<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13315
AVIS RENT A CAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3347585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 OLD COUNTRY ROAD, GARDEN CITY, NEW YORK 11530
(Address of principal executive offices)
(Zip Code)
(516)222-3000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by checkmark 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 the number of shares outstanding of each of the registrant's classes
of common stock as of November 7, 1997: Common Stock, $.01 par value - Class
A, 30,925,000 shares.
<PAGE>
AVIS RENT A CAR, INC.
INDEX
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Page
----
Unaudited Consolidated Statements of
Operations for the Three and Nine months ended
September 30, 1997 and 1996 1
Consolidated Statements of Financial
Position as of September 30, 1997 (Unaudited)
and December 31, 1996 2
Unaudited Consolidated Statements of
Cash Flows for the Nine months ended
September 30, 1997 and 1996 3
Notes to Unaudited Consolidated
Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 7
PART II. Other Information
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13
<PAGE>
<TABLE>
<CAPTION>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
UNAUDITED
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
Predecessor Predecessor
Companies Companies
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue $ 580,049 $531,478 $1,525,696 $1,419,044
---------- --------- ---------- ----------
Costs and expenses:
Direct operating 242,997 225,939 641,545 616,064
Vehicle depreciation, net 143,937 93,828 323,355 257,574
Vehicle lease charges 6,766 33,480 75,791 94,342
Selling, general and 110,256 96,290 313,639 264,332
administrative
Interest, net 49,465 42,012 117,808 115,165
Amortization of cost in
excess of net assets
acquired 1,675 1,193 4,245 3,575
---------- --------- ---------- ----------
555,096 492,742 1,476,383 1,351,052
---------- --------- ---------- ----------
Income before provision
for income taxes 24,953 38,736 49,313 67,992
Provision for income taxes 11,085 17,315 22,339 30,392
---------- --------- ---------- ----------
Net income $ 13,868 $ 21,421 $ 26,974 $ 37,600
========== ========= ========== ==========
Earnings per share $ 0.45 $ 0.69 $ 0.87 $ 1.22
========== ========= ========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 159,551 $ 50,886
Accounts receivable, net 400,653 311,179
Due from affiliates, net 61,807
Prepaid expenses 46,025 40,155
Vehicles, net 3,364,660 2,243,492
Property and equipment, net 117,290 98,887
Deferred income tax assets 106,500 113,660
Cost in excess of net assets acquired, 402,701 196,765
net
Other assets 119,727 14,526
---------- ----------
Total assets $4,717,107 $3,131,357
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 232,065 $ 175,535
Accrued liabilities 386,823 329,245
Due to affiliates, net 62,633
Current income tax liabilities 7,448 4,790
Deferred income tax liabilities 38,618 35,988
Public liability, property damage
and other insurance liabilities 249,866 213,785
Debt 3,285,548 2,295,474
---------- ----------
Total liabilities 4,263,001 3,054,817
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common Stock 309 85
Additional paid-in capital 430,507 74,915
Retained earnings 28,158 1,184
Foreign currency translation (4,868) 356
adjustment
---------- ----------
Total stockholders' equity 454,106 76,540
---------- ----------
Total liabilities and stockholders'
equity $4,717,107 $3,131,357
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
Predecessor
Companies
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,974 $ 37,600
Adjustments to reconcile net income to
net cash provided by operating activities:
Vehicle depreciation 332,183 287,836
Depreciation and amortization of property
and equipment 8,382 11,634
Amortization of cost in excess of net assets
acquired 4,245 3,575
Amortization of debt issuance costs 1,630 2,363
Deferred income tax provision 11,680 21,870
Undistributed (earings) losses of associated
companies, net 130 (219)
Provision for losses on accounts receivable 2,127 1,178
Provision for public liability, property
damage and other insurance liabilities, net 19,315 16,659
Change in operating assets and liabilities:
Accounts receivable (82,985) (32,168)
Prepaid expenses 4,583 (7,361)
Other assets (73,903) 1,909
Accounts payable 79,713 1,501
Accrued liabilities (39,680) 99,962
---------- ----------
Net cash provided by operating activities 294,394 446,339
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions (3,169,229) (2,085,689)
Vehicle deletions 1,987,853 1,414,507
Payments for additions to property
and equipment (30,297) (23,998)
Retirements of property and equipment 18,070 2,179
Payments for purchase of Licensees (199,381) (164)
---------- ----------
Net cash used in investing activities (1,392,984) (693,165)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in debt:
Proceeds 3,195,292 594,029
Repayments (2,390,528) (271,705)
---------- ----------
Net increase in debt 804,764 322,324
Payments for debt issuance costs (28,202) (2,429)
Proceeds from initial public offering 359,316
Proceeds (payments on) from intercompany
loans 71,945 (22,142)
---------- ----------
Net cash used in financing activities 1,207,823 297,753
---------- ----------
Effect of exchange rate changes on cash (568) 256
---------- ----------
Net increase in cash and cash equivalents 108,665 51,183
Cash and cash equivalents at
beginning of period 50,886 39,081
---------- ----------
Cash and cash equivalents at end of period 159,551 90,264
========== ==========
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 129,802 $ 123,809
========== ==========
Income taxes $ 7,946 $ 6,179
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include Avis Rent
A Car, Inc. and subsidiaries which includes certain carved out corporate
operations of HFS Car Rental, Inc., which was formerly known as, Avis, Inc.
Avis, Inc. was acquired by HFS Incorporated ("HFS") on October 17, 1996. Prior
to October 16, 1996, Avis Rent A Car, Inc. and subsidiaries and the carved out
corporate operations of Avis , Inc. are referred to collectively as the
"Predecessor Companies". Avis Rent A Car, Inc. and the Predecessor Companies
are referred to throughout the notes as the "Company".
These unaudited consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position, the results of
operations and cash flows for the periods presented. Operating results for
interim periods are not necessarily indicative of the results that can be
expected for a full year. These interim financial statements should be read in
conjunction with the Company's audited annual consolidated financial
statements and notes thereto.
NOTE 2 - CHANGES IN STOCKHOLDERS' EQUITY
On September 24, 1997, the Company effected an 85,000 to 1 common stock split
and increased its authorized shares to 100 million shares. After giving effect
to the stock split, the Company issued and sold 22,425,000 shares of its
common stock, $.01 par value, in an initial public offering and received net
proceeds of $359.3 million.
NOTE 3 - EARNINGS PER SHARE
Earnings per share is computed by dividing net income in each of the
three-months and nine-months ended September 30, 1997 and 1996 by 30,925,000
shares outstanding after the initial public offering.
NOTE 4 - ACQUISITIONS
On August 20, 1997, the Company purchased The First Gray Line Corporation. On
September 18, 1997, the Company purchased certain assets and repurchased the
franchise rights of a franchise based in Albany, New York. These acquisitions
had an aggregate purchase cost of $199.4 million. The excess purchase cost
over net assets acquired was approximately $171.8 million.
The following is the preliminary purchase cost allocation for the acquisitions
mentioned above:
Purchase cost $ 199,381
---------
Fair value of:
Assets acquired 353,832
Liabilities assumed 326,251
---------
Net assets 27,581
---------
Cost in excess of net assets acquired $ 171,800
=========
The preliminary purchase cost allocations for these acquisitions are subject
to adjustment when additional information concerning asset and liability
valuations are obtained. The final asset and liability fair values may differ
from those set forth in the accompanying unaudited statement of financial
position at September 30, 1997. However, the changes are not expected to have
a material effect on the financial position of the Company. These acquisitions
have all been accounted for by the purchase method. The financial statements
include the operating results of these acquisitions subsequent to their
respective dates of acquisition.
4
<PAGE>
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition of The First Gray Line
Corporation had taken place on January 1, of each period. These unaudited pro
forma results are not necessarily indications of the actual results of
operations that would have occurred had the acquisition of The First Gray Line
Corporation actually been made at January 1, of each period.
<TABLE>
<CAPTION>
Pro forma
Nine-months ended
September 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenue $ 1,655,439 $1,563,017
=========== ==========
Income before provision for income
taxes $ 65,247 $ 83,705
=========== ==========
Net income $ 36,147 $ 46,904
=========== ==========
Earnings per share $ 1.17 $ 1.52
=========== ==========
</TABLE>
The above unaudited pro forma results of operations of the Company do not give
effect, for the period ended September 30, 1996 to the acquisition of the
Company by HFS and the establishment of a franchisor/franchisee relationship
and do not give effect in each period presented to the repayment of debt with
the net proceeds (after the purchase of The First Gray Line Corporation) from
the initial public offering. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
NOTE 5 - FINANCING AND DEBT
Debt outstanding at September 30, 1997 and December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
CURRENT DEBT
<S> <C> <C>
Commercial paper (average rate 5.7%) $ 1,459,149
Short-term vehicle trust financing-revolving credit
facilities $1,970,000
Short-term notes - foreign at 3.89% to 13.00% in
1997 133,774 65,516
Current portion of 7.5% capital lease 40,169
Other current debt 11,443 1,060
----------- ----------
Total current debt 1,604,366 2,076,745
----------- ----------
LONG TERM DEBT
Term loan due December 2000 at 7.94%: 29,000
Medium term note due July 2000 at 6.22% 800,000
Medium term note due July 2002 at 6.40% 850,000
Vehicle manufacturer's floating rate notes
due September 1998 ($50,719 senior at 8.50% and
$16,281 subordinated at 10.00%) 67,000
Vehicle manufacturer's floating rate notes
due October 2001 ($63,731 senior at 7.16% and
$54,269 subordinated at 8.91%) 118,000
Other domestic debt 2,182 2,916
Debt of foreign subsidiaries:
Floating rate notes due February 1998 at 4.75% in
1996 2,935
Floating rate notes due August 1998 at 6.94% to
8.65% 27,878
----------- ----------
Total long-term debt 1,681,182 218,729
----------- ----------
$ 3,285,548 $2,295,474
=========== ==========
</TABLE>
5
<PAGE>
NOTE 6 - SEGMENT INFORMATION
Operations within major geographic areas for the three and nine-months ended
September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Three months ended Nine months
September 30, ended September 30,
--------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenue:
United States $ 510,406 $459,419 $1,340,674 $1,237,717
Australia/
New Zealand 30,036 33,219 98,322 99,906
Canada 32,818 33,019 67,452 66,114
Other foreign
operations 6,789 5,821 19,248 15,307
========= ======== ========== ==========
$ 580,049 $531,478 $1,525,696 $1,419,044
========= ======== ========== ==========
Income (loss) before provision
for income taxes:
United States $ 12,112 $ 26,550 $ 24,803 $ 45,991
Australia/
New Zealand 5,076 5,499 17,309 13,916
Canada 6,964 6,848 7,190 7,411
Other foreign
operations 801 (161) 11 674
========= ======== ========== ==========
$ 24,953 $ 38,736 $ 49,313 $ 67,992
========= ======== ========== ==========
</TABLE>
NOTE 7- STOCK OPTIONS
On September 23, 1997, the Avis Rent A Car, Inc. 1997 Stock Option Plan (the
"Stock Option Plan") was adopted by the Board of Directors. Shares of common
stock totaling 4,602,977 are reserved for issuance upon the exercise of
options granted to officers, key employees, and directors of the Company
pursuant to the Stock Option Plan. As of September 30, 1997, 3,963,900 options
were granted at the fair market value of the Company's common stock on the
date of grant. Options become exercisable as to 20% of the shares covered by
such options on the first anniversary of the date of grant, with an additional
20% of the shares covered by such options on each of the four succeeding
anniversaries of the date of grant. All options granted under the Stock Option
Plan, to the extent not exercised, expire on the earliest of (i) the tenth
anniversary of the date of grant, (ii) two years following the optionee's
termination of employment on account of death, retirement or disability or
(iii) one year following the optionee's termination of employment for any
other reason.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
UNAUDITED
GENERAL OVERVIEW
On October 17, 1996, HFS Incorporated acquired the Company and its
subsidiaries (the "Acquisition"). The Acquisition was accounted for as a
purchase.
On September 29, 1997, the Company issued and sold 22,425,000 shares of its
common stock in an initial public offering ("IPO") and received net proceeds
of $359.3 million. The net proceeds were used to repay amounts outstanding
under the acquisition credit facility utilized to complete the acquisition of
The First Gray Line Corporation, pay certain acquisition expenses incurred to
complete The First Gray Line acquisition and to prepay outstanding
indebtedness. HFS Car Rental, Inc. (the Franchisor), has entered into a
50-year Master License Agreement (the "Master License Agreement") with the
Company granting the Company the right to operate as a franchisee under the
Avis System. As an Avis System franchisee, the Company is required to make
monthly payments consisting of a monthly base royalty of 3.0% of the Company's
revenue and a supplemental royalty of 1.0% of revenue payable quarterly in
arrears (which will increase 0.1% per year commencing in 1999 and in each of
the following four years thereafter to a maximum of 1.5%). Until the fifth
anniversary of the effective date of the Master License Agreement, the
supplemental royalty or a portion thereof may be deferred if the Company does
not attain certain financial targets.
The Company conducts vehicle rental operations through wholly-owned
subsidiaries in the United States, Canada, Puerto Rico, the U.S. Virgin
Islands, Argentina, Australia and New Zealand. Revenue is derived principally
from time and mileage charges for vehicle rentals and, to a lesser extent, the
sale of loss damage waivers, liability insurance and other products and
services.
On August 20, 1997, the Company purchased The First Gray Line Corporation. For
further discussion of this transaction, see Note 4 of the Company's unaudited
consolidated financial statements herein.
Management believes that a more meaningful comparison of the results of
operations for the three and nine month periods ended September 30, 1997 and
1996 is obtained by presenting results on a pro forma basis to give effect to
the following transactions as if they had occurred on January 1, 1996: the
acquisition of the Company by HFS Incorporated and the establishment of a
franchisor/franchisee relationship; the acquisition of The First Gray Line
Corporation; and the repayment of debt with the net proceeds (after the
purchase of First Gray Line) from the IPO.
7
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Pro forma Pro forma
Three months ended Three months ended
September 30, 1997 September 30, 1996
--------------------- ----------------------
Percentage Percentage
of Revenue of Revenue
---------- ---------- ----------------------
<S> <C> <C> <C> <C>
Revenue $609,920 100.0% $ 581,388 100.0%
---------- ---------- ----------------------
Costs and expenses:
Direct operating 255,642 41.9 248,681 42.8
Vehicle depreciation,
and lease charges, net 154,771 25.4 135,050 23.2
Selling, general and
administrative 113,112 18.5 122,335 21.0
Interest, net 51,981 8.5 49,154 8.5
Amortization of cost in
excess of net assets
acquired 2,383 0.4 2,324 0.4
---------- ---------- ---------- ----------
577,889 94.7 557,544 95.9
---------- ---------- ---------- ----------
Income before provision
for income taxes 32,031 5.3 23,844 4.1
Provision for income taxes 14,574 2.4 16,429 2.8
---------- ---------- ---------- ----------
Net income $ 17,457 2.9% $ 7,415 1.3%
========== ========== ========== ==========
</TABLE>
REVENUE
Revenue increased 4.9%, from $581.4 million to $609.9 million, over the
corresponding period in 1996. The revenue increase reflected a 3.5% increase
in the number of rental transactions and a 1.3% increase in revenue per rental
transaction. The revenue increase resulted from greater overall market demand.
COSTS AND EXPENSES
Total costs and expenses increased 3.6%, from $557.5 million to $577.9
million, over the corresponding period in 1996. Direct operating expenses
increased 2.8% from $248.7 million to $255.6 million, over the corresponding
period in 1996. As a percentage of revenue, direct operating expenses declined
to 41.9%, from 42.8% for the corresponding period in 1996. Operating
efficiencies were derived primarily from lower vehicle damage costs net of
recoveries (0.6% of revenue) and lower vehicle registration costs (0.2% of
revenue).
Vehicle depreciation and lease charges increased 14.6% from $135.1 million to
$154.8 million, over the corresponding period in 1996. As a percentage of
revenue, vehicle depreciation and lease charges were 25.4% of revenue, as
compared to 23.2% of revenue for the corresponding period in 1996. The change
reflected a 0.9% increase in the average rental fleet combined with a higher
monthly cost per vehicle. In addition, the net proceeds received in excess of
book value from the disposition of used vehicles was $8.5 million higher in
the 1996 third quarter compared to the same period in 1997. This was primarily
due to favorable market conditions for the sale of certain model vehicles
during 1996.
8
<PAGE>
Selling, general and administrative expenses decreased 7.5%, from $122.3
million to $113.1 million, over the corresponding period in 1996. The decrease
was due to lower reservation costs due to operating efficiencies and reduced
marketing costs as a result of the elimination of certain marketing programs.
Interest expense increased 5.8%, from $49.2 million to $52.0 million, over the
corresponding period in 1996, due primarily to higher borrowings required to
finance the growth of the rental fleet partially offset by lower average
interest rates.
The provision for income taxes for the three months ended September 30, 1997
decreased 11.3% to $14.6 million from $16.4 million for the corresponding
period in 1996. The effective income tax rate was 45.5% compared to 68.9% for
the corresponding period in 1996. The lower effective income tax rate was due
to an increase in the ratio of domestic income to foreign income for 1997 over
1996. The required amount includes differences between the foreign income tax
rates and the U.S. federal statutory income tax rate, tax on repatriation of
foreign earnings, and foreign withholdings rates on dividends paid to the
Company.
Net income increased 135.4%, from $7.4 million to $17.5 million, over the
corresponding period in 1996. The increase reflects higher revenue, decreased
operating costs and expenses as a percentage of revenue and a lower effective
tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Pro forma Pro forma
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
--------------------- ------------------------
Percentage Percentage
of Revenue of Revenue
--------------------- ------------- ----------
<S> <C <C> <C> <C>
Revenue $1,655,439 100.0% $ 1,563,017 100.0%
--------------------- ------------- ----------
Costs and expenses:
Direct operating 697,194 42.1 681,482 43.6
Vehicle depreciation,
and lease charges net 415,425 25.1 372,497 23.8
Selling, general and
administrative 319,394 19.3 336,310 21.5
Interest, net 145,521 8.8 136,626 8.8
Amortization of cost in
excess of net assets
acquired 7,128 0.4 6,972 0.4
----------- ------ ------------ -------
1,584,662 95.7 1,533,887 98.1
----------- ------ ------------ -------
Income before provision
for income taxes 70,777 4.3 29,130 1.9
Provision for income taxes 32,203 2.0 20,071 1.3
=========== ====== ============ =======
Net income $ 38,574 2.3% $ 9,059 0.6%
=========== ====== ============ =======
</TABLE>
9
<PAGE>
REVENUE
Revenue increased 5.9%, from $1,563.0 million to $1,655.4 million, over the
corresponding period in 1996. The revenue increase was the result of a 4.0%
increase in the number of rental transactions and a 1.9% increase in revenue
per rental transaction. The revenue increase resulted from greater overall
market demand.
COSTS AND EXPENSES
Total costs and expenses increased 3.3%, from $1,533.9 million to $1,584.7
million, over the corresponding period in 1996. Direct operating expenses
increased 2.3%, from $681.5 million to $697.2 million, over the corresponding
period in 1996. As a percentage of revenue, direct operating expenses declined
to 42.1% from 43.6% for the corresponding period in 1996. Operating
efficiencies were derived primarily from lower vehicle registration costs
(0.3% of revenue), lower facility costs (0.3% of revenue), lower vehicle
liability insurance expense (0.2% of revenue) and a decline in wages as a
percentage of revenue (0.4% of revenue).
Vehicle depreciation and lease charges increased 11.5%, from $372.5 million to
$415.4 million, over the corresponding period in 1996. As a percentage of
revenue, vehicle depreciation and lease charges were 25.1% of revenue, as
compared to 23.8% of revenue for the corresponding period in 1996. The change
reflected a 3.7% increase in the average rental fleet and a higher monthly
cost per vehicle. In addition, the net proceeds received in excess of book
value upon the disposition of used vehicles was $21.4 million higher in the
1996 period as compared to the 1997 period. This was primarily due to
favorable market conditions for the sale of certain model vehicles in 1996.
Selling, general and administrative expenses decreased 5.0%, from $336.3
million to $319.4 million, over the corresponding period in 1996. The decrease
was due to lower reservation costs due to operating efficiencies and reduced
marketing costs as a result of the elimination of certain marketing programs.
Interest expense increased 6.5%, from $136.6 million to $145.5 million, over
the corresponding period in 1996, due primarily to higher borrowings required
to finance the growth of the rental fleet partially offset by lower average
interest rates.
The provision for income taxes increased 60.4% to $32.2 million, from $20.1
million for the corresponding period in 1996. The effective income tax rate
was 45.5% compared to 68.9% for the corresponding period in 1996. The increase
in the income taxes provision was primarily due to an increase in income
before provision for income taxes offset by a reduction in the effective
income tax rate due to an increase in the ratio of domestic income to foreign
income for 1997 over 1996. The required amount include differences between the
foreign income tax rates and the U.S. federal statutory income tax rate, tax
on repatriation of foreign earnings, and foreign withholding rates on
dividends paid to the Company.
Net income increased 325.8%, from $9.1 million to $38.6 million, over the
corresponding period in 1996. The increase reflects higher revenue and
decreased operating costs and expenses as a percentage of revenue.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's domestic and foreign operations are funded by cash provided by
operating activities and by financing arrangements maintained by the Company
in the United States, Canada, Puerto Rico, Argentina, Australia and New
Zealand. The Company's primary use of funds is for the acquisition of new
vehicles. For the nine months ended September 30, 1997, the Company's
expenditures for new vehicles were approximately $3.2 billion (of which
approximately $600 million were previously financed under various operating
lease agreements) and proceeds from the disposition of used vehicles were
approximately $2.0 billion. For 1997, the Company expects its expenditures for
new vehicles (net of proceeds from the disposition of used vehicles) to be
higher than in 1996. New vehicles are generally purchased by the Company in
accordance with the terms of agreements with vehicle manufacturers which cover
repurchase programs (the "Repurchase Programs"). The financing requirements
for vehicles typically reaches an annual peak in the third calendar quarters,
as fleet levels build up in response to increased rental demand during that
period. The typical low point for cash requirements occurs during the end of
the fourth quarter and the beginning of the first quarter, coinciding with
lower levels of fleet and rental demand. The Company has established methods
for disposition of its used vehicles that are not covered by Repurchase
Programs.
The Company expects that cash flows from operations and funds from available
credit facilities will be sufficient to enable the Company to meet its
anticipated cash requirements for operating purposes for the next twelve
months.
The Company also makes capital investments for property improvements and
non-revenue earning equipment. Capital investments for property improvements
and non-revenue earning equipment were $15.7 million for the nine months ended
September 30, 1997 compared to $24.0 for the same period in 1996. The
Company's customer receivables also provide liquidity with approximately 12
days of daily sales outstanding.
The Company has entered into a domestic integrated fleet financing program
that provides for up to $3.65 billion in financing for vehicles covered by
Repurchase Programs, with up to 25% of the facility available for vehicles not
covered by Repurchase Programs. The fleet program provides for the issuance of
up to $2.0 billion of asset backed variable funding notes (the "Commercial
Paper Notes") and $1.65 billion of asset backed medium term notes (the "Medium
Term Notes"). The Commercial Paper Notes and the Medium Term Notes are backed
by, among other things, a first priority security interest in the Company's
vehicle fleet. The Commercial paper Notes are rated A-1 by Standard & Poor's
Ratings Group ("Standard & Poor's") and P-1 by Moody's Investors Services,
Inc. ("Moody's"). The Medium Term Notes are supported by a surety Bond issued
by MBIA and Rated AAA by Standard & Poor's and Aaa by Moody's.
Avis Rent A Car System, Inc. ("ARACS"), a wholly owned subsidiary of the
Company, is party to a $470 million secured credit agreement that provides for
(i) a revolving credit facility in the amount of up to $125.0 million which is
available until December 31, 2000 (the "Final Maturity Date") in order to
finance the general corporate needs of ARACS in the ordinary course of
business (with up to $75.0 million of such amount available for the issuance
of standby letters of credit to support worker's compensation and other
insurance and bonding requirements of ARACS, the Company and their
subsidiaries in the ordinary course of business), (ii) a term loan facility in
the amount of $120.0 million to finance general corporate needs in the
ordinary course with a final maturity date of June 30, 2000, and (iii) a
standby letter of credit facility of up to $225.0 million available on a
revolving basis to fund (a) any shortfall in certain payments owing Commercial
Paper Notes cannot be repaid through the issuance of additional Commercial
Paper or draws under the liquidity facility supporting the Commercial Paper
Notes. Borrowings under
11
<PAGE>
the credit agreement are secured by substantially all of the tangible and
intangible assets of the Company including its intellectual property and its
rights under the Master License Agreement, except for those assets which are
subject to a negative pledge. Approximately 50% of the Company's outstanding
debt at September 30, 1997 was interest rate sensitive. The Company has
developed an interest rate management policy, including a target mix for
average fixed rate and floating rate indebtedness on a consolidated basis.
However, an increase in interest rates may have a material adverse impact on
the Company's profitability. At September 30, 1997, the Company had
approximately $3,285.5 million of debt outstanding. In addition, at September
30, 1997, the Company had approximately $934.4 million of additional credit
available.
Borrowings for the Company's international operations consist mainly of loans
obtained from local and international banks. All borrowings for international
operations are in the local currencies of the countries in which those
operations are conducted and are unsecured. At September 30, 1997, the total
debt for the Company's international operations was $133.8 million, which was
all due in less than 12 months. The impact on liquidity and financial
condition due to exchange rate fluctuations regarding the Company's foreign
operations is not material.
Seasonality
The Company's third quarter, which covers the peak summer travel months, has
historically been its strongest quarter. Any occurrence that disrupts travel
patterns during the summer period could have a material adverse effect on the
Company's annual operating results. The Company's first quarter is generally
its weakest, when there is limited leisure travel and a greater potential for
adverse weather conditions. Many of the Company's operating expenses are fixed
and cannot be reduced during periods of decreased rental demand. In certain
geographic markets, the impact of seasonality has been reduced by emphasizing
leisure or business travel in the off season.
Recent Pronouncements of the Financial Accounting Standards Board
Recent pronouncements of the Financial Accounting Standards Board, which are
not required to be adopted at this date, include Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), SFAS No. 130. "Reporting
Comprehensive Income" ("SFAS No. 130"), SFAS No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129") and SFAS No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS No. 131 and SFAS No. 130 are effective
for fiscal year ending December 31, 1998. SFAS No. 129 and SFAS No. 128 are
effective for fiscal year ending December 31, 1997. The adoption of these
statements will not have a material effect on the Company's consolidated
financial statements.
Forward Looking Information
This report contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition. These
statements are based upon a number of assumptions and estimates which are
inherently subject to uncertainties and contingencies, many of which are
beyond the control of the Company, and reflect future business decisions which
are subject to change. Some of the assumptions may not materialize and
unanticipated events may occur which can affect the Company's results.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 22, 1997, the Company filed a Registration Statement (File No.
33-28609) on Form S-1 which became effective on September 23, 1997.
On September 24, 1997, the Company effected an 85,000 to 1 stock split and
increased its authorized shares to 100 million. After giving effect to the
stock split on September 29, 1997, the Company issued and sold all of the
22,425,000 registered shares of its Common Stock, par value $.01 per share, in
an initial public offering (the "IPO").
The managing underwriters of the IPO were: Bear Stearns & Co., Inc., Goldman,
Sachs & Co., Lehman Brothers, Montgomery Securities, Robertson, Stephens &
Company, Chase Securities, Inc. and Blaylock & Partners, L.P. The total price
to public, underwriting discounts and commissions and proceeds to the Company
were $381.2 million, $21.9 million and $359.3 million , respectively. The
Company estimates $3.5 million of other expense in connection with the
offering has been incurred.
The net proceeds received from the IPO were used to repay a credit facility
utilized to complete the acquisition of The First Gray Line Corporation (see
Note 4), to pay certain related acquisition expenses and to prepay outstanding
indebtedness.
13
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Avis Rent A Car, Inc.
--------------------------
(Registrant)
Dated: November 11 , 1997 By: /s/ Kevin M. Sheehan
----------------------------
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Dated: November 11 , 1997 By: /s/ Timothy M. Shanley
----------------------------
Vice President and Controller
(principal accounting officer)
14
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
filed with
Form 10 - Q
for the quarter ended
September 30, 1997
under
THE SECURITIES EXCHANGE ACT OF 1934
AVIS RENT A CAR, INC.
Commission file number 1-13315
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------- ----------- --------
27 Financial Data Schedule for
the Nine months ended September 30, 1997 16
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Registrant's
Unaudited Consolidated Statement of Income and Consolidated Balance Sheet for
the nine-month period ended September 30, 1997 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 159,551
<SECURITIES> 0
<RECEIVABLES> 404,807
<ALLOWANCES> (4,154)
<INVENTORY> 3,364,660
<CURRENT-ASSETS> 0
<PP&E> 126,864
<DEPRECIATION> (9,574)
<TOTAL-ASSETS> 4,717,107
<CURRENT-LIABILITIES> 0
<BONDS> 3,285,548
0
0
<COMMON> 309
<OTHER-SE> 454,106
<TOTAL-LIABILITY-AND-EQUITY> 4,717,107
<SALES> 1,525,696
<TOTAL-REVENUES> 1,525,696
<CGS> 0
<TOTAL-COSTS> 1,352,203
<OTHER-EXPENSES> 4,245
<LOSS-PROVISION> 2,127
<INTEREST-EXPENSE> 117,808
<INCOME-PRETAX> 49,313
<INCOME-TAX> 22,339
<INCOME-CONTINUING> 26,974
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,974
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
</TABLE>
