31,
2001. The information for each of these quarters is unaudited and has been
prepared on the same basis as the audited Consolidated Financial Statements
included in this Form 10-K. In the opinion of management, all necessary
adjustments, which consist only of normal and recurring accruals, have been
included to fairly present the unaudited quarterly results. This data

75

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

should be read together with the Company's Consolidated Statements of Operations
and the notes to those statements included in this Form 10-K.

For periods prior to the Distribution date, the historical financial
information may not be indicative of the Company's future performance and does
not necessarily reflect what financial position and results of operations would
have been if the Company had been a separate, stand-alone entity during the
periods presented.

18. ADOPTION OF NEW ACCOUNTING STANDARD

In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133, as amended, became effective for the Company on January 1,
2001.

The major market risk hedged by the Company is the changes in LIBOR-based
interest rates. The Company's policy is to manage interest rate risk through a
combination of fixed and floating rate debt. The Company uses interest rate
derivatives to adjust interest rate exposures, when appropriate, based upon
market conditions. As of January 1, 2001 these derivatives consisted of
stand-alone interest rate caps and a combination of interest rate caps and
floors to create synthetic swaps. As of December 31, 2001 the Company only has
stand-alone caps. The Company enters into derivatives with a group of financial
institutions with investment grade ratings, thereby minimizing credit risk. 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
Company's derivative instruments qualify for hedge accounting treatment under
SFAS 133. In order to qualify for hedge accounting certain criteria must be met
including a requirement that both at inception of the hedge, and on an ongoing
basis, the hedging relationship is expected to be highly effective in offsetting
cash flows attributable to the hedged risk during the term of the hedge. Hedge
accounting treatment permits certain changes in the fair value of the Company's
qualifying derivatives to be deferred in other comprehensive income and
subsequently reclassified to earnings to offset the impact of the related hedged
interest rate. Changes in the fair value of non-qualifying derivatives and the
ineffective portion of changes in fair value of qualifying derivatives must be
recorded immediately through earnings.

The Company measures effectiveness of its stand alone caps by comparing the
changes in fair value of its stand-alone caps to a hypothetical derivative that
would be perfectly effective in offsetting changes in fair value of the hedged
cash flows. The Company expects little to no ineffectiveness relative to its
stand-alone caps and as such changes in the fair value of the stand-alone caps
are recorded as a component of other comprehensive income. However, as a result
of decreasing fleet and related fleet debt in the fourth quarter of 2001 the
Company recognized ineffectiveness on one of its stand-alone caps of
approximately $0.1 million.

76

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The FASB continues to provide implementation guidance on technical issues
regarding SFAS 133. In June 2001, the FASB approved alternative accounting
treatment that allows changes in the fair value of the Company's stand-alone
caps to be recorded as a component of other comprehensive income. The Company
adopted the alternative treatment as of July 1, 2001, and as such the Company
recognizes changes in fair value due to time value currently in other
comprehensive income and as such the expiring portion of time value for the
respective caps will be reflected in earnings of future quarters.

Based upon the fair values of the caps and the floors at January 1, 2001
the Company recognized assets of $24.7 million and liabilities of $34.0 million.
In addition, the Company de-recognized approximately $3.1 million of net
deferred losses related to the unwinding of certain swaps and floors primarily
due to the separation from its former Parent. The net deferred losses related to
the unwound derivatives are reflected as a component of accumulated other
comprehensive income and will continue to amortize over the remaining life of
the respective debt that was hedged.

The Company reclassified proceeds from its stand-alone caps of
approximately $1.1 million to vehicle interest expense, a component of interest
expense for the year ended December 31, 2001. The Company reclassified payments
under the floor component of its synthetic swaps of approximately $13.8 million
to vehicle interest expense for the year ended December 31, 2001. Amortization
related to deferred losses was reclassified from other comprehensive income to
vehicle interest expense and approximated $0.8 million for the year ended
December 31, 2001. The Company expects no proceeds from its stand-alone caps
over the next twelve months.

As a result of the Debtors' filing for Chapter 11 in the fourth quarter,
the counterparty to the interest rate floors terminated their agreement with the
Company. As such, the interest rate floors ceased being an effective hedge and
the Company will amortize these deferred losses from other comprehensive income
to current earnings over the life of the remaining debt outstanding. Losses
recognized in the fourth quarter of 2001 approximated $5.8 million. The Company
expects amortization of these deferred losses to be approximately $35.4 million
in 2002.

The table below reflects the components of assets, liabilities and the
equity effects of the transition adjustment as of January 1, 2001:

77

ANC RENTAL CORPORATION
(DEBTORS-IN-POSSESSION AS OF NOVEMBER 13, 2001)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. SUBSEQUENT EVENTS

As previously discussed, the Company is operating certain domestic
operating subsidiaries under Bankruptcy protection. The protection enabled the
Company to accumulate cash by not paying its obligations timely and deferring,
pursuant to the Bankruptcy Code, two fleet depreciation payments.

In addition, the Company has been engaged in investigating, and is
continuing to pursue, strategic alternatives to maximize stakeholder value and
strengthen its financial condition. The Company has engaged investment advisors
to assist us in evaluating these options. Separately the Company is planning a
reorganization which it will file with the Bankruptcy Court.

Continued losses will adversely affect the Company's financial condition
and may affect its ability to obtain incremental financing, comply with certain
covenants contained within its loan agreements and fully utilize certain
deferred tax and intangible assets. There is no assurance that the Company will
be able to generate sufficient operating cash flows, secure additional financing
facilities to meet its on-going financing needs, refinance existing
indebtedness, comply with covenants in future periods or fully utilize certain
deferred tax and intangible assets.

For the three months ended March 31, 2002 revenue was approximately $599.6
million (unaudited) or approximately $169.5 million below the comparable period
of the prior year. For the three months ended March 31, 2002 pre-tax loss was
approximately $139.4 million (unaudited) before the consideration of adopting
new accounting pronouncements, or approximately $73.7 million below the
comparable period of the prior year. On April 10, 2002, the Bankruptcy Court
approved the Company's use of cash collateral, subject to achieving certain cash
flow projections, as Debtors-in-Possession through September 22, 2002. As of
March 31, 2002 cash and cash equivalents approximated $215.5 million
(unaudited).

78

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS

Lawrence J. Ramaekers, 65, has served as our Chief Executive Officer since
April 2002. Since October 2001 he has also served as our President and Chief
Operating Officer. Prior to joining ANC Rental, Mr. Ramaekers worked at Jay Alix
& Associates, a well-known corporate turnaround and restructuring firm from
1982-2000 in various turnaround assignments primarily as CEO or COO. From
1992-1995 Mr. Ramaekers served as the President of National Car Rental. Other
representative engagements include: Chief Executive Officer of United Companies
Financial Corporation, Chief Executive Officer of Family Restaurants, Inc.,
Chief Executive Officer of Umbro International, Inc., Chief Executive Officer of
Centennial Technologies, Inc. and Chief Executive Officer of Medical Resources,
Inc.

William N. Plamondon, 54, has been one of our directors since June 2000
and, as of October 1, 2001, has assumed the role of Chief Restructuring Officer.
Mr. Plamondon founded R.I. Heller Company LLC, a management consulting firm, in
April 1998 and serves as its President and Chief Executive Officer.
Additionally, as of December 2000 Mr. Plamondon became a senior advisor to E&Y
Capital Advisors LLC, a position which he resigned upon assuming the role of our
Chief Restructuring Officer. Prior to founding R.I. Heller, Mr. Plamondon served
as President and Chief Executive Officer of First Merchants Acceptance
Corporation, a national financing company, from April 1997 until April 1998, and
served as a director of First Merchants from March 1995 until April 1998. Mr.
Plamondon was the President of Budget Rent-A-Car Corporation from June 1992
until February 1997 and held other management positions with Budget from 1978
until 1992.

Edward L. Jones, 53, 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.

Wayne Moor, 50, has served as our Senior Vice President and Chief Financial
Officer since October 2001. From October 2000 to October 2001, Mr. Moor served
as Senior Vice President and Chief Financial Officer for Gerald Stevens, Inc., a
Fort Lauderdale based public company. Gerald Stevens, Inc. filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code. Prior to joining Gerald
Stevens, Mr. Moor was Chief Financial Officer of Onloan.com, also located in
Fort Lauderdale. From February 1997 through January 2000, Mr. Moor was Executive
Vice President and Chief Financial Officer for US Diagnostics, Inc., a public
company in West Palm Beach, Florida. Mr. Moor, who is a certified public
accountant, began his career with Arthur Andersen LLP. He has also held senior
financial positions with two large savings and loan associations, a real estate
investment trust, a financial services company and a real estate development
company.

Howard D. Schwartz, 52, has served as our Senior Vice President and General
Counsel since November 1999. From October 1997 until November 1999, Mr. Schwartz
served as Vice President and Deputy General Counsel of AutoNation and from
January 1997 until September 1997, he served as Senior Vice President and
General Counsel of Alamo, a wholly-owned subsidiary of AutoNation, and as Chief
Litigation Counsel of AutoNation. Prior to joining AutoNation, Mr. Schwartz was
with the national law firm of Eckert Seamans Cherin & Mellott, LLC from 1974,
where he served as the partner-in-charge of the firm's Florida operations, a
member of the Executive Committee and Co-Chairman of the Litigation department.

79

Travis L. Tanner, 51, joined the company as Senior Vise President, Sales
and Marketing on April 2, 2002. From January 1999 until October 2001 he served
as Chief Executive Officer of Grand Expeditions, an upscale travel company. Mr.
Tanner was also the President and Chief Executive Officer of Carlson Wagonlit
Travel, one of the top global travel companies, from May 1993 until December
1998. Prior to May 1993, he served as Executive Vice President -- Resorts for
Walt Disney Attractions, and President of the Carlson Travel Group.

Leland F. Wilson, 36, has served as Vice President and Treasurer of ANC
Rental Corporation since November 1999 and has been promoted to Senior Vice
President in April 2002. Mr. Wilson previously served as Assistant Treasurer of
AutoNation, Inc. Prior to joining our former Parent in May 1998, Mr. Wilson was
an Assistant Vice President at Wellington Management Company, LLP from 1997 to
1998. Before joining Wellington, Mr. Wilson was Manager of Corporate Finance at
Staples, Inc. from 1995 to 1997. Prior to joining Staples, Mr. Wilson held
various positions at Nynex in Treasury and Operations, including Staff Director
of Financial Planning, from 1988 to 1995.

Mary E. Wood, 47, 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 May 1998. From June 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 June 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 November
1996. Prior to joining Alamo, Ms. Wood was a partner with KPMG Peat Marwick in
Fort Lauderdale, Florida for eight years.

Michael J. Kipp, 47, was appointed Vice President, Corporate Controller in
November 1999. From April 1998 through October 1999, he was Vice President,
Finance of the Automotive Rental Group, previously a division of AutoNation.
From May 1997 to April 1998, Mr. Kipp was Assistant Controller of AutoNation.
From 1995 to 1997, Mr. Kipp was employed by Blockbuster Entertainment as Vice
President, Financial Planning and Reporting.

DIRECTORS

Michael S. Egan, 62, has been our Chairman of the Board since June 2000 and
was our Chief Executive Officer from December 28, 2000 to April 4, 2002. Mr.
Egan also serves as Chairman and Chief Executive Officer of Certified Vacations,
Inc., a wholesale tour operator. Mr. Egan has been the controlling investor of
Dancing Bear Investments, a privately held investment company, since 1996. Mr.
Egan also serves as a director of Boca Resorts, Inc., 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, Inc. in
November 1996. Mr. Egan began his career with Alamo in 1976 and held various
management and ownership positions until he bought a controlling interest in
1986.

Gordon M. Bethune, 60, has been one of our directors since June 2000. Since
September 1996, Mr. Bethune has served as Chairman of the Board and Chief
Executive Officer of Continental Airlines, Inc., the nation's fifth largest
passenger airline. Mr. Bethune also served as Continental's President and Chief
Executive Officer from November 1994 until September 1996 and as its President
and Chief Operating Officer from February 1994 until November 1994. Mr. Bethune
has been a director of Continental since August 1994. Mr. Bethune also serves on
the board of directors of Honeywell International Inc., an international
developer and supplier of advanced-technology products, systems and services.

J. P. Bryan, 62, has been one of our directors since June 2000. Currently
Mr. Bryan is Senior Managing Director of Torch Energy Advisors Incorporated
which provides accounting and operations outsourcing services to the oil and gas
businesses. Mr. Bryan was Mission Resources Corporation's Chief Executive
Officer and President from August 2, 1999 to May 15, 2000, and Chairman of the
Board from August 2, 1999 to December 6, 2000. He has been a director of Mission
Resources Corporation (or its predecessor) since June
80

1997. Mr. Bryan was Mission Resources Corporation's Chairman of the Board from
August 1987 to June 1997, and Chief Executive Officer from June 1994 to January
1995 and from August 1987 to March 1998. From January 1995 to February 1998, Mr.
Bryan was Chief Executive Officer of Gulf Canada Resources Limited. He was
Chairman of the Board of Nuevo Energy Company, an independent oil and gas
company, from March 1990 to December 1997, and was Chief Executive Officer of
Nuevo from March 1990 to January 1995. Mr. Bryan was also Chairman of the Board
and Chief Executive Officer of Torch and its predecessor from January 1985 to
May 1997 and, since October 1998, has served as the Senior Managing Director of
Torch Energy Advisors Incorporated. Mr. Bryan is also a member of the board of
directors of AutoNation, Inc., a seller of new and used automobiles.

John O. Grettenberger, Sr., 64, has been one of our directors since June
2000. Since February 1997, Mr. Grettenberger has served as the President of
LorAnn Oils, Inc., a privately held essential oils company. In 1984, Mr.
Grettenberger was named a Vice President of General Motors Corporation, the
world's largest automobile manufacturer, and he served General Motors in various
capacities, most recently as the General Manager of the Cadillac Motor Car
Division, until February 1997.

H. Wayne Huizenga, 64, has been one of our directors since June 2000. Since
August 1995, Mr. Huizenga has served as Chairman of the Board of AutoNation,
Inc. which owns the nation's largest chain of franchised automotive retail
dealerships. From August 1995 to September 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
solid waste services company and from May 1998 to December 1998, served as its
Chief Executive Officer. Since September 1996, Mr. Huizenga has served as the
Chairman of the Board of Boca Resorts, Inc. Since January 1995, Mr. Huizenga
also has served as the Chairman of the Board of Extended Stay America, Inc., an
owner and operator of extended stay lodging facilities. Since May 2000, Mr.
Huizenga has been Vice Chairman of the Board of Zixit Corporation, a provider of
security services and products for Internet use. 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
1995, 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 into the world's largest video rental
company. In September 1994, Blockbuster merged into Viacom. In 1971, Mr.
Huizenga co-founded Waste Management, Inc., 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 and Pro
Player Stadium in South Florida, and is a director of NationsRent, Inc., a
national equipment rental company.

Our directors, executive officers and ten percent stockholders are required
to file reports of their ownership of our common stock with the Securities and
Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of
1934. To our knowledge, based solely on a review of the copies of such reports
furnished to us, all of such reporting requirements were satisfied during fiscal
year 2001.

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table describes in summary form the annual and long-term
compensation for all services rendered in all capacities to ANC Rental
Corporation, for the years ended December 31, 2000 and 2001, to

81

the individuals who served as our Chief Executive Officer during fiscal 2001 and
to our four other most highly compensated executive officers in fiscal 2001 who
were executive officers on December 31, 2001.

SUMMARY COMPENSATION TABLE

- ---------------

(1) The 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 officers other than Mr. Egan and, therefore, is not
required to be disclosed pursuant to Securities and Exchange Commission
rules.
(2) These amounts reflect the incremental cost of life insurance.
(3) Mr. Egan has been our Chairman since June 2000 and served as our Chief
Executive Officer from December 28, 2000 to April 4, 2002.
(4) Mr. Ramaekers assumed the additional role of Chief Executive Officer as of
April 4, 2002.
(5) This reflects the amount we paid in respect of Mr. Egan's personal use of a
private airplane.

82

OPTION GRANT TABLE

The following table describes the number of options granted to the
executive officers named in the summary compensation table under our stock
option plan during fiscal 2001.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

- ---------------

(1) One third of Mr. Egan's grants vested immediately with the remaining
two-thirds vesting equally in July of 2002 and July 2003. The exercise price
represented 100% of the fair market price as computed by the average of the
high and low price on July 3, 2001, the date the option was granted.

(2) The dollar amounts under these columns are based on assumed annual rates of
stock appreciation from the market price of common stock on the date of
grant of 5% and 10% over the term of the options. The 5% and 10% assumed
rates are mandated by the Commission and are not intended to be forecasts of
our common stock price.

OPTION EXERCISE TABLE

The following table describes the number of shares of common stock covered
by both exercisable and unexercisable options granted to our executive officers
named in the summary compensation table under our stock option plan as of
December 31, 2001. No options were exercised by these executive officers during
fiscal 2001.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

- ---------------

(1) None of the options were "in-the-money" as of December 31, 2001, based on
the closing price of $0.03 per share of our common stock as of December 31,
2001 as reported by the NASD OTC Bulletin Board.

EMPLOYMENT AGREEMENTS

In March 2002, the Bankruptcy Court approved, on a final basis, a key
employee retention plan. The purpose of the plan is to retain certain key
employees critical to the near-term success of our restructuring by providing
financial incentives and security against unanticipated termination of
employment. There are three levels of participation in the plan (Tier I, Tier
II, Tier III). Tier II and Tier III cover two retention payments, while Tier I
covers only base retention payments.
83

The Base Retention is payable upon the earlier of June 30, 2003,
involuntary termination of employment "other than for cause" or death or
"permanent disability," sale of the company or the consummation by the
Bankruptcy Court of a plan of reorganization. The Base Retention approximates
fifty percent of the participant's base salary and is payable in a lump sum.

The Holdback Retention is payable upon a "Triggering Event." A "Triggering
Event" occurs when a plan of reorganization of the Company under chapter 11 is
approved by the United States Bankruptcy Court so long as the plan of
reorganization is subsequently confirmed by the Bankruptcy Court without
material modifications, or the date upon which a motion seeking approval of the
sale of all or substantially all of the operating assets of the Company is
approved, so long as the sale is subsequently consummated without material
modifications. The Holdback Retention is paid based upon a sliding scale
affected by the passage of time and value realized in the "Triggering Event."

In March 2002, we and Mr. Ramaekers entered into a twenty-one month
employment agreement, approved by the bankruptcy court, providing for his
employment as our President and Chief Operating Officer. Under this agreement
Mr. Ramaekers will be entitled to an annual salary of $1,800,000.

Mr. Ramaekers will also be eligible for a success fee upon a "Triggering
Event." A "Triggering Event" is defined as the date upon which the Plan of
Reorganization is subsequently approved and confirmed by the Bankruptcy Court
without material modifications, or the date upon which a motion seeking approval
of the sale of all or substantially all the operating assets of the Company is
approved, so long as the sale is subsequently consummated without material
modifications. The success fee is paid based upon a sliding scale affected by
the passage of time and value realized by the Triggering Event. In no event may
the success fee exceed $5.0 million. In addition to the success fee, Mr.
Ramaekers is eligible for a fee of $900,000 should a "Triggering Event" occur on
or before September 30, 2003, regardless of Mr. Ramaekers' employment status
with us.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Decisions with respect to executive compensation are made by the
compensation committee of our board of directors. The members of the
compensation committee as of December 31, 2001 were Messrs. Bethune and
Grettenberger. None of the members of the compensation committee has ever been
an officer or employee of ANC Rental Corporation or any of our subsidiaries.

DIRECTOR COMPENSATION

Directors who are full time employees of ANC Rental Corporation receive no
compensation for serving on our board of directors or board committees. For
fiscal 2001, each non-employee director received options to purchase 50,000
shares of our common stock. The non-employee director options vested upon grant
and are exercisable at an option price equal to the fair market value of a share
of common stock on the date of grant.

For fiscal 2001, each non-employee director who chaired a committee of the
board of directors received a retainer of $3,500 for each committee chairmanship
held and $2,500 for each non-chairman committee position held. For fiscal 2001,
each non-employee director also received an annual retainer of $25,000. Such
amounts were also paid for fiscal 2002. For fiscal 2001 all non-employee
directors have been entitled to the use of a vehicle, while founding
non-employee directors and those directors with three years of service are
entitled to the use of a vehicle for life. For fiscal 2001, for those directors
who used a vehicle, the imputed income ranged from $3,917 to $17,127 depending
on the model selected and the number of months of usage. Directors are also
reimbursed for traveling costs and other out-of-pocket expenses incurred in
attending board and committee meetings.

84

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table includes information regarding the beneficial ownership
of our common stock by (1) each person who we believe to be the beneficial owner
of more than five percent of our common stock, based on a review of filings with
the Securities and Exchange Commission, (2) each of our directors, (3) each of
the executive officers named in the summary compensation table and (4) all of
our directors and executive officers as a group. In most cases, each individual
has sole voting and investment power with respect to the shares he or she
beneficially owns. When this is not the case, voting and investment power is
clarified in a footnote.

- ---------------

* The percentage of shares of common stock beneficially owned does not exceed
one percent of the outstanding shares of common stock.
(1) Percentages are based on 45,296,139 shares of common stock outstanding on
April 30, 2002. Calculations of percentage of beneficial ownership assume
the exercise by only the named stockholder of all options for the purchase
of common stock held by such stockholder which are exercisable within 60
days of April 30, 2002.
(2) Includes (1) 5,000 shares owned by ESL Partners, L.P., a Delaware limited
partnership, (2) 4,367,204 shares owned by ESL Limited, a Bermuda
corporation, (3) 136,412 shares owned by ESL Institutional Partners, L.P.,
a Delaware limited partnership, and (4) 5,000 shares owned by ESL
Investors, L.L.C., a Delaware limited liability company. The address of ESL
Partners, L.P., ESL Institutional Partners, L.P. and ESL Investors L.L.C.
is One Lafayette Place, Greenwich, CT 06830. The address of ESL Limited is
Hemisphere House, 9 Church Street, Hamilton, Bermuda. This information is
based on a Schedule 13G filed on February 14, 2002.
(3) Includes (1) 110,000 shares owned directly by Mr. Egan, (2) 2,152,863
shares owned by the Michael S. Egan Living Trust, of which Mr. Egan is the
sole trustee, (3) an aggregate of 441,080 shares owned by certain trusts
established for the benefit of members of Mr. Egan's family and (4) options
to acquire 1,000,000 shares of common stock which are exercisable within 60
days of April 30, 2002. Mr. Egan's address is 200 South Andrews Avenue,
Fort Lauderdale, Florida 33301. This information is based on a Schedule 13D
filed by Mr. Egan dated May 9, 2001.
(4) Includes 3,422,740 shares of common stock held by DCB Holdings, Inc., a
Florida corporation whose sole voting shareholder is Mr. Dan Breeden, Jr.
This information is based on a Schedule 13G filed by

85

Mr. Breeden dated December 21, 2001. The address of DCB Holdings is 450
East Las Olas Blvd, Fort Lauderdale, Florida 33301.
(5) According to a Schedule 13G filed on February 1, 2002, Capital Group
International, Inc. and Capital Guardian Trust Company have sole
dispositive power with respect to 2,524,360 shares and sole voting power
with respect to 2,295,360 of the shares. Capital Group International, Inc.
is the parent holding company of a group of investment management companies
that hold investment power and, in some cases, voting power over the
shares. Capital Guardian Trust Company, a bank as defined in Section
3(a)(6) of the Securities Exchange Act of 1934 and a wholly owned
subsidiary of Capital Group International, Inc., is deemed to be the
beneficial owner of the shares as a result of its serving as the investment
manager of various institutional accounts. The address of Capital Group
International, Inc. and Capital Guardian Trust Company is 11100 Santa
Monica Blvd., Los Angeles, California 90025.
(6) 2,453,900 of the shares beneficially owned by Mr. DeGroote are held in the
name of Westbury (Bermuda) Ltd., a Bermuda corporation, of which he is the
sole shareholder. Mr. DeGroote's and Westbury (Bermuda) Ltd.'s address is
Victoria Hall, 11 Victoria Street, P.O. Box HM 1065, Hamilton, HMEX,
Bermuda. This information is based on a Schedule 13G filed by Mr. DeGroote
dated July 13, 2000.
(7) 2,312,097 of the shares beneficially owned by Mr. Hudson are beneficially
owned by the Harris W. Hudson Limited Partnership, a Nevada limited
partnership, and Harris W. Hudson, Inc. a Nevada Corporation controlled by
Mr. Hudson. Mr. Hudson's business address is 110 S.E. Sixth Street, Fort
Lauderdale, Florida 33301. This information is based on a Schedule 13G
filed by Mr. Hudson dated July 7, 2000.
(8) Includes 150,000 shares of common stock issuable upon exercise of options
that are exercisable within 60 days of April 30, 2002.
(9) Includes (1) 366 shares owned directly by Mr. Huizenga and (2) options to
acquire 150,000 shares of common stock which are exercisable within 60 days
of April 30, 2002. Mr. Huizenga's business address is 450 East Las Olas
Blvd, Fort Lauderdale, Florida 33301. This information is based on a
Schedule 13D filed by Mr. Huizenga dated December 31, 2001 and a Form 4
filed by Mr. Huizenga on January 10, 2002.
(10) Includes 75,000 shares of common stock issuable upon exercise of options
that are exercisable within 60 days of April 30, 2002.
(11) Includes 35,000 shares of common stock issuable upon exercise of options
that are exercisable within 60 days of April 30, 2002.
(12) Includes 2,017,000 shares of common stock issuable upon exercise of options
that are exercisable within 60 days of April 30, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As part of our Chapter 11 filing, the Debtors have the right, subject to
court approval and other conditions, to assume or reject any pre-petition
executory contracts and unexpired losses. Parties effected by these rejections
may file claims with the court. We can provide no assurance that after
negotiations with various parties in interest, the terms of the agreements
described herein will or will not be significantly revised or that any of these
agreements will be assumed or rejected.

TRANSACTIONS WITH AUTONATION

AutoNation distributed all of our common stock to its shareholders as of
June 30, 2000. Our relationship with AutoNation since the spin-off has been
governed by a separation and distribution agreement and other agreements entered
into in June 2000 in connection with the spin-off. The material provisions of
these agreements are described below. H. Wayne Huizenga and J.P. Bryan are
directors of both our company and AutoNation.

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Separation and Distribution Agreement

Before the spin-off we entered into a separation and distribution agreement
with AutoNation. This agreement set forth the agreements between the parties
with respect to the principal corporate transactions required to effect the
separation of our automotive rental business from AutoNation's automotive retail
business and also contained other agreements governing our relationship with
AutoNation after the spin-off.

In conjunction with the spin-off, AutoNation separated its existing
businesses so that after the spin-off, (1) the assets and liabilities of its
automotive rental and related businesses were owned by us and (2) the assets and
liabilities of its automotive retail and related businesses were owned by
AutoNation or its subsidiaries. Specifically, our assets and liabilities upon
completion of the separation consisted of (a) those assets and liabilities
related to AutoNation's automotive rental business, (b) those assets acquired
and liabilities incurred or accrued after March 31, 2000 and (c) all other
assets, rights and liabilities expressly allocated to the company or its
subsidiaries under the distribution agreement or any ancillary agreements.

The distribution agreement provided that, subject to the terms and
conditions of the agreement, the IRS letter ruling and the facts and
representations submitted to the IRS, both ANC Rental Corporation and AutoNation
would 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. We
agreed with AutoNation that neither of us would take, or permit any of our
respective affiliates to take, any action which reasonably could be expected to
prevent the spin-off from qualifying as a tax-free distribution to AutoNation or
its stockholders or which would be inconsistent with any representation of fact
or submission made in connection with or in the IRS letter ruling. We 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.

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 June 30, 2000 between us and AutoNation, including in connection with the
transactions and all other activities to implement the spin-off, except as
described in the agreement.

Except as provided in the distribution agreement, we agreed to indemnify,
defend and hold harmless AutoNation and each of its directors, officers and
employees from and against all liabilities relating to, arising out of or
resulting from (1) our failure or the failure of any other person to pay,
perform or otherwise promptly discharge any of our liabilities in accordance
with their respective terms, (2) matters relating to our automotive rental
businesses and our liabilities and contracts, (3) any breach by us of the
distribution agreement or any of the ancillary agreements entered into by the
parties in connection with the spin-off and (4) any untrue statement of a
material fact or omission to state a material fact, or alleged untrue statements
or omissions, with respect to information relating to us contained in the
registration statement filed in connection with the spin-off.

Subject to exceptions provided in the distribution agreement, AutoNation
agreed to indemnify, defend and hold us and each of our directors, officers and
employees harmless from and against all liabilities relating to, arising out of
or resulting from (1) AutoNation's failure or the failure of any other person to
pay, perform or otherwise promptly discharge any liabilities of AutoNation other
than our liabilities, (2) matters relating to AutoNation's automotive retail and
related businesses and its liabilities and contracts, (3) any breach by
AutoNation of the distribution agreement or any of the other related agreements
and (4) any untrue statement of a material fact or omission to state a material
fact, or alleged untrue statements or omissions, with respect to information
relating to AutoNation contained in the registration statement filed in
connection with the spin-off. The distribution agreement describes specific
procedures with respect to claims subject to indemnification and related
matters.

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

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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. We and AutoNation agreed to allocate responsibility for any shared
contingent liability equally between the two companies, 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, ANC
Rental Corporation or AutoNation. Each of ANC Rental Corporation 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 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,
equally between the two companies, or upon another methodology to be established
by the contingent claims committee. AutoNation will have the sole and exclusive
authority to manage, control and otherwise determine all matters whatsoever with
respect to any shared contingent gain; and AutoNation may elect not to pursue
any shared contingent gain for any reason whatsoever, including a different
assessment of the merits of any action, claim or right or any business reasons
that are in the best interests of AutoNation without regard to our best
interests, and that AutoNation will have no liability to any person as a result
of any determination of this kind.

Transitional Services Agreement with AutoNation

We entered into a transitional services agreement with AutoNation on June
30, 2000. The services agreement has been terminated. During 2000 we paid or
accrued AutoNation approximately $645,000 under this agreement. During 2000,
AutoNation paid us approximately $183,000 under this agreement. We believe that
the fees we paid and received for these services are no less favorable to us
than we could obtain from unaffiliated third parties. We did not incur any
charges in 2001.

Tax Sharing Agreement with AutoNation

We entered into a tax sharing agreement with AutoNation on June 30, 2000.
The primary purpose of the 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 June 30, 2000 and any taxes resulting
from transactions effected in connection with the spin-off. The agreement also
covers 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. With respect to any period ending on or before the spin-off or
any tax period in which the spin-off occurs, AutoNation will:

- continue to be the sole and exclusive agent for us in all matters
relating to the income, franchise, property, sales and use tax
liabilities of ANC Rental 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,

- 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.

Even if the spin-off qualifies as a tax-free distribution to AutoNation
stockholders, a corporate tax could also be payable in accordance with Section
355(e) if, during the four-year period beginning two years before the spin-off,
one or more persons acquire 50% or more, by vote or value, of the capital stock
of AutoNation or

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ANC Rental Corporation as part of a plan or series of related transactions that
include the spin-off (a "change in control"). 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 related to the spin-off. If this change-in-control
occurs, and AutoNation or ANC Rental Corporation are unable to disprove or rebut
the presumption, AutoNation would recognize gain, if any, on the shares of our
common stock that it distributed in the spin-off.

To minimize the risk of a tax due to a change in control and other risks,
we have agreed with AutoNation to refrain from engaging in specified
transactions unless we receive AutoNation's prior consent or we receive:

- a ruling from the IRS 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 and designated by AutoNation to the same effect and is
satisfactory to AutoNation in its absolute discretion.

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, among others:

- a liquidation;

- a merger or consolidation with, or acquisition by, another company;

- issuance's and redemption's of shares of our common stock;

- the exercise of stock options;

- the sale, distribution or other disposition of assets in a manner that
would adversely affect the tax consequences of the spin-off; and

- the discontinuation of material businesses.

In addition, other transactions could also jeopardize the tax-free nature
of the spin-off.

The tax sharing agreement allocates responsibility for the possible
corporate-level tax burden resulting from the spin-off, as well as other tax
items. If the spin-off is taxable under Section 355(e) of the Code as a result
of a change in control, then the resulting corporate-level tax burden will be
borne by that entity, either we or AutoNation, with respect to which the change
in control 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 private 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 change in control or any action taken
by either company that is inconsistent with the IRS private letter ruling, will
be shared equally by us and AutoNation.

Leases with AutoNation

Before the spin-off we, as the tenant, entered into two leases with
AutoNation or an affiliate of AutoNation: (1) a lease for approximately 161,000
square feet of office space to serve as our corporate headquarters and (2) a
lease for approximately 31,600 square feet of computer data center space at
AutoNation's data center. Both properties are located in Fort Lauderdale,
Florida.

Payments due under the lease for the corporate headquarters total
approximately $2.0 million. In addition, we pay operating expenses, real estate
taxes, insurance and utilities relating to the facility. We have an option to
extend the term for two additional periods of five years each. The lease
payments will be increased on the fifth and eighth anniversary of the start of
the lease. Increases in lease payments will be based on increases in the
Consumer Price Index. In no event will the adjusted lease payment for the fifth
year be lower than the initial rate or more than 15% higher. In no event will
the adjusted lease payment for the eighth year be lower than the seventh year or
more than 9% higher. During the fourth quarter of 2000 AutoNation transferred
ownership in this property to an unrelated third party.

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Payments due under the lease for the computer data center space total
approximately $0.9 million which includes our proportionate share of the
operating expenses, real estate taxes, insurance and utilities of the facility.
The lease has an initial term of two years, with an option to extend the term
for an additional two years. If extended, the lease payments will be increased
based on increases in the Consumer Price Index. In no event will the adjusted
lease payment be more than 6% higher than the initial lease payment.

We believe that the lease payments reflect fair market value and that the
terms of the leases are no less favorable than could be obtained from persons
unrelated to us.

Reimbursement Agreement with AutoNation

Before the spin-off from AutoNation, AutoNation had provided guarantees in
support of our debt financing. Pursuant to a reimbursement agreement entered
into with AutoNation before the distribution date, some of this credit support
remained in place following the spin-off. In particular, AutoNation continued to
guarantee certain annual rent expense in connection with various real estate
lease obligations and a vehicle lease. We will have reimbursement obligations to
AutoNation to the extent AutoNation is required to satisfy any of its guarantees
of any of its obligations. These reimbursement obligations are payable upon
AutoNation's demand, except in the event that certain of our loans and credit
facilities remain in effect as of the date of AutoNation's demand. In that
event, the amount of our obligations to AutoNation will be converted to a loan
maturing 91 days after the date that all loans under those facilities are paid
in full, but not later than September 29, 2003. Each reimbursement obligation or
loan payable by us to AutoNation under that reimbursement agreement will bear
interest at an annual rate up to 18%. We have paid AutoNation a fee for the
amount of its credit support in an aggregate amount of approximately $1.1
million in 2001 and $343,000 in 2000. Additionally, as part of the issuance in
2001 of a $29.5 million surety bond AutoNation provided a $29.5 million back-up
guarantee for the benefit of Liberty Mutual Insurance Company, our primary
surety provider. The reimbursement agreement was amended to provide for a
reduction in AutoNation's back-up guarantee over the course of the next five
years.

Other Agreements with AutoNation

After the spin-off from AutoNation, we entered into three year contracts
with AutoNation pursuant to which we (1) purchase a substantial portion of our
vehicles from certain dealerships owned by AutoNation, (2) purchase a portion of
our parts at a negotiated market rate from certain dealerships owned by
AutoNation and (3) have the right to operate replacement car rental businesses
at certain dealerships owned by AutoNation. We also have corporate car rental
contracts with AutoNation and some of its subsidiaries. However, during 2001,
the vehicle and parts supply agreements were terminated. We have since found
other third party suppliers. Amounts charged and paid under these contracts and
arrangements are consistent with amounts charged to and paid by unaffiliated
customers and suppliers.

The total dollar volume related to the above discussed transactions and
paid to AutoNation for the year ended December 31, 2001 is as follows: (1)
dealer mark-up of approximately $0.3 million was paid on vehicle purchases or
typically less than one percent of acquisition cost; (2) parts purchases
approximated $2.3 million; and (3) rent paid for replacement car rental sites
approximated substantially the same amounts as in prior years. Vehicle rental
payments we received from AutoNation approximated substantially the same amounts
as in prior years.

The total dollar volume related to the above discussed transactions and
paid to AutoNation for the year ended December 31, 2000 is as follows: (1)
dealer mark-up of approximately $1.5 million was paid on vehicle purchases of
approximately $3.2 billion or less than one percent of acquisition cost; (2)
parts purchases approximated $7.5 million; and (3) rent paid for replacement car
rental sites approximated $300,000. Vehicle rental payments we received from
AutoNation approximated $225,000.

OTHER RELATED PARTY TRANSACTIONS

Mr. Plamondon, as of December 2000, became a senior advisor to E&Y Capital
Advisors LLC. During 2001, we retained the services of E&Y Capital Advisors LLC.
Fees incurred and paid related to these services
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approximated $3.1 million. Mr. Plamondon resigned from his position with E&Y
Capital Advisors upon becoming our Chief Restructuring Officer in October 2001.

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
at the time was 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 18.3% 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 3.0% a year. During the year 2001 Boca Resorts, Inc. transferred
ownership interests in the Arena to a third party. During 2000, we paid Boca
Resorts, Inc. approximately $318,000 respectively for team sponsorship and
$135,000 respectively for use of facilities. During 2001 and 2000, 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. During 2001, Boca Resorts Inc. transferred ownership in the
facility to a third party.

Mr. Egan has a beneficial ownership interest in Certified Vacations, Inc.,
a domestic tour operator that has conducted business with us. Mr. Egan also
serves as Certified Vacations' Chairman and Chief Executive Officer. Total gross
revenue recognized by us from Certified Vacations was approximately $5.7 million
and $8.7 million for the year ended December 31, 2001 and 2000, respectively. In
addition, we incurred marketing expense of approximately $69,000 and $301,000 to
Certified Vacations during 2001 and 2000. Additionally, during 2001 and 2000,
Certified Vacations, similar to most large tour operators, had the same use of
our vehicles at little or no cost to them. Vehicle expense, primarily comprised
of depreciation, related to these units approximated $16,000 for 2001 and
$37,000 in 2000.

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 above met that standard at the
time the transactions were effected.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements of the Company are set forth in Part II, Item
8.

(2) Financial Statement Schedule II, Valuation and Qualifying Accounts
and Reserves, for each of the three years ended December 31, 2001 is
submitted herewith.

(3) Exhibits -- See Exhibit Index included elsewhere in this document.

(b) Reports on Form 8-K

Form 8-K, dated November 13, 2001 (filed November 13, 2001), Item 3,
reporting that ANC Rental Corporation and certain of its direct and
indirect U.S. subsidiaries filed voluntary petitions under Chapter 11 of
Title 11, United States Code, in the United States Bankruptcy Court of the
District of Delaware.

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SCHEDULE II

ANC RENTAL CORPORATION

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)

- ---------------

(1) Primarily accounts written-off
(2) Primarily cash payments of costs associated with restructuring activities
(3) Amount reversed to income
(4) Primarily represents asset write-offs
(5) Primarily represents cash payments on settled claims
(6) Primarily represents non-cash transfers of liability from/(to) our former
Parent

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, ANC Rental Corporation has duly caused this report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

ANC Rental Corporation

By: /s/ LAWRENCE J. RAMAEKERS
------------------------------------
Lawrence J. Ramaekers
Chief Executive Officer

Date: May 15, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

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EXHIBIT INDEX