10-K 1 form10k123111.htm FORM 10-K form10k123111.htm
 


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
___________________

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, 2011

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
__________________

DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)

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

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

Title of each class:
Common Stock, $.01 par value
Name of each exchange on which registered:
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  X     No___

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes___   No   X 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   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.      X
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     X
Accelerated filer        
Non-accelerated filer ____
Smaller reporting company____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes___      No   X 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price of the stock on the New York Stock Exchange on such date was $1,705,111,773.

The number of shares outstanding of the registrant’s Common Stock as of February 22, 2012 was 28,141,936.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 7, 2012 are incorporated by reference in Part III.

 


 
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DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-K

TABLE OF CONTENTS

PART I
   
       
 
5
       
 
18
       
 
25
       
 
25
       
 
25
       
 
27
       
PART II
   
       
 
 
 
28
       
 
31
       
 
 
32
       
 
 
50
       
 
51
       
 
 
88
       
 
88
       
 
91
       
PART III
   
       
 
 
91
       
 
91
       
 
 
91
       
 
 
92
       
 
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FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
 
This report contains “forward-looking statements” about our expectations, plans and performance, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - 2012 Outlook” and “Liquidity and Capital Resources.”  These statements use such words as “may,” “will,” “expect,” “believe,” “intend,” “should,” “could,” “anticipate,” “estimate,” “forecast,” “project,” “plan” and similar expressions.  These statements do not guarantee future performance and Dollar Thrifty Automotive Group, Inc. assumes no obligation to update them.  Risks and uncertainties relating to our business that could materially affect our future results include:

·  
constraints on our growth and profitability given the challenges we face in increasing our market share in the key airport and local markets we serve, high barriers to entry in the insurance replacement market, capital and other constraints on expanding company-owned stores internationally and the challenges we would face in further reducing our expenses;
·  
the impact of the continuing volatility in the global financial and credit markets, particularly in certain countries in the European Union, and concerns about global economic prospects that could materially adversely affect consumer discretionary spending, including for international inbound travel to the United States and for leisure travel more generally, on which we are substantially dependent;
·  
the impact of pending and future U.S. governmental action to address budget deficits through reductions in spending and similar austerity measures, which could materially adversely affect unemployment rates and consumer spending levels;
·  
the continuing significant political unrest and other concerns involving certain oil-producing countries, which has contributed to price volatility for petroleum products, and in recent periods higher average gasoline prices, which could affect both broader economic conditions and consumer spending levels;
·  
the impact of pricing and other actions by competitors;
·  
our ability to manage our fleet mix to match demand and meet our target for vehicle depreciation costs, particularly in light of the significant level of risk vehicles (i.e., those vehicles not acquired through a guaranteed residual value program) in our fleet and our exposure to wholesale used vehicle prices;
·  
the cost and other terms of acquiring and disposing of automobiles and the impact of conditions in the used vehicle market on our vehicle cost, including the impact on vehicle depreciation costs in 2012 based on pricing volatility in the used vehicle market;
·  
our ability to reduce our fleet capacity as and when projected by our plans;
·  
the continuing strength of the U.S. automotive industry on which we depend for vehicle supply;
·  
airline travel patterns, including disruptions or reductions in air travel resulting from capacity reductions, pricing actions, severe weather conditions, industry consolidation or other events, particularly given our dependence on leisure travel;
·  
access to reservation distribution channels, particularly as the role of the Internet and mobile applications increases in the marketing and sale of travel-related services;
·  
the effectiveness of actions we take to maintain a low cost structure and to manage liquidity;
·  
the impact of repurchases of our common stock pursuant to our share repurchase program;
·  
our ability to obtain cost-effective financing as needed without unduly restricting our operational flexibility;
·  
our ability to comply with financial covenants, and the impact of those covenants on our operating and financial flexibility;
·  
whether our preliminary expectations about our federal income tax position, after giving effect to the impact of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, are affected by changes in our expected fleet size or operations or further legislative initiatives relating to taxes in the United States or elsewhere;
·  
our ability to continue to defer the reversal of prior period tax deferrals and the availability of accelerated depreciation payments in future periods, the lack of either of which could result in material cash federal income tax payments in future periods;
 
 
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·  
the cost of regulatory compliance, costs and other effects of potential future initiatives, including those directed at climate change and its effects, and the costs and outcome of pending litigation;
·  
disruptions in the operation or development of information and communication systems that we rely on, including those relating to methods of payment;
·  
local market conditions where we and our franchisees do business, including whether franchisees will continue to have access to capital as needed; and
·  
the impact of other events that can disrupt consumer travel, such as natural and man-made catastrophes, pandemics, social unrest and actual and perceived threats or acts of terrorism.
 

 
 
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PART I

BUSINESS
Company Overview

General

Dollar Thrifty Automotive Group, Inc., a Delaware corporation (“DTG”), owns DTG Operations, Inc. (“DTG Operations”), Dollar Rent A Car, Inc. and Thrifty, Inc. Thrifty, Inc. owns Thrifty Rent-A-Car System, Inc. and Thrifty Car Sales, Inc. (“Thrifty Car Sales”).  Thrifty Rent-A-Car System, Inc. owns Dollar Thrifty Automotive Group Canada Inc. (“DTG Canada”).  DTG operates under a corporate structure that combines the management of operations and administrative functions for both the Dollar and Thrifty brands.  DTG Operations operates company-owned stores under the Dollar brand and the Thrifty brand, operates reservation centers for both brands and conducts sales and marketing activities for both brands.  Thrifty Rent-A-Car System, Inc. and Dollar Rent A Car, Inc. conduct franchising activities for their respective brands.  Thrifty Car Sales operates a franchised retail used car sales network.  The Company also has a special purpose financing entity, Rental Car Finance Corp. (“RCFC”), which has been consolidated in the financial statements of the Company.  Dollar Rent A Car, Inc., the Dollar brand and DTG Operations operating under the Dollar brand are individually and collectively referred to hereafter as “Dollar”.  Thrifty, Inc., Thrifty Rent-A-Car System, Inc., Thrifty Car Sales, the Thrifty brand and DTG Operations operating under the Thrifty brand are individually and collectively 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 is the successor to Pentastar Transportation Group, Inc., which was formed in 1989 to acquire and operate the rental car subsidiaries of Chrysler Group, LLC, the new legal entity following the restructuring of Chrysler LLC (formerly known as DaimlerChrysler Corporation) (such successor or predecessor entity, as the context may require, and its subsidiaries and members of its affiliated group are hereinafter referred to as “Chrysler”).  DTG Operations, formerly known as 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. was incorporated in December 1998.

Operating Structure

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, government business and independent business travelers. As of December 31, 2011, Dollar and Thrifty had 586 locations in the U.S. and Canada, of which 280 were company-owned stores and 306 were locations operated by franchisees.

In the U.S., 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 focuses on serving both the airport and local markets operating through a network of company-owned stores and franchisees.  Dollar and Thrifty currently derive the majority of their U.S. revenues from providing rental vehicles and services directly to rental customers. Consequently, Dollar and Thrifty incur the costs of operating company-owned stores, and their revenues are directly affected by changes in rental demand and pricing.  Dollar and Thrifty also have franchisees in countries outside the U.S. and Canada and derive revenues from franchise fees and by providing services such as reservation and rate management services.

 
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Company Strategy

The Company believes that the U.S. travel markets should continue to improve in 2012.  The Company’s business strategy is designed to capitalize on these improving conditions and achieve sustained, profitable growth based on the following key initiatives:

·  
Focus on Profitability of Core Operations.  The Company’s focus is on maximizing profitability of its core operations and return on assets.  Key to this effort has been a focus on the optimal balance between transaction volume and pricing, including particularly enhancing rate per day, even where achieving this objective has resulted in reduced rental days.  The Company’s primary focus is the top 75 airport markets in the U.S. and in key leisure destinations.  The Company continues to focus on maximizing profitability of its company-owned stores and continually monitors its stores in light of return on asset and profitability targets.  The Company expects to increase revenues and profitability through expansion of its commercial and tour business, particularly with small and mid-sized corporate customers, and continued improvements in the convenience, value and service it offers to customers.

·  
Enhanced Fleet Diversification and Fleet Management.  The Company operates a diversified fleet, focused on maintaining inventory in line with travel demand, and product mix in line with customer demand.  The Company’s expected fleet composition for the 2012 model year is comprised of vehicles from Chrysler (35%), Ford Motor Company (“Ford”) (26%), General Motors Company (“General Motors”) (14%) and other manufacturers (25%).  A diversified fleet enables the Company to offer customers a wider range of vehicle options.  The Company has also reduced its credit exposure to the major vehicle manufacturers by shifting its fleet mix to a greater proportion of vehicles purchased outside of manufacturer residual value programs, which has also reduced funding requirements and vehicle depreciation rates.  The Company will also continue to explore alternative ways of disposing of its rental fleet to maximize proceeds, particularly through enhanced Internet sales opportunities and expanding retail sales.

·  
Expand Brand Representation in Select Markets Through Franchising.  The Company has a growing franchisee network, which provides it with brand representation in international markets, smaller U.S. airport locations and local markets that are not part of the Company’s core strategic focus.  In those markets, franchised operations can provide the Company with recurring and stable sources of profit.  In optimizing its ownership mix, the Company may continue to acquire franchisees on a limited and opportunistic basis for purposes of brand consolidation or to improve its representation in larger markets that may be under-served.  In international markets outside of North America, the Company exclusively utilizes its franchise network to promote its operations, and will continue to pursue international franchise expansion as a growth opportunity.  During 2011, the Company granted 18 and 4 new franchises to domestic and international franchisees, respectively.

·  
Continued Focus on Cost Controls.  The Company has undertaken significant cost control and productivity initiatives in recent years and considers its low cost structure to be a competitive strength.  In addition to key areas such as personnel productivity initiatives utilized to optimize staffing levels, planned initiatives include further reliance on outsourcing arrangements and elimination of redundant systems, further expansion of consolidated purchasing programs and expanded use of best practices throughout the Company.

Available Information

The Company makes available free of charge on or through its Internet Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such 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 Securities and Exchange Commission (“SEC”). The Company’s Internet address is http://www.dtag.com.
 
 
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The SEC also maintains a Web site that contains all of the Company’s filings at http://www.sec.gov. Information on the Company’s Web site is not incorporated into this Form 10-K.

The Company has a code of business conduct, which is available on the Company’s Web site under the heading, “About DTG”.  The Company’s Board of Directors has adopted a corporate governance policy and Board committee charters, which are updated periodically and can be found on the Company’s Web site under the heading, “Corporate Governance”.  A copy of the code of business conduct, the corporate governance policy and the charters are available without charge upon request to the Company’s headquarters as listed on the front of this Form 10-K, attention “Investor Relations” department.

Industry Overview

The Company competes primarily in the U.S. car rental industry.  The U.S. daily car 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 leisure and business travelers. 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, navigation systems and loss damage waivers to vehicle renters.  As a general matter, the car rental industry is significantly dependent on conditions in the overall leisure and business travel markets.

Vehicle rental companies typically incur substantial debt to finance their fleets which makes them dependent on access to the fleet financing and capital markets to fund operations, and also has a direct impact on profitability due to the interest costs associated with the debt and fluctuations in interest rates.  Although the fleet financing market has improved significantly since 2009, new issuances in these markets, including those undertaken by the Company, have required higher collateral enhancement rates than the industry has faced historically.  This increase in collateral enhancements will have a direct impact on the capital required to support operations in future periods.

Vehicle rental companies are also dependent on vehicle manufacturers and overall economic conditions in the new and used vehicle markets, as these factors directly impact the cost of acquiring vehicles, and the ultimate disposition value of vehicles, both of which impact operating cost.  Historically, rental companies acquired a large portion of their fleets under residual value programs (“Residual Value Programs”), under which vehicle manufacturers repurchase or guarantee the resale value of the vehicle in future periods, thereby allowing the rental companies to fix their holding cost of the vehicle (“Program Vehicles”).  Most vehicle rental companies have in recent periods increased their vehicle purchases made outside of Residual Value Programs to lower fleet costs and reduce the risk related to the creditworthiness of the vehicle manufacturers, which has increased their dependence on the used vehicle market in terms of both determining holding cost, and for ultimate disposition of the vehicles.  Vehicle rental companies bear residual value risk for these vehicles, which are referred to as “Non-Program Vehicles” or “risk vehicles”.

The U.S. rental car industry has nine top brands which are owned by four companies. Three of the companies are publicly held: Dollar and Thrifty operated by the Company; Avis and Budget operated by Avis Budget Group, Inc. (“Avis Budget”) and Hertz and Advantage operated by Hertz Global Holdings, Inc. (“Hertz”). The remaining three brands of Alamo, National and Enterprise are operating subsidiaries of Enterprise Rent-A-Car Company, which is privately held.  The Company also faces competition from local and regional car rental companies in the United States, some of which have the ability to impact pricing in numerous large airports in the United States.  There is intense competition in the U.S. car rental industry on the basis of price, service levels, vehicle quality, vehicle availability and the convenience and condition of rental locations.

 
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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, causes the Company to vary its fleet size over the course of the year. To accommodate increased demand in the summer vacation period, the Company increases its available fleet and staff and as demand declines, the fleet and staff are decreased accordingly.  Certain operating expenses, such as minimum concession fees, rent, insurance and administrative overhead represent fixed costs and cannot be adjusted for seasonal increases or decreases in demand. In 2011, the Company’s average monthly fleet size ranged from a low of approximately 94,000 vehicles in the first quarter to a high of approximately 118,000 vehicles in the second quarter.

The Company

The Company has two value rental car brands, Dollar and Thrifty, with a strategy to operate company-owned stores in the top 75 airport markets and in key leisure destinations in the United States.  In the U.S., the Dollar and Thrifty brands are marketed separately, but operate under a single management structure and share vehicles, back-office employees and facilities, where possible.  The Company also operates company-owned stores in five of the eight largest airport markets in Canada under DTG Canada.  In Canada, the company-owned stores are primarily co-branded.

The Company is focused on maximizing profitability of its company-owned stores and continually monitors any stores that do not meet minimum return on asset and profitability targets for potential improvements or possible closure.

The Company also offers franchise opportunities in smaller markets in the U.S. and Canada and in all other international markets so that franchisees can operate under the Dollar or Thrifty trademarks or dual franchise and operate both brands in one market.  Additionally, the Company may re-franchise company-owned stores outside its strategic markets.
 
Summary Operating Data of the Company
                 
   
Year Ended December 31,
   
2011
   
2010
   
2009
 
    (in thousands)
Revenues:
                 
 Revenue from U.S. and
                 
   Canada company-owned
                 
   stores
  $ 1,501,238     $ 1,491,210     $ 1,491,599  
 Revenue from franchisees
                       
   and other (a)
    47,690       45,950       54,650  
   Total revenues
  $ 1,548,928     $ 1,537,160     $ 1,546,249  
                         
(a)  Includes fleet leasing revenues of $5.1 million, $7.0 million and $16.4 million in 2011, 2010 and 2009, respectively. 
                         
   
As of December 31,
     2011      2010      2009  
Rental locations:
                       
 U.S. and Canada company-
                       
   owned stores
    280       297       296  
 U.S. and Canada franchisee
                       
   locations
    306       308       317  
                         
 
 
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Dollar and Thrifty Brands

Dollar

Dollar’s main focus is serving the airport vehicle rental market, which is comprised 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 U.S. and Canada, and also licenses to independent franchisees which operate as a part of the Dollar brand system. At December 31, 2011, Dollar had 81 company-owned stores at airports and 54 in local markets, and 64 franchised in-terminal airport locations and 61 franchised local market operations in the U.S. and Canada.  In Canada, Dollar operates company-owned stores in five of the eight largest airport markets.

As of December 31, 2011, Dollar’s vehicle rental system included 260 locations in the U.S. and Canada, consisting of 135 company-owned stores and 125 franchisee locations.  Dollar’s total rental revenue generated by company-owned stores was $892 million for the year ended December 31, 2011.

Thrifty

Thrifty serves both the airport and local markets through company-owned stores and its franchisees which derive approximately 90% of their combined rental revenues from the airport market and approximately 10% from the local market. At December 31, 2011, Thrifty had 81 company-owned stores at airports and 64 in local markets, and 75 franchised in-terminal airport locations and 106 franchised local market operations in the U.S. and Canada.

At December 31, 2011, Thrifty’s vehicle rental system included 326 rental locations in the U.S. and Canada, consisting of 145 company-owned stores and 181 franchisee locations.  Thrifty’s total rental revenue generated by company-owned stores was $592 million for the year ended December 31, 2011.

Corporate Operations

United States

The Company’s operating model for U.S. Dollar and Thrifty company-owned stores includes generally maintaining separate airport counters, reservations, marketing and all other customer contact activities, while using a single management team for both brands.  In addition, this operating model includes sharing vehicles, bussing operations, back-office employees and service facilities, where possible.

As of December 31, 2011, the Company operates each of the Dollar brand in 58 and the Thrifty brand in 59 of the top 75 airport markets in the U.S. and operates both brands in 53 of those top 75 airport markets.

Canada

The Company operates in Canada through DTG Canada.  The Company currently operates company-owned stores in five of the eight largest airport markets in Canada: Calgary, Toronto, Montreal, Halifax and Vancouver.  The majority of the markets are operated under the Company’s co-branding strategy in Canada where both the Dollar and Thrifty brands are represented at one shared location.

Tour Rentals

Vehicle rentals by customers of foreign and U.S. tour operators generated approximately $262 million or 17.7% of the Company’s rental revenues for the year ended December 31, 2011.  These rentals are usually part of tour packages that can also include air travel and hotel accommodations.  No single operator account generated in excess of 3% of the Company’s 2011 rental revenues.
 
 
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Other

As of December 31, 2011, the Company had 150 vehicle rental concessions for company-owned stores at 83 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.  A growing number of larger airports are building consolidated airport rental car facilities to alleviate congestion at the airport. These consolidated rental facilities may eliminate certain competitive advantages among the brands as competitors operate out of one centralized facility for both customer rental and return operations, share consolidated bussing operations and maintain image standards mandated by the airports.
 
Summary of Corporate Operations Data
                 
   
Year Ended December 31,
   
2011
   
2010
   
2009
 
   
(in thousands)
                   
Rental revenues:
                 
   United States - Dollar
  $ 881,034     $ 839,267     $ 835,935  
   United States - Thrifty
    542,964       574,141       576,230  
     Total U.S. rental revenues
    1,423,998       1,413,408       1,412,165  
                         
   Canada - Dollar
    10,981       10,912       9,178  
   Canada - Thrifty
    49,345       48,703       51,575  
     Total Canada rental revenues
    60,326       59,615       60,753  
                         
     Total rental revenues
    1,484,324       1,473,023       1,472,918  
                         
Other
    16,914       18,187       18,681  
                         
     Total revenues from U.S. and
                       
        Canadian Corporate Operations
  $ 1,501,238     $ 1,491,210     $ 1,491,599  
                         
                         
   
As of December 31,
     2011      2010      2009  
                         
Rental locations (U.S. and Canada):
                       
   Dollar
    135       149       151  
   Thrifty
    145       148       145  
     Total corporate rental locations
    280       297       296  
 
Franchising

United States and Canada

Both Dollar and Thrifty sell U.S. franchises on an exclusive basis for specific geographic areas, generally outside the top 75 U.S. airport markets.  Most franchisees are located at or near airports that generate a lower volume of vehicle rentals than the airports served by company-owned stores.  In Canada, Dollar and Thrifty sell franchises in markets generally outside the top eight airport markets.  The typical length of a franchise is ten years with a renewal option for five years if certain conditions are met.  The franchisee may terminate the franchise for convenience upon 120 days written notice and Dollar and Thrifty may terminate upon breach of the agreement or for cause as defined in the agreement.

 
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Dollar and Thrifty offer franchisees the opportunity to dual franchise in smaller U.S. and Canadian markets.  Under a dual franchise, one franchisee can operate both the Dollar and the Thrifty brand, thus allowing them to generate more business in their market while leveraging fixed costs.

Dollar and Thrifty license to franchisees the use of their respective brand service marks in the vehicle rental and leasing and parking businesses.  Franchisees of Dollar and Thrifty pay 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.  Dollar and Thrifty offer their respective franchisees a wide range of products and services which may not be easily or cost effectively available from other sources.

System Fees in the U.S.

Dollar - In addition to an initial franchise fee, each Dollar U.S. franchisee is generally required to pay a system fee equal to 8% of rental revenue at airport locations and 6% at suburban operations.

Thrifty - In addition to the initial franchise fee, each Thrifty U.S. franchisee pays a fee generally ranging from 6% to 8% of rental revenue.

System Fees in Canada

All Dollar and Thrifty Canadian franchisees, whether operating a single-brand or co-brand location, pay a monthly fee generally equal to 8% of rental revenue.

Franchisee Services and Products

Dollar and Thrifty provide their U.S. and Canadian franchisees a wide range of products and services, including reservations, marketing programs and assistance, branded supplies, image and standards, rental rate management analysis and customer satisfaction programs. Additionally, Dollar and Thrifty offer their respective franchisees centralized corporate account and tour billing and travel agent commission payments.
 
Summary of U.S. and Canada Franchise Operations Data
 
 
As of December 31,
 
2011
 
2010
 
2009
           
Franchisee locations:
         
   Dollar
               125
 
               125
 
               131
   Thrifty
               181
 
               183
 
               186
      Total franchisee locations
               306
 
               308
 
               317
 
International

Dollar and Thrifty offer master franchises outside the U.S. and Canada, generally on a countrywide basis.  Each master franchisee is permitted to operate within its franchised territory directly or through subfranchisees.  At December 31, 2011, exclusive of the U.S. and Canada, Dollar had franchised locations in 59 countries and Thrifty had franchised locations in 75 countries.  These locations are in Latin America, Europe, the Middle East, Africa and the Asia-Pacific regions. The Company offers franchisees the opportunity to license the rights to operate either the Dollar or the Thrifty brand or both brands in certain markets on a dual franchise or co-brand basis.  Revenue generated by the Company from franchised operations outside the U.S. and Canada totaled $14.2 million in 2011, comprised primarily of system, reservation and advertising fees.
 
 
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Thrifty Car Sales

Thrifty Car Sales provides an opportunity to franchised rental service providers to enhance or build 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 participation in a full service business development center, a nationally supported Internet strategy and Web site, operational and marketing support, vehicle supply services and customized retail and wholesale financing programs, as well as national accounts and supply programs.  At December 31, 2011, Thrifty Car Sales had 32 franchise locations.

Other Services

Supplemental Equipment and Optional Products – Dollar and Thrifty make available loss damage waivers and insurance products related to the vehicle rental, subject to availability and applicable local law, rent global positioning system (GPS) equipment, ski racks, infant and child seats and other supplemental equipment, offer a Rent-a-Toll product for electronic toll payments, and sell pre-paid gasoline and roadside emergency benefit programs (Road Safe and TripSaver).

Parking Services – Airport parking operations are a natural complement to vehicle rental operations. The Company operates 10 corporate parking operations.

Supplies and National Account Programs – The Company 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. The Company also negotiates national account programs to allow its franchisees to take advantage of volume discounts for many products or services such as tires, glass and long distance telephone and overnight mail services.

Reservations

The Internet is the primary source of reservations for the Company.  For the year ended December 31, 2011, approximately 76% of the Company’s total non-tour reservations came through the Internet, slightly increasing from approximately 75% in 2010.  During 2011, the Company’s Internet Web sites (dollar.com and thrifty.com) provided approximately 42% of total non-tour reservations. Third-party Internet sites provided 34% of non-tour reservations, with no third-party site providing more than 10% of total non-tour reservations.  The remaining non-tour reservations were primarily provided by reservation call centers and travel agents.  Dollar and Thrifty reservation systems are linked to all major airline reservation systems and to travel agencies in the U.S., Canada and abroad.

Marketing

Dollar and Thrifty are positioned as value car rental companies in the travel industry, providing on-airport convenience with low rates on quality vehicles.  Customers who rent from Dollar and Thrifty are cost-conscious leisure, government and business travelers who want to save money on car rentals without compromising the quality of car rental products and services.

Dollar and Thrifty acquire these value-oriented customers through a multi-faceted marketing approach that involves traditional and Internet advertising, Internet search marketing, sales teams, strategic marketing partners, and investments in traditional and emerging distribution channels.  Each of these disciplines has a specific focus on selected customer segment opportunities.
 
Strategic Marketing Partners

Dollar and Thrifty have aligned themselves with certain strategic marketing partners to facilitate the growth of their business.
 
 
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Dollar has strong relationships with many significant international tour operators and brokers who specialize in inbound travel to the U.S., as well as domestic tour operators, who generate inbound business to Hawaii, Florida and other leisure destinations.

Major travel agents and consortia operate under preferred supplier agreements with Dollar and Thrifty.  Under these agreements, Dollar and Thrifty provide travel agency groups additional commissions or benefits in return for featuring Dollar and Thrifty in their advertising or giving Dollar and Thrifty a priority in their reservation systems.  In general, these arrangements are not exclusive to Dollar and Thrifty.

Both Dollar and Thrifty have also developed strategic partnerships with certain hotels, credit card companies, and with most U.S. airlines through participation in airline frequent flyer programs.  In addition, Dollar and Thrifty actively participate with our partner airlines in their respective branded Web sites.

Internet Marketing and Distribution Channels

Dollar and Thrifty focus on Internet advertising and marketing, which continue to be the most cost-efficient means of reaching travel customers.  Dollar and Thrifty promote their respective brands via Internet banner advertising, keywords and rate guarantees to encourage travelers to book reservations on their own branded Internet Web sites, dollar.com and thrifty.com.  In addition, Dollar and Thrifty both continue to make technology investments in their respective Web sites, dollar.com and thrifty.com, to provide enhancements to best meet their customers’ changing travel needs.

In 2011, Dollar and Thrifty re-launched their mobile Web sites, since mobile is rapidly becoming a significant booking channel for customers. New mobile applications are expected to be rolled out in 2012 to meet consumer demand.  Additionally, in 2011, Dollar and Thrifty continued their efforts to integrate customer transactional data with an email marketing program to deliver relevant messages to subscribing customers at optimal times, with a view to increasing customer engagement and loyalty.  The Company believes that this type of integration can increase the interaction between customers and the brands while expanding customer loyalty and increasing revenue.

Dollar and Thrifty are among the leading car rental companies in direct-connect technology, which bypasses global distribution systems and reduces reservation costs by allowing customers to book directly through the travel partners’ Websites.  Dollar and Thrifty have entered into direct-connect relationships with certain airline and other travel partners.

In addition, Dollar and Thrifty are featured with numerous national online booking agents where customers frequently shop for travel services and are in regular discussions with owners of other emerging travel channels to secure inclusion of the Dollar and Thrifty brands in those channels.

Dollar and Thrifty have made filings under the intellectual property laws of jurisdictions in which they and their respective franchisees operate, including the U.S. Patent and Trademark Office, to protect the names, logos and designs identified with Dollar and Thrifty.  These marks are important for customer brand awareness and selection of Dollar and Thrifty for vehicle rental and for dollar.com and thrifty.com for reservation services.

Customer Service

The Company’s commitment to delivering consistent customer service is a key element of our strategy. At its headquarters and in company-owned stores, the Company has programs involving customer satisfaction training and team-based problem solving focused on improving customer service. The Company’s customer service centers measure customer service through third-party customer satisfaction surveys, track service quality trends, respond to customer inquiries and provide recommendations to senior management and vehicle rental location management. The Company conducts initial and ongoing training for headquarters, company-owned store and franchisee employees, using professional trainers, performance coaches and computer-based training programs.
 
 
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Information Systems

The Company depends upon a number of core information systems to operate its business, primarily its counter automation, Internet Web sites, distribution network, rate and reservation systems, fleet and revenue management systems. The counter automation system in company-owned stores processes rental transactions, facilitates the sale of additional products and services and facilitates the monitoring of the fleet and financial assets. The Company also relies on a revenue management system that enables the Company to better determine rental demand based on current and historical reservation patterns and adjust its rental rates accordingly. The Company’s Internet Web sites and various distribution networks allow the Company’s products to be marketed and reserved directly or through our various channel partners.

The Company continues to invest in new business system capabilities to facilitate operations and reduce ongoing operating costs.  In 2011, the Company continued to deploy new counter automation capabilities, redesigned and enhanced key distribution capabilities and upgraded the revenue management system to incorporate new products and handle greater volumes.  The Company also deployed newer technologies, consolidated platforms and renegotiated key supplier agreements that helped reduce ongoing information technology (“IT”) operating cost.

Hewlett-Packard Company (“HP”) provides the majority of the Company’s IT services, including applications development and maintenance, network, workplace and storage management, back-up and recovery and mid-range hosting services.  HP also manages and monitors the majority of the Company’s data network and its daily information processing.  The Company’s counter automation, reservations, revenue management, Internet Web sites and fleet processing systems are housed in a secure underground HP facility in Oklahoma designed to withstand disasters.  

U.S. franchisees receiving a certain volume of reservations are required to use an approved automated counter system.  In addition to providing an electronic data link with the Company’s worldwide reservations centers, the automated counter system produces rental agreements and provides the Company and its franchisees with customer and vehicle inventory information, as well as financial and operating reports.

Fleet Acquisition and Management
 
Vehicle Supply
 
The Company has vehicle supply agreements with both Chrysler and Ford covering vehicle purchases through the 2012 and 2013 model years, respectively, and has a vehicle purchase agreement with General Motors covering vehicle purchases through the 2012 model year.
 
For the 2011 model year, Ford, General Motors and Chrysler vehicles represented approximately 52%, 27% and 16%, respectively, of the total U.S. fleet purchases by DTG Operations.  The Company expects that for the 2012 model year Chrysler, Ford and General Motors will represent approximately 35%, 26% and 14%, respectively, of total U.S. fleet purchases of DTG Operations.
 
Vehicle Residual Value Risk

Vehicle depreciation is the largest single cost element in the Company’s operations, and is dependent upon the ultimate residual values of vehicles in the fleet, in addition to the overall mix of Program and Non-Program Vehicles.
 
 
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DTG Operations primarily purchases Non-Program Vehicles, for which it bears the full risk and potential benefits of changes in residual values because the vehicles are not covered by a manufacturer’s Residual Value Program.  Non-Program Vehicles typically have lower acquisition costs and lower depreciation rates than comparable Program Vehicles, and also allow the Company to reduce its risk related to the creditworthiness of the vehicle manufacturers.  The manufacturer does not set any terms or conditions on the resale of Non-Program Vehicles other than requiring minimum holding periods.  At December 31, 2011, approximately 96% of all vehicles operated by DTG Operations were Non-Program Vehicles.  In 2011, 2010 and 2009, the Company recorded gains on sales of Non-Program Vehicles of $46.9 million, $63.1 million and $35.1 million, respectively. These gains represented an average gain per Non-Program Vehicle sold of $1,190, $1,105 and $700 in 2011, 2010 and 2009, respectively.

Under Residual Value Programs, the manufacturer either guarantees the aggregate depreciated value upon resale of covered vehicles of a given model year, or agrees to repurchase vehicles at specified prices during established repurchase periods.  These programs provide the Company with a guaranteed depreciation rate per vehicle during the holding period, while minimizing the Company’s residual value risk.

As the level of Non-Program Vehicles in the fleet has increased, the Company has assumed additional risk related to fluctuations in the residual value of the vehicle, and has increased its reliance on the used vehicle markets.  The residual value market fluctuates seasonally with the lowest values typically in the fourth quarter.  Residual values depend on levels of supply and demand for both new and used vehicles, seasonality in the residual value market, fuel prices and consumer perceptions of manufacturer quality, and directly affect vehicle depreciation rates.  The level of the Company’s future investment in Program Vehicles will depend on the availability and attractiveness of Residual Value Programs, although the Company does not anticipate any material change in its fleet mix for the foreseeable future.

Vehicle Remarketing

DTG Operations typically holds Non-Program Vehicles in rental service for approximately 18 to 22 months.  DTG Operations remarketed approximately 60% of its Non-Program Vehicles through auctions and approximately 40% directly to used car dealers, wholesalers and its franchisees during the year ended December 31, 2011.

DTG Operations typically holds Program Vehicles in rental service for approximately six to eight months.  Generally, Program Vehicles must be removed from service before they reach 30,000 miles to avoid excess mileage penalties under manufacturers’ Residual Value Programs.  DTG Operations must bear the risk on the resale of Program Vehicles that cannot be returned.

Fleet Management

The Company utilizes fleet optimization software (the “Pros Fleet Management Software”) from PROS Holdings, Inc., a leading provider of pricing and revenue optimization software.  The Pros Fleet Management Software allows the Company to improve fleet planning and efficiencies in its vehicle acquisition and remarketing efforts.

Vehicle Financing

The Company requires a substantial amount of debt to finance the purchase of vehicles used in its rental fleets.  The Company utilizes asset-backed medium-term notes and variable funding note programs to finance its vehicles.  Under asset-backed medium-term notes, the Company is required to provide collateral at different levels depending on whether vehicle manufacturers maintain investment grade or non-investment grade credit ratings, and whether inventory is comprised of Program Vehicles or Non-Program Vehicles.  Under variable funding note programs, the Company is required to provide collateral at a fixed level.  See Part II, Item 8 - Note 8 of Notes to Consolidated Financial Statements.
 
 
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Fleet Leasing Programs
 
DTG Operations has historically made fleet leasing programs available to Dollar and Thrifty U.S. franchisees for each new model year.  Additionally, DTG Canada has historically made fleet leasing programs available to Canadian franchisees for each new model year.  However, in recent years, the Company has made fleet leasing programs available only on a very limited basis.
 
Competition
 
There is intense competition in the vehicle rental industry on the basis of price, service levels, vehicle quality, vehicle availability and the convenience and condition of rental locations.  Dollar and Thrifty and their franchisees operate mainly in the U.S. airport market, relying on leisure, tour and small business customers.  In addition to local and regional vehicle rental companies, Dollar and Thrifty and their franchisees’ principal competitors are Alamo, Avis, Budget, Enterprise, Hertz, Advantage and National.

The Canadian vehicle rental markets are also intensely competitive. Most of the Canadian market is operated either directly or through franchisees of the major U.S. vehicle rental companies, including Alamo, Avis, Budget, Enterprise, Hertz and National, as well as Dollar and Thrifty.

Insurance

The Company is subject to third-party bodily injury liability and property damage claims resulting from accidents involving its rental vehicles.  In 2011, 2010 and 2009, the Company retained the risk of loss up to $7.5 million per occurrence for public liability and property damage claims. The Company maintains insurance coverages at certain amounts in excess of its retained risk.  The Company retains the risk of loss on supplemental liability insurance sold to vehicle rental customers.

The Company retains risk of loss up to $5.0 million for general and garage liability.  The Company retains the risk of loss for any catastrophic and comprehensive damage to its vehicles.  In addition, the Company carries workers' compensation coverage with retentions in various amounts up to $500,000.  The Company also carries excess liability and directors' and officers' liability insurance coverage.

Provisions for bodily injury liability and property damage liability on self-insured claims and for supplemental liability insurance claims (collectively referred to as “Vehicle Insurance Reserves”) are made by charges to expense based upon periodic actuarial evaluations of estimated ultimate liabilities on reported and unreported claims.  As of December 31, 2011, the Company had Vehicle Insurance Reserves of $86.5 million.  The Company’s obligations to pay insurance-related losses and indemnify the insurance carriers for policies they have underwritten are collateralized by surety bonds and letters of credit. As of December 31, 2011, these letters of credit and surety bonds totaled approximately $48.5 million and $3.5 million, respectively.

The Company also maintains various letters of credit and surety bonds to secure performance under airport concession agreements and other obligations which totaled approximately $10.3 million and $43.9 million, respectively, as of December 31, 2011.
 
Regulation

Loss Damage Waivers

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 typically require notice to customers that the loss damage waiver may duplicate their own coverage or may not be necessary, limit customer responsibility for damage to the vehicle or cap the price 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 for Dollar, Thrifty and their franchisees.
 
 
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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 non-renewal of franchises.

Other Matters

Vehicle rental and leasing companies have insurance liability exposure for amounts up to each state’s minimum financial responsibility for the actions of any person driving a company-owned vehicle.  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, environmental protection, privacy and labor matters. The Company believes that Dollar’s and Thrifty’s 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.

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; and the generation, storage, transportation and off-site treatment or disposal of waste materials. Dollar and Thrifty own 20, and lease 100, 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 Company may also be subject to requirements related to remediation of Hazardous Substances that have been released into the environment at properties it owns or operates, or owned or operated in the past, or at properties to which it sends, or has 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 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 are investigating or remediating soil or groundwater contamination. Based on currently available information, the Company does not believe that the costs associated with environmental investigations or remediation will be material.
 
 
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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 Company.

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 Company may be subject to additional legal proceedings at other locations brought by government agencies or private parties for environmental matters.  In addition, with respect to cleanup of contamination, additional locations at which wastes generated by the Company may have been released or disposed, and of which the Company is currently unaware, may in the future become the subject of cleanup for which the Company may be liable, in whole or part.  Accordingly, while the Company believes that it is in substantial compliance with applicable requirements of environmental laws, there can be no assurance that the Company’s future environmental liabilities will not be material to the Company’s consolidated financial position, results of operations or cash flows.

Employees

As of December 31, 2011, the Company employed approximately 5,900 full-time and part-time employees.  Approximately 200 of the Company’s employees were subject to collective bargaining agreements as of December 31, 2011. The Company believes its relationship with its employees is good.
 
RISK FACTORS
Expanding upon the factors discussed above under “Factors Affecting Forward-Looking Statements”, the following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements that we made.  Risks that we do not know about could arise and issues we now view as minor could become more important.  If we are unable to adequately respond to any of these risks, our financial condition, results of operations and cash flows could be materially adversely affected.

Constraints on our Growth

We face constraints on our growth and profitability, given the challenges we face in increasing our market share in the key airport and local markets we serve, high barriers to entry in the insurance replacement market, capital and other constraints on expanding company-owned stores internationally, and the challenges we would face in further reducing our expenses. 

Economic Conditions
 
Our results are dependent on general economic conditions in the U.S. and Canada, our principal markets.  Adverse economic conditions negatively impacted our operations in 2009, and necessitated significant actions to mitigate their impact, including reductions in our rental fleet in response to declining demand, and reductions in our workforce.  While economic conditions have improved, uncertainty still remains as to the strength of the current economy.  Consumer confidence and spending levels have also improved in 2011; however, there is no assurance that these trends will continue.  Favorable economic trends in the United States, our principal market, could also be adversely affected by events outside the United States.  These include continuing volatility in the global financial and credit markets, particularly in certain countries in the European Union, concerns about global economic prospects, and the continuing significant political unrest and other concerns involving certain oil-producing countries, which has contributed to price volatility for petroleum products, and in recent periods higher average gasoline prices, which could affect both broader economic conditions and consumer discretionary spending patterns.  If economic conditions in the United States deteriorate based on these or other factors, spending on leisure travel could also decline, with consequent negative effects on our results of operations and prospects.
       
 
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Adverse economic conditions also affect our customers and franchisees, and some of our franchisees have experienced financial challenges.  These circumstances result in reduced fee revenue to the Company and a potential for increased bad debt exposure. Depending on the continued strength of the economy, we may lose customers or our franchisees may become unable to meet their payment obligations to us.

Exposure to Used Vehicle Market Conditions
 
We retained the residual value risk on approximately 96% of our vehicles at December 31, 2011 and expect that risk vehicles will account for approximately the same percentage of our fleet in 2012.  The depreciation costs for these vehicles are highly dependent on wholesale used vehicle prices at the time of sale, requiring us to make assumptions regarding the age and mileage of the vehicles at the time of disposal, as well as the general used vehicle auction market.  The costs of our risk vehicles may be materially affected by the relative strength of the used car market, particularly the market for one to two year old used cars. The strength of the used car market and its impact on residual values is driven by a number of factors, including macroeconomic factors impacting supply and demand for used vehicles, the volume of new vehicles produced by automotive manufacturers and the applicable level of discounts or incentives offered to stimulate sales, the availability of consumer credit to purchase new or used vehicles, and finally, changes in gasoline prices that may impact consumer demand for certain types of vehicles.  Additionally, residual values fluctuate seasonally with the lowest values typically in the fourth quarter.
 
 While the market has experienced favorable trends during 2011, whether these trends will continue in 2012 remains uncertain.  In the event of renewed pricing pressure in the used vehicle market, or if recent events in the Middle East result in significant increases in gasoline prices in the near term, residual values could decrease and our results could be materially and adversely affected.  Operating a fleet comprised predominantly of risk vehicles could also have a negative impact on vehicle utilization levels and profitability if we are unable to, or elect not to, sell those vehicles in periods of weaker rental demand.

Highly Competitive Nature of the Vehicle Rental Industry
 
In addition to local and regional vehicle rental companies, the vehicle rental industry primarily consists of nine major brands, all of which compete intensely for rental customers based on price and service.  The Internet has increased brand exposure and gives more details on rental prices to consumers and increases price competition, requiring companies to be highly competitive in pricing in order to attract consumers.  In addition to consumer demand, pricing in the industry is significantly impacted by the size of the rental fleets and the supply of vehicles available to consumers in the market.  While we have achieved improvements in our pricing as part of our strategic focus on return on assets in addition to the overall fleeting actions taken by the industry to balance supply with demand, we cannot provide assurance that we will continue to realize improved pricing or whether our attempts to do so will adversely affect rental days.  A significant increase in the supply of rental vehicles available in the market due to fleet actions taken by our competitors, or actions by our competitors to significantly reduce their prices in order to increase market share or utilization could negatively affect our pricing and other operating plans in material ways and adversely affect our results of operations and prospects.

Dependence on Domestic Automotive Manufacturers
 
We remain highly dependent on the domestic automotive manufacturers with approximately 75% of our 2012 orders attributable to Chrysler, Ford and General Motors.  We have exposure to these manufacturers in three primary areas:  their ability to manufacture and deliver vehicles to us in a timely manner and at a competitive price for use in our operations; the level of residual values of their vehicles in the overall used vehicle market, which could be adversely impacted by negative public perception regarding their products or financial prospects and in turn affect our vehicle depreciation costs and collateral requirements; and their ability to meet financial obligations to us for Residual Value Programs and other purchase-related incentives.  If any of these companies experience significant financial difficulties and fails to meet its financial or supply obligations to us, our results, financial position, cash flow and prospects could be materially adversely affected.
 
 
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Dependence on Air Travel
 
Approximately 90% of our rental revenues are attributable to airport locations. The number of airline passengers has a significant impact on our business. Mergers and acquisitions in the airline industry, airline restructuring through bankruptcy, and challenging economic conditions have caused airlines to reduce flight schedules.  The airline industry has also faced considerable challenges in light of global economic conditions, severe weather conditions and competitive industry conditions.  A significant reduction in airline passengers or any event that significantly disrupts air travel could negatively impact our results, particularly if it occurs during our peak rental season.

Dependence on Third-Party Internet Sales
 
The Internet has had a significant impact on the way travel companies get reservations. For 2011 and 2010, we received 76% and 75% of our non-tour reservations from the Internet, respectively, with 42% and 44%, respectively, coming from our own Internet Web sites, dollar.com and thrifty.com. The remaining non-tour reservations derived from the Internet were attributable to third-party sites, with no third-party site accounting for more than 10% of those non-tour reservations.  Future changes in the way travel-related services are marketed and sold over the Internet or changes in our relationship with third-party Internet sites could result in reduced reservations from one or more of these sites and less revenue.
 
Concentration in Leisure Destinations
 
We have a significant presence in key leisure destinations and earn a large portion of our revenue from these markets. Rental revenue from Florida, Hawaii, California and Texas represented approximately 60% of our total rental revenue for the year ended December 31, 2011. The severe decline in consumer spending in recent periods materially adversely affected leisure travel and could be expected to do so again in the future. Reductions in leisure travel resulting from natural disasters, terrorist acts, or other factors could also have a material adverse impact on our results if consumer spending does not rebound to more favorable levels.

Fuel Costs
 
Prices for petroleum-based products, including gasoline, have experienced significant volatility in recent periods and affected automotive travel patterns in material ways. A variety of factors, including the current economic environment, the continuing significant political unrest and other concerns involving certain oil-producing nations, could cause further price volatility.  Reduced fuel supplies or significant increases in fuel prices could have an adverse effect on our financial condition, results of operations and cash flows, either by directly discouraging customers from renting cars, causing a decline in airline passenger traffic, or increasing our operating costs, if these increased costs cannot be passed through to our customers.

Vehicle Financing Considerations

The rental car industry is capital intensive, and we depend on access to the capital markets for financing our vehicles using primarily asset-backed medium-term notes and variable funding note programs. We expect to have substantial debt and debt service requirements in the foreseeable future.  Based on our completion in 2011 of $1.5 billion in new asset-backed financing, we believe conditions in the asset-backed financing markets have improved significantly, but we cannot assure you that these conditions will be sustained if the credit markets experience disruptions or volatility as the economy continues to recover from the financial crisis.

Asset-backed financing facilities require varying levels of collateral enhancement, which we provide through a combination of vehicles, cash and letters of credit under our bank loan facility.  
 
 
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Enhancement levels are determined by rating agencies and are dependent on a number of factors, including the fleet mix of Program versus Non-Program Vehicles as well as the credit ratings of vehicle manufacturers and the Company.  There can be no assurance that collateral enhancement requirements on future asset-backed financings will not increase significantly.

The Company’s strategy is to maintain a predominately risk fleet, with risk vehicles comprising approximately 96% of our vehicle inventory as of December 31, 2011.  If residual values of our risk vehicles decline significantly or we experience cumulative losses on the disposition of risk vehicles exceeding a specified percentage of the aggregate value of our fleet, we could be required to increase the monthly depreciation payments under our asset-backed medium-term notes during the remaining life of the vehicles, increase the level of collateral enhancement, or both.  Such payments or increase in collateral enhancement would reduce our liquidity available for other purposes.
 
Restrictions and Restrictive Covenants

Certain of our vehicle financing and credit facilities contain covenants that, among other things, limits or restricts our and our subsidiaries’ ability to:

·  
dispose of assets;
·  
incur additional indebtedness;
·  
incur guarantee obligations;
·  
prepay other indebtedness;
·  
pay dividends or make share repurchases;
·  
create liens on assets;
·  
enter into sale and leaseback transactions;
·  
make investments, loans, advances or capital expenditures;
·  
make acquisitions;
·  
engage in mergers or consolidations;
·  
change the business conducted by us; and
·  
engage in certain transactions with affiliates.
 
On February 16, 2012, the Company terminated its existing Senior Secured Credit Facilities (hereinafter defined) and replaced it with a new $450 million revolving credit facility (the “New Revolving Credit Facility”) that expires in February 2017.  Under the New Revolving Credit Facility, we are subject to a maximum corporate leverage ratio of 3.0 to 1.0, a minimum corporate interest coverage ratio of 2.0 to 1.0, and a minimum corporate EBITDA requirement of $75 million.  In connection with the entry into the New Revolving Credit Facility, the financial covenants previously applicable under our Series 2010-3 variable funding notes and our Series 2011-2 medium-term notes were replaced, pursuant to the terms of the related series supplements, by financial covenants identical to the three described in the preceding sentence.

Our ability to comply with these restrictions and covenants will depend on our financial and operating performance, and a violation of any of them could result in an event of default under these facilities, entitling the relevant lenders to exercise remedies against us, such as acceleration of the maturity of the relevant indebtedness or, in the case of our asset-backed notes to the extent such covenants are applicable, in an early amortization event.  While a default is continuing under our New Revolving Credit Facility, we would be prohibited from further borrowings and issuances of letters of credit, which could have a significant adverse effect on our business and results of operations.   A default or event of default under one of our debt agreements may also result in a default or event of default under other debt agreements, with similar adverse consequences to us.  There can be no assurance that the relevant lenders would waive any such violation or that a waiver or replacement financing would be available to us on favorable terms, on a timely basis or at all.   In the absence of a waiver or the availability of replacement financing, our financial condition, results of operations and prospects could be materially and adversely affected.
 
 
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We are also subject to operational limitations under the terms of our asset-backed financing programs, including percentage limitations on the number of vehicles purchased from specified manufacturers and on the number of Program Vehicles in the fleet.  These may prevent us from making opportunistic vehicle purchases in order to obtain cost savings that might otherwise be available through a manufacturer subject to the limitations.  These limitations could also impact our targeted fleet mix in ways that adversely affect our results of operations and prospects.

Like-Kind Exchange Program
 
We use a Like-Kind Exchange Program (hereinafter defined) for our vehicles where we dispose of our vehicles and acquire replacement vehicles in such a way that we defer the gain on these dispositions for tax purposes. The use of this Like-Kind Exchange Program has allowed us to defer a material amount of federal and state income taxes beginning in 2002. In order to obtain the benefit of the deferral of the gains on disposal of our vehicles, we must acquire replacement vehicles within a specified time frame, and must also maintain or increase the overall size of our fleet comparable to the prior tax year. Our ability to defer the gains on the disposition of our vehicles under our Like-Kind Exchange Program is affected by significant downsizing of our fleet.  Projection of the results under the Like-Kind Exchange Program is complex, requires numerous assumptions and is not subject to precise estimation.  Actual results depend upon future sale and purchase transactions extending up to 180 days after year-end and actual results may differ from current projections.
 
The Company’s ability to continue to defer the reversal of prior period tax deferrals will depend on a number of factors, including the size of the Company’s fleet, as well as the availability of accelerated depreciation methods in future years.  Accordingly, the Company may make material cash federal income tax payments in future periods.

Seasonality
 
Our business is subject to seasonal variations in customer demand, with the summer vacation period representing the peak season for vehicle rentals. Any event that disrupts rental activity, fleet supply, or industry fleet capacity during the second and third quarters could have a disproportionately material adverse effect on our liquidity, our cash flows and/or our results of operations in those periods and for the full year.
 
Customer Surcharges
 
In almost every state, we recover various costs associated with the title and registration of our vehicles and, where permitted, the concession cost imposed by airport authorities or the owners and/or operators of the premises from which our vehicles are rented. Consistent with industry-wide business practices, we separately state these additional surcharges in our rental agreements and invoices and disclose the existence of these surcharges to customers together with an estimated total price, inclusive of these surcharges, in all distribution channels. This standard practice complies with the Federal Trade Commission Act and has been upheld by several courts. However, there are several legislative proposals in certain states that, if enacted, would define which surcharges are permissible and establish calculation formulas that may differ from the manner in which we set our surcharges.
 
Enactment of any of these proposals could restrict our ability to recover all of the surcharges we currently charge and may have a material adverse impact on our results of operations.

Laws and Regulations

We are subject to a wide variety of laws and regulations in the U.S. and Canada and other jurisdictions in which we operate, and changes in the level of government regulation of our business have the potential to materially alter our business practices and adversely affect our financial position and results of operations. Depending on the jurisdiction, those changes may come about through new legislation, the issuance of new laws and regulations or changes in the interpretation of existing laws and regulations by a court, regulatory body or governmental official.
 
 
- 22 -

 
 
Optional insurance products, including supplemental liability insurance, personal accident insurance and personal effects protection, we offer to renters providing various insurance coverages in our domestic vehicle rental operations are regulated under state laws governing the licensing of such products. Any changes in U.S. or foreign law that change our operating requirements with respect to optional insurance products could increase our costs of compliance or make it uneconomical to offer such products, which would lead to a reduction in revenue.  As a result of any changes in these laws or otherwise, if customers decline to purchase supplemental liability insurance products through us, our results of operations could be materially adversely affected.
 
The U.S. Congress and other legislative and regulatory authorities in the U.S. and internationally have considered, and will likely continue to consider, numerous measures related to climate change and greenhouse gas emissions. Should rules establishing limitations on greenhouse gas emissions or rules imposing fees on entities deemed to be responsible for greenhouse gas emissions become effective, demand for car rental services could be affected, or our vehicle costs and/or other costs could increase and our business could be adversely affected.
 
Laws in many jurisdictions limit the types of information that may be collected about individuals with whom we transact business, as well as how we collect, retain and use the information that we are permitted to collect.  The regulations applicable to privacy and data security are rapidly evolving, and additional regulations in those areas, some of which is difficult for us to accommodate, are often proposed and occasionally adopted.  Privacy and data security regulations could have an adverse effect on our business through hindering our transaction processing activities and/or through the resulting cost of complying with such regulations.  Additionally, it is possible that we could face significant liability for failing to comply with such requirements or new requirements as they are adopted.

We are subject to Payment Card Industry (“PCI”) data security standards, which require periodic audits by independent third parties to assess compliance. PCI data security standards are a comprehensive set of requirements for enhancing payment account data security that was developed by the PCI Security Standards Council comprised of the major credit card companies to help facilitate the broad adoption of consistent data security measures. Failure to comply with the security requirements as identified in subsequent audits or to rectify a security issue may result in fines. Although unlikely, restrictions on accepting payment cards may be imposed on companies that are not compliant and fail to timely remediate this non-compliance.  While we have not been subject to any fines or limitations on our ability to accept payment cards, there is no assurance that we will not incur fines or such limitations in the future.

Low Cost Structure

Our low cost structure has historically been one of our primary competitive advantages, as it has allowed us to offer low cost vehicle rentals and drive rental transactions to our brands.  Our inability to maintain our low cost structure could have an adverse affect on our results of operations and cash flows.  In an effort to maintain control over our operating expenses, we have implemented cost reduction initiatives.  These initiatives include, among other things, headcount reductions, business process re-engineering and internal reorganizations.  We cannot provide assurance that we will be able to continue to implement cost reduction initiatives to offset increasing fixed costs or, that we can do so without adversely affecting customer service levels and employee morale, which could in turn adversely affect our results of operations and prospects.

 Manufacturer Safety Recalls

Our vehicles may be subject to safety recalls by their manufacturers.  Under certain circumstances, the recalls may cause us to attempt to retrieve cars from customers and cause us to decide not to re-rent vehicles until we can arrange for the repairs described in the recalls to be completed.  We could face liability claims if recalls affect vehicles that we have already sold.  
 
 
- 23 -

 
 
If a large number of vehicles are subject to simultaneous recalls, or if needed replacement parts are not available, we may not be able to re-rent recalled vehicles for a significant period of time.  These types of disruptions could jeopardize our ability to satisfy demand for our vehicles, or could result in the loss of business to our competitors.  Depending on the severity of any manufacturer recall, it could have a material and adverse effect on our operations and cash flows.

Liability Insurance Risk

 We are exposed to claims for personal injury, death and property damage resulting from accidents involving our rental customers and the use of our cars. In both 2011 and 2010, we maintained the level of self-insurance of $7.5 million per occurrence for public liability and property damage claims, including third-party bodily injury and property damage, and maintained the level of self-insurance for general and garage liability of $5.0 million.  We maintain insurance coverage for liability claims above these self-insurance levels. We self-insure for all losses on supplemental liability insurance policies sold to vehicle rental customers.  A significant change in the amount and frequency of uninsured liability claims could negatively impact our results.

Environmental Regulations
 
We are subject to numerous environmental regulatory requirements related 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; and the generation, storage, transportation and off-site treatment or disposal of waste materials. We have made, and expect to continue to make, expenditures to comply with environmental laws and regulations. These expenditures may be material to our financial position, results of operations and cash flows. We have designed programs 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.  However, we cannot be certain that our programs will guarantee compliance with all regulations to which we are subject.
 
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 we may be subject to additional legal proceedings brought by government agencies or private parties for environmental matters. In addition, there may be additional locations of which we are currently unaware at which wastes generated by us may have been released or disposed. In the future, these locations may become the subject of cleanup for which we may be liable, in whole or part.  Accordingly, there can be no assurance that the Company’s future environmental liabilities will not be material to the Company’s consolidated financial position, results of operations or cash flows.

Dependence on Outsourcing Arrangements
 
HP handles the majority of our IT services.  If HP fails to meet its obligations in all material respects as and when required under our agreement, we may suffer a loss of business functionality and productivity, which would adversely affect our results.  Additionally, if there is a disruption in our relationship with HP, we may not be able to secure another IT supplier to adequately meet our IT needs on acceptable terms, which could result in performance issues and a significant increase in costs.
 
Dependence on Communication Networks and Centralized Information Systems
 
We heavily rely on information systems to conduct our business specifically in the areas of reservations, rental transaction processing, fleet management and accounting. We have centralized information systems in disaster resistant facilities maintained by HP in Tulsa, Oklahoma and we rely on communication service providers to link our system with the business locations these systems serve. A failure of a major system, or a major disruption of communications between the system and the locations it serves, could cause a loss of reservations, slow the rental transaction processing, interfere with our ability to manage our fleet and otherwise materially adversely affect our ability to manage our business effectively.
 
 
- 24 -

 
 
Our system back-up plans, continuity plans and insurance programs are designed to mitigate such a risk, but not to eliminate it.
 
Our systems contain personal information about our customers. Our failure to maintain the security of the data we hold, whether the result of our own error or that of others, could harm our reputation or give rise to legal liabilities, resulting in a material adverse effect on our results of operations or cash flows.

UNRESOLVED STAFF COMMENTS
None.
 
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 for Dollar and Thrifty.  These buildings and the related improvements were pledged as collateral under the Senior Secured Credit Facilities.

In connection with the Senior Secured Credit Facilities, the Company also executed liens encumbering its real property located in Tampa, Las Vegas, Ft. Lauderdale, Irving, Houston, Salt Lake City, San Diego, Chicago, Memphis, Tulsa, Fort Myers, Florida and Harlingen, Texas.  Those liens were terminated upon the termination of the Senior Secured Credit Facilities, and the Company has agreed in the New Revolving Credit Facility to pledge each of them (subject to certain conditions) as part of the collateral securing the New Revolving Credit Facility.

The Company owns or leases real property used for company-owned stores and office facilities, and in some cases owns real property that is leased to franchisees or other third-parties.  As of December 31, 2011, the Company’s company-owned operations were carried on at 280 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 usually competitively bid, are important for securing air traveler business.  These concession agreements typically provide that the airport will receive a specified percentage of vehicle rental revenue or a guaranteed minimum concession fee, whichever is greater.  Additionally, certain concession agreements require the payment or reimbursement of operating expenses.
 
LEGAL PROCEEDINGS
On November 14, 2007, a purported class action was filed against the Company, by Michael Shames and Gary Gramkow, individually and on behalf of all others similarly situated, in the Southern District Court of California, claiming that the pass through of the California Trade and Tourism Commission and airport concession fee authorized by legislation effective in January 2007 constitute antitrust violations of the Sherman Act and the California Unfair Competition Act.  The case is styled Michael Shames; Gary Gramkow, on behalf of themselves and on behalf of all persons similarly situated v. The Hertz Corporation, Dollar Thrifty Automotive Group, Inc., Avis Budget Group, Inc., Vanguard Car Rental USA, Inc., Enterprise Rent-A-Car Company, Fox Rent-A-Car, Inc., Coast Leasing Corp., The California Travel and Tourism Commission and Caroline Beteta (No. 07 CV 2174 H BLM (S.D. Cal.)).  The defendants filed a motion to dismiss the amended complaint, and on July 25, 2008, the Court issued an order denying the motion as to the antitrust claims but granting the motion to dismiss state law claims.  On November 21, 2011, the court ordered a stay of proceedings, this time until December 21, 2011, and on December 21, 2011 the court extended the stay on all proceedings until February 8, 2012. Mediation was held in December 2011 and again in January 2012 at which time the parties agreed to a preliminary settlement. The Company has accrued a contingency related to the preliminary settlement.
 
 
- 25 -

 
 
On September 22, 2009, a purported class action complaint was filed in Illinois state court by Susan and Jeffrey Dillon, individually and on behalf of all persons who rented a vehicle from Thrifty Car Rental in Colorado from September 22, 2006 forward, who signed a rental agreement which obligated them to pay for loss of use of a vehicle if damaged, and who were charged for loss of use or an administrative fee related to the vehicle damage claim.  Plaintiffs assert claims for breach of contract, violations of the Colorado Consumer Protection Act and for declaratory judgment under the Colorado Uniform Declaratory Judgment Law related to the assessment of loss of use and administrative fees in connection with vehicle damage claims against renters.  The case is styled: Susan and Jeffrey Dillon v. DTG Operations, Inc. d/b/a Thrifty Car Rental (Case No. 09CH34874, Cook County Circuit Court, Chancery Division, Illinois).   On July 23, 2010, these actions were dismissed with prejudice.  The plaintiffs filed their notice of appeal on August 19, 2010.  Appellate briefing was completed on May 16, 2011 and oral argument on the appeal occurred on December 6, 2011, and the parties are awaiting a ruling.
 
Various class action complaints relating to the now terminated proposed merger transaction with Hertz Global Holdings, Inc. (“Hertz”) have been filed in Oklahoma state court, Oklahoma federal court, and Delaware Chancery Court against the Company, its directors, and Hertz by various plaintiffs, for themselves and on behalf of the Company's stockholders, excluding defendants and their affiliates.  These complaints allege that the consideration the Company's stockholders would have received in connection with the proposed transaction with Hertz is inadequate and that the Company's directors breached their fiduciary duties to stockholders in negotiating and approving the merger agreement.  These complaints also allege that the proxy materials that were sent to the Company's stockholders to approve the merger agreement are materially false and misleading.  The cases and their current status are as follows: 1) Henzel v. Dollar Thrifty Automotive Group, Inc., et al. (Consolidated Case No. CJ-2010-02761, Dist. Ct. Tulsa County, Oklahoma) - this case has not been dismissed but is currently inactive and 2) In Re: Dollar Thrifty Shareholder Litigation (Consolidated Case No. 5458-VCS, Delaware Court of Chancery) - on October 18, 2011, plaintiffs sought permission to amend their pleadings to assert additional claims that members of the Company’s board of directors (the “Board”) breached their fiduciary duties concerning the following matters: (a) the Board’s response to a merger proposal by Avis Budget Group, Inc. (“Avis Budget”) in September, 2010; (b) the Board’s use of defensive measures, including the adoption of a poison pill, in response to the Exchange Offer made by Hertz; (c) the Board’s response to the failure of Hertz to submit an improved final offer meeting certain Board criteria by October 10, 2011; and (d) the Board’s alleged failure to make full material disclosures to the Company’s stockholders concerning the Hertz offer, the Company’s stand-alone plan, and the Company’s negotiations with Hertz regarding a business combination.  The court has not ruled on the plaintiffs’ request to amend.  On November 1, 2011, the plaintiffs advised the court that the parties have agreed to stay further activity pending the outcome of the Hertz antitrust review process.

Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of ultimate loss, if any, be reasonably estimated.

Various other legal actions, claims and governmental inquiries and proceedings have been in the past, or may be in the future, asserted or instituted against the Company, including other purported class actions or proceedings relating to the Hertz transaction terminated in October 2010 or a potential acquisition transaction, and some that may demand large monetary damages or other relief which could result in significant expenditures.  Litigation is subject to many uncertainties and is inherently unpredictable.  The Company is also subject to potential liability related to environmental matters.  The Company establishes reserves for litigation and environmental matters when the loss is probable and reasonably estimable.  It is reasonably possible that the final resolution of some of these matters may require the Company to make expenditures in excess of established reserves.  The term “reasonably possible” is used herein to mean that the chance of a future transaction or event occurring is more than remote but less than probable.  Disclosure for specific legal contingencies is provided if the likelihood of occurrence is at least reasonably possible and the exposure is considered material to the consolidated financial statements. The Company evaluates developments in its legal matters that could affect the amount of previously accrued reserves and makes adjustments as appropriate.  Significant judgment is required to determine both likelihood of a further loss and the estimated amount of the loss.  
 
 
- 26 -

 
 
With respect to outstanding litigation and environmental matters, based on current knowledge, the Company believes that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on its business or consolidated financial statements.  However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.

MINE SAFETY DISCLOSURES
Not applicable.

 
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PART II

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
DTG’s common stock is listed on the New York Stock Exchange under the trading symbol “DTG.”  The high and low closing sales prices for the common stock for each quarterly period during 2011 and 2010 were as follows:
 
 
 
First
     
Second
     
Third
     
Fourth
 
 
 
Quarter
     
Quarter
     
Quarter
     
Quarter
 
                               
2011
                             
                               
High
  $ 66.73       $ 83.74       $ 74.26       $ 70.43  
Low
  $ 47.70       $ 66.60       $ 56.30       $ 53.83  
                                       
                                       
2010
                                     
                                       
High
  $ 34.60       $ 51.55       $ 52.34       $ 50.00  
Low
  $ 23.84       $ 32.09       $ 41.06       $ 45.76  
 
The 28,141,936 shares of common stock outstanding at February 22, 2012 were held by approximately 2,600 registered and beneficial holders.  The Company has not paid cash dividends since completion of its initial public offering in December 1997.  The declaration of any dividends will be subject to the approval of the Board.  The payment of cash dividends is subject to limitations under the New Revolving Credit Facility.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On September 26, 2011, the Company announced that its Board of Directors had increased the authorization of the share repurchase program previously announced on February 24, 2011 of up to $100 million to up to $400 million.  The share repurchase program is discretionary and has no expiration date.  Subject to applicable law, the Company may repurchase shares through forward stock repurchase agreements, accelerated stock buyback programs, directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments or plans complying with SEC Rule 10b5-1, among other types of transactions and arrangements.  The New Revolving Credit Facility entered into on February 16, 2012, contains limitations on share repurchases.  See Item 8 - Note 8 of Notes to Consolidated Financial Statements for further discussion.  Although payments were funded in 2011 for share repurchases under the forward stock repurchase agreement described below, no shares were repurchased under the share repurchase program as of December 31, 2011.

On November 3, 2011, the Company entered into and pre-funded a forward stock repurchase agreement with Goldman Sachs & Co. (“Goldman”) under which the Company agreed to acquire $100 million of Company common stock.  The repurchase was settled in February 2012, and the Company acquired 1,451,193 shares of its common stock at an average share price of approximately $68.91. The Company currently expects to repurchase shares in 2012 under the remaining authorization of the share repurchase program.  The share repurchase program may be increased, suspended or discontinued at any time.

 
- 28 -

 
 
The following information describes the Company’s share repurchases during the fourth quarter of the fiscal year ended December 31, 2011:
 
 
               
Total Number of
    Approximate  
         
 
   
Shares Purchased
   
Dollar Value of
 
   
Total Number
   
Average
   
as Part of Publicly
   
Shares that May Yet
 
   
of Shares
   
Price Paid
   
Announced Plans
   
Be Purchased under
 
Period  
Purchased
   
Per Share
   
or Programs
   
the Plans or Programs
 
                         
October 1, 2011 -
                               
October 31, 2011       -      -        -      400,000,000  
 
                               
November 1, 2011 -
                               
November 30, 2011
    -     -        -      300,000,000   (a)
                                 
December 1, 2011 -
                               
December 31, 2011       -      -        -      300,000,000  
 
                               
Total
    -               -          
                                 
(a)  In November 2011, $100 million was pre-funded under a forward stock repurchase agreement.  However, the shares were not delivered until the settlement of the agreement in February 2012.
 
Performance Graph

The following graph compares the cumulative total stockholder return on DTG common stock with the Morningstar Rental & Leasing Services Group Index (the “Morningstar Group Index”) and the Russell 2000 Index.  The Morningstar Group Index is a published index of 25 stocks including DTG, which covers companies that rent or lease various durable goods to the commercial and consumer market including cars and trucks, medical and industrial equipment, appliances, tools and other miscellaneous goods.

 
- 29 -

 
 
The results are based on an assumed $100 invested on December 31, 2006, and reinvestment of dividends through December 31, 2011.
 
 
Company/Index/Peer Group
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
12/31/2011
Dollar Thrifty Automotive Group, Inc.
100.00
51.92
2.39
56.15
103.62
154.05
Russell 2000 Index
100.00
98.43
65.18
82.89
105.14
100.75
Morningstar Group Index   100.00  80.04  42.47  63.67  91.44  94.75
 
 
- 30 -

 
SELECTED FINANCIAL DATA
The selected consolidated financial data was derived from the audited consolidated financial statements of the Company.  The system-wide data and company-owned stores data were derived from Company records.
 
   
Year Ended December 31,
   
2011
   
2010
   
2009
   
2008
   
2007
 
    (in thousands except per share amounts)
Statements of Operations:
                             
                               
Revenues:
                             
Vehicle rentals
  $ 1,484,324     $ 1,473,023     $ 1,472,918     $ 1,616,153     $ 1,676,349  
Other
    64,604       64,137       73,331       81,840       84,442  
    Total revenues
    1,548,928       1,537,160       1,546,249       1,697,993       1,760,791  
                                         
Costs and expenses:
                                       
Direct vehicle and operating
    751,468       745,535       768,456       888,294       887,178  
Vehicle depreciation and lease
                                       
  charges, net
    270,957       299,200       426,092       539,406       477,853  
Selling, general and
                                       
  administrative
    191,043       209,341       200,389       213,734       230,515  
Interest expense, net
    77,462       89,303       96,560       110,424       109,728  
Goodwill and long-lived asset impairment
    -       1,057       2,592       366,822       3,719  
    Total costs and expenses
    1,290,930       1,344,436       1,494,089       2,118,680       1,708,993  
                                         
(Increase) decrease in fair value of derivatives
    (3,244 )     (28,694     (28,848     36,114       38,990  
                                         
Income (loss) before income taxes
    261,242       221,418       81,008       (456,801     12,808  
                                         
Income tax expense (benefit)
    101,692       90,202       35,986       (110,083     11,593  
                                         
Net income (loss)
  $ 159,550     $ 131,216     $ 45,022     $ (346,718   $ 1,215  
                                         
Basic Earnings (Loss) Per Share
  $ 5.51     $ 4.58     $ 1.98     $ (16.22   $ 0.05  
                                         
Diluted Earnings (Loss) Per Share
  $ 5.11     $ 4.34     $ 1.88     $ (16.22   $ 0.05  
                                         
Balance Sheet Data:
                                       
                                         
Cash and cash equivalents
  $ 508,648     $ 463,153     $ 400,404     $ 229,636     $ 101,025  
Cash and cash equivalents - required minimum balance
  $ -     $ 100,000     $ 100,000     $ -     $ -  
Restricted cash and investments
  $ 353,265     $ 277,407     $ 622,540     $ 596,588     $ 132,945  
Revenue-earning vehicles, net
  $ 1,467,835     $ 1,341,822     $ 1,228,637     $ 1,946,079     $ 2,808,354  
Total assets
  $ 2,615,666     $ 2,499,528     $ 2,645,937     $ 3,238,181     $ 3,891,452  
Debt and other obligations
  $ 1,399,955     $ 1,397,243     $ 1,727,810     $ 2,488,245     $ 2,656,562  
Stockholders' equity
  $ 607,672     $ 538,607     $ 393,914     $ 208,420     $ 578,865  
                                         
U. S. and Canada
                             
   
Year Ended December 31,
   
2011
   
2010
   
2009
   
2008
   
2007
 
System-wide Data:
                             
                               
Rental locations:
                             
                               
Company-owned stores
    280       297       296       400       466  
Franchisee locations
    306       308       317       341       365  
   Total rental locations
    586       605       613       741       831  
                                         
Company-owned Stores Data:
                                       
Vehicle rental data:
                                       
                                         
Average number of vehicles operated
    107,154       102,291       102,948       120,309       123,484  
Number of rental days
    31,482,339       30,338,815       30,616,395       36,879,641       37,231,340  
Vehicle utilization
    80.5 %     81.3 %     81.5 %     83.8 %     82.6 %
Average revenue per day
  $ 47.15     $ 48.55     $ 48.11     $ 43.82     $ 45.03  
Monthly average revenue per vehicle
  $ 1,154     $ 1,200     $ 1,192     $ 1,119     $ 1,131  
Average depreciable fleet
    108,127       103,207       105,301       123,673       127,979  
Monthly average depreciation
                                       
(net) per vehicle
  $ 209     $ 242     $ 337     $ 363     $ 311  
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview

The Company operates two value rental car brands, Dollar and Thrifty.  The majority of its customers pick up their vehicles at airport locations.  Both brands are value priced and the Company seeks to be the industry’s low cost provider.  Leisure customers typically rent vehicles for longer periods than business customers, resulting in lower costs per transaction due to less frequent operational interaction.

Both Dollar and Thrifty operate through a network of company-owned stores and franchisees.  The majority of the Company’s revenue is generated from renting vehicles to customers through company-owned stores, with lesser amounts generated through parking income, vehicle leasing, royalty fees and services provided to franchisees.

The Company’s profitability is primarily a function of the volume and pricing of rental transactions, vehicle utilization rates and depreciation expense. Significant changes in the purchase or sales price of vehicles or interest rates can also have a significant effect on the Company’s profitability, depending on the ability of the Company to adjust its pricing for these changes.  The Company’s business requires significant expenditures for vehicles and, consequently, requires substantial liquidity to finance such expenditures.

In 2011, the Company’s vehicle rental revenues increased when compared to 2010, primarily due to a 3.8% increase in the number of rental days, partially offset by a 2.9% decrease in average revenue per day.

During 2011, expenses declined 4.0% compared to 2010.  The Company had lower net vehicle depreciation and lease charges primarily due to lower depreciation rates per vehicle resulting from continued favorable conditions in the used car market, mix optimization through a more diversified fleet and improved remarketing efforts.  Selling, general and administrative expenses decreased primarily due to lower merger-related costs.  Net interest expense decreased primarily due to lower average vehicle debt and lower interest rates.  Additionally, the Company experienced increases in the fair value of derivatives in 2011 and 2010 of $3.2 million and $28.7 million, respectively.

The combination of these factors contributed to net income of $159.6 million for the year ended December 31, 2011, compared to net income of $131.2 million for the year ended December 31, 2010.  Excluding the change in fair value of derivatives and non-cash charges related to the impairment of long-lived assets, net of tax, non-GAAP net income was $157.7 million for the year ended December 31, 2011 compared to non-GAAP net income of $115.0 million for the year ended December 31, 2010.  Corporate Adjusted EBITDA for 2011 was $298.6 million compared to $235.7 million in 2010.  Additionally, the Company incurred $4.6 million in merger-related expenses for the year ended December 31, 2011, compared to $22.6 million for the year ended December 31, 2010.  Reconciliations of non-GAAP financial measures to the comparable measures calculated in accordance with generally accepted accounting principles in the United States (“GAAP”) are presented below.

Use of Non-GAAP Measures for Measuring Results

Non-GAAP pretax income, non-GAAP net income and non-GAAP EPS exclude the impact of the (increase) decrease in fair value of derivatives and the impact of long-lived asset impairments, net of related tax impact (as applicable), from the reported GAAP measures and are further adjusted to exclude merger-related expenses.  Due to volatility resulting from the mark-to-market treatment of the derivatives and the non-operating nature of the non-cash impairments and merger-related expenses, the Company believes these non-GAAP measures provide an important assessment of year-over-year operating results.
 
 
- 32 -

 
See the table below for a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measure. 
 
Reconciliation of reported GAAP pretax income per the
 
income statement to non-GAAP pretax income:
 
   
Year Ended December 31,
   
2011
   
2010
   
2009
 
         
(in thousands)
       
                   
Income before income taxes - as reported
  $ 261,242     $ 221,418     $ 81,008  
                         
Increase in fair value of derivatives
    (3,244 )     (28,694     (28,848
                         
Long-lived asset impairment
    -       1,057       2,592  
                         
Pretax income - non-GAAP
  $ 257,998     $ 193,781     $ 54,752  
                         
Merger-related expenses       4,600        22,605        -  
                         
Non-GAAP pretax income, excluding merger-related expenses     262,598      216,386      54,752  
                         
Reconciliation of reported GAAP net income per the
 
income statement to non-GAAP net income:
 
                         
Net income - as reported
  $ 159,550     $ 131,216     $ 45,022  
                         
Increase in fair value of derivatives, net of tax (a)
    (1,811 )     (16,826     (16,917
                         
Long-lived asset impairment, net of tax (b)
    -       645       1,497  
                         
Net income - non-GAAP
  $ 157,739     $ 115,035     $ 29,602  
                         
Merger-related expenses, net of tax (c)       2,679        13,172        -  
                         
Non-GAAP net income, excluding merger-related expenses     160,418      128,207      29,602  
                         
Reconciliation of reported GAAP diluted earnings
 
per share (“EPS”) to non-GAAP diluted EPS:
 
                         
EPS, diluted - as reported
  $ 5.11     $ 4.34     $ 1.88  
                         
EPS impact of increase in fair value of derivatives, net of tax
    (0.06 )     (0.56     (0.71
                         
EPS impact of long-lived asset impairment, net of tax
     -        0.02        0.06  
                         
EPS, diluted - non-GAAP (d)
  $ 5.05     $ 3.80     $ 1.24  
                         
EPS impact of merger-related expenses, net of tax       0.09        0.44        -  
                         
Non-GAAP diluted EPS, excluding merger-related expenses (d)     5.13      4.24      1.24  
                         
(a)
The tax effect of the increase in fair value of derivatives is calculated using the entity-specific, U.S. federal and blended state tax rate applicable to the derivative instruments which amounts are ($1,433,000), ($11,868,000) and ($11,931,000) for the years ended December 31, 2011, 2010 and 2009, respectively.
 
 
         
(b)
The tax effect of the long-lived asset impairment is calculated using the tax-deductible portion of the impairment and applying the entity-specific, U.S. federal and blended state tax rate which amounts are $412,000 and $1,095,000 for the years ended December 31, 2010 and 2009, respectively.
 
 
         
(c)  Merger-related expenses include legal, litigation, advisory and other fees related to a potential merger transaction.  The tax effect of the merger-related expenses is calculated using the entity-specific, U.S. federal and blended state tax rate applicable to the merger-related expenses which amounts are $1,921,000 and $9,433,000 for the years ended December 31, 2011 and 2010, respectively.
             
(d)
Since each category of EPS is computed independently for each period, total per share amounts may not equal the sum of the respective categories.
 
- 33 -

 
 
Corporate Adjusted EBITDA means earnings, excluding the impact of the (increase) decrease in fair value of derivatives, before non-vehicle interest expense, income taxes, non-vehicle depreciation, amortization, and certain other items as shown below. The Company believes Corporate Adjusted EBITDA is important as it provides a supplemental measure of the Company's liquidity by adjusting earnings to exclude certain non-cash items, taxes and corporate-level capital structure decisions (i.e. non-vehicle interest), thus, allowing the Company’s management, including the chief operating decision maker, as well as investors and analysts, to evaluate the Company’s operating cash flows based on the core operations of the Company.  Additionally, the Company believes Corporate Adjusted EBITDA is a relevant measure of operating performance in providing a measure of profitability that focuses on the core operations of the Company while excluding certain items that do not directly reflect ongoing operating performance.  The Company’s management, including the chief operating decision maker, uses Corporate Adjusted EBITDA to evaluate the Company’s performance and in preparing monthly operating performance reviews and annual operating budgets.  The items excluded from Corporate Adjusted EBITDA, but included in the calculation of the Company’s reported net income, are significant components of its consolidated statements of income, and must be considered in performing a comprehensive assessment of overall financial performance.  Corporate Adjusted EBITDA is not defined under GAAP and should not be considered as an alternative measure of the Company's net income, cash flow or liquidity.  Corporate Adjusted EBITDA amounts presented may not be comparable to similar measures disclosed by other companies.  See the table below for a reconciliation of non-GAAP to GAAP results.
 
   
Year Ended December 31,
   
2011
   
2010
   
2009
 
      (in thousands)
Reconciliation of net income to
                 
Corporate Adjusted EBITDA
                 
                   
Net income - as reported
  $ 159,550     $ 131,216     $ 45,022  
                         
Increase in fair value of derivatives
    (3,244 )     (28,694     (28,848
Non-vehicle interest expense
    10,699       9,647       12,797  
Income tax expense
    101,692       90,202       35,986  
Non-vehicle depreciation
    19,381       20,190       19,200  
Amortization
    7,505       7,290       7,994  
Non-cash stock incentives
    3,234       4,785       4,698  
Long-lived asset impairment
    -       1,057       2,592  
Other
    (249 )     (25     (6
                         
Corporate Adjusted EBITDA
  $ 298,568     $ 235,668     $ 99,435  
                         
                         
Reconciliation of Corporate Adjusted EBITDA
                       
to Cash Flows From Operating Activities
                       
                         
Corporate Adjusted EBITDA
  $ 298,568     $ 235,668     $ 99,435  
                         
Vehicle depreciation, net of gains/losses from disposal
    270,927       299,149       425,574  
Non-vehicle interest expense
    (10,699 )     (9,647 )     (12,797 )
Change in assets and liabilities and other
    8,498       (63,229     23,712  
     Net cash provided by operating activities
  $ 567,294     $ 461,941     $ 535,924  
                         
Memo:
                       
Net cash provided by (used in) investing activites
  $ (402,501   $ (59,094   $ 278,955  
Net cash used in financing activities
  $ (119,298 )   $ (340,098 )   $ (644,111 )
 
 
- 34 -

 
 
The Company’s operating performance is significantly impacted by increases or decreases in certain key drivers. The table below provides sensitivity to the Company’s results for changes in these key drivers:
 
Metric   Sensitivity    
Estimated
Change in
Corporate
Adjusted EBITDA
   
Estimated
Change
in EPS
          (increase or decrease)     (increase or decrease)
Revenue Per Day ("RPD") (a)   
$1.00 Change in Price
/ RPD 
  26,000,000     0.52
                 
Rental Days (a) (b)   
1% Change in Rental
Days 
   4,400,000    0.09
                 
Fleet Costs (c)   
$10.00 Change in
Fleet Cost Per Vehicle
Per Month 
   12,000,000    0.24
                 
Operating Expenses (d)   
1% Change in
Operating Expense
Ratio (e) 
   15,000,000    0.30
                 
 
Note: All scenarios are on a full year basis and assume an effective consolidated tax rate of 39% and 31.0 million diluted shares.

(a)  
Assumes 31 million rental days.
(b)  
Assumes full year revenue per day of $47.15.
(c)  
Assumes an average fleet of 100,000 vehicles.
(d)  
Comprised of direct vehicle and operating and selling, general and administrative expenses.
(e)  
The ratio is derived by dividing operating expenses by total revenue, assuming consolidated total revenue of $1.5 billion.
 
Results of Operations

The following table sets forth the percentage of total revenues in the Company’s consolidated statements of income:
 
 
Year Ended December 31,
 
2011
 
2010
 
2009
Revenues:
               
 
Vehicle rentals
95.8
%
 
95.8
%
 
95.3
%
 
Other
4.2
   
4.2
   
4.7
 
 
    Total revenues
100.0
   
100.0
   
100.0
 
                   
Costs and expenses:
               
 
Direct vehicle and operating
48.5
   
48.5
   
49.7
 
 
Vehicle depreciation and lease charges, net
17.5
   
19.5
   
27.6
 
 
Selling, general and administrative
12.3
   
13.6
   
13.0
 
 
Interest expense, net
5.0
   
5.8
   
6.2
 
 
Long-lived asset impairment
0.0
   
0.1
   
0.1
 
 
    Total costs and expenses
83.3
   
87.5
   
96.6
 
                   
 
(Increase) decrease in fair value of derivatives
(0.2)
   
(1.9)
   
(1.8)
 
                   
Income before income taxes
16.9
   
14.4
   
5.2
 
                   
Income tax expense
6.6
   
5.9
   
2.3
 
                   
Net income
10.3
%
 
8.5
%
 
2.9
%
 
 
- 35 -

 
 
The Company’s revenues consist of:
 
Vehicle rental revenue generated from renting vehicles and related ancillary products and services sold to customers through company-owned stores, and
 
Other revenue generated from leasing vehicles to franchisees, continuing franchise and service fees, parking income and miscellaneous sources.
 
 
The Company’s expenses consist of:
 
Direct vehicle and operating expense related to the rental of revenue-earning vehicles to customers and the leasing of vehicles to franchisees,
 
Vehicle depreciation and lease charges net of gains and losses on vehicle disposal,
 
Selling, general and administrative expense, which primarily includes headquarters personnel expenses, advertising and marketing expenses, most IT expenses and administrative expenses,
 
Interest expense, net, which includes interest expense on vehicle-related debt and non-vehicle debt, net of interest earned on restricted and unrestricted cash, and
 
Long-lived asset impairment relates to the write-off of software no longer in use and property and equipment deemed to be impaired.

The Company’s (increase) decrease in fair value of derivatives consists of the changes in the fair market value of its interest rate swap and cap agreements that did not qualify for hedge accounting treatment.
 
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

Revenues
               
$ Increase/
   
% Increase/
 
   
2011
   
2010
   
(decrease)
   
(decrease)
 
   
(in millions)
                         
Vehicle rentals
  $ 1,484.3     $ 1,473.0     $ 11.3       0.8 %
Other
    64.6       64.2       0.4       0.7 %
  Total revenues
  $ 1,548.9     $ 1,537.2     $ 11.7       0.8 %
                                 
Vehicle rental metrics:
                               
Average number of vehicles operated
    107,154       102,291       4,863       4.8 %
Average revenue per day
    $47.15       $48.55       ($1.40     (2.9 %)
Number of rental days
    31,482,339       30,338,815       1,143,524       3.8 %
Vehicle utilization
    80.5 %     81.3 %  
(0.8) p.p.
      N/
 
Vehicle rental revenue for 2011 increased 0.8%.  The Company experienced a 3.8% increase in rental days totaling $55.4 million, partially offset by a 2.9% decrease in revenue per day totaling $44.1 million.
 
 
- 36 -

 
 
Expenses
               
$ Increase/
   
% Increase/
 
   
2011
   
2010
   
(decrease)
   
(decrease)
 
   
(in millions)
                         
Direct vehicle and operating
  $ 751.5     $ 745.5     $ 6.0       0.8 %
Vehicle depreciation and lease charges, net
    271.0       299.2       (28.2 )     (9.4 %)
Selling, general and administrative
    191.0       209.3       (18.3     (8.7 %)
Interest expense, net of interest income
    77.4       89.3       (11.9 )     (13.3 %)
Long-lived asset impairment
    -       1.1       (1.1 )     (100.0 %) 
  Total expenses
  $ 1,290.9     $ 1,344.4     $ (53.5 )     (4.0 %)
                                 
(Increase) decrease in fair value of derivatives
  $ (3.2 )   $ (28.7   $ 25.5       (88.7 %)
 
Direct vehicle and operating expenses increased $6.0 million, primarily due to an increase in the number of rental days during the period of 3.8%, partially offset by a significant reduction in insurance-related expenses.  As a percent of revenue, direct vehicle and operating expenses were 48.5% in 2011 and 2010.

The increase in direct vehicle and operating expenses in 2011 primarily resulted from the following:

Ø  
Vehicle-related expenses increased $27.3 million, which included an increase in gasoline expense of $12.6 million and an increase in toll and ticket expense of $4.4 million.  Increased sales of pre-paid fuel and toll road products are a focus for the Company, and the majority of the increase in these expenses is recovered through customer revenue related to these products.  Additionally, the Company experienced a $7.5 million increase in vehicle maintenance expense due to the increase in the rental fleet size and the number of higher mileage vehicles in the fleet compared to 2010, a $1.4 million increase in shuttling expense and a $0.7 million increase in general excise and surcharge taxes.  All other vehicle-related expenses increased $0.7 million.

Ø  
Litigation expense increased $1.7 million primarily due to recording a reserve in respect of a preliminary litigation settlement.

Ø  
Personnel-related expenses increased $0.4 million, primarily due to a $6.6 million increase in field employee salaries due to merit-based raises, a $1.5 million increase in rental agent commissions and $1.3 million of one-time incentives.  These increases were partially offset by a $5.6 million decrease in field employee salaries related to a decrease in the number of employees, a $1.5 million decrease in workers compensation expense due to favorable claims development, a $1.1 million decrease in group insurance expense due to favorable claims and lower number of personnel, and $0.8 million decrease in the vacation accrual.

Ø  
Vehicle insurance expenses decreased $21.6 million compared to 2010 as a result of reductions in provisions for future losses as well as reductions in insurance accrual rates in conjunction with semi-annual third-party actuarial reviews.  These decreases were driven by changes in loss development factors as a result of favorable claims development trends resulting from specific actions taken by the Company to lower its overall insurance costs.  Those steps included, among others, closing a significant number of local market locations and raising acceptable credit scores for eligible customers in order to reduce the likelihood of adverse selection in certain markets.  Additionally, the Company has implemented drivers’ license validation procedures and requires examinations under oath in order to reduce the risk of fraud and personal injury claims in certain markets.
 
 
- 37 -

 
 
Ø  
Communications and computer expenses decreased $1.6 million due to cost reduction initiatives.
 
Net vehicle depreciation and lease charges decreased $28.2 million. As a percent of revenue, net vehicle depreciation expense and lease charges were 17.5% in 2011, compared to 19.5% in 2010.

The decrease in net vehicle depreciation and lease charges resulted from the following:

Ø  
Vehicle depreciation expense decreased $44.4 million, primarily resulting from a 16.1% decrease in the average depreciation rate due to continued favorable used vehicle market conditions, partially offset by a 4.8% increase in the average depreciable fleet.

Ø  
Net vehicle gains on disposal of risk vehicles (reductions to net vehicle depreciation and lease charges), which effectively represent revisions to previous estimates of vehicle depreciation charges by reducing vehicle depreciation and lease charges, decreased $16.2 million from a $63.1 million gain in 2010 to a $46.9 million gain in 2011.  This decrease in gains on vehicle dispositions resulted from approximately 17,700 fewer units sold in 2011, partially offset by a higher average gain per unit in 2011 as compared to 2010.

Selling, general and administrative expenses for 2011 decreased $18.3 million.  As a percent of revenue, selling, general and administrative expenses were 12.3% in 2011, compared to 13.6% in 2010.

The decrease in selling, general and administrative expenses in 2011 primarily resulted from the following:

Ø  
Merger-related costs decreased $18.0 million.

Ø  
Outsourcing expenses decreased $1.4 million primarily due to a lower base fee paid to a third party service provider in 2011 as compared to 2010.
 
Ø  
Loyalty programs and commission expenses increased $1.4 million primarily due to increased rental days.
 
Net interest expense decreased $11.9 million in 2011 primarily due to lower average vehicle debt and lower interest rates, partially offset by higher amortization of deferred financing costs and a $2.7 million write-off of deferred financing fees related to the payoff of the Term Loan (hereinafter defined) and termination of the Series 2010-1 notes. As a percent of revenue, net interest expense was 5.0% in 2011, compared to 5.8% in 2010.

Long-lived asset impairment expense decreased $1.1 million in 2011, due to write-offs of software no longer in use during 2010 with no corresponding write-offs in 2011.

The change in fair value of the Company’s derivative agreements was an increase of $3.2 million in 2011 compared to an increase of $28.7 million in 2010, primarily due to the decrease in the amount of outstanding derivative agreements not designated as hedging instruments, as well as market changes in the interest rate yield curve and a reduction in the remaining term to maturity of the derivative agreements.

Income tax expense for 2011 was $101.7 million, compared to $90.2 million for 2010.  The Company reports taxable income for the U.S. and Canada in separate tax jurisdictions and establishes provisions separately for each jurisdiction.  On a separate, domestic basis, the U.S. effective tax rate approximates the statutory tax rate including the effect of state income taxes.  The Company’s overall effective tax rate will vary depending on the amount of taxable income generated by the Company’s operations in various states and the applicable tax rates in those states, as well as the proportion those taxes represent of the Company’s pretax income on  a consolidated basis.  The effective income tax rates for 2011 of 38.9% and 2010 of 40.7% were higher than the statutory rates principally due to state and local income taxes.  The decrease in state income tax rate was attributable to variations in the overall apportionment of income among states.
 
 
- 38 -

 
 
Operating Results

The Company had income before income taxes of $261.2 million in 2011 compared to income before income taxes of $221.4 million in 2010.

Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
 
Revenues
               
$ Increase/
   
% Increase/
 
   
2010
   
2009
   
(decrease)
   
(decrease)
 
   
(in millions)
                         
Vehicle rentals
  $ 1,473.0     $ 1,472.9     $ 0.1       0.0 %
Other
    64.2       73.3       (9.1 )     (12.5 %)
  Total revenues
  $ 1,537.2     $ 1,546.2     $ (9.0 )     (0.6 %)
                                 
Vehicle rental metrics:
                               
Average number of vehicles operated
    102,291       102,948       (657 )     (0.6 %)
Average revenue per day
    $48.55       $48.11       $0.44       0.9 %
Number of rental days
    30,338,815       30,616,395       (277,580 )     (0.9 %)
Vehicle utilization
    81.3 %     81.5 %  
(0.2) p.p.
      N/
 
Vehicle rental revenue remained basically flat with a 0.9% increase in revenue per day, offset by a 0.9% decrease in rental days.  On a same store basis, vehicle rental revenue was up 1.6% in 2010 compared to 2009, due to company-owned store closures in 2009.

Other revenue decreased $9.1 million. This decrease was primarily due to a $9.5 million decline in leasing revenue, primarily due to the termination of a substantial portion of the licensee vehicle leasing program during 2009 and a $1.8 million decrease in the market value of investments in the Company’s deferred compensation and retirement plans, partially offset by an increase of $1.8 million in fees and services revenue derived from franchisees. The revenue relating to the deferred compensation and retirement plans is attributable to the mark-to-market valuation of the corresponding investments and is offset in selling, general and administrative expenses and, therefore, has no impact on net income.
 
Expenses
               
$ Increase/
   
% Increase/
 
   
2010
   
2009
   
(decrease)
   
(decrease)
 
   
(in millions)
                         
Direct vehicle and operating
  $ 745.5     $ 768.5     $ (23.0     (3.0 %)
Vehicle depreciation and lease charges, net
    299.2       426.1       (126.9     (29.8 %)
Selling, general and administrative
    209.3       200.3       9.0       4.5 %
Interest expense, net of interest income
    89.3       96.6       (7.3     (7.5 %)
Long-lived asset impairment
    1.1      </