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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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 1-13647
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DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 73-1356520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5330 East 31st Street, Tulsa, Oklahoma 74135
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (918) 660-7700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 No __
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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 1, 1999 was $192,975,696.
The number of shares outstanding of the registrant's Common Stock as of
March 1, 1999 was 24,125,941.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 27, 1999, are incorporated by reference in Part
III.
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2
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-K
CONTENTS
Page
PART I ----
ITEM 1. BUSINESS.....................................................4
ITEM 2. PROPERTIES..................................................21
ITEM 3. LEGAL PROCEEDINGS...........................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.............................22
ITEM 6. SELECTED FINANCIAL DATA.....................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...........................................34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE......................60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........60
ITEM 11. EXECUTIVE COMPENSATION.....................................60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............60
3
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K........................................60
SIGNATURES....................................................................65
INDEX TO EXHIBITS.............................................................66
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Some of the statements contained herein under "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Although Dollar Thrifty Automotive
Group, Inc. believes such forward-looking statements are based on reasonable
assumptions, such statements are not guarantees of future performance and
certain factors could cause results to differ materially from current
expectations. These factors include: economic and competitive conditions in
markets and countries where our customers reside and where our companies and
their franchisees operate; changes in capital availability or cost; costs and
other terms related to the acquisition and disposition of automobiles; the
ability of Dollar Thrifty Automotive Group, Inc. and its third party providers,
vendors, suppliers and independent franchisees to adequately address the Year
2000 issue; and certain regulatory and environmental matters. Should one or more
of these risks or uncertainties, among others, materialize, actual results could
vary materially from those estimated, anticipated or projected. Dollar Thrifty
Automotive Group, Inc. undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
4
PART I
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ITEM 1. BUSINESS
COMPANY OVERVIEW
Dollar Thrifty Automotive Group, Inc., a Delaware corporation (the
"Company"), owns two vehicle rental companies, Dollar Rent A Car Systems, Inc.
("Dollar"), and Thrifty Rent-A-Car System, Inc. Thrifty Rent-A-Car System, Inc.
is an indirect subsidiary of the Company as it is a wholly owned subsidiary of
Thrifty, Inc. (Thrifty, Inc., Thrifty Rent-A-Car System, Inc. and all their
respective subsidiaries are individually or collectively, as the context
requires, referred to hereafter as "Thrifty"). Dollar and Thrifty and their
independent franchisees operate the Dollar and Thrifty vehicle rental systems.
The Dollar and Thrifty brands represent a value-priced rental vehicle generally
appealing to leisure customers and tourists, including foreign tourists and to
small businesses and independent business travelers. As of December 31, 1998,
Dollar and Thrifty had 902 locations in the United States and Canada of which
139 were company-owned stores and 763 were locations operated by franchisees.
While Dollar and Thrifty have franchisees in countries outside the United States
and Canada, revenues from these franchisees have not been material to results of
operations of the Company and its consolidated subsidiaries (collectively, the
"Group"). Dollar's gross revenues comprise approximately 73% of the Group's
revenues with Thrifty contributing the remaining 27% of revenues.
The businesses of Dollar and Thrifty complement each other, although they
have different approaches to the vehicle rental market. In the United States,
Dollar's main focus is operating company-owned stores located at major airports,
and it derives substantial revenues from tour and leisure rentals. Thrifty
operates almost exclusively through franchisees serving both the airport and
local markets. Dollar derives a majority of its U.S. revenues from providing
rental vehicles and services directly to rental customers, while Thrifty derives
its revenues primarily from franchising fees and services including vehicle
leasing. Thrifty's U.S. franchisees provide vehicles and services to the rental
customer except in two cities where Thrifty operates company-owned stores.
Dollar incurs the costs of operating its company-owned stores and its revenues
are directly affected by changes in rental demand. As Thrifty operates primarily
through franchisees, it does not incur the costs of operating the franchised
locations and does not generally deal directly with rental customers. Therefore,
changes in levels of customer demand tend to affect Thrifty's results less
quickly than those of Dollar. See Note 14 of Notes to Consolidated Financial
Statements for business segment information.
The Company was incorporated on November 4, 1997. It is the successor to
Pentastar Transportation Group, Inc. which was formed in 1989 to acquire and
operate the rental car subsidiaries of Chrysler Corporation, now known as
DaimlerChrysler Corporation ("DaimlerChrysler"). Dollar was incorporated in 1965
and Thrifty was incorporated in 1950. Thrifty is an indirect subsidiary of the
Company. Thrifty, Inc., which was formed in December 1998, directly owns Thrifty
and Thrifty Car Sales, Inc., which principally franchises used vehicle sales.
The Company sold its wholly owned subsidiary, Snappy Car Rental, Inc. ("Snappy")
in 1994.
On December 23, 1997, the Company completed its initial public offering of
Common Stock after registration with the Securities and Exchange Commission
("SEC") on Form S-1 (the "Offering"). Upon closing of the Offering, 22,500,000
shares of Common Stock were sold at an initial price to the public of $20.50 per
share. In addition, the underwriters exercised an over allotment option and
acquired an additional 1,125,000 shares for the same price, less the applicable
underwriter's discount. Of the shares sold in the Offering, 20,000,000 shares
were sold by DaimlerChrysler, which prior to the Offering was the parent of the
Company, and 3,625,000 shares were sold by the Company. On January 15, 1998, the
underwriters exercised a second and final portion of their over allotment
option, purchasing an additional 498,105 shares of Common Stock.
In order to close the offering of Common Stock, it was also necessary for
the Company to complete new financing arrangements. On December 23, 1997, the
Company closed a $900 million asset backed medium term note program, together
with a Revolving Credit Facility (hereinafter defined). In addition, on March 4,
1998, the Company established a $615 million Commercial Paper Program
(hereinafter defined) backed by a Liquidity Facility (hereinafter defined).
Proceeds of the medium term notes and commercial paper were used and will be
used to finance existing vehicles and the acquisition of new vehicles. The
Revolving Credit Facility was established to provide letters of credit to
enhance these vehicle financing programs and to meet the Group's borrowing needs
for its other business operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
5
INDUSTRY OVERVIEW
The U.S. daily vehicle rental industry has two principal markets: the
airport market and the local market. Vehicle rental companies that focus on the
airport market rent primarily to business and leisure travelers. Vehicle rentals
from airport locations account for the largest portion of vehicle rentals in the
United States. Companies focusing on the local market rent primarily to persons
who need a vehicle periodically for personal or business use or who require a
temporary replacement vehicle. Rental companies also sell used vehicles and
ancillary products such as refueling services and loss damage waivers.
Vehicle rental companies typically incur substantial debt to finance the
ongoing turnover of their rental fleets. They also typically acquire a majority
of their fleets under manufacturer residual value programs that guarantee the
resale value of Program Vehicles (hereinafter defined) at particular times in
the future. This allows a rental company to predict this important element of
its cost structure. The Program Vehicles and the related obligations of the
manufacturers are used as collateral for fleet financing.
The domestic vehicle rental industry has experienced significant revenue
growth over the past five years, following a period of reduced rental rates
prompted by excess vehicle capacity. The economic recession in the United States
from earlier this decade led to decreased new vehicle demand and overcapacity
among automotive manufacturers. The manufacturers offered significant purchase
incentives to vehicle rental companies, enabling them to significantly expand
the size of their fleets. This eventually resulted in excess capacity,
intensified competition and depressed rental rates. As general economic
conditions in the United States improved, the manufacturers increased their new
vehicle prices and substantially reduced the incentives offered to fleet
purchasers. Continued competitive pressure within the rental industry, however,
constrained increases in average daily rental rates. The domestic vehicle rental
industry is now experiencing improved profitability resulting from increased
transaction volumes, higher average daily rental rates and favorable cost
trends.
There have recently been significant changes in the ownership of the
principal companies in the U.S. vehicle rental industry, several of which had
been owned by domestic automotive manufacturers. Cendant Corporation purchased
Avis Rent A Car, Inc. and subsequently sold 70% of Avis to the public. Republic
Industries Inc. acquired National Car Rental System, Inc. and Alamo Rent-a-Car,
Inc., and Team Rental Group Inc. (renamed Budget Group, Inc.) acquired Budget
Rent a Car Corporation from Ford Motor Company ("Ford"). Ford sold a minority
interest in The Hertz Corporation to the public. Accordingly, most of the major
companies in the industry are now publicly held, including the Company. The
Company believes these changes should lead to improved operating results as a
result of increased industry focus on profitability and shareholder returns,
rather than on transaction volume and market share.
SEASONALITY
The third quarter, during the peak summer travel months, has historically
been the strongest quarter of the year in terms of number of vehicle rentals,
rental rates and Group profitability. In 1998, the Group's average monthly fleet
size ranged from a low of approximately 81,000 vehicles in the first quarter of
1998 to a high of approximately 106,000 vehicles in the third quarter of 1998.
Travel disruptions during the summer period could have a material adverse effect
on the Group.
DOLLAR
GENERAL
Dollar's main focus is serving the airport vehicle rental market, which is
composed of business and leisure air travelers. The majority of its locations
are on or near airport facilities. Dollar operates primarily through
company-owned stores in the United States, and also licenses to independent
franchisees to operate as a part of the Dollar system in the United States and
abroad. All of its Canadian and international operations are franchised.
6
Dollar's services and products include fleet leasing, marketing,
centralized reservations, counter automation, insurance, central billing,
supplies and training and operational support. Dollar's company-owned stores and
franchisees rent vehicles on a daily, weekend, weekly and monthly basis, at
varying rates depending on cost and other competitive factors in each location's
market. In addition to vehicle rentals, Dollar and its franchisees sell
ancillary products and rent supplemental equipment. To meet seasonal and other
demand changes, Dollar shifts vehicles among its company-owned stores and U.S.
franchisees. Revenues from Dollar's franchisees outside the United States and
Canada have not been material to its results of operations.
As of December 31, 1998, Dollar's vehicle rental system included 268
locations in the United States and Canada, consisting of 114 company-owned
stores and 154 that were operated by franchisees. Dollar's total revenue was
$659.7 million in 1998, of which $603.3 million (91.5%) was generated by
company-owned stores and $56.4 million (8.5%) was revenue from Dollar
franchisees for vehicle leasing fees and other service and product fees and
other revenue.
Dollar operates primarily through company-owned stores, and through
franchisees in key U.S. leisure destinations and in other U.S. locations. Dollar
has company-owned stores in 37 of the 50 largest U.S. airport markets and
franchisees in the remaining 13 locations. When opportunities arise, Dollar may
acquire operations from franchisees and convert them to company-owned stores.
Dollar converted one franchised operation to a company-owned operation in 1994,
two in 1995, four in 1996 and three in 1997. Dollar acquired two franchised
operations in 1998. In March 1998, it acquired the operations of its San Diego
franchisee, and in October 1998, it acquired the operations of its Phoenix
franchisee. Dollar generally has rights of first refusal on the sale of a
franchised operation. Dollar also opened a new corporate store in Columbus, Ohio
in May 1998.
Dollar sold its company-owned store in Colorado Springs in October 1998,
including a license to operate Aspen, Grand Junction and Gunnison, Colorado.
This transaction was consistent with Dollar's strategy to license markets of
this size in order to grow the Dollar system.
COMPANY-OWNED STORES
Dollar believes that having company-owned stores in most of the largest 50
airport markets and other key markets enhances its ability to manage its vehicle
rental system and fleet. Dollar can implement marketing and pricing strategies
to focus on discretionary leisure and business travelers, reduce costs through
bulk purchasing, apply performance benchmarks and develop and implement best
practice management techniques nationwide. Its company-owned store network also
allows Dollar to offer customers one-way rentals in certain markets.
Vehicle rentals by customers of foreign and U.S. tour operators generated
approximately 35% of Dollar's rental revenues in 1998. These rentals are usually
part of tour packages that also include air travel and hotel accommodations.
Rentals to tour customers have certain advantages. Tour customers tend to
reserve vehicles earlier than other customers, rent them for longer periods and
cancel reservations less frequently. Dollar has significant relationships with
foreign and domestic tour operators that resulted in rental revenue of $211.7
million in 1998.
Dollar is the exclusive U.S. vehicle rental company for three of its five
largest tour operator accounts. Its arrangement with the other two tour operator
accounts is non-exclusive. The agreements for these five accounts expire from
December 31, 1999 to October 31, 2007. No single tour operator account generated
in excess of 5% of the Group's 1998 revenues.
As of December 31, 1998, Dollar had vehicle rental concessions for
company-owned stores at 58 airports in the United States. Its payments for these
concessions are usually based upon a specified percentage of airport-generated
revenue, subject to a minimum annual fee, and sometimes include fixed rent for
terminal counters or other leased properties and facilities.
7
SERVICES AND PRODUCTS PROVIDED TO RENTAL CUSTOMERS
Worldwide Reservation System. Dollar has continuously staffed reservation
facilities at its headquarters in Tulsa, Oklahoma and in its newly opened
reservation facility in Tahlequah, Oklahoma. All of Dollar's current reservation
facilities, as well as the major U.S. airline global distribution systems, are
linked to Dollar's worldwide reservation computer and telecommunications system,
which is also located in Tulsa, Oklahoma. Dollar's reservation facilities
processed 7.2 million reservation telephone calls during 1998. Approximately 49%
of Dollar's 1998 non-tour vehicle rentals were booked by travel agents through
airline distribution systems. Dollar has preferred supplier agreements with many
major travel agency chains and travel consortia. Reservations to Dollar's
Internet web site increased significantly in 1998.
Supplemental Equipment and Optional Products. Dollar rents ski racks,
mobile telephones, baby seats and other supplemental equipment and, subject to
availability and applicable local law, makes available loss damage waivers and
insurance.
Instant Return. Dollar offers customers instant return service at most of
its U.S. airport company-owned stores. When a customer returns a vehicle at one
of these locations, a representative meets the customer and provides a receipt
from a hand-held computer terminal.
INFORMATION SYSTEMS
Dollar depends upon a number of core information systems to operate its
business. Its worldwide reservation system has rate management applications. The
counter automation system in Dollar's company-owned stores facilitates the sale
of additional products and services and allows Dollar to monitor its fleet and
financial assets. Dollar completed the nationwide introduction in company-owned
stores of Dollar's new rental counter automation system, FASTLANE, in 1998,
except for Hawaii, which will be completed in 1999, and Florida, which will be
completed in 2000. FASTLANE is currently being adapted to serve Dollar's tour
customers. In 1998, Dollar developed a revenue management system with Talus, a
leading supplier of such systems, which was introduced in Dollar's company-owned
stores except Florida and Hawaii, which will occur in 1999. The initial version
of this system is being designed to enable Dollar to better determine rental
demand based on historical reservation patterns and adjust its rental rates
accordingly. Dollar has entered into an agreement with The SABRE Group, Inc.
("SABRE"), a leader in electronic distribution systems for the travel industry,
to manage and monitor its data center network and its daily information
processing.
Dollar's core information systems are either designed to, or are being
updated to, address the Year 2000 issues as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000." All of Dollar's key systems are housed in a secure underground SABRE
facility in Oklahoma designed to withstand disasters.
CUSTOMER SERVICE AND EMPLOYEE TRAINING
Dollar has programs at its headquarters and in company-owned stores to
improve customer service. Customer First!, Dollar's quality improvement program,
involves establishing a team at each vehicle rental location that is accountable
for customer satisfaction. Dollar's customer service center measures customer
satisfaction, tracks service quality trends, handles customer complaints and
provides recommendations to Dollar's senior management and vehicle rental
location supervisors. Dollar conducts initial and ongoing training for
company-owned store and franchisee employees through education centers in San
Francisco, Tulsa and Newark. Dollar opened additional training centers in
Denver, Los Angeles and Cleveland in 1998.
ORLANDO OPERATIONS
Central Florida, with its many tourist attractions, is the most important
leisure destination for Dollar. Dollar's company-owned store at Orlando
International Airport has a mix of tour and other business. Dollar also operates
a facility at the Orlando Sanford International Airport, 25 miles north of
Orlando, which mainly serves charter flights by foreign tour operators. This
facility, which was specifically designed to handle tour customers, has 42
rental stations and parking for approximately 1,600 vehicles.
8
FRANCHISING
United States and Canada
Approximately 8% of Dollar's 1998 revenues in the United States and Canada
consisted of leasing revenue and fees from its franchisees and other revenues.
Dollar sells its U.S. franchises on an exclusive basis for specific geographic
areas. Most franchisees are located at or near airports that generate a lower
volume of vehicle rentals than the airports served by Dollar's company-owned
stores. Dollar also makes a fleet leasing program available to its U.S.
franchisees, which in 1998 accounted for approximately 5% of Dollar's total
revenue. See "-- Fleet Acquisition and Management -- Fleet Leasing Programs."
Dollar licenses its franchisees to use Dollar's service marks in the
vehicle rental and leasing, parking and used car sales businesses. Franchisees
pay Dollar an initial franchise fee generally based on the population, number of
airline passengers, total airport vehicle rental revenues and the level of any
other vehicle rental activity in the franchised territory, as well as other
factors.
System Fees. In addition to an initial franchise fee, in 1999 each U.S.
franchisee is generally required to pay Dollar a system fee on their rental car
revenue equal to 8% of gross rental revenue on a monthly basis for airport
operations (7% in 1998 and 6% in 1997) and 6% for suburban operations.
Franchisee Services and Products. Dollar makes insurance coverage
available to its franchisees and provides them with training and operational
assistance, site selection guidance, vehicle damage recovery and claims
management advice, sales assistance and image and standards guidance. Dollar
also provides them with fleet planning and customer satisfaction programs and
sells them certain Dollar-branded supplies. In addition, Dollar offers its
franchisees rental rate management analysis and programs under which Dollar
handles warranty claims processing, corporate account and tour billing and
travel agent commission payments. Dollar franchisees are connected to, and pay
Dollar a fee for, each reservation made through Dollar's worldwide reservation
system.
International
Dollar's vehicle rental locations outside the United States are operated
by master franchisees, direct franchisees and subfranchisees. Master franchisees
are authorized to use Dollar's service marks and business methods in territories
in which they operate directly or through subfranchisees, and are responsible
for promoting the Dollar brand name and its services and products and for
developing and supporting their direct operations and subfranchisees. Dollar's
revenues from international franchise operations were less than 1% of 1998 total
revenue.
As of December 31, 1998, Dollar had franchised operations located in 27
countries. In Canada, Dollar's master franchisee directly operates or
subfranchises 27 airport and suburban locations. In December 1997, Dollar
entered into a reservation transfer agreement with Europcar International, S.A.,
a European-based vehicle rental company ("Europcar"), which became effective
February 1, 1998. Dollar and Europcar have announced that this agreement will
terminate on February 29, 2000. The interim period will allow each of the
companies to develop solutions more adapted to their respective segments in
leisure and business and their respective long-term strategies. Until the end of
this agreement, the parties will continue to cooperate to maintain the best
service to their transatlantic customers.
Although the agreement with Europcar requires each party to display the
trademarks or service marks of the other company at their own locations, such
locations remain autonomous and under control of the company which established
the location. Accordingly, the number of foreign locations or Dollar system-wide
locations disclosed in this report do not include Europcar locations where
Dollar trademarks or service marks may appear.
Effective March 1, 2000, Dollar has agreed to begin exchanging European
and U.S. reservations with Sixt, AG, a major European rental car company.
9
MARKETING
National Advertising and Promotion
Dollar's primary marketing objective is to convey to cost conscious
leisure and business travelers that Dollar is committed to providing
lower-priced vehicle rentals than its competitors. Dollar also emphasizes its
operations in Florida, California, Hawaii and Nevada, where Dollar has a higher
share of the leisure rental market than in other locations. Dollar's national
advertising programs build on these themes through weekly advertisements in U.S.
Sunday newspaper travel sections and weekly advertisements in USA Today. Dollar
also advertises on U.S. broadcast and cable television networks, promoting its
low rates and on-airport convenience. Dollar spends approximately 5% of its
annual total U.S. system-wide revenues on marketing, advertising, public
relations and sales promotions. Dollar has national marketing partnerships with
major U.S. airlines' frequent flier programs in order to attract customers who
value frequent flier awards as well as low vehicle rental rates.
Dollar encourages franchisees, as well as local management of
company-owned stores, to develop local market relationships and retail sales
initiatives that coordinate with Dollar's national advertising programs. Dollar
makes available print and broadcast advertising materials to franchisees for use
in local markets, and pays a promotional allowance for qualifying advertising
expenditures to the franchisees that participate in Dollar's fleet program.
Dollar has made filings under the intellectual property laws of
jurisdictions in which it or its licensees operate, including the U.S. Patent
and Trademark office, to protect the names, logos and designs identified with
Dollar. These marks are important for customer awareness and selection of Dollar
for vehicle rental.
Strategic Marketing Efforts
Travel agencies book approximately 49% of Dollar's non-tour vehicle
rentals through the major U.S. airline global distribution systems. Major travel
agency chains and consortia operate under preferred supplier agreements with
Dollar, as they do with other vehicle rental companies, and are supported by
Dollar's sales department. Under its preferred supplier arrangements, Dollar
provides these travel agency groups additional commissions or lower prices in
return for their featuring Dollar in their advertising or giving Dollar a
priority in their reservation systems. In general, these arrangements are not
exclusive to Dollar, and many travel agency groups have similar arrangements
with other vehicle rental companies.
10
SUMMARY OPERATING DATA OF DOLLAR
Years Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
(in thousands)
Revenues:
U.S. Company-owned stores ................ $438,722 $559,610 $605,187
U.S. and Canada franchisees .............. 55,212 51,256 50,011
International franchisees ................ 2,359 3,427 3,100
Other .................................... 1,174 1,989 1,421
-------- -------- --------
Total revenues ........................... $497,467 $616,282 $659,719
======== ======== ========
As of December 31,
-----------------
1996 1997 1998
---- ---- ----
Rental Locations:
U.S. Company-owned stores ................ 95 103 114
U.S. and Canada franchisee locations ..... 175 152 154
Franchisees:
U.S. and Canada .......................... 68 70 73
International ............................ 45 49 50
THRIFTY
GENERAL
Thrifty's main focus is on franchising and franchise support services.
Thrifty also operates company-owned stores in six cities in the United States
and Canada. Thrifty's company-owned stores and its franchisees derive
approximately 57% of their combined rental revenues from the airport market and
approximately 43% from the local market. Thrifty's approach of serving both the
airport and local markets within each territory allows many of its franchisees
and company-owned stores to have multiple locations to improve fleet utilization
and profit margins by moving vehicles among locations to better address
differences in demand between their markets. As airports have begun to institute
fees for vehicle rental companies located outside their properties, or limited
these companies' access to airport travelers, some Thrifty franchisees have
moved to on-airport locations. Thrifty believes that the local market offers
Thrifty's franchisees and company-owned stores better growth opportunities, less
pricing pressure, a lower cost structure and a more diverse customer base than
the airport market.
As of December 31, 1998, Thrifty's vehicle rental system included 634
rental locations in the United States and Canada, divided between 609 franchisee
locations and 25 company-owned stores. The Thrifty system also included 580
locations abroad, all of which were franchisee locations. Thrifty's total
revenue was $237.8 million in 1998, of which $206.1 million (86.7%) was revenue
from franchisees in the form of fleet leasing fees, commissions and other
service and product fees and $31.7 million (13.3%) of which was generated by
company-owned stores. Revenues from Thrifty's franchisees outside the United
States and Canada have not been material to its results of operations.
11
FRANCHISING
United States
Thrifty's U.S. franchisees are the core of its operations and are
essential to its long-term profitability and growth. Thrifty offers its
franchisees a full line of services and products not easily or cost-effectively
available from other sources. Thrifty actively promotes franchisee financial
stability and growth and seeks opportunities to enhance its vehicle rental
system by improving its services to franchisees, particularly its fleet leasing
programs, and by developing new franchisee revenue opportunities, such as
airport parking and truck rental. Thrifty also works closely with its U.S.
franchisees in formulating and implementing marketing and operating strategies.
Thrifty licenses its U.S. franchisees to use its service marks and
participate in its various services and systems. Franchisees pay Thrifty an
initial franchise fee based on such factors as the population, the number of
airline passengers, and total airport vehicle rental revenues and the level of
any other vehicle rental activity in the franchised territory. Franchises are
sold on an exclusive basis for a specific geographical territory, usually a city
or metropolitan area. Over the past five years, Thrifty's franchisee turnover
has averaged approximately 10% per year, with an average of 17 terminations and
24 new sales (including new territories added to existing franchise agreements)
per year.
Initial Franchise Fees, System Fees and Advertising Fees. Thrifty's
initial franchise fees are negotiated on a case-by-case basis, and may be
structured to promote expansion of an existing franchisee's operations into a
contiguous area. In addition to the initial franchise fee, its U.S. franchisees
pay Thrifty an administrative fee, which is generally 3% of base rental revenue,
excluding ancillary products.
U.S. franchisees also pay an advertising fee ranging from 2.5% to 5% of
base rental revenue to a separate advertising fund managed jointly by
franchisees and Thrifty management. Thrifty has implemented, and may implement
in the future, special short-term reductions in system and advertising fees to
encourage growth.
For 1998, Thrifty's five largest U.S. franchisees generated
administration, fleet leasing, reservation and other fees to Thrifty totaling
approximately 20% of Thrifty's total revenue.
Marketing to Prospective Franchisees. Thrifty has developed programs to
attract additional franchisees in the vehicle rental industry. Programs include
attracting independent vehicle rental companies with phased-in fees and
competitive fleet leasing terms, assisting individuals experienced in vehicle
rental operations to operate their own franchises through financial assistance,
start-up fleet supply and other support, and encouraging existing franchisees to
acquire and expand into neighboring territories by offering fleet incentives,
reduced administrative and advertising fees and lower initial franchise fees for
additional territories.
Fleet Leasing Program. Thrifty has a fleet leasing program for franchisees
that it believes provide them with a competitive and flexible source of fleet
vehicles. In 1998, fleet leasing accounted for approximately 71% of Thrifty's
total revenue. See "-- Fleet Acquisition and Management -- Fleet Leasing
Programs."
Training and Support. Thrifty's franchisees receive required initial
orientation, and ongoing training, in areas such as customer service and hiring.
In early 1997, Thrifty began implementing its "True Blue Pride Initiative" to
identify areas requiring customer service improvements and to implement new
standards to deliver faster and friendlier service. This initiative emphasizes
the role that franchisee customer service employees should have in identifying
and resolving customer complaints. New programs that have been developed as part
of the initiative include Thrifty's frequent renter program, Blue Chip, which
provides for preprinted rental contracts and expedited service.
Thrifty also publishes a comprehensive operating manual for franchisees
and provides operational support in areas such as cost control, fleet planning,
revenue management and local advertising and marketing. Thrifty also assists
franchisees on real estate matters, including site selection and airport
facility issues.
12
Worldwide Reservation Center and Other Information Systems. Thrifty's
franchisees benefit from Thrifty's continuously staffed worldwide reservation
center at its headquarters in Tulsa, Oklahoma and at its newly opened
reservation facility in Okmulgee, Oklahoma, which in 1998, collectively
processed approximately 4.2 million telephone calls and 1.8 million
reservations. All of Thrifty's reservation facilities are also linked to all of
the major U.S. airline reservation systems and through them to travel agencies
in the United States, Canada and abroad. These centers are a key means of
marketing the Thrifty system to consumers and travel agents and informing them
about the system's vehicle rental rates, products, promotions and services.
Thrifty franchisee payments for reservations made through these centers
accounted for approximately 4% of Thrifty's 1998 total revenues. Reservations
through Thrifty's Internet web site also increased in 1998.
U.S. franchisees receiving a certain volume of reservations are required
to use an approved automated counter system, usually leasing or subleasing the
related hardware and software from Thrifty or a third-party leasing agent. In
addition to providing an electronic data link with Thrifty's worldwide
reservation centers, the automated counter system prints rental agreements and
provides Thrifty and its franchisees with customer and vehicle inventory
information and financial and operating reports.
Thrifty supports its information systems through a combination of internal
resources and external technology providers. Thrifty has engaged SABRE to manage
and monitor its data center network and its daily information processing.
Reservation applications systems continue to be serviced by Perot Systems
Corporation ("Perot"). The arrangements with Perot give Thrifty access to
technical resources through the year 2000, thereby providing a greater level of
assurance that Thrifty can meet its need to maintain and improve important
applications. Other information systems are supported by Thrifty employees.
Thrifty's core information systems are either designed to, or are being
updated to, address the Year 2000 issues that might otherwise result if the
systems could not accommodate the date change at the turn of the century, as
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000." All of Thrifty's key systems are housed in a
secure underground SABRE facility in Oklahoma designed to withstand disasters.
Insurance, Supplies and National Account Programs. Thrifty makes available
to its franchisees for a fee insurance for death or injury to third parties,
property damage and damage to or theft of franchisee vehicles.
Thrifty makes bulk purchases of items used by its franchisees, which it
sells to franchisees at prices that are often lower than they could obtain on
their own. Thrifty also negotiates national account programs to allow its
franchisees to take advantage of volume discounts for many materials or services
used for operations such as tires, glass replacement, long distance telephone
service and overnight mail.
Parking Services. Airport parking operations are a natural complement to
vehicle rental operations. Thrifty encourages its franchisees that have
near-airport locations to add this ancillary business. Thrifty assists its
franchisees in obtaining additional property and in planning and implementing
parking operations. Franchisees benefit since the Thrifty service marks are
already on the premises, shuttle buses are already being operated for rental
customers and parking operations increase service levels and recognition at the
airports. Franchisees with parking operations may also offer ancillary services
such as car washes and oil changes to create additional opportunities to service
the vehicle while the traveler is away. Thrifty receives a royalty fee generally
equal to 3% of the total revenue generated from these services.
Services and Products Provided to Rental Customers. Thrifty's franchisees
provide their customers with products and services substantially similar to
those provided to customers by Dollar's company-owned stores.
International (Except Canada)
As of December 31, 1998, Thrifty master franchisees operated 580 vehicle
rental locations in 67 countries and territories outside the United States and
Canada. Regions with Thrifty franchisees include Latin America, Europe, the
Middle East and the Asia-Pacific region. Thrifty seeks to attract international
franchisees by emphasizing Thrifty's uniform image, brand marketing efforts,
worldwide reservation system and consistent vehicle rental system practices and
procedures.
13
Thrifty grants master franchises on a countrywide basis. Each master
franchisee is permitted to use directly and subfranchise others to use Thrifty's
service marks, systems and technologies within its country or territory.
COMPANY-OWNED STORES
Thrifty typically establishes company-owned stores only upon the financial
failure of a franchisee. Thrifty uses company-owned stores to preserve its
presence in key markets. As opportunities arise, these locations are
refranchised. During 1998, Thrifty reduced the number of cities in which it
operates company-owned stores from three to two in the United States by selling
a company store to a franchisee. The services and products Thrifty provides to
company-owned stores and those provided by company-owned stores to vehicle
rental customers are substantially similar to those provided to and by Thrifty's
U.S. franchisees.
THRIFTY CAR SALES
In December 1998, Thrifty Car Sales, Inc. was formed to operate its new
franchise system, "Thrifty Car Sales" which will sell primarily late model, low
mileage used vehicles. Because of the nature of the Group's business, it will
almost always have a supply of the type of vehicle inventory Thrifty Car Sales
will feature. Thrifty Car Sales may accordingly provide a cost-effective
distribution system for efficient disposal of the Group's vehicle fleet reducing
the Group's dependence on auctions. However, the Company also believes Thrifty
Car Sales can become an important source of additional revenue with very little
capital investment by the Company or Thrifty, Inc. Used vehicle retailers,
whether they acquire vehicles for sale from the Group or not, may desire to seek
a national brand identification like Thrifty.
There are now three Thrifty Car Sales franchise locations operating in
addition to a corporate operation in Tulsa. Thrifty Car Sales anticipates
opening seven additional franchise locations in the first quarter of 1999.
CANADIAN OPERATIONS
Thrifty operates in Canada through its wholly owned subsidiary, Thrifty
Canada, Ltd. ("TCL"). TCL operates company-owned stores in the four largest
airport vehicle rental markets in Canada and encourages franchisees to operate
in the remaining markets. As of December 31, 1998, the TCL system included 125
vehicle rental locations, of which 104 were operated by franchisees and 21 were
operated as company-owned stores.
Company-Owned Stores
TCL's company-owned store operations include four strategic airports:
Toronto, Montreal, Vancouver and Calgary. These operations are important to
maintaining a national airport presence in Canada, where TCL has significant
airport concession and lease commitments. Historically, TCL's operating results
have been adversely affected by losses incurred by company-owned stores.
Franchising
TCL provides services and products to its franchisees that are
substantially similar to those Thrifty provides to its U.S. franchisees,
including fleet leasing, insurance services, advertising and marketing support
and supplies. Due to the structure of the Canadian vehicle rental market, which
has a greater proportion of vehicle rental activity from on-airport locations
than off-airport locations as compared to the United States, Thrifty has sought
to strengthen its airport presence in Canada by encouraging existing and
prospective franchisees to locate on-airport. Canadian franchisees pay TCL a
combined monthly administrative and advertising fee fixed in most cases at 8% of
rental revenues.
MARKETING
Thrifty's marketing strategy is to position the Thrifty system as an
industry leader in delivering value for cost-conscious consumers. In the United
States it implements this strategy primarily through national advertising and
promotion assistance to U.S. franchisees in local advertising, promotion and
sales and strategic marketing partnerships.
14
Advertising, Promotion and Sales
Thrifty employs national advertising on U.S. broadcast and cable
television networks and in newspapers and travel industry and airline magazines.
Thrifty also sponsors sports and other events to increase national exposure and
promote local Thrifty operations. In the United States, Thrifty's national
advertising and marketing expenses are paid out of an advertising fund managed
by a national advertising committee consisting of representatives of Thrifty
franchisees and certain members of Thrifty management. U.S. franchisees and
company-owned stores contribute 5% of their base rental revenue from airport
operations and 2.5% of their base rental revenue from local operations to the
advertising fund.
U.S. franchisees and company-owned stores are also required to spend an
additional 3% of their base rental revenue on local advertising and promotion.
Thrifty has a local sales department that assists franchisees in developing
their local markets. Thrifty also provides an allowance for qualifying local
advertising, promotion and sales expenditures to U.S. franchisees that
participate in Thrifty's fleet leasing program. In the 1998 model year,
franchisees and company-owned stores earned an aggregate allowance of
approximately $7 million.
Thrifty has made filings under the intellectual property laws of
jurisdictions in which it or its licensees operate, including the U.S. Patent
and Trademark office, to protect the names, logos and designs identified with
Thrifty. These marks are important for customer awareness and selection of
Thrifty for vehicle rental.
Strategic Marketing Efforts
Thrifty's approach of targeting value-conscious consumers includes
strategic marketing partnerships, such as those it has with Montgomery Ward in
the United States, Canadian Tire in Canada and Ryder Truck Rental throughout
North America. Thrifty also has frequency-based marketing relationships with
numerous airlines and hotel chains. Since a significant portion of Thrifty's
rentals system-wide result from travel agency reservations, Thrifty maintains
its relationships with travel agency chains and consortia through preferred
supplier agreements, travel agent advertising and other efforts. Under its
preferred supplier arrangements, Thrifty provides these travel agency groups
additional commissions or lower prices in return for their featuring Thrifty in
their advertising or giving Thrifty a priority in their reservation systems. In
general, these arrangements are not exclusive to Thrifty, and many travel agency
groups have similar arrangements with other vehicle rental companies.
15
SUMMARY OPERATING DATA OF THRIFTY
Years Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
(in thousands)
Revenues:
U.S. and Canada franchisees .............. $138,809 $159,636 $200,505
U.S. and Canada company-owned stores ..... 63,522 63,946 34,408
International franchisees ................ 2,606 2,761 2,888
-------- -------- --------
Total revenues ........................... $204,937 $226,343 $237,801
======== ======== ========
As of December 31,
-----------------
1996 1997 1998
---- ---- ----
Rental Locations:
U.S. and Canada franchisee locations ..... 554 600 609
U.S. and Canada company-owned stores ..... 61 36 25
Franchisees:
U.S. and Canada .......................... 248 231 232
International ............................ 48 63 67
FLEET ACQUISITION AND MANAGEMENT
U.S. VEHICLE SUPPLY
For the 1998 model year, DaimlerChrysler vehicles represented over 87% of
Dollar's U.S. fleet and 95% of the vehicles in its fleet leasing program for
franchisees. Dollar also purchases vehicles from other automotive manufacturers,
permitting it to adjust the composition and overall cost of its fleet.
DaimlerChrysler vehicles made up 91% of the vehicles in Thrifty's fleet leasing
program. The Company expects that for the 1999 model year, DaimlerChrysler
vehicles will represent over 90% of Dollar's U.S. fleet and all of the vehicles
in its fleet leasing program, and over 90% of the vehicles in Thrifty's fleet
leasing program.
Automotive manufacturers' residual value programs limit the Group's
residual value risk. Under these programs, the manufacturer either guarantees
the aggregate depreciated value upon resale of covered vehicles of a given model
year, as is generally the case under DaimlerChrysler's program, or agrees to
repurchase vehicles at specified prices during established repurchase periods.
In either case, the manufacturer's obligation is subject to certain conditions
relating to the vehicle's age, physical condition and mileage. Vehicles
purchased by vehicle rental companies under these programs are referred to
herein as "Program Vehicles." Vehicles not purchased under these programs and
for which rental companies therefore bear residual value risk are referred to
herein as "Non-Program Vehicles." The Company believes that a majority of
vehicles owned by other U.S. vehicle rental companies are Program Vehicles.
For the 1998 model year, DaimlerChrysler Program Vehicles represented
approximately 70% of the vehicles in Dollar's and Thrifty's respective fleets
and approximately 80% and 78% of the vehicles in their respective fleet leasing
programs. DaimlerChrysler sets the terms of its residual value program before
the start of each model year. The terms include monthly depreciation rates,
minimum and maximum holding periods and mileages, model mix requirements and
vehicle condition and other return requirements. The residual value program
enables Dollar and Thrifty to limit their residual value risk with respect to
Program Vehicles because DaimlerChrysler agrees to reimburse Dollar and Thrifty
for any difference between the aggregate gross auction sale price of the Program
Vehicles for the particular model year and the vehicles' aggregate predetermined
residual value. Under the program, Dollar and Thrifty must sell the Program
Vehicles in closed auctions to DaimlerChrysler dealers. Dollar and Thrifty are
reimbursed under the program for certain transportation and auction-related
costs.
16
Dollar and Thrifty also purchase Non-Program Vehicles, when required by
manufacturers in connection with the purchase of Program Vehicles, or if they
believe there is an opportunity to lower their fleet costs or to fill model and
class niches not available through residual value programs. DaimlerChrysler,
which is the main provider of Non-Program Vehicles to Dollar and Thrifty, does
not set any terms or conditions on the resale of Non-Program Vehicles other than
required minimum holding periods. For the 1998 model year, approximately 16% of
the vehicles acquired by Dollar and Thrifty were Non-Program Vehicles. As of
December 31, 1998, the Group was subject to "residual value risk" on
approximately 24.5% of its fleet, with a book value of approximately $241
million.
The Group's operating results are materially affected by the depreciation
rates and other purchase terms provided under DaimlerChrysler's residual value
program, as well as by other purchase incentives DaimlerChrysler provides. The
percentage of vehicles acquired under DaimlerChrysler's and other manufacturers'
residual value programs in the future will depend upon a number of factors,
including the availability and cost of these programs. Residual value programs
enable Dollar and Thrifty to determine their depreciation expense on Program
Vehicles in advance. Vehicle depreciation is the largest single cost element in
the Group's operations. The percentage of the Group's vehicle rental fleets
benefiting from residual value programs could decrease if the automotive
manufacturers changed the size or terms of these programs. In that event, Dollar
and Thrifty would have increased residual value risk that could be material to
their results of operations and could adversely affect their ability to finance
their fleets. Second, because it is difficult to predict future vehicle resale
values, Dollar and Thrifty may not be able to manage effectively the residual
value risk on their Non-Program Vehicles. As recently as 1997, results for the
Group were adversely affected by lower than anticipated residual values. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year Ended December 31, 1997 Compared With Year Ended December 31,
1996." The residual value of Non-Program Vehicles depends on such factors as 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.
The Company cannot predict the level of retail sales incentives DaimlerChrysler
or the other automotive manufacturers will offer in the future. Dollar and
Thrifty have received substantial payments under residual value programs over
the past several years. See Note 5 of Notes to Consolidated Financial
Statements.
DaimlerChrysler has been the Group's principal supplier of vehicles. In
1996, DaimlerChrysler began operating under five-year vehicle supply
arrangements that were formalized in 1996 and 1997 in separate U.S. vehicle
supply agreements with Dollar and Thrifty ("VSAs"). DaimlerChrysler has agreed
to make specified volumes of DaimlerChrysler vehicles available to Dollar and
Thrifty through July 2001. Dollar and Thrifty may purchase vehicles for use by
company-owned stores or for their fleet leasing programs. Dollar and Thrifty
have agreed to promote DaimlerChrysler vehicles exclusively in their advertising
and other promotional materials. DaimlerChrysler has agreed to make various
promotional payments to Dollar and Thrifty, some of which vary based on the
volume of vehicles purchased. These payments are material to the Group's results
of operations. See Note 5 of Notes to Consolidated Financial Statements.
The VSAs provide that Dollar and Thrifty will each purchase at least 80%
of their respective vehicles from DaimlerChrysler until a certain minimum level
is reached. Also, certain minimum numbers of vehicles must be Program Vehicles.
While DaimlerChrysler has the sole discretion to set the specific terms and
conditions of its residual value program for a model year, it has agreed in the
VSAs to offer programs to Dollar and Thrifty that, taken as a whole, are
competitive with a residual value program Ford or General Motors Corporation
("General Motors") is then making generally available to domestic vehicle rental
companies.
If purchases of DaimlerChrysler vehicles by Dollar or Thrifty during any
model year exceed certain targets, DaimlerChrysler will make available to Dollar
or Thrifty additional Program Vehicles up to a maximum of 15% of the target
number of DaimlerChrysler Program Vehicles.
17
VEHICLE DISPOSITION
The Group generally holds vehicles in rental service from six months to 18
months. The length of service is determined by taking into account seasonal
rental demand and the average monthly mileage accumulation. Most vehicles must
be removed from service before they reach 30,000 miles to avoid significant
penalties under DaimlerChrysler's residual value program. As of December 31,
1998, the average age of vehicles in the Group's fleet was approximately five
months. The Group's flexibility to adjust the holding period for vehicles,
particularly for Program Vehicles, enables the Group to adjust its fleet size up
or down relatively quickly in response to changing market conditions. Less than
4% of the Group's DaimlerChrysler Program Vehicles were ineligible for return
based on repair condition during 1998. Dollar or Thrifty must bear the risk on
the resale of Program Vehicles that cannot be returned. Dollar and Thrifty
dispose of Non-Program Vehicles through auctions and directly to used car
dealers or franchisees. Dollar and Thrifty may also sell Non-Program Vehicles to
corporate operations or franchisees of Thrifty Car Sales.
Dollar and Thrifty each believe that, instead of through auction, the sale
of vehicles directly to dealers, including Thrifty Car Sales, reduces their
disposal costs and saves interest due to a quicker return time on vehicle
proceeds. Both Dollar and Thrifty use telemarketing to sell cars directly to
dealers. Separate from Thrifty Car Sales, Dollar continues to develop its own
plans for a used vehicle disposal network.
MAINTENANCE
Dollar and certain Thrifty franchisees may have automotive maintenance
centers at airports and in urban and suburban areas. Many of these facilities
are accepted by automotive manufacturers as eligible to perform and receive
reimbursement for warranty work. Collision damage and major repairs are
generally performed by independent contractors. Dollar's and Thrifty's
franchisees are responsible for the maintenance of their fleet vehicles.
FLEET LEASING PROGRAMS
Dollar and Thrifty make fleet leasing programs available to their U.S.
franchisees for each new model year. The terms of their fleet leasing programs
generally mirror the requirements of various manufacturers' residual value
programs with respect to model mix, order and delivery, vehicle maintenance and
returns, but also include Non-Program Vehicles. Dollar and Thrifty monitor the
creditworthiness and operating performance of franchisees participating in their
fleet leasing programs and periodically audit franchisees' leased fleets. Dollar
and Thrifty design their fleet leasing programs to offer their franchisees an
attractive means of obtaining fleet vehicles. For 1998, approximately 46% and
75% of the vehicles in the fleets of Dollar's and Thrifty's respective U.S.
franchisees had been provided through their fleet leasing programs. In 1998,
approximately 5% of Dollar's and 71% of Thrifty's (including Canada) total
revenue was derived from vehicle leasing programs. During 1998, a limited number
of larger franchisees acquired their vehicles directly from manufacturers.
The Group sets their lease rates after considering residual value program
depreciation rates for Program Vehicles, estimated Non-Program Vehicle
depreciation, interest costs, model mix and administrative costs. Average
monthly lease rates vary depending on vehicle model, and the average lease
period is between eight and ten months. Although Dollar and Thrifty lease
Non-Program Vehicles as well as Program Vehicles to their franchisees, their
fleet leasing programs eliminate the residual value risk for their franchisees.
Thrifty franchisees may, however, elect to assume some residual value risk on
certain Non-Program Vehicles they lease in exchange for a lower lease rate.
18
U.S. FLEET DATA
Years Ended December 31,
1996 1997 1998
------ ------ ------
Thrifty:
Average number of vehicles leased to franchisees .... 20,358 23,878 29,595
------ ------ ------
Average number of vehicles in combined fleets of
franchisees ...................................... 28,122 31,854 39,434
Average number of vehicles in combined fleets of
company-owned stores ............................. 3,862 3,470 865
------ ------ ------
Total ....................................... 31,984 35,324 40,299
====== ====== ======
Dollar:
Average number of vehicles leased to franchisees .... 7,801 6,735 6,151
------ ------ ------
Average number of vehicles in combined fleets of
franchisees ...................................... 17,132 13,523 13,513
Average number of vehicles in combined fleets of
company-owned stores ............................. 38,952 47,813 50,673
------ ------ ------
Total ....................................... 56,084 61,336 64,186
====== ====== ======
COMPETITION
There is intense competition in the vehicle rental industry on the basis
of price, service levels, vehicle quality, vehicle availability and convenience
and condition of rental locations. The Group's principal competitors have larger
market shares and rental volumes, greater financial resources and more
sophisticated information systems. Dollar operates mainly in the U.S. airport
market, although compared to its competitors it relies more heavily on
discretionary leisure, tour and business customers. Dollar's franchisees have a
similar customer profile. In any given location, Dollar may compete with
national, regional and local vehicle rental companies, many of which have
greater financial resources than the Group. Dollar's principal competitors for
discretionary business and leisure travelers are Alamo Rent-a-Car, Inc., Avis
Rent A Car, Inc., Budget Group, Inc., The Hertz Corporation, National Car Rental
System, Inc. and Thrifty. Dollar competes primarily on the basis of price and
customer service.
Thrifty's U.S. franchisees and company-owned stores generally compete for
cost-conscious consumers with Alamo, Avis, Budget, Dollar, Hertz and National.
Enterprise Rent-A-Car Company, Hertz, Avis and CarTemps USA (a division of
Republic Industries) as well as local and regional rental companies are major
competitors in the local market. They compete on the basis of price, location,
service and well-established customer relationships. Most Thrifty franchisees
and company-owned stores compete in the local market for retail general use
business rather than insurance replacement rentals.
The Canadian vehicle rental markets are also intensely competitive. The
vast majority of the Canadian market is operated either directly or through
franchisees of the major U.S. vehicle rental companies, including Budget, Avis,
Hertz and National, as well as Dollar and Thrifty.
INSURANCE
The Group is subject to third-party public liability and property damage
claims resulting from accidents involving their rental customers. For
third-party bodily injury and property damage claims arising from the use of a
vehicle in the United States, the Group retained the risk of loss ranging from
$250,000 to $2 million on a per occurrence basis (the "self-insured retention")
over the last three years. For claims in excess of the self-insured retention,
the Group maintains insurance at certain amounts in excess of their respective
self-insured retention levels and coverages.
The Group retains the risk of loss for general and garage liability
insurance coverage up to $1 million and maintains insurance at certain amounts
in excess of $1 million. They also maintain catastrophic and comprehensive
coverage for damage to vehicles owned by them up to $3 million per occurrence
with a deductible amount of $250,000. In addition, the Group carries workers'
compensation, excess liability and directors' and officers' liability insurance
coverage.
19
Provisions for public liability and property damage on self-insured claims
are made by charges to expense based upon evaluations of estimated ultimate
liabilities on reported and unreported claims. As of December 31, 1998, the
Group's reserve for liability claims was approximately $78 million. The Group's
obligations to pay these losses and indemnify the insurance carriers are
collateralized by surety bonds. As of December 31, 1998, these surety bonds
totaled approximately $85 million.
The Group also maintains various surety bonds to secure performance under
airport concession agreements and other obligations. As of December 31, 1998,
the total amount of these bonds was approximately $16 million.
REGULATION
LOSS DAMAGE WAIVERS AND SUPPLEMENTAL LIABILITY INSURANCE
Approximately 13% and 9% of the 1998 vehicle rental revenues of Dollar and
Thrifty, respectively, were generated from the sale of loss damage waivers.
These waivers relieve customers from financial responsibility for vehicle
damage. Legislation affecting the sale of loss damage waivers has been adopted
in 25 states. These laws either require disclosure to customers that loss damage
waivers may not be necessary, limit customer liability to specified amounts,
limit the ability of vehicle rental companies to offer loss damage waivers for
sale or cap the amounts that may be charged for loss damage waivers. Adoption of
national or additional state legislation limiting the sale, or capping the
rates, of loss damage waivers could further restrict sales of this product, and
additional limitations on potential customer liability could increase costs to
Dollar, Thrifty and their franchisees.
Dollar and Thrifty and other vehicle rental companies sell customers
supplemental liability insurance ("SLI"). In 1997, Dollar, Thrifty and the other
principal vehicle rental companies entered into a consent order with the Texas
Department of Insurance in which they agreed to stop selling SLI in Texas
pending licensing and product approval. In 1998, the Texas Department of
Insurance established regulations for licensing and product approval. Both
Dollar and Thrifty obtained licensing and product approval and began selling the
approved product in September 1998. A civil action was also brought in Alabama
alleging violation of state insurance laws. See "Legal Proceedings." Additional
actions in other jurisdictions could lead to restrictions on the sale of SLI,
which would result in a reduction of the Group's revenues.
FRANCHISING REGULATION
As franchisors, Dollar and Thrifty are subject to federal, state and
foreign laws regulating various aspects of franchise operations and sales. These
laws impose registration and disclosure requirements on franchisors in the offer
and sale of franchises and, in certain states, also apply substantive standards
to the relationship between the franchisor and the franchisee, including those
pertaining to default, termination and nonrenewal of franchises.
OTHER MATTERS
Certain states currently make vehicle owners (including vehicle rental
companies) vicariously liable for the actions of any person lawfully driving an
owned vehicle, regardless of fault. Some of these states, including Florida and
New York, do not limit this liability. Vehicle rental companies 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.
Dollar and Thrifty are subject to federal, state and local laws and
regulations relating to taxing and licensing of vehicles, franchise sales,
franchise relationships, vehicle liability, used vehicle sales, insurance,
telecommunications, vehicle rental transactions and labor matters. The Company
believes that Dollar and Thrifty practices and procedures are in substantial
compliance with federal, state and local laws and is not aware of any material
expenditures necessary to meet legal or regulatory requirements. Nevertheless,
considering the nature and scope of Dollar's and Thrifty's businesses, it is
possible that regulatory compliance problems could be encountered in the future.
20
ENVIRONMENTAL MATTERS
The principal environmental regulatory requirements applicable to Dollar
and Thrifty operations relate to the ownership, storage or use of petroleum
products such as gasoline, diesel fuel and new and used motor oil; the treatment
or discharge of waste waters; the operation of automotive body shops; and the
generation, storage, transportation and off-site treatment or disposal of waste
materials. Dollar and Thrifty own eleven and lease 77 locations where petroleum
products are stored in underground or above-ground tanks. For owned and leased
properties, Dollar and Thrifty have programs designed to maintain compliance
with applicable technical and operational requirements, including leak detection
testing of underground storage tanks, and to provide financial assurance for
remediation of spills or releases.
The historical and current uses of the Dollar and Thrifty facilities may
have resulted in spills or releases of various hazardous materials or wastes or
petroleum products ("Hazardous Substances") that now, or in the future, could
require remediation. The Group also may be subject to requirements related to
remediation of Hazardous Substances that have been released into the environment
at properties they own or operate, or owned or operated in the past, or at
properties to which they send, or have sent, Hazardous Substances for treatment
or disposal. Such remediation requirements generally are imposed without regard
to fault, and liability for any required environmental remediation can be
substantial.
Dollar and Thrifty may be eligible for reimbursement or payment of
remediation costs associated with releases from registered underground storage
tanks in U.S. states that have established funds to assist in the payment of
such remediation costs. Subject to certain deductibles, the availability of
funds, the compliance status of the tanks and the nature of the release, these
tank funds may be available to Dollar and Thrifty for use in remediating
releases from their tank systems.
At certain facilities, Dollar and Thrifty presently are investigating or
remediating soil or groundwater contamination. Based on currently available
information, the Company does not believe that the costs associated with
environmental investigation or remediation will be material. However, additional
contamination could be identified or occur in the future.
The use of automobiles and other vehicles is subject to various
governmental requirements designed to limit environmental damage, including that
caused by emissions and noise. Generally, these requirements are met by the
manufacturer except, on occasion, equipment failure requiring repair by the
Group.
Environmental legislation and regulations and related administrative
policies have changed rapidly in recent years. There is a risk that governmental
environmental requirements, or enforcement thereof, may become more stringent in
the future and that the Group may be subject to legal proceedings brought by
government agencies or private parties with respect to environmental matters. In
addition, with respect to cleanup of contamination, additional locations at
which wastes generated by the Group may have been released or disposed, and of
which the Group is currently unaware, may in the future become the subject of
cleanup for which the Group may be liable, in whole or part. Accordingly, while
the Group believes that it is in substantial compliance with applicable
requirements of environmental laws, there can be no assurance that the Group's
future environmental liabilities will not be material to the Group's
consolidated financial position or results of operations or cash flows.
EMPLOYEES
As of December 31, 1998, the Group employed a total of approximately 4,900
full-time and part-time employees of whom approximately 3,900 were employed by
Dollar and 1,000 by Thrifty. Approximately 90 of the Group's employees were
subject to collective bargaining agreements as of December 31, 1998. The Company
believes the Group's relationship with its employees is good.
21
ITEM 2. PROPERTIES
The Company owns its headquarters located at 5330 East 31st Street, Tulsa,
Oklahoma. This location is a three building office park that houses headquarters
and a reservation center for Dollar and Thrifty. These buildings and the related
improvements were mortgaged in December 1997 pursuant to a mortgage in favor of
Credit Suisse First Boston ("CSFB"), as administrative agent for a syndicate of
banks. The mortgage was executed in connection with the Revolving Credit
Facility, as described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
Dollar and Thrifty each own or lease real property used for company-owned
stores and office facilities, and in some cases own real property that is
subleased to franchisees or other third parties. As of December 31, 1998, the
Group's owned operations were carried on at 139 locations worldwide. Most of
these premises are leased, except for two that are owned. Dollar and Thrifty
each operate company-owned stores under concession agreements with various
governmental authorities charged with the operation of airports. Concession
agreements for airport locations, which are sometimes competitively bid, are
important for securing air traveler business.
In connection with the Revolving Credit Facility, Dollar executed
mortgages in favor of CSFB encumbering its real property located in San Diego
and Tampa. Thrifty also executed mortgages in favor of CSFB encumbering its real
property located in Phoenix, Ft. Lauderdale, Orlando, Dallas, Houston, and Salt
Lake City.
ITEM 3. LEGAL PROCEEDINGS
On November 2, 1994, the City of San Jose, California filed an action in
the Superior Court of California, against Chevron, Dollar and others, seeking
unspecified compensatory and punitive damages and injunctive relief. The City of
San Jose has not served process on Dollar. The suit relates to pollution at a
site currently occupied by Dollar and formerly occupied by Chevron. Dollar has
partially remediated the affected soil, but not the allegedly affected ground
water. Dollar believes that prior uses of the site resulted in any remaining
contamination at the site.
On October 2, 1997, a purported class action suit was filed in the Circuit
Court of Coosa County, Alabama, against Dollar, Thrifty and other car rental
companies. The plaintiffs in this suit alleged violations of state law in
connection with the sale by the car rental companies of certain insurance
products. Dollar and Thrifty have filed answers denying the alleged violations.
The case has been removed to the U.S. District Court for the Middle District of
Alabama. Plaintiffs filed an amended complaint on February 16, 1998, dropping
their fraud allegations, but adding a claim for a refund of the amounts paid for
insurance. Dollar, Thrifty and other car rental companies have filed a motion to
dismiss the conspiracy claim portion of the suit.
In addition to the foregoing, various legal actions, claims and
governmental inquiries and proceedings are pending or may be instituted or
asserted in the future against the Company and its subsidiaries. Litigation is
subject to many uncertainties, and the outcome of the individual litigated
matters is not predictable with assurance. It is possible that certain of the
actions, claims, inquiries or proceedings, including those discussed above,
could be decided unfavorably to the Company or the subsidiaries involved.
Although the amount of liability with respect to these matters cannot be
ascertained, potential liability is not expected to materially affect the
consolidated financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
22
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the trading symbol "DTG." The high and low sales prices for the
Common Stock for each quarterly period from December 17, 1997, the date the
Common Stock began trading on the NYSE, were as follows:
1997 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
High N/A N/A N/A $21-9/16
Low N/A N/A N/A $20-1/2
1998
----
High $24-1/4 $24-7/16 $16-9/16 $14-5/8
Low $18-3/8 $12 $ 9-7/8 $ 8-11/16
The 24,125,941 shares of Common Stock outstanding at March 1, 1999 were
held by 3,832 stockholders of record.
The Company intends to reinvest its earnings in its business and therefore
does not anticipate paying any cash dividends in the foreseeable future. The
Company has not paid cash dividends since completion of the Offering.
Under the terms of the Revolving Credit Facility, restrictions were
imposed by the lender on the payment of cash dividends to stockholders. During
the five-year term of such agreement, dividends are permitted at the lesser of
specified monetary levels or percentages of cash flow.
23
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data of the Group
The selected consolidated statement of operations and balance sheet data
were derived from the audited consolidated financial statements of the Group.
References to system-wide vehicle rental revenue include revenue received from
the Group company-owned stores and by franchisees from the rental of vehicles.
Years Ended December 31,(b)
--------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS
(IN THOUSANDS):
Revenues:
Vehicle rental ................................ $ 413,424 $ 372,508 $ 497,239 $ 620,045 $ 635,033
Vehicle leasing ............................... 172,999 177,836 149,713 164,701 202,371
Fees and services ............................. 58,966 49,382 47,597 49,143 51,770
Other ........................................... 8,614 9,653 9,342 9,899 9,234
----------- ----------- ----------- ---------- ----------
Total revenues .............................. 654,003 609,379 703,891 843,788 898,408
----------- ----------- ----------- ---------- ----------
Costs and expenses:
Direct vehicle and operating .................. 234,370 190,577 242,466 281,485 285,457
Vehicle depreciation, net ..................... 210,975 196,367 213,143 277,276 288,443
Selling, general and administrative ........... 143,155 123,439 140,089 149,697 161,471
Interest expense, net ......................... 83,526 78,817 72,868 87,852 88,726
Amortization of cost in excess of net
assets acquired .............................. 11,517 10,456 8,169 6,010 5,417
Intangible asset impairment losses ............ - - 157,758 - -
Restructuring charge (reversal) ............... (7,000) - - - -
Loss on sale of Snappy ........................ 40,893 - - - -
----------- ----------- ----------- ---------- ----------
Total costs and expenses .................... 717,436 599,656 834,493 802,320 829,514
----------- ----------- ----------- ---------- ----------
Income (loss) before income taxes ............... (63,433) 9,723 (130,602) 41,468 68,894
Income tax expense (benefit) .................... (12,755) 9,753 16,682 23,427 31,229
----------- ----------- ----------- ---------- ----------
Net income (loss)(a) ............................ $ (50,678) $ (30) $ (147,284) $ 18,041 $ 37,665
=========== =========== =========== ========== ==========
Basic and diluted earnings (loss)
per share (a) ................................... $ (2.53) $ 0.00 $ (7.36) $ 0.90 $ 1.56
=========== =========== =========== ========== ==========
BALANCE SHEET DATA (IN THOUSANDS):
Revenue-earning vehicles, net ................... $ 991,276 $ 958,799 $ 1,120,346 $1,319,490 $1,342,066
Total assets .................................... 1,585,651 1,657,823 1,647,951 1,942,210 1,865,300
Total debt ...................................... 1,047,065 1,128,811 1,241,558 1,418,687 1,313,799
Stockholders' equity ............................ 331,159 331,189 183,883 268,426 315,433
24
Years Ended December 31 ,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
System-Wide Data (U.S. and Canada)(c):
Vehicle rental revenue (in thousands):
Company-owned stores .............................. $ 359,951 $ 372,508 $ 495,598 $ 618,120 $ 635,033
Franchisee locations .............................. 558,049 556,492 502,402 515,880 619,552
---------- ---------- ---------- ---------- ----------
Total ......................................... $ 918,000 $ 929,000 $ 998,000 $1,134,000 $1,254,585
========== ========== ========== ========== ==========
Rental locations:
Company-owned stores .............................. 169 162 156 139 139
Franchisee locations .............................. 773 720 729 752 763
---------- ---------- ---------- ---------- ----------
Total rental locations ........................ 942 882 885 891 902
========== ========== ========== ========== ==========
Average number of vehicles
operated during the period
by company-owned stores
and franchisees ..................................... 98,974 93,989 94,992 103,417 111,652
Peak number of vehicles
operated during the period
by company-owned stores
and franchisees ..................................... 117,906 108,447 110,771 122,286 134,407
Company-Owned Stores Data
(U.S. and Canada)(c):
Average number of vehicles
operated ............................................ 40,083 36,246 45,037 53,719 53,983
Number of rental
transactions ........................................ 2,230,076 2,196,611 2,817,269 3,300,420 3,320,294
Average revenue per
transaction ........................................ $ 161 $ 170 $ 176 $ 187 $ 191
Monthly average revenue
per vehicle ......................................... $ 748 $ 856 $ 917 $ 959 $ 980
Vehicle Leasing Data (U.S. and Canada)(c):
Average number of vehicles
leased ............................................. 41,072 34,373 30,583 32,814 37,709
Average monthly lease revenue
per unit ........................................... $ 349 $ 400 $ 409 $ 420 $ 447
(a) Management believes it is important to note that net income (loss) and
earnings per share for the year ended December 31, 1996 include intangible
asset impairment losses of $157,758,000, related to DaimlerChrysler's
decision in 1996 to dispose of Thrifty as a non-core asset ($155,000,000)
and an impairment loss related to TCL ($2,758,000).
(b) Certain reclassifications have been made in the selected consolidated
financial data to conform to the classifications used in 1998.
(c) Excludes 1994 data for Snappy, which was sold in September 1994.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Group owns two vehicle rental companies, Dollar and Thrifty. They
engage in the business of renting vehicles directly to retail and tour customers
and providing vehicle leasing and other services to franchisees that rent to
customers. The majority of Dollar's revenue is derived from renting vehicles to
customers from company-owned stores, while the majority of Thrifty's revenue is
generated from leasing vehicles and providing services to franchisees.
The Group's revenues consist of:
o Vehicle rentals -- revenue generated from renting vehicles to customers,
including all related charges, through company-owned stores,
o Vehicle leasing -- revenue generated from leasing vehicles, primarily to
franchisees,
o Fees and services -- revenue generated from franchise fees and providing
reservations, insurance, supplies and other products and services
to franchisees, and
o Other -- revenue generated from franchise sales, parking income,
non-vehicle lease income and interest income derived from franchisees.
The Group's expenses consist of:
o Direct vehicle and operating -- costs related to the rental of
revenue-earning vehicles to customers and to the leasing of vehicles to
franchisees, such as leasing expenses, concessions and commissions paid
to airport authorities, commissions paid to travel agencies, insurance
and lease promotion expenses, net of certain incentives received from
vehicle manufacturers,
o Vehicle depreciation, net -- depreciation expense relating to
revenue-earning vehicles, net of gains and losses on the disposal of
such vehicles,
o Selling, general and administrative expenses, including advertising and
marketing expenses and reservations,
o Interest expense, net -- interest expense, net of interest earned on
restricted cash and working capital facility, relating primarily to
revenue-earning vehicle financing and to working capital debt, and
o Amortization of cost in excess of net assets acquired.
The Group's profitability is primarily a function of the volume and
pricing of rental transactions, utilization of the vehicles and the number of
vehicles leased to franchisees. Significant changes in the purchase price of
vehicles or interest rates can also have a significant effect on the Group's
profitability, depending on the ability of the Group to adjust pricing and lease
rates for these changes.
The Group's business requires significant expenditures for vehicles and
consequently, requires substantial liquidity to finance such expenditures.
26
RESULTS OF OPERATIONS
The following table sets forth the percentage of operating revenues
represented by certain items in the Group's consolidated statement of
operations:
Years Ended December 31, (b)
-----------------------------
1996 1997 1998
---- ---- ----
Revenues:
Vehicle rentals ...................... 70.6% 73.5% 70.7%
Vehicle leasing ...................... 21.3% 19.5% 22.5%
Fees and services .................... 6.8% 5.8% 5.8%
Other ................................ 1.3% 1.2% 1.0%
----- ----- -----
Total revenues ....................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Direct vehicle and operating ......... 34.4% 33.4% 31.8%
Vehicle depreciation, net ............ 30.3% 32.9% 32.1%
Selling, general and administrative .. 19.9% 17.7% 17.9%
Interest expense, net ................ 10.3% 10.4% 9.9%
Amortization of cost in excess
of net assets acquired ............... 1.2% 0.7% 0.6%
Intangible asset impairment losses ... 22.4% 0.0% 0.0%
----- ----- -----
Total costs and expenses ........ 118.5% 95.1% 92.3%
----- ----- -----
Income (loss) before income taxes ...... (18.5)% 4.9% 7.7%
Income tax expense (benefit) ........... 2.4% 2.8% 3.5%
----- ----- -----
Net income (loss) (a) .................. (20.9)% 2.1% 4.2%
===== ===== =====
- ----------
(a) Net loss for the year ended December 31, 1996 includes intangible
asset impairment losses related to DaimlerChrysler's decision in 1996 to
dispose of Thrifty as a non-core asset and an impairment loss related to
TCL. In 1997, the Group incurred a one-time tax charge of $4,314,000
related to its separation from DaimlerChrysler.
(b) Certain reclassifications have been made in the 1996 and 1997 consolidated
financial statements to conform to the classifications used in 1998.
The following table sets forth a breakdown of the Group's two major
sources of revenue:
Years Ended December 31, (a)
-----------------------------
1996 1997 1998
---- ---- ----
(in thousands)
Vehicle rental revenue:
Dollar .................... $436,715 $559,101 $603,331
Thrifty ................... 60,524 60,944 31,702
-------- -------- --------
Total ............... $497,239 $620,045 $635,033
======== ======== ========
Leasing revenue:
Dollar .................... $ 37,729 $ 34,452 $ 33,224
Thrifty ................... 111,969 130,249 169,147
Other ..................... 15 - -
-------- -------- --------
Total ............... $149,713 $164,701 $202,371
======== ======== ========
- ----------
(a) Certain reclassifications have been made in the 1996 and 1997 consolidated
financial statements to conform to the classifications used in 1998.
27
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenue for the year ended December 31, 1998 increased $54.6
million, or 6.5%, to $898.4 million compared to 1997. The increase in total
revenue was due to an increase in leasing revenue of 22.9% over 1997 and a 2.4%
growth in rental revenue. Fees and services revenue increased $2.6 million due
to a final payment received related to Dollar's terminated European franchise
agreement and higher franchise fees and other revenue fees from franchisees.
Vehicle rental revenue and vehicle leasing revenue were impacted by the
re-franchising of company-owned stores at Thrifty and by franchise acquisitions
at Dollar.
The Group's vehicle rental revenue for 1998 was $635 million, a 2.4%
increase from 1997. This increase was due primarily to a $44.2 million increase
for Dollar offset by a $29.2 million decline at Thrifty. The increase in vehicle
rental revenue at Dollar was the result of an increase of 6.6% in transactions
combined with a 1% increase in revenue per transaction. The rental revenue
growth at Dollar related to the acquisition of franchisees during 1998 totaled
$21.4 million, which represented 48% of Dollar's total rental revenue growth.
The decline at Thrifty was due to the re-franchising of several company-owed
stores during 1997 and early 1998.
Vehicle leasing revenue for 1998 was $202.4 million, a $37.7 million
increase from 1997. This increase in vehicle leasing revenue reflects an
increase of $38.9 million, or 29.9%, in Thrifty's leasing revenue primarily due
to a 23.9% increase in the average number of vehicles leased to franchisees
along with a 4.9% increase in the vehicle leasing rates. Dollar's leasing
revenue declined $1.2 million, or 3.6% due to a decrease in the average number
of vehicles leased to franchisees as a result of the acquisition of several
franchised locations during 1998.
EXPENSES
Total expenses increased 3.4% from $802.3 million in 1997 to $829.5
million in 1998. This increase was due primarily to a $28.1 million, or 4.8%
increase for Dollar offset by a $2.1 million, or 1% decline at Thrifty. Total
expenses as a percentage of revenue declined to 92.3% in 1998 from 95.1% in
1997.
Direct and vehicle operating expenses for 1998 increased $4 million, or
1.4%, over 1997, comprised of a $10.4 million increase at Dollar offset by a
$6.4 million decline at Thrifty. The overall increase was due to higher
personnel costs, airport concession fees and tour account incentives at Dollar
partially offset by a reduction of expenses at Thrifty as a result of the
re-franchising of several company-owned stores. These expenses were 31.8% of
revenue for 1998, compared to 33.4% of revenue for 1997. These expenses improved
as a percentage of revenue partially due to a decrease in the proportion of
total revenue generated from vehicle rentals at company-owned stores, which
carry additional costs not associated with vehicle leasing revenue. The shift in
revenue from vehicle rentals to vehicle leasing resulted primarily from
re-franchising several Thrifty company-owned stores in late 1997 and early 1998.
Net vehicle depreciation expenses increased $11.2 million or 4% for 1998
as compared to 1997, consisting of an $11.1 million increase at Dollar and a
$0.1 million increase at Thrifty. The increase was primarily due to a 5.4%
increase (6.1% at Dollar and 4.3% at Thrifty) in depreciable fleet partially
offset by a decline of 1.5% (0.4% increase at Dollar and a 4% decrease at
Thrifty) in the average depreciation rate. In 1998, the Company recorded higher
depreciation rates on Non-Program Vehicles, which were partially offset by a
$5.5 million net vehicle disposition gain on the disposal of Non-Program
Vehicles. In 1997, the disposition of Non-Program Vehicles resulted in a net
vehicle disposition loss of $11.4 million.
Selling, general and administrative expenses of $161.5 million for 1998
increased 7.9% from $149.7 million in 1997, comprised of a $9.3 million increase
at Dollar, a $0.6 million increase at Thrifty and a $1.9 million increase for
other operations. The higher costs were due to higher personnel costs related to
the development of new information technology systems, sales and marketing and
Year 2000 remediation costs. Higher expenses in 1998 were also the result of
one-time cost reductions in 1997 related to the settlement of a $1.5 million
condemnation claim and the reversal of a $1.1 million reserve related to
resolved litigation at Dollar and the elimination of a $1.9 million reserve
related to the sale of Snappy in 1994 Selling, general and administrative
expenses for the Group were 17.9% of revenue for 1998 compared to 17.7% for
1997.
28
Net interest expense increased $0.9 million, or 1% to $88.7 million
comprised primarily of a $3.6 million increase at Thrifty partially offset by a
$2.1 million decrease at Dollar. Net interest expense decreased as a percentage
of revenue from 10.4% in 1997 to 9.9% in 1998. The increase in expense for the
Group was due to the effect of higher average vehicle debt levels partially
offset by a decrease in vehicle interest rates.
The tax provision for 1998 was $31.2 million. The effective rate of 45.3%
in 1998 differs from the U.S. statutory rate due primarily to non-deductible
amortization costs in excess of net assets acquired, state and local taxes and
losses relating to Thrifty's Canadian subsidiary for which no benefit was
recorded. The effective rate for 1997 was 56.5% due primarily to non-deductible
amortization costs in excess of net assets acquired, losses relating to
Thrifty's Canadian subsidiary for which no benefit was recorded, and the
one-time tax charge of $4.3 million related to the separation from
DaimlerChrysler.
OPERATING RESULTS
The Group had income before income taxes of $68.9 million for 1998 as
compared to $41.5 million in 1997, a 66.1% increase. This growth was due to a
$15.3 million increase at Dollar and a $13.6 million increase at Thrifty. Income
before income taxes declined for other operations in 1998 due primarily to the
elimination of a $1.9 million reserve during 1997 related to the sale of Snappy
in 1994.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES
The Group's total revenues for 1997 were $843.8 million, an increase of
$139.9 million, or 19.9% compared to 1996. Dollar's revenue was $616.3 million
for 1997, an increase of $118.8 million, or 23.9%, compared to 1996. Thrifty's
total revenues were $226.3 million for 1997, an increase of $21.4 million, or
10.4%, compared to 1996.
The Group's vehicle rental revenue for 1997 was $620 million, a 24.7%, or
$122.8 million, increase from 1996. This increase was due primarily to a $122.4
million, or 28%, increase for Dollar. The increase in vehicle rental revenue for
Dollar was due primarily to a 20.2% increase in the number of transactions in
combination with a 6.1% increase in revenue per transaction due to selected
price increases. The rental revenue growth related to the conversion of several
franchised locations to company-owned stores totaled $34 million, which
represented 28% of the total rental revenue growth.
Vehicle leasing revenue for 1997 was $164.7 million, a 10% increase from
1996. This increase in vehicle leasing revenue reflects an increase of $18.3
million, or 16.3%, in Thrifty's leasing revenues due primarily to a 14.4%
increase in the average number of vehicles leased to franchisees along with a
2.4% increase in the vehicle leasing rates. Dollar's leasing revenues declined
$3.3 million, or 8.7%, due to a decrease in the average number of vehicles
leased to franchisees as a result of the conversion of several franchised
locations to company-owned stores.
EXPENSES
Total expenses were $802.3 million for 1997, compared to $834.5 million
for 1996 resulting from a $100.8 million increase at Dollar and a $132.7 million
decrease at Thrifty. The 1996 expenses at Thrifty included a $155 million
intangible asset impairment loss required as a result of DaimlerChrysler's
decision to dispose of Thrifty as a non-core asset and an intangible asset
impairment loss related to TCL of $2.8 million. Excluding these intangible asset
impairment losses, total expenses for 1996 were $676.7 million, or 96.1% of
total revenues, and total expenses for 1997 were 95.1% of total revenues.
29
Direct vehicle and operating expense for 1997 increased $39 million, or
16.1%, over 1996. Direct vehicle and operating expenses for Dollar increased
$42.6 million for 1997 offset by a $3.7 million decline at Thrifty. The higher
costs were due to an increase in the number of vehicles operated and an increase
in per unit costs, which were partially offset, by an increase in manufacturer
promotional incentives related to the acquisition of vehicles. These expenses
were 33.4% of revenue for 1997, compared to 34.4% of revenue for 1996.
Net vehicle depreciation expense increased $64.1 million, or 30.1%, for
1997 over 1996 which included a $39.5 million increase at Dollar and a $24.7
million increase at Thrifty. The increase was primarily due to a 14.7% increase
(14.2% at Dollar and 15.4% at Thrifty) in depreciable fleet and a 13.6% increase
(14.1% at Dollar and 12.3% at Thrifty) in the average depreciation rate. Higher
average depreciation expense per unit was the result of the increased cost of
vehicles and losses on disposition of Non-Program Vehicles due to the
deterioration in the used vehicle market in 1997. The disposition of Non-Program
Vehicles resulted in a net vehicle disposition loss of $11.4 million in 1997
compared to a net vehicle disposition gain of $3.5 million in 1996.
Selling, general and administrative expenses increased $9.6 million, or
6.9%, for 1997 compared to 1996. This increase was due primarily to an $8.3
million increase at Dollar and a $3.3 million increase at Thrifty. Higher
selling, general and administrative expenses arose primarily from increases in
personnel costs and increases in sales and marketing expenditures partially
offset by lower bad debt and legal expenses. Higher expenses in 1997 were also
the result of the reversal of a sales tax reserve in 1996 that was accrued prior
to 1994. Selling, general and administrative expenses were 17.7% of revenue for
1997 compared to 19.9% for 1996.
Net interest expenses increased $15 million, or 20.6% from 1996 comprised
of an $11.8 million increase at Dollar and a $3.2 million increase at Thrifty.
The increase was primarily due to the effect of increased debt levels and higher
short-term interest rates in 1997. Increased debt levels were due to financing
the growth in fleet during 1997 and the increase in vehicle costs.
Amortization of cost in excess of net assets acquired was $2.2 million
less for 1997 than 1996, primarily due to the intangible asset impairment losses
at Thrifty discussed above.
The effective tax rate for 1997 was 56.5% due primarily to non-deductible
amortization costs in excess of net assets acquired, losses in Thrifty's
Canadian subsidiary for which no benefit was recorded, and the one-time tax
charge of $4.3 million related to the separation from DaimlerChrysler. For 1996,
the Group had income tax expenses of $16.7 million even though the loss before
income taxes was $130.6 million. This unfavorable tax result was due to
non-deductible expenses related to the intangible asset losses of $157.8
million, non-deductible amortization costs in excess of net assets acquired, and
losses in Thrifty's Canadian subsidiary for which no benefit was recorded.
OPERATING RESULTS
The Group had income before income taxes of $41.5 million compared to a
loss before income taxes of $130.6 million in 1996 due to the effect on the
Group of DaimlerChrysler's decision during 1996 to dispose of Thrifty as a
non-core asset. Dollar's income before income taxes was $34.7 million, in 1997,
an increase of $16.3 million from 1996. Thrifty's income before income taxes was
$5.2 million, in 1997, as compared to $8.9 million in 1996 when excluding the
impairment losses of $157.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Group's U.S. and Canadian operations are funded by cash provided by
operating activities and its financing arrangements. The Group's primary use of
funds is for the acquisition of revenue-earning vehicles. For the year ended
December 31, 1998, the Group's expenditures for revenue-earning vehicles were
$2.1 billion ($1.3 billion at Dollar and $0.8 billion at Thrifty) which were
partially offset by $1.8 billion ($1.1 billion at Dollar and $0.7 billion at
Thrifty) in proceeds from the sale of used vehicles.
30
The Company expects the amount of cash required to purchase vehicles, net
of proceeds from the sale of used vehicles, to increase in 1999 because rental
fleets are increasing to meet anticipated rental demand. The Group expects to
meet these cash requirements with cash provided from operations and its
increased vehicle financing facilities. The Group's need for cash to finance
vehicles is highly seasonal and typically peaks in the second and third quarters
of the year when fleet levels build up to meet seasonal rental demand. Fleet
levels are lowest in the fourth quarter when rental demand is at a seasonal low.
The Group also requires cash for non-vehicle capital expenditures. These
expenditures totaled $26.5 million in 1998 ($20.1 million at Dollar, $4.1
million at Thrifty and $2.3 million for other operations), $13.7 million in 1997
($10 million at Dollar, $3.1 million at Thrifty and $0.6 million for other
operations), and are estimated to be approximately $34 million in 1999. These
expenditures are expected to be financed with cash provided from operations. The
1999 capital expenditures include approximately $10 million for reservation,
tour and other information systems. Non-vehicle capital expenditures are
expected to be financed with cash provided by operations.
ASSET BACKED NOTES
The asset backed note program is comprised of $1.2 billion in asset backed
notes with maturities ranging from 1999 to 2005. Borrowings under the asset
backed notes are secured by eligible vehicle collateral and bear interest at
fixed rates on $1.1 billion ranging from 6.25% to 6.80% and floating rates on
$127 million ranging from LIBOR plus .70% to LIBOR plus 1.25%. Proceeds from the
asset backed notes that are temporarily unutilized for financing vehicles and
certain related receivables are maintained in restricted cash and investment
accounts, which were approximately $62.3 million at December 31, 1998.
OTHER VEHICLE DEBT
Thrifty has financed its Canadian vehicle fleet under a lease agreement
with an unrelated auto leasing trust providing for CND$125 million
(approximately US$82 million) of funding, which is supported by underlying bank
financing that is required to be renewed annually. On February 18, 1999, Thrifty
established new arrangements for its Canadian vehicle financing through a
five-year fleet securitization program. Under this program, Thrifty can borrow
up to CND$150 million (approximately US$109 million) funded through a bank
commercial paper conduit. The previous facility will be phased out as the
vehicles financed thereunder are taken out of service.
COMMERCIAL PAPER PROGRAM AND LIQUIDITY FACILITY
The Company established the commercial paper program on March 4, 1998 of
up to $615 million (the "Commercial Paper Program") and concurrently,
established a 364 day, $545 million liquidity facility to support the Commercial
Paper Program (the "Liquidity Facility"). Borrowings under the Commercial Paper
Program are secured by eligible vehicle collateral and bear interest based on
market-dictated commercial paper rates. At December 31, 1998, the Group had
$80.2 million in commercial paper outstanding under the Commercial Paper
Program.
Effective March 4, 1999, the Commercial Paper Program was renewed for
another year at a maximum size of $640 million, backed by a renewal of the
Liquidity Facility totaling $575 million.
REVOLVING CREDIT FACILITY
The Company has a $215 million 5-year, senior secured, revolving credit
facility (the "Revolving Credit Facility"). The Revolving Credit Facility is
used to provide letters of credit with a sublimit of $190 million and cash for
operating activities with a sublimit of $70 million. The Group had letters of
credit outstanding of approximately $20.1 million and no working capital
borrowings at December 31, 1998.
31
DAIMLERCHRYSLER CREDIT SUPPORT
In December 1997, in connection with the Company's separation from
DaimlerChrysler and closing of the Offering, DaimlerChrysler provided $38.2
million credit support for the Group's vehicle fleet financing in the form of a
letter of credit facility. The credit support was reduced to $28.6 million (the
"Initial Support Amount") due to exercise of a second over-allotment option in
January 1998. The Initial Support Amount will decline annually, beginning
September 30, 1999, by the greater of 20% of the Initial Support Amount or 50%
of the Group's excess cash flow. The Company may need to replace reductions in
the Initial Support Amount with cash from operations or with borrowings or
letters of credit under the Revolving Credit Facility. To secure reimbursement
obligations under the DaimlerChrysler credit support agreement, DaimlerChrysler
has liens and security interests on certain assets of the Group.
DEBT SERVICING REQUIREMENTS
The Group will continue to have substantial debt and debt service
requirements under its financing arrangements. As of December 31, 1998, the
Group's total consolidated debt was approximately $1.3 billion, substantially
all of which was secured debt for the purchase of vehicles. The Group has
scheduled annual principal payments of approximately $219 million in 1999,
$265.2 million in 2000, $230 million in 2001, $170.7 million in 2002, $230
million in 2003 and $200 million thereafter.
The Group intends to use cash generated from operations for debt service
and, subject to restrictions under its debt instruments, to make capital
investments. The Company has historically repaid its debt and funded its capital
investments (aside from growth in its rental fleet) with cash provided from
operations and from the sale of vehicles. The Company has funded growth in its
vehicle fleet by incurring additional secured vehicle debt. The Group expects to
incur additional debt from time to time to the extent permitted under the terms
of its debt instruments.
The Group has significant requirements for bonds and letters of credit to
support its insurance programs and airport concession obligations. At December
31, 1998, the Group had approximately $100.3 million in bonds outstanding.
INTEREST RATE RISK
The Group's results of operations depend significantly on prevailing
levels of interest rates because of the large amount of debt it incurs to
purchase vehicles. In addition, the Group is exposed to increases in interest
rates because a portion of its debt bears interest at floating rates. The
Company estimates that, in 1999, approximately 23% of its average debt will bear
interest at floating rates. The amount of the Group's financing costs affects
the amount Dollar, Thrifty and their franchisees must charge their customers to
be profitable. See Note 8 of Notes to Consolidated Financial Statements.
INFLATION
The increased acquisition cost of vehicles is the primary inflationary
factor affecting the Group. Many of the Group's other operating expenses are
also expected to increase with inflation. Management does not expect that the
effect of inflation on the Group's overall operating costs will be greater for
the Group than for its competitors.
YEAR 2000
INTRODUCTION
The year 2000 issue ("Y2K") relates to potential problems with computer
systems or any equipment employing technology that uses dates where the date has
been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any date
recording mechanism within the computer system, including date sensitive
software, which uses only two digits to represent the year may recognize a date
using 00 as the year 1900 rather than the year 2000. If this occurs, it could
cause system failures or miscalculations resulting in disruption of operations.
32
The Group's management recognizes the importance of ensuring that its
operations and material relationships with third parties will not be negatively
affected by interruptions caused from failure to be Y2K compliant. The Group has
formed committees to address Y2K compliance of its operating entities.
STATE OF READINESS
A formalized project began in 1997, in which the Group identified
mission-critical areas of information technology ("IT") for Y2K compliance
review. Hardware, software applications and other technologies, which in the
event of a failure would have a material adverse impact on the Group's business,
financial condition, or results of operations, are considered mission-critical.
These include fleet systems, reservation systems, counter systems, revenue
management systems, and financial systems.
The Group is using a five-phase process to review each of its systems,
which includes awareness, assessment, renovation, validation, and
implementation. During the awareness phase, the Group inventories each system to
identify the components that require modification to become Y2K compliant. Once
identified, each component is assessed for its risk of failure and the impact of
potential failure to the Group's operations. During the next phase, renovation,
each system component is either modified or replaced in order to meet Y2K
requirements. Each system is then validated by installing it in a separate
testing environment that will simulate the Year 2000 and test for compliance.
Once the results of the validation phase verify that the date change does not
cause operational problems, the system is moved to the final phase of
implementation, at which time it is considered to be Y2K compliant and returned
to normal operation.
The Group has completed the awareness and assessment phases and is
currently in the renovation and validation phases of its mission-critical IT
systems. The renovation and validation phases are expected to be completed in
the second and third quarters of 1999. With regard to non-IT systems such as
phone systems, security systems, and elevator operations, the Group is currently
in the awareness and assessment phases of remediation. All mission-critical
systems that are not already Y2K compliant will be modified, upgraded or
replaced and are anticipated to be compliant no later than September 30, 1999.
During the first quarter of 1998, the Group began sending inquiries to
third parties with whom it transacts significant business requesting assurances
of Y2K compliance. The Group continues to make additional inquiries to third
parties seeking Y2K assurances as well as collecting responses, discussing
concerns, and sending follow-up inquiries requesting status of remediation
plans. Dollar and Thrifty have also been advising their independent franchisees
of the need to conduct their own Y2K assessments.
COSTS
The Group's costs to remediate Y2K issues are projected to total $6.8
million. Of this total, $3.3 million has been incurred as of December 31, 1998
and $3.5 million is expected to be incurred during 1999. Certain IT projects to
enhance systems and improve operating efficiencies are being delayed due to Y2K
compliance efforts. The Group's Y2K costs for 1998 and 1999 represent
approximately 14% and 15%, respectively, of the total annual IT budget and will
be funded through its internal cash flow.
33
RISKS
Like many organizations, the Group relies on third parties such as
telecommunication companies, airlines, vehicle manufacturers, travel agents,
credit card processors, banks, utilities, and also its independent franchisees.
The Group recognizes that failure to resolve Y2K issues could result in
disruptions in operations. In the worst case, non-compliance by the Group
regarding Y2K issues may result in significant interruptions in business flow
including failure to process rental transactions efficiently and inability to
invoice or process payments. Third party failures may result in additional
business interruptions such as airline, FAA, travel agent, and tour company
failures causing reduction of travel and tourism revenues, telecommunication
failures resulting in inability to process reservations and service clientele,
and vehicle manufacturer or vehicle delivery source failures causing shortages
of vehicles. Failure of independent franchisees to be Y2K compliant could result
in disruptions in the Dollar and Thrifty vehicle rental systems, and potentially
affect fees and vehicle leasing revenues received from these independent
parties. Accordingly, third party Y2K failures could significantly limit the
Group's revenue-earning potential and result in a material adverse effect on the
Group's business, financial condition, and results of operations.
CONTINGENCY PLANS
The Group is in the process of developing basic contingency plans to cover
all mission-critical processes that could result in a material adverse impact on
the Group's operations. The Group plans to continually refine these plans as
more information becomes available from third parties and through completion of
the validation phase of the Group's remediation plan. The Group intends to have
a formalized contingency plan in place no later than the third quarter of 1999.
Management believes that the Group is taking adequate actions to remediate
all of its mission-critical IT and its non-IT systems. Nevertheless, since it is
impossible to anticipate all future outcomes, especially when third parties are
involved, there can be no assurance that the Group will not experience
disruptions in operations that could materially and adversely affect the Group's
business, results of operations, and financial condition.
NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company will adopt Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use and requires
that entities capitalize certain internal-use software costs once certain
criteria are met. The Company is currently evaluating SOP 98-1, but does not
expect its adoption will have a material impact on its consolidated financial
statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and be measured at fair value. SFAS No. 133 is effective for the
Company beginning January 1, 2000. The Company plans to adopt the standard when
required.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Group's market sensitive
financial instruments and constitutes a "forward-looking statement." The Group's
primary market risk exposure is changing interest rates, primarily in the United
States. The Group's policy is to manage interest rates through use of a
combination of fixed and floating rate debt. A portion of the Group's borrowings
are denominated in Canadian dollars which exposes the Group to market risk
associated with exchange rate fluctuations. The Group has entered into no
hedging or derivative transactions. All items described are non-trading and are
stated in U.S. Dollars.
Fair Value
Expected Maturity Dates December 31,
(U.S. dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total 1998
- ---------------------------------- ------ ------ ------ ------ ------ ---------- --------- -----------
Debt
Vehicle obligations and other -
floating rates $170,006 $ - $ - $ 4,000 $ 22,269 $ 11,135 $ 207,410 $ 206,981
Weighted Average interest rates 6.34% - % - % 6.95% 6.65% 6.75%
Vehicle obligations and other -
fixed rates $ 2,282 $265,215 $226,120 $170,699 $207,400 $188,865 $1,060,581 $1,059,912
Weighted Average interest rates 8.50% 6.41% 6.48% 6.45% 6.50% 6.50%
Vehicle obligations and other -
Canadian dollar denominated $ 46,906 $ - $ - $ - $ - $ - $ 46,906 $ 46,906
Weighted Average interest rates 5.88% - % - % - % - % - %
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Dollar Thrifty Automotive Group, Inc.:
We have audited the accompanying consolidated balance sheet of Dollar Thrifty
Automotive Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Dollar Thrifty
Automotive Group, Inc. and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
February 4, 1999, except for
Note 17 as to which the date
is March 4, 1999
36
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
(In Thousands Except Share and Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
ASSETS
Cash and cash equivalents $ 49,505 $ 56,074
Restricted cash and investments 62,255 137,980
Accounts and notes receivable, net 115,423 149,701
Prepaid expenses and other assets 42,186 34,127
Revenue-earning vehicles, net 1,342,066 1,319,490
Property and equipment, net 70,897 62,042
Deferred income taxes 8,554 6,428
Intangible assets, net 174,414 176,368
---------- ----------
$1,865,300 $1,942,210
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 60,862 $ 88,923
Accrued liabilities 88,426 78,249
Income taxes payable 9,161 12,238
Public liability and property damage 77,619 75,687
Debt and other obligations 1,313,799 1,418,687
---------- ----------
Total liabilities 1,549,867 1,673,784
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Authorized 10,000,000 shares; none outstanding - -
Common stock, $.01 par value:
Authorized 50,000,000 shares; issued and outstanding 24,125,055
and 23,625,000, respectively 241 236
Additional capital 705,399 695,716
Accumulated deficit (389,050) (426,715)
Foreign currency translation adjustment (1,157) (811)
---------- ----------
315,433 268,426
---------- ----------
$1,865,300 $1,942,210
========== ==========
See notes to consolidated financial statements.
37
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In Thousands Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
REVENUES:
Vehicle rentals $635,033 $620,045 $ 497,239
Vehicle leasing 202,371 164,701 149,713
Fees and services 51,770 49,143 47,597
Other 9,234 9,899 9,342
-------- -------- ---------
Total revenues 898,408 843,788 703,891
-------- -------- ---------
COSTS AND EXPENSES:
Direct vehicle and operating 285,457 281,485 242,466
Vehicle depreciation, net 288,443 277,276 213,143
Selling, general and administrative 161,471 149,697 140,089
Interest expense, net of interest income of $6,834, $4,341,
and $5,446 88,726 87,852 72,868
Amortization of cost in excess of net assets acquired 5,417 6,010 8,169
Intangible asset impairment losses - - 157,758
-------- -------- ---------
Total costs and expenses 829,514 802,320 834,493
-------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 68,894 41,468 (130,602)
INCOME TAX EXPENSE 31,229 23,427 16,682
-------- -------- ---------
NET INCOME (LOSS) $ 37,665 $ 18,041 $(147,284)
======== ======== =========
Basic and diluted earnings (loss) per share $ 1.56 $ 0.90 $ (7.36)
======== ======== =========
See notes to consolidated financial statements.
38
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In Thousands Except Share and Per Share Data)
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Foreign
$.01 Par Value Currency Total
--------------------- Additional Accumulated Translation Stockholders'
Shares Amount Capital Deficit Adjustment Equity
BALANCE, JANUARY 1, 1996 20,000,000 $200 $628,916 $(297,472) $ (455) $331,189
Comprehensive income (loss):
Net loss - - - (147,284) - (147,284)
Foreign currency translation - - - - (22) (22)
---------- ---- -------- --------- ------- --------
Total comprehensive income (loss) - - - (147,284) (22) (147,306)
---------- ---- -------- --------- ------- --------
BALANCE, DECEMBER 31, 1996 20,000,000 200 628,916 (444,756) (477) 183,883
Issuance of common shares in
public offering 3,625,000 36 66,800 - - 66,836
Comprehensive income:
Net income - - - 18,041 - 18,041
Foreign currency translation - - - - (334) (334)
---------- ---- -------- --------- ------- --------
Total comprehensive income - - - 18,041 (334) 17,707
---------- ---- -------- --------- ------- --------
BALANCE, DECEMBER 31, 1997 23,625,000 236 695,716 (426,715) (811) 268,426
Issuance of common shares in
public offering 498,105 5 9,643 - - 9,648
Issuance of common stock for
director compensation 1,950 - 40 - - 40
Comprehensive income:
Net income - - - 37,665 - 37,665
Foreign currency translation - - - - (346) (346)
---------- ---- -------- --------- ------- --------
Total comprehensive income - - - 37,665 (346) 37,319
---------- ---- -------- --------- ------- --------
BALANCE, DECEMBER 31, 1998 24,125,055 $241 $705,399 $(389,050) $(1,157) $315,433
========== ==== ======== ========= ======= ========
See notes to consolidated financial statements.
39
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 37,665 $ 18,041 $ (147,284)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 305,024 275,432 225,521
Amortization 11,991 7,448 10,394
Net losses (gains) from disposition of revenue-earning vehicles (5,538) 11,431 (3,484)
Impairment losses 1,305 - 157,758
Provision for losses on accounts and notes receivable 6,891 2,942 8,404
Change in assets and liabilities, net of acquisitions:
Accounts and notes receivable 26,654 (59,199) 13,266
Prepaid expenses, intangibles and other assets (9,199) (6,361) 1,715
Deferred income taxes (2,126) 9,251 8,626
Accounts payable, accrued liabilities and income taxes payable (20,882) 26,862 23,135
Public liability and property damage 1,932 12,452 3,886
Other 58 (334) (26)
----------- ----------- -----------
Net cash provided by operating activities 353,775 297,965 301,911
CASH FLOWS FROM INVESTING ACTIVITIES:
Revenue-earning vehicles:
Purchases (2,093,581) (1,847,957) (1,615,615)
Proceeds from sales 1,782,562 1,371,496 1,241,879
Restricted cash and investments, net 75,725 (34,047) 35,240
Property and equipment:
Purchases (21,899) (13,334) (13,378)
Proceeds from sales 691 2,656 -
Acquisition of businesses, net of cash acquired (4,617) (397) (4,425)
----------- ----------- -----------
Net cash used in investing activities (261,119) (521,583) (356,299)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt and other obligations:
Proceeds 1,603,678 2,206,482 1,174,200
Payments (1,708,819) (2,029,353) (1,061,453)
Cash management/working capital - Chrysler, net - 38,267 (58,507)
Issuance of common shares in public offering 9,648 66,836 -
Vehicle financing issue costs (3,732) (5,965) (657)
----------- ----------- -----------
Net cash provided by (used in) financing activities (99,225) 276,267 53,583
----------- ----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS (6,569) 52,649 (805)
CASH AND CASH EQUIVALENTS:
Beginning of year 56,074 3,425 4,230
----------- ----------- -----------
End of year $ 49,505 $ 56,074 $ 3,425
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes to taxing authorities $ 30,112 $ 3,235 $ 2,348
=========== =========== ===========
Interest $ 98,514 $ 95,253 $ 82,180
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING ACTIVITIES:
Reversal of valuation allowance on pre-acquisition net operating loss carryforwards $ - $ 22,400 $ -
=========== =========== ===========
Issuance of common stock for director compensation $ 40 $ - $ -
=========== =========== ===========
See notes to consolidated financial statements.
40
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Dollar Thrifty Automotive Group, Inc. ("Dollar Thrifty Group" or the
"Company") is the successor to Pentastar Transportation Group, Inc. and
subsidiaries. Prior to December 23, 1997, the Company was a wholly owned
subsidiary of Chrysler Corporation, now known as DaimlerChrysler
Corporation ("DaimlerChrysler"). On December 23, 1997, the Company
completed an initial public offering of all its outstanding common stock
owned by DaimlerChrysler together with additional shares issued by the
Company (Note 9).
The Company's significant wholly owned subsidiaries include Dollar Rent A
Car Systems, Inc. ("Dollar"), Thrifty, Inc., Rental Car Finance Corp.
("RCFC") and Dollar Thrifty Funding Corp. ("DTFC"). Thrifty, Inc. is the
parent company to Thrifty Rent-A-Car System, Inc. and Thrifty Car Sales,
Inc. (individually and collectively referred to as "Thrifty"). Dollar and
Thrifty were acquired in 1990 and 1989, respectively. The acquisitions
were accounted for using the purchase method of accounting and the
purchase prices were allocated to the assets acquired and liabilities
assumed based on their estimated fair values, which are reflected in the
accompanying consolidated financial statements. RCFC and DTFC are special
purpose financing entities for the Dollar Thrifty Group, which were formed
in 1995 and 1998, respectively. The term the "Company" is used to refer to
Dollar Thrifty Group and subsidiaries, collectively, and to the individual
subsidiaries of Dollar Thrifty Group. Intercompany accounts and
transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Dollar and Thrifty are engaged in the business of the
daily rental of vehicles to business and leisure customers through
company-owned stores and in the business of leasing vehicles to their
franchisees for use in the daily vehicle rental business throughout the
United States and Canada. Dollar and Thrifty are also involved in selling
vehicle rental franchises worldwide and providing sales and marketing,
reservations, data processing systems, insurance and other services to
their franchisees. RCFC and DTFC provide financing services to Dollar and
Thrifty.
Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand
and on deposit, including highly liquid investments with initial
maturities of three months or less.
Restricted Cash and Investments - Restricted cash and investments are
restricted for the acquisition of vehicles and other specified uses under
the rental car asset backed note indenture and other agreements (Note 8).
These funds are primarily held in a highly rated money market fund with
investments primarily in government and corporate obligations with a
dollar-weighted average maturity not to exceed 60 days, as permitted by
the indenture. Restricted cash and investments are excluded from cash and
cash equivalents. Interest earned on restricted cash and investments was
$4,706,000, $2,382,000 and $4,526,000 for 1998, 1997 and 1996,
respectively.
Allowance for Doubtful Accounts - An allowance for doubtful accounts is
generally established during the period in which receivables are recorded.
The allowance is maintained at a level deemed appropriate based on loss
experience and other factors affecting collectibility.
41
Revenue-Earning Vehicles - Revenue-earning vehicles are stated at cost net
of related discounts and are depreciated over their estimated economic
lives, or at rates corresponding to manufacturers' guaranteed residual
values, where applicable. Depreciation rates range from approximately 0.9%
to 2.5% per month. Net gains and losses from sales of revenue-earning
vehicles are recorded as an adjustment to vehicle depreciation.
Property and Equipment - Property and equipment are recorded at cost and
are depreciated or amortized using principally the straight-line basis
over the estimated useful lives of the related assets. Estimated useful
lives range from ten to 31 years for buildings and improvements and three
to seven years for furniture and equipment. Leasehold improvements are
amortized over the shorter of ten years or the lives of the related
leases.
Intangible Assets - Intangible assets are amortized using the
straight-line basis. Cost in excess of net assets acquired is amortized
over forty- and thirty-year periods. Other intangible assets are amortized
over periods ranging from five to ten years. The Company continually
assesses the recoverability of the cost in excess of net assets acquired
based on its estimates of the expected future cash flows of the operations
to which such amounts relate.
Long-Lived Assets - The Company reviews the value of long-lived assets and
certain identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable based upon estimated future cash flows.
Accounts Payable - Disbursements in excess of bank balances of $42,393,000
and $71,765,000 are included in accounts payable at December 31, 1998 and
1997, respectively.
Public Liability and Property Damage - Provisions for public liability and
property damage on self-insured claims are made by charges primarily to
direct vehicle and operating expense. Accruals for such charges are based
upon actuarially determined evaluations of estimated ultimate liabilities
on reported and unreported claims, prepared on at least an annual basis by
an independent actuary. Historical data related to the amount and timing
of payments for self-insured claims are utilized in preparing the
actuarial evaluations. The accrual for public liability and property
damage claims is discounted based upon the independently prepared,
actuarially determined estimated timing of payments to be made in the
future. Management reviews the actual timing of payments as compared with
the annual actuarial estimate of timing of payments and has determined
that there have been no material differences in the timing of payments for
each of the three years in the period ended December 31, 1998.
Foreign Currency Translation - Foreign assets and liabilities are
translated using the exchange rate in effect at the balance sheet date,
and results of operations are translated using an average rate for the
period. Translation adjustments are accumulated and reported as a
component of stockholders' equity and comprehensive income (loss).
Comprehensive Income - In 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement requires presentation of
comprehensive income (net income plus all other changes in net assets from
non-owner sources). The Company's comprehensive income (loss) consists of
net income (loss) and foreign currency translation adjustments and is
presented in the Consolidated Statement of Stockholders' Equity. The
adoption of SFAS No. 130 had no impact on total stockholders' equity.
Revenue Recognition - The Company rents revenue-earning vehicles under
short-term rental contracts. Revenues are recognized as earned under the
terms of the rental contracts. The Company also leases revenue-earning
vehicles to franchisees primarily under operating leases. Revenues are
recognized as earned over the lease term.
Initial franchise fees are recognized at the date of sale of the
franchise, which coincides with commencement of operations by the
franchisee. Continuing franchise fees are reported as revenue as the fees
are earned.
42
Advertising Costs - Advertising costs are primarily expensed as incurred.
The Company incurred advertising expense of $35,863,000, $37,000,000 and
$34,958,000 for 1998, 1997 and 1996, respectively.
Thrifty's primary advertising is conducted by an unconsolidated affiliated
entity, Thrifty Rent-A-Car System, Inc. National Advertising Committee
("Thrifty National Ad"). Thrifty made payments of $3,073,000, $4,222,000
and $4,163,000 in 1998, 1997 and 1996, respectively, to Thrifty National
Ad to support funding of advertising campaigns, which are included in
advertising costs. Thrifty also received reimbursement from Thrifty
National Ad for administrative services performed of $1,790,000,
$1,741,000 and $1,530,000 during 1998, 1997 and 1996, respectively, which
are recorded as offsets to selling, general and administrative expense.
Environmental Costs - The Company's operations include the storage of
gasoline in underground storage tanks at certain company-owned stores.
Liabilities incurred in connection with the remediation of accidental fuel
discharges are recorded when it is probable that obligations have been
incurred and the amounts can be reasonably estimated.
Income Taxes - Prior to December 23, 1997, the Company's U.S. operations
were included in the consolidated U.S. income tax returns of
DaimlerChrysler. U.S. operating results subsequent to that date are
included in the Company's U.S. consolidated returns. The Company has
provided for income taxes on its separate taxable income or loss and other
tax attributes. Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. A valuation allowance is recorded for
deferred income tax assets when management determines it is more likely
than not that such assets will not be realized.
Earnings Per Share - Basic earnings (loss) per share ("EPS") is computed
by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted EPS is based on the combined
weighted average number of common shares and common share equivalents
outstanding which include, where appropriate, the assumed exercise of
options. In computing diluted EPS, the Company has utilized the treasury
stock method.
Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation cost for stock options, if any, is measured as
the excess of the quoted market price of the Company's stock at the date
of grant over the amount an employee must pay to acquire the stock.
Compensation cost for shares issued under performance share plans is
recorded based upon the current market value of the Company's stock at the
end of each period. The Company has adopted the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation."
New Accounting Standards - Effective January 1, 1999, the Company will
adopt Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on accounting for the costs of computer software
developed or obtained for internal use and requires that entities
capitalize certain internal-use software costs once certain criteria are
met. The Company is currently evaluating SOP 98-1, but does not expect its
adoption will have a material impact on its consolidated financial
statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that all derivatives
be recognized as either assets or liabilities in the statement of
financial position and be measured at fair value. SFAS No. 133 is
effective for the Company beginning January 1, 2000. The Company plans to
adopt the standard when required.
Reclassifications - Certain reclassifications have been made in the 1997
and 1996 consolidated financial statements to conform to the
classification used in 1998.
43
3. ACQUISITIONS
During 1998, Dollar acquired certain assets and assumed certain
liabilities of its former San Diego and Phoenix franchisees. Total cash
paid for these two acquisitions was $4,617,000, net of cash acquired. In
November 1996, Dollar acquired certain assets and assumed certain
liabilities of Trynd, Inc. and AHL, Inc., its former Denver and Dallas
franchisees. Dollar paid $4,425,000 in cash, net of cash acquired, and
assumed net liabilities of $218,000. These transactions have been
accounted for using the purchase method of accounting and operating
results of the acquirees from the dates of acquisition, which are not
material to the respective years of acquisition, are included in the
consolidated statement of operations of the Company. At December 31, 1998,
cost in excess of net assets of Dollar franchisees acquired of $19,695,000
is being amortized on the straight-line basis over thirty years.
4. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
December 31,
--------------------------------
1998 1997
(In Thousands)
Trade:
Accounts receivable $ 75,943 $ 90,960
Notes receivable 8,684 10,890
Due from DaimlerChrysler 45,706 60,596
-------- ------
130,333 162,446
Less allowance for doubtful accounts (14,910) (12,745)
-------- --------
$115,423 $149,701
======== ========
Trade accounts and notes receivable include primarily amounts due from
franchisees and tour operators arising from billings under standard credit
terms for services provided in the normal course of business and amounts
due from the sale of revenue earning vehicles. Included in trade accounts
receivable at December 31, 1998 is approximately $903,000 due from a tour
operator, which is owned by a director of the Company. During 1998, the
Company received tour rental revenues of approximately $10,700,000 from
this entity. Notes receivable are generally issued to certain franchisees
at current market interest rates with varying maturities and are generally
guaranteed by franchisees.
Due from DaimlerChrysler is comprised primarily of amounts due under
various incentive and promotion programs and amounts due from the sale of
revenue-earning vehicles. In 1997 and 1996, the Company recorded net
interest income of $1,873,000 and $1,165,000, respectively, on working
capital amounts due from DaimlerChrysler.
44
5. REVENUE-EARNING VEHICLES
Revenue-earning vehicles consist of the following:
December 31,
---------------------------------
1998 1997
(In Thousands)
Revenue-earning vehicles $1,477,506 $1,469,581
Less accumulated depreciation (135,440) (150,091)
---------- ----------
$1,342,066 $1,319,490
========== ==========
Dollar and Thrifty entered into U.S. Vehicle Supply Agreements ("VSAs")
with DaimlerChrysler, which commenced with the 1997 model year and expire
in July 2001. Under the VSAs, DaimlerChrysler has agreed to supply certain
specified volumes of vehicles, which are comprised of approximately 80%
guaranteed depreciation program vehicles ("Program Vehicles"). Dollar and
Thrifty are required to purchase at least 80% of their vehicles from
DaimlerChrysler, up to specified volumes of which minimum amounts must be
Program Vehicles. Under the terms of the VSAs, Dollar and Thrifty have
agreed to advertise and promote DaimlerChrysler products exclusively, and
will receive promotional payments from DaimlerChrysler for each model
year. Purchases of revenue-earning vehicles from DaimlerChrysler and
Chrysler Canada Ltd. were $2,021,105,000, $1,799,915,000 and
$1,612,122,000 during 1998, 1997 and 1996, respectively.
Rent expense for vehicles leased from other vehicle manufacturers under
operating leases with terms of less than one year was $14,972,000,
$15,188,000 and $16,687,000 for 1998, 1997 and 1996, respectively.
Vehicle acquisition terms provide for guaranteed residual values in the
U.S. or buybacks in Canada of the majority of vehicles, under specified
conditions. Guaranteed residual and buyback payments received are included
in proceeds from sales of revenue-earning vehicles. Additionally, the
company receives promotional payments and other incentives primarily
related to the disposal of revenue-earning vehicles, which amounts are
reflected as offsets to direct vehicle and operating expense. Promotional
payments are primarily amortized on the straight-line basis over the
respective model year to which the promotional payments relate. Amounts
received from DaimlerChrysler for guaranteed residual value program
payments, promotional payments and other incentives totaled $328,301,000,
$260,976,000 and $204,117,000 in 1998, 1997 and 1996, respectively.
Buyback payments received from Chrysler Canada Ltd. were $67,330,000,
$78,385,000 and $79,039,000 in 1998, 1997 and 1996, respectively.
6. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
December 31,
-----------------------
1998 1997
(In Thousands)
Land $ 14,275 $ 14,307
Buildings and improvements 14,380 12,201
Furniture and equipment 42,809 34,945
Leasehold improvements 36,743 32,211
Construction in progress 11,546 8,450
-------- --------
119,753 102,114
Less accumulated depreciation and amortization (48,856) (40,072)
-------- --------
$ 70,897 $ 62,042
======== ========
45
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
--------------------------
1998 1997
(In Thousands)
Cost in excess of net assets acquired $ 246,526 $ 241,778
Other 30,008 30,522
--------- ---------
276,534 272,300
Less accumulated amortization (102,120) (95,932)
--------- ---------
$ 174,414 $ 176,368
========= =========
In 1996, DaimlerChrysler committed to a plan of disposal for Thrifty and
the Company recognized a $155 million intangible asset impairment loss to
reduce Thrifty's carrying value to estimated fair value less cost to sell.
Management's estimate of the fair value of Thrifty was based principally
on analysis of non-binding bids. In connection with the successful
completion of the offering of the Company's common stock in December 1997,
management abandoned the plan to dispose of Thrifty.
As a result of continuing operating losses incurred by Thrifty Canada,
Ltd. ("TCL"), a wholly owned subsidiary, during 1996, management assessed
the carrying value of intangible assets related to TCL and recorded an
intangible asset impairment loss of $2,758,000 (pre- and after-tax). The
intangible asset impairment loss was based on the estimated recoverable
value of TCL utilizing historical cash flows as the basis for estimating
discounted future cash flows of that operation.
In connection with the Company's separation from DaimlerChrysler in
December 1997, the Company realized certain pre-acquisition net operating
loss carryforwards for which valuation allowances had previously been
established. The realization of these net operating loss carryforwards
resulted in a reduction of cost in excess of net assets acquired and
income tax valuation allowances of $22,400,000.
8. DEBT AND OTHER OBLIGATIONS
Debt and other obligations consist of the following:
December 31,
----------------------------
1998 1997
(In Thousands)
Vehicle Debt and Obligations:
Asset backed notes, net of discount $1,182,998 $1,369,077
Commercial paper, net of discount 79,786 -
Deferred vehicle rent 46,906 43,654
Other vehicle debt 3,884 5,519
---------- ----------
1,313,574 1,418,250
Other Notes Payable 225 437
---------- ----------
Total debt and other obligations $1,313,799 $1,418,687
========== ==========
46
Vehicle Debt and Obligations
Asset Backed Notes are comprised of rental car asset backed notes issued
by RCFC in December 1997 (the "1997 Series notes") and December 1995 (the
"1995 Series notes") and variable funding notes issued in 1996.
The 1997 Series notes total $900,000,000 and are comprised of $866,596,000
(with a discount of $631,000 at December 31, 1998) of fixed rate notes,
with rates ranging from 6.25% to 6.8% and $33,404,000 of floating rate
notes with interest at rates ranging from LIBOR plus .95% to LIBOR plus
1.05% (6.61% to 6.71% at December 31, 1998 and 7.06% to 7.16% at December
31, 1997).
The 1995 Series notes total $283,667,000 (1998) and $450,000,000 (1997)
and are comprised of $190,000,000 (with a discount of $38,000 and $57,000
at December 31, 1998 and 1997, respectively) of 6.6% fixed rate notes and
$93,667,000 (1998) and $260,000,000 (1997) of floating rate notes, with
interest at rates ranging from LIBOR plus .70% to LIBOR plus 1.25% (6.36%
to 6.91% at December 31, 1998 and 6.81% to 7.36% at December 31, 1997).
The assets of RCFC, including revenue-earning vehicles related to the
asset backed notes, restricted cash and investments, and certain
receivables related to revenue-earning vehicles, are available first to
satisfy the claims of its creditors. At December 31, 1998 and 1997,
letters of credit totaling $28,560,000 and $38,200,000, respectively,
issued on behalf of DaimlerChrysler, also serve as collateral for the
asset backed notes. These letters of credit will continue to decline over
the next five years. DaimlerChrysler has liens on and collateral interest
in certain assets of the Company. Dollar and Thrifty lease vehicles from
RCFC under the terms of a master lease and servicing agreement. The asset
backed note indentures also provide for additional credit enhancement
through overcollateralization of the vehicle fleet or other letters of
credit and maintenance of a liquidity reserve. RCFC is in compliance with
the terms of the indentures.
The asset backed notes mature from 1999 through 2005 and are generally
subject to repurchase on any payment date subject to a prepayment penalty.
Commercial Paper represents borrowings under a $615,000,000 Commercial
Paper Program as a part of the existing asset backed note program.
Proceeds are used for financing of vehicle purchases and for periodic
refinancing of asset backed notes. Concurrently with the establishment of
the Commercial Paper Program, the Company also entered into a 364-day,
$545,000,000 Liquidity Facility to support the Commercial Paper Program.
The Liquidity Facility provides the Commercial Paper Program with an
alternative source of funding if the Company is unable to refinance
maturing commercial paper by issuing new commercial paper. At December 31,
1998, the total commercial paper outstanding of $80,215,000 (with a
discount of $429,000) bears interest at rates ranging from 5.2% to 5.9%
and matures within 45 days.
Deferred Vehicle Rent represents TCL financing under a Master Concurrent
Lease Agreement (the "Lease Agreement") with an unrelated auto leasing
trust ("Leasing Trust") for the TCL vehicle fleet. Under the Lease
Agreement, Leasing Trust prepays 91% of the total lease rent due to TCL at
the inception of the leases. This prepaid rent is reflected as deferred
vehicle rent. The Lease Agreement has a four-year term and allows for
replacement of vehicles under lease. Monthly and other periodic refunds of
rent to Leasing Trust are required on certain leased vehicles. Upon
disposition of vehicles, the deferred vehicle rent is refundable to
Leasing Trust. TCL's beneficial interest in the vehicles leased to Leasing
Trust and any amounts due to TCL directly related to the vehicles,
including payments from franchisees and vehicle disposition programs, are
vested in the Lease Agreement.
47
This transaction included the creation of a special purpose,
not-for-profit Canadian trust ("Thrifty Trust") which concurrently leases
the vehicles from TCL for a four-year term and simultaneously leases such
vehicles to the TCL franchisees and company-operated stores. The term of
the Lease Agreement is concurrent with the term of the lease between TCL
and Thrifty Trust. Due to the nature of the relationship between TCL and
Thrifty Trust, the consolidated financial statements include the accounts
of Thrifty Trust and all material intercompany accounts and transactions
have been eliminated.
Leasing Trust has committed to funding of approximately CDN$125,000,000
(approximately US$81,688,000 at December 31, 1998) under the Lease
Agreement and TCL pays a fee of 0.1% on the unused portion of this
commitment. The Lease Agreement also provides a CDN$11,000,000
(approximately US$7,200,000 at December 31, 1998) revolving line of credit
to fund vehicle acquisitions. No amounts were outstanding under this line
at December 31, 1998 and CDN$1,500,000 (approximately US$1,049,000) was
outstanding at December 31, 1997. The four-year funding commitment from
Leasing Trust is supported by underlying bank financing that is required
to be renewed by Leasing Trust annually. The deferred vehicle rent and
revolving line of credit amounts bear interest based on the bankers'
acceptance rate plus .78% and .88%, at December 31, 1998 and 1997,
respectively, or the Canadian prime rate plus .125%. The weighted average
interest rate on deferred vehicle rent at December 31, 1998 and 1997 was
5.9% and 4.9%, respectively.
The Lease Agreement requires the maintenance of certain letters of credit
and contains various restrictive covenants, including a limitation on the
percentage of vehicles which are not covered by manufacturer repurchase
programs, and the maintenance by TCL of a specified minimum tangible net
worth.
Other Vehicle Debt at December 31, 1998 includes $3,760,000 of borrowings
collateralized by shuttle buses financed. The net weighted average
interest rate at December 31, 1998 and 1997 was 8.5%. In December 1998,
the Company established a $2,000,000 vehicle line of credit facility with
interest at LIBOR plus 2% (7.7% at December 31, 1998) payable monthly
through November 30, 2000. At December 31, 1998, $124,000 was outstanding
under this new line.
During 1997 and 1996, while the Company was a subsidiary of
DaimlerChrysler, total interest expense on all DaimlerChrysler vehicle and
other debt, net of interest subvention, was $55,425,000 and $46,332,000,
respectively.
Expected repayments of vehicle debt and obligations outstanding at
December 31, 1998 are as follows:
1999 2000 2001 2002 2003 Thereafter
(In Thousands)
Asset backed notes $ 89,667 $264,181 $229,819 $170,386 $229,614 $200,000
Commercial paper 80,215 - - - - -
Deferred vehicle
rent 46,906 - - - - -
Other vehicle debt 2,290 991 253 295 55 -
-------- -------- -------- -------- -------- --------
Total $219,078 $265,172 $230,072 $170,681 $229,669 $200,000
======== ======== ======== ======== ======== ========
48
Other Notes Payable
In December 1997, the Company established a five-year, $215,000,000 Senior
Secured Revolving Credit Facility (the "Revolver"). The Revolver provides
sub-limits up to $190,000,000 for letters of credit and up to $70,000,000
for working capital borrowings. At December 31, 1998, the Company is
required to pay a 0.375% commitment fee on the unused available line, a 2%
letter of credit fee on the aggregate amount of outstanding letters of
credit and a 0.125% letter of credit issuance fee. Interest rates on loans
under the Revolver are, at the option of the Company, based on the prime,
Federal funds or Eurodollar rates and are payable quarterly. The Revolver
is secured by a first priority lien on substantially all material
non-vehicle assets of the Company. The Revolver contains various
restrictive covenants, including maintenance of certain financial ratios
consisting of minimum net worth, adjusted EBITDA, fixed charge, leverage
and interest coverage ratios and the restriction of cash dividends. The
Company had letters of credit of $20,059,000 and no working capital
borrowings outstanding under the Revolver at December 31, 1998.
Maturities of other notes payable at December 31, 1998 are as follows:
$116,000 (1999), $43,000 (2000),$48,000 (2001) and $18,000 (2002).
9. STOCKHOLDERS' EQUITY
The Company completed an initial public offering of its common stock on
December 23, 1997. The Company issued and sold 3,625,000 shares of its
common stock (2,500,000 "primary shares" and 1,125,000 "over allotment
shares") and DaimlerChrysler sold all of the 20,000,000 outstanding shares
of the Company's common stock that it owned ("secondary shares"). On
January 15, 1998, 498,105 additional over allotment shares were issued by
the Company. The common stock was sold at an initial price of $20.50 per
share. The Company received net proceeds of $66,836,000 and $9,648,000,
respectively, from the issuance of the shares. The proceeds received by
the Company from the offering were used to provide collateral for
financing of revenue-earning vehicles and for other general corporate
purposes.
On July 23, 1998, the Company adopted a stockholders' rights plan. The
rights were issued on August 3, 1998, to stockholders of record on that
date, and will expire on August 3, 2008, unless earlier redeemed,
exchanged or amended by the Board of Directors.
The plan provides for the issuance of one right for each outstanding share
of the Company's common stock. Upon the acquisition by a person or group
of 15% or more of the Company's outstanding common stock, the rights
generally will become exercisable and allow the stockholder, other than
the acquiring person or group, to acquire common stock at a discounted
price. An exception was made for an institutional investor whose holdings
exceeded 15% at the adoption date.
The plan also includes an exchange option after the rights become
exercisable. The Board of Directors may effect an exchange of part or all
of the rights, other than rights that have become void, for shares of the
Company's common stock for each right. The Board of Directors may redeem
all rights for $.01 per right, generally at any time prior to the rights
becoming exercisable.
The issuance of the rights has no dilutive effect on the number of common
shares outstanding and does not affect earnings per share.
49
10. EARNINGS PER SHARE
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted EPS is shown below:
1998 1997 1996
(In Thousands, Except Share and Per Share Data)
Net Income (Loss) $ 37,665 $ 18,041 $ (147,284)
Basic EPS:
Weighted average common shares 24,105,837 20,089,384 20,000,000
Basic EPS $ 1.56 $ 0.90 $ (7.36)
=========== =========== ===========
Diluted EPS:
Weighted average common shares 24,105,837 20,089,384 20,000,000
Shares contingently issuable:
Stock options 43,569 - -
Performance awards 37,350 - -
Director compensation shared deferred 3,197 - -
----------- ----------- -----------
Shares applicable to diluted 24,189,953 20,089,384 20,000,000
----------- ----------- -----------
Diluted EPS $ 1.56 $ 0.90 $ (7.36)
=========== =========== ===========
Options to purchase 1,155,000 shares of common stock were outstanding at
December 31, 1998 but were not included in the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the common shares.
11. EMPLOYEE BENEFIT PLANS
Employee Benefit Plans
The Company sponsors a retirement savings plan that incorporates the
salary reduction provisions of Section 401(k) of the Internal Revenue Code
and covers substantially all employees of the Company meeting specific age
and length of service requirements. The Company contributes 50% up to 5%
of the employee's contribution for a maximum matching contribution by the
Company of 2-1/2% of the employee's base salary. Contributions by the
Company amounted to $1,037,000, $938,000 and $793,000 in 1998, 1997 and
1996, respectively.
The Company has profit sharing plans for all full-time employees not
covered by a company performance bonus plan. Expense related to these
plans was $2,762,000 and $2,455,000 in 1998 and 1997, respectively.
Deferred Compensation and Retirement Plans
The Company has deferred compensation and retirement plans providing key
executives with the opportunity to defer compensation, including related
investment income. Under the deferred compensation plan, the Company
contributes up to 7% of participant cash compensation. Participants become
fully vested under both plans after five years of service. The total of
participant deferrals in the deferred compensation and retirement plans,
which are reflected in accrued liabilities, is $4,335,000 as of December
31, 1998. Contributions to these plans totaled $2,086,000, $273,000 and
$292,000 in 1998, 1997 and 1996, respectively.
50
Long-Term Incentive Plan
The Company has a long-term incentive plan ("LTIP") for employees and
non-employee directors which provides for grants in the form of
nonqualified stock options, incentive stock options, stock appreciation
rights, restricted stock, performance share awards and other stock-based
incentive awards. Ten percent of the Company's initial common stock
outstanding was authorized for issuance under the LTIP (2,412,798 shares),
with an evergreen provision that allows for the number of shares reserved
to increase proportionately when shares outstanding are increased.
The Board of Directors, upon the recommendation of the Human Resources and
Compensation Committee, is authorized to award stock options. The exercise
prices for nonqualified stock options are equal to the fair market value
of the Company's common stock at the date of grant, except for the initial
grant which was made at the initial public offering price. The options
vest in three equal annual installments commencing on the first
anniversary of the grant date and have a term not exceeding ten years from
the date of grant.
Performance share awards are granted to Company officers and certain key
employees, including the executive officers. Such awards established a
target number of shares that may be earned in three equal annual
installments commencing on the first anniversary of the grant date. The
number of performance shares ultimately earned is expected to range from
zero to 200% of the target award, depending on the level of corporate
performance each year against annual profit targets and stock price
appreciation targets. Any performance share installments not earned as of
a given anniversary date are forfeited. Performance shares earned are
delivered on the third anniversary of the initial grant, provided the
grantee is then employed by the Company. Values of the performance shares
earned will be recognized as compensation expense over the vesting period
of the grants. At December 31, 1998, the Company had 130,404 performance
shares outstanding under the Plan with a three-year vesting period. These
shares would become vested under certain circumstances, including a change
of control. The Company recognized $481,000 of compensation cost in 1998
for performance share awards.
During 1998, the Company granted a total of 1,677,000 stock options at a
weighted-average exercise price of $17.60. Forfeited stock options totaled
34,000 shares in 1998 with a weighted-average price of $19.68. At December
31, 1998, 1,643,000 stock options are outstanding at a weighted-average
price of $17.56. There were no awards under the LTIP made before 1998.
Accounting for Stock-Based Compensation
As stated in Note 2, the Company has elected to follow the intrinsic value
approach prescribed in APB Opinion No. 25 in accounting for its employee
stock plans. The Company has adopted the disclosure-only provisions of
SFAS No. 123. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at the grant date as
prescribed by SFAS No. 123, net income for 1998 would have been reduced
from the amount as reported of $37,665,000 to the pro forma amount of
$34,377,000. Earnings per share as reported of $1.56 would have been
reduced to the pro forma amount of $1.42.
The pro forma amounts noted reflect the portion of the estimated fair
value of awards earned in 1998 based on the vesting period of the options.
No awards were granted prior to December 31, 1997.
The Black-Scholes option valuation model was used to estimate the fair
value of the options at the date of grant for purposes of the pro forma
amounts noted, with the following assumptions for 1998: weighted-average
expected life of the awards of five years, volatility factor of 37.5%,
risk-free interest rate of 4.74% and no payment of dividends. Based on
this model, the weighted-average fair value of options granted during the
year was $7.10 per share.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock volatility. Because the Company's employee stock options
have characteristics significantly different from those traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of the employee stock options.
51
The following table summarizes information regarding fixed stock options
that were outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Weighted-Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Life Exercise Exercisable Exercise
Prices (In Thousands) (In Years) Price (In Thousands) Price
$10.50 - $14.325 488 9.72 $10.59 12 $14.325
$20.50 1,155 9.00 20.50 384 20.50
----- ---- ------ --- -------
$10.50 - $20.50 1,643 9.22 $17.56 396 $ 20.31
===== ==== ====== === =======
Under certain circumstances, including a change of control of the Company,
the options outstanding would be exercisable immediately.
12. INCOME TAXES
Income tax expense consists of the following:
Year Ended December 31,
-----------------------------------
1998 1997 1996
(In Thousands)
Current:
Federal $28,879 $13,259 $ 6,075
State and local 4,126 504 1,691
Foreign 350 413 290
------- ------- -------
33,355 14,176 8,056
Deferred:
Federal (1,860) 8,653 8,890
State and local (266) 598 (264)
------- ------- -------
(2,126) 9,251 8,626
------- ------- -------
$31,229 $23,427 $16,682
======= ======= =======
Foreign losses before income taxes were approximately $1,727,000,
$2,368,000 and $8,813,000, in 1998, 1997 and 1996, respectively
Intercompany tax settlements for tax periods prior to December 23, 1997
resulted in payments from (to) DaimlerChrysler of ($6,320,000), $(676,000)
and $5,409,000, in 1998, 1997 and 1996, respectively.
52
Deferred tax assets (liability) consist of the following:
December 31,
--------------------
1998 1997
(In Thousands)
Depreciation $(49,524) $(49,346)
Public liability and property damage 30,152 29,306
Allowance for doubtful accounts and notes receivable 5,617 4,042
Other accrued liabilities 12,940 14,289
Federal and state NOL credits and carryforwards 5,328 5,832
Canadian NOL carryforwards 5,108 5,539
Other 4,041 2,305
-------- --------
13,662 11,967
Valuation allowance (5,108) (5,539)
-------- --------
$ 8,554 $ 6,428
======== ========
The Company has net operating loss carryforwards available in certain
states to offset future state taxable income. At December 31, 1998, TCL
has net operating loss carryforwards of approximately $11,520,000
available to offset future taxable income in Canada, which expire through
2002. Valuation allowances have been established for the total estimated
future tax effect of the Canadian net operating losses. In connection with
the Company's separation from DaimlerChrysler in December 1997, the
Company realized $22,400,000 of pre-acquisition net operating loss
carryforwards, eliminated the related valuation allowance and recorded a
reduction of cost in excess of net assets acquired. No other valuation
allowances have been recorded against deferred tax assets.
The Company's effective tax rate differs from the maximum U.S. statutory
income tax rate. The following summary reconciles taxes at the maximum
U.S. statutory rate with recorded taxes:
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
(Amounts in Thousands)
Tax expense (benefit)
computed at the maximum
U.S. statutory rate $24,113 35.0 % $14,514 35.0 % $(45,711) (35.0)%
Difference resulting from:
Amortization of cost in excess
of net assets acquired 1,774 2.6 2,103 5.1 2,324 1.8
State and local taxes, net of
Federal income tax benefit 3,860 5.6 979 2.3 1,355 1.0
Valuation allowance for
foreign losses 604 0.9 828 2.0 1,974 1.5
Foreign taxes 350 0.5 413 1.0 290 0.2
Chrysler separation
adjustments - - 4,314 10.4 - -
Nondeductible impairment
loss - - - - 55,474 42.5
Other 528 0.7 276 0.7 976 0.7
------- ---- ------- ---- -------- ----
$31,229 45.3 % $23,427 56.5 % $ 16,682 12.7 %
======= ==== ======= ==== ======== ====
The tax provision in 1997 includes a $4,314,000 one-time charge related to
the separation of the Company from DaimlerChrysler.
53
13. COMMITMENTS AND CONTINGENCIES
Concessions and Operating Leases
The Company has certain concession agreements with airports and hotels
throughout the United States and Canada. Typically, these agreements
provide airport terminal counter or hotel space in return for a minimum
rent. In many cases, the Company's subsidiaries are also obligated to pay
insurance and maintenance costs and additional rents generally based on
revenues earned at the location. Certain of the airport locations are
operated by franchisees who are obligated to make the required rent and
concession fee payments under the terms of their franchise arrangements
with the Company's subsidiaries.
The Company's subsidiaries operate from various leased premises under
operating leases with terms up to 15 years. Some of the leases contain
renewal options.
Expenses incurred under operating leases and concessions were as follows:
Year Ended December 31,
-------------------------------
1998 1997 1996
(In Thousands)
Rent $14,694 $15,174 $14,509
Concession expenses:
Minimum fees 20,832 22,447 19,463
Contingent fees 27,784 23,754 17,088
------- ------- ------
Total $63,310 $61,375 $51,060
======= ======= =======
Rent expense is presented in the above table net of sublease rental income
of $2,836,000, $2,333,000 and $2,457,000 in 1998, 1997 and 1996,
respectively.
Future minimum rentals and fees under noncancelable operating leases, net
of sublease rental income of $5,550,000 and the Company's obligation for
minimum airport concession fees at December 31, 1998 are presented in the
following table. Concession fees-franchisee locations are required to be
paid by franchisees under terms of their franchise agreements.
Concession Fees
----------------------
Company-
Owned Franchisee Operating
Stores Locations Leases Total
(In Thousands)
1999 $ 24,820 $ 1,378 $ 15,318 $ 41,516
2000 22,228 1,747 12,730 36,705
2001 18,696 1,468 10,084 30,248
2002 16,810 1,005 8,441 26,256
2003 10,701 946 6,920 18,567
Thereafter 34,321 20,978 22,095 77,394
-------- -------- -------- --------
$127,576 $ 27,522 $ 75,588 $230,686
======== ======== ======== ========
The Company has an outstanding bid for an additional airport concession
agreement, which upon execution would result in an additional commitment
totaling $33,127,000 from 1999 through 2023.
54
In 1997, the Company entered into a data processing services agreement.
The agreement requires monthly payments totaling $4,201,000 (1999),
$4,308,000 (2000), $4,420,000 (2001), $4,535,000 (2002) and $564,000
(2003).
Public Liability and Property Damage
The Company is self-insured or has policy deductibles to certain limits
with respect to liabilities for claims arising as a result of personal
injury, property damage and employee health claims. The accrual for public
liability and property damage includes amounts for incurred losses and
incurred but not reported losses. Such liabilities are necessarily based
on actuarially determined estimates and management believes that the
amounts accrued are adequate. At December 31, 1998 and 1997, these amounts
have been discounted at 4.6% and 6%, respectively, (assumed risk free
rate), based upon the actuarially determined estimated timing of payments
to be made in future years. Discounting resulted in reducing the accrual
for public liability and property damage by $6,862,000 and $8,222,000 at
December 31, 1998 and 1997, respectively. Estimated payments of public
liability and property damage as of December 31, 1998 are as follows (in
thousands):
1999 $40,701
2000 19,202
2001 11,087
2002 6,445
2003 3,441
Thereafter 3,605
-------
Aggregate undiscounted public liability and property damage 84,481
Effect of discounting (6,862)
-------
$77,619
=======
Contingencies
Various claims and legal proceedings have been asserted or instituted
against the Company, including some purporting to be class actions, and
some which demand large monetary damages or other relief which could
result in significant expenditures. Litigation is subject to many
uncertainties, and the outcome of individual matters is not predictable
with assurance. The Company is also subject to potential liability related
to environmental matters. The Company establishes reserves for litigation
and environmental matters when the loss is probable and reasonably
estimable. It is reasonably possible that the final resolution of some of
these matters may require the Company to make expenditures, in excess of
established reserves, over an extended period of time and in a range of
amounts that cannot be reasonably estimated. The term "reasonably
possible" is used herein to mean that the chance of a future transaction
or event occurring is more than remote but less than likely. Although the
final resolution of any such matters could have a material effect on the
Company's consolidated operating results for the particular reporting
period in which an adjustment of the estimated liability is recorded, the
Company believes that any resulting liability should not materially affect
its consolidated financial position.
In 1995, a judgment was entered against Dollar and its parent for
$8,705,000 plus attorney's fees and interest, relating to certain
litigation with franchisees, which judgment was reversed by the U.S. Court
of Appeals for the Ninth Circuit on November 28, 1997. In January 1998,
the plaintiff's motion for reconsideration was denied. Plaintiffs filed a
petition for writ of certiorari in the U.S. Supreme Court seeking review
of a single claim dismissed by summary judgment before trial, which was
denied. Plaintiffs did not seek review of any of the claims which
supported the original judgment. Accordingly, in 1997, the Company
reversed certain established reserves in the consolidated financial
statements related to this litigation.
55
Other
Liabilities include $2,661,000 and $3,552,000 at December 31, 1998 and
1997, respectively, for the estimated remaining obligations associated
with General Rent-A-Car, a former wholly owned subsidiary of
DaimlerChrysler that was merged with Dollar on January 1, 1993. The
reduction in these liabilities included the resolution of certain
outstanding matters, which resulted in a $5,000,000 reduction in selling,
general and administrative expenses in 1996.
At December 31, 1998 and 1997, the Company had other outstanding letter of
credit and guarantee obligations totaling $1,958,000 and $1,352,000,
respectively.
14. BUSINESS SEGMENTS
The Company has two reportable segments: Dollar and Thrifty. These
reportable segments are strategic business units that offer different
products and services. They are managed separately based on the
fundamental differences in their operations. Dollar operates company-owned
stores located at major airports and derives the majority of its revenues
by providing rental vehicles and services directly to rental customers.
Thrifty operates primarily through franchisees serving both the airport
and local markets, and it derives the majority of its revenues from
franchising fees and services including vehicle leasing.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
segment performance based on profit and loss from operations before income
taxes.
Information by industry segment is set forth below:
Year Ended
December 31, 1998 Dollar Thrifty Other Consolidated
(In Thousands)
Revenues from external customers $ 659,719 $237,800 $ 889 $ 898,408
Interest expense, net (a) 54,767 33,195 764 88,726
Depreciation and amortization 196,973 112,785 1,719 311,477
Income before income taxes 50,055 18,839 - 68,894
Segment assets $1,137,405 $628,409 $ 99,486 $1,865,300
Expenditures for segment assets $1,299,346 $813,849 $ 2,285 $2,115,480
Year Ended
December 31, 1997 Dollar Thrifty Other Consolidated
(In Thousands)
Revenues from external customers $ 616,281 $226,346 $ 1,161 $ 843,788
Interest expense, net (a) 56,902 29,619 1,331 87,852
Depreciation and amortization 182,004 110,948 1,359 294,311
Income before income taxes 34,721 5,246 1,501 41,468
Segment assets $1,107,583 $600,864 $233,763 $1,942,210
Expenditures for segment assets $1,092,008 $768,635 $ 648 $1,861,291
56
Year Ended
December 31, 1996 Dollar Thrifty Other Consolidated
(In Thousands)
Revenues from external customers $ 497,467 $204,937 $ 1,487 $ 703,891
Interest expense, net(a) 45,129 26,449 1,290 72,868
Depreciation and amortization 141,517 89,070 1,844 232,431
Income (loss) before income taxes(b) 18,432 8,921 (197) 27,156
Segment assets $ 956,226 $637,190 $ 54,535 $1,647,951
Expenditures for segment assets $ 962,991 $666,002 $ - $1,628,993
(a) Management primarily relies on net interest, not the gross interest
revenue and expense amounts, in assessing segment performance.
(b) Income before income taxes for the year ended December 31, 1996
excludes an intangible asset impairment loss of $157,758,000 related
to DaimlerChrysler's decision to dispose of Thrifty as a non-core
asset and an impairment loss related to TCL.
Included in the consolidated financial statements are the following
amounts relating to geographic locations:
Years Ended December 31,
------------------------------------
1998 1997 1996
(In Thousands)
Revenues:
United States $856,772 $801,088 $662,197
Other foreign countries 41,636 42,700 41,694
-------- -------- --------
$898,408 $843,788 $703,891
======== ======== ========
Long-lived assets:
United States $243,854 $237,237 $265,738
Other foreign countries 1,457 1,173 1,271
-------- -------- --------
$245,311 $238,410 $267,009
======== ======== ========
Revenues are attributed to geographic regions based on the location of the
transaction. Long-lived assets include property and equipment and
intangible assets.
15. CONCENTRATION OF CREDIT RISK AND FAIR VALUE INFORMATION
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of restricted cash and
investments and trade receivables. The Company limits its exposure on
restricted cash and investments by investing in highly rated funds.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different businesses and
geographic areas.
57
The following estimated fair values of financial instruments have been
determined by the Company using available market information and valuation
methodologies.
CASH AND CASH EQUIVALENTS, ACCOUNTS AND NOTES RECEIVABLE, ACCOUNTS
PAYABLE, ACCRUED LIABILITIES AND PUBLIC LIABILITY AND PROPERTY DAMAGE -
The carrying amounts of these items are a reasonable estimate of their
fair value.
DEBT AND OTHER OBLIGATIONS - The carrying amounts of debt and other
obligations are a reasonable estimate of their fair value based on
interest rates and other terms currently available to the Company.
LETTER OF CREDIT AND GUARANTEED OBLIGATIONS - The estimated fair value of
these items is $196,000 and $135,000 at December 31, 1998 and 1997,
respectively.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the quarterly operating results during 1998 and 1997 follows:
Basic and
Diluted
Income (Loss) Earnings
Operating Before Net Income (Loss)
Revenues Income Income Taxes (Loss) Per Share
(In Thousands Except Per Share Amounts)
1998
First quarter $191,332 $ 22,913 $ 2,917 $ 822 $ 0.03
Second quarter 227,177 41,132 17,114 9,213 0.38
Third quarter 274,701 69,305 42,020 24,151 1.00
Fourth quarter 205,198 29,687 6,843 3,479 0.14
-------- -------- -------- -------- -------
Total year $898,408 $163,037 $ 68,894 $ 37,665 $ 1.56
======== ======== ======== ======== =======
1997
First quarter $177,101 $ 18,351 $ (957) $ (1,319) $ (0.07)
Second quarter 212,883 40,698 17,029 9,168 0.45
Third quarter 262,418 55,772 28,486 16,371 0.82
Fourth quarter 191,386 20,509 (3,090) (6,179) (0.30)
-------- -------- -------- -------- -------
Total year $843,788 $135,330 $ 41,468 $ 18,041 $ 0.90
======== ======== ======== ======== =======
Operating income in the table above represents pre-tax income (loss)
before interest and amortization of costs in excess of net assets
acquired.
The tax provision in the fourth quarter of 1997 includes a $4,314,000
one-time income tax charge related to the Company's separation from
DaimlerChrysler.
17. SUBSEQUENT EVENTS
On February 8, 1999, the Company entered into a five-year
telecommunications contract which requires annual payments of $5,100,000
through 2004 for a total commitment of $25,500,000. This agreement
replaces previous separate Dollar and Thrifty telecommunication contracts.
58
On February 18, 1999, Thrifty completed a five-year CDN$150,000,000
(approximately US$109,000,000) program to finance its Canadian fleet. The
new financing also provides an additional CDN$15,000,000 (approximately
US$9,800,000) revolving line of credit to fund vehicle acquisitions. Under
this new program, amounts advanced for the purchase of vehicles are funded
through the issuance of asset backed commercial paper by a conduit
financing source. The existing Canadian fleet financing will be phased out
as the vehicles financed thereunder are taken out of service.
On March 4, 1999, the Commercial Paper Program was renewed for another
year at a maximum size of $640,000,000 backed by a renewal of the
Liquidity Facility totaling $575,000,000.
******
59
SCHEDULE II
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------
BALANCE AT ADDITIONS BALANCE AT
Beginning Charged to End of
of Year Income Deductions Year
(In Thousands)
1998
Allowance for doubtful accounts $12,745 $ 6,891 $ (4,726) $14,910
======= ======= ======== =======
Public liability and property damage $75,687 $44,528 $(42,596) $77,619
======= ======= ======== =======
1997
Allowance for doubtful accounts $16,622 $ 2,942 $ (6,819) $12,745
======= ======= ======== =======
Public liability and property damage $63,235 $51,708 $(39,256) $75,687
======= ======= ======== =======
1996
Allowance for doubtful accounts $19,340 $ 8,404 $(11,122) $16,622
======= ======= ======== =======
Public liability and property damage $59,349 $36,650 $(32,764) $63,235
======= ======= ======== =======
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements on matters related
to accounting or financial disclosure during the fiscal years ended December 31,
1998 and 1997.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information appearing under the captions
"Biographical Information Regarding Director Nominees and Named Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement which will be filed pursuant to Regulation
14A promulgated by the SEC not later than 120 days after the end of the
Company's fiscal year ended December 31, 1998, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information appearing under the captions
"Meetings, Committees and Compensation of the Board of Directors -
Compensation," "Meetings, Committees and Compensation of the Board of Directors
- - Certain Understandings," and "Executive Compensation" in the Company's
definitive Proxy Statement which will be filed pursuant to Regulation 14A
promulgated by the SEC not later than 120 days after the end of the Company's
fiscal year ended December 31, 1998, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information appearing under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's
definitive Proxy Statement which will be filed pursuant to Regulation 14A
promulgated by the SEC not later than 120 days after the end of the Company's
fiscal year ended December 31, 1998, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information appearing under "Certain
Relationships and Related Transactions" in the Company's definitive Proxy
Statement which will be filed pursuant to Regulation 14A promulgated by the SEC
not later than 120 days after the end of the Company's fiscal year ended
December 31, 1998, and is incorporated herein by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report
(1) All Financial Statements. The response to this portion of Item
14 is submitted as a separate section herein under Part II, Item
8 - Financial Statements and Supplementary Data.
(2) Financial Statement Schedules. Schedule II - Valuation and
Qualifying Accounts - Years Ended December 31, 1998, 1997 and
1996 is set forth under Part II - Item 8 - Financial Statements
and Supplementary Data. All other schedules are omitted because
they are not applicable or the information is shown in the
financial statements or notes thereto.
(3) Index of Exhibits
61
Exhibit No. Description
1.1 Form of U.S. Underwriting Agreement, filed as the same
numbered exhibit with the Company's Registration
Statement on Form S-1, as amended, Registration No.
333-39661, which became effective December 16, 1997***
1.2 Form of Subscription Agreement, filed as the same
numbered exhibit with the Company's Registration
Statement on Form S-1, as amended, Registration No.
333-39661, which became effective December 16, 1997***
3.1 Certificate of Incorporation of the Company, filed as the
same numbered exhibit with the Company's Registration
Statement on Form S-1, as amended, Registration No.
333-39661, which became effective December 16, 1997*
3.2 By-Laws of the Company, as amended, which became
effective September 24, 1998, filed as the same numbered
exhibit with the Company's Form 10-Q for the quarterly
period ended September 30, 1998, filed November 16, 1998*
4.1 Form of Certificate of Common Stock, filed as the same
numbered exhibit with the Company's Registration
Statement on Form S-1, as amended, Registration No.
333-39661, which became effective December 16, 1997*
4.2 Base Indenture dated as of December 13, 1995 between
Thrifty Car Rental Finance Corporation and Bankers Trust
Company, filed as the same numbered exhibit with the
Company's Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
4.3 Series 1995-1 Supplement to Base Indenture dated as of
December 13, 1995 between Thrifty Car Rental Finance
Corporation and Bankers Trust Company, filed as the same
numbered exhibit with the Company's Registration
Statement on Form S-1, as amended, Registration No.
333-39661, which became effective December 16, 1997*
4.4 Master Motor Vehicle Lease and Servicing Agreement dated
as of December 13, 1995 between Thrifty Car Rental
Finance Corporation and Thrifty, filed as the same
numbered exhibit with the Company's Registration
Statement on Form S-1, as amended, Registration No.
333-39661, which became effective December 16, 1997*
4.5 Master Collateral Agency Agreement dated as of December
13, 1995 between Thrifty Car Rental Finance Corporation
and Bankers Trust Company, filed as the same numbered
exhibit with the Company's Registration Statement on Form
S-1, as amended, Registration No. 333-39661, which became
effective December 16, 1997*
4.6 Form of Revolving Credit Agreement among the Company,
Dollar, Thrifty and the Institutions named therein, filed
as the same numbered exhibit with the Company's
Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
62
4.7 Form of Series 1997-1 Supplement to Base Indenture
between Rental Car Finance Corp. and Bankers Trust
Company, filed as the same numbered exhibit with the
Company's Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
4.8 Form of Master Motor Vehicle Lease and Servicing
Agreement among the Company, Dollar, Thrifty and Rental
Car Finance Corp., filed as the same numbered exhibit
with the Company's Registration Statement on Form S-1, as
amended, Registration No. 333-39661, which became
effective December 16, 1997*
4.9 Commitment Letter dated November 19, 1997, among Credit
Suisse First Boston, The Chase Manhattan Bank, Chase
Securities Inc., Dollar, Thrifty and the Company
regarding a $230,000,000 Revolving Credit Facility and a
$545,000,000 Commercial Paper Liquidity Facility and
related Term Sheet, filed as the same numbered exhibit
with the Company's Registration Statement on Form S-1, as
amended, Registration No. 333-39661, which became
effective December 16, 1997*
4.10 Amended and Restated Master Collateral Agency Agreement
dated as of December 23, 1997 among the Company, Rental
Car Finance Corp., Thrifty, Dollar and Bankers Trust
Company, filed as the same numbered exhibit with the
Company's Form 8-K, filed March 16, 1998*
4.11 Chrysler Support Letter of Credit and Reimbursement
Agreement dated as of December 23, 1997 among
DaimlerChrysler, Dollar, Thrifty, the Company, TRAC Team,
Inc. and DTAG Services, Inc., filed as the same numbered
exhibit with the Company's Form 8-K, filed March 16,
1998*
4.12 Series 1998-1 Supplement to Base Indenture dated as of
March 4, 1998 between Rental Car Finance Corp. and
Bankers Trust Company, filed as the same numbered exhibit
with the Company's Form 8-K, filed March 16, 1998*
4.13 Master Motor Vehicle Lease and Servicing Agreement dated
as of March 4, 1998 among the Company, Dollar, Thrifty
and Rental Car Finance Corp., filed as the same numbered
exhibit with the Company's Form 8-K, filed March 16,
1998*
4.14 Note Purchase Agreement dated as of March 4, 1998 among
Rental Car Finance Corp., Dollar Thrifty Funding Corp.
and Credit Suisse First Boston, filed as the same
numbered exhibit with the Company's Form 8-K, filed March
16, 1998*
4.15 Liquidity Agreement dated as of March 4, 1998 among
Dollar Thrifty Funding Corp., Certain Financial
Institutions and Credit Suisse First Boston, filed as the
same numbered exhibit with the Company's Form 8-K, filed
March 16, 1998*
4.16 Depositary Agreement dated as of March 4, 1998 between
Dollar Thrifty Funding Corp. and Bankers Trust Company,
filed as the same numbered exhibit with the Company's
Form 8-K, filed March 16, 1998*
4.17 Collateral Agreement dated as of March 4, 1998 among
Dollar Thrifty Funding Corp., Credit Suisse First Boston
Corporation and Bankers Trust Company, filed as the same
numbered exhibit with the Company's Form 8-K, filed March
16, 1998*
63
4.18 Dealer Agreement dated as of March 4, 1998 among Dollar
Thrifty Funding Corp., the Company, Credit Suisse First
Boston Corporation and Chase Securities, Inc., filed
as the same numbered exhibit with the Company's Form 8-K,
filed March 16, 1998*
4.19 Rights Agreement (including a Form of Certificate of
Designation of Series A Junior Participating Preferred
Stock as Exhibit A thereto, a Form of Right Certificate
as Exhibit B thereto and a Summary of Rights to Purchase
Preferred Stock as Exhibit C thereto) dated as of July
23, 1998 between the Company and Harris Trust and Savings
Bank, as Rights Agent, filed as the same numbered exhibit
with the Company's Form 8-K, filed July 24, 1998*
5 Opinion of Debevoise & Plimpton regarding legality of the
Common Stock, filed as the same numbered exhibit with the
Company's Registration Statement on Form S-1, as amended,
Registration No.333-39661,which became effective December
16, 1997***
10.1 Vehicle Supply Agreement between DaimlerChrysler and
Dollar, filed as the same numbered exhibit with the
Company's Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
10.2 Amended and Restated Vehicle Supply Agreement between
DaimlerChrysler and Thrifty, filed as the same numbered
exhibit with the Company's Registration Statement on Form
S-1, as amended, Registration No. 333-39661, which became
effective December 16, 1997*
10.3 Employment Continuation Agreement between the Company and
Joseph E. Cappy dated September 29, 1998, filed as the
same numbered exhibit with the Company's Form 10-Q for
the quarterly period ended September 30, 1998, filed
November 16, 1998*
10.4 Employment Continuation Plan for Key Employees of Dollar
Thrifty Automotive Group, Inc., which became effective
September 29, 1998, filed as the same numbered exhibit
with the Company's Form 10-Q for the quarterly period
ended September 30, 1998, filed November 16, 1998*
10.5 Dollar Thrifty Automotive Group, Inc. Retirement Plan,
dated as of December 5, 1998, by and among the Company,
Thrifty, Dollar and Bank of Oklahoma, N.A.**
10.6 [Reserved]
10.7 [Reserved]
10.8 Pentastar Transportation Group, Inc. Deferred
Compensation Plan, filed as the same numbered exhibit
with the Company's Registration Statement on Form S-1, as
amended, Registration No. 333-39661, which became
effective December 16, 1997*
10.9 Pentastar Transportation Group, Inc. Executive Retention
Plan, filed as the same numbered exhibit with the
Company's Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
64
10.10 Dollar Thrifty Automotive Group, Inc. Long-Term Incentive
Plan, filed as the same numbered exhibit with the
Company's Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
10.11 Tax Sharing and Disaffiliation Agreement between
DaimlerChrysler and Dollar Thrifty Automotive Group,
Inc., filed as the same numbered exhibit with the
Company's Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
10.12 Form of Indemnification Agreement between the Company and
DaimlerChrysler, filed as the same numbered exhibit with
the Company's Registration Statement on Form S-1, as
amended, Registration No. 333-39661, which became
effective December 16, 1997*
21 Subsidiaries of the Company**
23.2 Consent of Debevoise & Plimpton (included in Exhibit 5),
filed as the same numbered exhibit with the Company's
Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
23.3 Consent of Donovan Leisure Newton & Irvine LLP,
filed as the same numbered exhibit with the Company's
Registration Statement on Form S-1, as amended,
Registration No. 333-39661, which became effective
December 16, 1997*
27.1 Financial Data Schedule**
- ----------
* Incorporated by reference
** Filed herewith
*** Not incorporated by reference in this report
(b) No report on Form 8-K was filed by the Company during or applicable
to the quarter ended December 31, 1998.
(c) Filed Exhibits
The response to this item is submitted as a separate section of this
report.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 19, 1999 DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
By: /s/ JOSEPH E. CAPPY
----------------------------------
Name: Joseph E. Cappy
Title: President and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ JOSEPH E. CAPPY Chairman of the Board March 19, 1999
------------------- Chief Executive Officer
Joseph E. Cappy President and Director
/s/ STEVEN B. HILDEBRAND Vice President March 19, 1999
------------------------ Principal Financial Officer
Steven B. Hildebrand Principal Accounting Officer
/s/ DONALD M. HIMELFARB Executive Vice President and Director March 19, 1999
----------------------- President of Thrifty, Inc.
Donald M. Himelfarb
/s/ GARY L. PAXTON Executive Vice President and Director March 19, 1999
------------------ President of Dollar Rent A Car Systems, Inc.
Gary L. Paxton
/s/ THOMAS P. CAPO Director March 19, 1999
------------------
Thomas P. Capo
/s/ EDWARD J. HOGAN Director March 19, 1999
-------------------
Edward J. Hogan
/s/ EDWARD C. LUMLEY Director March 19, 1999
--------------------
Edward C. Lumley
/s/ JOHN C. POPE Director March 19, 1999
----------------
John C. Pope
/s/ JOHN P. TIERNEY Director March 19, 1999
-------------------
John P. Tierney
/s/ EDWARD L. WAX Director March 19, 1999
-----------------
Edward L. Wax
66
INDEX TO EXHIBITS
-----------------
Exhibit Number Description
- -------------- -----------
10.5 Dollar Thrifty Automotive Group, Inc. Retirement
Plan, dated as of December 5, 1998, by and among
the Company, Thrifty, Dollar and Bank of Oklahoma,
N.A.
21 Subsidiaries of the Company
27.1 Financial Data Schedule