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, 2002 |
OR
| o | 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
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
| Delaware (State or other jurisdiction of incorporation or organization) |
73-1356520 (I.R.S. Employer 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
| Title of each class: Common Stock, $.01 par value |
Name of each exchange on which registered: New York Stock Exchange |
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes x No o
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: x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 28, 2002, the last business day of the registrant's most recently completed second fiscal quarter was $537,851,210.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of February 28, 2003 was $401,881,714.
The number of shares outstanding of the registrant’s Common Stock as of February 28, 2003 was 24,671,895.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2003, are incorporated by reference in Part III.
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DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
PART I |
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ITEM 1. |
BUSINESS |
4 |
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ITEM 2. |
PROPERTIES |
21 |
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ITEM 3. |
LEGAL PROCEEDINGS |
21 |
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ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
22 |
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PART II |
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ITEM 5. |
MARKET FOR REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
23 |
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ITEM 6. |
SELECTED FINANCIAL DATA |
24 |
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ITEM 7. |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
26 |
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ITEM 7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
37 |
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ITEM 8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA |
38 |
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ITEM 9. |
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
68 |
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PART III |
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ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
68 |
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ITEM 11. |
EXECUTIVE COMPENSATION |
68 |
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ITEM 12. |
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
68 |
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ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
68 |
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ITEM 14. |
CONTROLS AND PROCEDURES |
68 |
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DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-K
TABLE OF CONTENTS (Continued)
PART IV |
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ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |
|
|
69 |
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SIGNATURES |
85 |
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CERTIFICATIONS |
86 |
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INDEX TO EXHIBITS |
88 |
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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 upon 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: price and product competition; economic and competitive conditions in markets and countries where our companies’ customers reside and where our companies and their franchisees operate; airline travel patterns; changes in capital availability or cost; costs and other terms related to the acquisition and disposition of automobiles; costs of conducting business and changes in structure or operations; and certain regulatory and environmental matters. Should one or more of these risks or uncertainties, among others, materialize, actual results could vary 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.
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Dollar Thrifty Automotive Group, Inc., a Delaware corporation ("DTG"), owns Dollar Rent A Car Systems, Inc. and Thrifty, Inc. Thrifty, Inc. owns Thrifty Rent-A-Car System, Inc. and Thrifty Car Sales, Inc., which operates a franchised retail used car sales network. Dollar Rent A Car Systems, Inc., which was renamed DTG Operations, Inc. on December 2, 2002, and Dollar Rent A Car, Inc., a newly-formed subsidiary of DTG, are individually or collectively, as the context requires, referred to hereafter as "Dollar". Thrifty, Inc., Thrifty Rent-A-Car System, Inc., Thrifty Car Sales, Inc. and all their respective subsidiaries are individually or collectively, as the context requires, referred to hereafter as "Thrifty". DTG, Dollar and Thrifty and each of their subsidiaries are individually or collectively referred to herein as the "Company", as the context may require. The Company has two additional subsidiaries, Rental Car Finance Corp. and Dollar Thrifty Funding Corp., which are special purpose financing entities and have been appropriately consolidated in the financial statements of the Company. Dollar and Thrifty and their respective independent franchisees operate the Dollar and Thrifty vehicle rental systems. The Dollar and Thrifty brands represent a value-priced rental vehicle generally appealing to leisure customers, including foreign tourists, and to small businesses and independent business travelers. As of December 31, 2002, Dollar and Thrifty had 803 locations in the United States and Canada of which 224 were company-owned stores and 579 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. For the year ended December 31, 2002, Dollar's gross revenues comprised approximately 71% of the Company's revenues with Thrifty contributing the remaining 29% of revenues.
In the United States, Dollar’s main focus is operating company-owned stores located in major airports, and it derives substantial revenues from leisure and tour package rentals. Thrifty primarily operates 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. However, as part of a new strategy, beginning in 2001 and continuing in 2002, Thrifty began operating stores that were previously operated by franchisees. Thrifty does not plan to offer its corporate stores in large airport markets for refranchising. Thrifty’s U.S. franchisees provide vehicles and services to the rental customer except in ten cities where Thrifty operated company-owned stores at December 31, 2002. Dollar and Thrifty incur the costs of operating company-owned stores and their revenues are directly affected by changes in rental demand and pricing. See Note 17 of Notes to Consolidated Financial Statements for business segment information.
The Company 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 (such entity and its subsidiaries and members of its affiliated group are hereinafter referred to as "DaimlerChrysler"). Dollar Rent A Car Systems, Inc. was incorporated in 1965. Thrifty Rent-A-Car System, Inc. was incorporated in 1950 and Dollar Rent A Car, Inc. was incorporated in December 2002. Thrifty, Inc., which was formed in December 1998, directly owns Thrifty Rent-A-Car System, Inc. and Thrifty Car Sales, Inc. ("Thrifty Car Sales").
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, 24,123,105 shares of Common Stock were sold at an initial price of $20.50 per share. 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 4,123,105 shares were sold by the Company.
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, including issues in 1999,
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2001 and 2002, a variable funding note issue in 2000, and proceeds from the Commercial Paper Program are each utilized 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 Company’s borrowing needs for its other business operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources.”
In December 2002, the Company announced a new corporate operating structure which became effective on January 1, 2003. This new structure will realign the Company from a brand structure to a functional structure, combining the management of operations and administrative functions for both Dollar and Thrifty brands. This new structure will facilitate additional cost savings and synergies between the two brands and provide a platform for cost avoidance going forward.
Under the new operating structure, DTG Operations, Inc. will operate company stores, provide vehicle leasing to franchisees and operate reservation centers for both brands. Thrifty Rent-A-Car System, Inc. and Dollar Rent A Car, Inc., a newly-formed corporation, will manage franchising activities and sales and marketing activities for their respective brands.
Prior to January 1, 2003, all operations, including operating company stores and reservation centers, leasing vehicles to franchisees, managing franchising activities and sales and marketing, were handled by Dollar Rent A Car Systems, Inc. and Thrifty Rent-A-Car System, Inc., for their respective brands. Information discussed in the “Business” section of this report does not reflect this new structure as it was not in effect until January 1, 2003.
The Company makes available free of charge on or through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material has been electronically filed with, or furnished to, the SEC. The Company’s Internet address is http://www.dtag.com. The SEC also maintains a web site that contains all of the Company’s filings at http://www.sec.gov.
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 to vehicle renters.
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 determine in advance this important element of its cost structure. The Program Vehicles and the related obligations of the manufacturers are used as collateral for fleet financing.
The rental car industry has experienced significant changes in ownership in the past several years. In the mid-1990s, most major rental car companies were owned by domestic automobile manufacturers. Ford Motor Company (“Ford”) owned both Hertz and Budget, General Motors Corporation owned National and DaimlerChrysler owned both Dollar and Thrifty. Since that time, these companies have become principally publicly traded companies focused more on profitability. The industry has also consolidated the ownership of brands with six of the top eight brands now owned by just three companies. Ford re-acquired all public ownership of Hertz in 2001, ANC Rental Corporation (currently operating under bankruptcy court protection pursuant to Chapter 11 of the U.S. Bankruptcy Code), which owns both Alamo and National is publicly owned, Enterprise remains privately held and Budget and Avis are operating subsidiaries of Cendant Corporation.
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Prior to 2001, the car rental industry had experienced steady growth over the last decade driven by increased leisure and business airline passenger traffic and additional capacity in the hotel industry. During 2001, however, the travel industry suffered from the effects of an economic recession as well as the terrorist attacks of September 11. In the aftermath of September 11, airline passenger traffic dropped significantly from the prior year and car rental companies reduced their fleet size in response to lower levels of demand. In 2002, average airline passenger enplanements continued to be down approximately 12-14% from 2000 levels; however, pricing improved on average approximately 6-8%, significantly improving profitability for most car rental companies. The future growth of the car rental industry will be determined by general economic conditions and developments in the travel industry. The outlook for the travel industry continues to be uncertain early in 2003.
In the fourth quarter of 2002, vehicle manufacturers accelerated deliveries to fleet customers, including car rental companies, which resulted in weakness in pricing early in 2003.
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, causes the Company to vary its fleet size over the course of the year. In 2002, the Company’s average monthly fleet size ranged from a low of approximately 73,000 vehicles in the first quarter to a high of approximately 127,000 vehicles in the third quarter.
Dollar’s 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. At December 31, 2002, Dollar had 97 company-owned and franchised in-terminal locations. Dollar operates primarily through company-owned stores in the United States and also licenses to independent franchisees the right to operate as a part of the Dollar system in the United States and abroad. At December 31, 2002 all of its Canadian and international operations were franchised. In January 2003, Dollar re-acquired the master franchise rights to the Dollar brand for all of Canada.
Dollar’s services and products include fleet leasing, marketing, centralized reservations, counter automation, insurance, central billing, supplies, 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.
As of December 31, 2002, Dollar’s vehicle rental system included 267 locations in the United States and Canada, consisting of 138 company-owned stores and 129 that were operated by franchisees. The Dollar system also included 115 locations abroad, all of which were franchised locations. Dollar’s total revenue was $809 million in 2002, of which $783 million (97%) was generated by company-owned stores, and $26 million (3%) was revenue from Dollar franchisees for vehicle leasing fees and other service and product fees and other revenue. Dollar’s revenues from outside the United States and Canada were less than 1% of 2002 total 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 53 of the 75 largest U.S. airport markets and franchisees in all but two of the remaining markets. When opportunities arise, Dollar may acquire operations from franchisees and convert them to company-owned stores. Dollar converted three franchised operations to company-owned operations in 2000 and one in 2002. In April 2002, Dollar acquired previously franchised Louisville, Kentucky and will continue to pursue opportunities in 2003. Dollar generally has the right of first refusal on the sale of a franchised operation. Consistent with its strategy of operating corporately in the top 75 airports and other key markets, company-owned stores located in the smaller markets may be franchised in order to grow Dollar’s franchisee system.
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Dollar believes that having company-owned stores in most of the top 75 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 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.
Dollar has significant relationships with foreign and domestic tour operators which generated rental revenue of $177 million, or 22%, of Dollar’s total rental revenues in 2002. 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 is the exclusive U.S. vehicle rental company for all five of its largest tour operator accounts. The agreements for these five accounts expire from December 2003 to December 2009. No single tour operator account generated in excess of 5% of the Company’s 2002 revenues.
As of December 31, 2002, Dollar had vehicle rental concessions for company-owned stores at 72 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 typically include fixed rent for terminal counters or other leased properties and facilities.
Worldwide Reservations System. Dollar has continuously staffed reservation facilities at its headquarters in Tulsa, Oklahoma and at its facility in Tahlequah, Oklahoma. Dollar’s reservation facilities are linked to all major airline reservation systems and through such systems to travel agencies in the United States, Canada and abroad. The Internet is an important source of reservations for Dollar. In 2002, 44% of Dollar’s non-tour reservations came through the Internet. Dollar’s Internet web site, (dollar.com), provided approximately 19% of Dollar’s non-tour reservations booked for the year.
Supplemental Equipment and Optional Products. Dollar rents ski racks, 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.
Dollar depends upon a number of core information systems to operate its business, primarily its counter automation, reservations and revenue management systems. The counter automation system in Dollar’s company-owned stores processes rental transactions, facilitates the sale of additional products and services and allows Dollar to monitor its fleet and financial assets. In 1998, Dollar developed a revenue management system with Manugistics Group, Inc. (formerly Talus), a leading supplier of such systems, which is utilized by 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.
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In 1997, Dollar entered into an agreement with The Sabre Group, Inc., a leading global information technology service company, to manage and monitor its data center network and its daily information processing, which agreement was later transferred to EDS Information Systems, L.L.C. (“EDS”). All of Dollar’s key systems are housed in a secure underground EDS facility in Oklahoma designed to withstand disasters.
Dollar has programs at its headquarters and in company-owned stores to improve customer service. Customer First!, Dollar’s quality improvement program, involves customer satisfaction training and team-based problem solving, especially as it relates to improving customer service. Dollar’s customer service center measures customer satisfaction, tracks service quality trends, responds to customer inquiries 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 Tulsa, Newark, Los Angeles, Cleveland, Honolulu and Oakland. Training for newly hired rental employees is performed at individual work sites using computer based training materials.
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 international tour operators.
United States and Canada
Approximately 3% of Dollar’s 2002 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 2002 accounted for approximately 1% of Dollar’s total revenue. See “Fleet Acquisition and Management — Fleet Leasing Programs.” In Canada, Dollar’s master franchisee directly operates or sub-franchises 22 airport and suburban locations. In January 2003, Dollar re-acquired the master franchise rights to the Dollar brand for all of Canada.
Dollar licenses its franchisees to use Dollar’s service marks in the vehicle rental and leasing business. 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, each U.S. franchisee is generally required to pay Dollar a system fee on their rental car revenue equal to 8% of gross rental revenue on a monthly basis for airport operations 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 requirements. 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, centralized corporate account and tour billing and travel agent commission payments. Dollar franchisees pay Dollar a fee for each reservation made through Dollar’s worldwide reservation system.
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International
As of December 31, 2002, Dollar had franchised operations located in 27 countries outside the United States and Canada. Master franchisees, direct franchisees and sub-franchisees 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 sub-franchisees, and are responsible for promoting the Dollar brand name and its services and products, and for developing and supporting their direct operations and sub-franchisees. Dollar’s revenues from international franchise operations were less than 1% of 2002 total revenue.
Dollar exchanges reservations with Sixt, AG, a major European rental car company. Through its alliance with Sixt, Dollar offers service in more than 45 countries covering Europe, the Middle East and Africa. In November 2002, Dollar provided the required notification to Sixt of its intent to terminate this agreement, with such termination to become effective November 4, 2003. The number of foreign locations or Dollar system-wide locations disclosed in this report does not include the Sixt locations.
Dollar’s marketing strategy is to position Dollar as the value-priced, on-airport car rental company to cost conscious leisure and business travelers. Dollar utilizes a mix of national and local advertising, promotions and strategic marketing efforts to promote this strategy.
Advertising and Promotion
Dollar’s national advertising programs utilize a media mix of both print and television with an emphasis on the popular leisure destinations of Florida, California, Hawaii, Nevada and Arizona. Dollar communicates its value-priced message to consumers via frequent print advertisements as well as media advertising via the Internet. Dollar also advertises on U.S. broadcast and cable television networks, promoting dollar.com, its online booking channel. Dollar spends approximately 3% 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.
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
Strategic marketing partnerships and frequent flier programs have been established with most major airline partners and many travel agencies. Approximately 24% of Dollar’s non-tour reservations are booked through travel agencies utilizing the major 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.
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During 2002, Dollar received approximately 44% of its reservations through its dollar.com web site and other Internet travel sites. Dollar continues to invest in its dollar.com web site and plans to continually enhance the site to best meet its customers’ travel needs. In recognition of the shift in travel distribution patterns, Dollar has placed significant emphasis on developing relationships with Internet travel sites. Dollar maintains preferred supplier arrangements with two of the leading Internet travel sites, Expedia and Travelocity, as well as having strong online market share with Orbitz and HRN. Additionally, Dollar’s innovative use of direct-connect technology with Southwest Airlines’ southwest.com web site opened up another new booking channel in 2001, and it continued to grow in 2002.
| Years Ended December 31, | |||||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||||
| (in thousands) | |||||||||||||||||
Revenues: |
|||||||||||||||||
U.S. Company-owned stores |
$ | 782,809 | $ | 758,937 | $ | 803,472 | |||||||||||
U.S. and Canada franchisees |
24,401 | 35,136 | 45,158 | ||||||||||||||
International franchisees |
1,374 | 1,412 | 1,624 | ||||||||||||||
Other |
811 | 119 | 2,542 | ||||||||||||||
Total revenues |
$ | 809,395 | $ | 795,604 | $ | 852,796 | |||||||||||
| As of December 31, | |||||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||||
Rental Locations: |
|||||||||||||||||
U.S. Company-owned stores |
138 | 134 | 130 | ||||||||||||||
U.S. and Canada franchisee locations |
129 | 135 | 152 | ||||||||||||||
Franchisees: |
|||||||||||||||||
U.S. and Canada |
56 | 61 | 66 | ||||||||||||||
International |
42 | 42 | 38 | ||||||||||||||
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Thrifty’s focus has been on franchising and franchise support services. However, as part of a new strategy, beginning in 2001 and continuing in 2002, Thrifty began operating stores that were previously operated by franchisees. Thrifty does not plan to offer its corporate stores in large airport markets for refranchising. Thrifty operated company-owned stores in 17 cities in the United States and Canada as of December 31, 2002. Thrifty’s U.S. company-owned stores and its franchisees derive approximately 69% of their combined rental revenues from the airport market and approximately 31% 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 and its franchisees have been moving to in-terminal locations. At December 31, 2002, Thrifty had 85 company-owned and franchised in-terminal locations, which is over half of the airports serviced by Thrifty in the U.S.
As of December 31, 2002, Thrifty’s vehicle rental system included 536 rental locations in the United States and Canada, divided between 450 franchisee locations and 86 company-owned stores. The Thrifty system also included 591 locations abroad, all of which were franchisee locations. Thrifty’s total revenue was $323 million in 2002, of which $204 million (63%) was revenue from franchisees in the form of fleet leasing fees, system fees and other service and product fees and $119 million (37%) of which was generated by company-owned stores. Revenues from Thrifty’s franchisees outside the United States and Canada were less than 1% of 2002 total revenue.
United States
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 car sales, 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 U.S. franchisee turnover has averaged approximately 14% per year, with an average of 23 terminations and 19 additions 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.
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For 2002, Thrifty’s five largest U.S. franchisees generated approximately 19% of Thrifty’s total revenue in the form of system, fleet leasing, reservation and other fees.
Marketing to Prospective Franchisees. Thrifty has developed programs to attract franchisees in the vehicle rental industry. Programs include recruiting 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 2002, fleet leasing accounted for approximately 49% of Thrifty’s total revenue. The Company’s 2003 strategy is to offer attractive lease rates that it believes will improve franchisee health and support additional growth in the fleet leasing program. See “Fleet Acquisition and Management — Fleet Leasing Programs.”
Training and Support. Thrifty’s franchisees are required to attend initial orientation and receive ongoing training in areas such as customer service and hiring. Thrifty’s “True Blue Pride Initiative,” identifies areas requiring customer service improvements and establishes 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 express rental 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 Reservations 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. Thrifty’s reservation facilities are linked to all of the major airline reservation systems and through such systems to travel agencies in the United States, Canada and abroad. Thrifty franchisee payments for reservations made through these centers accounted for approximately 4% of Thrifty’s 2002 total revenues. Thrifty’s Internet web site (thrifty.com) continues to show significant growth with reservations booked through thrifty.com representing 22% of Thrifty’s reservations in 2002. An additional 26% of Thrifty’s reservations were booked through other Internet travel sites.
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 EDS to manage and monitor its data center network and its daily information processing. Other information systems are supported by Thrifty employees. Thrifty’s fleet and reservation processing systems are housed in a secure underground EDS facility in Oklahoma designed to withstand disasters.
Insurance, Supplies and National Account Programs. Thrifty makes available to its franchisees, for a fee, insurance for death or injury to third parties, property damage and damage to or theft of franchisee vehicles.
Thrifty makes bulk purchases of items used by its franchisees, which it sells to franchisees at prices that are often lower than they could obtain on their own. Thrifty also negotiates national account programs to allow its franchisees to take advantage of volume discounts for many materials or services used for operations such as tires, glass replacement, long distance telephone service and overnight mail.
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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 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, 2002, Thrifty master franchisees operated 591 vehicle rental locations in 64 countries and territories outside the United States and Canada. Regions with Thrifty franchisees include Latin America, Europe, the Middle East, Africa 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 revenues from international franchisees were less than 1% of 2002 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.
Historically, Thrifty had established company-owned stores only upon the financial failure of a franchisee. As part of a new strategy, beginning in 2001 and continuing in 2002, Thrifty began operating stores that were previously operated by franchisees. Thrifty does not plan to offer its company-owned stores in large airport markets for refranchising. Additionally, on an opportunistic basis, Thrifty may acquire operations from U.S. franchisees and convert them to company-owned stores. As of December 31, 2002, Thrifty operated company-owned stores in 10 cities in the United States, which are Tulsa, Dallas-Fort Worth, Oakland, San Francisco, Washington, D.C., Baltimore, Norfolk, Boston, Denver and Bentonville, Arkansas. Thrifty expects to acquire additional locations in key markets in 2003. 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, 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 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. At December 31, 2002, Thrifty Car Sales had 46 franchise locations in operation.
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Thrifty operates in Canada through its wholly owned subsidiary, Thrifty Canada, Ltd., which was renamed Dollar Thrifty Automotive Group Canada Inc. on January 21, 2003 (“TCL”). TCL operates company-owned stores in seven of the eight largest airport vehicle rental markets in Canada and encourages franchisees to operate in the remaining market. As of December 31, 2002, the TCL system included 129 vehicle rental locations, of which 85 were operated by franchisees and 44 were operated as company-owned stores.
Company-Owned Stores
TCL’s company-owned store operations include seven strategic airports: Toronto, Montreal, Vancouver, Winnipeg, Calgary, Ottawa and Halifax. 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.
Thrifty’s marketing objective is to position the Thrifty brand as an industry leader in delivering value for vehicle rental to value-conscious consumers. In the United States, it implements this strategy primarily through national advertising, strategic marketing partnerships and enhancing distribution channels. In addition, marketing assistance is provided to U.S. franchisees in local advertising, promotion and sales.
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, as well as new media advertising via the Internet. 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. Thrifty has national marketing partnerships with major U.S. airlines’ frequent flier programs, as well as Carlson Wagonlit’s Gold Point Rewards Program.
Thrifty 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 Thrifty. These marks are important for customer awareness and selection of Thrifty for vehicle rental.
Strategic Marketing Efforts
During 2002, the volume of reservations received through its thrifty.com web site and other Internet travel sites continued to grow rapidly. Thrifty continues to invest in its thrifty.com web site and recently introduced a new and easier means of booking on thrifty.com.
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Thrifty enjoys a strong relationship with the travel agency community, which is highlighted by its longstanding support of ASTA (American Society of Travel Agents) and through its preferred supplier arrangements. 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. Thrifty continues to be the exclusive car rental supplier in Radisson’s “Look to Book” program.
In 2002, Thrifty developed a relationship with Wal-Mart Stores, Inc. This relationship has resulted in Thrifty being named co-primary supplier of rental cars for Wal-Mart’s corporate travel and an exclusive marketing and sales agreement with Wal-Mart.com to provide anytime, anywhere flat rate pricing for Thrifty’s compact and intermediate size rental vehicles. Thrifty is also the only car rental company approved to accept the Wal-Mart credit card.
| Years Ended December 31, | |||||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||||
| (in thousands) | |||||||||||||||||
Revenues: |
|||||||||||||||||
U.S. and Canada franchisees |
$ | 201,484 | $ | 185,556 | $ | 215,340 | |||||||||||
U.S. and Canada Company-owned stores |
118,981 | 66,025 | 42,844 | ||||||||||||||
International franchisees |
2,818 | 2,930 | 2,885 | ||||||||||||||
Total revenues |
$ | 323,283 | $ | 254,511 | $ | 261,069 | |||||||||||
| As of December 31, | |||||||||||||||||
| 2002 | 2001 | & | |||||||||||||||