ANC RENTAL CORP - 10-K Annual Report

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

COMMISSION FILE NUMBER 0-30776

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

(Exact name of registrant as specified in its charter)

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

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

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

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

NONE

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

COMMON STOCK
(Title of Class)

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

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

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

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

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

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

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

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

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

BANKRUPTCY PROCEEDINGS

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

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

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

ANC RENTAL BUSINESS STRATEGY

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

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

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

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

RESTRUCTURING EFFORTS

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

Airport Location Consolidation

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

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Dual Brand Existing Single Brand Cities

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

Combining Information Technology Systems

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

Changes in Licensee Operations

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

Closure of Alamo Local Market Locations

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

Strategic Alternatives

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

AIRPORT OPERATIONS

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

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Business Strategy and Operations

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

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

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

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

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

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

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

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

U.S. Airport Operations

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

Alamo Rental Operations

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

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

National Rental Operations

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

Sales and Marketing

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

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

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

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

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

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

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

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

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

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

Reservations

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

International Rental Operations

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

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

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

Before February 1, 1998, National served its customers in Europe, Africa
and the Middle East through a marketing affiliation with Europcar/Interrent.
Beginning February 1, 1998, as a result of the acquisition and rebranding of
EuroDollar in the fourth quarter of 1997, National began to operate, and in some
cases license, its own locations in each of these markets. National serves its
customers in Japan and others parts of the Pacific through a marketing
affiliation in Japan. In July 2000, our unprofitable Australian operations were
divested in a sale to an independent third party.

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

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

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

INSURANCE REPLACEMENT AND NEIGHBORHOOD BUSINESS

Alamo Local Market Division Overview

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

Business Strategy and Operations

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

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

- Increased fleet sharing with nearby airport operations

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

- Consideration of strategic alternatives or alliances

ANC RENTAL FLEET OPERATIONS

Fleet Management Strategy for Airport Operations

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

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

We place a strong emphasis on vehicle maintenance since quick and proper
repairs are critical to fleet utilization. To accomplish this task we employ
full-time National Institute for Automotive Service Excellence fully certified
technician instructors. In addition, we use specific manufacturer dealerships to
maintain and

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

Fleet Management Strategy for Alamo Local Market Operations

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

Vehicle Supply

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

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

INFORMATION TECHNOLOGY

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

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

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

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

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

CUSTOMERS

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

COMPETITION

The automotive rental industry is capital intensive and is characterized by
intense price and service competition. We believe we compete through a
competitive pricing structure, increased service levels, better
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vehicle quality, availability and value, and convenient rental locations
maintained in good condition. In any given location, we may encounter
competition from national, regional and local vehicle rental companies. Our main
domestic competitors are Avis Group Holdings, Inc., Budget Group, Inc., Dollar
Thrifty Automotive Group, Inc., Enterprise Rent-A-Car and The Hertz Corporation.
In Europe and other foreign markets, our vehicle rental business competes with
the companies listed previously and other national and local vehicle rental
companies.

At times, industry-wide price pressures have adversely affected the major
vehicle rental companies, and our vehicle rental business has, on such
occasions, priced its product in response to these pressures. Moreover, at times
when the vehicle rental industry has experienced vehicle oversupply, competitive
pressure has intensified, with a negative impact on the industry's rental rates.
We continually focus on optimizing our cost structure to improve our overall
competitive position.

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

AUTOMOTIVE RENTAL REGULATIONS

Our operations generally are subject to various federal, state and local
laws and regulations including those relating to taxing and licensing of
vehicles, consumer protection, finance, insurance, advertising, currency
controls, used vehicle sales, zoning and land use, environmental and labor
matters. In addition, a majority of states have considered legislation affecting
the sale of loss damage waiver products. To date, approximately half of the
states have enacted legislation requiring disclosure to each customer at the
time of rental that the customer's personal automobile insurance may cover
damage to the rental vehicle and therefore purchase of a collision damage waiver
may be unnecessary. In addition, certain states such as Nevada, California and
Illinois have capped the price at which collision damage waivers can be sold.
New York has prohibited the sale of collision damage waivers and New York and
Illinois have capped the liability of the renter for damage to the vehicle.
Adoption of national or state legislation limiting the sale or capping the rates
of collision damage waiver products could further restrict sales of this product
and additional limitations of potential customer liability could increase the
cost of our operations. During recent years, however, two states enacted
legislation to rescind the price control of collision damage waivers, two others
have raised their price caps, and another state has enacted legislation to
partially rescind renter immunity from liability and permit the sale of
collision damage waivers.

As a result of private and past governmental regulatory legal proceedings
in some states regarding the sale of other optional service items at the rental
counter, such as liability insurance, personal accident coverage, personal
effects coverage and other travel related coverage's, the vehicle rental
industry has requested regulatory agencies and legislative bodies to provide
affirmative authorization for the sale of these services and products. To date,
a majority of states have either adopted clarifying legislation to fully exempt
the industry from licensing requirements or enacted special or limited licenses
to specifically cover the sale of insurance products incidental to the vehicle
rental. However, the outcome of the legal proceedings and the initiation of any
future governmental regulatory proceedings could negatively impact the revenue
generated from the sale of these services and products.

Our operations are also subject to various federal, state and local
consumer protection laws and regulations including those relating to advertising
and disclosure of charges to customers. The National Association of Attorneys
General has promulgated suggested guidelines for vehicle rental advertisements.
Alamo and two other industry participants are subject to substantially similar
consent decrees resulting from Federal Trade Commission inquiries initiated in
1989, which consent decrees require certain disclosures to customers at each
stage of the rental transaction, including in advertisements, of charges that
are mandatory and not otherwise reasonably avoidable. The rental car industry
has sought and obtained legislation in

9

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

TRADEMARKS

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

ENVIRONMENTAL MATTERS

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

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

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

The Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), along with related regulations,
establish a framework for regulating the handling, transportation, treatment and
disposal of hazardous and non-hazardous solid wastes in the United States. In
addition, a subchapter of RCRA regulates underground storage tanks. Many of our
operations operate underground storage tanks, which we use primarily to store
petroleum-based products. RCRA and various federal, state and local laws and
regulations mandate periodic testing, upgrading, closure and/or removal of
underground storage tanks and, in the event of leaks from these tanks, require
clean-up of the affected groundwater and soils. We have a number of underground
storage tanks that have been removed or closed in place. If underground storage
tanks owned or operated by us leak, and the leak migrates onto the property of
third parties, we could be subject to liability for response costs, and other
damages to these third parties.

10

Compliance with regulations related to underground storage tanks has not had,
and is not expected to have, a material adverse effect on us.

LIABILITY INSURANCE AND BONDING

The nature of our business exposes us to the risk of liabilities arising
out of our operations. These potential liabilities could involve, for example,
claims of employees, customers or third parties for personal injury or property
damage occurring in the course of our operations, and claims for personal
injury, property damage, and damage to the environment in cases where we may be
held responsible for the escape of harmful materials. We could also be subject
to fines and civil and criminal penalties in connection with alleged violations
of regulatory requirements.

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

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

Provisions for retained or self-insured claims are made by charges to
expense based upon periodic evaluations of the estimated ultimate liabilities on
reported and unreported claims. We have collateral requirements that are set by
insurance companies, which underwrite our insurance programs. Our collateral
requirements may change from time to time, based on, among other things, our
claims experience, financial performance or credit quality and level of
retention.

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

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

EMPLOYEES

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

11

customary in the industry, principally for the non-revenue movement of the
rental fleet between locations. We believe that we have good relations with our
employees.

SEASONALITY

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

RISK FACTORS

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

There are significant uncertainties relating to our bankruptcy proceeding.

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

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

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

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

- the incurrence of significant costs associated with the reorganization;

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

12

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

- limiting our ability to borrow additional funds; and

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

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

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

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

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

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

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

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

13

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

We have significant working capital needs.

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

We have substantial debt and are highly leveraged.

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

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

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

- increase our vulnerability to adverse economic and industry conditions;

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

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

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

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

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

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

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

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

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

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

We primarily use one surety provider.

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

We are self-insured in certain domestic locations.

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

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

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

15

Our business is seasonal.

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

A decrease in air travel would significantly impact our business.

In 2001, our Alamo and National on-airport and near-airport locations
generated approximately ninety percent of our total revenue from total domestic
operations. We also expect to generate a significant portion of our revenue from
Alamo and National locations on-airport or near-airport in 2002. We were
significantly adversely affected by the decrease in air travel following
September 11, 2001. A sustained material decrease in airline passenger traffic
would significantly reduce our customer volume and significantly impact our
business. Events that could reduce airline passenger traffic include a general
economic downturn, labor unrest, airline bankruptcies and consolidations,
substantially higher air fares, adverse weather conditions, the outbreak of war,
high-profile crimes against tourists and further incidents of terrorism.

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

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

Changes in manufacturers' repurchase programs may affect our business.

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

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

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

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

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

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

Cost of our rental fleet may increase.

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

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

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

We rely on asset-backed financing to purchase vehicles.

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

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

An increase in interest rates could reduce our profitability

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

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

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

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

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

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

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

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

In connection with the spin-off our former Parent, AutoNation, received a
private letter ruling from the IRS to the effect that, among other things, the
spin-off qualified as a tax-free distribution to AutoNation stockholders and to
AutoNation. Whether a spin-off qualifies as tax-free depends in part upon the
reasons for the spin-off and satisfaction of numerous other fact-based
requirements. The IRS private letter ruling is based upon various factual
representations made by AutoNation and us. If any of those factual
representations were incorrect or incomplete in a material respect, or if the
facts upon which the letter ruling is based are materially different from the
facts at the time of the spin-off, the spin-off could become taxable to
AutoNation stockholders, AutoNation, or both.

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If the spin-off fails to qualify as a tax-free distribution for U.S.
federal income tax purposes, AutoNation stockholders who received shares of ANC
Rental common stock in the spin-off would be treated as if they had received a
taxable distribution in an amount equal to the fair market value of ANC Rental
common stock received. The amount of the taxable distribution would be taxed as
a dividend.

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

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

- a ruling from the IRS to the effect that the proposed transaction will
not result in the spin-off being taxable to AutoNation or its
stockholders; or

- an opinion of counsel recognized as an expert in federal income tax
matters and designated by AutoNation to the same effect and is
satisfactory to AutoNation in its absolute discretion.

Transactions that may be affected by these restrictions relating to an
acquisition of a 50% or greater interest and other restrictions required to
preserve the tax-free nature of the spin-off include, among others:

- a liquidation;

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

- issuance and redemption of shares of our common stock;

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

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

- the discontinuation of a material business.

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

The market for our common stock is currently not liquid.

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

The market price of our common stock may fluctuate significantly due to a
number of factors, some of which may be beyond our control, including:

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

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

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

- changes in earnings estimates by securities analysts or our ability to
meet those estimates;

- the operating results and stock price performance of other comparable
companies;

- overall stock market fluctuations; and

- economic conditions generally.

In particular, the realization of any of the risks described in these "Risk
Factors" could have a significant and adverse impact on the market price of our
common stock. In addition, the stock market in general has in the recent period
experienced volatility that has often been unrelated or disproportionate to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the trading price of our common stock, regardless of our
actual operating performance.

ITEM 2. PROPERTIES

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

Our facilities serving airport locations are located on airport property or
near the airport in locations convenient for bus transport of customers to the
airport. We lease many of these airport locations from governmental authorities
charged with the operation of the airports under arrangements generally
providing for either the payment of a fixed rent or the payment of rent based on
a percentage of revenue at a location with a guaranteed annual minimum payment.
Most of our other facility leases provide for fixed rental payments. Each of the
airport facilities in the metropolitan areas we serve includes, in addition to
concession space, vehicle storage and maintenance areas, as well as rental and
return facilities. Typical airport facility leases may not necessarily have the
same duration as our local airport concession agreement. Most of our airport
facility leases expire at varying times over the next ten years. Some of these
leases include purchase options at the end of their terms. Some airport
concession agreements require us to obtain surety bonds for the benefit of the
airport. Any failure to obtain or maintain these bonds would constitute a
default under the concession agreements and could result in our loss of position
at such airport.

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

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

We believe that our facilities are sufficient for our needs.

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

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

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

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

21

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

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

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

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

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

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

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

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

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

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

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

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PART II

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

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

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

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

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

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ITEM 6. SELECTED FINANCIAL DATA

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

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

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

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

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

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

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

OVERVIEW

We rent vehicles on a daily, weekly or monthly basis to leisure and
business travelers principally from on-airport or near-airport locations through
Alamo and National, and to local customers who need replacement or daily rental
vehicles from locations in neighborhood areas through Alamo Local Market
Division. We operate mainly in the United States, Europe and Canada. We generate
revenue primarily from vehicle rental charges and the sale of ancillary rental
products. Approximately 85% of our rental revenue is derived from vehicle rental
charges with the remaining 15% derived from the sale of liability and other
accident protection products, fuel usage fees, and customer convenience products
including vehicle upgrades, additional or underage driver privileges, infant
seat rentals, cellular phone rentals and ski rack rentals.

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

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

CHAPTER 11 PROCEEDINGS

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

25

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

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

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

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

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

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

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

MANAGEMENT CHANGES

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

26

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

RESTRUCTURING EFFORTS

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

Airport Location Cons