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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, 2002

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

(Exact name of registrant as specified in its charter)

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

     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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)

     Yes o  No x

     As of April 28, 2003, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $8,150,000. 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 28, 2003, 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.

DOCUMENTS INCORPORATED BY REFERENCE

None

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. In 2002, we operated an average worldwide fleet of approximately 214,000 cars. Alamo and National serve the daily rental needs of both leisure and business travelers from a network of more than 3,200 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. In the year ended December 31, 2002, our operations generated revenue of approximately $2.4 billion, which includes $338 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 and National operate through both company-owned and franchised locations in the United States and internationally.

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 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 operations, realization of assets, and payment of liabilities in the ordinary course of business. However, 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 Debtors do not include our international operations, our insurance captive or our fully consolidated special purpose financing entities.

      The confirmation of a plan of reorganization is our primary objective. After negotiations with various parties in interest, we expect to present a plan or plans of reorganization to the Court to reorganize our business and to restructure our obligations. This plan or plans 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 certain portion of the pre-petition liabilities recorded will be subject to compromise.

      The plan or plans 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. Other

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      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. We have notified all known claimants and historical creditors that the Bankruptcy Court established a bar date of January 14, 2003. A bar date is the date by which a claimant, whose claim against the Debtors is either omitted from or listed different from the amount or status described in the schedules of liabilities filed by the Debtors with the Bankruptcy Court, must file a claim against the Debtors if the claimant wishes to participate in the chapter 11 case as provided for in any Plan of Reorganization. In addition, the Debtors have the continuing right, subject to Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by these subsequent rejections may file claims with the Bankruptcy Court subject to an extended bar date. Any damages resulting from rejection of executory contracts and unexpired leases are treated as unsecured pre-petition claims. 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, which contracts and leases will be assumed or rejected, 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 that any value 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. 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 or a plan of reorganization. Adjustments necessitated by a plan of reorganization will materially change the amounts reported in the consolidated financial statements included elsewhere herein.

      The ability of the company to continue as a going concern is dependent upon, among other things, (i) our ability to generate adequate sources of liquidity, (ii) our ability to generate sufficient cash from operations, (iii) the ability of our subsidiaries that are not included in the chapter 11 cases to obtain necessary financing, (iv) confirmation of a plan or plans of reorganization under the Bankruptcy Code, and (v) 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.

ANC Rental Business Strategy

      Our goal is to be the brand leaders in our industry, achieving consistent, sustainable and profitable growth. Our success will be driven by customer satisfaction, employee pride and value creation. The core elements of our overall strategy include:

	•	Increase Customer Focus. We believe consistently exceeding customer expectations will result in increased loyalty and maximize the value of our customers to us.

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	•	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.
	•	Improve Profitability. Through our restructuring efforts, we are committed to increasing profitability, operating margins and stakeholder value through specific initiatives to increase revenue, lower costs and improve fleet utilization.
	•	Continually develop the skills of our associates. Our success is driven by our team’s ability to focus on the execution of our plan. As an organization, we will provide the tools to improve their quality and performance in serving our customers.

Restructuring Efforts

      During 2001 we commenced a comprehensive review of our business practices and processes to identify the key operational, organizational and system changes required to return us to profitability and position us for future growth (the “Restructuring Plan”). The Restructuring Plan was focused on the execution of an innovative “dual branded” strategy built upon the unique attributes of the Alamo and National brands. The plan required realignment of our organizational structure, programs and third party relationships in support of this strategy and the achievement of significant reductions in the Company’s global cost structure.

      During 2002 we focused our restructuring efforts on six aspects of our business in order to improve profitability. The six operating focuses included: (i) brand positioning, (ii) rate, product and rental policy programs, (iii) non-vehicle related cost reduction opportunities, (iv) internal management reporting and fiscal budget processes, (v) customer reservations process, and (vi) revenue management policies and procedures. The discussion below summarizes certain of the key initiatives launched in 2002 and their current status. We believe our substantial completion of the Restructuring Plan during 2002 provides a strong foundation for our 2003 Business Plan.

      As of the date of the bankruptcy filing, Alamo and National operated under 140 separate stand-alone concession agreements at seventy airports including most of the major airports in the United States. During 2002, we consolidated as many of these separately branded locations as possible into 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 reduce rent expense. While material uncertainties and negotiations with third parties make it difficult 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, we plan to substantially complete the facility consolidation program during 2003. As of March 31, 2003 we have dual branded our operations at forty-six of these airports and have received court orders allowing us to dual brand an additional three airport locations, which we expect to complete by the end of 2003.

      We currently operate two separate and distinct information technology systems, one for each of our brands. We plan to migrate to one information system and abandon the other. We believe that by combining information technology onto one of our operating systems cost savings can be achieved. Additional benefits of migrating to one system are expected to include a reduction of support staff, elimination of duplicative system infrastructures, improved operational efficiency, lower cost of training, and standardization across the organization. The migration to one information technology system is not without significant risks, such as the ability to successfully migrate onto one system, additional delays in implementation, the temporary loss of business functionality, questions regarding the scalability of existing infrastructure, and the need for coordination with third party vendors to accept system changes.

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      In August 2002, we sold certain assets and transferred specific liabilities related to our Holland and Belgium operations to an unrelated third party and entered into a ten-year franchise agreement. We realized approximately $10.1 million in net proceeds from this transaction. In the third and fourth quarters of 2002, our German operating and financing subsidiaries filed for receivership in Germany under local law.

      During the fourth quarter of 2002, management approved and announced a plan for the closure and abandonment of our Alamo Local Market Division. The plan included provisions for employee terminations, closure of locations, and disposal or transfers of fleet to other operations.

      We have modified our past licensee structure and have entered into new “dual branded” licensing agreements that include but are not be limited to (i) selling or transferring ownership of certain Alamo locations in existing National licensee markets to the current National licensee, (ii) increasing the fees charged to our licensees, and (iii) licensing Alamo to current National licensees in those markets where an Alamo location currently does not exist. As of March 31, 2003, we have reached an agreement with the Policy Advisory Committee of our licensees and have entered into new agreements with the vast majority of our domestic licensees.

      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 worldwide basis through both company-owned and licensed rental locations. We operate in three separate and distinct geographic regions: the United States, Canada and International, which includes rental operations primarily located in Europe.

      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.

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	—	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 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 aggressively develop our e-commerce business through the use of our web sites and key e-commerce partner relationships for both brands. National recently launched a breakthrough product Quickrent. Quickrent enables an Internet customer to not only reserve, but also functionally rent their car on line. Upon arrival at the location they proceed to the vehicle and directly to the exit gate eliminating the need to stop at the rental counter. We believe this product will provide a premium internet experience, build customer loyalty and satisfaction and 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.

      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.

      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 and Hawaii. In 2002 these top ten locations include cities such as Orlando, Miami, Los Angeles, Las Vegas, Fort Lauderdale, Tampa, San Francisco, Maui, and other major markets, which collectively generate approximately 42% of Alamo’s total domestic revenue. Because the Alamo brand primarily targets the leisure traveler, approximately 37% of its business comes from the direct consumer sub-market (including Internet revenues), approximately 48% 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 has built its reputation in the 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 29% of its total revenue, comprise major business travel destinations, such as Los Angeles, Atlanta, Dallas, Seattle, Newark, Chicago, Philadelphia and Detroit. The National brand has found success positioning itself in the business travel market. Accordingly, commercial accounts represent approximately 48% of its revenue. Its remaining revenue comes from the leisure travel market through sources such as Emerald Club Members, travel agents and affinity groups.

      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.

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      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 American Express, 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 which is an incentive program developed specifically for front-line agents.
	•	Direct Customers. Alamo markets to consumers using the Internet at our Alamo.com website, television, newspapers, specialized seasonal product offerings (such as ski products), targeted direct mail and e-mail and partnership efforts. Alamo also leverages its partnership with Disney as the Official Car Rental Company of Walt Disney World and Disneyland.

      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 the Internet, television, newspapers, trade publications and direct marketing and partnership efforts.

      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.

      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.

      We operate the Alamo and National brands in 77 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 151,000 rental vehicles, of which approximately 33,000 are within company-owned locations.

      With the exception of the United Kingdom, Germany and Switzerland, 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

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      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 other 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, who then became a National licensee.

      In August 2002, we sold certain assets and transferred specific liabilities related to our Holland and Belgium operations to an unrelated third party and entered into a ten-year franchise agreement. In the third and fourth quarters of 2002, our German operating and financing subsidiaries filed for receivership in Germany under local law.

      Within the European marketplace, the business market accounts for approximately 66% of our revenue, the leisure market accounts for approximately 31% of our revenue and the insurance replacement market accounts for approximately 3% 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. 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 15 of our Consolidated Financial Statements included elsewhere herein.

ANC Rental Fleet Operations

      The single largest cost to a rental car company is its fleet. Since the mid 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 nine months. Approximately 96% of our model year 2002 vehicle acquisitions for the airport operations of Alamo and National were acquired under operating leases or manufacturer repurchase programs and were not subject to residual value risk. Manufacturer repurchase 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 2001, 3.7% of the repurchase program cars were not returned to the manufacturer or were subsequently rejected by the manufacturer after their return.

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

      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 2002, vehicles manufactured by General Motors made up approximately 61% of our total domestic rental fleet purchases. In an effort to efficiently manage our fleet cost we may modify the mix of vehicles we purchase in the 2003 model year. We expect to purchase a lesser percentage of our domestic rental fleet from General Motors, replacing it with other vehicle suppliers including, but not limited to, Chrysler, Mitsubishi, Toyota, Isuzu, Ford, Nissan and Suzuki.

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.

      Domestically, our Odyssey information system supports the National brand while the Alamo brand uses a legacy system. Both systems are fully integrated information systems that include reservations, rental operations and fleet management. 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.

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

Customers

      No single customer represented greater than 10% of our total revenue during 2002.

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 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. The brands we primarily compete against domestically are Avis, Budget, Dollar, Enterprise, Hertz and Thrifty. 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.

      In the last two years there have been significant changes in the ownership of participants in the vehicle rental industry. Ford Motor Company and Cendant Inc. acquired the outstanding shares of Hertz and Avis, respectively in 2001. In 2002 Cendant Inc. acquired certain assets and liabilities of Budget Group, Inc. We

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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 previously prohibited the sale of collision damage waivers, and New York and Illinois capped the liability of the renter for damage to the vehicle at a specific dollar value. New York recently repealed the prohibition of the sale of collision damage waiver and the damage recovery dollar value cap and replaced it with a price cap on the sale of collision damage waivers. 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 two states have 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 coverages, the vehicle rental industry has requested regulatory agencies and legislative bodies to provide affirmative authorization for the sale of these services and products. To date, a substantial 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 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®, National®, National Car Rental®, Emerald Club® and QuickSilver®. We also have a number of applications pending to register other marks. These trademarks are important to our business. 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.

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Environmental Matters

      The operation of our business is subject to a variety of requirements of national, state/provincial, and local governments that 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 discharges and air emissions, solid waste disposal, and, in most cases, the release and cleanup of regulated substances, and liability for these matters. In addition, government 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 injunctions or impose fines and other sanctions, including criminal penalties, for alleged violations. Our company has incurred, and will continue to incur costs, to comply with applicable environmental laws and regulations.

      Our company’s principal on-going environmental regulatory compliance obligations arise from our use of fuel (unleaded gasoline and diesel) and motor oil. Our company stores these petroleum products in above and underground storage tanks of varying capacities. We upgraded or replaced our underground storage tanks to comply with federal standards that became effective in 1998. We carry out a compliance program to ensure that underground storage tanks do not release their contents to the environment. In 2002, our company initiated a comprehensive inspection and equipment-upgrading program in response to new requirements applicable to our underground storage tanks in California. We do not expect the costs of equipment upgrading identified as being necessary as a result of the California inspection program to have a material adverse effect on our capital expenditures, earnings, or competitive position.

      In 2001, the U.S. government’s General Accounting Office issued a report calling for more frequent regulatory inspections of facilities that store petroleum products in underground storage tanks. Our storage tanks are (and we expect them to continue to be) inspected frequently by state and local regulatory officials. Fines imposed as the result of non-compliances detected through such inspections have not had (and we do not expect them to have) a material adverse effect on us. In 2003, several members of Congress introduced legislation that, if enacted, may impose additional regulatory obligations (including training requirements) upon operators of petroleum storage tanks.

      For above ground storage tanks, we (i) have a compliance program to ensure they have adequate secondary containment to prevent releases to the environment, and (ii) implement plans to prevent or respond to inadvertent spills. In 2002, we modified our compliance program for above ground storage tanks in response to rule changes that became effective nationally in the U.S. We do not expect the cost of these modifications to have a material adverse effect on our capital expenditures, earnings, or competitive position.

      In certain U.S. jurisdictions, our company must operate equipment, and routinely assess the integrity of this equipment, to reduce the release of fuel vapors into the air. We (i) have installed the necessary equipment in those jurisdictions where it is required, (ii) assess the equipment’s integrity in compliance with rules that may vary in each local air quality management district, and (iii) carry out a program to ensure that facility employees have the necessary training to operate and maintain such equipment.

      Discharges of wastewater associated with our company’s operations, chiefly from vehicle washing, are also subject to federal, state/provincial, and local rules. In some situations, these rules require our company to install oil/water separators or grease traps, the costs of which are not material. In some situations, we must obtain permits to discharge to municipal sewer systems or to operate car wash wastewater recycle systems. Our company is generally not subject to U.S. federal rules governing the discharge of storm water from its locations. In some instances, however, and usually because of a contractual commitment to a landlord, a company location adopts and implements a storm water pollution prevention plan.

      In addition to the on-going regulatory compliance obligations described above, our company has liability for addressing past releases from its petroleum storage tank systems or for having sent used oil off-site for management. For past releases on property that our company owns or leases (or formerly owned or leased), the objective is to obtain a determination from a state environmental agency that there is no need for further remedial action (“no further action”). Our company is currently pursuing no further action determinations for

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      In some situations, our company’s ability to secure no further action determinations depends upon decisions committed to the discretion of our landlords. Every U.S. state agency overseeing our company’s efforts to obtain no further action determinations applies some variation of a risk-based corrective action regime. Under such a regime, the residual petroleum that may remain after remedial efforts are undertaken depends upon possible exposure to the residue, and, hence, current and future site use. As a result, some no further action determinations where petroleum residue remains depend upon the imposition of an institutional (e.g., deed or groundwater use restriction) or engineering (e.g., paving) control. In many cases, the landowner (i.e., the company’s landlord) must consent to the imposition of an institutional control. We do not believe that any decision by our landlords to withhold consent to the imposition of institutional controls in connection with risk-based corrective actions will have a material adverse effect on us.

      Our company has experienced a few situations in which its having transported used oil for off-site management has resulted in liability under the Comprehensive Environmental Response, Compensation, and Liability Act (the Superfund statute) and its state counterparts. That statute imposes strict, retroactive, and joint-and-several liability. Our company’s Superfund liability has not in the past had a material adverse effect on our financial condition and our results of operations. The Miami-Dade Airport, a company landlord, has asserted the most substantial Superfund claim against our company to date, albeit for releases at a location at which the company formerly operated. We are defending against that claim vigorously and asserting that it is covered by a contractual indemnity.

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. 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 subject to certain deductibles. 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

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      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 2003, the loss of our ability to obtain surety bonds would have an adverse effect on our business and financial condition.

      Currently, certain of our operating subsidiaries are self-insured in 32 states. Periodically, these 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, 2002, we employed approximately 15,000 associates worldwide, approximately 2,200 of whom were covered by 37 collective bargaining agreements. Currently, Alamo and National are in the process of negotiating seven collective bargaining agreements, which have expired, and 27 agreements which will expire in 2003 and three agreements which will expire in 2004. 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 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 traditionally 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. 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. The events of September 11, 2001 and the war with Iraq, have impacted air travel patterns, and have directly affected our business, and the historical norms of our industry.

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.

      Our future results are dependent upon the successful confirmation and implementation of a plan or plans of reorganization. We have not yet submitted such a plan or plans to the Bankruptcy Court for approval and

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      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;
	•	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 or plans 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.

      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 the ultimate plan or plans 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 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

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      Our ability to continue as a going-concern is contingent upon, among other things, confirmation of a plan or plans of reorganization, future profitable operations and the ability to generate sufficient cash flow from operations and financing arrangements to meet ongoing obligations. We cannot assure you that we will achieve any of the foregoing.

      We have notified all known claimants and historical creditors that the Bankruptcy Court established a bar date of January 14, 2003. A bar date is the date by which a claimant, whose claim against the Debtors is either omitted from or listed different from the amount or status described in the schedules of liabilities filed by the Debtors with the Bankruptcy Court, must file a claim against the Debtors if the claimant wishes to participate in the chapter 11 case as provided for in any Plan of Reorganization. In addition, the Debtors have the continuing right, subject to Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by these subsequent rejections may file claims with the Bankruptcy Court subject to an extended bar date. Any damages resulting from rejection of executory contracts and unexpired leases are treated as unsecured pre-petition claims. The amounts of claims filed by creditors could be significantly different from their recorded amounts.

      You may lose all or part of your investment in our common stock. The Bankruptcy Code requires that all debts be settled 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 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.

      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 July 19, 2003. 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 in 2003, we may need to refinance existing fleet debt, potentially obtain additional debtor-in-possession financing or 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 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

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      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 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 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, we have entered into a debtor-in-possession financing agreement, which contains material restrictions on our operations. These restrictions limit our ability to, among other things, incur certain debt, create certain liens, pay dividends, make certain investments, sell certain assets, pledge assets, enter into a change in control transaction, or enter into affiliate transactions. 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 net losses of $534.1 million for the year ended December 31, 2002 and $606.7 million for the year ended December 31, 2001. In addition, for the first quarter of 2003, we anticipate that our net loss will approximate $92.7 million. 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, will adversely affect our financial condition, and our ability to obtain financing.

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      In the normal course of business we are required to post performance and surety bonds as financial guarantees of our performance with airports, self-regulatory authorities and insurance companies. 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 in certain of our assets and cash collateral. We currently have an agreement with our surety to issue bonds on our behalf through 2003. However, substantially all of our surety bonds expire in 2003 and there is no assurance that our surety provider will provide us with adequate surety bonding coverage for the remainder of 2003 or beyond. The loss of our ability to obtain surety bonds would have an adverse effect on our business and financial condition.

      Certain of our domestic operating subsidiaries are self-insured for property, auto liability and general liability. In 2001, we 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.

      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.

      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 traditionally 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 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. The events of September 11, 2001 and the war with Iraq, have impacted air travel patterns, and have directly affected our business and the historical norms of our industry. 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.

      Our Alamo and National on-airport and near-airport locations generate substantially all of our total revenue and as such are highly dependent on air travel. Events such as, the war with Iraq, the outbreak of SARS and the terrorist acts of September 11, 2001 have resulted in a downturn in air travel both domestically and internationally. A sustained material decrease in airline passenger traffic would significantly reduce our customer volume and significantly impact our business. Other events that could reduce airline passenger traffic include a general economic downturn, labor unrest, airline bankruptcies and consolidations, substantially

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      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. Political and military events involving or affecting the Middle East such as the war in Iraq, could have a significant impact, temporary or permanent, on fuel costs and availability.

      During the year ended December 2002, we operated a combined fleet of approximately 214,000 owned and leased vehicles. For the 2002 model year, approximately 96% of vehicle acquisitions were covered by vehicle manufacturer repurchase programs or operating leases 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 limited to, accelerated depreciation charges and turn-in charges imposed under the terms of our manufacturer repurchase agreements for vehicles returned ahead of schedule.

      As of December 31, 2002, we were subject to residual value risk on approximately 13% 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.

      During the last few years, the average price of new cars has increased. In December 2002, we entered into a new agreement with General Motors under which the average price of new cars increased. The effect on us

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      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 2002, we purchased approximately 61% of our aggregate domestic rental fleet from General Motors. In model year 2003, we may purchase a lesser amount of our domestic rental fleet from General Motors. 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 have relied and will continue to rely on asset-backed financing to purchase vehicles. As of December 31, 2002, we had outstanding approximately $3.25 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 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.

      A majority of our debt accrues interest at floating interest rates. We use interest rate caps to manage the impact of interest rate changes on our variable rate debt. Although fixed or capped interest rate debt was 100% of our total debt outstanding as of December 31, 2002, a substantial increase in interest rates, up to the strike price of our caps, would significantly increase our cost of indebtedness.

      As we renew airport concession agreements, airport agencies may prohibit dual branding at some consolidated facilities. Should a significant number of these airport agencies prohibit dual branding, our ability to execute this strategy will be adversely affected. Additionally certain airport authorities have filed legal challenges with the U.S. Bankruptcy Court, arguing that we should not be able to maintain concession agreements under which we operate both of our brands, 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 the appellate courts agree with the objectors’ position it could affect our ability to consolidate these airports.

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      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.

      During the time we were part of our former Parent’s consolidated Federal Income Tax Return our former Parent engaged in certain transactions that are of a type that the Internal Revenue Service has indicated it intends to challenge. Generally, the transactions relate to accelerations of certain future projected tax deductions. Based upon disclosures from AutoNation a settlement has been reached with the Internal Revenue Service however, until and unless paid by AutoNation, we may still have several liability with AutoNation to the Internal Revenue Service for all transactions, that occurred while we were part of AutoNation’s consolidated Federal tax returns. We have included below an excerpt from AutoNation’s peri