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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ________________
Commission file number 1-13647
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DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 73-1356520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5330 East 31st Street, Tulsa, Oklahoma 74135
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (918) 660-7700
Securities registered pursuant to Section
12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [ ]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of February 29, 2000 was
$272,179,543.
The number of shares outstanding of the registrant's Common Stock as of
February 29, 2000 was 24,160,598.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 25, 2000 are incorporated by reference in Part
III.
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2
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-K
CONTENTS
PART I
ITEM 1. BUSINESS................................................. 4
ITEM 2. PROPERTIES............................................... 22
ITEM 3. LEGAL PROCEEDINGS........................................ 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.......................... 23
ITEM 6. SELECTED FINANCIAL DATA.................................. 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................ 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............. 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 63
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... 63
ITEM 11. EXECUTIVE COMPENSATION................................... 63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................... 63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........... 63
3
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K....................................... 64
SIGNATURES.................................................................. 70
INDEX TO EXHIBITS........................................................... 71
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Some of the statements contained herein under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although Dollar Thrifty
Automotive Group, Inc. believes such forward-looking statements are based on
reasonable assumptions, such statements are not guarantees of future performance
and certain factors could cause results to differ materially from current
expectations. These factors include: economic and competitive conditions in
markets and countries where our customers reside and where our companies and
their franchisees operate; changes in capital availability or cost; costs and
other terms related to the acquisition and disposition of automobiles and
certain regulatory and environmental matters. Should one or more of these risks
or uncertainties, among others, materialize, actual results could vary
materially from those estimated, anticipated or projected. Dollar Thrifty
Automotive Group, Inc. undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
4
PART I
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ITEM 1. BUSINESS
Company Overview
Dollar Thrifty Automotive Group, Inc., a Delaware corporation (the
"Company"), owns two vehicle rental companies, Dollar Rent A Car Systems, Inc.
("Dollar"), and Thrifty Rent-A-Car System, Inc. Thrifty Rent-A-Car System, Inc.
is an indirect subsidiary of the Company as it is a wholly owned subsidiary of
Thrifty, Inc. (Thrifty, Inc., Thrifty Rent-A-Car System, Inc. and all their
respective subsidiaries are individually or collectively, as the context
requires, referred to hereafter as "Thrifty"). Dollar and Thrifty and their
respective independent franchisees operate the Dollar and Thrifty vehicle rental
systems as separate businesses. The Dollar and Thrifty brands represent a
value-priced rental vehicle generally appealing to leisure customers and
tourists, including foreign tourists, and to small businesses and independent
business travelers. As of December 31, 1999, Dollar and Thrifty had 973
locations in the United States and Canada of which 149 were company-owned stores
and 824 were locations operated by franchisees. While Dollar and Thrifty have
franchisees in countries outside the United States and Canada, revenues from
these franchisees have not been material to results of operations of the Company
and its consolidated subsidiaries (collectively, the "Group"). Dollar's gross
revenues comprise approximately 74% of the Group's revenues with Thrifty
contributing the remaining 26% of revenues.
The businesses of Dollar and Thrifty complement each other, although
they have separate and different approaches to the vehicle rental market. In the
United States, Dollar's main focus is operating company-owned stores located at
major airports, and it derives substantial revenues from tour and leisure
rentals. Thrifty operates almost exclusively through franchisees serving both
the airport and local markets. Dollar derives a majority of its U.S. revenues
from providing rental vehicles and services directly to rental customers, while
Thrifty derives its revenues primarily from franchising fees and services
including vehicle leasing. Thrifty's U.S. franchisees provide vehicles and
services to the rental customer. Dollar incurs the costs of operating its
company-owned stores and its revenues are directly affected by changes in rental
demand. As Thrifty operates primarily through franchisees, it does not incur the
costs of operating the franchised locations and does not generally deal directly
with rental customers. Therefore, changes in levels of customer demand tend to
affect Thrifty's results less quickly than those of Dollar. See Note 15 of Notes
to Consolidated Financial Statements for business segment information.
The Company was incorporated on November 4, 1997. It is the successor
to Pentastar Transportation Group, Inc. which was formed in 1989 to acquire and
operate the rental car subsidiaries of Chrysler Corporation, now known as
DaimlerChrysler Corporation ("DaimlerChrysler"). Dollar was incorporated in 1965
and Thrifty was incorporated in 1950. Thrifty, Inc., which was formed in
December 1998, directly owns Thrifty Rent-A-Car System, Inc. and Thrifty Car
Sales, Inc. ("Thrifty Car Sales"), which operates a franchised retail used car
sales network.
On December 23, 1997, the Company completed its initial public offering
of Common Stock (the "Offering") after registration with the Securities and
Exchange Commission ("SEC") on Form S-1. Upon closing of the Offering,
22,500,000 shares of Common Stock were sold at an initial price to the public of
$20.50 per share. In addition, the underwriters exercised an over allotment
option and acquired an additional 1,125,000 shares for the same price, less the
applicable underwriter's discount. Of the shares sold in the Offering,
20,000,000 shares were sold by DaimlerChrysler, which prior to the Offering was
the parent of the Company, and 3,625,000 shares were sold by the Company. On
January 15, 1998, the underwriters exercised a second and final portion of their
over allotment option, purchasing an additional 498,105 shares of Common Stock.
5
In connection with the Offering, the Company completed new financing
arrangements. On December 23, 1997, the Company closed a $900 million asset
backed medium term note program, together with a Revolving Credit Facility
(hereinafter defined). In addition, on March 4, 1998, the Company established a
Commercial Paper Program (hereinafter defined) backed by a Liquidity Facility
(hereinafter defined). Proceeds of the medium term notes and commercial paper
are used to finance vehicles used by Dollar and Thrifty for their operations.
The Revolving Credit Facility was established to provide letters of credit for
financing and operational needs and to meet the Group's borrowing needs for its
other business operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Industry Overview
The U.S. daily vehicle rental industry has two principal markets: the
airport market and the local market. Vehicle rental companies that focus on the
airport market rent primarily to business and leisure travelers. Vehicle rentals
from airport locations account for the largest portion of vehicle rentals in the
United States. Companies focusing on the local market rent primarily to persons
who need a vehicle periodically for personal or business use or who require a
temporary replacement vehicle. Rental companies also sell used vehicles and
ancillary products such as refueling services and loss damage waivers.
Vehicle rental companies typically incur substantial debt to finance
the ongoing turnover of their rental fleets. They also typically acquire a
majority of their fleets under manufacturer residual value programs that
repurchase or guarantee the resale value of Program Vehicles (hereinafter
defined) at particular times in the future. This allows a rental company to
predict this important element of its cost structure. The Program Vehicles and
the related obligations of the manufacturers are used as collateral for fleet
financing.
Most of the major domestic vehicle rental car companies were formerly
owned by domestic automotive manufacturers. The industry has seen significant
changes in the last few years. Cendant Corporation purchased Avis Rent A Car,
Inc. and subsequently sold 70% of Avis to the public. AutoNation, Inc. (formerly
Republic Industries, Inc.), acquired National Car Rental System, Inc. and Alamo
Rent-a-Car, Inc., and Team Rental Group Inc. (renamed Budget Group, Inc.)
acquired Budget Rent a Car Corporation from Ford Motor Company ("Ford"). Ford
sold a minority interest in The Hertz Corporation to the public. Accordingly,
most of the major companies in the industry are now publicly held, including the
Company. The Company believes these changes have led to increased industry focus
on profitability and shareholder returns.
Seasonality
The Company's business is subject to seasonal variations in customer
demand, with the summer vacation period representing the peak season for vehicle
rentals. This general seasonal variation in demand, along with more localized
changes in demand, caused the Group to vary its fleet size over the course of
the year. In 1999, the Group's average monthly fleet size ranged from a low of
approximately 77,000 vehicles in the first quarter to a high of approximately
118,000 vehicles in the third quarter.
Dollar
General
Dollar's main focus is serving the airport vehicle rental market, which
is composed of business and leisure travelers. The majority of its locations are
on or near airport facilities. Dollar operates primarily through company-owned
stores in the United States, and also licenses to independent franchisees to
operate as a part of the Dollar system in the United States and abroad. All of
its Canadian and international operations are franchised.
6
Dollar's services and products include fleet leasing, marketing,
centralized reservations, counter automation, insurance, central billing,
supplies and training and operational support. Dollar's company-owned stores and
franchisees rent vehicles on a daily, weekend, weekly and monthly basis, at
varying rates depending on cost and other competitive factors in each location's
market. In addition to vehicle rentals, Dollar and its franchisees sell
ancillary products and rent supplemental equipment. To meet seasonal and other
demand changes, Dollar shifts vehicles among its company-owned stores and U.S.
franchisees. Revenues from Dollar's franchisees outside the United States and
Canada have not been material to its results of operations.
As of December 31, 1999, Dollar's vehicle rental system included 289
locations in the United States and Canada, consisting of 116 company-owned
stores and 173 that were operated by franchisees. Dollar's total revenue was
$735 million in 1999, of which $685 million (93%) was generated by company-owned
stores and $50 million (7%) was revenue from Dollar franchisees for vehicle
leasing fees and other service and product fees and other revenue.
Dollar operates primarily through company-owned stores, and through
franchisees in key U.S. leisure destinations and in other U.S. locations. Dollar
has company-owned stores in 39 of the 50 largest U.S. airport markets and
franchisees in the remaining 11 markets. When opportunities arise, Dollar may
acquire operations from franchisees and convert them to company-owned stores.
Dollar converted two franchised operations to company-owned operations in 1995,
four in 1996, three in 1997 and two in 1998. On March 13, 2000, Dollar acquired
the franchised operations of its largest Texas licensee, which includes
operations in San Antonio, Corpus Christi, Midland/Odessa, and other smaller
markets. Dollar generally has rights of first refusal on the sale of a
franchised operation.
Dollar sold its company-owned store in Colorado Springs in October
1998, including a license to operate Aspen, Grand Junction and Gunnison,
Colorado. This transaction was consistent with Dollar's strategy to license
markets of this size in order to grow the Dollar system.
Company-Owned Stores
Dollar believes that having company-owned stores in most of the top 50
airport markets and other key markets enhances its ability to manage its vehicle
rental system and fleet. Dollar can implement marketing and pricing strategies
to focus on discretionary leisure and business travelers, reduce costs through
bulk purchasing, apply performance benchmarks and develop and implement best
practice management techniques nationwide. Its company-owned store network also
allows Dollar to offer customers one-way rentals in certain markets.
Vehicle rentals by customers of foreign and U.S. tour operators
generated approximately 30% of Dollar's rental revenues in 1999. These rentals
are usually part of tour packages that also include air travel and hotel
accommodations. Rentals to tour customers have certain advantages. Tour
customers tend to reserve vehicles earlier than other customers, rent them for
longer periods and cancel reservations less frequently. Dollar has significant
relationships with foreign and domestic tour operators that resulted in rental
revenue of $206 million in 1999.
Dollar is the exclusive U.S. vehicle rental company for three of its
five largest tour operator accounts. Its arrangement with the other tour
operator accounts are non-exclusive. The agreements for these five accounts
expire from December 31, 2001 to December 31, 2009. No single tour operator
account generated in excess of 5% of the Group's 1999 revenues.
As of December 31, 1999, Dollar had vehicle rental concessions for
company-owned stores at 59 airports in the United States. Its payments for these
concessions are usually based upon a specified percentage of airport-generated
revenue, subject to a minimum annual fee, and sometimes include fixed rent for
terminal counters or other leased properties and facilities.
7
Services and Products Provided to Rental Customers
Worldwide Reservation System. Dollar has continuously staffed
reservation facilities at its headquarters in Tulsa, Oklahoma and at its
facility in Tahlequah, Oklahoma. Dollar's reservation facilities, as well as the
major U.S. airline global distribution systems, are linked to Dollar's worldwide
reservation computer and telecommunications system, which is also located in
Tulsa, Oklahoma. Dollar's reservation facilities collectively processed 8.1
million reservation telephone calls during 1999. Approximately 40% of Dollar's
1999 non-tour vehicle rentals were booked by travel agents through airline
distribution systems. Dollar has preferred supplier agreements with many major
travel agency chains and travel consortia. Reservations to Dollar's Internet web
site, (www.dollar.com), increased 182% in 1999 to approximately 246,000 booked
reservations.
Supplemental Equipment and Optional Products. Dollar rents ski racks,
mobile telephones, baby seats and other supplemental equipment and, subject to
availability and applicable local law, makes available loss damage waivers and
insurance products related to the vehicle rental.
Instant Return. Dollar offers customers instant return service at most
of its U.S. airport company-owned stores. When a customer returns a vehicle at
one of these locations, a representative meets the customer and provides a
receipt from a hand-held computer terminal.
Information Systems
Dollar depends upon a number of core information systems to operate its
business, primarily its counter automation and revenue management systems. The
counter automation system in Dollar's company-owned stores facilitates the sale
of additional products and services and allows Dollar to monitor its fleet and
financial assets. Dollar introduced its new rental counter automation system,
FASTLANE(R), for company-owned stores in the continental United States (except
Florida) in 1998 and Hawaii in 1999. In 1998, Dollar developed a revenue
management system with Talus, a leading supplier of such systems, which is
utilized in all of Dollar's company-owned stores. The system is designed to
enable Dollar to better determine rental demand based on historical reservation
patterns and adjust its rental rates accordingly.
Dollar has entered into an agreement with The SABRE Group, Inc.
("SABRE"), a leader in electronic distribution systems for the travel industry,
to manage and monitor its data center network and its daily information
processing. All of Dollar's key systems are housed in a secure underground SABRE
facility in Oklahoma designed to withstand disasters.
Dollar's core information systems were updated to address the Year 2000
issues as discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000."
Customer Service and Employee Training
Dollar has programs at its headquarters and in company-owned stores to
improve customer service. Customer First!, Dollar's quality improvement program,
involves establishing a team at each vehicle rental location that is accountable
for customer satisfaction. Dollar's customer service center measures customer
satisfaction, tracks service quality trends, handles customer complaints and
provides recommendations to Dollar's senior management and vehicle rental
location supervisors. Dollar conducts initial and ongoing training for
company-owned store and franchisee employees through education centers in San
Francisco, Tulsa, Newark, Denver, Los Angeles and Cleveland.
8
Orlando Operations
Central Florida, with its many tourist attractions, is the most
important leisure destination for Dollar. Dollar's company-owned store at
Orlando International Airport has a mix of tour and retail business. Dollar also
operates a facility at the Orlando Sanford International Airport, 25 miles north
of Orlando, which mainly serves charter flights by foreign tour operators. This
facility, which was specifically designed to handle tour customers, has 42
rental stations and parking for approximately 1,600 vehicles.
Franchising
United States and Canada
Approximately 7% of Dollar's 1999 revenues in the United States and
Canada consisted of leasing revenue and fees from its franchisees and other
revenues. Dollar sells its U.S. franchises on an exclusive basis for specific
geographic areas. Most franchisees are located at or near airports that generate
a lower volume of vehicle rentals than the airports served by Dollar's
company-owned stores. Dollar also makes a fleet leasing program available to its
U.S. franchisees, which in 1999 accounted for approximately 4% of Dollar's total
revenue. As of December 31, 1999, Dollar had franchised operations located in 26
countries. In Canada, Dollar's master franchisee directly operates or
subfranchises 34 airport and suburban locations. See "Fleet Acquisition and
Management -- Fleet Leasing Programs."
Dollar licenses its franchisees to use Dollar's service marks in the
vehicle rental and leasing, parking and used car sales businesses. Franchisees
pay Dollar an initial franchise fee generally based on the population, number of
airline passengers, total airport vehicle rental revenues and the level of any
other vehicle rental activity in the franchised territory, as well as other
factors.
System Fees. In addition to an initial franchise fee, in 1999 each U.S.
franchisee was generally required to pay Dollar a system fee on their rental car
revenue equal to 8% of gross rental revenue on a monthly basis for airport
operations (7% in 1998 and 6% in 1997) and 6% for suburban operations.
Franchisee Services and Products. Dollar makes insurance coverage
available to its franchisees and provides them with training and operational
assistance, site selection guidance, vehicle damage recovery and claims
management advice, sales assistance and image and standards guidance. Dollar
also provides them with fleet planning and customer satisfaction programs and
sells them certain Dollar-branded supplies. In addition, Dollar offers its
franchisees rental rate management analysis, corporate account and tour billing
and travel agent commission payments. Dollar franchisees are connected to, and
pay Dollar a fee for, each reservation made through Dollar's worldwide
reservation system.
International
Master franchisees, direct franchisees and subfranchisees operate
Dollar's vehicle rental locations outside the United States. Master franchisees
are authorized to use Dollar's service marks and business methods in territories
in which they operate directly or through subfranchisees, and are responsible
for promoting the Dollar brand name and its services and products and for
developing and supporting their direct operations and subfranchisees. Dollar's
revenues from international franchise operations were less than 1% of 1999 total
revenue.
Effective February 29, 2000, Dollar terminated its reservation transfer
agreement with Europcar International, S.A., a European-based vehicle rental
company ("Europcar") and thereafter began exchanging reservations with Sixt, AG,
a major European rental car company, which operates over 1,500 rental outlets
principally in Europe and North Africa.
9
The number of foreign locations or Dollar system-wide locations
disclosed in this report do not include the Europcar or Sixt locations.
Marketing
National Advertising and Promotion
Dollar's primary marketing objective is to convey to cost conscious
leisure and business travelers that Dollar is committed to providing
lower-priced vehicle rentals than its competitors. Dollar also emphasizes its
operations in Florida, California, Hawaii, Nevada and Arizona, which are popular
leisure destinations. Dollar's national advertising programs build on these
themes through weekly advertisements in U.S. newspaper travel sections and
advertisements in USA Today. Dollar also advertises on U.S. broadcast and cable
television networks, promoting its low rates and on-airport convenience. Dollar
spends approximately 5% of its annual total U.S. system-wide revenues on
marketing, advertising, public relations and sales promotions. Dollar has
national marketing partnerships with major U.S. airlines' frequent flier
programs in order to attract customers who value frequent flier awards as well
as low vehicle rental rates.
Dollar encourages franchisees, as well as local management of
company-owned stores, to develop local market relationships and retail sales
initiatives that coordinate with Dollar's national advertising programs. Dollar
makes available print and broadcast advertising materials to franchisees for use
in local markets, and pays a promotional allowance for qualifying advertising
expenditures to the franchisees that participate in Dollar's fleet program.
Dollar has made filings under the intellectual property laws of
jurisdictions in which it or its franchisees operate, including the U.S. Patent
and Trademark Office, to protect the names, logos and designs identified with
Dollar. These marks are important for customer awareness and selection of Dollar
for vehicle rental.
Strategic Marketing Efforts
Travel agencies book approximately 40% of Dollar's non-tour vehicle
rentals through the major U.S. airline global distribution systems. Major travel
agency chains and consortia operate under preferred supplier agreements with
Dollar and are supported by Dollar's sales department. Under its preferred
supplier arrangements, Dollar provides these travel agency groups additional
commissions or lower prices in return for their featuring Dollar in their
advertising or giving Dollar a priority in their reservation systems. In
general, these arrangements are not exclusive to Dollar, and many travel agency
groups have similar arrangements with other vehicle rental companies.
During 1999, Dollar received approximately 14% of its reservations
through its www.dollar.com web site and other internet travel sites. Dollar will
continue to invest in its www.dollar.com web site and plans to roll out
additional improvements in early 2000. In January 2000, Gomez Advisors, a
recognized resource in providing consumer and business-based e-commerce research
tools and analysis, rated dollar.com as the No. 1 car rental site on the Gomez
Advisors Winter 1999-2000 Internet Car Rentals Scorecard.
In January 2000, Dollar launched the first full-service travel web site
sponsored by a car rental company. DollarTravel.com is powered by TRIP.com,
which offers consumers online access to more than 500 airlines, 40,000 hotels
and 45 car rental companies.
10
Summary Operating Data of Dollar
Years Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
Revenues:
U.S. Company-owned stores $ 682,769 $ 605,187 $ 559,610
U.S. and Canada franchisees 47,848 50,011 51,256
International franchisees 2,547 3,100 3,427
Other 1,847 1,824 1,989
---------- ---------- ----------
Total revenues $ 735,011 $ 660,122 $ 616,282
========== ========== ==========
As of December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Rental Locations:
U.S. Company-owned stores 116 114 103
U.S. and Canada franchisee locations 173 154 152
Franchisees:
U.S. and Canada 77 73 70
International 40 50 49
11
Thrifty
General
Thrifty's main focus is on franchising and franchise support services.
Thrifty also operates company-owned stores in six cities in the United States
and Canada. Thrifty's U.S. company-owned stores and its franchisees derive
approximately 60% of their combined rental revenues from the airport market and
approximately 40% from the local market. Thrifty's approach of serving both the
airport and local markets within each territory allows many of its franchisees
and company-owned stores to have multiple locations to improve fleet utilization
and profit margins by moving vehicles among locations to better address
differences in demand between their markets. As airports have begun to institute
fees for vehicle rental companies located outside their properties, or limited
these companies' access to airport travelers, Thrifty franchisees have begun
moving to on-airport locations.
As of December 31, 1999, Thrifty's vehicle rental system included 684
rental locations in the United States and Canada, divided between 651 franchisee
locations and 33 company-owned stores. The Thrifty system also included 610
locations abroad, all of which were franchisee locations. Thrifty's total
corporate revenue was $263 million in 1999, of which $229 million (87%) was
revenue from franchisees in the form of fleet leasing fees and other service and
product fees and $34 million (13%) of which was generated by company-owned
stores. Revenues from Thrifty's franchisees outside the United States and Canada
have not been material to its results of operations.
Franchising
United States
Thrifty's U.S. franchisees are the core of its operations and are
essential to its long-term profitability and growth. Thrifty offers its
franchisees a full line of services and products not easily or cost-effectively
available from other sources. Thrifty actively promotes franchisee financial
stability and growth and seeks opportunities to enhance its vehicle rental
system by improving its services to franchisees, particularly its fleet leasing
programs, and by developing new franchisee revenue opportunities, such as
airport parking and truck rental. Thrifty also works closely with its U.S.
franchisees in formulating and implementing marketing and operating strategies.
Thrifty licenses its U.S. franchisees to use its service marks and
participate in its various services and systems. Franchisees pay Thrifty an
initial franchise fee based on such factors as the population, the number of
airline passengers, and total airport vehicle rental revenues and the level of
any other vehicle rental activity in the franchised territory. Franchises are
sold on an exclusive basis for a specific geographical territory, usually a city
or metropolitan area. Over the past five years, Thrifty's franchisee turnover
has averaged approximately 9% per year, with an average of 16 terminations and
24 new sales (including new territories added to existing franchise agreements)
per year.
Initial Franchise Fees, System Fees and Advertising Fees. Thrifty's
initial franchise fees are negotiated on a case-by-case basis, and may be
structured to promote expansion of an existing franchisee's operations into a
contiguous area. In addition to the initial franchise fee, its U.S. franchisees
pay Thrifty an administrative fee, which is generally 3% of base rental revenue,
excluding ancillary products.
U.S. franchisees also pay an advertising fee ranging from 2.5% to 5% of
base rental revenue to a separate advertising fund managed jointly by
franchisees and Thrifty management. Thrifty has implemented, and may implement
in the future, special short-term reductions in system and advertising fees to
encourage growth.
12
For 1999, Thrifty's five largest U.S. franchisees generated
approximately 19% of Thrifty's total corporate revenue in the form of system,
fleet leasing, reservation and other fees.
Marketing to Prospective Franchisees. Thrifty has developed programs to
attract additional franchisees in the vehicle rental industry. Programs include
attracting independent vehicle rental companies with phased-in fees and
competitive fleet leasing terms, assisting individuals experienced in vehicle
rental operations to operate their own franchises through financial assistance,
start-up fleet supply and other support. Thrifty also encourages existing
franchisees to acquire and expand into neighboring territories by offering fleet
incentives, reduced administrative and advertising fees and lower initial
franchise fees for additional territories.
Fleet Leasing Program. Thrifty has a fleet leasing program for
franchisees that it believes provides them with a competitive and flexible
source of fleet vehicles. In 1999, fleet leasing accounted for approximately 72%
of Thrifty's total revenue.
See "Fleet Acquisition and Management-- Fleet Leasing Programs."
Training and Support. Thrifty's franchisees receive required initial
orientation and ongoing training in areas such as customer service and hiring.
In early 1997, Thrifty began implementing its "True Blue Pride Initiative" to
identify areas requiring customer service improvements and to implement new
standards to deliver faster and friendlier service. This initiative emphasizes
the role that franchisee customer service employees should have in identifying
and resolving customer complaints. New programs that have been developed as part
of the initiative include Thrifty's frequent renter program, Blue Chip, which
provides for preprinted rental contracts and expedited service.
Thrifty also publishes a comprehensive operating manual for franchisees
and provides operational support in areas such as cost control, fleet planning,
revenue management and local advertising and marketing. Thrifty also assists
franchisees on real estate matters, including site selection and airport
facility issues.
Worldwide Reservation Center and Other Information Systems. Thrifty's
franchisees benefit from Thrifty's continuously staffed worldwide reservation
centers at its headquarters in Tulsa, Oklahoma and its reservation facility in
Okmulgee, Oklahoma, which in 1999, collectively processed approximately 4.3
million telephone calls. Thrifty's reservation facilities are linked to all of
the major U.S. airline reservation systems and through them to travel agencies
in the United States, Canada and abroad. These centers are a key means of
marketing the Thrifty system to consumers and travel agents and informing them
about the system's vehicle rental rates, products, promotions and services.
Thrifty franchisee payments for reservations made through these centers
accounted for approximately 4% of Thrifty's 1999 total revenues. Reservations
through Thrifty's Internet web site (www.thrifty.com) increased in 1999 by 206%
to approximately 73,000 booked reservations.
U.S. franchisees receiving a certain volume of reservations are
required to use an approved automated counter system, usually leasing or
subleasing the related hardware and software from Thrifty or a third-party
leasing agent. In addition to providing an electronic data link with Thrifty's
worldwide reservation centers, the automated counter system prints rental
agreements and provides Thrifty and its franchisees with customer and vehicle
inventory information and financial and operating reports.
Thrifty supports its information systems through a combination of
internal resources and external technology providers. Thrifty has engaged SABRE
to manage and monitor its data center network and its daily information
processing. Reservation applications systems continue to be serviced by Perot
Systems Corporation under a five-year agreement through 2002. Other information
systems are supported by Thrifty employees. All of Thrifty's key systems are
housed in a secure underground SABRE facility in Oklahoma designed to withstand
disasters.
13
Thrifty's core information systems were updated to address the Year
2000 issues, as discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000."
Insurance, Supplies and National Account Programs. Thrifty makes
available to its franchisees for a fee insurance for death or injury to third
parties, property damage and damage to or theft of franchisee vehicles.
Thrifty makes bulk purchases of items used by its franchisees, which it
sells to franchisees at prices that are often lower than they could obtain on
their own. Thrifty also negotiates national account programs to allow its
franchisees to take advantage of volume discounts for many materials or services
used for operations such as tires, glass replacement, long distance telephone
service and overnight mail.
Parking Services. Airport parking operations are a natural complement
to vehicle rental operations. Thrifty encourages its franchisees that have
near-airport locations to add this ancillary business. Thrifty assists its
franchisees in obtaining additional property and in planning and implementing
parking operations. Franchisees benefit since the Thrifty service marks are
already on the premises, shuttle buses are already being operated for rental
customers and parking operations increase service levels and recognition at the
airports. Franchisees with parking operations may also offer ancillary services
such as car washes and oil changes to create additional opportunities to service
the vehicle while the traveler is away. Thrifty receives a royalty fee generally
equal to 3% of the total revenue generated from these services.
Services and Products Provided to Rental Customers. Thrifty's
franchisees provide their customers with products and services substantially
similar to those provided to customers by Dollar's company-owned stores.
International (Except Canada)
As of December 31, 1999, Thrifty master franchisees operated 610
vehicle rental locations in 63 countries and territories outside the United
States and Canada. Regions with Thrifty franchisees include Latin America,
Europe, the Middle East and the Asia-Pacific region. Thrifty seeks to attract
international franchisees by emphasizing Thrifty's uniform image, brand
marketing efforts, worldwide reservation system and consistent vehicle rental
system practices and procedures. Thrifty's corporate revenues from international
franchisees were less than 2% of 1999 total revenues.
Thrifty grants master franchises on a countrywide basis. Each master
franchisee is permitted to use directly and subfranchise others to use Thrifty's
service marks, systems and technologies within its country or territory.
Company-Owned Stores
Thrifty typically establishes company-owned stores only upon the
financial failure of a franchisee. Thrifty uses company-owned stores to preserve
its presence in key markets. As opportunities arise, these locations are
refranchised. During 1999, Thrifty reduced the number of cities in which it
operates company-owned stores to one in the United States by selling a company
store to a franchisee. Thrifty intends to continue to operate its company-owned
store in Tulsa, Oklahoma. The services and products Thrifty provides to
company-owned stores and those provided by company-owned stores to vehicle
rental customers are substantially similar to those provided to and by Thrifty's
U.S. franchisees.
Thrifty Car Sales
Thrifty Car Sales, Inc., was formed in December 1998, to franchise
retail used car dealerships under the Thrifty Car Sales brand name. Thrifty Car
Sales provides an opportunity for both independent and manufacturer franchised
dealers to enhance or expand their used car operations under a well-recognized
national brand name. In addition to the use of the brand name dealers will have
access to a variety of products and services offered by Thrifty Car Sales. These
products and services include operational and marketing support, vehicle supply
services, customized retail and wholesale financing programs as well as national
accounts and supplies programs.
14
At December 31, 1999, Thrifty Car Sales had signed dealer agreements
for 15 U.S. cities including a corporate operation in Tulsa, Oklahoma.
Canadian Operations
Thrifty operates in Canada through its wholly owned subsidiary, Thrifty
Canada, Ltd. ("TCL"). TCL operates company-owned stores in the five largest
airport vehicle rental markets in Canada and encourages franchisees to operate
in the remaining markets. As of December 31, 1999, the TCL system included 130
vehicle rental locations, of which 101 were operated by franchisees and 29 were
operated as company-owned stores.
Company-Owned Stores
TCL's company-owned store operations include five strategic airports:
Toronto, Montreal, Vancouver, Winnipeg and Calgary. These operations are
important to maintaining a national airport presence in Canada, where TCL has
significant airport concession and lease commitments. Historically, TCL's
operating results have been adversely affected by losses incurred by
company-owned stores.
Franchising
TCL provides services and products to its franchisees that are
substantially similar to those Thrifty provides to its U.S. franchisees,
including fleet leasing, insurance services, advertising and marketing support
and supplies. Due to the structure of the Canadian vehicle rental market, which
has a greater proportion of vehicle rental activity from on-airport locations
than off-airport locations as compared to the United States, Thrifty has sought
to strengthen its airport presence in Canada by encouraging existing and
prospective franchisees to locate on-airport. Canadian franchisees pay TCL a
combined monthly administrative and advertising fee fixed in most cases at 8% of
rental revenues.
Marketing
Thrifty's marketing strategy is to position the Thrifty system as an
industry leader in delivering value for cost-conscious consumers. In the United
States it implements this strategy primarily through national advertising and
promotion assistance to U.S. franchisees in local advertising, promotion and
sales and strategic marketing partnerships.
Advertising, Promotion and Sales
Thrifty employs national advertising on U.S. broadcast and cable
television networks and in newspapers and travel industry and airline magazines.
Thrifty also sponsors sports and other events to increase national exposure and
promote local Thrifty operations. In the United States, Thrifty's national
advertising and marketing expenses are paid out of an advertising fund managed
by a national advertising committee consisting of representatives of Thrifty
franchisees and certain members of Thrifty management. U.S. franchisees and
company-owned stores contribute 5% of their base rental revenue from airport
operations and 2.5% of their base rental revenue from local operations to the
advertising fund.
U.S. franchisees and company-owned stores are also required to spend an
additional 3% of their base rental revenue on local advertising and promotion.
Thrifty has a local sales department that assists franchisees in developing
their local markets. Thrifty also provides an allowance for qualifying local
advertising, promotion and sales expenditures to U.S. franchisees that
participate in Thrifty's fleet leasing program. In the 1999 model year,
franchisees and company-owned stores earned an aggregate allowance of
approximately $5.5 million.
15
Thrifty has made filings under the intellectual property laws of
jurisdictions in which it or its licensees operate, including the U.S. Patent
and Trademark Office, to protect the names, logos and designs identified with
Thrifty. These marks are important for customer awareness and selection of
Thrifty for vehicle rental.
Strategic Marketing Efforts
Thrifty's approach of targeting value-conscious consumers includes
strategic marketing partnerships, such as those it has with Montgomery Wards in
the United States, Canadian Tire in Canada and Ryder Truck Rental throughout
North America. Thrifty also has frequency-based marketing relationships with
numerous airlines and hotel chains. Since a significant portion of Thrifty's
system-wide rentals result from travel agency reservations, Thrifty maintains
its relationships with travel agency chains and consortia through preferred
supplier agreements, travel agent advertising and other efforts. Under its
preferred supplier arrangements, Thrifty provides these travel agency groups
additional commissions or lower prices in return for their featuring Thrifty in
their advertising or giving Thrifty a priority in their reservation systems. In
general, these arrangements are not exclusive to Thrifty, and many travel agency
groups have similar arrangements with other vehicle rental companies.
Summary Operating Data of Thrifty
Years ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
Revenues:
U.S. and Canada franchisees $ 225,934 $ 200,505 $ 159,636
U.S. and Canada company-owned stores 33,981 34,526 63,946
International franchisees 3,063 2,888 2,761
---------- ---------- ----------
Total revenues $ 262,978 $ 237,919 $ 226,343
========== ========== ==========
As of December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Rental Locations:
U.S. and Canada franchisee locations 651 609 600
U.S. and Canada company-owned stores 33 25 36
Franchisees:
U.S. and Canada 245 232 231
International 63 67 63
16
Fleet Acquisition and Management
U.S. Vehicle Supply
For the 1999 model year, DaimlerChrysler vehicles represented
approximately 87% of the Group's total U.S. fleet. The Group also purchases or
leases vehicles of other automotive manufacturers, permitting it to adjust the
composition and overall cost of its fleet. The Company expects that for the 2000
model year, DaimlerChrysler vehicles will represent over 85% of the Group's U.S.
fleet.
Automotive manufacturers' residual value programs limit the Group's
residual value risk. Under these programs, the manufacturer either guarantees
the aggregate depreciated value upon resale of covered vehicles of a given model
year, as is generally the case under DaimlerChrysler's program, or agrees to
repurchase vehicles at specified prices during established repurchase periods.
In either case, the manufacturer's obligation is subject to certain conditions
relating to the vehicle's age, physical condition and mileage. Vehicles
purchased by vehicle rental companies under these programs are referred to
herein as "Program Vehicles." Vehicles not purchased under these programs and
for which rental companies therefore bear residual value risk are referred to
herein as "Non-Program Vehicles." The Company believes that a majority of
vehicles owned by other U.S. vehicle rental companies are Program Vehicles.
The Group's primary supplier, DaimlerChrysler, sets the terms of its
residual value program before the start of each model year. The terms include
monthly depreciation rates, minimum and maximum holding periods and mileage,
model mix requirements and vehicle condition and other return requirements. The
residual value program enables the Group to limit its residual value risk with
respect to Program Vehicles because DaimlerChrysler agrees to reimburse Dollar
and Thrifty for any difference between the aggregate gross auction sale price of
the Program Vehicles for the particular model year and the vehicles' aggregate
predetermined residual value. Under the program, Dollar and Thrifty must sell
the Program Vehicles in closed auctions to DaimlerChrysler dealers. Dollar and
Thrifty are reimbursed under the program for certain transportation and
auction-related costs.
The Group also purchases Non-Program Vehicles, when required by
manufacturers in connection with the purchase of Program Vehicles, or if it
believes there is an opportunity to lower its fleet costs or to fill model and
class niches not available through residual value programs. DaimlerChrysler,
which is the main provider of Non-Program Vehicles to the Group, does not set
any terms or conditions on the resale of Non-Program Vehicles other than
required minimum holding periods. For the 1999 model year, approximately 20% of
the vehicles acquired by the Group were Non-Program Vehicles.
The Group's operating results are materially affected by the
depreciation rates and other purchase terms provided under DaimlerChrysler's
residual value program, as well as by other purchase incentives DaimlerChrysler
provides. The percentage of vehicles acquired under DaimlerChrysler's and other
manufacturers' residual value programs in the future will depend upon a number
of factors, including the availability and cost of these programs. Residual
value programs enable Dollar and Thrifty to determine their depreciation expense
on Program Vehicles in advance. Vehicle depreciation is the largest single cost
element in the Group's operations. The percentage of the Group's vehicle rental
fleets benefiting from residual value programs could decrease if the automotive
manufacturers changed the size or terms of these programs. In that event, the
Group would have increased residual value risk that could be material to its
results of operations and could adversely affect its ability to finance its
vehicles. Second, because it is difficult to predict future vehicle resale
values, the Group may not be able to manage effectively the residual value risk
on its Non-Program Vehicles. As recently as 1997, results for the Group were
adversely affected by lower than anticipated residual values. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
Ended December 31, 1998 Compared With Year Ended December 31, 1997." The
residual value of Non-Program Vehicles depends on such factors as the general
level of pricing in the automotive industry for both new and used vehicles.
Prices for used vehicles generally decrease if the automotive manufacturers
increase the retail sales incentives they offer on new vehicles. The Company
cannot predict the level of retail sales incentives DaimlerChrysler or the other
automotive manufacturers will offer in the future. The Group has received
substantial payments under residual value programs over the past several years.
See Note 5 of Notes to Consolidated Financial Statements.
17
DaimlerChrysler has been the Group's principal supplier of vehicles. In
1996, DaimlerChrysler began operating under five-year vehicle supply
arrangements that were formalized in 1996 and 1997 in separate U.S. vehicle
supply agreements ("VSAs") with Dollar and Thrifty. DaimlerChrysler has agreed
to make specified volumes of DaimlerChrysler vehicles available to Dollar and
Thrifty through July 2001. Negotiations are underway to extend the VSAs. Dollar
and Thrifty may purchase vehicles for use by company-owned stores or for their
fleet leasing programs. Dollar and Thrifty have agreed to promote
DaimlerChrysler vehicles exclusively in their advertising and other promotional
materials. DaimlerChrysler has agreed to make various promotional payments to
Dollar and Thrifty, some of which vary based on the volume of vehicles
purchased. These payments are material to the Group's results of operations. See
Note 5 of Notes to Consolidated Financial Statements.
The VSAs provide that Dollar and Thrifty will each purchase at least
80% of their respective vehicles from DaimlerChrysler until a certain minimum
level is reached. Also, certain minimum numbers of vehicles must be Program
Vehicles. While DaimlerChrysler has the sole discretion to set the specific
terms and conditions of its residual value program for a model year, it has
agreed in the VSAs to offer programs to Dollar and Thrifty that, taken as a
whole, are competitive with a residual value program Ford or General Motors
makes generally available to domestic vehicle rental companies.
If purchases of DaimlerChrysler vehicles by Dollar or Thrifty during
any model year exceed certain targets, DaimlerChrysler will make available to
Dollar or Thrifty additional Program Vehicles up to a maximum of 15% of the
target number of DaimlerChrysler Program Vehicles.
Vehicle Disposition
Dollar and Thrifty generally hold vehicles in rental service from six
months to 18 months. The length of service is determined by taking into account
seasonal rental demand and the average monthly mileage accumulation. Most
vehicles must be removed from service before they reach 30,000 miles to avoid
significant penalties under DaimlerChrysler's residual value program. As of
December 31, 1999, the average age of vehicles in the Group's fleet was
approximately five months. The Group's flexibility to adjust the holding period
for vehicles, particularly for Program Vehicles, enables the Group to adjust its
fleet size up or down relatively quickly in response to changing market
conditions. Dollar or Thrifty must bear the risk on the resale of Program
Vehicles that cannot be returned
Dollar and Thrifty dispose of Non-Program Vehicles through auctions and
directly to used car dealers, wholesalers, retail and franchisees. During 1999,
Dollar and Thrifty disposed of 72% of their Non-Program Vehicles through direct
channels and 28% through auctions compared to 53% direct and 47% to auctions
during 1998. The Company believes that utilizing sales channels other than
auctions avoids transportation costs, interest costs and auction fees and may
provide higher net residual amounts from disposal.
Maintenance
Dollar and certain Dollar and Thrifty franchisees may have automotive
maintenance centers at airports and in urban and suburban areas. Many of these
facilities are accepted by automotive manufacturers as eligible to perform and
receive reimbursement for warranty work. Collision damage and major repairs are
generally performed by independent contractors. Dollar and Thrifty franchisees
are responsible for the maintenance of their fleet vehicles.
18
Fleet Leasing Programs
Dollar and Thrifty make fleet leasing programs available to their U.S.
franchisees for each new model year. The terms of their fleet leasing programs
generally mirror the requirements of various manufacturers' residual value
programs with respect to model mix, order and delivery, vehicle maintenance and
returns, but also include Non-Program Vehicles. Dollar and Thrifty monitor the
creditworthiness and operating performance of franchisees participating in their
fleet leasing programs and periodically audit franchisees' leased fleets. Dollar
and Thrifty design their fleet leasing programs to offer their franchisees an
attractive means of obtaining fleet vehicles. For 1999, approximately 35% and
70% of the vehicles in the fleets of Dollar's and Thrifty's respective U.S.
franchisees had been provided through their fleet leasing programs. In 1999,
approximately 4% of Dollar's and 72% of Thrifty's (including Canada) total
revenue was derived from vehicle leasing programs. During 1999, a limited number
of larger franchisees acquired their vehicles directly from manufacturers.
The Group sets their lease rates after considering Program Vehicle
depreciation rates, estimated Non-Program Vehicle depreciation, interest costs,
model mix and administrative costs. Average monthly lease rates vary depending
on vehicle model, and the average lease period is between eight and ten months.
Although Dollar and Thrifty lease Non-Program Vehicles as well as Program
Vehicles to their franchisees, their fleet leasing programs eliminate the
residual value risk for their franchisees. Thrifty franchisees may, however,
elect to assume some residual value risk on certain Non-Program Vehicles they
lease in exchange for a lower lease rate.
U.S. Fleet Data
Years Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Thrifty:
Average number of vehicles leased to franchisees 31,856 29,595 23,878
---------- ---------- ----------
Average number of vehicles in combined fleets of
franchisees 45,613 39,434 31,854
Average number of vehicles in combined fleets of
company-owned stores 483 865 3,470
---------- ---------- ----------
Total 46,096 40,299 35,324
========== ========== ==========
Dollar:
Average number of vehicles leased to franchisees 4,960 6,151 6,735
---------- ---------- ----------
Average number of vehicles in combined fleets of
franchisees 14,252 13,513 13,523
Average number of vehicles in combined fleets of
company-owned stores 56,065 50,673 47,813
---------- ---------- ----------
Total 70,317 64,186 61,336
========== ========== ==========
19
Competition
There is intense competition in the vehicle rental industry on the
basis of price, service levels, vehicle quality, vehicle availability and
convenience and condition of rental locations. Dollar and Thrifty's principal
competitors have larger market shares and rental volumes, greater financial
resources and more sophisticated information systems. Dollar operates mainly in
the U.S. airport market, although compared to its competitors it relies more
heavily on discretionary leisure, tour and business customers. Dollar's
franchisees have a similar customer profile. In any given location, Dollar may
compete with national, regional and local vehicle rental companies, many of
which have greater financial resources than the Group. Dollar's principal
competitors for discretionary business and leisure travelers are Alamo, Avis,
Budget, Hertz, National and Thrifty. Dollar competes primarily on the basis of
price and customer service.
Thrifty's U.S. franchisees generally compete for cost-conscious
consumers with Alamo, Avis, Budget, Dollar, Hertz and National. Enterprise,
Hertz, Avis and CarTemps USA (a division of AutoNation) as well as local and
regional rental companies are major competitors in the local market. They
compete on the basis of price, location, service and well-established customer
relationships. Most Thrifty franchisees compete in the local market for retail
general use business rather than insurance replacement rentals. Thrifty's
company-owned store has a similar customer profile.
The Canadian vehicle rental markets are also intensely competitive. The
vast majority of the Canadian market is operated either directly or through
franchisees of the major U.S. vehicle rental companies, including Budget, Avis,
Hertz and National, as well as Dollar and Thrifty.
Insurance
The Group is subject to third-party bodily injury liability and
property damage liability claims resulting from accidents involving their rental
customers. The Group carries first dollar coverage for third-party bodily injury
and property damage liability claims arising from the use of a vehicle in the
United States. Dollar obtained first dollar coverage during the first quarter of
1999 and Thrifty obtained first dollar coverage during the second quarter of
1999. Prior to the above coverage levels, the Group retained the risk of loss in
various amounts up to $2 million on a per occurrence basis. The Group maintains
additional insurance at certain amounts in excess of its respective underlying
coverages.
The Group retains the risk of loss for general and garage liability
insurance coverage up to $1 million and maintains insurance at certain amounts
in excess of $1 million. They also maintain catastrophic and comprehensive
coverage for damage to vehicles owned by them up to $3 million per occurrence
with a deductible amount of $250,000. In addition, the Group carries workers'
compensation coverage with retentions up to $100,000. The Group also carries
excess liability and directors' and officers' liability insurance coverage.
Provisions for bodily injury liability and property damage liability on
self-insured claims are made by charges to expense based upon periodic
evaluations by an independent actuary of estimated ultimate liabilities on
reported and unreported claims. As of December 31, 1999, the Group's reserve for
public liability and property damage claims was approximately $58.8 million. The
Group's obligations to pay these losses and indemnify the insurance carriers are
collateralized by surety bonds. As of December 31, 1999, these surety bonds
totaled approximately $64.5 million.
The Group also maintains various surety bonds to secure performance
under airport concession agreements and other obligations. As of December 31,
1999, the total amount of these bonds was approximately $14.5 million.
20
Regulation
Loss Damage Waivers and Supplemental Liability Insurance
Loss damage waivers relieve customers from financial responsibility for
vehicle damage. Legislation affecting the sale of loss damage waivers has been
adopted in 25 states. These laws either require disclosure to customers that
loss damage waivers may not be necessary, limit customer liability to specified
amounts, limit the ability of vehicle rental companies to offer loss damage
waivers for sale or cap the amounts that may be charged for loss damage waivers.
Adoption of national or additional state legislation affecting or limiting the
sale, or capping the rates, of loss damage waivers could result in the loss of
this revenue and additional limitations on potential customer liability could
increase costs to Dollar, Thrifty and their franchisees.
Dollar, Thrifty and other vehicle rental companies offer customers
supplemental liability insurance ("SLI") in connection with vehicle rentals. In
1997, the State of Texas determined that car rental companies cannot sell SLI
without licensing and product approval. Some other states concluded that the
selling of SLI required an insurance license while other states were unclear on
the issue. During the fourth quarter of 1999, the Financial Services Reform Bill
was passed by Congress to address this issue. The effect of the legislation is
to create a federal presumption for a three-year period that car rental
companies are not required to have a state insurance license to sell certain
insurance products, unless state law specifically requires such a license. In
states where existing law does not require such insurance licensing, car rental
companies are working to enact legislation which either specifically exempts
them from licensing requirements or which grants them a limited license to sell
insurance products related to car rental, such as SLI.
Franchising Regulation
As franchisors, Dollar and Thrifty are subject to federal, state and
foreign laws regulating various aspects of franchise operations and sales. These
laws impose registration and disclosure requirements on franchisors in the offer
and sale of franchises and, in certain states, also apply substantive standards
to the relationship between the franchisor and the franchisee, including those
pertaining to default, termination and nonrenewal of franchises.
Other Matters
Certain states currently make vehicle owners (including vehicle rental
companies) vicariously liable for the actions of any person lawfully driving an
owned vehicle, regardless of fault. Some of these states, primarily New York, do
not limit this liability. Vehicle rental companies are also subject to various
federal, state and local consumer protection laws and regulations including
those relating to advertising and disclosure of charges to customers.
Dollar and Thrifty are subject to federal, state and local laws and
regulations relating to taxing and licensing of vehicles, franchise sales,
franchise relationships, vehicle liability, used vehicle sales, insurance,
telecommunications, vehicle rental transactions and labor matters. The Company
believes that Dollar and Thrifty practices and procedures are in substantial
compliance with federal, state and local laws and is not aware of any material
expenditures necessary to meet legal or regulatory requirements. Nevertheless,
considering the nature and scope of Dollar's and Thrifty's businesses, it is
possible that regulatory compliance problems could be encountered in the future.
21
Environmental Matters
The principal environmental regulatory requirements applicable to
Dollar and Thrifty operations relate to the ownership, storage or use of
petroleum products such as gasoline, diesel fuel and new and used motor oil; the
treatment or discharge of waste waters; the operation of automotive body shops;
and the generation, storage, transportation and off-site treatment or disposal
of waste materials. Dollar and Thrifty own 10 and lease 87 locations where
petroleum products are stored in underground or above-ground tanks. For owned
and leased properties, Dollar and Thrifty have programs designed to maintain
compliance with applicable technical and operational requirements, including
leak detection testing of underground storage tanks, and to provide financial
assurance for remediation of spills or releases.
The historical and current uses of the Dollar and Thrifty facilities
may have resulted in spills or releases of various hazardous materials or wastes
or petroleum products ("Hazardous Substances") that now, or in the future, could
require remediation. The Group also may be subject to requirements related to
remediation of Hazardous Substances that have been released into the environment
at properties they own or operate, or owned or operated in the past, or at
properties to which they send, or have sent, Hazardous Substances for treatment
or disposal. Such remediation requirements generally are imposed without regard
to fault, and liability for any required environmental remediation can be
substantial.
Dollar and Thrifty may be eligible for reimbursement or payment of
remediation costs associated with releases from registered underground storage
tanks in U.S. states that have established funds to assist in the payment of
such remediation costs. Subject to certain deductibles, the availability of
funds, the compliance status of the tanks and the nature of the release, these
tank funds may be available to Dollar and Thrifty for use in remediating
releases from their tank systems.
At certain facilities, Dollar and Thrifty presently are investigating
or remediating soil or groundwater contamination. Based on currently available
information, the Company does not believe that the costs associated with
environmental investigation or remediation will be material. However, additional
contamination could be identified or occur in the future.
The use of automobiles and other vehicles is subject to various
governmental requirements designed to limit environmental damage, including that
caused by emissions and noise. Generally, these requirements are met by the
manufacturer except, on occasion, equipment failure requiring repair by the
Group.
Environmental legislation and regulations and related administrative
policies have changed rapidly in recent years. There is a risk that governmental
environmental requirements, or enforcement thereof, may become more stringent in
the future and that the Group may be subject to legal proceedings brought by
government agencies or private parties with respect to environmental matters. In
addition, with respect to cleanup of contamination, additional locations at
which wastes generated by the Group may have been released or disposed, and of
which the Group is currently unaware, may in the future become the subject of
cleanup for which the Group may be liable, in whole or part. Accordingly, while
the Group believes that it is in substantial compliance with applicable
requirements of environmental laws, there can be no assurance that the Group's
future environmental liabilities will not be material to the Group's
consolidated financial position or results of operations or cash flows.
Employees
As of December 31, 1999, the Group employed a total of approximately
5,500 full-time and part-time employees of whom approximately 4,400 were
employed by Dollar and 1,100 by Thrifty. Approximately 240 of the Group's
employees were subject to collective bargaining agreements as of December 31,
1999. The Company believes the Group's relationship with its employees is good.
22
ITEM 2. PROPERTIES
The Company owns its headquarters located at 5330 East 31st Street,
Tulsa, Oklahoma. This location is a three building office complex that houses
the headquarters and reservation centers for Dollar and Thrifty. These buildings
and the related improvements were mortgaged in December 1997 pursuant to a
mortgage in favor of Credit Suisse First Boston ("CSFB"), as administrative
agent for a syndicate of banks. The mortgage was executed in connection with the
Revolving Credit Facility, as described in "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources".
Dollar and Thrifty each own or lease real property used for
company-owned stores and office facilities, and in some cases own real property
that is leased to franchisees or other third parties. As of December 31, 1999,
the Group's company-owned operations were carried on at 149 locations in the
U.S. and Canada, the majority of which are leased. Dollar and Thrifty each
operate company-owned stores under concession agreements with various
governmental authorities charged with the operation of airports. Concession
agreements for airport locations, which are sometimes competitively bid, are
important for securing air traveler business.
In connection with the Revolving Credit Facility, Dollar executed
mortgages in favor of CSFB encumbering its real property located in San Diego,
Tampa and Las Vegas. Thrifty also executed mortgages in favor of CSFB
encumbering its real property located in Phoenix, Ft. Lauderdale, Orlando,
Dallas, Houston, and Salt Lake City.
ITEM 3. LEGAL PROCEEDINGS
On November 2, 1994, the City of San Jose, California filed an action
in the Superior Court of California, against Chevron, Dollar and others, seeking
unspecified compensatory and punitive damages and injunctive relief. The City of
San Jose has not served process on Dollar. The suit relates to pollution at a
site currently occupied by Dollar and formerly occupied by Chevron. Dollar has
partially remediated the affected soil, but not the allegedly affected ground
water. Dollar believes that prior uses of the site resulted in any remaining
contamination at the site.
In addition to the foregoing, various legal actions, claims and
governmental inquiries and proceedings are pending or may be instituted or
asserted in the future against the Company and its subsidiaries. Litigation is
subject to many uncertainties, and the outcome of the individual litigated
matters is not predictable with assurance. It is possible that certain of the
actions, claims, inquiries or proceedings, including the one discussed above,
could be decided unfavorably to the Company or the subsidiaries involved.
Although the amount of liability with respect to these matters cannot be
ascertained, potential liability is not expected to materially affect the
consolidated financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1999.
23
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the trading symbol "DTG." The high and low sales prices for the
Common Stock for each quarterly period during 1999 and 1998, were as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
1999
----
High $ 17.31 $ 23.94 $ 25.44 $ 24.06
Low $ 11.31 $ 16.56 $ 18.31 $ 16.88
1998
----
High $ 24.25 $ 24.44 $ 16.56 $ 14.63
Low $ 18.38 $ 12.00 $ 9.88 $ 8.69
The 24,160,598 shares of Common Stock outstanding at February 29, 2000
were held by 3,041 stockholders of record.
The Company intends to reinvest its earnings in its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future. The Company has not paid cash dividends since completion of the
Offering.
Under the terms of the Revolving Credit Facility, restrictions were
imposed by the lender on the payment of cash dividends to stockholders. During
the five-year term of such agreement, dividends are permitted at the lesser of
specified monetary levels or percentages of cash flow.
24
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data of the Group
The selected consolidated statement of operations and balance sheet
data were derived from the audited consolidated financial statements of the
Group. References to system-wide vehicle rental revenue include revenue received
from the Group's company-owned stores and by franchisees from the rental of
vehicles.
Years Ended December 31, (b)
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Statement of Operations
(in thousands):
Revenues:
Vehicle rental $ 714,407 $ 635,600 $ 620,045 $ 497,239 $ 372,508
Vehicle leasing 218,614 202,371 164,701 149,713 177,836
Fees and services 57,046 51,770 49,143 47,597 49,382
Other 8,685 9,225 9,899 9,342 9,653
---------- ---------- ---------- ---------- ----------
Total revenues 998,752 898,966 843,788 703,891 609,379
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Direct vehicle and operating 289,129 267,504 263,850 225,558 166,473
Vehicle depreciation and lease
charges, net 311,113 305,169 294,911 230,051 220,471
Selling, general and
administrative 190,994 163,256 149,697 140,089 123,439
Interest expense, net 95,114 88,726 87,852 72,868 78,817
Amortization of cost in excess
of net assets acquired 5,842 5,417 6,010 8,169 10,456
Intangible asset impairment losses - - - 157,758 -
---------- ---------- ---------- ---------- ----------
Total costs and expenses 892,192 830,072 802,320 834,493 599,656
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 106,560 68,894 41,468 (130,602) 9,723
Income tax expense 46,974 31,229 23,427 16,682 9,753
---------- ---------- ---------- ---------- ----------
Net income (loss) (a) $ 59,586 $ 37,665 $ 18,041 $ (147,284) $ (30)
========== ========== ========== ========== ==========
Earnings (loss) per share (a):
Basic $ 2.47 $ 1.56 $ 0.90 $ (7.36) $ -
Diluted $ 2.43 $ 1.56 $ 0.90 $ (7.36) $ -
Balance Sheet Data:
(in thousands)
Revenue-earning vehicles, net $1,507,692 $1,342,066 $1,319,490 $1,120,346 $ 958,799
Total assets 2,171,653 1,865,300 1,942,210 1,647,951 1,657,823
Total debt 1,555,609 1,313,799 1,418,687 1,241,558 1,128,811
Stockholders' equity 379,127 315,914 268,426 183,883 331,189
25
U. S. and Canada
Years Ended December 31, (b)
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
System-wide Data:
Vehicle rental revenue:
(in thousands)
Company-owned stores $ 714,000 $ 636,000 $ 620,000 $ 497,000 $ 373,000
Franchisee locations 699,000 620,000 516,000 502,000 556,000
---------- ---------- ---------- ---------- ----------
Total vehicle rental revenue $1,413,000 $1,256,000 $1,136,000 $ 999,000 $ 929,000
========== ========== ========== ========== ==========
Rental locations:
Company-owned stores 149 139 139 156 162
Franchisee locations 824 763 752 729 720
---------- ---------- ---------- ---------- ----------
Total rental locations 973 902 891 885 882
========== ========== ========== ========== ==========
Average number of vehicles operated
during the period by company-owned
stores and franchisees 123,814 111,652 103,417 94,992 93,989
Peak number of vehicles operated
during the period by company-owned
stores and franchisees 148,832 134,407 122,286 110,771 108,447
Company-owned Stores Data:
Vehicle Rental Data:
Average number of vehicles operated 59,218 53,983 53,719 45,037 36,246
Number of rental transactions 3,621,111 3,320,294 3,300,420 2,817,269 2,196,611
Average revenue per transaction $ 197 $ 191 $ 187 $ 176 $ 170
Monthly average revenue per vehicle $ 1,005 $ 980 $ 959 $ 917 $ 856
Vehicle Leasing Data:
Average number of vehicles leased 38,690 37,709 32,814 30,583 34,373
Average monthly lease revenue per unit $ 471 $ 447 $ 420 $ 409 $ 400
- ----------
(a) Management believes it is important to note that net income (loss) and
earnings (loss) per share for the year ended December 31, 1996 include
intangible asset impairment losses of $157,758,000, related to
DaimlerChrysler's decision in 1996 to dispose of Thrifty as a non-core
asset ($155,000,000) and an impairment loss related to TCL
($2,758,000).
(b) Certain reclassifications have been made in the selected consolidated
financial data to conform to the classifications used in 1999.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Group owns two separate vehicle rental companies, Dollar and
Thrifty. They engage in the business of renting vehicles directly to retail and
tour customers and providing vehicle leasing and other services to franchisees
that rent to customers. The majority of Dollar's revenue is derived from renting
vehicles to customers from company-owned stores, while the majority of Thrifty's
revenue is generated from leasing vehicles and providing services to
franchisees.
The Group's revenues consist of:
o Vehicle rentals -- revenue generated from renting vehicles to
customers, including all related charges, through company-owned
stores,
o Vehicle leasing -- revenue generated from leasing vehicles to
franchisees,
o Fees and services -- revenue generated from franchise fees and
providing reservations, insurance, supplies and other products and
services to franchisees, and
o Other -- revenue generated from franchise sales, parking income,
non-vehicle lease income and interest income derived from
franchisees.
The Group's expenses consist of:
o Direct vehicle and operating -- costs related to the rental of
revenue-earning vehicles to customers and to the leasing of
vehicles to franchisees, such as leasing expenses, concessions and
commissions paid to airport authorities, travel agencies and
others, insurance and lease promotion expenses, net of certain
incentives received from vehicle manufacturers,
o Vehicle depreciation and lease charges, net -- depreciation expense
relating to revenue-earning vehicles, net of gains and losses on
the disposal of such vehicles, and lease charges for vehicles
leased from third parties,
o Selling, general and administrative expenses, including advertising
and marketing expenses and reservation expenses,
o Interest expense, net -- interest expense, net of interest earned
on restricted cash, cash and cash equivalents, relating primarily
to revenue-earning vehicle financing, and
o Amortization of cost in excess of net assets acquired.
The Group's profitability is primarily a function of the volume and
pricing of rental transactions, utilization of the vehicles and the number of
vehicles leased to franchisees. Significant changes in the purchase or disposal
price of vehicles or interest rates can also have a significant effect on the
Group's profitability, depending on the ability of the Group to adjust the size
of the fleet as well as pricing and lease rates for these changes. The Group's
business requires significant expenditures for vehicles and consequently,
requires substantial liquidity to finance such expenditures.
The following discussion and analysis provides information that
management believes to be relevant to understanding the Company's consolidated
financial condition and results of operations. This discussion should be read in
conjunction with the Group's consolidated financial statements and the related
notes thereto included in this report.
27
Results of Operations
The following table sets forth the percentage of total revenues in the
Group's consolidated statement of income:
Years Ended December 31, (b)
-----------------------------
1999 1998 1997
------- ------- -------
Revenues:
Vehicle rentals 71.5% 70.7% 73.5%
Vehicle leasing 21.9% 22.5% 19.5%
Fees and services 5.7% 5.8% 5.8%
Other 0.9% 1.0% 1.2%
------- ------- -------
Total revenues 100.0% 100.0% 100.0%
------- ------- -------
Costs and expenses:
Direct and vehicle operating 28.9% 29.8% 31.3%
Vehicle depreciation and lease charges, net 31.2% 33.9% 35.0%
Selling, general and administrative 19.1% 18.1% 17.7%
Interest expense, net 9.5% 9.9% 10.4%
Amortization of cost in excess of net
assets acquired 0.6% 0.6% 0.7%
------- ------- -------
Total costs and expenses 89.3% 92.3% 95.1%
------- ------- -------
Income before income taxes 10.7% 7.7% 4.9%
Income tax expense 4.7% 3.5% 2.8%
------- ------- -------
Net income (a) 6.0% 4.2% 2.1%
======= ======= =======
- ----------------
(a) In 1997, the Group incurred a one-time tax charge of $4,314,000 related to
its separation from DaimlerChrysler.
(b) Certain reclassifications have been made in the 1998 and 1997 consolidated
financial statements to conform to the classifications used in 1999.
28
The following table sets forth a breakdown of the Group's two major sources of
revenue:
Years Ended December 31, (a)
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(in thousands)
Vehicle rental revenue:
Dollar $ 681,240 $ 603,331 $ 559,101
Thrifty 33,167 32,269 60,944
-------------- -------------- --------------
Total $ 714,407 $ 635,600 $ 620,045
============== ============== ==============
Leasing revenue:
Dollar $ 28,762 $ 33,224 $ 34,452
Thrifty 189,852 169,147 130,249
-------------- -------------- --------------
Total $ 218,614 $ 202,371 $ 164,701
============== ============== ==============
- ------------------
(a) Certain reclassifications have been made in the 1998 and 1997 consolidated
financial statements to conform to the classifications used in 1999.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Revenues
Total revenues for the year ended December 31, 1999 increased $99.8
million, or 11.1%, to $998.8 million compared to 1998. The increase in total
revenues was due to an increase in rental revenue of 12.4% over 1998 and a 8.0%
growth in leasing revenue. Fees and services revenue increased $5.3 million due
to higher franchise fees and other revenue fees from franchisees. Vehicle rental
revenue and vehicle leasing revenue were impacted by franchise acquisitions at
Dollar and re-franchising of company-owned stores at Thrifty.
The Group's vehicle rental revenue for 1999 was $714.4 million, a 12.4%
increase from 1998. This increase was due primarily to a $77.9 million increase
for Dollar and a $0.9 million increase at Thrifty. The growth in vehicle rental
revenue at Dollar was the result of an increase of 9.6% in transactions combined
with a 3.1% increase in revenue per transaction. The rental revenue growth at
Dollar related to the acquisition of franchisees was $15 million, which
represented 19.2% of Dollar's total rental revenue growth during 1999.
Vehicle leasing revenue for 1999 was $218.6 million, a $16.2 million
increase from 1998. This increase in vehicle leasing revenue reflects an
increase of $20.7 million, or 12.2%, in Thrifty's leasing revenue due to a 6.9%
increase in the average number of vehicles leased to franchisees along with a
4.9% increase in the vehicle leasing rates partially due to a change in vehicle
mix. Dollar's leasing revenue declined $4.5 million, or 13.4%, due to a decrease
in the average number of vehicles leased to franchisees as a result of the
acquisition of franchised locations during 1999 partially offset by an increase
in lease rates.
29
Expenses
Total expenses increased 7.5% from $830.1 million in 1998 to $892.2
million in 1999. This increase was due primarily to a $45.9 million, or 7.5%
increase for Dollar and a $16.3 million, or 7.5% increase at Thrifty. Total
expenses as a percentage of revenue declined to 89.3% in 1999 from 92.3% in
1998.
Direct vehicle and operating expenses for 1999 increased $21.6 million,
or 8.1%, over 1998, primarily due to an increase at Dollar. The overall increase
was due to higher airport concession rents, personnel and other vehicle
operating costs partially offset by lower insurance costs. These expenses were
28.9% of revenue for 1999, compared to 29.8% of revenue for 1998.
Net vehicle depreciation expense and lease charges increased $5.9
million, or 1.9%, for 1999 as compared to 1998, consisting of a $5.6 million
increase at Dollar and a $0.3 million increase at Thrifty. Net vehicle
depreciation expense increased $14.8 million, or 5.2%, due to a 10.4% increase
in depreciable fleet (11.2% at Dollar and 9.0% at Thrifty) partially offset by a
decline of 4.8% in the average depreciation rate (4.3% decrease at Dollar and a
5.3% decrease at Thrifty). The decline in depreciation rate includes $25.2
million net vehicle gains on the disposal of Non-Program Vehicles. In 1998, the
disposition of Non-Program Vehicles resulted in a net vehicle gain of $5.5
million. Lease charges, for vehicles leased from third parties, declined $8.9
million due to fewer vehicles leased during the year ended December 31, 1999.
Selling, general and administrative expenses of $190.9 million for 1999
increased from $163.3 million in 1998, comprised primarily of a $13.9 million
increase at Dollar and a $13.8 million increase at Thrifty. The higher costs
were due primarily to higher information technology system costs including Year
2000 remediation, costs incurred with the start-up of Thrifty Car Sales and
other personnel related costs.
Net interest expense increased $6.4 million, or 7.2% to $95.1 million.
Net interest expense decreased as a percentage of revenue from 9.9% in 1998 to
9.5% in 1999. The increase in expense for the Group was due to the effect of
higher average vehicle debt levels partially offset by a decrease in vehicle
interest rates.
The tax provision for 1999 was $46.9 million. The effective rate of
44.1% and 45.3% in 1999 and 1998, respectively, differs from the U.S. statutory
rate due primarily to non-deductible amortization of costs in excess of net
assets acquired, state and local taxes and losses relating to Thrifty's Canadian
subsidiary for which no benefit was recorded. The improvement in the effective
rate as compared to 1998 was due to higher U.S. pre-tax income and improved
results in the Canadian operations.
Operating Results
The Group had income before income taxes of $106.6 million for 1999 as
compared to $68.9 million in 1998, a 54.7% increase. This growth was due to a
$29.0 million increase at Dollar and a $8.7 million increase at Thrifty.
30
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenues
Total revenues for the year ended December 31, 1998 increased $55.2
million, or 6.5%, to $898.9 million compared to 1997. The increase in total
revenues was due to an increase in leasing revenue of 22.9% over 1997 and a 2.5%
growth in rental revenue. Fees and services revenue increased $2.6 million due
to a final payment received related to Dollar's terminated European franchise
agreement and higher franchise fees and other revenue fees from franchisees.
Vehicle rental revenue and vehicle leasing revenue were impacted by the
re-franchising of company-owned stores at Thrifty and by franchise acquisitions
at Dollar.
The Group's vehicle rental revenue for 1998 was $635.6 million, a 2.5%
increase from 1997. This increase was due primarily to a $44.2 million increase
for Dollar offset by a $28.7 million decline at Thrifty. The increase in vehicle
rental revenue at Dollar was the result of an increase of 6.6% in transactions
combined with a 1.0% increase in revenue per transaction. The rental revenue
growth at Dollar related to the acquisition of franchisees during 1998 totaled
$21.4 million, which represented 48% of Dollar's total rental revenue growth.
The decline at Thrifty was due to the re-franchising of several company-owned
stores during 1997 and early 1998.
Vehicle leasing revenue for 1998 was $202.4 million, a $37.7 million
increase from 1997. This increase in vehicle leasing revenue reflects an
increase of $38.9 million, or 29.9%, in Thrifty's leasing revenue primarily due
to a 23.9% increase in the average number of vehicles leased to franchisees
along with a 4.9% increase in the vehicle leasing rates. Dollar's leasing
revenue declined $1.2 million, or 3.6% due to a decrease in the average number
of vehicles leased to franchisees as a result of the acquisition of several
franchised locations during 1998.
Expenses
Total expenses increased 3.5% from $802.3 million in 1997 to $830.1
million in 1998. This increase was due primarily to a $28.5 million, or 4.9%
increase for Dollar offset by a $2.0 million, or 0.9% decline at Thrifty. Total
expenses as a percentage of revenue declined to 92.3% in 1998 from 95.1% in
1997.
Direct vehicle and operating expenses for 1998 increased $3.7 million,
or 1.4%, over 1997, comprised of a $14.6 million increase at Dollar offset by a
$10.9 million decline at Thrifty. The overall increase was due to higher
personnel costs, airport concession fees and tour account incentives at Dollar,
partially offset by a reduction of expenses at Thrifty as a result of the
re-franchising of several company-owned stores. These expenses were 29.8% of
revenue for 1998, compared to 31.3% of revenue for 1997. These expenses improved
as a percentage of revenue partially due to a decrease in the proportion of
total revenue generated from vehicle rentals at company-owned stores, which
carry additional costs not associated with vehicle leasing revenue. The shift in
revenue from vehicle rentals to vehicle leasing resulted primarily from
re-franchising several Thrifty company-owned stores in late 1997 and early 1998.
Net vehicle depreciation expense and lease charges increased $10.3
million or 3.5% for 1998 as compared to 1997, consisting of a $5.7 million
increase at Dollar and a $4.6 million increase at Thrifty. Net vehicle
depreciation expense increased $11.2 million, or 4.0%, due to a 5.4% increase in
depreciable fleet (6.1% at Dollar and 4.3% at Thrifty) partially offset by a
decline of 1.5% in the average depreciation rate (0.4% increase at Dollar and a
4% decrease at Thrifty). The decline in the depreciation rate includes $5.5
million net vehicle gains on the disposal of Non-Program Vehicles. In 1997, the
disposition of Non-Program Vehicles resulted in a net vehicle loss of $11.4
million. Lease charges, for vehicles leased from third parties, decreased $0.9
million due to fewer vehicles leased during 1998.
31
Selling, general and administrative expenses of $163.3 million for 1998
increased 9.1% from $149.7 million in 1997, comprised of a $11.0 million
increase at Dollar, a $0.7 million increase at Thrifty and a $1.9 million
increase for other operations. The higher costs were due to higher personnel
costs related to the development of new information technology systems, sales
and marketing and Year 2000 remediation costs. Higher expenses in 1998 were also
the result of one-time cost reductions in 1997 related to the settlement of a
$1.5 million condemnation claim and the reversal of a $1.1 million reserve
related to resolved litigation at Dollar and the elimination of a $1.9 million
reserve related to the sale of Snappy Car Rental in 1994. Selling, general and
administrative expenses for the Group were 18.1% of revenue for 1998 compared to
17.7% for 1997.
Net interest expense increased $0.9 million, or 1% to $88.7 million
comprised primarily of a $3.6 million increase at Thrifty partially offset by a
$2.1 million decrease at Dollar. Net interest expense decreased as a percentage
of revenue from 10.4% in 1997 to 9.9% in 1998. The increase in expense for the
Group was due to the effect of higher average vehicle debt levels partially
offset by a decrease in vehicle interest rates.
The tax provision for 1998 was $31.2 million. The effective rate of
45.3% in 1998 differs from the U.S. statutory rate due primarily to
non-deductible amortization costs in excess of net assets acquired, state and
local taxes and losses relating to Thrifty's Canadian subsidiary for which no
benefit was recorded. The effective rate for 1997 was 56.5% due primarily to
non-deductible amortization costs in excess of net assets acquired, losses
relating to Thrifty's Canadian subsidiary for which no benefit was recorded, and
the one-time tax charge of $4.3 million related to the separation from
DaimlerChrysler.
Operating Results
The Group had income before income taxes of $68.9 million for 1998 as
compared to $41.5 million in 1997, a 66.1% increase. This growth was due to a
$15.3 million increase at Dollar and a $13.6 million increase at Thrifty. Income
before income taxes declined for other operations in 1998 due primarily to the
elimination of a $1.9 million reserve during 1997 related to the sale of Snappy
Car Rental in 1994.
Liquidity and Capital Resources
The Group's primary cash requirements are for the acquisition of
revenue-earning vehicles and to fund its U.S. and Canadian operations. During
1999, cash provided by operating activities was $372.5 million. Net income
adjusted for depreciation, net of vehicle gains, primarily generated cash
provided by operating activities.
Cash used in investing activities was $583.4 million. The principal use
of cash in investing activities was the purchase of revenue-earning vehicles
which totaled $2.4 billion ($1.4 billion at Dollar and $1.0 billion at Thrifty)
which was partially offset by $1.9 billion ($1.1 billion at Dollar and $800
million at Thrifty) in proceeds from the sale of used revenue-earning vehicles.
The Group's need for cash to finance vehicles is highly seasonal and typically
peaks in the second and third quarters of the year when fleet levels build to
meet seasonal rental demand. Fleet levels are the lowest in the fourth quarter
when rental demand is at a seasonal low. The Company expects to continue to fund
its revenue-earning vehicles with cash provided from operations and increased
secured vehicle financing. Restricted cash and investments increased $82.4
million for the year ended December 31, 1999. Restricted cash and investments
are restricted for the acquisition of revenue-earning vehicles and other
specified uses under the asset backed notes discussed below. The Group also used
cash for the purchase of non-vehicle capital expenditures of $23 million. These
expenditures consist primarily of airport facility improvements for the Group's
rental locations and investments in information technology equipment and
systems. The Group estimates non-vehicle capital expenditures to be
approximately $30 million in 2000. In addition, Dollar will pursue the
acquisition of certain franchisee operations, if available. These expenditures
are expected to be financed with cash provided from operations.
32
Cash provided by financing activities was $238.8 million primarily
provided by the issuance of $250 million in asset backed notes during 1999.
Asset Backed Notes
The asset backed note program is comprised of $1.34 billion in asset
backed notes with maturities ranging from 2000 to 2005. Borrowings under the
asset backed notes are secured by eligible vehicle collateral and bear interest
at fixed rates on $1.3 billion ranging from 5.90% to 7.10% and floating rates on
$37.4 million ranging from LIBOR plus .95% to LIBOR plus 1.25%. Proceeds from
the asset backed notes that are temporarily unutilized for financing vehicles
and certain related receivables are maintained in restricted cash and investment
accounts, which were approximately $140.0 million at December 31, 1999.
Commercial Paper Program and Liquidity Facility
At December 31, 1999, the Company's commercial paper program (the
"Commercial Paper Program") had a maximum size of $640 million supported by a
$575 million, 364-day liquidity facility (the "Liquidity Facility"). Borrowings
under the Commercial Paper Program are secured by eligible vehicle collateral
and bear interest based on market-dictated commercial paper rates. At December
31, 1999, the Group had $80.4 million in commercial paper outstanding under the
Commercial Paper Program. The Commercial Paper Program and the Liquidity
Facility are renewable annually. The Commercial Paper Program peaked in size
during the third quarter of 1999 when it reached $545.7 million to support the
seasonal increase in vehicle fleet.
Effective March 2, 2000, the Commercial Paper Program was renewed for
another year at a maximum size of $780 million, backed by a renewal of the
Liquidity Facility which was increased to $700 million.
Other Obligations and Vehicle Debt
Thrifty had financed its Canadian vehicle fleet under a lease agreement
with an unrelated auto leasing trust which provided for CND$125 million of
funding, which was supported by underlying bank financing that was required to
be renewed annually. This facility was phased out as the vehicles financed
thereunder were taken out of service with all financing arrangements terminated.
On February 18, 1999, Thrifty established new arrangements for its Canadian
vehicle financing through a five-year fleet securitization program. Under this
program, Thrifty can obtain vehicle financing up to CND$150 million funded
through a bank commercial paper conduit. At December 31, 1999, Thrifty had
approximately $45.4 million funded under this program.
On May 20, 1999, a vehicle manufacturer's finance subsidiary extended a
$102 million revolving line of credit to the Group to purchase revenue-earning
vehicles. The line of credit is secured by the vehicles financed under this
facility. This credit facility expires in August 2000 and is renewable by mutual
agreement. At December 31, 1999, the Company had $67.9 million outstanding under
the line of credit.
Revolving Credit Facility
The Company has a $215 million 5-year, senior secured, revolving credit
facility (the "Revolving Credit Facility") that expires in December 2002. The
Revolving Credit Facility is used to provide letters of credit with a sublimit
of $190 million and cash for operating activities with a sublimit of $70
million. The availability of funds under the Revolving Credit Facility is
subject to the Company's continued compliance with certain covenants, including
a covenant that sets the maximum amount the Company can spend annually on the
acquisition of fixed or capital assets, and certain financial covenants
including a maximum leverage ratio, a minimum fixed charge ratio and a minimum
interest expense coverage ratio. The Group is in compliance with all covenants.
At December 31, 1999, the Group had letters of credit outstanding under the
Revolving Credit Facility of approximately $37.8 million and no working capital
borrowings.
33
DaimlerChrysler Credit Support
In connection with the Company's separation from DaimlerChrysler and
completion of the Offering, DaimlerChrysler provided $38.2 million credit
support for the Group's vehicle fleet financing in the form of a letter of
credit facility. The credit support was reduced to $28.6 million due to the sale
of additional shares by the Company in the Offering. The letter of credit
declines annually over five years, which began September 30, 1999, by the
greater of $5.7 million or 50% of the Group's excess cash flow, as defined. At
December 31, 1999, the credit support amount was approximately $22.8 million.
The Company may need to replace reductions in the letter of credit with cash
from operations or with borrowings or letters of credit under the Revolving
Credit Facility. To secure reimbursement obligations under the DaimlerChrysler
credit support agreement, DaimlerChrysler has liens and security interests on
certain assets of the Group.
Debt Servicing Requirements
The Group will continue to have substantial debt and debt service
requirements under its financing arrangements. As of December 31, 1999, the
Group's total consolidated debt and other obligations was approximately $1.6
billion, substantially all of which was secured debt for the purchase of
vehicles. The Group has scheduled annual principal payments of approximately
$475 million in 2000, $231 million in 2001, $172 million in 2002, $274 million
in 2003, $269 million in 2004 and $137 million thereafter.
The Group intends to use cash generated from operations for debt
service and, subject to restrictions under its debt instruments, to make capital
investments. The Company has historically repaid its debt and funded its capital
investments (aside from growth in its rental fleet) with cash provided from
operations and from the sale of vehicles. The Company has funded growth in its
vehicle fleet by incurring additional secured vehicle debt and cash generated
from operations. The Group expects to incur additional debt from time to time to
the extent permitted under the terms of its debt instruments.
The Group has significant requirements for bonds to support its
insurance programs and airport concession obligations. At December 31, 1999,
various insurance companies had issued approximately $79.0 million in bonds to
secure these obligations.
Interest Rate Risk
The Group's results of operations depend significantly on prevailing
levels of interest rates because of the large amount of debt it incurs to
purchase vehicles. In addition, the Group is exposed to increases in interest
rates because a portion of its debt bears interest at floating rates. The
Company estimates tha