<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1997
REGISTRATION NO. 333-28609
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AVIS RENT A CAR, INC.
(Exact Name Of Registrant As Specified In Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7514 11-3347585
(State or other jurisdiction of (Primary standard industrial classification (I.R.S. employer
incorporation or organization) code number) identification number)
</TABLE>
900 OLD COUNTRY ROAD
GARDEN CITY, N.Y. 11530
(516) 222-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN H. CARLEY, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
AVIS RENT A CAR, INC.
900 OLD COUNTRY ROAD
GARDEN CITY, N.Y. 11530
(516) 222-3000
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
VINCENT J. PISANO, ESQ.
SUSAN J. SUTHERLAND, ESQ. STEPHEN H. COOPER, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP WEIL, GOTSHAL & MANGES LLP
919 THIRD AVENUE 767 FIFTH AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10153
(212) 735-3000 (212) 310-8000
(212) 735-2000 (FAX) (212) 310-8007 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------
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<CAPTION>
PROPOSED MAXIMUM
TITLE OF SECURITIES AGGREGATE OFFERING PRICE AMOUNT OF
TO BE REGISTERED (A) REGISTRATION FEE
<S> <C> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE $381,225,000 $115,523 (B)
</TABLE>
- -----------------------------------------------------------------------------
(a) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(b) $75,758 of the fee was previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the
"U.S. Prospectus"), and one to be used in a concurrent offering outside the
United States and Canada (the "International Prospectus"). The prospectuses
are identical except for the front and back cover pages. The form of U.S.
Prospectus is included herein and is followed by the alternate pages to be
used in the International Prospectus. Each of the alternate pages for the
International Prospectus included herein is labeled "International
Prospectus--Alternate Pages." Final forms of each Prospectus will be filed
with the Securities and Exchange Commission pursuant to Rule 424(b) under the
Securities Act of 1933.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 28, 1997
PROSPECTUS
#############################################################################
GRAPHIC OMITTED
PICKUP: "p1"
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IMAGE: "av6"
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19,500,000 SHARES
AVIS RENT A CAR, INC.
COMMON STOCK
All of the shares of Common Stock offered hereby will be sold by Avis Rent
A Car, Inc. (the "Company"). A total of 15,600,000 shares (the "U.S. Shares")
are being offered in the United States and Canada (the "U.S. Offering") by
the underwriters of the U.S. Offering named herein (the "U.S. Underwriters")
and 3,900,000 shares (the "International Shares") are being offered outside
the United States and Canada (the "International Offering") by the managers
of the International Offering named herein (the "Managers"). The initial
public offering price and the underwriting discounts and commissions are
identical for both the U.S. Offering and the International Offering
(collectively, the "Offerings").
Prior to the Offerings, there has been no public market for the Company's
Common Stock. It is currently estimated that the initial public offering
price will be between $15.00 and $17.00 per share. For a discussion of the
factors to be considered in determining the initial public offering price,
see "Underwriting."
The Company is a wholly owned indirect subsidiary of HFS Incorporated
("HFS"). Upon consummation of the Offerings, HFS will beneficially own
approximately 30% of the then outstanding shares of the Company's Common
Stock (approximately 27.5% if the over-allotment options granted to the U.S.
Underwriters and the Managers are exercised in full). HFS has informed the
Company that it has no present plans to reduce its ownership interest through
sales or other dispositions.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "AVI," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Per Share..... $ $ $
- ------------- ---------------- ----------------- ----------------
Total (3)..... $ $ $
- ------------- ---------------- ----------------- ----------------
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(1) See "Underwriting" for indemnification arrangements with the U.S.
Underwriters and the Managers.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters and the Managers 30-day
options to purchase in the aggregate up to 2,925,000 additional shares
of Common Stock, solely to cover over-allotments, if any. If the
options are exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The U.S. Shares are offered by the several U.S. Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them and subject to
certain conditions, including the approval of certain legal matters by
counsel. The U.S. Underwriters reserve the right to withdraw, cancel or
modify the U.S. Offering and to reject orders in whole or in part. It is
expected that delivery of the U.S. Shares will be made against payment
therefor on or about , 1997, at the offices of Bear, Stearns & Co. Inc.,
245 Park Avenue, New York, New York 10167.
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
BLAYLOCK & PARTNERS, L.P. CHASE SECURITIES INC.
, 1997
<PAGE>
[GRAPHIC OMITTED]
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE
OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING
TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
Avis(R) and Wizard(R) are registered service marks of Wizard Co., Inc.,
and indirect wholly owned subsidiary of HFS.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless
the context otherwise requires, references in this Prospectus to (i) the
"Company" refer to Avis Rent A Car, Inc. and its operating subsidiaries and
predecessors, (ii) "ARACS" refer to Avis Rent A Car System, Inc., a wholly
owned subsidiary of the Company, (iii) "HFS" refer to HFS Incorporated and
its subsidiaries, (iv) the "Franchisor" refer to HFS Car Rental, Inc., a
wholly owned subsidiary of HFS, and (v) "WizCom" refer to WizCom
International Ltd., an indirect wholly owned subsidiary of HFS. Unless
otherwise indicated or unless the context otherwise requires, all information
contained in this Prospectus (i) assumes that the over-allotment options are
not exercised and (ii) gives effect to an 85,000 to 1 split of the Company's
common stock currently outstanding and the authorization of additional shares
of common stock and a new class of preferred stock, each of which will be
effected immediately prior to the consummation of the Offerings. Statistical
information contained herein with respect to the domestic car rental industry
has been derived from publicly available sources, including trade
publications, which the Company has not independently verified but believes
to be reliable.
HFS owns all of the outstanding equity of the Franchisor which, in turn,
owns the Avis worldwide vehicle rental system (the "Avis System"). The
Franchisor has entered into a 50 year franchise agreement with the Company
granting the Company the right to operate as a franchisee under the Avis
System. WizCom, the owner of the data processing and information system used
in connection with the vehicle rental business and which forms a part of the
Avis System (the "Wizard System"), has entered into a 50 year computer
services agreement with the Company with respect to its use of the Wizard
System.
THE COMPANY
The Company is a holding company which, through its operating subsidiary,
ARACS, operates the second largest general use car rental business in the
world, based on total revenue and volume of rental transactions. The Company
rents vehicles to business and leisure travelers through approximately 536
rental locations in both airport and non-airport (downtown and suburban)
markets in the United States, Canada, Puerto Rico, the U.S. Virgin Islands,
Argentina, Australia and New Zealand. During 1996, the Company completed
nearly 13 million rental transactions with a fleet that averaged 174,000
vehicles and generated total revenue of approximately $1.9 billion, of which
approximately 87% was derived from its operations in the United States. On
August 20, 1997, the Company purchased The First Gray Line Corporation
("First Gray Line"), the second largest Avis System franchisee in North
America.
The Avis brand name is owned by the Franchisor and is licensed for use by
its franchisees, including the Company, which is the largest Avis System
franchisee in the world. As an Avis System franchisee, the Company has
entered into certain arrangements with the Franchisor and its affiliates that
requires the Company to make payments to the Franchisor and its affiliates,
including monthly payments under the Master License Agreement consisting of a
monthly base royalty of 3.0% of the Company's gross revenue and a
supplemental royalty of 1.0% of gross 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. See "Relationship With HFS." The Avis
System is comprised of approximately 4,200 rental locations, including
locations at the largest airports and cities in the United States and
approximately 160 other countries and territories, and a fleet of
approximately 370,000 vehicles during the peak season, all of which are
operated by franchisees. During 1996, the Company's 414 domestic rental
locations produced approximately 77% of the Avis System's revenue in the
United States, with the balance derived from 490 locations operated by 75
other Avis System franchisees, of whom five (including First Gray Line)
accounted for approximately 16% of the Avis System's U.S. revenue. The
Company is the sole franchisee of the Avis System in the international
markets in which it operates. The Avis System in Europe, Africa, part of Asia
and the Middle East is operated under franchise by Avis Europe Ltd. ("Avis
Europe"), which is not
3
<PAGE>
affiliated with the Company. Management believes that the strong recognition
of the Avis brand name, the breadth of the Avis System and the sophistication
of the Wizard System enable the Company and other Avis System franchisees to
provide consistent quality, pricing and service to business and leisure
customers worldwide.
The domestic vehicle rental industry has experienced significant growth
over the past five years. According to information provided by major U.S.
airports, vehicle rental industry revenues have increased at a compound
annual rate of approximately 11% since 1992. Management believes that factors
such as increases in airline passenger traffic, increased business travel and
demographic trends, among others, continue to expand the demand for rental
vehicles. Based on concessionable revenues reported by 157 airports in the
United States at which the Company operates, the Company has historically
maintained the second leading market share in the industry, with a 25% share
for 1996. The Company's network of airport rental locations, which it
believes is among the nation's largest, accounted for approximately 85% of
its domestic revenue in 1996.
The Company has historically targeted its marketing efforts toward
business travelers, who accounted for approximately 61% of the Company's
domestic revenue in 1996. The Company believes that business travelers, many
of whom rent the Company's vehicles pursuant to agreements between the
Company and their employers, have represented an important factor in the
growth and stability of its business. While the Company continues to focus on
business travelers, it intends to leverage its strong airport presence by
expanding its marketing efforts toward the leisure travel market in order to
increase its fleet utilization during non-peak business periods and extend
the average length of its rentals. During 1996, leisure travelers accounted
for approximately 39% of the Company's domestic revenue.
The Company utilizes the Wizard System, which it believes is one of the
most sophisticated information management systems in the car rental industry.
Key functions of the Wizard System include: (i) global reservations
processing, (ii) rental agreement generation and administration and (iii)
fleet accounting and control. The Company has also developed software
applications that utilize the data gathered by the Wizard System and third
party reservation systems to achieve centralized control of its major
business operations. These applications include: (i) a yield management
system that is designed to increase profit by controlling vehicle
availability by length of rental and providing decision support for rate
changes, (ii) a competitive rate information system that monitors industry
rate changes by market on a daily basis at different vehicle rental locations
and (iii) a business mix model that analyzes potential profit contribution
data by segment based upon business mix and fleet optimization
recommendations.
The Company is currently a wholly owned subsidiary of the Franchisor,
which was acquired by HFS in October 1996 (the "Acquisition"). The Company is
the successor to the car rental operations previously owned by the Franchisor
and its subsidiaries (collectively referred to as the "Predecessor
Companies"). HFS is a global provider of real estate and travel services with
a base of approximately 100 million consumer contacts annually. It is the
world's largest franchisor of real estate brokerage offices and lodging
facilities and owns leading providers of timeshare exchange services,
corporate relocation services, mortgage services for consumers and vehicle
fleet management services. On May 27, 1997, HFS announced that it had entered
into a merger agreement with CUC International Inc. ("CUC"). CUC is a leading
member services and direct marketing organization offering shopping, travel,
dining, vehicle purchasing, home buying and other services to approximately
68 million consumer members worldwide. Upon consummation of the Offerings,
HFS, through the Franchisor, will own approximately 30% of the then
outstanding shares of Common Stock of the Company (approximately 27.5% if the
over-allotment options granted to the U.S. Underwriters and the Managers are
exercised in full).
THE FIRST GRAY LINE ACQUISITION
On August 20, 1997, the Company purchased (the "First Gray Line
Acquisition") all of the outstanding capital stock of First Gray Line for
approximately $210.0 million in cash, including expenses. The net proceeds
from the Offerings will be used, among other things, to repay indebtedness
incurred to finance the First Gray Line Acquisition. See "Use of Proceeds."
4
<PAGE>
First Gray Line was the second largest Avis System franchisee in North
America with 70 locations in Southern California, Nevada and Arizona. Its
operations represented approximately 10% of the Avis System's domestic
revenue in 1996. First Gray Line's principal operation is located at Los
Angeles International Airport, one of the world's largest airport rental
vehicle markets based on vehicle rental revenues.
STRATEGY
The Company's objective is to improve its profitability through a strategy
that consists of the following key elements:
Capitalizing on Changing Industry Dynamics. The domestic car rental
industry is beginning to emerge from a period during which rental rates did
not keep pace with rising fleet and operating costs. Management believes that
the current restructuring of ownership of the Company's major competitors
will lead to an increased focus on profitability and shareholder return,
rather than upon transaction volume and market share, and, ultimately, to
more rational pricing behavior. Management intends to use its proprietary
software applications, including its sophisticated yield management, rate
information and business mix modeling systems, to capitalize upon the
improving pricing and profit outlook in the industry.
Improving Business Mix and Fleet Utilization. Historically, the Company
has capitalized on its strong network of airport rental locations by focusing
its sales and marketing resources principally toward business travelers.
While this has enabled the Company to leverage its overhead costs by
capturing a large share of transaction volume at relatively few locations,
fleet utilization historically has been characterized by peak business travel
demand during the middle of the week and reduced demand during and
immediately before and after the weekend. Management believes that the
Company's substantial presence at the nation's leading airports provides it
with the opportunity, without significant incremental cost, to capitalize on
increased air travel by leisure travelers, who tend to initiate air travel
during or close to the weekend. Accordingly, while continuing to concentrate
on its core presence in the business travel market, the Company plans to
increase its marketing efforts toward the leisure market in order to improve
fleet utilization and extend the average length of rental. In addition, the
Company believes that it can further enhance the utilization of its fleet
during non-peak periods by selectively expanding its presence in non-airport
markets through both internal growth and, if appropriate opportunities arise,
acquisitions of other car rental operators including, where feasible, other
Avis System franchisees.
Increasing Brand Loyalty Through Target Marketing. Management believes
that the domestic car rental industry will become increasingly focused on
such factors as customer service and loyalty. The customer base of the major
domestic car rental companies, including the Company, has become increasingly
diverse. Management plans to utilize the Company's proprietary software
applications to analyze its extensive customer database to identify
distinguishing characteristics and preferences of those customers who have
been historically associated with its most profitable rental transactions and
to focus its sales and marketing efforts and service features to attract
additional customers with similar characteristics and preferences. Management
believes that this analysis will enhance the quality of the car rental
experience of such customers and increase their loyalty to the Avis brand.
Capitalizing on Cross Marketing and Other Synergistic Arrangements with
HFS. The Company has initiated and is expanding cross marketing relationships
with HFS's corporate relocation and resort timeshare exchange businesses, its
lodging franchise systems, which include the Days Inn(Registered Trademark),
Howard Johnson(Registered Trademark) and Ramada(Registered Trademark) brands,
and its real estate brokerage franchise systems, including the CENTURY
21(Registered Trademark) and Coldwell Banker(Registered Trademark) brands. As
a result of the proposed merger of HFS and CUC, additional cross marketing
opportunities with CUC's membership-based consumer services are expected to
arise. The Company also expects to reduce its costs of purchasing media and
other non-fleet goods and services through arrangements with HFS.
5
<PAGE>
The following sets forth a summary organizational chart for the Company
immediately prior to the consummation of the Offerings.
HFS Incorporated
100%
HFS Car Rental Holdings, Inc.
100%
WizCom
International,
Ltd.
100%
HFS Car
Rental, Inc.
100% (a)
Wizard Co., Inc.
100%
AVIS RENT A
CAR, INC.
100%
Avis Rent A Car
System, Inc.
(including operating
subsidiaries)
Wizard Co., Inc.
- ------------
(a) Upon consummation of the Offerings, HFS Car Rental, Inc. will own
approximately 30% of the then outstanding shares of Common Stock of
the Company (approximately 27.5% if the over-allotment options
granted to the U.S. Underwriters and the Managers are exercised in
full).
6
<PAGE>
THE OFFERINGS
Common Stock to be sold by the
Company:
U.S. Offering .............. 15,600,000 shares
International Offering ..... 3,900,000 shares
Total .................... 19,500,000 shares
Common Stock to be outstanding
after the Offerings .......... 28,000,000 shares(a)
Use of Proceeds ............... The net proceeds to the Company from the
Offerings are estimated to be
approximately $290.0 million
(approximately $334.0 million if the
over-allotment options granted to the U.S.
Underwriters and the Managers are
exercised in full), assuming an initial
offering price of $16.00 per share, the
midpoint of the price range shown on the
cover of this Prospectus, after deducting
underwriting discounts and expenses
related to the Offerings. The Company
expects that approximately $210.0 million
of the net proceeds from the Offerings
will be used to repay amounts outstanding
under the Acquisition Credit Facility (as
defined), and certain acquisition expenses
incurred to complete the First Gray Line
Acquisition. The remaining net proceeds
will be used to prepay outstanding
indebtedness. See "Use of Proceeds" and
"Business--The First Gray Line
Acquisition."
New York Stock Exchange
("NYSE") symbol .............. AVI
- ------------
(a) Does not include 4,183,908 shares of Common Stock reserved for issuance
under the Company's stock option plan (the "Stock Option Plan"), for
which options to purchase 3,460,674 shares will be outstanding upon
consummation of the Offerings. If the over-allotment options granted to
the U.S. Underwriters and the Managers are exercised in full, 4,620,977
shares of Common Stock will be reserved for issuance under the Stock
Option Plan and options to purchase 3,822,191 shares will be
outstanding. See "Management -- Stock Option Plan."
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered in connection with an investment in the Common Stock offered
hereby.
7
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary pro forma financial data are derived from the Unaudited Pro
Forma Consolidated Financial Statements and the related notes thereto
included elsewhere in this Prospectus. The summary pro forma financial data
give effect, as of January 1 of the earliest period presented, to (i) the
Acquisition, (ii) the settlement of a net intercompany receivable with HFS
and its affiliated companies, (iii) adjustments to reflect a 4% royalty fee
pursuant to the Master License Agreement (as defined) with HFS, and (iv) the
refinancing of substantially all of the Company's domestic fleet under
facilities consisting of: (a) a $2.0 billion commercial paper program, (b) a
$1.65 billion medium term notes program with maturities extending 3 and 5
years and (c) a $470.0 million credit facility (collectively, the "
Refinancing"). See "Description of Certain Indebtedness -- New Credit
Facility." The "Pro Forma as Adjusted" net income and earnings per share
amounts give effect, as of January 1 of the earliest period presented, to (i)
the First Gray Line Acquisition and (ii) the Offerings and the application of
the net proceeds therefrom. The pro forma adjustments are based upon available
information and certain assumptions that management of the Company believes
are reasonable. The pro forma financial data do not purport to represent the
results of operations or the financial position of the Company which actually
would have occurred had such events been consummated on the aforesaid dates.
All of the pro forma financial data presented below should be read in
conjunction with (i) the Audited Consolidated Financial Statements and
related notes thereto, (ii) the Unaudited Condensed Consolidated Financial
Statements for the six months ended June 30, 1997 and related notes thereto,
(iii) the Unaudited Pro Forma Consolidated Financial Statements and related
notes thereto, and (iv) "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
each case included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ---------------
<S> <C> <C>
Statements of Operations Data:
Revenue.............................................. $1,867,517 $945,647
Costs and expenses:
Direct operating.................................... 818,432 398,548
Vehicle depreciation, net........................... 415,184 223,298
Vehicle lease charges............................... 29,208 10,833
Selling, general and administrative (a)............. 419,597 196,463
Interest, net ...................................... 183,461 89,702
Amortization of cost in excess of net assets
acquired........................................... 4,945 2,570
----------------- ---------------
Income (Loss) before provision for income taxes ..... (3,310) 24,233
Provision for income taxes........................... 2,897 11,206
----------------- ---------------
Net income (loss) ................................... $ (6,207) $ 13,027
================= ===============
Pro Forma as Adjusted:
Net income ......................................... $ 4,323 $ 19,765
================= ===============
Earnings per share (b) ............................. $ .15 $ .71
================= ===============
</TABLE>
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(a) Reflects a $74.7 million pro forma increase for the year ended
December 31, 1996 resulting from the net adjustment relating to a 4%
royalty fee payable to HFS.
(b) "Pro forma as Adjusted" earnings per share amounts were computed on
the basis of 28,000,000 shares of Common Stock, the number of shares
of Common Stock outstanding after giving effect to an 85,000 to 1
stock split to be effected immediately prior to the consummation of
the Offerings and the issuance of 19,500,000 shares of Common Stock
in the Offerings.
8
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE REVENUE PER VEHICLE RENTAL TRANSACTION)
The summary financial data for the years ended December 31, 1992 and 1993
are derived from the Unaudited Consolidated Financial Statements of the
Company. The financial data for the years ended December 31, 1994 and 1995
and for the periods ended October 16, 1996 and December 31, 1996 are derived
from the Audited Consolidated Financial Statements of the Company. The
financial data for the six month periods ended June 30, 1996 and 1997 are
derived from the Unaudited Condensed Consolidated Financial Statements of the
Company. The financial data for the years ended December 31, 1992 and 1993
and the six month periods ended June 30, 1996 and 1997 are unaudited but, in
the opinion of management, have been prepared on the same basis as the
Audited Consolidated Financial Statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for fair
presentation of the financial position and results of operations for the
periods presented. Results for the six months ended June 30, 1996 and 1997
are not indicative of results for a full year. The pro forma Statements of
Financial Position Data are derived from the Unaudited Pro Forma Consolidated
Financial Statements included elsewhere in this Prospectus. The pro forma
amounts give effect, to (i) the Refinancing and (ii) the settlement of a net
intercompany receivable with HFS and its affiliated companies as if it had
been consummated on June 30, 1997. The "Pro Forma as Adjusted" amounts give
effect to (i) the First Gray Line Acquisition and (ii) the Offerings and the
application of the net proceeds therefrom as if it had been consummated on
June 30, 1997. All of the financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Audited Consolidated Financial
Statements and related notes thereto, the Unaudited Condensed Consolidated
Financial Statements for the six months ended June 30, 1997 and related notes
thereto and the Unaudited Pro Forma Consolidated Financial Statements and
related notes thereto, in each case included elsewhere in this Prospectus.
9
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES (A)
------------------------------------------------------------
YEARS ENDED DECEMBER 31, JANUARY 1, 1996
------------------------------------------- TO
1992 1993 1994 1995 OCTOBER 16, 1996
---------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................ $1,228,560 $1,333,477 $1,412,400 $1,615,951 $1,504,673
Costs and expenses:
Direct operating.............. 621,838 646,821 664,993 724,759 650,750
Vehicle depreciation, net .... 142,602 208,090 266,637 324,186 275,867
Vehicle lease charges......... 57,666 49,633 42,778 86,916 100,318
Selling, general and
administrative (c)........... 204,927 222,629 252,024 269,434 283,180
Interest, net................. 123,362 114,036 128,898 145,199 120,977
Amortization of cost in
excess of net assets
acquired..................... 4,266 4,439 4,754 4,757 3,782
---------- ---------- ---------- ---------- ----------------
Income before provision for
income taxes.................. 73,899 87,829 52,316 60,700 69,799
Provision for income taxes .... 4,857 34,375 30,213 34,635 31,198
---------- ---------- ---------- ---------- ----------------
Net income .................... $ 69,042 $ 53,454 $ 22,103 $ 26,065 $ 38,601
========== ========== ========== ========== ================
Pro Forma as Adjusted: (d)
Net income....................
Earnings per share(e).........
SELECTED OPERATING DATA:
Number of vehicle rental
locations at period end....... 582 656 576 541 550
Peak number of vehicles during
period........................ 146,630 151,964 150,966 167,511 196,077
Average number of vehicles
during period................. 125,993 134,926 137,715 150,853 174,813
Number of rental transactions
during period (in thousands) 9,076 10,003 10,577 11,544 10,272
Average revenue per rental
transaction during period ... $ 135 $ 133 $ 134 $ 140 $ 146
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF COMBINED PREDECESSOR
ACQUISITION) YEAR ENDED COMPANIES (A) SIX MONTHS
TO DECEMBER 31, 1996 SIX MONTHS ENDED ENDED
DECEMBER 31, 1996 (B) JUNE 30, 1996 JUNE 30, 1997
------------------- ------------------ ---------------- -------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................ $362,844 $1,867,517 $887,566 $945,647
Costs and expenses:
Direct operating.............. 167,682 818,432 390,125 398,548
Vehicle depreciation, net .... 66,790 342,657 163,746 179,418
Vehicle lease charges......... 22,658 122,976 60,862 69,025
Selling, general and
administrative (c)........... 68,215 351,395 168,042 203,383
Interest, net................. 34,212 155,189 73,153 68,343
Amortization of cost in
excess of net assets
acquired..................... 1,026 4,808 2,382 2,570
------------------- ------------------ ---------------- -------------
Income before provision for
income taxes.................. 2,261 72,060 29,256 24,360
Provision for income taxes .... 1,040 32,238 13,077 11,254
------------------- ------------------ ---------------- -------------
Net income .................... $ 1,221 $ 39,822 $ 16,179 $ 13,106
=================== ================== ================ =============
Pro forma as aDjusted: (d)
Net Income.................... $ 4,323 $ 19,765
================== =============
Earnings per share(e)......... $ .15 $ .71
================== =============
SELECTED OPERATING DATA:
Number of vehicle rental
locations at period end....... 546 546 549 536
Peak number of vehicles during
period........................ 177,839 196,077 183,334 185,290
Average number of vehicles
during period................. 172,461 174,226 165,767 174,993
Number of rental transactions
during period (in thousands) 2,534 12,806 6,243 6,505
Average revenue per rental
transaction during period ... $ 143 $ 146 $ 142 $ 145
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ -------------
<S> <C> <C> <C>
STATEMENTS OF FINANCIAL POSITION DATA:
Vehicles, net.............................. $2,312,109 $2,852,828 $3,145,122
Total assets............................... 3,029,073 3,656,315 4,162,622
Debt....................................... 2,183,769 2,837,874 2,976,374
Stockholders' equity....................... 87,086 87,086 377,086
Total liabilities and stockholders'
equity.................................... 3,029,073 3,656,315 4,162,622
</TABLE>
- ------------
(a) See Note 1 to the Audited Consolidated Financial Statements of the
Company.
(b) Presented on a combined twelve-month basis and include the results of
the Predecessor Companies for the period January 1, 1996 to October 16,
1996 and the results of the Company for the period October 17, 1996
(Date of Acquisition) to December 31, 1996. See Note 1 to the Audited
Consolidated Financial Statements.
(c) The amounts for the periods October 17, 1996 (Date of Acquisition) to
December 31, 1996 and the six months ended June 30, 1997 include
charges from HFS. See Note 3 to the Audited Consolidated Financial
Statements.
(d) See Unaudited Pro Forma Consolidated Financial Statements.
(e) "Pro forma as Adjusted" earnings per share amounts were computed on the
basis of 28,000,000 shares of Common Stock, the number of shares of
Common Stock outstanding after giving effect to an 85,000 to 1 stock
split to be effected immediately prior to the consummation of the
Offerings and the issuance of 19,500,000 shares of Common Stock in the
Offerings.
10
<PAGE>
RISK FACTORS
Prospective investors should consider carefully all of the information in
this Prospectus and, in particular, should evaluate the following risks in
connection with an investment in the Common Stock being offered hereby.
FRANCHISEE STATUS; ROYALTY PAYMENTS; DEPENDENCE ON AVIS SYSTEM
As an Avis System franchisee, the Company must coordinate significant
matters relating to the Company's growth and operational strategies with the
Franchisor. Effective January 1, 1997, the Company was required to pay
royalties to the Franchisor based upon the Company's revenue, not its
profits, which could result in increasing royalty payments during a period of
declining profits. On an unaudited pro forma basis, if the royalties had been
charged to the Company beginning on October 17, 1996, net income for the
period October 17, 1996 to December 31, 1996 would have been reduced by $4.3
million resulting in a pro forma net loss of $3.1 million. The royalties
resulted in a charge to the Company for the six months ended June 30, 1997 of
$37.8 million and resulted in a reduction in net income of approximately
$20.4 million. The Company is required to maintain certain standards and meet
certain guidelines relating to its operations. The Franchisor has the right
to terminate the Company's franchise for certain violations of its franchise
agreement, including, among others, certain bankruptcy or insolvency events,
if the Company purports to transfer any rights or obligations thereunder
without compliance with its terms, or if the Company fails, refuses or
neglects to promptly pay monies owing to the Franchisor, WizCom or HFS on
three or more occasions and upon the occurrence of a Change of Control Event.
A Change of Control Event (as more fully defined herein) refers to any
transaction pursuant to which (a) a party other than HFS or its affiliates
acquires control of specified percentages of the voting stock of the Company,
(b) another corporation merges into the Company or the Company merges into or
consolidates with another corporation, (c) the Company sells or otherwise
conveys substantially all of its assets or (d) a majority of the Board of
Directors leaves office during any two year period. Any such termination
would have a material adverse effect on the Company. See "Relationship with
HFS -- Master License Agreement."
LEVERAGE; LIMITATIONS UPON LIQUIDITY; CAPITAL RAISING; INTEREST RATE RISK
Leverage
At June 30, 1997, the Company had approximately $2.2 billion of
indebtedness outstanding, of which approximately $2.2 billion was incurred
for fleet financing and secured by purchased vehicles. At June 30, 1997, the
Company had approximately $900.0 million of additional credit availability
under its fleet financing facilities. On a pro forma basis, at June 30, 1997,
after giving effect to the Refinancing, the Company had approximately $2.8
billion of debt outstanding which included approximately $553.5 million of
debt related to vehicles which were previously accounted for as operating
leases. In addition, on a pro forma basis, at June 30, 1997, the Company had
approximately $1.1 billion of additional credit available. This high level of
indebtedness could have important consequences to the Company's operations,
including: (i) the potential limitation on the Company's ability to obtain
additional financing for certain purposes, (ii) the commitment of a
substantial portion of the Company's cash flow from operations to debt
service and (iii) the limitation of the Company's ability to react to changes
in the vehicle rental industry and general economic conditions.
Restrictions Imposed by Indebtedness
The agreements with the Company's lenders include a number of significant
covenants that, among other things, restrict its ability to dispose of
non-fleet assets, incur additional indebtedness, create liens, pay dividends,
enter into certain investments or acquisitions, repurchase or redeem capital
stock, engage in mergers or consolidations or engage in certain transactions
with affiliates and otherwise restrict corporate activities. Certain of these
agreements also require the Company to maintain specified financial ratios. A
breach of any of these covenants or the inability of the Company to maintain
the required financial ratios could result in a default in respect of the
related indebtedness. In the event of a default, the lenders could elect,
among other options, to declare the indebtedness, together with accrued
interest
11
<PAGE>
and other fees, to be immediately due and payable, failing which the lenders
could proceed against the collateral securing that indebtedness. See
"--Dividends."
Availability of Financing; Requirements for Capital
The Company depends upon third-party financing to purchase its fleet
vehicles. Continued availability of such financing upon favorable terms is
critical to the Company's operations. Since a substantial portion of such
financing is obtained in connection with Repurchase Programs, a significant
change in the financial condition of the vehicle manufacturers, particularly
General Motors Corporation ("GM") and Chrysler Corporation ("Chrysler"),
would significantly affect the Company's ability to obtain such financing on
favorable terms. In addition, under the terms of certain of the Company's
credit facilities, including the Company's fleet financing arrangements, the
failure of a repurchase party (such as GM or Chrysler) to maintain an
investment grade rating for its own senior debt or the bankruptcy of a
repurchase party or any other event that has a material adverse effect on the
repurchase party's ability to perform, or upon a material default of a
repurchase party under a Repurchase Program, may result in termination of the
Company's credit lines for the purchase of vehicles from such repurchase
party, a requirement to repay a portion of the indebtedness that is secured
by vehicles purchased from that repurchase party and removal of those
vehicles from the applicable collateral pool for such facilities. The
inability of the Company to obtain fleet financing on favorable terms would
have a material adverse effect on the Company's financial condition and
results of operations.
Interest Rate Risk
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. Approximately 44% of
the Company's outstanding debt at August 1, 1997 was interest rate sensitive
and had a weighted average interest rate at such date of 5.9%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness."
IMPORTANCE OF MANUFACTURERS' REPURCHASE PROGRAMS
At June 30, 1997, approximately 92% of the vehicles in the Company's
rental fleet were covered by vehicle manufacturers' repurchase programs (the
"Repurchase Programs"). Under a Repurchase Program, a buyer, such as the
Company, agrees to purchase a specified minimum number of vehicles directly
from franchised dealers of the manufacturer at a specified price and the
manufacturer agrees to buy those vehicles back from the buyer at a future
date at a price that is based upon the capitalized cost of the vehicles less
an agreed-upon depreciation factor and, in certain cases, an adjustment for
damage and/or excess mileage. The Repurchase Programs limit the Company's
risk of a decline in the residual value of its fleet and enable the Company
to fix its depreciation expense in advance. Vehicle depreciation is the
largest cost factor in the Company's vehicle rental operations. The Company
could be adversely affected if automobile manufacturers reduce the
availability of Repurchase Programs or related incentives. See "--Dependence
on GM" and "Business -- Fleet Acquisition and Management."
The Company could be at a competitive disadvantage if U.S. automobile
manufacturers selectively restrict eligibility to participate in their
Repurchase Programs. Certain U.S. automobile manufacturers have direct or
indirect equity stakes in certain of the major domestic car rental companies,
and each of these companies maintains a close relationship with one or more
U.S. automobile manufacturers. At June 1, 1997, Ford Motor Company ("Ford")
owned a controlling interest in The Hertz Corporation ("Hertz") and a
minority interest in Budget Rent A Car Corporation ("Budget") and Chrysler
had equity interests in Dollar Rent a Car Systems, Inc. ("Dollar") and
Thrifty Rent-A-Car Systems, Inc. ("Thrifty"). Any effort by GM to reduce the
scope of the Company's GM Repurchase Program could adversely affect the
Company's ability to compete with those of its competitors whose access to
similar programs is not reduced or that have well established alternative
vehicle disposition facilities.
INCREASING PRICE OF VEHICLES
In recent years, the average price of new cars has increased. From time to
time, automobile manufacturers sponsor sales incentive programs that tend to
lower the average cost of vehicles for fleet
12
<PAGE>
purchasers such as the Company. The Company anticipates that new vehicle
prices will continue to increase, and there can be no assurance that sales
incentive programs will remain available, that the Company will be able to
effectively control the average cost of its fleet by purchasing a mix of less
expensive vehicles or that, because of competitive pressures, the Company
will be able to pass on the increased cost of vehicles to its rental
customers.
DEPENDENCE ON GM
GM, through its franchised dealers, has been the Company's principal
supplier of vehicles for nearly twenty years. From 1989 until the date of the
Acquisition, GM was a minority shareholder of the Company. The number of
vehicles purchased by the Company varies from year to year. In model year
1996, approximately 83% of the Company's vehicle fleet purchases in the
United States consisted of GM vehicles. In model year 1997, approximately 69%
of the Company's vehicle fleet purchases in the United States are expected to
consist of GM vehicles. During the term of the agreement, at least 51% of the
Company's domestic fleet must consist of GM vehicles. Shifting significant
portions of fleet purchases to other manufacturers would require lead time.
As a result, GM's inability to supply the Company with the planned number and
type of vehicles could have a material adverse effect on the Company's
financial condition and results of operations. In addition, if GM is not able
to offer competitive terms and conditions and the Company is not able to
purchase sufficient quantities of vehicles from other automobile
manufacturers on competitive terms and conditions, then the Company may be
forced to purchase vehicles at higher prices or on otherwise less favorable
terms. Such a situation could adversely affect the Company's results of
operations through increased vehicle acquisition and depreciation costs if it
is unable to pass these costs on to its customers through increases in rental
rates. See "Business -- Fleet Acquisition and Management."
AVAILABILITY AND PRICE OF FUEL
The Company's operations could be adversely affected by limitations on
fuel supplies, the imposition of mandatory allocations or rationing of fuel
or significant increases in fuel prices. A severe and protracted disruption
of fuel supplies or significant increases in fuel prices could materially
adversely affect the Company's operating results.
DEPENDENCE ON AIR TRAVEL INDUSTRY
In 1996, approximately 85% of the Company's revenue from its domestic
operations was generated at its airport rental locations. A sustained
material decrease in airline passenger traffic in the United States could
have a material adverse effect on the Company's results of operations. Events
that could reduce airline passenger traffic include, in addition to a general
economic downturn (discussed below), labor unrest, airline bankruptcies and
consolidations, substantially higher air fares, the outbreak of war,
high-profile crimes against tourists and incidents of terrorism.
RISK OF ECONOMIC DOWNTURN
The Company's results of operations are affected by certain economic
factors, including the level of economic activity in the markets in which it
operates. A decline in economic activity either in the United States or in
international markets may adversely affect the Company. In the vehicle rental
business, a decline in economic activity typically results in a decline in
both business and leisure travel, and accordingly a decline in the volume of
vehicle rental transactions. In the case of a decline in vehicle rental
activity, the Company may reduce rental rates to meet competitive pressures,
which could adversely affect the Company's results of operations. A decline
in economic activity also may have an adverse effect on residual values
realized on the disposition of those of the Company's vehicles that are not
covered by Repurchase Programs. At June 30, 1997, the Company was subject to
residual risk with respect to 8% of the vehicles in its fleet.
SEASONALITY
The Company's third quarter, which covers the peak summer travel months,
has historically been its strongest, accounting in 1996 for approximately 28%
and 53% of the Company's revenue and pre-tax
13
<PAGE>
income, respectively. 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
because of reduced leisure travel and the greater potential for adverse
weather conditions. Many of the Company's operating expenses, such as rent,
insurance and personnel, are fixed and cannot be reduced during periods of
decreased rental demand. As a result, there can be no assurance that the
Company would have sufficient liquidity under all conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
COMPETITION
The vehicle rental industry is characterized by intense competition,
particularly with respect to price and service. In addition, recent changes
in ownership of a number of the major domestic vehicle rental companies could
further intensify competition. See "Business --Industry Overview" and
"Business -- Competition." In any geographic market, the Company may
encounter competition from national, regional and local vehicle rental
companies. The Company's main competitors for vehicle rentals are Hertz,
Budget, Alamo Rent-a-Car Inc. ("Alamo"), National Car Rental System, Inc.
("National"), Dollar, Enterprise Rent a Car ("Enterprise") and Thrifty.
From time to time, either because of overcapacity or reduced demand, the
major vehicle rental companies have been subject to industry-wide price
pressures, and the Company has, on such occasions, adjusted its rental rates
in response to such pressures. The Company has taken steps to address its
fixed cost structure to improve its overall competitive position and industry
overcapacity has declined. However, a recurrence of oversupply or a marked
reduction in overall demand could adversely affect the Company's ability to
maintain or increase its rental rates.
REGULATION OF LOSS DAMAGE WAIVERS
A significant source of profits for the vehicle rental industry has been
the sale of loss damage waivers, by which rental companies agree to relieve a
customer from financial responsibility arising from vehicle damage incurred
during the rental period. Approximately 3.6% of the Company's total revenue
during 1996 was generated by the sale of loss damage waivers. The U.S. House
of Representatives has from time to time considered legislation that would
regulate the conditions under which loss damage waivers may be sold by
vehicle rental companies. House Bill H.R. 175, introduced in January 1995,
seeks to prohibit the imposition of liability on renters for loss of, or
damage to, rented vehicles, except in certain circumstances, and would
prohibit the sale of loss damage waivers. To date, no action has been taken
on this bill. In addition, approximately 40 states have considered
legislation affecting loss damage waivers. To date, 24 states have enacted
legislation regulating the sale of loss damage waivers, most of which
requires disclosure to each customer at the time of rental that damage to the
rented vehicle may be covered by the customer's personal automobile insurance
and that loss damage waivers may not be necessary. In addition, in the late
1980's, New York and Illinois enacted legislation which eliminated the
Company's right to offer loss damage waivers for sale and limited potential
customer liability to $100 and $200, respectively. The Illinois legislature
has passed legislation increasing the limit on potential customer liability
to the fair market value of the vehicle or the cost of the repairs, whichever
is less. The legislation is awaiting the approval of the Governor of
Illinois. Adoption of national or additional state legislation affecting or
limiting the sale of loss damage waivers could result in the loss of this
revenue source and additional limitations on potential customers' liability
could increase the Company's costs.
ENVIRONMENTAL RISKS INHERENT IN ON-SITE PETROLEUM STORAGE
Approximately 241 of the Company's domestic and international facilities
contain tanks for the storage of petroleum products, such as gasoline, diesel
fuel and waste oils. At approximately 213 of the Company's locations, one or
more of these tanks are located underground. The Company maintains an
environmental compliance program that includes the replacement of steel tanks
and the implementation of required technical and operational procedures
designed to minimize the potential for leaks and spills, maintenance of
records and the regular testing of tank systems for tightness. However, there
can be no assurance that these tank systems will at all times remain free
from leaks or that the use of these tanks
14
<PAGE>
will not result in spills. In addition, historical operations at certain of
the Company's properties, including activities relating to automobile and bus
maintenance, may have resulted in leaks or spills to soil or groundwater. Any
such leak or spill, depending on such factors as the material involved,
quantity and environmental setting, could result in interruptions to the
Company's operations and expenditures that could have a material adverse
effect on the Company's results of operations and financial condition. At
certain facilities, the Company presently is remediating soil and groundwater
contamination. Based on currently available information, the Company does not
believe that the related expenditures will be material. In the United States,
Canada and Puerto Rico, the Company carries environmental impairment
liability coverage with annual limits of $4.0 million per site and $4.0
million in the aggregate per site and a deductible generally of $250,000
against liability to third parties and clean-up costs, but does not cover
business interruption in the Company's own operations.
UNINSURED LIABILITY RISK
The Company's business exposes it to claims for personal injury, death and
property damage resulting from the use of the vehicles rented by the Company.
The Company either self-insures or maintains coverage for such risk up to
$1.0 million per occurrence in its countries of operation and maintains
insurance with unaffiliated carriers in excess of such level up to $200.0
million per occurrence. There can be no assurance that the Company will not
be exposed to uninsured liability at levels in excess of historical levels
resulting from multiple payouts or otherwise, that liabilities in respect of
existing or future claims will not exceed the level of the Company's
insurance, that the Company will have sufficient capital available to pay any
uninsured claims or that insurance with unaffiliated carriers will continue
to be available to the Company on economically reasonable terms. See
"Business -- Insurance" and "--Legal Proceedings."
FUTURE SALES OF COMMON STOCK BY HFS
Subject to applicable federal securities laws and the restrictions set
forth below, after completion of the Offerings, HFS may sell any or all of
the shares of Common Stock beneficially owned by it or distribute any or all
of such shares of Common Stock to its stockholders. Sales or distributions by
HFS of substantial amounts of Common Stock in the public market or to its
stockholders, or the perception that such sales or distributions could occur,
could adversely affect prevailing market prices for the Common Stock. HFS has
advised the Company that its current intent is to continue to hold all of the
Common Stock beneficially owned by it following the Offerings. However, HFS
is not subject to any contractual obligation to retain its interest, except
that HFS and the Company have agreed, subject to certain limited exceptions,
not to sell or otherwise dispose of any shares of Common Stock for a period
of 180 days after the date of this Prospectus without the prior written
consent of Bear, Stearns & Co. Inc. See "Underwriting." As a result, there
can be no assurance concerning the period of time during which HFS will
maintain its beneficial ownership of Common Stock owned by it following the
Offerings. HFS will have registration rights with respect to the shares of
Common Stock owned by it following the Offerings, which would facilitate any
future disposition. See "Relationship with HFS -- Registration Rights
Agreement" and "Shares Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law, the Company's Amended and Restated
Certificate of Incorporation and the Company's Amended and Restated By-laws
could delay or impede the removal of incumbent directors and could make it
more difficult for a third party to acquire, or could discourage a third
party from attempting to acquire, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Common Stock. In addition, shares of preferred stock
may be issued by the Board of Directors of the Company without stockholder
approval on such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in
the future. The Company has no current plans to issue any shares of preferred
stock. See "Description of Capital Stock -- Preferred
15
<PAGE>
Stock" and "Descriptions of Capital Stock -- Section 203." The Franchisor has
the right to terminate the Company's franchise upon a Change of Control Event
which would discourage a third party from acquiring control of the Company.
See "Relationship with HFS --Master License Agreement."
LACK OF PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF PUBLIC OFFERING
PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on the NYSE,
subject to official notice of issuance, there can be no assurance as to the
development or liquidity of any trading market for the Common Stock or that
investors in the Common Stock will be able to resell their shares at or above
the initial public offering price. The initial public offering price for the
shares of Common Stock will be determined through negotiations between the
Company and representatives of the U.S. Underwriters and the Managers, and
may not be indicative of the market price of the Common Stock after the
Offerings. See "Underwriting."
DILUTION
Purchasers of the Common Stock will experience immediate and substantial
dilution in net tangible book value per share of Common Stock from the
initial offering price. See "Dilution."
RELATIONSHIP WITH HFS; POTENTIAL CONFLICTS OF INTEREST
HFS's continuing beneficial ownership of the Company's Common Stock, and
the ownership of HFS common stock by directors or officers of the Company or
their service as directors or officers of both the Company and HFS, could
create conflicts of interest when those directors and officers are faced with
decisions that could have different implications for the Company and HFS,
including potential acquisitions of businesses, the issuance of additional
securities, the election of new or additional directors, the payment of
dividends by the Company and other matters. The Company has not instituted
any formal plan or arrangement to address potential conflicts of interest
that may arise among the Company, HFS and their affiliates. However, under
Delaware corporate law, officers and directors of the Company owe fiduciary
duties to the Company and its stockholders. See "Relationship with HFS."
The Company is party to various agreements with HFS and its subsidiaries
that were entered into when HFS beneficially owned all of the outstanding
Common Stock of the Company. While these agreements, including the Company's
franchise agreement with the Franchisor, were not negotiated on an arms'
length basis, these agreements, taken together, are generally consistent with
other agreements HFS has negotiated with third parties. In addition, the
Company is required to pay the Franchisor royalties based on a percentage of
the Company's revenue, not its profits. As a result, the Company's strategy
to increase profitability may conflict with the Franchisor's interest in
increasing revenue. See "Relationship with HFS -- Master License Agreement."
DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The New Credit Facility (as defined) prohibits
the payment of cash dividends until the fiscal year ending December 31, 1998
and, thereafter, permits the payment of dividends only if the Company meets a
minimum leverage ratio, the amount of such dividend does not exceed a
designated percentage of the Company's cash flow and no default exists under
the New Credit Facility. See "Dividend Policy."
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" including, without limitation, those
concerning (i) the Company's strategy, (ii) the Company's expansion plans,
(iii) the Company's capital expenditures, (iv) the percentage of vehicles
expected to be acquired from GM in the future, (v) the terms upon which
vehicles will be acquired, (vi) the development of the Company's strategic
information system and (vii) the cross-marketing opportunities with HFS and
CUC, contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking
statements. Factors that could cause such differences include, but are not
limited to, those discussed under "Risk Factors."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are estimated to be
approximately $290.0 million (approximately $334.0 million if the
over-allotment options granted to the U.S. Underwriters and the Managers are
exercised in full), assuming an initial offering price of $16.00 per share,
the midpoint of the price range shown on the cover of this Prospectus, after
deducting underwriting discounts and estimated expenses related to the
Offerings. The Company expects that approximately $210.0 million of the net
proceeds from the Offerings will be used to repay amounts outstanding under
the Acquisition Credit Facility which was entered into in connection with the
First Gray Line Acquisition and certain acquisition expenses. The Company
entered into a credit agreement dated as of August 19, 1997 (the "Acquisition
Credit Facility") with ARACS, the lenders party thereto (the "Lenders") and
The Chase Manhattan Bank, as administrative agent. The Company borrowed
$200.0 million pursuant to the Acquisition Credit Facility at an interest
rate equal to the rate for loans in the London interbank market as determined
therein plus a margin of 0.225%. The Acquisition Credit Facility matures on
November 19, 1997, but the borrowings thereunder are required to be prepaid
prior to such date out of the net cash proceeds of the Offerings. The
remaining net proceeds will be used to prepay approximately $80.0 million of
indebtedness under debt instruments bearing interest, at a weighted average
interest rate of 5.63% as of June 30, 1997, with maturities not in excess of
90 days. See "Business -- The First Gray Line Acquisition."
DIVIDEND POLICY
The Company anticipates that for the foreseeable future all earnings will
be retained for use in its business and does not anticipate paying cash
dividends. Any future declaration and payment of dividends will be subject to
the discretion of the Board of Directors of the Company and subject to
certain limitations under the General Corporate Law of the State of Delaware.
The timing, amount and form of dividends, if any, will depend, among other
things, on the Company's results of operations, financial condition, cash
requirements and other factors deemed relevant by the Board of Directors of
the Company. The Company, as a holding company, will be dependent on the
earnings and cash flow of, and dividends and distributions from, ARACS to pay
any cash dividends or distributions on the Common Stock. In addition, the
Company's ability to pay cash dividends is restricted under various of its
debt instruments. See "Risk Factors -- Dividends," "Business -- Regulatory
Matters," "Description of Certain Indebtedness" and "Management's Discussion
and Analysis of Financial Condition -- Liquidity and Capital Resources."
Prior to the acquisition by HFS of the parent of the Company's Predecessor
Company in October 1996, the Company's Predecessor Company paid dividends to
its parent of $1.4 million and $8.7 million during 1996 and 1995,
respectively, which are not indicative of those that may be paid by the
Company in the future.
18
<PAGE>
DILUTION
At June 30, 1997, the Company had a net tangible book value (deficiency)
of approximately $(112.0) million, or $(13.17) per share. "Net tangible book
value" per share represents net tangible assets (total assets less
liabilities and cost in excess of net assets acquired) of the Company on a
consolidated basis, divided by the total number of shares outstanding before
the Offerings (after giving effect to an 85,000 to 1 stock split). Without
taking into account any changes in net tangible book value after June 30,
1997, other than to give effect to the Offerings and the application of the
net proceeds therefrom (at an assumed public offering price of $16.00 per
share), the pro forma net tangible book value of the Common Stock as of June
30, 1997 would have been approximately $178.0 million, or $6.36 per share.
The following table gives effect to the Offerings as if they had occurred at
June 30, 1997 and illustrates the immediate increase in net tangible book
value of $19.53 per share to the Franchisor and an immediate dilution of
$9.64 per share to new investors:
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price per share...................... $16.00
Net tangible book value (deficiency) per share as of
June 30, 1997 .................. .................. $(13.17)
Increase in net tangible book value per share
attributable to the Offerings....................... 19.53
Pro forma net tangible book value per share as of
June 30, 1997, after giving effect to the Offerings 6.36
--------
Immediate dilution per share to new investors in the
Offerings........................................... $9.64
</TABLE>
The calculation in the table above excludes 4,183,908 shares reserved for
issuance under the Stock Option Plan (4,620,977 shares if the over-allotment
options granted to the U.S. Underwriters and the Managers are exercised in
full). See "Management -- Stock Option Plan."
The following table sets forth as of June 30, 1997, on a pro forma basis,
the respective positions of the Franchisor and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid therefor and the average price paid per share, at an
assumed public offering price of $16.00 per share.
<TABLE>
<CAPTION>
SHARES TOTAL CONSIDERATION
---------------------------- ---------------------------- AVERAGE
APPROXIMATE APPROXIMATE PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
-------------- ------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
New Investors . 19,500,000 70% $312,000,000 81% $16.00
The Franchisor 8,500,000(a) 30 75,000,000 19 8.82
Total......... 28,000,000 100.0% $387,000,000 100.0% 13.82
============== ============= ============== ============= ===========
</TABLE>
- ------------
(a) Reflects an 85,000 to 1 stock split to be effected immediately prior to
the consummation of the Offerings.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 (a) on an actual basis, (b) as adjusted to give effect to (i)
the Refinancing, (ii) additional indebtedness related to vehicles previously
accounted for as operating leases and (iii) the settlement of a net
intercompany receivable with HFS and its affiliated companies and the
application of the net proceeds therefrom to reduce indebtedness and (c) as
further adjusted to give effect to the sale of the shares of Common Stock
offered hereby and application of the net proceeds therefrom as described
under "Use of Proceeds." This table should be read in conjunction with the
Unaudited Condensed Consolidated Financial Statements of the Company included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------------------------
AS FURTHER
ACTUAL(A) AS ADJUSTED ADJUSTED
------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Vehicle Financing--Short-term ............... $1,954,987 $ 908,805 $1,047,305
Vehicle Financing--Term Notes ............... -- 1,650,000 1,650,000
Vehicle Financing--Subordinated ............. 69,713 -- --
Debt of foreign subsidiaries ................ 138,067 138,067 138,067
Other debt .................................. 21,002 141,002 141,002
------------ ------------- ------------
Total debt ................................. 2,183,769 2,837,874 2,976,374
------------ ------------- ------------
Stockholders' equity:
Preferred Stock, $.01 par value, 20,000,000
shares authorized; none issued(d) .......... -- -- --
Common Stock, $.01 par value, 100,000,000
shares authorized; 8,500,000 shares issued
and outstanding, actual and as adjusted;
28,000,000 shares issued, as further
adjusted(b)(c)(d) .......................... 85 85 280
Additional paid-in capital(c) ............... 74,915 74,915 364,720
Retained earnings ........................... 14,290 14,290 14,290
Foreign currency translation adjustment .... (2,204) (2,204) (2,204)
------------ ------------- ------------
Total stockholders' equity.................. 87,086 87,086 377,086
------------ ------------- ------------
Total capitalization ...................... $2,270,855 $2,924,960 $3,353,460
============ ============= ============
</TABLE>
- ------------
(a) Excludes $254.0 million of subordinated vehicle financing due to an
affiliate of HFS.
(b) Excludes 4,183,908 shares of Common Stock reserved for issuance under
the Stock Option Plan (4,620,977 shares if the over-allotment options
granted to the U.S. Underwriters and the Managers are exercised in
full). See "Management -- Stock Option Plan."
(c) The actual number of shares issued and outstanding and additional
paid-in capital as of June 30, 1997 have been restated to reflect the
85,000 to 1 stock split to be effected immediately prior to the
consummation of the Offerings.
(d) Reflects an increase in the number of authorized shares of Common Stock
and Preferred Stock to be effected immediately prior to the consummation
of the Offerings.
20
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE REVENUE PER VEHICLE RENTAL TRANSACTION)
The selected financial data for the years ended December 31, 1992 and 1993
are derived from the Unaudited Consolidated Financial Statements of the
Company. The financial data for the years ended December 31, 1994 and 1995
and for the periods ended October 16, 1996 and December 31, 1996, are derived
from the Audited Consolidated Financial Statements of the Company. The
financial data for the six month periods ended June 30, 1996 and 1997 are
derived from the Unaudited Condensed Consolidated Financial Statements of the
Company. The financial data for the years ended December 31, 1992 and 1993
and the six month periods ended June 30, 1996 and 1997 are unaudited but, in
the opinion of management, have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for fair
presentation of the financial position and results of operations for the
periods presented. Results for the six months ended June 30, 1996 and 1997
are not indicative of results for a full year. All of the financial data
presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and with the
Audited Consolidated Financial Statements and related notes thereto and the
Unaudited Condensed Consolidated Financial Statements for the six months
ended June 30, 1997 and related notes thereto included elsewhere in this
Prospectus.
21
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES(A)
------------------------------------------------------------
YEARS ENDED DECEMBER 31, JANUARY 1, 1996
------------------------------------------- TO
1992 1993 1994 1995 OCTOBER 16, 1996
---------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.......................................... $1,228,560 $1,333,477 $1,412,400 $1,615,951 $1,504,673
Costs and expenses:
Direct operating................................ 621,838 646,821 664,993 724,759 650,750
Vehicle depreciation, net ...................... 142,602 208,090 266,637 324,186 275,867
Vehicle lease charges........................... 57,666 49,633 42,778 86,916 100,318
Selling, general and administrative(d) ......... 204,927 222,629 252,024 269,434 283,180
Interest, net................................... 123,362 114,036 128,898 145,199 120,977
Amortization of cost in excess of net assets
acquired....................................... 4,266 4,439 4,754 4,757 3,782
---------- ---------- ---------- ---------- ----------------
Income before provision for income taxes ........ 73,899 87,829 52,316 60,700 69,799
Provision for income taxes....................... 4,857 34,375 30,213 34,635 31,198
---------- ---------- ---------- ---------- ----------------
Net income ...................................... $ 69,042 $ 53,454 $ 22,103 $ 26,065 $ 38,601
========== ========== ========== ========== ================
STATEMENTS OF FINANCIAL POSITION DATA:
Vehicles, net.................................... $1,452,197 $1,716,518 $1,873,158 $2,167,167 $2,404,275
Total assets..................................... 2,189,008 2,419,684 2,603,113 2,824,898 3,187,697
Debt............................................. 746,532 842,541 1,060,123 1,109,747 1,355,595
Vehicle financing notes--due to affiliates ..... 1,000,000 1,010,000 1,050,000 1,180,000 1,289,500
Stockholder's equity............................. 465,856 628,256 658,351 688,360 741,307
Total liabilities and stockholders' equity ...... $2,189,008 $2,419,684 $2,603,113 $2,824,898 $3,187,697
SELECTED OPERATING DATA:
Number of vehicle rental locations at period
end............................................. 582 656 576 541 550
Peak number of vehicles during period............ 146,630 151,964 150,966 167,511 196,077
Average number of vehicles during period ........ 125,993 134,926 137,715 150,853 174,813
Number of rental transactions during period
(in thousands) ................................. 9,076 10,003 10,577 11,544 10,272
Average revenue per rental transaction during
period ......................................... $ 135 $ 133 $ 134 $ 140 $ 146
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OCTOBER 17, 1996 PREDECESSOR
(DATE OF COMBINED COMPANIES(A) SIX MONTHS
ACQUISITION) YEAR ENDED SIX MONTHS ENDED
TO DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, 1996 1996(B) JUNE 30, 1996 1997(C)
<S> <C> <C> <C> <C>
<C>
------------------- ----------------- ------------- -------------
STATEMENTS OF OPERATIONS DATA:
REVENUE.......................................... $ 362,844 $1,867,517 $ 887,566 $ 945,647
COSTS AND EXPENSES:
DIRECT OPERATING................................ 167,682 818,432 390,125 398,548
VEHICLE DEPRECIATION, NET ...................... 66,790 342,657 163,746 179,418
VEHICLE LEASE CHARGES........................... 22,658 122,976 60,862 69,025
SELLING, GENERAL AND ADMINISTRATIVE(D) ......... 68,215 351,395 168,042 203,383
INTEREST, NET................................... 34,212 155,189 73,153 68,343
AMORTIZATION OF COST IN EXCESS OF NET ASSETS
ACQUIRED....................................... 1,026 4,808 2,382 2,570
------------------- ----------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES ........ 2,261 72,060 29,256 24,360
PROVISION FOR INCOME TAXES....................... 1,040 32,238 13,077 11,254
------------------- ----------------- ------------- -------------
NET INCOME ...................................... $ 1,221 $ 39,822 $ 16,179 $ 13,106
=================== ================= ============= =============
STATEMENTS OF FINANCIAL POSITION DATA:
VEHICLES, NET.................................... $2,243,492 $2,243,492 $2,476,530 $2,312,109
TOTAL ASSETS..................................... 3,131,357 3,131,357 2,730,057 3,029,073
DEBT............................................. 2,295,474 2,295,474 1,314,921 2,183,769
VEHICLE FINANCING NOTES--DUE TO AFFILIATES ..... 247,500 247,500 1,239,500 254,029
STOCKHOLDER'S EQUITY............................. 76,540 76,540 706,713 87,086
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...... $3,131,357 $3,131,357 $2,730,057 $3,029,073
SELECTED OPERATING DATA:
NUMBER OF VEHICLE RENTAL LOCATIONS AT PERIOD
END............................................. 546 546 549 536
PEAK NUMBER OF VEHICLES DURING PERIOD............ 177,839 196,077 183,334 185,290
AVERAGE NUMBER OF VEHICLES DURING PERIOD ........ 172,461 174,226 165,767 174,993
NUMBER OF RENTAL TRANSACTIONS DURING PERIOD
(IN THOUSANDS) ................................. 2,534 12,806 6,243 6,505
AVERAGE REVENUE PER RENTAL TRANSACTION DURING
PERIOD ......................................... $ 143 $ 146 $ 142 $ 145
</TABLE>
<PAGE>
- ------------
(a) See Note 1 to the Audited Consolidated Financial Statements of the
Company.
(b) Presented on a combined twelve-month basis and include the results of
the Predecessor Companies for the period January 1, 1996 to October 16,
1996 and the results of the Company for the period October 17, 1996
(Date of Acquisition) to December 31, 1996. See Note 1 to the Audited
Consolidated Financial Statements.
(c) The six months ended June 30, 1997 includes a 4% royalty fee payable to
HFS.
(d) The amounts for the periods October 17, 1996 (Date of Acquisition) to
December 31, 1996 and the six months ended June 30, 1997 include
charges from HFS. See Note 3 to the Audited Consolidated Financial
Statements.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
On October 17, 1996, HFS acquired the Franchisor and its subsidiaries,
which included the operations presently conducted by the Company. The
Acquisition was accounted for as a purchase. In connection with the
Offerings, the Franchisor has entered into a 50 year franchise agreement with
the Company granting the Company the right to operate as a franchisee under
the Avis System. WizCom, the owner of the data processing and information
system known as the Wizard System used in connection with the vehicle rental
business, has entered into a 50 year computer services agreement with the
Company with respect to its use of the Wizard System.
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.
The Company's expenses consist primarily of:
o Direct operating expenses (primarily wages and related benefits,
concessions and commissions paid to airport authorities, vehicle
insurance premiums and other costs relating to the operation of the
rental fleet).
o Depreciation and lease charges relating to the rental fleet (including
net gains or losses upon the disposition of vehicles).
o Selling, general and administrative expenses (including advertising,
reservations and marketing costs, and commissions paid to airlines and
travel agencies).
o Interest expense relating primarily to financing of the rental fleet.
The Company's profitability is primarily a function of the volume and
pricing of its rental transactions and the utilization of its rental fleet.
Significant changes in the Company's net cost of vehicles or in interest
rates can also have a material effect on the Company's profitability,
depending on its ability to adjust its rental rates. In addition, pursuant to
its franchise agreement with the Franchisor, the Company is required to pay
royalties based on its revenue, not its profits, which could increase royalty
payments during a period of declining profits. The Company's royalty fee
obligations and its significant expenditures for vehicles and facilities
impose a significant need for liquidity. See "Relationship with HFS -- Master
License Agreement."
The following discussion and analysis provides information that management
believes to be relevant to understanding the Company's consolidated financial
condition and results of operations. For comparative purposes, results for
1996 are presented on a combined twelve-month basis and include the results
of the Predecessor Companies for the period January 1, 1996 to October 16,
1996 and the results of the Company for the period October 17, 1996 (Date of
Acquisition) to December 31, 1996. As a result of the Acquisition, the
Consolidated Financial Statements for the period subsequent to the
Acquisition are presented on a different basis of accounting than those for
the period prior to the Acquisition and, therefore, are not directly
comparable. A separate discussion of the results of operations for the
Company has been presented for the period October 17, 1996 through December
31, 1996 compared to October 17, 1995 through December 31, 1995 in light of
the reporting of separate results from the date of Acquisition (October 16,
1996) and the different basis of accounting for the period prior to the
Acquisition. This discussion should be read in conjunction with the Audited
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenue represented by certain items in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
COMBINED
1994(A) 1995(A) 1996(B) 1996(A) 1997
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue ....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Direct operating ............. 47.1 44.9 43.8 44.0 42.1
Vehicle depreciation, net and
lease charges ............... 21.9 25.4 25.0 25.3 26.3
Selling, general and
administrative .............. 17.9 16.7 18.8 18.9 21.5
Interest, net ................ 9.1 9.0 8.3 8.2 7.2
Amortization of cost in
excess of net assets
acquired .................... 0.3 0.3 0.3 0.3 0.3
-------- -------- ---------- -------- --------
96.3 96.3 96.2 96.7 97.4
-------- -------- ---------- -------- --------
Income before provision for
income taxes ................. 3.7 3.7 3.8 3.3 2.6
Provision for income taxes ... 2.1 2.1 1.7 1.5 1.2
-------- -------- ---------- -------- --------
Net income .................... 1.6% 1.6% 2.1% 1.8% 1.4%
======== ======== ========== ======== ========
</TABLE>
- ------------
(a) Represents the results of operations of the Predecessor Companies. See
Note 1 to the Audited Consolidated Financial Statements.
(b) For comparative purposes, results for 1996 are presented on a combined
twelve-month basis and include the results of the Predecessor Companies
for the period January 1, 1996 to October 16, 1996 and the results of
the Company for the period October 17, 1996 (Date of Acquisition) to
December 31, 1996. See Note 1 to the Audited Consolidated Financial
Statements. A separate discussion has been presented below for the
period October 17, 1996 to December 31, 1996 compared to the period
October 17, 1995 to December 31, 1995.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenue
Revenue for the six months ended June 30, 1997 increased 6.5%, from $887.6
million to $945.6 million, over the corresponding period in 1996, reflecting
a 4.2% increase in the number of rental transactions and a 2.3% increase in
revenue per rental transaction. The revenue increase resulted from greater
overall market demand.
Costs and Expenses
Total costs and expenses for the six months ended June 30, 1997 increased
7.3%, from $858.3 million to $921.3 million, over the corresponding period in
1996. A portion of the increase (5.2%) represents fees of $44.7 million paid
to HFS. Direct operating expenses for the six months ended June 30, 1997
increased 2.2%, from $390.1 million to $398.5 million, over the corresponding
period in 1996. As a percentage of revenue, direct operating expenses for the
six months ended June 30, 1997 declined to 42.1% from 44.0% for the
corresponding period in 1996. Operating efficiencies were derived primarily
from lower field administration costs (0.7% of revenue), lower facility costs
(0.4% of revenue), lower vehicle insurance costs (0.3% of revenue) and a
decline in wages and benefits as a percentage of revenue (0.3% of revenue).
Vehicle depreciation and lease charges for the six months ended June 30,
1997 increased 10.6%, from $224.6 million to $248.4 million, over the
corresponding period in 1996. As a percentage of revenue, vehicle
depreciation and lease charges for the six months ended June 30, 1997 were
26.3% of revenue, as compared to 25.3% of revenue for the corresponding
period in 1996. The change reflected a 5.6% increase in the average rental
fleet required to service higher rental day activity, partially offset by a
lower monthly
24
<PAGE>
cost per vehicle. In addition, the net proceeds received in excess of book
value upon the disposition of used vehicles was $12.1 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.
Selling, general and administrative expenses for the six months ended June
30, 1997 increased 21.0%, from $168.0 million to $203.4 million, over the
corresponding period in 1996. This increase reflected fees of $44.7 million
paid to HFS in the 1997 period, which were partially offset by lower
reservation costs due to operating efficiencies and reduced marketing costs
as a result of the elimination of certain marketing programs in place during
the first half of 1996.
Interest expense, net, for the six months ended June 30, 1997 decreased
6.6%, from $73.2 million to $68.3 million, over the corresponding period in
1996, due primarily to (i) higher borrowings required to finance the growth
of the rental fleet, partially offset by lower average interest rates and
(ii) $6.9 million of interest income earned on a $194.1 million note
receivable from a subsidiary of HFS.
The provision for income taxes for the six months ended June 30, 1997
decreased 13.9% to $11.3 million from $13.1 million for the corresponding
period in 1996. The effective tax rate for the six months ended June 30, 1997
was 46.2% as compared to 44.7% for the 1996 period. The decrease in the tax
provision was primarily due to lower income before provision for income
taxes. The required amount includes differences between the foreign income
tax rates and the statutory income tax rate, tax on the repatriation of
foreign earnings, and foreign withholding taxes on dividends paid to the
Company.
Net income for the six months ended June 30, 1997 decreased 19.0%, from
$16.2 million to $13.1 million, over the corresponding period in 1996. The
decrease reflects higher revenue and decreased operating costs and expenses
as a percentage of revenue (before fees paid to HFS), which were more than
offset by fees of $44.7 million paid to HFS and a higher effective tax rate
in the 1997 period as explained above.
PERIOD FROM OCTOBER 17, 1996 TO DECEMBER 31, 1996 COMPARED TO PERIOD FROM
OCTOBER 17, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
OCTOBER 17, 1996
OCTOBER 17, 1995 TO (DATE OF
DECEMBER 31, 1995 PERCENTAGE ACQUISITION) PERCENTAGE
PREDECESSOR COMPANIES OF REVENUE TO DECEMBER 31, 1996 OF REVENUE
--------------------- ------------ -------------------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue ................................ $333,503 100.0 $362,844 100.0
Costs and expenses:
Direct operating ...................... 154,141 46.2 167,682 46.2
Vehicle depreciation, net and lease
charges .............................. 87,862 26.3 89,448 24.7
Selling, general and administrative .. 62,774 18.8 68,215 18.8
Interest, net ......................... 31,222 9.4 34,212 9.4
Amortization of cost in excess of net
assets acquired ...................... 987 0.3 1,026 0.3
--------------------- ------------ -------------------- ------------
336,986 101.0 360,583 99.4
--------------------- ------------ -------------------- ------------
Income (loss) before provision
(benefit) for income taxes ............ (3,483) (1.0) 2,261 0.6
Provision (benefit) for income taxes .. (1,989) (0.6) 1,040 0.3
--------------------- ------------ -------------------- ------------
Net income (loss) ...................... $ (1,494) (0.4) $ 1,221 0.3
===================== ============ ==================== ============
</TABLE>
Revenue
Revenue for the period October 17, 1996 to December 31, 1996 (the "1996
Period") increased 8.8%, from $333.5 million to $362.8 million, over the
corresponding period in 1995 (the "1995 Period"), reflecting a 7.0% increase
in the number of rental transactions and a 1.7% increase in revenue per
rental transaction. The revenue increase resulted from greater overall market
demand.
25
<PAGE>
Costs and Expenses
Total costs and expenses for the 1996 Period increased 7.0%, from $337.0
million to $360.6 million, over the 1995 Period. Direct operating expenses
for the 1996 Period increased 8.8%, from $154.1 million to $167.7 million,
over the 1995 Period. For both the 1996 and 1995 Periods, direct operating
expenses were 46.2% of revenue. The 1996 Period reflected lower manpower
(0.8% of revenue), as well as lower facility costs (1.2% of revenue), offset
by higher maintenance and damage costs (2.0% of revenue).
Vehicle depreciation and lease charges for the 1996 Period increased 1.8%,
from $87.9 million to $89.4 million, over the 1995 Period. As a percentage of
revenue, vehicle depreciation and lease charges for the 1996 Period decreased
to 24.7% of revenue as compared to 26.3% of revenue for the 1995 Period. The
change reflected a 10.8% increase in the average rental fleet required to
service higher rental day activity and a 7.5% decrease in the average monthly
cost per vehicle. In addition, the net proceeds received in excess of book
value upon the disposition of used vehicles improved by $1.7 million or 0.4%
of revenue in the 1996 Period over the 1995 Period. This was primarily due to
favorable market conditions for the sale of certain model vehicles.
Selling, general and administrative expenses for the 1996 Period increased
8.7%, from $62.8 million to $68.2 million, over the 1995 Period. The increase
was due primarily to fees of $6.5 million payable to HFS for the 1996 Period.
Interest expense, net, for the 1996 Period increased 9.6%, from $31.2
million to $34.2 million, over the 1995 Period, primarily due to higher
borrowings required to finance the increased cost and size of the rental
fleet.
The provision for income taxes for the 1996 Period income increased to
$1.0 million from a benefit for income taxes of $2.0 million for the 1995
Period. The increase in the tax provision was primarily due to having income
before taxes for the 1996 Period as compared to a loss before taxes for the
1995 Period. The effective tax rate for the 1996 Period was 46.0% as compared
to 57.1% for the 1995 Period. The decrease in the effective tax rate was
primarily due to a reduction in the tax effect of foreign operations. The tax
effect of foreign operations includes differences between the foreign income
tax rates and the statutory U.S. income tax rate, tax on the repatriation of
foreign earnings, and foreign withholding taxes on dividends paid to the
Company.
COMBINED YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995
Revenue
Revenue for the year ended December 31, 1996 increased 15.6%, from
$1,616.0 million to $1,867.5 million, over 1995, reflecting a 10.9% increase
in the number of rental transactions and a 4.3% increase in revenue per
rental transaction. The revenue increase resulted from greater overall market
demand as well as the benefits of specific marketing initiatives implemented
by the Company.
Costs and Expenses
Total costs and expenses for 1996 increased 15.4%, from $1,555.3 million
to $1,795.5 million, over 1995. Direct operating expenses for 1996 increased
12.9%, from $724.8 million to $818.4 million, over 1995. As a percentage of
revenue, direct operating expenses for 1996 decreased to 43.8% of revenue as
compared to 44.9% of revenue in 1995. The improvement was primarily
attributable to lower vehicle insurance costs (0.4% of revenue) resulting
from improved claims experience, as well as lower facility costs (0.6% of
revenue), offset in part by higher maintenance and damage costs (0.8% of
revenue). In addition, 1995 expenses included environmental remediation costs
and organizational restructuring charges which approximated 0.6% of revenue.
Vehicle depreciation and lease charges for 1996 increased 13.3%, from
$411.1 million to $465.6 million, over 1995. As a percent of revenue, vehicle
depreciation and lease charges for 1996 were 24.9% of revenue in 1996, as
compared to 25.4% of revenue in 1995. The change reflected a 15.5% increase
in the average rental fleet required to service higher rental day activity,
and a 1.0% increase in the average monthly cost per vehicle. In addition, the
net proceeds received in excess of book value upon the disposition of used
vehicles improved by $17.0 million or 0.7% of revenue in 1996 over 1995. This
was primarily due to favorable market conditions for the sale of certain
model vehicles.
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Selling, general and administrative expenses for 1996 increased 30.4%,
from $269.4 million to $351.4 million, over 1995. The increase was primarily
due to higher advertising and marketing expenditures. In addition, the
increase reflected fees of $6.5 million payable to HFS for the period October
17, 1996 to December 31, 1996.
Interest expense, net, for 1996 increased 6.9%, from $145.2 million to
$155.2 million, over 1995, due 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 1996 decreased 6.9%, from $34.6 million
to $32.2 million, over 1995. The effective tax rate for 1996 was 44.7% as
compared to 57.1% for 1995. The decrease in the tax provision was primarily
due to a reduction in the tax effect of foreign operations. The tax effect of
foreign operations includes differences between the foreign income tax rates
and the statutory U.S. income tax rate, tax on the repatriation of foreign
earnings, and foreign withholding taxes on dividends paid to the Company.
YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Revenue
Revenue for the year ended December 31, 1995 increased 14.4%, from
$1,412.4 million to $1,616.0 million, over 1994, reflecting a 9.1% increase
in the number of rental transactions and a 4.8% increase in revenue per
rental transaction. The revenue increase resulted from greater overall market
demand as well as the benefits of specific marketing initiatives implemented
by the Company.
Costs and Expenses
Total costs and expenses for 1995 increased 14.3%, from $1,360.1 million
to $1,555.3 million, over 1994. Direct operating expenses for 1995 increased
9.0%, from $665.0 million to $724.8 million, over 1994. As a percentage of
revenue, direct operating expenses decreased to 44.9% in 1995 from 47.1% in
1994. This improvement reflected a reduction in vehicle insurance costs as a
result of improved claims experience, lower wages and benefits as a percent
of revenue and higher recoveries from customers on damage to rental vehicles.
Vehicle depreciation and lease charges for 1995 increased 32.9%, from
$309.4 million to $411.1 million, over 1994, as a result of higher
contractual depreciation rates under the Company's domestic Repurchase
Programs. The change also reflected a 9.5% increase in the average rental
fleet which was required to service higher rental day activity.
Selling, general and administrative expenses for 1995 increased 6.9%, from
$252.0 million to $269.4 million, over 1994. The increase reflected $24.5
million of higher costs for various marketing programs implemented to
stimulate rental activity, partially offset by $3.9 million of lower
advertising expenditures and a $3.2 million reduction in general and
administrative expenses.
Interest expense, net, for 1995 increased 12.6%, from $128.9 million to
$145.2 million, over 1994, primarily due to higher borrowings required to
finance the increased cost and size of the rental fleet.
The provision for income taxes for 1995 increased 14.6%, from $30.2
million to $34.6 million, over 1994. The effective tax rate for 1995 was
57.1% as compared to 57.8% for 1994. The increase in the provision for income
taxes was primarily due to higher income before provisions for income taxes.
The required amount includes differences between the foreign income tax rates
and the statutory U.S. income tax rate, tax on the repatriation of foreign
earnings and foreign withholding taxes on dividends paid to the Company.
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. In 1996, the Company's expenditures for new vehicles were
approximately $2.9 billion and its proceeds from the disposition of used
vehicles were approximately $2.4 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
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<PAGE>
of Repurchase Programs. The financing requirements for vehicles typically
reaches an annual peak during the second and 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 $29.4 million in 1996, and management
estimates such expenditures will approximate $35.0 million in 1997. The
Company's customer receivables also provide liquidity with approximately 12
days of daily sales outstanding.
The Company has entered into a consolidated 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 will be 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 & Poors") 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.
ARACS is party to a $470.0 million secured credit agreement that provides
for (i) a revolving credit facility in the amount of up to $125.0 million
which is available on a revolving basis 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 of business, which is repayable in
four installments, the first three of which shall be in the amount of $1.0
million payable on June 30, 1998, June 30, 1999 and June 30, 2000 and the
remainder of which is due on the Final Maturity Date, 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 pursuant to fleet
lease agreements and (b) maturing Commercial Paper Notes if such Commercial
Paper Notes cannot be repaid through the issuance of additional Commercial
Paper Notes or draws under the liquidity facility supporting the Commercial
Paper Notes (the "Liquidity Facility"). Borrowings under 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 44% of the Company's outstanding debt at August 1, 1997
was interest rate sensitive and had a weighted average interest rate at such
date of 5.9%. 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. On a pro forma basis,
at June 30, 1997, after giving effect to the Refinancing, the Company had
approximately $2.8 billion of debt outstanding which included approximately
$553.5 million of debt related to vehicles which were previously accounted for
as operating leases. In addition, on a pro forma basis, at June 30, 1997, the
Company had approximately $1.1 billion of additional credit available. See
"Description of Certain Indebtedness -- New Credit Facility."
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. The Company
guarantees only the borrowings of its subsidiaries in Australia and Puerto
Rico. At June 30, 1997, the total debt for the Company's international
operations was $138.0 million, of which $134.4 million was short term
(original maturity of one year) and $3.6 million was long term. The impact on
liquidity and financial condition due to exchange rate fluctuations regarding
the Company's foreign operations is not material.
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<PAGE>
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The agreements with the Company's lenders include a number of significant
covenants that, among other things, restrict its ability to dispose of
non-fleet assets, incur additional indebtedness, create liens, pay dividends,
enter into certain investments or acquisitions, repurchase or redeem capital
stock, engage in mergers or consolidations or engage in certain transactions
with affiliates and otherwise restrict corporate activities. Certain of these
agreements also require the Company to maintain specified financial ratios. A
breach of any of these covenants or the inability of the Company to maintain
the required financial ratios could result in a default in respect of the
related indebtedness. In the event of a default, the lenders could elect,
among other options, to declare the indebtedness, together with accrued
interest and other fees, to be immediately due and payable, failing which the
lenders could proceed against the collateral securing such indebtedness. As
of June 30, 1997, the Company was in compliance with all such covenants
related to these agreements. See "Risk Factors -- Dividends."
INFLATION
The increased acquisition cost of vehicles is the primary inflationary
factor affecting the Company's operations. Many of the Company's other
operating expenses are inflation sensitive, with increases in inflation
generally resulting in increased costs of operations. The effect of
inflation-driven cost increases on the Company's overall operating costs is
not expected to be greater for the Company than for its competitors.
SEASONALITY
The Company's third quarter, which covers the peak summer travel months,
has historically been its strongest quarter accounting for 28% and 53% of the
Company's revenue and pre-tax income, respectively, in 1996. 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, such as rent, insurance and personnel, are fixed and
cannot be reduced during periods of decreased rental demand. As a result,
there can be no assurance that the Company would have sufficient liquidity
under all conditions.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board
("FASB"), 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 No. 128"). SFAS No. 131 requires
that a public business enterprise report financial and descriptive
information about its reportable segments on the same basis that it uses
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 129 requires an entity to
explain, in summary form within its financial statements, the pertinent
rights and privileges of its securities outstanding. SFAS No. 128 specifies
guidelines as to the method of computation as well as presentation and
disclosure requirements for earnings per share ("EPS"). The objective of SFAS
No. 128 is to simplify the calculation and to make the U.S. standard for
computing EPS more compatible with the EPS standards of other countries and
with that of the International Accounting Standards Committee. 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.
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BUSINESS
INDUSTRY OVERVIEW
The car rental industry is composed of two principal markets: general use
(mainly airport) and local/replacement (mainly downtown and suburban
locations). In 1996, general use rental companies, which include the Company,
accounted for approximately 69% of vehicle rental revenue in the United
States. General use rental companies rent primarily to business and leisure
travelers. Local/replacement rental companies typically rent vehicles to
individuals who have lost the use of their vehicles through accident, theft
or breakdown. In addition to revenue from vehicle rentals, the industry
derives revenue from the sale of rental related products such as liability
insurance, refueling services and loss damage waivers.
The domestic general use car rental market includes five major companies:
Alamo, Avis, Budget, Hertz and National. Certain of the Company's major
competitors are owned by or affiliated with major automobile manufacturers.
The following table sets forth the airport market share of each of the major
vehicle rental companies at 157 airports in the United States where the
Company operates that report concessionable revenues (i.e., revenues on which
airport authorities assess fees from vehicle rental companies) for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
The Company .. 24% 22% 23% 25%
Hertz......... 28 30 30 29
National...... 13 14 15 16
Budget........ 15 14 13 11
Alamo......... 8 10 10 10
</TABLE>
The domestic vehicle rental industry has experienced significant growth
over the past five years. According to information provided by major U.S.
airports, vehicle rental industry revenues have increased at a compound
annual rate of approximately 11% since 1992. Management believes that factors
such as increases in airline passenger traffic, increased business travel and
demographic trends, among others, continue to expand the demand for rental
vehicles. The Company's network of airport rental locations, which it
believes is among the nation's largest, accounted for approximately 85% of
its domestic revenue in 1996.
Customers of general use vehicle rental companies generally are (i)
business travelers renting under negotiated contractual arrangements between
their employers and the rental company, (ii) business and leisure travelers
who may receive discounts through travel, professional or other
organizations, (iii) small corporate accounts that are provided with a rate
and benefits package that does not require a contractual commitment and (iv)
leisure travelers with no organizational or corporate affiliation programs.
Travelers who do not have the benefits of negotiated contractual arrangements
generally are influenced by price, advertising, reputation for reliability
and service.
Since the late 1980's, vehicle rental companies have acquired vehicles
primarily pursuant to Repurchase Programs. Repurchase prices under the
Repurchase Programs are based on either (i) a specified percentage of
original vehicle cost determined in the month the vehicle is returned or (ii)
the original capitalization cost less a set daily depreciation amount. These
Repurchase Programs limit a vehicle rental company's residual risk with
respect to vehicles purchased under the programs. This enables vehicle rental
companies to determine depreciation expense in advance. The Company believes
that most vehicles in the fleets of U.S. vehicle rental companies are these
"non-risk" vehicles. See "Risk Factors -- Importance of Manufacturers'
Repurchase Programs."
At present, the domestic vehicle rental industry is recovering from a
period that was characterized by substantial increases in fleet costs and
significant rental rate pressure. In the early 1990's, the then prevailing
economic recession in the United States led to decreased new vehicle demand
and subsequent overcapacity among automotive manufacturers. In response,
manufacturers offered significant incentives
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<PAGE>
to car rental companies, which allowed them to significantly expand the size
of their fleets and eventually resulted in excess capacity, intensified
competition and depressed rental rates. As general economic conditions in the
United States improved during the years 1992 through 1994, manufacturers
increased their new vehicle prices and substantially reduced incentives to
fleet purchasers, but continued competitive pressure within the rental
industry inhibited corresponding increases in average daily rental rates.
Recently, the domestic car rental industry has experienced greater
profitability as average daily rental rates have increased and oversupply
conditions have been reduced.
Significant changes in the ownership of participants in the domestic
vehicle rental industry have occurred over the past year. Republic
Industries, Inc. acquired Alamo and National, Team Rental Group, Inc.
acquired control of Budget from Ford and Ford sold approximately 20% of the
equity of Hertz in an initial public offering. The Company believes that
these companies will increasingly focus on profitability, resulting in a
trend toward increasing vehicle rental rates in the United States.
COMPANY OVERVIEW
The Company is a holding company which, through its operating subsidiary,
ARACS, operates the second largest general use car rental business in the
world, based on total revenue and volume of rental transactions. The Company
rents vehicles to business and leisure travelers through approximately 536
rental locations in both airport and non-airport (downtown and suburban)
markets in the United States, Canada, Puerto Rico, the U.S. Virgin Islands,
Argentina, Australia and New Zealand. During 1996, the Company completed
nearly 13 million rental transactions with a fleet that averaged 174,000
vehicles and generated total revenue of approximately $1.9 billion, of which
approximately 87% was derived from its operations in the United States. On
August 20, 1997, the Company purchased First Gray Line, the second largest
Avis System franchisee in North America. See Note 12 to the Audited
Consolidated Financial Statements for financial information attributable to
the Company's major geographic areas.
The Avis brand name is owned by the Franchisor and is licensed for use by
its franchisees, including the Company, which is the largest Avis System
franchisee in the world. As an Avis System franchisee, the Company has
entered into certain arrangements with the Franchisor and its affiliates that
require the Company to make payments to the Franchisor and its affiliates,
including monthly payments under the Master License Agreement consisting of a
monthly base royalty of 3.0% of the Company's gross revenue and a
supplemental royalty of 1.0% of gross 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. See "Relationship with HFS." The Avis
System is comprised of approximately 4,200 rental locations, including
locations at the largest airports and cities in the United States and
approximately 160 other countries and territories, and a fleet of
approximately 370,000 vehicles during the peak season, all of which are
operated by franchisees. During 1996, the Company's 414 domestic rental
locations produced approximately 77% of the Avis System's revenue in the
United States, with the balance derived from 490 locations operated by 75
other Avis System franchisees, of whom five (including First Gray Line)
accounted for approximately 16% of the Avis System's U.S. revenue. The
Company is the sole franchisee of the Avis System in the international
markets in which it operates. The Avis System in Europe, Africa, part of Asia
and the Middle East is operated under franchise by Avis Europe, which is not
affiliated with the Company. Management believes that the strong recognition
of the Avis brand name, the breadth of the Avis System and the sophistication
of the Wizard System enable the Company and other Avis System franchisees to
provide consistent quality, pricing and service to business and leisure
customers worldwide.
The Company has historically targeted its marketing efforts toward
business travelers, who accounted for approximately 61% of the Company's
domestic revenue in 1996. The Company believes that business travelers, many
of whom rent the Company's vehicles pursuant to agreements between the
Company and their employers, have represented an important factor in the
growth and stability of its business. While the Company continues to focus on
business travelers, it intends to leverage its strong airport presence by
expanding its marketing efforts toward the leisure travel market in order to
increase its fleet utilization during non-peak business periods and extend
the average length of its rentals. During 1996, leisure travelers accounted
for approximately 39% of the Company's domestic revenue.
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The Company utilizes the Wizard System, which it believes is one of the
most sophisticated information management systems in the car rental industry.
Key functions of the Wizard System include: (i) global reservations
processing, (ii) rental agreement generation and administration and (iii)
fleet accounting and control. The Company has also developed software
applications that utilize the data gathered by the Wizard System and third
party reservation systems to achieve centralized control of its major
business operations. These applications include: (i) a yield management
system that is designed to increase profit by controlling vehicle
availability by length of rental and providing decision support for rate
changes, (ii) a competitive rate information system that monitors industry
rate changes by market on a daily basis by vehicle rental location and (iii)
a business mix model that analyzes potential profit contribution data by
segment based upon business mix and fleet optimization recommendations.
The Company is currently a wholly-owned subsidiary of the Franchisor,
which was acquired by HFS in October 1996. The Company is the successor to
the car rental operations of the Predecessor Companies. Prior to the
Acquisition, the principal shareholder of the Franchisor and the Predecessor
Companies was an Employee Stock Ownership Plan and the minority shareholder
was GM. The Company was incorporated in Delaware on October 17, 1996 in
connection with the Acquisition. ARACS was incorporated in Delaware on
September 18, 1956. The principal executive offices of the Company are
located at 900 Old Country Road, Garden City, New York 11530, and its
telephone number at that location is (516) 222-3000.
THE FIRST GRAY LINE ACQUISITION
On August 20, 1997, the Company purchased all of the outstanding capital
stock of First Gray Line for approximately $210.0 million in cash, including
expenses. The net proceeds from the Offerings will be used, among other things,
to repay indebtedness incurred to finance the First Gray Line Acquisition. See
"Use of Proceeds."
First Gray Line was the second largest Avis System franchisee in North
America with 70 locations in Southern California, Nevada and Arizona. Its
operations represented approximately 10% of the Avis System's domestic
revenue in 1996.
First Gray Line operates 13 airport vehicle rental locations, including
Los Angeles International Airport ("LAX"), McCarran International Airport
(Las Vegas) and San Diego International Airport. The Company estimates that
First Gray Line's share of the overall airport markets which it serves was
approximately 18% for the first three months of 1997, placing it among the
top five rental car companies in those markets. First Gray Line also operates
57 other locations throughout Southern California and in Las Vegas, Nevada,
and Yuma, Arizona.
First Gray Line's principal operation is located at LAX, one of the
world's largest airport rental vehicle markets based on vehicle rental
revenues. First Gray Line's operation at LAX is well-integrated with most of
its other Southern California operations which operate largely in contiguous
geographical areas. First Gray Line's Las Vegas and San Diego operations have
experienced substantial growth in recent years reflecting the continued high
growth of these areas as destination resorts and convention sites.
First Gray Line's average fleet size for fiscal 1996 was approximately
18,000 vehicles.
STRATEGY
The Company's objective is to improve its profitability through a strategy
that consists of the following key elements:
Capitalizing on Changing Industry Dynamics. The domestic car rental
industry is beginning to emerge from a period during which rental rates did
not keep pace with rising fleet and operating costs. Management believes that
the current restructuring of ownership of the Company's major competitors
will lead to an increased focus on profitability and shareholder return,
rather than upon transaction volume and market share, and, ultimately, to
more rational pricing behavior. Management intends to use
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its proprietary software applications, including its sophisticated yield
management, rate information and business mix modeling systems, to capitalize
upon the improving pricing and profit outlook in the industry.
Improving Business Mix and Fleet Utilization. Historically, the Company
has capitalized on its strong network of airport rental locations by focusing
its sales and marketing resources principally toward business travelers.
While this has enabled the Company to leverage its overhead costs by
capturing a large share of transaction volume at relatively few locations,
fleet utilization historically has been characterized by peak business travel
demand during the middle of the week and reduced demand during and
immediately before and after the weekend. Management believes that the
Company's substantial presence at the nation's leading airports provides it
with the opportunity, without significant incremental cost, to capitalize on
increased air travel by leisure travelers, who tend to initiate air travel
during or close to the weekend. Accordingly, while continuing to concentrate
on its core presence in the business travel market, the Company plans to
increase its marketing efforts toward the leisure market in order to improve
fleet utilization and extend the average length of rental. In addition, the
Company believes that it can further enhance the utilization of its fleet
during non-peak periods by selectively expanding its presence in non-airport
markets through both internal growth and, if appropriate opportunities arise,
acquisitions of other car rental operators including, where feasible, other
Avis System franchisees.
Increasing Brand Loyalty Through Target Marketing. Management believes
that the domestic car rental industry will become increasingly focused on
such factors as customer service and loyalty. The customer base of the major
domestic car rental companies, including the Company, has become increasingly
diverse. Management plans to utilize the Company's proprietary software
applications to analyze its extensive customer database to identify
distinguishing characteristics and preferences of those customers who have
been historically associated with its most profitable rental transactions and
to focus its sales and marketing efforts and service features to attract
additional customers with similar characteristics and preferences. Management
believes that this analysis will enhance the quality of the car rental
experience of such customers and increase their loyalty to the Avis brand.
Capitalizing on Cross Marketing and Other Synergistic Arrangements with
HFS. The Company has initiated and is expanding cross marketing relationships
with HFS's corporate relocation and resort timeshare exchange businesses, its
lodging franchise systems, which include the Days Inn(Registered Trademark),
Howard Johnson(Registered Trademark) and Ramada(Registered Trademark) brands,
and its real estate brokerage franchise systems, including the CENTURY
21(Registered Trademark) and Coldwell Banker(Registered Trademark) brands. As
a result of the proposed merger of HFS and CUC, additional cross marketing
opportunities with CUC's membership-based consumer services are expected to
arise. The Company also expects to reduce its costs of purchasing media and
other non-fleet goods and services through arrangements with HFS.
RENTAL OPERATIONS
General. The Company's fleet includes various categories of automobiles,
most of which are of the current and immediately preceding model years.
Rentals are generally made on a daily, weekend, weekly or monthly basis.
Rental charges in the United States usually are computed on the basis of the
duration of the rental and may include a mileage charge and vary based upon
vehicle category, the day on which the rental begins and local competitive
and cost factors. Additional charges are made for optional refueling
services, loss damage waivers (a waiver of the Company's right to make a
renter pay for damage to the vehicle), personal accident insurance, personal
effects protection, optional products such as cellular phones, child seats
and ski racks and, in some instances, additional liability insurance. Most
rentals are made utilizing rate plans under which the customer is responsible
for gasoline used during the rental. The Company also generally offers its
customers the convenience of leaving a rented vehicle at an Avis location in
a city other than the one in which it was rented under Avis's "Rent it Here
- -- Leave it There" program, although, consistent with industry practices, a
drop-off charge or special intercity rate may be imposed.
United States Operations. At June 30, 1997, the Company operated 406
vehicle rental facilities at airport, near-airport and downtown locations
throughout the United States. During 1996, approximately
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<PAGE>
85% of the Company's United States revenue was generated at 175 airports in
the United States with the balance generated at the Company's 239 non-airport
locations. The Company's emphasis on airport traffic has resulted in
particularly strong market position in the major domestic rental revenue
airports.
At most airports, the Company is one of five to seven vehicle rental
concessionaires. In general, concession fees for airport locations are based
on a percentage of total commissionable revenues (as determined by each
airport location), subject to a minimum guaranteed amount. Concessions are
typically awarded by airport authorities every three to five years based upon
competitive bids. As a result of airport authority requirements as to the
size of the minimum guaranteed fee, smaller vehicle rental companies
generally are not located at airports. The Company's concession arrangements
with the various airport authorities generally include minimum requirements
for vehicle age, operating hours, employee conduct, and provide for
relocation in the event of future construction and abatement of fees in the
event of extended low passenger volume.
International Operations. The Company operates in Canada, Puerto Rico, the
U.S. Virgin Islands, Argentina, Australia and New Zealand. Its operations in
Canada and Australia were the principal contributors of revenue, accounting
for 35% and 45%, respectively, of international revenues in 1996. Revenue
from international operations in 1996 were approximately $241.7 million.
The Company holds a solid market position in each of the countries in
which it operates internationally. The operations in Australia and New
Zealand are acknowledged as the largest in their respective markets in terms
of revenue.
AVIS SYSTEM AND WIZARD SYSTEM SERVICES
As a participant in the Avis System, the Company has the benefits of a
variety of services, including (i) comprehensive safety initiatives,
including the "Avis Cares" Safe Driving Program, which offers vehicle safety
information, directional assistance such as satellite guidance, regional
maps, weather reports and specialized equipment for travelers with
disabilities; (ii) standardized system-identity for rental location
presentation and uniforms; (iii) training program and business policies,
quality of service standards and data designed to monitor service commitment
levels; (iv) marketing/advertising/public relations support for national
consumer promotions including Frequent Flyer/Frequent Stay programs and the
Avis System internet website; and (v) brand awareness of the Avis System
through the familiar "We try harder" service announcements.
Under a long-term computer services agreement, the Company, like other
Avis System franchisees, is provided with access to the Wizard System, a
reservations, data processing and information management system for the
vehicle rental business. See "Relationship with HFS -- Computer Services
Agreement." The Wizard System is linked to all major travel networks on six
continents through telephone lines and satellite communications. Direct
access with other computerized reservations systems allows real-time
processing for travel agents and corporate travel departments. Among the
principal features of the Wizard System are:
o an advanced graphical interface reservation system;
o "Rapid Return," which permits customers who are returning vehicles
to obtain completed charge records from radio-connected "Roving
Rapid Return" agents who complete and deliver the charge record at
the vehicle as it is being returned;
o "Preferred Service," an expedited rental service that provides
customers with a preferred service rental record printed prior to
arrival, a pre-assigned vehicle and fast convenient check out;
o "Wizard on Wheels," which enables the Avis System locations to
assign vehicles and complete rental agreements while customers are
being transported to the vehicle;
o a flight arrival notification system that alerts the Company's
rental location when flights have arrived so that vehicles can be
assigned and paperwork prepared automatically;
o "Flight Check," a system that provides flight arrival and departure
times and the next three available flights to the roving rapid
return terminals and Wizard System terminals;
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o "Avis Link," which automatically identifies the fact that a user of
a major credit card is entitled to special rental rates and
conditions, and therefore sharply reduces the number of instances in
which the Company inadvertently fails to give renters the benefits
of negotiated rate arrangements to which they are entitled;
o interactive interfaces through third party computerized reservation
systems described under "--Marketing"; and
o sophisticated automated ready-line programs that, among other
things, enable rental agents to ensure that a customer who rents a
particular type of vehicle will receive the available vehicle of
that type which has the lowest mileage.
In 1996, the Wizard System enabled the Company to process approximately
30.8 million incoming customer calls, during which customers inquired about
locations, rates and availability and placed or modified reservations. In
addition, millions of inquiries and reservations come to the Company through
travel agents and travel industry partners, such as airlines. Regardless of
where in the world a customer may be located, the Wizard System is designed
to ensure that availability of vehicles, rates and personal profile
information is accurately delivered at the proper time to the customer's
rental destination.
MANAGEMENT INFORMATION SYSTEMS
The Company also uses data supplied from the Wizard System and third party
reservation systems in its proprietary management information systems to
maintain centralized control of major business processes such as fleet
acquisition and logistics, sales to corporate accounts and determination of
rental rates. The principal components of the systems employed by the Company
include:
o Fleet Planning Model. The Company has created a comprehensive
decision tool to develop fleet plans and schedules for the
acquisition and disposition of its fleet, along with fleet age, mix,
mileage and cost reports based upon such plans and schedules. This
tool allows management to monitor and change fleet volume and
composition on a daily basis and to develop the lowest cost fleet
alternative based on business levels and available Repurchase
Programs.
o Yield Management. The Company's yield management system is designed
to optimize profit by providing greater control of vehicle
availability and rate availability changes at its rental locations.
The system monitors and forecasts supply and demand to insure that
the Company is able to capture the combination of rentals that will
produce the highest return over time at each location. Integrated
into the Company's yield management system is a fleet distribution
module that takes into consideration the costs as well as the
potential benefits associated with distributing vehicles to various
rental locations within a geographic area to accommodate rental
demand at these locations. The fleet distribution module makes
specific recommendations for movement of vehicles between the
locations.
o Pricing Decision Support System. Pricing in the vehicle rental
industry is highly competitive and complex. To insure its ability to
respond to rental rate changes in the marketplace the Company has
developed sophisticated systems to gather and report competitive
industry rental rate changes each day. The system, using data from
third party reservation systems as its source of information,
automatically scans rate movements and reports significant changes
to a staff of pricing analysts for evaluation. The system greatly
enhances the Company's ability to gather and respond to rate changes
in its markets.
o Business Mix Model. The Company has also developed a strategic
planning model to evaluate the discrete segments of its business
relative to each other. The model considers revenues and costs to
determine the potential margin contribution of each discrete
segment. Using data from the Company's financial systems, the Wizard
System, the fleet and revenue management systems along with
management objectives and targets, the model develops business mix
and fleet optimization recommendations.
o Profitability Model. The Company has developed a sophisticated model
that blends a corporate customer's individual rental into a pattern
that determines fleet costs by developing a profile of
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such corporate customer's utilization. The model also combines local
operations costs with division overhead expenses with a resulting
benchmark profitability which is used to determine the financial
merit of individual corporate accounts.
o Sales and Marketing System. The Company has also developed a
sophisticated system of on-line data screens which enables its sales
force to analyze key account information of its corporate customers
including historical and current rental activity, revenue and
booking sources, top renting locations, rate usage categories and
customer satisfaction data. This information, which is updated
weekly and captured on a country-by-country basis, is utilized by
management to determine opportunities for revenue growth,
profitability and improvement.
FLEET ACQUISITION AND MANAGEMENT
Fleet Purchasing
The Company participates in a variety of vehicle purchase programs with
major domestic and foreign manufacturers, principally GM, although actual
purchases are made directly through franchised dealers. The average price for
automobiles purchased by the Company in 1996 for its U.S. rental fleet was
approximately $16,100. For the 1996 model year, approximately 83% of new
vehicle purchases were comprised of GM vehicles, 13% of Chrysler vehicles and
4% of Toyota, Nissan, Subaru, Hyundai, Ford and Land Rover vehicles. In model
year 1997, approximately 69% of the Company's fleet in the United States will
consist of GM vehicles, 15% will be Chrysler vehicles and the balance will be
provided by other manufacturers. Manufacturers' vehicle purchase programs
sometimes provide the Company with sales incentives for the purchase of
certain models, and most of these programs allow the Company to serve as a
drop-ship location for vehicles, thus enabling the Company to receive a fee
from the manufacturers for preparing newly purchased vehicles for use. There
can be no assurance that the Company will continue to benefit from sales
incentives in the future. For its international operations, vehicles are
acquired by way of negotiated arrangements with local manufacturers and or
dealers using operating leases or Repurchase Programs.
Under the terms of the Company's agreement with GM, which expires at the
end of GM's model year 2000, the Company is required to purchase at least
116,650 GM vehicles for model year 1997 and maintain at least 51% GM vehicles
in the Company's domestic fleet at all times. The GM Repurchase Program is
available for all vehicles purchased pursuant to the agreement.
Impact of 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 at each of the Company's operations, causes the
Company to vary its fleet size over the course of the year. In 1996, the
Company's average monthly fleet size ranged from a low of 152,000 vehicles in
January to a high of 196,000 vehicles in August. Fleet utilization, which is
based on the number of hours vehicles are rented compared to the total number
of hours vehicles are available for rental, ranged from 67% in December to
83% in August and averaged 75% for all of 1996.
Vehicle Disposition
The Company's current operating strategy is to hold vehicles not more than
12 months with the average fleet age being less than six months.
Approximately 93% of the vehicles purchased for its domestic fleet under the
model year 1997, including most GM vehicles, were eligible for Repurchase
Programs. These programs impose certain return conditions, including those
related to mileage and repair condition over specified allowances. Less than
2.5% of the Repurchase Program vehicles purchased by the Company and returned
in 1996 were ineligible for return. Upon return of a Repurchase Program
vehicle, the Company receives a price guaranteed at the time of purchase and
is thus protected from a decrease in prevailing used car prices in the
wholesale market. The Company also disposes of its used vehicles that are not
covered by Repurchase Programs to dealers in the United States through
informal arrangements
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or at auctions. The future percentage of Repurchase Program vehicles in the
Company's fleet will depend on the availability of Repurchase Programs, over
which the Company has no control. See "Risk Factors -- Importance of
Manufacturers' Repurchase Programs."
Maintenance
The Company places a strong emphasis on vehicle maintenance since quick
and proper repairs are critical to fleet utilization. To accomplish this task
the Company employs two full-time National Institute for Automotive Service
Excellence ("ASE") fully certified technician instructors at its headquarters
who have developed a unique training program for the Company's 250
technicians who operate at 75 repair centers. The technicians also maintain a
strong relationship with General Motors Service Technology Group (STG). The
Company uses "state of the art" diagnostic equipment including GM's
"Techline" and "Tech 2" diagnostic computers, and is the only vehicle rental
fleet to utilize GM's "Pulsat Satellite Training Network." The Company's
technician training department also prepares their own technical service
bulletins that can be retrieved electronically at all of the Company's repair
locations. Approximately 70% of the Company's technicians are ASE certified
versus the national average of 44%.
MARKETING
United States
In the United States, approximately 77% of the Company's 1996 rental
transactions were generated by travelers who used the Avis System under
contracts between the Company and their employers or organizations of which
they were members. The Company's corporate sales organization is the
principal source of contracts with corporate accounts. Unaffiliated business
travelers are solicited by direct mail, telesales and advertising campaigns.
The Company's telesales department consists of a centralized staff that
handles small corporate accounts, travel agencies, meetings and conventions,
tour operators and associations. Working with a state-of-the-art system in
Tulsa, Oklahoma, the telesales operation produced revenue for the Avis System
that exceeded $200.0 million in 1996.
The Company solicits contractual arrangements with corporate accounts by
emphasizing the Wizard System's customer service, rental rates, a worldwide
rental network, advanced technology and centralized account servicing. The
Wizard System plays a significant part in securing business of this type
because the Wizard System enables the Company to offer a wide variety of
rental rate combinations, special reports and tracking techniques tailored to
the particular needs of each account, and to assure adherence to agreed-upon
rates.
The Company's presence in the leisure market is substantially less than
its presence in the business market. Leisure rental activity is important in
enabling the Company to balance the use of its fleet. Typically, business
renters use vehicles from Monday through Thursday, while in most areas of the
United States leisure renters use vehicles primarily over weekends. The
Company's concentration on serving business travelers has led to excess
capacity from Friday through Sunday of most weeks. The Company intends to
increase its leisure market penetration by capitalizing on its strength at
airports and by increased focusing of its marketing efforts toward leisure
travelers. An important part of the Company's leisure marketing strategy is
to develop and maintain contractual arrangements with associations that
provide member benefits to their constituents. In addition to developing
arrangements with traditional organizations, the Company has created
innovative programs such as the Affinity Link Program that cross references
bankcard numbers with Avis Worldwide identification numbers and provides
discounts to the cardholders for participating bankcard programs. The Company
also uses coupons in dine-out books and provides discounts to members of
shopping and travel clubs whose members generated approximately $60.0 million
of leisure business revenue in 1996. Preferred supplier agreements with
select travel agencies and contracts with tour operators have also succeeded
in generating leisure business for the Company.
The Company maintains strong links to the air travel industry. It has
arrangements with most major airlines, including American Airlines, American
West Airlines, Continental Airlines, Delta Airlines, Trans World Airlines,
United Airlines, USAirways and Northwest Airlines, under which participants
in the airlines' frequent flier programs can earn mileage credits whenever
they rent Avis System vehicles.
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Frequent flier programs (under which travelers can earn reduced fares or free
flights based upon miles flown on particular airlines) are a significant
sales incentive to U.S. travelers, and the Company believes it benefits
significantly from its frequent flier arrangements with the airlines. All the
other major vehicle rental companies also participate in a number of airline
frequent flier programs.
Travel agents can make Avis System reservations through all four major
U.S. based global distribution systems and several international based
systems. Users of the U.S. based global distribution systems can obtain
access through these systems to the Company's rental locations, vehicle
availability and applicable rate structures. An automated link between these
systems and the Wizard System gives them the ability to reserve and confirm
rentals directly through these systems. The Company also maintains strong
links to the hotel industry. The Company has arrangements with the Hilton
Corporation, the Hyatt Corporation and Best Western frequent traveler
programs, which provide various incentives to all program participants. The
Company also has an arrangement with HFS whereby lodging customers who are
making reservations by telephone will be transferred to the Company if they
desire to rent a vehicle.
International
The Company utilizes a multi-faceted approach to sales and marketing
throughout its global network. In its principal international operations, the
Company employs teams of trained and qualified account executives to
negotiate contracts with major corporate accounts and leisure and travel
industry partners. In addition, the Company utilizes centralized
telemarketing and direct mail initiatives to continuously broaden its
customer base. Sales efforts are designed to secure customer commitment and
support customer requirements for both domestic and international car rental
needs.
International sales and marketing activities promote the Company's
reputation for delivering a high quality of service, contract rates,
competitive pricing and customer benefits from special services such as
Preferred Service, Roving Rapid Return and other benefits of the Wizard
System.
The Company's international operations maintain close relationships with
the travel industry including participation in airline frequent flyer
programs operated by Air Canada and Ansett Airlines (Australia).
COMPETITION
The vehicle rental industry is characterized by intense price and service
competition. In any given location, the Company may encounter competition
from national, regional and local companies, many of which, particularly
those owned by the major automobile manufacturers, have greater financial
resources than the Company. The Company's principal competitors for
commercial accounts in the United States are Hertz and National. Its
principal competitors for unaffiliated business and leisure travelers in the
United States are Budget, Hertz and National, and, particularly with regard
to leisure travelers, Alamo and Dollar. In addition, the Company competes
with a variety of smaller vehicle rental companies throughout the country.
Competition in the U.S. vehicle rental business is based primarily upon
price, reliability, ease of rental and return and other elements of customer
service. In addition, competition is influenced strongly by advertising and
marketing. The Company believes it is capable of competing for virtually all
aspects of the vehicle rental business, except the insurance replacement
vehicle business (in which the Company has agreed not to engage until June
13, 2000 pursuant to an agreement relating to the sale of its replacement
vehicle rental business). In part because of the Wizard System, the Company
has been particularly successful in competing for commercial accounts. There
have been many occasions during the history of the vehicle rental industry in
which all of the major vehicle rental companies have been adversely affected
by severe industry-wide rental rate cutting, and the Company has, on such
occasions, lowered its rates in response to such rate cutting. However,
during the past two years, industry-wide rates have increased, reflecting, in
part, both increased costs of owning and maintaining vehicles and the need to
generate returns on invested capital.
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INSURANCE
The Company generally assumes the risk of liability to third parties
arising from vehicle rental services in the United States, Canada, Puerto
Rico and the U.S. Virgin Islands, for up to $1.0 million per occurrence,
through a combination of certificates of self-insurance, insurance coverage
provided by its wholly owned domestic subsidiary, Pathfinder Insurance
Company ("Pathfinder"), and insurance coverage secured from an unaffiliated
domestic insurance carrier. The Company maintains additional insurance with
unaffiliated carriers in excess of such level up to $200.0 million per
occurrence.
Currently, the Company provides primary automobile insurance for a
majority of its fleet through Pathfinder or through self-insurance. In
addition, the Company provides claims management services from its
headquarters in New York to all of its locations in the United States,
Canada, Puerto Rico and the U.S. Virgin Islands.
The Company insures the risk of liability to third parties in Argentina,
Australia and New Zealand through a combination of unaffiliated carriers and
Global Excess and Reinsurance, Ltd., a wholly owned subsidiary established
under the laws of Bermuda ("Global Excess"). These carriers provide coverage
supplemental to minimum local requirements. The Company additionally
maintains excess coverage to a limit up to $200.0 million per occurrence.
To further control its insurance costs, the Company reinsures some of its
risks through its wholly owned subsidiary, Constellation Reinsurance Company
Limited ("Constellation"), an insurance company established under the laws of
Barbados.
Under its standard rental contract, the Company provides its renters
liability coverage up to the minimum financial responsibility limits required
by applicable law. Higher limits are provided to some United States national
corporate accounts and the Company makes available to renters, for an
additional daily charge, participation in a group policy of "Additional
Liability Insurance" underwritten by CNA (Continental Group), which increases
renters' liability coverage up to $1.0 million. The Company also offers
renters, for additional daily charges, "Personal Accident Insurance," which
pays medical expenses and accidental death benefits for accidents during the
rental period, and "Personal Effects Protection," which insures against loss
or damage to the renters' personal belongings during the rental period.
Coverages are underwritten by Gulf Insurance Company.
REGULATORY MATTERS
The Company is subject to federal, state and local laws and regulations
including those relating to taxing and licensing of vehicles, franchising,
consumer credit, environmental protection, retail vehicle sales and labor
matters. The principal environmental regulatory requirements applicable to
the Company's operations relate to the ownership or use of tanks for the
storage of petroleum products, such as gasoline, diesel fuel and waste oils;
the treatment or discharge of waste waters; and the generation, storage,
transportation and off-site treatment or disposal of solid or liquid wastes.
The Company operates 233 locations at which petroleum products are stored in
underground or aboveground tanks. The Company has instituted an environmental
compliance program designed to ensure that these tanks are in compliance with
applicable technical and operational requirements, including the replacement
of underground steel tanks and periodic testing of underground storage tanks.
The Company believes that the locations where it currently operates are in
compliance, in all material respects, with such regulatory requirements.
The Company may also be subject to requirements related to the remediation
of, or the liability for remediation of, substances that have been released
to the environment at properties owned or operated by the Company or at
properties to which the Company sends substances for treatment or disposal.
Such remediation requirements may be imposed without regard to fault and
liability for environmental remediation can be substantial. See "Risk Factors
- -- Environmental Risks Inherent in On-Site Petroleum Storage."
The Company may be eligible for reimbursement or payment of remediation
costs associated with future releases from its regulated underground storage
tanks. Certain of the states in which the Company maintains underground
storage tanks have established funds to assist in the payment of remediation
costs for releases from certain registered underground tanks. Subject to
certain deductibles, the availability of
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funds, compliance status of the tanks and the nature of the release, these
tank funds may be available to the Company for use in remediating future
releases from its tank systems.
A traditional revenue source for the vehicle rental industry has been the
sale of loss damage waivers, by which rental companies agree to relieve a
customer from financial responsibility arising from vehicle damage incurred
during the rental period. Approximately 3.6% of the Company's revenue during
1996 was generated by the sale of loss damage waivers. The U.S. House of
Representatives has from time to time considered legislation that would
regulate the conditions under which loss damage waivers may be sold by
vehicle rental companies. House Bill H.R. 175, introduced in January 1995,
seeks to prohibit the imposition of liability on renters for loss of, or
damage to, rented vehicles, except in certain circumstances, and would
prohibit the sale of loss damage waivers. To date, no action has been taken
on this bill. In addition, approximately 40 states have considered
legislation affecting the loss damage waivers. To date, 24 states have
enacted legislation which requires disclosure to each customer at the time of
rental that damage to the rented vehicle may be covered by the customer's
personal automobile insurance and that loss damage waivers may not be
necessary. In addition, in the late 1980's, New York enacted legislation
which eliminated the Company's right to offer loss damage waivers for sale
and limited potential customer liability to $100. Moreover, California and
Nevada have capped rates that may be charged for loss damage waivers to $9.00
and $10.00 per day, respectively. Texas requires that the rate charged for
loss damage waivers be reasonably related to the direct cost of the repairs.
Adoption of national or additional state legislation affecting or limiting
the sale of loss damage waivers could result in the loss of this revenue
source and additional limitations on potential customers liability could
increase the Company's costs.
The Company is also subject to regulation under the insurance statutes,
including insurance holding company statutes, of the jurisdictions in which
its insurance company subsidiaries are domiciled. These regulations vary from
state to state, but generally require insurance holding companies and
insurers that are subsidiaries of insurance holding companies to register and
file certain reports including information concerning their capital
structure, ownership, financial condition and general business operations
with the state regulatory authority, and require prior regulatory agency
approval of changes in control of an insurer and intercorporate transfers of
assets within the holding company structure.
Pathfinder, as a licensed stock insurance company in the State of
Colorado, is subject to the applicable rules and regulations of the Colorado
Insurance Department. The Colorado Insurance Law provides that no person may
acquire control of the Company, and thus indirect control of Pathfinder,
unless it has obtained prior approval of the Colorado Insurance Commissioner
for such acquisition. "Control" is generally presumed to exist through the
ownership of 10% or more of the voting securities of a Colorado domestic
insurance company or of any company which controls a Colorado domestic
insurance company. Any purchaser of 10% or more of the outstanding Common
Stock would be presumed to have acquired control of the Company, unless such
presumption is rebutted by a showing that such control does not exist in
fact. Accordingly, any purchase of shares of Common Stock representing 10% or
more of the voting power of the Company would require prior approval by the
Colorado Insurance Department.
Global Excess is subject to Bermuda Insurance Laws, which require Global
Excess to file at least a Bermuda statutory financial return in the form
prescribed by Bermuda Insurance Laws. Furthermore, any transfer of shares of
Global Excess by the Company will require the approval of the Bermuda
Monetary Authority, Foreign Exchange Control. In addition, Constellation is
required to file an annual financial return in accordance with Barbados
Insurance Regulations.
The payment of dividends to the Company by its insurance company
subsidiaries, Pathfinder, Global Excess and Constellation, will be restricted
by government regulations in Colorado, Bermuda and Barbados affecting
insurance companies domiciled in those jurisdictions.
EMPLOYEES
The Company has more than 16,000 employees worldwide, of whom
approximately 15,000 serve in various capacities at the Company's rental
locations and the balance are engaged in executive, financial, sales and
marketing, and administrative capacities. Approximately 32% of the Company's
employees are
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represented by various unions under contracts expiring at various dates. No
local union represents more than 2.5% of the Company's employees. The Company
believes its relationships with its employees are good.
PROPERTIES
The Company leases or has concessions relating to space at 394 locations
in the United States and 129 locations outside the United States. Of those
locations, 175 in the United States and 53 outside the United States are at
airports. Typically, an airport receives a percentage of vehicle rental
revenues, with a guaranteed minimum. Because there is a limit to the number
of vehicle rental locations in an airport, vehicle rental companies
frequently bid for the available locations, usually on the basis of the size
of the guaranteed minimums. The Company and other vehicle rental firms also
rent parking space at or near airports and at their other vehicle rental
locations.
The Company leases all of its vehicle rental facilities. The airport
facilities are located on airport property owned by airport authorities or
located near the airport in locations convenient for bus transport of
customers to and from the airport. The Company's airport locations serve as
the administrative headquarters for the Company's non-airport locations
nearest to those airport locations and, as a general rule, each airport
location includes vehicle storage areas, a vehicle maintenance facility, a
car wash, a refueling station and rental and return facilities. The Company's
non-airport facilities generally consist of a limited parking facility and a
rental and return desk and are generally subject to long-term leases with
renewal options. Certain of these leases also have purchase options at the
end of their terms.
The Company's principal offices are in Garden City, New York where the
Company leases approximately 269,000 square feet under a sublease agreement
with WizCom which, by exercising renewal options, can be extended through the
year 2015. The Avis reservation system is operated by HFS from leased space
in Tulsa, Oklahoma where the Company subleases approximately 28,000 square
feet from WizCom pursuant to a sublease agreement for certain marketing
activities. The Company maintains terminal network facilities which it uses
in connection with the Wizard System in Garden City and Tulsa. The Company
also leases 94,000 square feet in a building owned by WizCom in Virginia
Beach, Virginia that serves as a satellite administrative and reservation
facility. See "Relationship with HFS -- Lease Agreements."
LEGAL MATTERS
From time to time, the Company is subject to routine litigation incidental
to its business. The Company maintains insurance policies that cover most of
the actions brought against the Company and has indemnification rights from
HFS covering certain pending litigation. See "--Insurance," "Relationship
with HFS -- Separation Agreement" and Note 13 to the Audited Consolidated
Financial Statements. The Company is not currently involved in any legal
proceeding which it believes would have a material adverse effect upon its
financial condition or operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ------------------------ ----- ----------------------------------------------------------
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND
<S> <C> <C>
R. Craig Hoenshell ...... 53 Director
F. Robert Salerno ....... 46 President, Chief Operating Officer and Director
Kevin M. Sheehan ........ 44 Executive Vice President and Chief Financial Officer
John H. Carley .......... 56 Executive Vice President and General Counsel
Kevin P. Carey .......... 49 Senior Vice President, Human Resources
Patricia D. Yoder ....... 57 Senior Vice President, Communications
Gerard J. Kennell ....... 52 Vice President and Treasurer
Timothy M. Shanley ...... 48 Vice President and Controller
John Forsythe ........... 52 Vice President--Operations U.S. Rent A Car
Michael P. Collins ...... 50 Vice President--International
Robert D. Cardillo....... 47 Vice President--Worldwide Marketing
Thomas J. Byrnes......... 52 Vice President--Sales North America
Stephen P. Holmes ....... 40 Director
Michael P. Monaco ....... 48 Director
Alun Cathcart ........... 53 Nominee for Director (1)
Leonard S. Coleman, Jr. 48 Nominee for Director (1)
Martin L. Edelman........ 55 Nominee for Director (1)
Deborah L. Harmon........ 38 Nominee for Director (1)
Michael J. Kennedy....... 60 Nominee for Director (1)
Michael L. Tarnopol...... 61 Nominee for Director (1)
</TABLE>
- ------------
(1) Messrs. Cathcart, Coleman, Edelman, Kennedy, Tarnopol and Ms. Harmon
will be nominated by the Company and elected Directors of the Company
by the Board of Directors upon the consummation of the Offerings.
All directors are elected annually to serve until the next annual meeting
of stockholders and until their successors have been elected and qualified.
Upon completion of the Offerings, the Company will have a Board of Directors
consisting of the four current members of the Company's Board of Directors
identified above. After completion of the Offerings, the Company anticipates
that the size and composition of the Board of Directors will be changed and
will include two directors who will be officers of the Company, four
directors who will be officers or directors of HFS and four directors who
will be persons not associated with the Company or HFS. See "Relationship
with HFS."
The Company's Board of Directors is expected to appoint two directors who
are not affiliated with the Company or HFS to a compensation committee of the
Board of Directors (the "Compensation Committee") and an audit committee of
the Board of Directors (the "Audit Committee") after such directors are
elected. The Compensation Committee will establish remuneration levels for
certain officers of the Company and perform such functions as may be
delegated to it under the Company's employee benefit programs and executive
compensation programs. The Audit Committee will select and engage, on behalf
of the Company, the independent public accountants to audit the Company's
annual financial statements. The Audit Committee also will review and approve
the planned scope of the annual audit.
The Board of Directors may, from time to time, establish certain other
committees to facilitate the management of the Company.
Officers are elected at the organizational meeting of the Board of
Directors held each year for a term of one year, and they are elected to
serve until the next annual meeting.
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MR. HOENSHELL has been Chairman, Chief Executive Officer and a Director of
the Company and ARACS since March 1997. From 1995 to March 1997, Mr.
Hoenshell was the principal in his own consulting firm which focused on
future payment technologies. From 1993 to 1995, Mr. Hoenshell was president
of American Express International. From 1990 to 1993, Mr. Hoenshell was the
President of American Express Travelers Cheques and from 1986 to 1990 he was
President of American Express Centurion Bank. Prior to 1986, Mr. Hoenshell
spent ten years as a principal and senior executive of First Data Resources,
Inc., which provides back-office data processing services to financial
institutions that issue debit and credit cards.
MR. SALERNO has been President and Chief Operating Officer of the Company
and ARACS since November 1996 and has been a director of the Company since
May 29, 1997. From September, 1995 to November 1996, Mr. Salerno was
Executive Vice President of Operations of the Franchisor and ARACS. From July
1990 to September, 1995, Mr. Salerno was Senior Vice President and General
Manager Rent A Car of the Franchisor and ARACS.
MR. SHEEHAN has been Executive Vice President and Chief Financial Officer
of the Company and ARACS since December 1996. Mr. Sheehan has been a Senior
Vice President of HFS since September 1996. From December 1994 to September
1996, Mr. Sheehan was the Chief Financial Officer for STT Video Partners, a
joint venture between Time Warner, Telecommunications, Inc., Sega of America
and HBO. Prior thereto, he was with Reliance Group Holdings, Inc., an
insurance holding company, and some of its affiliated companies for ten years
and was involved with the formation of the Spanish language television
network, Telemundo Group, Inc. and from 1991 through 1994 was Senior Vice
President -- Finance and Controller.
MR. CARLEY has been Executive Vice President and General Counsel of the
Company and ARACS since January 1997. From January 1995 to December 1996, Mr.
Carley served as Deputy Attorney General for Public Advocacy for New York
State. From December 1987 to March 1994, Mr. Carley was a partner at the New
York City law firm of Donovan, Leisure, Newton & Irvine. Previous positions
include General Counsel to the Reagan Administration's Office of Management
and Budget, and General Counsel to the Federal Trade Commission.
MR. CAREY has been Senior Vice President -- Human Resources of the Company
and ARACS since April 1997. From 1987 to 1996, Mr. Carey was a Senior Vice
President -- Human Resources for American Express International. From June
1982 to September 1985, Mr. Carey was Vice President -- Human Resources and
Administration for Warner Leisure Inc. (a division of Time Warner).
MS. YODER has been Senior Vice President -- Communications of the Company
since August 1997. From 1995 through 1996, Ms. Yoder was Corporate Vice
President, Public Affairs and Communications for GTE Corporation, where she
was a member of the Executive Leadership Committee. From 1991 through 1995,
Ms. Yoder held the position of Vice President, Corporate Public Relations and
Advertising and was a member of the Corporate Executive Council for GE
Capital, the financial services arm of the General Electric Company.
MR. KENNELL has been Vice President and Treasurer of the Company and ARACS
since February 1987.
MR. SHANLEY has been Vice President and Controller of the Company and
ARACS since November 1996. From November 1989 to November 1996, Mr. Shanley
was Vice President -- Planning and Analysis of the Franchisor and ARACS.
MR. FORSYTHE has been Vice President -- Operations U.S. Rent A Car for
ARACS since 1990. From 1982 until 1990, Mr. Forsythe was Vice President --
Fleet and Vehicle Sales of ARACS.
MR. COLLINS has been Vice President -- International for ARACS and General
Manager of its international operations since 1987.
43
<PAGE>
MR. CARDILLO has been Vice President -- Worldwide Marketing of the Company
and ARACS since September 1995. From July 1990 until September 1995, Mr.
Cardillo was Vice President -- Sales and Marketing -- U.S. Rent A Car.
MR. BYRNES has been Vice President -- Sales North America of the Company
and ARACS since January 1987.
MR. HOLMES has been a Director of the Company and ARACS since October
1996. Mr. Holmes was appointed Vice Chairman of HFS in September 1996 and has
served as a director of HFS since June 1994. From July 1990 through September
1996, Mr. Holmes served as Executive Vice President, Treasurer and Chief
Financial Officer of HFS. Mr. Holmes also serves as a director and officer of
several subsidiaries of HFS. Mr. Holmes also serves as a Director and, from
November 1994 to February 1996, was the Executive Vice President and Chief
Financial Officer, of Chartwell. Mr. Holmes also serves as a director of Avis
Europe.
MR. MONACO has been a Director of the Company since May 29, 1997. Mr.
Monaco has been Vice Chairman and Chief Financial Officer of HFS since
October 1996 and has been a Director of HFS since January 27, 1997. Mr.
Monaco also serves as a director and officer of several subsidiaries of HFS.
Mr. Monaco served as Executive Vice President and Chief Financial Officer of
the American Express Company from September 1990 to June 1996.
MR. CATHCART has been the Chairman and Chief Executive of Avis Europe plc
since February 1988.
MR. COLEMAN has been President of the National League of Professional
Baseball Clubs since March 1994. From 1992 to March 1994, Mr. Coleman served
as Executive Director --Market Development of Major League Baseball. Mr.
Coleman also serves on the Board of Directors of HFS, Beneficial Corporation,
Omnicom Group, the Advisory Board of the Martin Luther King, Jr. Center for
Non-Violent Social Change, The Metropolitan Opera, The Newark Museum, the
Schuman Fund, the Clark Foundation, the Children's Defense Fund and Seton
Hall University.
MR. EDELMAN has been a Director of HFS since November 1993. Mr. Edelman
also serves as President and a Director of Chartwell Leisure Inc. He has been
a partner with Battle Fowler, a New York City law firm, from 1972 through
1993 and as of January 1, 1994 is Of Counsel to that firm. Mr. Edelman is
also a partner of Chartwell Hotels Associates, Chartwell Leisure Associates
L.P., Chartwell Leisure Associates L.P. II, and of certain of their
respective affiliates. Mr. Edelman also serves as a Director of Presidio
Capital Corp., California Real Estate Investment Trust and Networks, Inc.
MS. HARMON has been a Principal in the Office of the President at JER Real
Estate Partners, L.P., an institutional, private equity fund for investment
in real estate assets since 1991. Prior to joining JER, Ms. Harmon served as
Managing Director of the Real Estate Finance Group at Banker's Trust Company.
MR. KENNEDY has been an attorney with his own law firm since 1976. Mr.
Kennedy also serves as a Director of Chartwell Leisure Inc.
MR. TARNOPOL has been Vice Chairman of The Bear Stearns Companies Inc.
since July 1996 and has been a Director of The Bear Stearns Companies Inc.
since 1985. Mr. Tarnopol has been a Senior Managing Director of Bear, Stearns
& Co. Inc. since 1985 and has been the Chairman of the Investment Banking
Division of Bear, Stearns & Co. Inc. since 1987.
44
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of the compensation earned by the
Chief Executive Officer and certain other executive officers of the Company
for the year ended December 31, 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- ---------------------------- ------ ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Joseph V. Vittoria(4) ....... 1996 $550,000 $251,646 $23,000
Chairman & CEO
F. Robert Salerno ........... 1996 239,000 103,825 7,750
President and
Chief Operating Officer
Robert D. Cardillo .......... 1996 171,461 53,896 --
Vice President,
Worldwide Marketing
John Forsythe ............... 1996 170,154 56,430 7,750
Vice President,
Operations
Michael P. Collins .......... 1996 166,615 53,483 --
Vice President,
International
James E. Collins ............ 1996 228,673 79,477 7,250
Executive Vice President(5)
Lawrence Ferezy ............. 1996 209,961 76,021 7,250
Executive Vice
President and CFO(7)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION OPTIONS(2) COMPENSATION(3)
- ---------------------------- --------------------- ---------------
<S> <C> <C>
Joseph V. Vittoria(4) ....... 450,000 $ 44,370
Chairman & CEO
F. Robert Salerno ........... 200,000 4,584
President and
Chief Operating Officer
Robert D. Cardillo .......... 30,000 3,120
Vice President,
Worldwide Marketing
John Forsythe ............... 60,000 5,225
Vice President,
Operations
Michael P. Collins .......... 40,000 4,234
Vice President,
International
James E. Collins ............ 50,000 1,339,148(6)
Executive Vice President(5)
Lawrence Ferezy ............. 75,000 1,406,939(8)
Executive Vice
President and CFO(7)
</TABLE>
- ------------
(1) Includes value of management preferential lease arrangements and
insurance associated with leased cars.
(2) Amounts listed represent options to acquire HFS common stock.
(3) Includes only the value of group term life insurance, unless otherwise
indicated.
(4) Mr. Vittoria ceased to serve as an employee of the Company in January
1997.
(5) Mr. James E. Collins ceased to serve as an employee of the Company in
November 1996.
(6) Includes value of benefits paid as a result of termination of
employment. The cost of group term life insurance for Mr. J. Collins
was $21,648.
(7) Mr. Ferezy ceased to serve as an employee of the Company in November
1996.
(8) Includes value of benefits paid as a result of termination of
employment. The cost of group term life insurance for Mr. Ferezy was
$11,939.
45
<PAGE>
OPTION GRANTS DURING FISCAL 1996
The following tables describe the stock options granted to the Chief
Executive Officer and certain other executive officers of the Company in the
last fiscal year.(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE PER EXPIRATION
NAME GRANTED FISCAL YEAR(3) SHARE DATE
- ---------------------- ------------ ---------------- -------------- ------------
<S> <C> <C> <C> <C>
Joseph V. Vittoria(4) 450,000 4% $76.75 10/17/2006
F. Robert Salerno .... 150,000 2% 76.75 10/17/2006
50,000 57.25 12/17/2006
Robert D. Cardillo ... 30,000 * 76.75 10/17/2006
John Forsythe ......... 60,000 * 76.75 10/17/2006
Michael P. Collins ... 40,000 * 76.75 10/17/2006
James E. Collins(4) .. 50,000 * 76.75 10/17/2006
Lawrence Ferezy(4) ... 75,000 * 76.75 10/17/2006
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM(2)
- ---------------------- ---------------------------
NAME 5% 10%
- ---------------------- ------------- -------------
<S> <C> <C>
Joseph V. Vittoria(4) $21,636,000 $54,828,000
F. Robert Salerno .... 7,212,000 18,276,000
1,800,000 4,561,500
Robert D. Cardillo ... 1,442,400 3,655,200
John Forsythe ......... 2,884,800 7,310,400
Michael P. Collins ... 1,923,200 4,873,600
James E. Collins(4) .. -- --
Lawrence Ferezy(4) ... -- --
</TABLE>
- ------------
* Represents less than 1% of all options to acquire HFS common stock
granted within the last fiscal year.
(1) Options shown in the table are options to acquire HFS common stock.
(2) The amounts shown in these two columns represent the potential
realizable values using the options granted and the exercise price. The
assumed rates of stock price appreciation are set by the Securities and
Exchange Commission's executive compensation disclosure rules and are
not intended to forecast the future appreciation of HFS common stock.
(3) Figures represent the percentage of all options to acquire HFS common
stock granted within the last fiscal year.
(4) Options granted to Messrs. Vittoria, Ferezy and J. Collins were
cancelled in connection with the termination of their employment.
46
<PAGE>
CANCELLATION OF SARS
AND EQUIVALENT SHARES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NAME NUMBER OF SECURITIES VALUE REALIZED
- ------------------- -------------------- --------------
<S> <C> <C>
Joseph V. Vittoria 350,000 $5,181,050(1)
71,123 2,485,038(2)
F. Robert Salerno . 200,000 2,960,600(1)
17,883 624,837(2)
Robert D. Cardillo 110,000 1,628,330(1)
13,795 482,021(2)
John Forsythe ...... 150,000 2,220,450(1)
13,141 459,162(2)
Michael P. Collins 110,000 1,628,330(1)
12,954 452,624(2)
James E. Collins .. 170,000 2,516,510(1)
23,559 823,151(2)
Lawrence Ferezy ... 180,000 2,664,540(1)
21,275 743,349(2)
</TABLE>
- ------------
(1) In connection with the Acquisition on October 17, 1996, all outstanding
stock appreciation units (the "Units") held under the Avis, Inc.
Phantom Stock Plan and the Avis, Inc. Stock Appreciation Rights Plan
(together the "SAR Plans") by the named executives were cancelled, the
SAR Plans were terminated, and each of the named executives received a
lump sum cash payment equal to $14.803 (the difference between the
value of the Units on their date of grant and the agreed purchase price
of $25.00) times the number of Units held by each such executive.
Amounts reflected above include payments received in connection with
the cancellation of SAR Units.
(2) In connection with the Acquisition on October 17, 1996, all outstanding
equivalent shares (the "Equivalent Shares") held under the Avis, Inc.
Nonqualified Employee Stock Ownership Equivalent Plan by the named
executives were cancelled and each of the executives received a lump
sum cash payment equal to $34.94 times the number of Equivalent Shares
held by each such executive. $5.00 of the consideration paid per
Equivalent Share was paid to the named executives in HFS Common Stock.
* Amounts shown under "Option Grants During Fiscal 1996" on the prior
page represent all outstanding Options held by the named officers at
fiscal year end. None of these options were exercisable at such time.
Only the grant of 50,000 options to Mr. Salerno was in-the-money at the
end of the fiscal year and its value at such time was $125,000.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Pursuant to the terms of an offer letter from HFS, Mr. Hoenshell is
entitled to an annual base salary of $600,000 and a target bonus of 60% of
his base salary, which bonus is guaranteed for the first year of employment
with the Company. Mr. Hoenshell is also eligible for a grant of 300,000
options to acquire HFS common stock, and a grant of options equivalent to at
least 3% of the Company's Common Stock. The letter does not contain a
specified term of employment.
Under the terms of the offer letter, if Mr. Hoenshell's employment is
involuntarily terminated within the first 90 days of such employment for
reasons other than willful misconduct, he is entitled to receive a grant of
100,000 options to acquire HFS common stock, which options will be fully
vested and exercisable for a period of one year. If his employment is
similarly terminated in the next 90 days, all 300,000 options will become
fully vested and exercisable for a period of one year. In addition, if Mr.
Hoenshell's employment is involuntarily terminated for reasons other than
willful misconduct in the first six months of his employment, he is entitled
to receive a payment equal to six months salary and a pro
47
<PAGE>
rated bonus. If his employment is similarly terminated after the first six
months, Mr. Hoenshell is entitled to receive a payment equal to one year's
base salary or such greater payment as the Board may determine.
Mr. Salerno and Mr. Forsythe have employment agreements with a predecessor
of the Company which terminate on February 8, 2001. Mr. Salerno and Mr.
Forsythe receive an annual base salary of $300,000 and $175,000,
respectively, which salary may be increased by the Board of Directors during
the term of the agreement. If the employment of either of these executives is
terminated by the Company for reasons other than "just cause" or if either of
these executives terminates his employment for "good reason" (as each term is
defined in the agreement), he is entitled to receive his remaining salary and
full bonus and certain perquisites through the term of the agreement.
Mr. M. Collins has an employment agreement with a predecessor of the
Company which renews automatically each year unless notice of termination is
given to Mr. Collins at least 60 days prior to the anniversary date of the
agreement. Mr. M. Collins receives an annual base salary of $172,000. If the
employment of Mr. M. Collins is terminated by the Company without "just
cause" (as defined in the agreement), he is entitled to receive his base
salary for a period equal to one month for every year of service with the
Company and such Company's predecessor, plus a pro rata share of the bonus
for the year during which he is terminated.
DEFINED BENEFIT PLAN
The Company maintains a defined benefit pension plan for employees who met
the eligibility requirements as of December 31, 1983. The eligibility
requirements were non-union full time employees hired prior to December 31,
1983 who were age 25 or above on January 1, 1985. The plan provides that the
benefit for each participant, payable monthly, be equal to 1-1/2% of his or
her final average compensation (average compensation being the average of the
highest five consecutive years of compensation in the last ten years of
employment) for each year of service, not to exceed 35, minus 1 3/7% of the
estimated Social Security benefit for each year of service, not to exceed 35.
In general, the effect is to provide a participant who has worked for the
company for 35 years prior to retirement with a pension, including Social
Security, equal to at least 52% of the average compensation (including bonus,
overtime and commissions) earned during the highest five consecutive years of
his or her employment.
To the extent that applicable federal laws limit a participant's pension
plan benefit to an amount less than the amount otherwise provided by the
plan's formula, the company has adopted a Retirement Equalization Benefit
Plan to compensate the participant for the reductions in the retirement
benefit.
The following table shows the estimated annual pension benefit payable
under the plans under normal retirement in 1996 after selected periods of
service (assuming such employees and their spouses elect a straight life
annuity rather than a form of joint and survivor or other form of annuity, in
which case the benefits would generally be lower than shown in the following
table.) The estimated maximum benefits for employees who retire in years
other than 1996 will be different from the amount shown in the table because
pension benefits will be offset by different Social Security benefits,
however, the benefit shown in the table will not be reduced by the amount of
Social Security benefits actually paid.
48
<PAGE>
PENSION PLAN TABLE
ESTIMATED ANNUAL PENSION BENEFIT(A)
YEARS OF SERVICE
<TABLE>
<CAPTION>
ANNUAL PAY 15 20 25 30 35
- ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$200,000 $ 39,819 $ 53,091 $ 66,364 $ 79,637 $ 92,910
250,000 50,506 67,341 84,177 101,012 117,848
300,000 61,194 81,591 101,989 122,387 142,785
350,000 71,881 95,841 119,802 143,762 167,723
400,000 82,569 110,091 137,614 165,137 192,660
450,000 93,256 124,341 155,427 186,512 217,598
500,000 103,944 138,591 173,239 207,887 242,535
</TABLE>
- ------------
(a) A portion of the benefit will be paid by the Company under its
Retirement Equalization Benefit Plan, if the benefit exceeds the
maximum pension payable from the tax qualified retirement plan under
federal law.
Except for the age 701/2 minimum distributions, all payments are made in
lump sums upon death, disability, age 65 or termination of employment.
As of December 31, 1996 (or as of the date the executive's employment with
the Company terminated, if earlier), the named executives had the following
years of service under the defined benefit plan: Mr. Vittoria, twenty-seven
years; Mr. J. Collins, thirteen years, eight months; Mr. Ferezy, fourteen
years, six months; Mr. Salerno, fourteen years, seven months; Mr. Cardillo,
thirteen years, nine months; Mr. Forsythe, fourteen years, eight months; Mr.
M. Collins, twenty-one years, six months.
STOCK OPTION PLAN
Introduction
The Avis Rent A Car, Inc. 1997 Stock Option Plan (the "Stock Option Plan")
will be adopted by the Board of Directors prior to the consummation of the
Offerings. 4,183,908 shares of Common Stock (4,620,977 shares if the
over-allotment options granted to the U.S. Underwriters and the Managers are
exercised in full) will be reserved for issuance upon the exercise of options
granted to officers, key employees, independent contractors and non-employee
Directors of the Company and its designated subsidiaries pursuant to the
Stock Option Plan. The primary purpose of the Stock Option Plan is to provide
additional incentive to officers, key employees, independent contractors and
non-employee Directors of the Company and to strengthen their commitment to
the Company and its subsidiaries. The Stock Option Plan is intended to
qualify for the performance-based exclusion from the deduction limitation of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
General
A committee (the "Committee") will be appointed by the Board of Directors
to administer the Stock Option Plan. The Committee generally will select the
recipients of options under the Stock Option Plan, the exercise price of such
options and other terms and conditions of the option grant. Options granted
under the Stock Option Plan may be "incentive stock options" ("ISOs") (within
the meaning of Section 422 of the Code) or options not subject to Section 422
of the Code ("NSOs"). Each such option (ISO or NSO), when it becomes
exercisable, entitles the holder thereof to purchase a share of Common Stock
for an amount equal to the exercise price of the option, payable in cash. The
Company may also provide for payment of the exercise price of the option in
shares of Common Stock with an aggregate value equal to the exercise price of
the option, or pursuant to a cashless exercise procedure.
Non-employee Directors of the Company receive an initial automatic grant
of an option to purchase shares of Common Stock under the Stock Option
Plan. Subsequently elected non-employee
49
<PAGE>
Directors will receive a like grant under the Stock Option Plan upon election
or appointment to the Board of Directors. On the first anniversary of the
non-employee Director's initial grant, an additional automatic grant of an
option to purchase shares of Common Stock will be made to each continuing
non-employee Director under the terms of the Stock Option Plan.
The exercise price of each option under the Stock Option Plan may not be
less than the fair market value of a share of Common Stock on the date the
option is granted. Options held by an optionee will generally become
exercisable as to 20% of the shares covered by such options on the first
anniversary of the date of grant and with respect to an additional 20% of the
shares covered by such options on each of the four succeeding anniversaries
of the date of grant (if the optionee continues to be employed [or retained
as an independent contractor] by the Company on each such date). All options
held by an optionee will become fully exercisable (to the extent not already
exercisable) if a "change of control transaction" (as defined in the Stock
Option Plan) occurs. Shares of Common Stock acquired upon the exercise of
options may be subject to restrictions on transfer which will be set forth in
the agreement evidencing the grant of the option. 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,
disability or (iii) one year following the optionee's termination of
employment for any other reason. Grants of options under the Stock Option
Plan are subject to an annual per-participant maximum grant of shares of
Common Stock.
Generally, the Board of Directors of the Company may from time to time
amend or terminate the Stock Option Plan, provided that (i) no such amendment
or termination may adversely affect the rights of any participant without the
consent of such participant and (ii) to the extent required by any law,
regulation or stock exchange rule, no amendment shall be effective without
the approval of the Company's stockholders.
Certain Federal Income Tax Consequences
The following discussion is a brief summary of the principal federal
income tax consequences under current federal income tax laws relating to
awards under the Stock Option Plan. This summary is not intended to be
exhaustive and, among other things, does not describe state, local or foreign
income and other tax consequences.
Nonstatutory Stock Options. An optionee generally will not be taxed upon
the grant of an NSO. Rather, at the time of exercise of such NSO (and in the
case of an untimely exercise of an ISO), the optionee will recognize ordinary
income for federal income tax purposes in an amount equal to the excess of
the fair market value of the shares purchased over the option price. The
Company will generally be entitled to a tax deduction at such time and in the
same amount that the optionee recognizes ordinary income.
If shares acquired upon exercise of an NSO (or upon untimely exercise of
an ISO) are later sold or exchanged, then the difference between the sales
price and the fair market value of such stock on the date that ordinary
income was recognized with respect thereto will generally be taxable as
long-term or short-term capital gain or loss (if the stock is a capital asset
of the optionee) depending upon whether the stock has been held for more than
one year after such date.
Incentive Stock Options. An optionee will not be in receipt of taxable
income upon the grant of an ISO. Exercise of an ISO will be timely if made
during its term and if the optionee remains an employee of the Company or a
subsidiary at all times during the period beginning on the date of grant of
the ISO and ending on the date three months before the date of exercise (or
one year before the date of exercise in the case of a disabled optionee).
Exercise of an ISO will also be timely if made by the legal representative of
an optionee who dies (i) while in the employ of the Company or a subsidiary
or (ii) within three months after termination of employment. The tax
consequences of an untimely exercise of an ISO will be determined in
accordance with the rules applicable to NSOs.
If stock acquired pursuant to the timely exercise of an ISO is later
disposed of, the optionee will, except as noted below, recognize long-term
capital gain or loss (if the stock is a capital asset of the optionee) equal
to the difference between the amount realized upon such sale and the option
price. The
50
<PAGE>
Company, under these circumstances, will not be entitled to any federal
income tax deduction in connection with either the exercise of the ISO or the
sale of such stock by the optionee.
If, however, stock acquired pursuant to the exercise of an ISO is disposed
of by the optionee prior to the expiration of two years from the date of
grant of the ISO or within one year from the date such stock is transferred
to him upon exercise (a "disqualifying disposition"), any gain realized by
the optionee generally will be taxable at the time of such disqualifying
disposition as follows: (i) at ordinary income rates to the extent of the
difference between the option price and the lesser of the fair market value
of the stock on the date the ISO is exercised or the amount realized on such
disqualifying disposition and (ii) if the stock is a capital asset of the
optionee, as short-term or long-term capital gain to the extent of any excess
of the amount realized on such disqualifying disposition over the fair market
value of the stock on the date which governs the determination of his
ordinary income. In such case, the Company may claim a federal income tax
deduction at the time of such disqualifying disposition for the amount
taxable to the optionee as ordinary income. Any capital gain recognized by
the optionee will be long-term capital gain if the optionee's holding period
for the stock at the time of disposition is more than one year; otherwise it
will be short-term.
RELATIONSHIP WITH HFS
Immediately prior to the sale of shares of Common Stock in the Offerings,
HFS, through a wholly owned subsidiary, will own all of the issued and
outstanding Common Stock. As a result of the Offerings, HFS's ownership will
be reduced to approximately 30% of the outstanding shares of Common Stock (or
approximately 27.5% of the outstanding shares of Common Stock if the
over-allotment options granted to the U.S. Underwriters and the Managers are
exercised in full). HFS has advised the Company that its current intent is to
continue to hold all of the Common Stock beneficially owned by it following
the Offerings. However, HFS is not subject to any contractual obligation to
retain its interest, except that each of the Company and HFS has agreed,
subject to certain exceptions, not to sell or otherwise dispose of any shares
of Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of Bear, Stearns & Co. Inc. As a result,
there can be no assurance concerning the period of time during which HFS will
maintain its beneficial ownership of Common Stock owned by it following the
Offerings. See "Underwriting."
The Company is a wholly owned subsidiary of the Franchisor, which was
acquired by HFS in October 1996. HFS is a global provider of real estate and
travel services with a base of approximately 100 million consumer contacts
annually. It is the world's largest franchisor of real estate brokerage
offices and lodging facilities and owns leading providers of timeshare
exchange services, corporate relocation services, mortgage services for
consumers and vehicle fleet management services. On May 27, 1997, HFS
announced that it had entered into a merger agreement with CUC, a leading
member services and direct marketing organization offering shopping, travel,
dining, vehicle purchasing, home buying and other services to approximately
68 million consumer members worldwide.
For purposes of governing the on-going relationships between HFS, the
Franchisor, WizCom and the Company after the Offerings, HFS, the Franchisor,
WizCom and the Company have entered or will enter into various agreements
setting forth the on-going responsibilities regarding various matters
outlined below. The agreements summarized below are included as exhibits to
the Company's Registration Statement of which this Prospectus is a part. The
following summaries are qualified in their entirety by reference to such
exhibits.
SEPARATION AGREEMENT
The Company and the Franchisor have entered into a Separation Agreement
which provides for, among other things, the principal corporate transactions
required to effect the Offerings, the assumption by the Company of all
liabilities relating to the vehicle rental business, other than liabilities
related to alleged acts of illegal discrimination against customers in the
rental of vehicles which are alleged to have occurred prior to the
consummation of the Offerings, and the allocation between the Company and the
Franchisor of certain other liabilities, certain indemnification obligations
of the Company and the
51
<PAGE>
Franchisor and certain other agreements governing the relationship between
the Company and the Franchisor with respect to or in consequence of the
Offerings (the "Separation"). The Separation Agreement provides that the
Offerings are subject to the prior satisfaction of certain conditions
including, among other things, the transfer of the vehicle rental business to
the Company, the execution of all ancillary agreements, certain of which are
described below, to the Separation Agreement and the formal approval of the
Offerings by the Board of Directors of the Company and HFS. See Notes 4 and
13 to the Audited Consolidated Financial Statements.
Cross-Indemnification. Subject to certain exceptions, the Company has
agreed to indemnify the Franchisor and its subsidiaries against any loss,
liability or expense incurred or suffered by the Franchisor or its
subsidiaries arising out of or related to the failure by the Company to
perform or otherwise discharge liabilities allocated to and assumed by the
Company under the Separation Agreement, and the Franchisor has agreed to
indemnify the Company and its subsidiaries against any loss, liability or
expense incurred or suffered by the Company or its subsidiaries arising out
of or related to the failure by the Franchisor to perform or otherwise
discharge the liabilities retained by the Franchisor under the Separation
Agreement, including any liabilities arising out of alleged acts of illegal
discrimination against customers in the rental of vehicles which are alleged
to have occurred prior to the consummation of the Offerings. The Separation
Agreement also includes procedures for notice and payment of indemnification
claims and provides that the indemnifying party may assume the defense of a
claim or suit brought by a third party.
Expenses. The Separation Agreement provides that, except as otherwise
specifically provided, all costs and expenses incurred in connection with the
preparation, execution, delivery and implementation of the Separation
Agreement and with the consummation of the transactions contemplated by the
Separation Agreement shall be paid by the party incurring such cost or
expense. Notwithstanding the foregoing, the Company shall be obligated to pay
the legal, filing, accounting, printing and other accountable and
out-of-pocket expenditures in connection with the preparation, printing and
filing of the Registration Statement of which this Prospectus forms a part
and obtaining financing.
MASTER LICENSE AGREEMENT
The Company's status as an Avis System franchisee is governed by an
agreement among the Company, the Franchisor and Wizard Co. (the "Master
License Agreement") which grants to the Company the non-exclusive right to
operate the Avis vehicle rental business in the territories specified therein
and the exclusive right to operate the Avis vehicle rental business in
certain specified territories for a period of 50 years.
Pursuant to the Master License Agreement, the Company has agreed to pay
the Franchisor a monthly base royalty of 3.0% of the Company's gross revenue.
In addition, the Company has agreed to pay a supplemental royalty of 1.0% of
gross 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% (the "Supplemental Fee"). These fees have been paid by the
Company since January 1, 1997. Until the fifth anniversary of the effective
date of the Master License Agreement, the Supplemental Fee or a portion
thereof may be deferred if the Company does not attain certain financial
targets. Any Supplemental Fees that are deferred shall bear interest at a
market rate until paid and shall be expressly subordinated to indebtedness of
the Company. On an unaudited pro forma basis, if the royalties had been
charged to the Company beginning on October 17, 1996, net income for the
period October 17, 1996 to December 31, 1996 would have been reduced by $4.3
million resulting in a pro forma net loss of $3.1 million. The royalties
charged to the Company for the six months ended June 30, 1997 amounted to
$37.8 million and resulted in a reduction in net income of approximately
$20.4 million.
The Company has the exclusive right to open Avis franchises in 28 selected
standard metropolitan statistical areas in the United States, in territories
outside the United States that are not currently licensed to other Avis
System franchisees and in territories that the Company purchases from
existing franchisees that have exclusivity. The Company has the non-exclusive
right to open new franchises in any other market not currently served by
another Avis System franchisee. In the markets where the Company has a
non-exclusive right to open new franchises, the Company will have a right of
first refusal to develop such
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area prior to the Franchisor's granting a license to a third party. In the
event HFS acquires another car rental company, the Company has a right of
first refusal to negotiate a grant of a license to operate the rental
locations for such car rental company within any territory in which the
Company operates.
The Master License Agreement provides the Franchisor with significant
rights regarding the business and operations of the Company. The Company is
required to operate each of its Avis franchises in accordance with certain
standards contained in the Avis operating manual (the "Operating Manual").
Pursuant to the Master License Agreement, the Franchisor may impose certain
guidelines relating to the Avis System, the vehicle rental operations and the
amount of advertising and promotion expenditures. In general, the Master
License Agreement provides that the Company shall not (i) engage in any other
vehicle rental business or (ii) disclose the terms of the Operating Manual or
any other confidential information relating to the Avis System to any third
party. In addition, the Company agrees not to use any of the licensed
trademarks other than in its vehicle rental business without the Franchisor's
consent.
The Master License Agreement shall terminate without offering the Company
an opportunity to cure its default, if (i) certain bankruptcy and insolvency
events occur, (ii) the Company purports to transfer any rights and
obligations under the Master License Agreement without compliance with the
terms of the Master License Agreement, (iii) the Company competes with the
Franchisor in violation of the Master License Agreement, (iv) the Company
discloses the confidential information of the Franchisor in violation of the
Master License Agreement, (v) the Company challenges Wizard Co.'s rights to
the licensed proprietary marks, (vi) upon a Change of Control Event (as
defined) or (vii) the Company receives three or more notices of termination
for Curable Defaults (as defined) which are cured or not cured (collectively,
the "Non-Curable Defaults"); provided that, except for (i) above, the
Franchisor shall give the Company 30 days notice of such Non-Curable Default.
The Franchisor may also terminate the Master License Agreement if the Company
(i) fails, refuses or neglects to promptly pay monies owing to the
Franchisor, WizCom or HFS under certain specified agreements, (ii) misuses or
makes any unauthorized use of the licensed proprietary marks or otherwise
materially impairs the goodwill associated with such marks, (iii) engages in
any business or markets any service or product under a name or mark which, in
the Franchisor's opinion, is similar to the licensed proprietary marks, (iv)
fails to maintain material compliance with the standards prescribed by the
Franchisor in the Master License Agreement, in the Operating Manual or
otherwise in writing or (v) with respect to any facility, fails to maintain
compliance with the standards or procedures prescribed by the Franchisor at
such facility (collectively, the "Curable Defaults"), provided, however, that
the Company shall have 30 days (10 days in the case of (i) above) after its
receipt from the Franchisor of written notice of such default to remedy such
default and, provided further, that other than with respect to (i) above, in
the event such default is not cured within 30 days but the Company has
commenced to cure such default within 30 days and is diligently prosecuting
such cure to completion, the Company shall have up to an additional 60 days
to cure such default. In the event of a termination of the agreement, HFS has
the option to acquire the Company's rental locations, leases and fleet for
fair value.
Change of Control Event means a transaction or series of related
transactions by which (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) other than HFS or an affiliate
or successor to HFS, is or becomes after the date hereof the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act as in
effect on the date hereof), of more than 25% of the total voting power of all
voting stock of the Company then outstanding when HFS controls 20% or more of
such voting power and otherwise 20% of the total voting power (the "Relevant
Percentage"); (b)(1) another corporation merges into the Company or the
Company consolidates with or merges into any other corporation or (2) the
Company conveys, transfers or leases all or substantially all its assets to
any person or group, in one transaction or a series of related transactions
other than any conveyance, transfer or lease between the Company and a wholly
owned subsidiary of the Company, with the effect that a person or group,
other than a person or group which is the beneficial owner of more than the
Relevant Percentage of the total voting power of all voting stock of the
Company immediately prior to such transaction becomes the beneficial owner of
more than the Relevant Percentage of the total voting power of all voting
stock of the surviving or transferee corporation of such transaction or
series; or (c) during any period of two consecutive years, individuals who at
the beginning of such period constituted
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the Company's Board of Directors (together with any new directors whose
election by the Company's Board of Directors, or whose nomination for
election by the Company's shareholders, was approved by a vote of a majority
of the Directors then still in office who were either Directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Directors then in office.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the Offerings, the Company will enter into
the Registration Rights Agreement, pursuant to which HFS and certain
transferees of Common Stock held by the Franchisor (the "Holders") will have
the right to require the Company to register all or part of the Common Stock
owned by such Holders under the Securities Act (a "Demand Registration");
provided that the Company (i) will not be obligated to effect a Demand
Registration within 180 days of the closing date in connection with the
Offerings unless Bear, Stearns & Co. Inc. has given its consent and (ii) must
postpone giving effect to a Demand Registration up to a period of 30 days if
the Company believes such registration might have a material adverse effect
on any plan or proposal by the Company with respect to any financing,
acquisition, recapitalization, reorganization or other material transaction,
or the Company is in possession of material non-public information that, if
publicly disclosed, could result in a material disruption of a major
corporate development or transaction then pending or in progress or in other
material adverse consequences to the Company. HFS has advised the Company
that it does not have any present intention to request any such registration.
In addition, the Holders will have the right to participate in registrations
by the Company of its Common Stock (a "Piggyback Registration"). The Holders
will pay all out-of-pocket expenses incurred in connection with any Demand
Registration. The Company will pay any expenses incurred in connection with a
Piggyback Registration, except for underwriting discounts, commissions and
expenses attributable to the shares of Common Stock sold by such Holders.
COMPUTER SERVICES AGREEMENT
The Wizard reservation and rental processing system, with the associated
back office and accounting systems, are owned and operated by WizCom at a
computer center in Garden City, New York. The Company purchases use of the
Wizard System for the purpose of processing reservation and rental
transactions, and for accounting purposes, under the terms of a Computer
Services Agreement entered into with WizCom in connection with the Offerings.
The Computer Services Agreement provides the Company with access to all
functions of the Wizard System. The Company participates in the funding of
the development costs for any new features which it agrees with other
relevant users to be desirable. Once developed, any such additional features
also become available to the Company. WizCom will charge the Company the full
cost of providing computer services each month. The method of calculating
costs chargeable to the Company will vary depending on the service being
provided. The Computer Services Agreement is coterminous with the Master
License Agreement.
Under the Computer Services Agreement, WizCom may, from time to time,
provide the Company with software or system development services. The Company
has the exclusive right to use any such software or systems from the date of
implementation thereof.
Pursuant to a Termination Services Agreement, WizCom has agreed to provide
services to ARACS for a period of up to six months in the event the Computer
Services Agreement is terminated in accordance with certain provisions
thereof.
RESERVATION SERVICES AGREEMENT
The Company has entered into a Reservation Services Agreement with HFS,
pursuant to which HFS has agreed to operate and maintain (directly or by
subcontracting with affiliates or one or more third parties) reservation
center services consistent with the services historically provided to the
Company. The Company is obligated to obtain and maintain at its vehicle
rental locations the computer equipment and communication equipment and
service required to participate in the reservation system. The Company has
agreed to pay HFS (i) a per call charge for each call received in the call
centers operated by HFS for
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the Avis System, (ii) for manually entered transactions, a per booking charge
for every booking made through direct electronic interface with the global
distribution systems utilized by the airlines and (iii) a per booking charge
for every booking made through an internet connection for the Avis System.
Such fees are subject to adjustment annually to reflect the cost of providing
such service. The Reservation Services Agreement shall terminate upon the
termination of the Master License Agreement, unless earlier terminated in
accordance with the terms thereof.
Pursuant to an Employee Management Agreement with HFS, certain employees
of the Company who perform certain reservations related services will be
managed by, and under the direction of, HFS in the performance of such
services. The aggregate of the costs and expenses incurred by the Company for
services performed by the Company's employees pursuant to the Employee
Management Agreement shall be considered part of the cost of receiving
services pursuant to the Reservation Services Agreement.
PURCHASING SERVICES AGREEMENT
On or prior to the consummation of the Offerings, HFS and ARACS will enter
into a Purchasing Services Agreement pursuant to which HFS has agreed with
the assistance of ARACS, to identify vendors and programs which would benefit
ARACS and pursue establishing a preferred alliance program with such vendors
for the benefit of ARACS. Any commissions, related access fees or other
amounts paid by preferred alliance partners in connection with an agreement
relating to sales to ARACS shall be shared by the parties.
CALL TRANSFER AGREEMENT
ARACS and HFS are parties to a Call Transfer Agreement, dated March 4,
1997 (the "Call Agreement"). Pursuant to the Call Agreement, HFS has agreed
to transfer telephone calls from its lodging customers if such customers wish
to rent vehicles. Pursuant to the Call Agreement, ARACS has agreed to pay to
HFS a fee of $1.75 per call transferred to ARACS by HFS. Further, ARACS has
agreed to pay to HFS a fee of $8.00 for each car rental that results from a
call transferred by HFS. ARACS has guaranteed that it will pay HFS no less
than $2.25 million in recurring fees during each of the five years of the
contract term which expires on March 4, 2002. The Company incurred $750,000
in fees payable to HFS for the period ended June 30, 1997. The Company also
paid a one-time access fee of $1.0 million to HFS pursuant to such agreement.
LOANS BETWEEN THE COMPANY AND HFS
Intercompany Note
In connection with the Acquisition, the Franchisor assigned to ARACS a
note, dated October 1996, made by Wizard Co., Inc. and originally payable to
the Franchisor in the principal amount of $194,100,000 (the "Wizard Note").
ARACS subsequently assigned the Wizard Note to Reserve Claims Management Co.,
a subsidiary of the Company. In connection with the Separation, the Company
assumed Wizard Co., Inc.'s obligations under the Wizard Note pursuant to
an Assignment, Assumption and Release Agreement dated July 30, 1997 among
ARACS, Wizard Co., Inc. and Reserve Claims Management Co. in exchange for
payment by Wizard Co., Inc. to the Company of the amount due under the Wizard
Note. The Wizard Note matures on October 1, 2006, bears interest at a rate
per annum equal to 7.13% and is payable annually on each anniversary thereof
commencing October 1, 1997.
Vehicle Financing Notes
At December 31, 1996 and June 30, 1997, the Company had loans outstanding
from the Franchisor of $247.5 million and $254.0 million, respectively, which
provide subordinated vehicle financing. See Note 3 to the Audited
Consolidated Financial Statements.
Other
The Company had a net receivable due from HFS and its affiliated companies
at December 31, 1996 and June 30, 1997 of $112.3 million and $65.6 million,
respectively. These amounts primarily represent the
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transfer of assets from the Company in connection with the Acquisition, as
well as intercompany transactions relating to management, service and
administrative fees since the Acquisition. See Note 3 to the Audited
Consolidated Financial Statements.
TAX DISAFFILIATION AGREEMENT
Prior to the completion of the Offerings, HFS and the Company will enter
into a tax disaffiliation agreement (the "Tax Disaffiliation Agreement") that
will set forth each party's rights and obligations with respect to payments
and refunds, if any, for taxes relating to taxable periods before and after
the completion of the Offerings and related matters such as the filing of tax
returns and the conduct of audits and other proceedings involving claims made
by taxing authorities.
On or prior to October 16, 1997 (the "Acquisition Date"), Franchisor was
the common parent of an affiliated group of corporations within the meaning
of Section 1504(a) of the Internal Revenue Code of 1986, as amended, whose
members included the Franchisor, the Company and certain of their respective
subsidiaries (the "Old Avis Group"). Generally, under the Tax Disaffiliation
Agreement, the Company will agree to indemnify HFS for (i) taxes of or
attributable to the Old Avis Group, any member of the Old Avis Group and any
nonconsolidated subsidiary of the Franchisor for any period or portion
thereof ending on or before the Acquisition Date, (ii) taxes incurred
pursuant to Section 1.1502-6 of the U.S. Treasury regulations (or similar
provisions under state, local or foreign law imposing several liability upon
members of a consolidated, combined, affiliated or unitary group) as a result
of any member of the Old Avis Group having been a member of another
affiliated group, (iii) taxes of or attributable to the Company and its
subsidiaries for periods or portions thereof beginning the day after the
Acquisition Date and (iv) transfer taxes incurred as a result of the
transactions contemplated by the Offerings.
LEASE AGREEMENTS
The Company and WizCom currently share three facilities, which are located
in (i) Virginia Beach, Virginia, (ii) Tulsa, Oklahoma and (iii) Garden City,
New York (which houses the Company's principal executive offices). The
Virginia Beach property is owned by WizCom. The Garden City property (which
houses the Company's principal executive offices) and the Tulsa property are
each owned by third parties unrelated to the Company or WizCom.
In connection with the Separation, the Company and WizCom intend to enter
into lease and sublease agreements with respect to each property. WizCom will
lease space at its Virginia Beach property to the Company pursuant to a lease
agreement. The lease agreement will have a term of 18 years and will require
the Company to pay WizCom its proportionate share based on allocated space,
of the cost of operating such facility. In addition, WizCom will sublease
space at its Tulsa and Garden City properties to the Company pursuant to
sublease agreements for each respective property. The sublease agreements
will have a term coterminous with the terms under WizCom's existing lease
agreements and will require the Company to reimburse WizCom its proportionate
share of the rent required under WizCom's existing leases relating to such
properties.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 28,000,000 shares
of Common Stock issued and outstanding (30,925,000 shares if the
over-allotment options granted to the U.S. Underwriters and the Managers are
exercised in full). All of the shares of Common Stock to be sold in the
Offerings will be freely tradeable without restrictions or further
registration under the Securities Act, unless purchased by an "affiliate" of
the Company (as that term is defined in Rule 144 adopted under the Securities
Act ("Rule 144")), in which case such shares would be subject to the resale
limitations of Rule 144. All of the outstanding shares of Common Stock
beneficially owned by HFS have not been registered under the Securities Act
and may not be sold in the absence of an effective registration statement
under the Securities Act other than in accordance with Rule 144 or another
exemption from registration. HFS has certain rights to require the Company to
effect registration of shares of Common Stock owned by HFS, which rights may
be assigned. See "Relationship with HFS -- Registration Rights Agreement."
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In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has beneficially owned shares of Common Stock for at
least one year, including a person who may be deemed an "affiliate", is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of one percent of the total number of shares of the
class of stock sold or the average weekly reported trading volume of the
class of stock being sold or the average weekly reported trading volume of
the class of stock being sold during the four calendar weeks preceding such
sale. A person who is not deemed an "affiliate" of the Company at any time
during the three months preceding a sale and who has beneficially owned
shares for at least two years is entitled to sell such shares under Rule 144
without regard to the volume limitations described above. As defined in Rule
144, an "affiliate" of an issuer is a person that directly or indirectly
through the use of one or more intermediaries controls, is controlled by, or
is under common control with, such issuer. Rule 144A adopted under the
Securities Act ("Rule 144A") provides a non-exclusive safe harbor exemption
from the registration requirements of the Securities Act for specified
resales of restricted securities to certain institutional investors. In
general, Rule 144A allows unregistered resales of restricted securities to a
"qualified institutional buyer", which generally includes an entity, acting
for its own account or for the account of other qualified institutional
buyers, that in the aggregate owns or invests at least $100 million in
securities of unaffiliated issuers. Rule 144A does not extend an exemption to
the offer or sale of securities that, when issued, were of the same class as
securities listed on a national securities exchange or quoted on an automated
quotation system. The shares of Common Stock outstanding as of the date of
this Prospectus would be eligible for resale under Rule 144A because such
shares, when issued, were not of the same class as any listed or quoted
securities. The foregoing summary of Rule 144 and Rule 144A is not intended
to be a complete description thereof.
Prior to the Offerings, there has been no market for the Common Stock, and
no prediction can be made as to the effect, if any, that market sales of
outstanding shares of Common Stock by HFS, or the availability of such shares
for sale, will have on the market price of the Common Stock prevailing from
time to time. Nevertheless, sales of substantial amounts of Common Stock
beneficially owned by HFS in the public market, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock offered in the Offerings.
Although HFS in the future may effect or direct sales or other
dispositions of Common Stock that would reduce its beneficial ownership
interest in the Company, HFS has advised the Company that its current intent
is to continue to hold all of the Common Stock beneficially owned by it
following the Offerings. However, HFS is not subject to any contractual
obligation to retain its controlling interest except that HFS and the Company
have agreed, subject to certain limited exceptions, not to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of Bear, Stearns & Co.
Inc. As a result, there can be no assurance concerning the period of time
during which HFS will maintain its beneficial ownership of Common Stock owned
by it following the Offerings. See "Underwriting."
DESCRIPTION OF CAPITAL STOCK
Immediately prior to consummation of the Offerings, the Company will
effect an 85,000 to 1 stock split of its current outstanding common stock and
amend its Certificate of Incorporation to change its authorized capital stock
to 100,000,000 shares of Common Stock, $.01 par value per share, of which
28,000,000 shares will be issued and outstanding (30,925,000 shares if the
over-allotment options granted to the U.S. Underwriters and the Managers are
exercised in full), and 20,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"), of which none will be issued and
outstanding. The following summary description of the capital stock of the
Company is qualified in its entirety by reference to the form of Amended and
Restated Certificate of Incorporation of the Company (the "Amended
Certificate") and form of Amended and Restated By-Laws of the Company, a copy
of each of which is filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled and
permitted to vote. Such holders are not entitled to
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vote cumulatively for the election of directors. Holders of Common Stock have
no redemption, conversion, preemptive or other subscription rights. There are
no sinking fund provisions relating to the Common Stock. In the event of the
liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all of the assets of the Company
remaining, if any, after satisfaction of the debts and liabilities of the
Company. The outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby will be, upon payment therefor as contemplated herein,
validly issued, fully paid and nonassessable.
Holders of Common Stock are entitled to receive dividends when and as
declared by the Board of Directors of the Company out of funds legally
available therefor. The Company does not anticipate paying cash dividends in
the foreseeable future. See "Dividend Policy."
PREFERRED STOCK
The Amended Certificate provides that shares of Preferred Stock may be
issued from time to time in one or more series. The Board of Directors of the
Company is authorized to fix the voting rights, if any, designations, powers,
preferences and the relative participation, optional or other rights, if any,
and the qualifications, limitations or restrictions thereof, of any unissued
series of Preferred Stock, to fix the number of shares constituting such
series, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding). Upon
consummation of the Offerings, no shares of Preferred Stock will be issued
and outstanding.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 ("Section 203") of the General Corporation Law of the State of
Delaware (the "DGCL") provides, in general, that a stockholder acquiring more
than 15% of the outstanding voting stock of a corporation subject to the
statute (an "Interested Stockholder") but less than 85% of such stock may not
engage in certain Business Combinations (as defined in Section 203) with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date
the corporation's board of directors approved either the Business Combination
or the transaction in which the stockholder became an Interested Stockholder
or (ii) the Business Combination is approved by the corporation's board of
directors and authorized by a vote of at least 66 2/3% of the outstanding
voting stock of the corporation not owned by the Interested Stockholder. The
Amended Certificate contains a provision electing not to be governed by
Section 203.
LISTING
The Common Stock has been approved for listing on the NYSE under the
symbol "AVI," subject to official notice of issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be determined
prior to the consummation of the Offerings.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
ARACS has entered into a $470.0 million secured credit facility (the "New
Credit Facility") which will be guaranteed by the Company and certain of
ARACS's subsidiaries to replace the Company's current credit facility. The
following is a summary of the material terms and conditions of the New Credit
Facility.
The New Credit Facility consists of (i) a revolving credit facility in the
amount of up to $125.0 million and will be available on a revolving basis
until the Final Maturity Date in order to finance the working capital 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 working
capital needs in the ordinary course of business, which will be repayable in
four installments, the first three of which shall be in the amount of $1.0
million payable on June 30, 1998, June 30, 1999 and June 30, 2000 and the
remainder of which will be due on the Final Maturity Date, 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 to AESOP
Leasing or AESOP Leasing Corp. II, as applicable, pursuant to fleet lease
agreements and (b) maturing Commercial Paper Notes if such Commercial Paper
Notes cannot be repaid through the issuance of additional Commercial Paper
Notes or draws under the Liquidity Facility.
Interest accrues on borrowings outstanding under the New Credit Facility,
at a rate equal to, at the option of ARACS, (A) the sum of (i) the highest of
(a) the rate of interest publicly announced by Chase Securities Inc. as its
prime rate in effect at its principal office in New York City, (b) the
secondary market rate for three-month certificates of deposit (adjusted for
statutory reserve requirements) plus 1% and (c) the federal funds effective
rate from time to time plus 0.5%, and (ii) an applicable margin; or (B) the
sum of (i) the rate (adjusted for statutory reserve requirements) at which
eurodollar deposits for one, two, three or six months (as selected by ARACS)
are offered in the interbank eurodollar market and (ii) an applicable margin.
The New Credit Facility is secured by the tangible and intangible assets
of ARACS and the Company (including, without limitation, its intellectual
property, its rights under the Master License Agreement and related
agreements, real property and all of the capital stock or equivalent equity
ownership interests of ARACS and each of its direct and indirect domestic
subsidiaries and 65% of ARACS's first-tier foreign subsidiaries), except for
those assets which are subject to a negative pledge or as to which the agents
for the New Credit Facility shall determine in their sole discretion that the
costs of obtaining such a security interest are excessive in relation to the
value of the security to be afforded thereby.
The New Credit Facility contains a number of customary affirmative
covenants, including covenants which require ARACS and the Company to deliver
financial statements and other reports; pay other obligations; maintain
corporate existence and material rights and privileges; comply with laws and
material contracts; maintain properties and insurance; maintain books and
records; grant the lenders certain inspection rights; provide notices of
defaults, litigation and material events; and comply with environmental
matters. The New Credit Facility also contains a number of customary negative
covenants, including limitations on indebtedness (including preferred stock
of subsidiaries); liens; guarantee obligations; mergers; consolidations;
liquidations and dissolutions; sales of assets; leases; dividends and other
payments in respect of capital stock, capital expenditures; investments;
loans and advances; optional payments and modifications of subordinated and
other debt instruments; modification to certain franchise agreements
transactions with affiliates; sale and leaseback transactions; changes in
fiscal year; negative pledge clauses; and changes in lines of business. ARACS
will be required to meet certain financial covenants, including (i) certain
maximum leverage ratios and (ii) certain minimum interest coverage ratios.
The New Credit Facility includes certain events of defaults, including:
nonpayment of principal when due; nonpayment of interest when due, fees or
other amounts after a grace period; material inaccuracy of representations
and warranties; violation of covenants (subject, in the case of certain
affirmative
59
<PAGE>
covenants, to a period to cure such violations); cross-default; default under
franchise agreements; bankruptcy events; certain ERISA events; material
judgments; actual or asserted invalidity of any guarantee or security
document or security interest; and a change of control of the Company.
For a description of the Company's fleet financing arrangements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
60
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and
disposition of Common Stock by a Non-United States Holder. For purposes of
this discussion, a "Non-United States Holder" is any holder other than (i) a
citizen or an individual considered under the United States tax laws to be a
resident of the United States, (ii) a corporation or partnership created or
organized in the United States or under the laws of the United States or of
any political subdivision thereof, (iii) an estate whose income is includible
in gross income for United States federal tax purposes regardless of its
source or (iv) a trust for which a court within the United States is able to
exercise primary jurisdiction over the administration of the trust, and for
which one or more United States fiduciaries has the authority to control all
substantial decisions of the trust. This discussion does not address all
aspects of United States federal tax that may be relevant to Non-United
States Holders in light of their specific circumstances. Prospective
investors are urged to consult their tax advisors with respect to the
particular tax consequences to them of acquiring, holding and disposing of
Common Stock, as well as any tax consequences which may arise under the laws
of any foreign, state, local or other taxing jurisdiction. This discussion is
based upon the United States federal income and estate tax law now in effect,
which is subject to change, possibly retroactively, and is for general
information only.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States federal income tax at the rate of 30% of the
gross amount of such dividends (or at such lower rate as may be specified by
an applicable income tax treaty) unless such dividends are effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder ("effectively connected"), in which case the
dividends will be subject to the United States federal income tax on net
income on the same basis that it applies to United States persons. In the
case of a Non-United States Holder which is a corporation, such dividends
might also be subject to the United States branch profits tax (which is
generally imposed on a foreign corporation on the repatriation from the
United States of effectively connected earnings and profits at a 30% rate).
An applicable income tax treaty may, however, change these rules. A
Non-United States Holder may be required to satisfy certain certification
requirements in order to claim treaty benefits or otherwise obtain any
reduction of or exemption from withholding under the foregoing rules.
SALE OR OTHER DISPOSITION OF COMMON STOCK
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with the conduct
of a trade or business within the United States by the Non-United States
Holder (or by a partnership, trust or estate in which the Non-United States
Holder is a partner or beneficiary), (ii) in the case of a Non-United States
Holder who is a nonresident alien individual and holds Common Stock as a
capital asset, such holder is present in the United States for 183 days or
more in the taxable year of disposition and (x) has a "tax home" in the United
States (as specifically defined under the United States federal income tax
laws) or (y) maintain as an office or other fixed place of business in the
United States to which the gain from the sale of the stock is attributable,
(iii) the Non-United States Holder is subject to tax, pursuant to the
provisions of United States tax law applicable to certain United States
expatriates whose loss of United States citizenship had as one of its
principal purposes the avoidance of United States taxes, or (iv)(A) the
Company is or becomes a "United States real property holding corporation" for
United States federal income tax purposes and (B) assuming the Common Stock
continues to be "regularly traded on an established securities market" for
tax purposes, the Non-United States Holder held, directly or indirectly, at
any time during the five year period ending on the date of disposition, more
than 5% of the outstanding Common Stock. The Company believes that it is not
currently, and is not likely to become, a United States real property holding
corporation. Any such gain that is (or is treated as being) effectively
connected will not be subject to withholding, but will be subject to United
States federal income tax (and, in the case of corporate holders, possibly
the United States branch profits tax). Non-United States Holders should
consult applicable treaties, which may provide for different rules (including
possibly the exemption of certain capital gains from tax).
61
<PAGE>
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
DIVIDENDS. United States backup withholding tax will generally not apply
to dividends paid on Common Stock to a Non-United States Holder at an address
outside the United States. The Company must report annually to the Internal
Revenue Service and to each Non-United States Holder the amount of dividends
paid to, and the tax withheld with respect to, such holder, regardless of
whether any tax was actually withheld. This information may also be made
available to the tax authorities in the Non-United States Holder's country of
residence.
SALE OR OTHER DISPOSITION OF COMMON STOCK. Upon the sale or other taxable
disposition of Common Stock by a Non-United States Holder to or through a
United States office of a broker, the broker must backup withhold at a rate
of 31% and report the sale to the Internal Revenue Service, unless the holder
certifies its Non-United States Holder status under penalties of perjury or
otherwise establishes an exemption. Upon the sale or other taxable
disposition of Common Stock by a Non-United States Holder to or through the
foreign office of a United States broker, or a foreign broker with certain
types of relationships to the United States, the broker must report the sale
to the Internal Revenue Service (but not backup withhold) unless the broker
has documentary evidence in its files that the seller is a Non-United States
Holder and/or certain other conditions are met, or the holder otherwise
establishes an exemption.
BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit
against such Non-United States Holder's United States federal income tax
liability, if any, provided that the required information is furnished to the
Internal Revenue Service.
PROPOSED REGULATIONS. On April 22, 1996, the Internal Revenue Service
issued proposed regulations relating to withholding, backup withholding and
information reporting that, if adopted in their current form, would, among
other things, unify current certification procedures and forms and clarify
reliance standards. The proposed regulations would, among other things,
eliminate the general current law presumption that dividends paid to an
address in a foreign country are paid to a resident of that country and would
impose certain certification and documentation requirements on Non-United
States Holders claiming the benefit of a reduced withholding rate with
respect to dividends under a tax treaty. These regulations generally are
proposed to be effective with respect to payments made after December 31,
1997, although in certain cases they are proposed to be effective only with
respect to payments made after December 31, 1999. Proposed regulations are
subject to change, however, prior to their adoption in final form.
FEDERAL ESTATES TAXES
Common Stock owned or treated as owned by an individual who is neither a
citizen nor a resident (as defined for United States federal estate tax
purposes) of the United States at the date of death will be included in such
individual's estate for United States federal estate tax purposes and subject
to such tax, except to the extent that an applicable estate tax treaty
provides otherwise.
62
<PAGE>
UNDERWRITING
The underwriters of the U.S. Offering named below (the "U.S.
Underwriters"), for whom Bear, Stearns & Co. Inc., Blaylock & Partners, L.P.,
Chase Securities Inc., Goldman, Sachs & Co., Lehman Brothers Inc., Montgomery
Securities and Robertson, Stephens & Company LLC are acting as
representatives, have severally agreed with the Company, subject to the terms
and conditions of the U.S. Underwriting Agreement (the form of which has been
filed as an exhibit to the Registration Statement on Form S-1 of which this
Prospectus is a part), to purchase from the Company the aggregate number of
U.S. Shares set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF U.S. UNDERWRITER U.S. SHARES
- -------------------------------- -------------
<S> <C>
Bear, Stearns & Co. Inc..........
Blaylock & Partners, L.P. ......
Chase Securities Inc. ...........
Goldman, Sachs & Co. ............
Lehman Brothers Inc. ............
Montgomery Securities ...........
Robertson, Stephens & Company
LLC ............................
-------------
Total.......................... 15,600,000
=============
</TABLE>
The managers of the concurrent International Offering named below (the
"Managers"), for whom Bear, Stearns International Limited, Bayerische
Vereinsbank AG, Chase Manhattan International Limited, Credit Lyonnais
Securities, Goldman Sachs International, Lehman Brothers International
(Europe), Montgomery Securities and Robertson, Stephens & Company LLC are
acting as lead Managers, have severally agreed with the Company, subject to
the terms and conditions of the International Underwriting Agreement (the form
of which has been filed as an exhibit to the Registration Statement on
Form S-1 of which this Prospectus is a part), to purchase from the Company
the aggregate number of International Shares set forth opposite their
respective names below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL
NAME OF MANAGER SHARES
- --------------------------------------- ---------------
<S> <C>
Bear, Stearns International Limited ....
Bayerische Vereinsbank AG...............
Chase Manhattan International Limited ..
Credit Lyonnais Securities .............
Goldman Sachs International ............
Lehman Brothers International (Europe)
Montgomery Securities ..................
Robertson, Stephens & Company LLC ......
---------------
Total................................. 3,900,000
===============
</TABLE>
The nature of the respective obligations of the U.S. Underwriters and the
Managers is such that all of the U.S. Shares and all of the International
Shares must be purchased if any are purchased. Those obligations are subject,
however, to various conditions, including the approval of certain matters by
counsel. The Company has agreed to indemnify the U.S. Underwriters and the
Managers against certain liabilities, including liabilities under the
Securities Act, and, where such indemnification is unavailable, to contribute
to payments that the U.S. Underwriters and the Managers may be required to
make in respect of such liabilities.
The Company has been advised that the U.S. Underwriters propose to offer
the U.S. Shares in the United States and Canada and the Managers propose to
offer the International Shares outside the United States and Canada,
initially at the public offering price set forth on the cover page of this
Prospectus and to certain selected dealers at such price less a concession
not to exceed $ per share; that the U.S. Underwriters and the Managers may
allow, and such selected dealers may reallow, a concession to certain other
dealers not to exceed $ per share; and that after the commencement of the
Offerings, the public offering price and the concessions may be changed.
63
<PAGE>
The Company has granted the U.S. Underwriters and the Managers options to
purchase in the aggregate up to 2,925,000 additional shares of Common Stock
solely to cover over-allotments, if any. The options may be exercised in
whole or in part at any time within 30 days after the date of this
Prospectus. To the extent the options are exercised, the U.S. Underwriters
and the Managers will be severally committed, subject to certain conditions,
including the approval of certain matters by counsel, to purchase the
additional shares of Common Stock in proportion to their respective purchase
commitments as indicated in the preceding tables.
Pursuant to an agreement between the U.S. Underwriters and the Managers
(the "Agreement Between"), each U.S. Underwriter has agreed that, as part of
the distribution of the U.S. Shares and subject to certain exceptions, (a) it
is not purchasing any U.S. Shares for the account of anyone other than a U.S.
or Canadian Person (as defined below) and (b) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any U.S.
Shares or distribute any prospectus relating to the U.S. Offering outside the
United States or Canada or to anyone other than a U.S. or Canadian Person or
a dealer who similarly agrees. Similarly, pursuant to the Agreement Between,
each Manager has agreed that, as part of the distribution of the
International Shares and subject to certain exceptions, (a) it is not
purchasing any of the International Shares for the account of any U.S. or
Canadian Person and (b) it has not offered or sold, and will not offer, sell,
resell or deliver, directly or indirectly, any of the International Shares or
distribute any prospectus relating to the International Offering in the
United States or Canada or to any U.S. or Canadian Person or to a dealer who
does not similarly agree. As used herein, "U.S. or Canadian Person" means any
individual who is a resident or citizen of the United States or Canada, any
corporation, pension, profit sharing or other trust or any other entity
organized under or governed by the laws of the United States or Canada or of
any political subdivision thereof (other than the foreign branch of any U.S.
or Canadian Person), any estate or trust the income of which is subject to
United States or Canadian federal income taxation regardless of the source of
such income, and any United States or Canadian branch of a person other than
a U.S. or Canadian Person; "United States" means the United States of America
(including the District of Columbia), its territories, its possessions and
other areas subject to its jurisdiction; "Canada" means the provinces of
Canada, its territories, its possessions and other areas subject to its
jurisdiction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the Managers of such number of shares of Common Stock as may
be mutually agreed upon. The price of any shares so sold shall be the public
offering price as then in effect for the Common Stock being sold by the U.S.
Underwriters and the Managers, less an amount not greater than the selling
concession allocable to such Common Stock. To the extent that there are sales
between the U.S. Underwriters and the Managers pursuant to the Agreement
Between, the number of shares of Common Stock initially available for sale by
the U.S. Underwriters or by the Managers may be more or less than the amount
specified on the cover page of this Prospectus.
Each Manager has represented and agreed that (i) it has not offered or
sold, and, prior to the expiration of six months following the consummation
of the Offerings, it will not offer or sell, any shares of Common Stock to
any person in the United Kingdom other than persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their business or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (ii) it has complied and will comply with
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom, and (iii) it has only issued or passed on, and
will only issue or pass on, in the United Kingdom any document received by it
in connection with the issue of the Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom such document
may otherwise lawfully be issued or passed on.
Purchasers of the International Shares offered in the International
Offering may be required to pay stamp taxes and other charges in accordance
with the laws and practices of the country of purchase in addition to the
initial public offering price set forth on the cover page hereof.
64
<PAGE>
The U.S. Underwriters and the Managers have reserved for sale at the
initial public offering price up to 975,000 shares of Common Stock which may
be sold to the Company's employees. The number of shares available for sale
to the general public will be reduced to the extent any reserved shares are
purchased. Any reserved shares not so purchased will be offered by the U.S.
Underwriters and the Managers on the same basis as the other shares offered
hereby. Any employee of the Company who purchases reserved shares will be
required to agree not to dispose of such shares for a period of 180 days
following the date of this Prospectus. In order to comply with local
securities laws, in certain jurisdictions outside the United States, sales to
employees of the Company will be made directly by the Company, rather than
through the Managers, and the total underwriting discount set forth on the
cover page of this Prospectus will be reduced accordingly.
The Company and HFS have agreed that, subject to certain limited
exceptions, for a period of 180 days after the date of this Prospectus,
without the prior written consent of Bear, Stearns & Co. Inc., they will not,
directly or indirectly, offer or agree to sell, sell or otherwise dispose of
any shares of Common Stock (or securities convertible into, exchangeable for
or evidencing the right to purchase shares of Common Stock).
Prior to the Offerings, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations among the Company and the representatives of the U.S.
Underwriters and the Managers. Among the factors to be considered in making
such determination will be the Company's financial and operating history and
condition, its prospects and prospects for the industry in which it does
business in general, the management of the Company, prevailing equity market
conditions and the demand for securities considered comparable to those of
the Company.
In order to facilitate the Offerings, certain persons participating in the
Offerings may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock during and after the Offerings.
Specifically, the U.S. Underwriters and the Managers may over-allot or
otherwise create a short position in the Common Stock for their own account
by selling more shares than have been sold to them by the Company. The U.S.
Underwriters and the Managers may elect to cover any such short position by
purchasing shares in the open market or by exercising the over-allotment
options granted to the U.S. Underwriters and the Managers. In addition, such
persons may stabilize or maintain the price of the Common Stock by bidding
for or purchasing shares in the open market and may impose penalty bids,
under which selling concessions allowed to syndicate members or other
broker-dealers participating in the Offerings are reclaimed if shares
previously distributed in the Offerings are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may
be to stabilize or maintain the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. The imposition
of a penalty bid may also affect the price of the Common Stock to the extent
that it discourages resales thereof. No representation is made as to the
magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the NYSE or otherwise and, if commenced, may
be discontinued at any time.
Certain of the U.S. Underwriters and the Managers and their affiliates
have from time to time provided, and may continue to provide, investment
banking services and general financing and banking transactions to the
Company and certain of its affiliates for which such U.S. Underwriters,
Managers or affiliates have received and will receive fees and commissions.
The Chase Manhattan Bank ("CMB"), an affiliate of Chase Securities Inc., one
of the U.S. Underwriters ("CSI"), is the administrative agent and a lender
under the New Credit Facility. CSI was the arranger of such facility. Each of
CMB and CSI received compensation for their roles in connection therewith.
CMB is also the administrative agent and the sole lender under the
Acquisition Credit Facility that financed the The First Gray Line
Acquisition. A substantial portion of the proceeds of the Offerings will
be paid to CMB in order to retire the Acquisition Credit Facility. See
"Use of Proceeds." Accordingly, the Offerings are being made pursuant to
Section 2710(c)(8) of the NASD Conduct Rules and Bear, Stearns & Co. Inc.
is assuming the responsibilities of acting as Qualified Independent
Underwriter in pricing the Offerings and conducting due diligence.
65
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, New York,
New York. Certain legal matters in connection with the Offerings will be
passed upon for the U.S. Underwriters and the Managers by Weil, Gotshal &
Manges LLP, New York, New York. Skadden, Arps, Slate, Meagher & Flom LLP has
from time to time represented, and may continue to represent, HFS and certain
of its affiliates (including the Company) in connection with certain legal
matters.
EXPERTS
The consolidated financial statements as to the Company as of December 31,
1996 and the period October 17, 1996 (Date of Acquisition) to December 31,
1996 and as to the Predecessor Companies as of December 31, 1995 and for the
period January 1, 1996 to October 16, 1996 and for each of the two years in
the period ended December 31, 1995 included in this Prospectus and the
related financial statement schedule included elsewhere in the Registration
Statement of which this Prospectus is a part have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement, and are included in reliance
upon the reports of such firm given their authority as experts in accounting
and auditing.
The consolidated financial statements of First Gray Line as of September
30, 1996 and 1995 and for each of the two years in the period ended September
30, 1996 included elsewhere in the Registration Statement of which this
Prospectus is a part have been audited by Ernst & Young LLP, independent
auditors, as stated in their report appearing herein and elsewhere in the
Registration Statement, and are included in reliance upon the report of such
firm given their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington D.C. a Registration Statement on Form S-1 (as
amended, the "Registration Statement") of which this Prospectus is a part
under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document are summaries of the
material terms of such contract, agreement or other document. With respect to
each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved. The Registration Statement (including the
exhibits and schedule thereto) filed by the Company with the Commission may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street (Suite 1400), Chicago, Illinois 60661. Copies of such material may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a website that contains reports, proxy and
information statements and other information. The website address is
http://www.sec.gov.
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the addresses set forth above. The
Company reports its financial statements on a year ended December 31. The
Company intends to furnish its stockholders with annual reports containing
consolidated financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of
each fiscal year.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE #
----------
<S> <C>
AVIS RENT A CAR, INC.
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Statement of Financial Position at June 30, 1997 ...........F-2
Condensed Consolidated Statements of Operations for the six months ended
June 30, 1996 and 1997............................................................F-3
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1997............................................................F-4
Notes to the Unaudited Condensed Consolidated Financial Statements ...............F-5
Audited Consolidated Financial Statements:
Independent Auditors' Report.......................................................F-7
Consolidated Statements of Financial Position at December 31, 1995 and 1996 .......F-8
Consolidated Statements of Operations for the years ended December 31, 1994 and
1995, and for the periods January 1, 1996 to October 16, 1996 and October 17,
1996 (Date of Acquisition) to December 31, 1996...................................F-9
Consolidated Statements of Stockholder's Equity for the years ended December 31,
1994 and 1995, and for the periods January 1, 1996 to October 16, 1996 and
October 17, 1996 (Date of Acquisition) to December 31, 1996.......................F-10
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and
1995, and for the periods January 1, 1996 to October 16, 1996 and October 17,
1996 (Date of Acquisition) to December 31, 1996 ..................................F-11
Notes to the Audited Consolidated Financial Statements.............................F-12
THE FIRST GRAY LINE CORPORATION
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet at June 30, 1997..............................F-30
Condensed Consolidated Statements of Income for the nine months ended June 30,
1997 and 1996 .....................................................................F-31
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30,
1997 and 1996 .....................................................................F-32
Notes to the Unaudited Condensed Consolidated Financial Statements ................F-33
Audited Consolidated Financial Statements:
Report of Independent Auditors ....................................................F-34
Consolidated Balance Sheets at September 30, 1996 and 1995.........................F-35
Consolidated Statements of Income for the years ended September 30, 1996
and 1995..........................................................................F-36
Consolidated Statements of Changes In Stockholders' Equity for the years ended
September 30, 1996 and 1995.......................................................F-37
Consolidated Statements of Cash Flows for the years ended September 30, 1996
and 1995..........................................................................F-38
Notes to Audited Consolidated Financial Statements.................................F-39
AVIS RENT A CAR, INC.
Unaudited Pro Forma Consolidated Financial Statements:
Pro Forma Consolidated Statement of Financial Position at
June 30, 1997 ....................................................................P-2
Pro Forma Consolidated Statements of Operations for the year ended December 31,
1996 .............................................................................P-3
Pro Forma Consolidated Statements of Operations for the six months ended
June 30, 1997 ....................................................................P-4
Notes to the Unaudited Pro Forma Consolidated Financial Statements ...............P-5
</TABLE>
F-1
<PAGE>
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997
------------
<S> <C>
ASSETS
Cash and cash equivalents........................................ $ 57,479
Accounts receivable, net......................................... 190,292
Due from affiliates, net......................................... 15,477
Prepaid expenses................................................. 35,076
Vehicles, net.................................................... 2,312,109
Property and equipment, net...................................... 100,331
Other assets..................................................... 13,320
Deferred income tax assets....................................... 105,937
Cost in excess of net assets acquired, net....................... 199,052
------------
Total assets................................................... $3,029,073
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable................................................. $ 228,264
Accrued liabilities.............................................. 268,209
Current income tax liabilities................................... 3,794
Deferred income tax liabilities.................................. 34,478
Public liability, property damage and other insurance
liabilities..................................................... 223,473
Debt............................................................. 2,183,769
------------
Total liabilities.............................................. 2,941,987
------------
Commitments and contingencies
Stockholder's equity:
Common stock.................................................... --
Additional paid-in capital...................................... 75,000
Retained earnings............................................... 14,290
Foreign currency translation adjustment......................... (2,204)
------------
Total stockholder's equity..................................... 87,086
------------
Total liabilities and stockholder's equity..................... $3,029,073
============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
F-2
<PAGE>
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997
-------------- --------------
<S> <C> <C>
Revenue ............................................... $887,566 $945,647
-------------- --------------
Cost and expenses:
Direct operating...................................... 390,125 398,548
Vehicle depreciation, net............................. 163,746 179,418
Vehicle lease charges................................. 60,862 69,025
Selling, general and administrative................... 168,042 203,383
Interest, net.......................................... 73,153 68,343
Amortization of cost in excess of net assets acquired 2,382 2,570
-------------- --------------
858,310 921,287
-------------- --------------
Income before provision for income taxes............... 29,256 24,360
Provision for income taxes............................. 13,077 11,254
-------------- --------------
Net income ............................................ $ 16,179 $ 13,106
============== ==============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
F-3
<PAGE>
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 16,179 $ 13,106
Adjustments to reconcile net income to net cash provided by
operating activities:
Vehicle depreciation.............................................. 178,085 184,510
Depreciation and amortization of property and equipment .......... 7,676 5,499
Amortization of cost in excess of net assets acquired ............ 2,382 2,570
Amortization of debt issuance costs............................... 1,604 --
Deferred income tax provision..................................... 9,410 6,050
Undistributed (charges) earnings of associated companies, net .... (245) 75
Provision for losses on accounts receivable....................... 707 1,340
Provision for public liability, property damage and other
insurance liabilities............................................ 44,606 44,996
Change in operating assets and liabilities:
Increase in accounts receivable.................................. (29,183) (18,464)
(Increase) decrease in prepaid expenses.......................... (10,714) 4,685
Decrease in other assets......................................... 3,422 1,054
Increase in accounts payable..................................... 28,604 24,261
Increase (decrease) in accrued liabilities....................... 10,027 (65,595)
Decrease in public liability, property damage and other
insurance liabilities........................................... (34,796) (35,240)
--------------- ---------------
Net cash provided by operating activities........................ 227,764 168,847
--------------- ---------------
Cash flows from investing activities:
Payments for vehicle additions.................................... (1,347,799) (1,435,234)
Vehicle deletions................................................. 914,766 1,342,420
Payments for additions to property and equipment.................. (18,606) (9,509)
Sales of property and equipment................................... 1,522 2,075
--------------- ---------------
Net cash used in investing activities............................ (450,117) (100,248)
--------------- ---------------
Cash flows from financing activities:
Changes in debt:
Proceeds......................................................... 401,533 188,507
Repayments....................................................... (188,755) (298,410)
--------------- ---------------
Net increase (decrease) in debt.................................. 212,778 (109,903)
Deferred debt issuance costs...................................... (1,701) --
Proceeds from intercompany loans.................................. 28,552 48,164
--------------- ---------------
Net cash provided by (used in) financing activities ............. 239,629 (61,739)
--------------- ---------------
Effect of exchange rate changes on cash............................ 245 (267)
--------------- ---------------
Net increase in cash and cash equivalents.......................... 17,521 6,593
Cash and cash equivalents at beginning of period................... 39,081 50,886
--------------- ---------------
Cash and cash equivalents at end of period......................... $ 56,602 $ 57,479
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.......................................................... $ 79,114 $ 90,113
=============== ===============
Income taxes...................................................... $ 4,510 $ 6,187
=============== ===============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
F-4
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position at June 30, 1996 and 1997, and the results of operations
and cash flows for the six month periods then ended. The results of
operations for interim periods are not indicative of the results for a full
year.
For a summary of significant accounting policies and additional financial
information, see the Company's consolidated financial statements which are
included elsewhere in this Prospectus.
NOTE 2--BASIS OF FINANCIAL STATEMENT PRESENTATION
On January 1, 1997, HFS Car Rental, Inc. (formerly known as, and
hereinafter referred to as, Avis, Inc.) contributed the net assets of its
corporate operations and all of its common stock ownership in Avis
International, Ltd., Avis Enterprises, Inc., Pathfinder Insurance Company and
Global Excess & Reinsurance, Ltd. to Avis Rent A Car, Inc.
NOTE 3--FINANCING AND DEBT
Debt outstanding at June 30, 1997 is not guaranteed by HFS and is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
VEHICLE TRUST FINANCING
- --------------------------------------------------------------
Short Term:
Short-term vehicle trust financing revolving credit
facilities .................................................. $1,839,700
------------
Long Term:
Vehicle manufacturer's floating rate notes due September 1998
($50,912 senior at 8.5% and $16,088 subordinated at 10.0%) .. 67,000
Vehicle manufacturer's floating rate notes due October 2001
($64,375 senior at 7.4% and $53,625 subordinated at 9.2%) .. 118,000
------------
Total long-term portion of vehicle trust financing ......... 185,000
------------
OTHER FINANCING
- --------------------------------------------------------------
Short Term:
Short-term notes--foreign at 4.1% to 10.5%.................... 134,401
7.50% capital lease terminating November 1997 and current
portion of long-term debt ................................... 18,595
------------
Total current portion of other financing debt ............... 152,996
------------
Long Term:
Other domestic................................................ 2,407
Debt of foreign subsidiaries:
Floating rate notes due February 1998 at 4.8%................. 2,164
Floating rate notes due August 1998 at 6.4%................... 1,502
------------
Total long-term portion of Other Financing .................. 6,073
------------
$2,183,769
============
</TABLE>
NOTE 4--SUBSEQUENT EVENTS.
On August 20, 1997, the Company purchased The First Gray Line Corporation
and its subsidiaries for approximately $210 million, including expenses. The
fair value of unaudited assets and liabilities, exclusive of cost in excess
of the fair value of net assets acquired, at June 30, 1997 are $332.3 million
and $296.3 million, respectively. The transaction is subject to customary
closing conditions and regulatory approval.
On July 31, 1997, the Company refinanced all of its domestic debt. This
debt was refinanced by utilizing a $3.65 billion asset-backed structure,
which consisted of (i) a $2.0 billion Commercial Paper Program and (ii) a
$1.65 billion Medium Term Note Issuance with maturities of 3 and 5 years.
F-5
<PAGE>
ARACS is party to a $470.0 million secured credit agreement that provides
for (i) a revolving credit facility in the amount of up to $125.0 million
which is available on a revolving basis 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 of business, which will be repayable
in four installments, the first three of which shall be in the amount of $1.0
million payable on June 30, 1998, June 30, 1999 and June 30, 2000 and the
remainder of which will be due on the Final Maturity Date, 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 pursuant
to fleet lease agreements and (b) maturing Commercial Paper Notes if such
Commercial Paper Notes cannot be repaid through the issuance of additional
Commercial Paper Notes or draws under the Liquidity Facility. Under terms of
this facility, the Company will be required to meet the following covenants
(i) certain maximum leverage ratios, (ii) certain minimum interest coverage
ratios, and (iii) certain minimum fixed charge coverage. In addition, the
Credit Facility prohibits the payment of cash dividends until the fiscal year
ending December 31, 1998 and, thereafter, permits the payment of dividends
only if the Company meets a minimum leverage ratio, the amount of such
dividend does not exceed a designated percentage of the Company's cash flow
and no default exists. Interest rates under these new facilities ranged from
5.6% to 7.8% at July 31, 1997.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder of
Avis Rent A Car, Inc.
Garden City, New York
We have audited the accompanying consolidated statements of financial
position of Avis Rent A Car, Inc. and subsidiaries (successor to Avis Rent A
Car Systems Holdings, Inc. and subsidiaries, Avis International, Ltd. and
subsidiaries, Avis Enterprises, Inc. and subsidiaries, Pathfinder Insurance
Company and Global Excess & Reinsurance, Ltd., all previously wholly-owned by
Avis, Inc., collectively the "Predecessor Companies"), (collectively referred
to as "Avis Rent A Car, Inc." or the "Company") as of December 31, 1996 and
as to the Predecessor Companies as of December 31, 1995, and the related
consolidated statements of operations, stockholder's equity and cash flows
for the period October 17, 1996 (Date of Acquisition) to December 31, 1996
and as to the Predecessor Companies the related consolidated statements of
operations, stockholder's equity and cash flows for each of the two years in
the period ended December 31, 1995 and the period January 1, 1996 to October
16, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 1996, and the results of its operations and its cash flows for
the period October 17, 1996 to December 31, 1996 (period after the change in
control referred to in Note 1 to the consolidated financial statements), and
with respect to the Predecessor Companies as of December 31, 1995, and for
each of the two years in the period ended December 31, 1995 and the period
January 1, 1996 to October 16, 1996 (period up to the change in control
referred to in Note 1 to the consolidated financial statements) in conformity
with generally accepted accounting principles.
As more fully discussed in Note 1 to the consolidated financial statements,
the Predecessor Companies were acquired in a business combination accounted
for as a purchase. As a result of the acquisition, the consolidated financial
statements for the period subsequent to the acquisition are presented on a
different basis of accounting than those for the periods prior to the
acquisition and, therefore, are not directly comparable.
Deloitte & Touche LLP
New York, New York
May 12, 1997
(August 20, 1997 as to Note 15)
F-7
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 39,081 $ 50,886
Accounts receivable, net......................................... 194,971 311,179
Due from affiliates, net......................................... 61,807
Prepaid expenses................................................. 35,053 40,155
Vehicles, net.................................................... 2,167,167 2,243,492
Property and equipment, net...................................... 140,992 98,887
Other assets..................................................... 20,882 14,526
Deferred income tax assets....................................... 81,974 113,660
Cost in excess of net assets acquired, net....................... 144,778 196,765
-------------- --------------
Total assets................................................. $2,824,898 $3,131,357
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable................................................. $ 228,146 $ 175,535
Accrued liabilities.............................................. 183,595 329,245
Due to affiliates, net........................................... 385,687
Current income tax liabilities................................... 6,696 4,790
Deferred income tax liabilities.................................. 27,990 35,988
Public liability, property damage and other insurance
liabilities..................................................... 194,677 213,785
Debt............................................................. 1,109,747 2,295,474
-------------- --------------
Total liabilities............................................ 2,136,538 3,054,817
-------------- --------------
Commitments and contingencies
Stockholder's equity:
Common stock ($.01 par value, 1,000 shares authorized;
100 shares outstanding at December 31, 1996)................... 2,977 --
Additional paid-in capital...................................... 344,531 75,000
Retained earnings............................................... 340,596 1,184
Foreign currency translation adjustment......................... 256 356
-------------- --------------
Total stockholder's equity................................... 688,360 76,540
-------------- --------------
Total liabilities and stockholder's equity................... $2,824,898 $3,131,357
============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-8
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES OCTOBER 17, 1996
------------------------------------------ (DATE OF
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 ACQUISITION)
------------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
------------ ------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Revenue........................ $1,412,400 $1,615,951 $1,504,673 $362,844
------------ ------------ ---------------- -------------------
Cost and expenses:
Direct operating.............. 664,993 724,759 650,750 167,682
Vehicle depreciation, net .... 266,637 324,186 275,867 66,790
Vehicle lease charges......... 42,778 86,916 100,318 22,658
Selling, general and
administrative............... 252,024 269,434 283,180 68,215
Interest, net................. 128,898 145,199 120,977 34,212
Amortization of cost in
excess of net assets
acquired .................... 4,754 4,757 3,782 1,026
------------ ------------ ---------------- -------------------
1,360,084 1,555,251 1,434,874 360,583
------------ ------------ ---------------- -------------------
Income before provision for
income taxes.................. 52,316 60,700 69,799 2,261
Provision for income taxes .... 30,213 34,635 31,198 1,040
------------ ------------ ---------------- -------------------
Net income..................... $ 22,103 $ 26,065 $ 38,601 $ 1,221
============ ============ ================ ===================
</TABLE>
See accompanying notes to the consolidated financial statements.
F-9
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
-------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994..................... $2,827 $318,125 $309,902 $(2,598) $628,256
Net income for the year ended December
31, 1994.................................... 22,103 22,103
Tax benefit of ESOP income tax deductions ... 13,104 13,104
Foreign currency translation adjustment ..... 3,466 3,466
Cash dividends............................... (8,578) (8,578)
Stock dividends.............................. 150 (150)
-------- ------------ ---------- ------------- ----------
Balance, December 31, 1994................... 2,977 331,229 323,277 868 658,351
Net income for the year ended December
31, 1995.................................... 26,065 26,065
Tax benefit of ESOP income tax deductions ... 13,302 13,302
Foreign currency translation adjustment ..... (612) (612)
Cash dividends............................... (8,746) (8,746)
-------- ------------ ---------- ------------- ----------
Balance, December 31, 1995................... 2,977 344,531 340,596 256 688,360
Net income for the period ended October
16, 1996.................................... 38,601 38,601
Tax benefit of ESOP income tax deductions ... 12,939 12,939
Foreign currency translation adjustment ..... 2,805 2,805
Cash dividends............................... (1,398) (1,398)
-------- ------------ ---------- ------------- ----------
Balance, October 16, 1996.................... $2,977 $357,470 $377,799 $ 3,061 $741,307
======== ============ ========== ============= ==========
Avis Rent A Car, Inc. ($.01 par value, 1,000
shares authorized; 100 shares outstanding
at October 17, 1996 (Date of Acquisition)) . $-- $ 75,000 $ 75,000
Net income for the period from
October 17, 1996 to December 31, 1996 ...... $ 1,221 1,221
Foreign currency translation adjustment for
the period October 17, 1996 to December 31,
1996........................................ $ 356 356
Additional minimum pension liability
for the period October 17, 1996 to December
31, 1996.................................... (37) (37)
-------- ------------ ---------- ------------- ----------
Balance, December 31, 1996................... $-- $ 75,000 $ 1,184 $ 356 $ 76,540
======== ============ ========== ============= ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-10
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES OCTOBER 17, 1996
-------------------------------------------- (DATE OF
YEARS ENDED DECEMBER 31, JANUARY 1, 1996 ACQUISITION)
--------------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
------------- ------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 22,103 $ 26,065 $ 38,601 $ 1,221
Adjustments to reconcile net income to net cash
provided by operating activities:
Vehicle depreciation............................ 291,360 342,048 306,159 71,343
Depreciation and amortization of property and
equipment...................................... 12,782 13,387 12,333 2,212
Amortization of cost in excess of net assets
acquired....................................... 4,754 4,757 3,782 1,026
Amortization of debt issuance costs ............ 3,454 2,660 2,423
Deferred income tax provision................... 19,384 25,852 22,342 33
Undistributed earnings of associated companies . (65) (376) (232)
Provision for (benefit from) losses on accounts
receivable..................................... 305 (48) 1,238 227
Provision for public liability, property damage
and other insurance liabilities................ 73,900 81,800 74,109 17,355
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable .... 53 (22,644) (204,137) 10,327
Decrease (increase) in prepaid expenses ....... 4,640 (863) (2,125) (2,664)
(Increase) decrease in other assets............ (595) 1,988 3,266 (3,459)
(Decrease) increase in accounts payable ....... (44,087) (5,733) 82,354 (18,712)
Increase (decrease) in accrued liabilities .... 26,399 42,176 101,069 (24,718)
Decrease in public liability, property damage
and other insurance liabilities............... (72,363) (71,159) (56,364) (16,015)
------------- ------------- ---------------- -------------------
Net cash provided by operating activities .... 342,024 439,910 384,818 38,176
------------- ------------- ---------------- -------------------
Cash flows from investing activities:
Payments for vehicle additions.................. (3,218,613) (2,553,324) (2,325,460) (561,117)
Vehicle deletions............................... 2,680,535 2,028,474 1,795,562 565,896
Payments for additions to property and
equipment...................................... (24,487) (36,939) (25,953) (3,484)
Sales of property and equipment................. 2,898 3,715 1,849 361
Investment in associated companies.............. (100)
Investment in Canadian Licensees................ (3,134)
------------- ------------- ---------------- -------------------
Net cash (used in) provided by investing
activities.................................... (559,767) (558,074) (557,136) 1,656
------------- ------------- ---------------- -------------------
Cash flows from financing activities:
Changes in debt:
Proceeds....................................... 423,502 320,940 519,167 63,903
Repayments..................................... (161,523) (287,271) (267,317) (133,457)
------------- ------------- ---------------- -------------------
Net increase (decrease) in debt................ 261,979 33,669 251,850 (69,554)
Deferred debt issuance costs.................... (4,637) (5,515) (2,604)
(Payments on) proceeds from intercompany loans . (29,090) 104,209 (27,696) (6,661)
Cash dividends.................................. (8,578) (8,746) (1,398)
------------- ------------- ---------------- -------------------
Net cash provided by (used in) financing
activities.................................... 219,674 123,617 220,152 (76,215)
------------- ------------- ---------------- -------------------
Effect of exchange rate changes on cash ......... 119 (197) 260 94
------------- ------------- ---------------- -------------------
Net increase (decrease) in cash and cash
equivalents..................................... 2,050 5,256 48,094 (36,289)
Cash and cash equivalents at beginning of
period.......................................... 31,775 33,825 39,081 87,175
------------- ------------- ---------------- -------------------
Cash and cash equivalents at end of period ...... $ 33,825 $ 39,081 $ 87,175 $ 50,886
============= ============= ================ ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest....................................... $ 131,877 $ 149,885 $ 135,733 $ 28,170
============= ============= ================ ===================
Income taxes................................... $ 7,576 $ 8,688 $ 6,220 $ 827
============= ============= ================ ===================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION
--
Recapitalization at Date of Acquisition ........ $ -- $ -- $ -- $ 666,307
============= ============= ================ ===================
</TABLE>
See accompanying notes to the consolidated financial statements.
F-11
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include Avis Rent A
Car, Inc. (name changed from and formerly known as Rental Car System
Holdings, Inc. which was incorporated on October 17, 1996) and subsidiaries
(including the carved out corporate operations of HFS Car Rental, Inc. (name
changed from and formerly known as, and hereinafter referred to as, Avis,
Inc.), which is the holding company of Rental Car System Holdings, Inc., and
Prime Vehicles Trust (the "Vehicle Trust")), Avis International, Ltd. and
subsidiaries, Avis Enterprises, Inc. and subsidiaries, Pathfinder Insurance
Company and Global Excess & Reinsurance, Ltd. (collectively referred to as
"Avis Rent A Car, Inc."). All of the foregoing companies are ultimately
wholly-owned subsidiaries of Avis, Inc., which was acquired by HFS
Incorporated ("HFS") on October 17, 1996 (the "Date of Acquisition") for
approximately $806.5 million. The purchase price was comprised of
approximately $367.2 million in cash, $100.9 million of indebtedness and
$338.4 million of HFS common stock. Prior to October 16, 1996, the
above-named entities were wholly-owned by Avis, Inc. and 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".
The major shareholder of Avis, Inc. was an Employee Stock Ownership Plan
("ESOP") and the minority shareholder was General Motors Corporation
("General Motors"). The Company purchases a significant portion of its
vehicles, obtains financing, and receives certain financial incentives and
allowances from General Motors (see Notes 2, 4, 7 and 14). As a result of the
acquisition, the consolidated financial statements for the period subsequent
to the acquisition are presented on a different basis of accounting than
those for the periods prior to the acquisition and, therefore, are not
directly comparable. On January 1, 1997, Avis, Inc. contributed the net
assets of its corporate operations and all of its common stock ownership in
Avis International, Ltd., Avis Enterprises, Inc., Pathfinder Insurance
Company and Global Excess & Reinsurance, Ltd. to the Company. After the
transfer, the remaining operations of Avis, Inc. consist of an investment in
a wholly-owned subsidiary which owns the Avis trade names and trademarks.
Pursuant to a plan developed by HFS prior to the Date of Acquisition, HFS
will cause the Company to undertake an initial public offering ("IPO") within
one year of the Date of Acquisition, which will reduce HFS' equity interest
in the Company to 25%. HFS owns and operates the reservation system as well
as the telecommunications and computer processing systems which service the
rental car operations for reservations, rental agreement processing,
accounting and vehicle control. HFS will charge a fee for such services (see
Note 3). In addition, HFS will retain the Avis trade name and charge the
Company a royalty fee for the use of the Avis name.
The acquisition was accounted for under the purchase method and includes
the operations of the Company subsequent to the Date of Acquisition. A
portion of this purchase price has been allocated to the estimated fair value
of the Company. This estimate is calculated assuming that the Company is an
independent franchisee of Avis, Inc. and is required to pay certain fees for
use of the Avis trade name, reservation services and other franchise related
services. HFS and its advisors have estimated that the value of the Company
at the Date of Acquisition was $75 million. The value of the Company is
expected to increase to approximately $300 million upon completion of the IPO
(with the IPO proceeds retained by the Company) with HFS's equity interest to
be reduced to 25% equal to $75 million. If the results of the IPO do not
confirm the preliminary value as of the Date of Acquisition, then the
allocated purchase price will be adjusted with a corresponding adjustment to
cost in excess of net assets acquired. The estimated fair value of the
Company has been allocated to individual assets and liabilities based on
their estimated fair value at the Date of Acquisition. The final asset and
liability fair values may differ from those set forth in the accompanying
consolidated statement of financial position on December 31, 1996; however,
the changes are not expected to have a material effect on the consolidated
financial position of the Company.
F-12
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The preliminary purchase cost allocation at the Date of Acquisition has
been allocated to the Company as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Allocated purchase cost ...........................$ 75,000
-----------
Fair Value of:
Liabilities assumed .............................. 3,145,395
Assets acquired .................................. 3,022,712
-----------
Net Liabilities ................................... 122,683
-----------
Excess of purchase price over net assets acquired $ 197,683
===========
</TABLE>
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES
Generally accepted accounting principles require the use of estimates,
which are subject to change, in the preparation of financial statements.
Significant accounting estimates used include estimates for determining
public liability, property damage and other insurance liabilities, and the
realization of deferred income tax assets. Management has exercised
reasonableness at deriving these estimates. However, actual results may
differ.
REVENUE RECOGNITION
Revenue is recognized over the period the vehicle is rented.
CASH AND CASH EQUIVALENTS
The Company considers deposits and short-term investments with an original
maturity of three months or less to be cash equivalents.
VEHICLES
Vehicles are stated at cost net of accumulated depreciation. In accordance
with industry practice, when vehicles are sold, gains or losses are reflected
as an adjustment to depreciation. Vehicles are generally depreciated at rates
ranging from 10% to 25% per annum. Manufacturers provide the Company with
incentives and allowances (such as rebates and volume discounts) which are
amortized to income over the holding period of the vehicles.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost net of accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful life of the assets. Estimated useful lives range
from five to ten years for furniture and office equipment, to thirty years
for buildings. Leasehold improvements are amortized over the shorter of
twenty years or the remaining life of the lease. Maintenance and repairs are
expensed; renewals and improvements are capitalized. When depreciable assets
are retired or sold, the cost and related accumulated depreciation are
removed from the accounts with any resulting gain or loss reflected in the
consolidated statement of operations.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is amortized over a 40 year period
and is shown net of accumulated amortization of $37.5 million and $1.0
million at December 31, 1995 and 1996, respectively.
F-13
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IMPAIRMENT ACCOUNTING
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". The Company reviews the recoverability
of its long-lived assets, including cost in excess of net assets acquired,
when events or changes in circumstances occur that indicate that the carrying
value of the assets may not be recoverable. The measurement of possible
impairment is based on the Company's ability to recover the carrying value of
the asset from the expected future pre-tax undiscounted future cash flows
generated. The measurement of impairment requires management to use estimates
of expected future cash flows. If an impairment loss existed, the amount of
the loss would be recorded under the caption Costs and Expenses in the
consolidated statement of operations. It is at least reasonably possible that
future events or circumstances could cause these estimates to change. The
adoption of this statement had no material effect on the consolidated
financial statements of the Company.
PUBLIC LIABILITY, PROPERTY DAMAGE AND OTHER INSURANCE LIABILITIES
Insurance liabilities on the accompanying consolidated statements of
financial position include additional liability insurance, personal effects
protection insurance, public liability and property damage ("PLPD") and
personal accident insurance claims for which the Company is self-insured. The
Company is self-insured up to $1 million per claim under its automobile
liability insurance program for PLPD and additional liability insurance.
Costs in excess of $1 million per claim are insured under various contracts
with commercial insurance carriers. The liability for claims up to $1 million
is estimated based on the Company's historical loss and loss adjustment
expense experience and adjusted for current trends.
The insurance liabilities include a provision for both claims reported to
the Company as well as claims incurred but not yet reported to the Company.
This method is an actuarially accepted loss reserve method. Adjustments to
this estimate and differences between estimates and the amounts subsequently
paid are reflected in operations as they occur.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign companies are translated at the
year-end exchange rates. The resultant translation adjustment is included as
a component of consolidated stockholder's equity. Results of operations are
translated at the average rates of exchange in effect during the year.
INCOME TAXES
The Company is included in the consolidated federal income tax return of
HFS. Pursuant to the regulations under the Internal Revenue Code, the
Company's pro rata share of the consolidated federal income tax liability of
HFS is allocated to the Company on a separate return basis. The Predecessor
Companies were included in the consolidated federal income tax return of
Avis, Inc. The Company files separate income tax returns in states where a
consolidated return is not permitted. In accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), deferred income tax assets and liabilities are measured based upon the
difference between the financial accounting and tax bases of assets and
liabilities.
PENSIONS
Costs of the defined benefit plans are actuarially determined under the
projected unit credit cost method and include amounts for current service and
interest on projected benefit obligations and plan assets. The Company's
policy is to fund at least the minimum contribution amount required by the
Employee Retirement Income Security Act of 1974.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs were $60.4
million, $48.4 million, $66.1 million and $10.3 million for the periods ended
December 31, 1994, December 31, 1995, October 16, 1996 and December 31, 1996,
respectively.
F-14
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENVIRONMENTAL COSTS
The Company's operations include the storage and dispensing of gasoline.
The Company accrues losses associated with the remediation of accidental fuel
discharges when such losses are probable and reasonably estimable. Accruals
for estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances
change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value. Recoveries from
insurance companies and other reimbursements are generally not significant.
In October 1996, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 96-1
Environmental Remediation Liabilities ("SOP 96-1"). SOP 96-1 provides
guidance on the timing and measurement of liabilities associated with
environmental remediation. The statement is effective for fiscal years
beginning after December 15, 1996. The adoption of this statement is not
expected to have a material effect on the results of operations or financial
position of the Company.
NOTE 2 -- ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1995 and 1996 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Vehicle rentals....................... $ 90,290 $ 94,480
Due from vehicle manufacturers ...... 11,308 14,758
Due from General Motors .............. 69,504 168,546
Damage claims ........................ 5,969 10,697
Due from licensees ................... 3,297 3,903
Other ................................ 17,349 19,022
---------- ---------
197,717 311,406
Less allowance for doubtful accounts (2,746) (227)
---------- ---------
$194,971 $311,179
========== =========
</TABLE>
Amounts due from vehicle manufacturers include receivables for vehicles
sold under guaranteed repurchase contracts and amounts due for incentives and
allowances. Incentives and allowances are based on the volume of vehicles to
be purchased for a model year, or from the manufacturers' willingness to
encourage the Company to retain vehicles rather than return the vehicles back
to the manufacturer or arise from the purchase of particular models not
subject to repurchase under "buyback" arrangements. Incentives and allowances
are amortized to income over the holding period of the vehicles (see Notes 4
and 14).
NOTE 3 -- DUE (TO) FROM AFFILIATES, NET
Due (to) from affiliates, net at December 31, 1995 and 1996 consist of the
following balances due to or from HFS or its consolidated subsidiaries which
will be settled on or before the previously mentioned IPO (in thousands):
F-15
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
------------- -----------
<S> <C> <C>
Note receivable from Wizard Co., Inc. (a) .. $ 196,965
Subordinated vehicle financing notes (b) .... $ (180,000) (247,500)
Due to Avis, Inc. for tax advantaged vehicle
financing (c) .............................. (1,000,000)
Non-interest bearing advances (d) ........... 794,313 112,342
------------- -----------
$ (385,687) $ 61,807
============= ===========
</TABLE>
NOTES:
(a) Consists of a $194.1 million note receivable from Wizard Co., Inc., an
indirect wholly-owned subsidiary of HFS, plus accrued interest. The
note bears interest at 7.13% and is due on October 1, 2006 and is
guaranteed by HFS.
(b) Represents loans from Avis, Inc. to the Vehicle Trust, as described in
Note 7, to provide additional subordinated financing. The amounts
provided reduce, within certain limits, the amount of subordinated
financing required from other lenders. The loans are made under terms
of a credit agreement which terminates on October 29, 2003. At December
31, 1995 and 1996, the weighted average interest rate under these loans
was 11.16% and 10.75%, respectively.
(c) Represents a $1 billion ESOP related tax advantaged vehicle trust
financing consisting of loans under various agreements with banks,
insurance companies and vehicle manufacturer finance companies. The tax
advantaged notes were issued in September 1987 with a final maturity of
25 years and annual principal reductions commencing in 1998. At
December 31, 1995, the weighted average interest rate under these loans
was 6.0%. Included within the $1 billion ESOP related vehicle trust
financing is $118 million that is ultimately due to General Motors.
This loan was retired as of the Date of Acquisition.
(d) Primarily represents the transfer of assets from the Company to HFS and
subsidiaries, recorded in connection with the October 17, 1996
acquisition of Avis, Inc. by HFS, as well as intercompany transactions
relating to management, service and administrative fees since the Date
of Acquisition. The amounts due to or from HFS and subsidiaries are
interest free and are guaranteed by HFS.
Expense and (income) items of the Company include the following charges
from (to) Avis, Inc. and subsidiaries prior to the Date of Acquisition for
the period ended December 31, 1994, December 31, 1995 and October 16, 1996
(in thousands).
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, JANUARY 1, 1996
-------------------- TO
1994 1995 OCTOBER 16, 1996
--------- ---------- ----------------
<S> <C> <C> <C>
Vehicle related costs ........ $(3,954) $(25,134)
Data processing .............. $28,671 29,833 30,209
Employee benefits allocation (2,975) (3,385) (2,776)
Rent ......................... (1,730) (2,188) (2,459)
</TABLE>
These charges seek to reimburse the affiliated company for the actual
costs incurred. These amounts reflect the effect of various intercompany
agreements, which are subject to renegotiation from time to time, and certain
allocations which are based upon such factors as square footage, employee
salaries, computer usage time, etc.
F-16
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Expense items of the Company include the following charges from HFS and
affiliates of HFS for the period October 17, 1996 (Date of Acquisition) to
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Reservations ................................ $10,900
Data processing ............................. 8,772
Management, service and administrative fees 8,568
Interest on intercompany debt, net .......... 2,561
Rent ........................................ 950
----------
$31,751
==========
</TABLE>
Reservations and data processing services are charged to the Company based
on actual cost. Effective January 1, 1997, HFS will charge the Company a
royalty fee of 4.0% of revenue for the use of the Avis trade name. On an
unaudited pro forma basis, had the royalty fee been charged to the Company
beginning on October 17, 1996, net income for the period October 17, 1996 to
December 31, 1996 would have been reduced by $4.3 million resulting in a pro
forma net loss of $3.1 million.
NOTE 4 -- VEHICLES
Vehicles at December 31, 1995 and 1996 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Vehicles ................................................ $2,283,003 $2,250,309
Vehicles acquired under long-term capital lease (Note 7) 95,084 19,324
Buses and support vehicles .............................. 42,075 45,868
Vehicles held for sale .................................. 42,332 36,378
------------ ------------
2,462,494 2,351,879
Less accumulated depreciation ........................... (295,327) (108,387)
------------ ------------
$2,167,167 $2,243,492
============ ============
</TABLE>
Depreciation expense recorded for vehicles was $266.6 million, $324.2
million, $275.9 million and $66.8 million, for the periods ended December 31,
1994, December 31, 1995, October 16, 1996 and December 31, 1996,
respectively. Depreciation expense reflects a net gain on the disposal of
vehicles of $24.8 million, $17.8 million, $30.3 million and $4.5 million for
the periods ended December 31, 1994, December 31, 1995, October 16, 1996 and
December 31, 1996, respectively. It also reflects the amortization of certain
incentives and allowances from various vehicle manufacturers (the most
significant of which was received from General Motors) of approximately $74
million, $77 million, $61 million and $14 million for the periods ended
December 31, 1994, December 31, 1995, October 16, 1996 and December 31, 1996,
respectively.
During the periods ended December 31, 1994, December 31, 1995, October 16,
1996 and December 31, 1996, the Company purchased from General Motors $2.7
billion, $2.0 billion, $1.8 billion and $0.4 billion of vehicles, net of
incentives and allowances, respectively (see Notes 1 and 14).
In November 1988 and April 1990, the Company entered into seven year
operating leases under which an original amount of $324.3 million of vehicles
were leased, with the ability to exchange such leased vehicles for newly
manufactured vehicles with the same value to the lessor. The leases are
cancelable at the Company's option, however, additional costs may be incurred
upon termination based upon the fair value of the vehicles at the time the
option is exercised. At the termination of the leases, the Company may
purchase the vehicles at the agreed upon fair market value or return them to
the lessor.
F-17
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1994, the Company entered into a financing arrangement
whereby it may lease up to $503 million of vehicles. This arrangement was
amended on October 17, 1996 to increase the amount to $650 million. Under
this arrangement, at December 31, 1995 and 1996, there were $219 million and
$322 million of vehicles under operating leases. The vehicles leased under
this arrangement may be leased for periods of up to 18 months. The lease cost
charged to the Company varies with the number of vehicles leased and the
repurchase agreement offered by the vehicle manufacturer to the lessor and
includes all expenses including the interest costs of the financing company.
The rental payments due in each of the years ending December 31 for the
operating leases as described above are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ... $69,444
1998 ... 15,388
</TABLE>
Rental expense for those vehicles under operating leases as described
above was $59.2 million, $106.1 million, $93.0 million and $16.1 million for
the periods ended December 31, 1994, December 31, 1995, October 16, 1996 and
December 31, 1996, respectively.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Land .......................................... $ 19,702 $ 19,523
Buildings ..................................... 13,321 11,862
Leasehold improvements ........................ 139,938 48,898
Furniture, fixtures and equipment ............. 30,779 10,997
Construction-in-progress ...................... 15,813 9,946
---------- ---------
219,553 101,226
Less accumulated depreciation and
amortization.................................. (78,561) (2,339)
---------- ---------
$140,992 $ 98,887
========== =========
</TABLE>
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities at December 31, 1995 and 1996 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Payroll and related costs ..... $ 54,706 $ 73,142
Taxes, other than income taxes 10,740 29,522
Rents and property related .... 10,594 30,889
Interest ....................... 12,081 18,531
Sales and marketing ............ 20,567 20,395
Vehicle related ................ 24,492 18,784
Other various .................. 50,415 137,982
---------- ---------
$183,595 $329,245
========== =========
</TABLE>
F-18
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- FINANCING AND DEBT
Debt outstanding at December 31, 1996 is not guaranteed by HFS and debt
outstanding at December 31, 1995 and 1996 is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
VEHICLE TRUST FINANCING
Commercial paper........................................... $ 3,000
Short-term vehicle trust financing--revolving credit
facilities ............................................... $1,970,000
Current portion of long-term debt ......................... 56,000
------------ ------------
Total current portion of vehicle trust financing ......... 59,000 1,970,000
------------ ------------
Long-term vehicle trust revolving credit facilities ...... 476,000
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
Floating rate notes due September 1998 .................... 115,000
Insurance company notes due from December 1997 to December
1999 at 7.53% to 8.23% ................................... 112,000
Insurance company notes due from June 1998 to June 2003 at
6.75% to 7.92% ........................................... 150,500
------------ ------------
Total long-term portion of vehicle trust financing ..... 853,500 185,000
------------ ------------
OTHER FINANCING
Short-term notes--foreign at 6.63% to 18.00% in 1995 and
3.89% to 13.00% in 1996 .................................. 37,264 65,516
Short-term floating rate capital lease terminating in 1996 12,801
Current portion of 7.50% capital lease terminating
November 1997 ............................................ 19,153 40,169
Current portion of long-term debt--other .................. 13,605 1,060
------------ ------------
Total current portion of other financing ................ 82,823 106,745
------------ ------------
7.50% capital lease terminating November 1997 ............. 40,169
Other domestic............................................. 3,974 2,916
Debt of foreign subsidiaries:
Floating rate notes due April 1997 at 8.26% to 8.44% .... 51,891
Floating rate notes due July 1997 at 9.42% to 9.63% ..... 10,378
Floating rate notes due February 1998 at 7.65% in 1995
and 4.75% in 1996 ....................................... 8,012 2,935
Floating rate notes due August 1998 at 6.94% to 8.65% ... 27,878
------------ ------------
Total long-term portion of other financing .............. 114,424 33,729
------------ ------------
$1,109,747 $2,295,474
============ ============
</TABLE>
F-19
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Currently, the primary source of funding for domestic vehicles is
provided by the Vehicle Trust (a grantor trust). The Vehicle Trust consists
of loans from banks, vehicle manufacturer finance companies and Avis, Inc.
The Predecessor Companies' financing structure of the Vehicle Trust consisted
of loans from banks, insurance companies, vehicle manufacturer finance
companies and Avis, Inc. Amounts drawn against this facility may be used to
purchase vehicles and pay certain expenses of the Vehicle Trust. The security
for the Vehicle Trust financing facility consists of a lien on the vehicles
acquired under the facility, which at December 31, 1995 and 1996, totaled
approximately $1.9 billion and $2.1 billion, respectively, exclusive of
related valuation reserves. The security for the Vehicle Trust financing
facility also consists of security interests in certain other assets of the
Vehicle Trust. In addition, the Vehicle Trust and its security agreement
require that there be outstanding, at all times, subordinated debt in a
specified percentage range (10% -25%) of the net book value of the vehicles
owned by the Vehicle Trust. Pursuant to the agreement, the subordinated debt
is to be provided by vehicle manufacturer finance companies and Avis, Inc. At
December 31, 1995 and 1996, subordinated debt of $292.1 million and $318.0
million, respectively, was required under the Vehicle Trust financing of
which $180.0 million and $247.5 million, respectively, was due to Avis, Inc.
(Note 3).
At December 31, 1995, the weighted average interest rate on commercial
paper was 6.4%. For the periods ended December 31, 1994, December 31, 1995
and October 16, 1996, the average outstanding borrowings of commercial paper
were $19.9 million, $33.5 million and $30.4 million, respectively, with a
weighted average interest rate of 5.3%, 6.5% and 6.0%, respectively.
The short-term notes are issued pursuant to a $2.5 billion revolving
credit facility dated as of October 17, 1996 which matures on October 16,
1997. At December 31, 1996, the weighted average interest rate on borrowings
under this facility was 6.00%. For the period from October 17, 1996 to
December 31, 1996, the average outstanding borrowings under this facility
were $2.0 billion with a weighted average interest rate of 5.98%. This
facility requires a fee of 1/8 of 1% on the committed amount.
The long-term vehicle trust revolving credit facility consisted of $850
million revolving credit facility expiring on September 30, 1997. The
interest rate on these loans is based on the London interbank rate ("LIBOR")
plus a spread negotiated at the time of borrowing. At December 31, 1995, the
weighted average interest rate on outstanding borrowings under this facility
was 6.3%. For the periods ended December 31, 1994, December 31, 1995 and
October 16, 1996, the average outstanding borrowings under this facility were
$366.5 million, $288.0 million and $516.9 million, respectively, with a
weighted average interest rate of 5.2%, 6.5% and 5.7%, respectively. This
facility was retired on the Date of Acquisition.
The Company also had Vehicle Trust financing outstanding from vehicle
manufacturer finance companies under terms of loan agreements dated October
17, 1996. Under these agreements, the maximum amount of borrowings allowed is
$267 million, of which up to $260 million may be used as subordinated debt.
On December 31, 1996, $185 million was outstanding of which $70.5 million of
the outstanding debt was deemed subordinated. At December 31, 1996, the
weighted average interest rate of borrowings under this facility was 8.5%.
For the period October 17, 1996 to December 31, 1996, the average outstanding
borrowings under this facility was $185 million with a weighted average
interest rate of 8.41%. The Predecessor Companies, through its parent, Avis,
Inc., had substantially similar financing arrangements under a portion of a
$1 billion ESOP related tax advantaged vehicle trust financing facility (Note
3). At December 31, 1995, the outstanding borrowings under this arrangement
was $185 million, of which $112.1 million was subordinated. The average
borrowings under this facility for the periods ended December 31, 1994,
December 31, 1995 and October 16, 1996 were $317.0 million, $268.2 million
and $185.0 million, respectively. The weighted average interest rate on these
average borrowings were 6.2%, 7.7% and 7.3%.
The floating rate notes were issued pursuant to a loan agreement, dated
September 1, 1995, for a period of three years. The interest rate on these
notes is based on the LIBOR, plus a spread of 0.45%. The
F-20
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interest rate on these notes at December 31, 1995 was 6.2%. For the periods
ended December 31, 1995 and October 16, 1996, the average outstanding
borrowings under this facility were $35.1 million and $115.0 million,
respectively, with a weighted average interest rate of 6.2% and 6.0%,
respectively. The notes were retired on the Date of Acquisition.
In December 1992 and May 1993, the Company borrowed a total of $318.5
million from a group of insurance companies. The maturities on these notes
ranged from 3 to 10 years, with an average life, when issued, of 6.1 years.
The effective interest rate on these notes was 7.3% at December 31, 1995. The
average amounts outstanding for the periods ended December 31, 1994, December
31, 1995 and October 16, 1996 were $318.5 million, $318.5 million and $287.1
million, respectively, with a weighted average interest rate of 7.3%, 7.3%
and 7.4%, respectively. These notes were retired as of the Date of
Acquisition.
In November 1992, the Predecessor Companies entered into a five year
capital lease under which $96.7 million of vehicles were leased. The lease is
cancelable at the Company's option, however, additional costs may be incurred
upon termination based upon the fair value of the vehicles at the time the
option is exercised. At the termination of the lease, the Company may
purchase the vehicles at an agreed upon fair market value or return them to
the lessor. The future minimum lease payments due under the Company's capital
lease obligation, which terminates on November 30, 1997, are $41.5 million
(including interest of $1.3 million).
Included in total debt at December 31, 1995 and 1996 is indebtedness to
General Motors of $10.1 million and $118.3 million, respectively (see Note
14).
Under the terms of the Company's loan agreements, the Company must
maintain a minimum net worth, minimum earnings and cash flow ratios.
Mandatory maturities of long-term obligations for each of the next five
years ending December 31, and thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ......... $ 41,229
1998 ......... 98,950
1999 ......... 1,086
2000 ......... 209
2001 ......... 118,228
Thereafter .. 256
</TABLE>
OTHER CREDIT FACILITIES
At December 31, 1995 and 1996, the Company has letters of credit/working
capital agreements totaling $102.6 million and $102.6 million, respectively,
which may be renewed biannually at the Company's option and the banks'
discretion. The collateral for certain of these agreements consists of a lien
on property and equipment and certain receivables with a carrying value of
$140.9 million and $136.9 million, respectively. At December 31, 1995 and
1996, the Company has outstanding letters of credit amounting to $47.6
million and $55.1 million, respectively.
In addition, for certain of its international operations, the Company has
available at December 31, 1995 and 1996, unused lines of credit of $176.9
million and $224.3 million, respectively. The unused lines of credit
agreements require an annual fee of 0.2% to 0.5% of the unused line.
INTEREST RATE SWAP AGREEMENTS
The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on certain outstanding debt obligations.
These agreements effectively change the Company's interest rate exposure on
$29.1 million and $44.0 million of its outstanding debt from a weighted
average
F-21
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
variable interest rate to a fixed rate of 7.7% and 7.1% at December 31, 1995
and 1996, respectively. The variable interest element with respect to these
interest rate swap agreements is reset quarterly. The interest rate swap
agreements will terminate in March 1997, July 1998 and November 1998. The
differential to be paid or received is recognized ratably as interest rates
change over the life of the agreements as an adjustment to interest expense.
The net interest differential charged to interest expense for the periods
ended December 31, 1994, December 31, 1995, October 16, 1996 and December 31,
1996 was $179,000, $146,000, $582,000 and $285,000, respectively. The Company
is exposed to credit risk in the event of nonperformance by counterparties to
its interest rate swap agreements. Credit risk is limited by entering into
such agreements with primary dealers only; therefore, the Company does not
anticipate that nonperformance by counterparties will occur. Notwithstanding
this, the Company's treasury department monitors counterparty credit ratings
at least quarterly through reviewing independent credit agency reports. Both
current and potential exposure are evaluated as necessary, by obtaining
replacement cost information from alternative dealers. Potential loss to the
Company from credit risk on these agreements is limited to amounts
receivable, if any.
NOTE 8 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and the estimated fair value of the Company's interest
rate swap agreements represent liabilities of approximately $123,600 and
$843,100 at December 31, 1995, and $578,000 and $1.4 million at December 31,
1996, respectively.
For instruments including cash and cash equivalents, accounts receivable
and accounts payable, the carrying amount approximates fair value because of
the short maturity of these instruments. The fair value of floating-rate debt
approximates carrying value because these instruments re-price frequently at
current market prices. The fair value of fixed-rate debt approximates
carrying value.
The Company believes that it is not practicable to estimate the current
fair value of the amounts due from (to) affiliates because of the related
party nature of the instruments.
NOTE 9 -- INCOME TAXES
The provision for income taxes for the periods ended December 31, 1994,
December 31, 1995, October 16, 1996 and December 31, 1996 consists of the
following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
YEARS ENDED, (DATE OF
DECEMBER 31, JANUARY 1, 1996 ACQUISITION)
------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
--------- --------- ---------------- -------------------
<S> <C> <C> <C> <C>
Current:
State..................... $ 735 $ 1,422 $ 2,176 $ 719
Foreign .................. 10,094 7,361 6,680 288
--------- --------- ---------------- -------------------
10,829 8,783 8,856 1,007
--------- --------- ---------------- -------------------
Deferred:
Federal .................. 16,020 19,057 19,614 (85)
Foreign .................. 3,364 6,795 2,728 118
--------- --------- ---------------- -------------------
19,384 25,852 22,342 33
--------- --------- ---------------- -------------------
Provision for income
taxes..................... $30,213 $34,635 $31,198 $1,040
========= ========= ================ ===================
</TABLE>
F-22
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective income tax rate for the periods ended December 31, 1994,
December 31, 1995, October 16, 1996 and December 31, 1996 varies from the
statutory U.S. federal income tax rate due to the following (dollars amounts
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995
----------------- -----------------
<S> <C> <C> <C> <C>
Statutory U.S. federal
income tax rate........... $18,311 35.0% $21,245 35.0%
Tax effect of foreign
operations and dividends 9,447 18.1 8,984 14.8
Amortization of cost in
excess of net assets
acquired and other
intangibles .............. 1,633 3.1 1,633 2.7
State income taxes, net of
federal tax benefit ...... 478 .9 924 1.5
Other non-deductible
business expenses ........ 550 .9
Other ..................... 344 .7 1,299 2.2
--------- ------- --------- -------
Effective income tax rate . $30,213 57.8% $34,635 57.1%
========= ======= ========= =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF
JANUARY 1, 1996 ACQUISITION)
TO TO
OCTOBER 16, 1996 DECEMBER 31, 1996
<S> <C> <C> <C> <C>
----------------- ------------------
Statutory U.S. federal
income tax rate........... $24,429 35.0% $ 791 35.0%
Tax effect of foreign
operations and dividends 5,134 7.4 (1,073) (47.5)
Amortization of cost in
excess of net assets
acquired and other
intangibles .............. 1,045 1.5 359 15.9
State income taxes, net of
federal tax benefit ...... 1,413 2.0 469 20.8
Other non-deductible
business expenses ........ 462 .6 494 21.8
Other ..................... (1,285) (1.8)
--------- ------- --------- --------
Effective income tax rate . $31,198 44.7% $ 1,040 46.0%
========= ======= ========= ========
</TABLE>
In accordance with SFAS 109, the net deferred income tax assets at
December 31, 1995 and 1996 include the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
GROSS DEFERRED INCOME TAX ASSETS:
Accrued liabilities ........................................ $ 108,914 $ 171,050
Net operating loss carryforwards ........................... 68,474 78,172
Alternative minimum income tax credit carryforwards ....... 3,025 3,025
----------- -----------
180,413 252,247
----------- -----------
GROSS DEFERRED INCOME TAX LIABILITIES:
Tax depreciation in excess of book depreciation ........... (116,304) (152,346)
Tax amortization in excess of book amortization of cost in
excess of net assets acquired and difference in book and
tax basis of intangibles .................................. (13,547)
Prepaids and other ......................................... (10,125) (8,682)
----------- -----------
(126,429) (174,575)
----------- -----------
Net deferred income tax assets.............................. $ 53,984 $ 77,672
=========== ===========
</TABLE>
The Company, under its tax disaffiliation agreement with HFS, has
allocated alternative minimum tax net operating loss carryforwards of $139.8
million. The net operating loss carryforward is $223.3 million. The net
operating loss carryforwards expire as follows: 2001, $4.3 million; 2002,
$2.5 million; 2005, $32.6 million; 2008, $23.7 million; 2009, $15.1 million.
The Company also has available unused investment tax credits of approximately
$5.8 million which expire on February 28, 2002.
F-23
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- RETIREMENT BENEFITS
The Company, through its subsidiary, Avis Rent A Car System, Inc.
("ARACS"), sponsors non-contributory defined benefit plans covering employees
who are members of certain collective bargaining units and non-union
full-time employees hired prior to December 31, 1983 who were age 25 or above
on January 1, 1985. ARACS also contributes to union sponsored pension plans.
Through ARACS, the Company sponsors a Voluntary Investment Savings Plan
under a "qualified cash or deferred arrangement" under Section 401(k) of the
Internal Revenue Code. For the periods ended December 31, 1994, December 31,
1995, October 16, 1996, and December 31, 1996, the cost of the plan was $1.6
million, $1.7 million, $1.4 million and $352,000, respectively. Included in
the Investment Savings Plan, ARACS sponsors a defined contribution plan for
substantially all non-union full-time employees not otherwise covered. Costs
for this plan are determined at 2% of each covered employee's compensation.
Employer contributions and costs of the plan for the periods ended December
31, 1994, December 31, 1995, October 16, 1996 and December 31, 1996 amounted
to $1.7 million, $1.8 million, $1.5 million and $394,000, respectively.
The defined benefit plans provide benefits based upon years of credited
service, highest average compensation and social security benefits. Annual
retirement benefits, at age 65, are equal to 1 1/2% of the participating
employee's final average compensation (average compensation during the
highest five consecutive years of employment in the ten years prior to
retirement) less 1 3/7% of the Social Security benefits for each year of
service up to a maximum of 35 years. In addition, the plan provides for
reduced benefits before age 65 and for a joint and survivor annuity option.
The Company also sponsors several foreign pension plans. The most
significant of these is the Canadian pension plan.
The status of the defined benefit plans at December 31, 1995 and 1996 is
as follows (in thousands):
<TABLE>
<CAPTION>
1995
---------------------------
U.S. PLANS
---------------------------
SALARIED AND
HOURLY
EMPLOYEES
AS OF JUNE BARGAINING CANADIAN
30, 1985 PLAN PLAN
-------------- ------------ ----------
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested................................................ $(37,040) $(5,327) $(2,349)
Nonvested ............................................ (4,186) (201)
-------------- ------------ ----------
Total ............................................... $(41,226) $(5,528) $(2,349)
============== ============ ==========
Actuarial present value of projected benefit
obligation............................................ $ 57,780 $ 5,528 $ 2,566
Plan assets at fair value ............................. 51,633 4,426 7,072
-------------- ------------ ----------
Projected benefit obligation (in excess of) less than
plan assets .......................................... (6,147) (1,102) 4,506
Unrecognized net actuarial loss (gain) ................ 4,713 455 (557)
Prior service cost (gain) not yet recognized in net
periodic pension cost ................................ (2,798) 996
Remaining unrecognized obligation ..................... (1,451)
Unrecognized net transition asset ..................... (2,944)
-------------- ------------ ----------
Pension (liability) asset included in the statement of
financial position.................................... $ (4,232) $(1,102) $ 1,005
============== ============ ==========
</TABLE>
F-24
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1996
---------------------------
U.S. PLANS
---------------------------
SALARIED AND
HOURLY
EMPLOYEES
AS OF JUNE BARGAINING CANADIAN
30, 1985 PLAN PLAN
-------------- ------------ ----------
<S> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested ............................................... $(43,406) $(7,147) $(3,389)
Nonvested ............................................ (4,671) (284)
-------------- ------------ ----------
Total ............................................... $(48,077) $(7,431) $(3,389)
============== ============ ==========
Actuarial present value of projected benefit
obligation ........................................... $ 66,083 $ 7,431 $ 3,703
Plan assets at fair value ............................. 60,697 6,623 8,323
-------------- ------------ ----------
Projected benefit obligation (in excess of) less than
plan assets .......................................... (5,386) (808) 4,620
Unrecognized net actuarial loss (gain) ................ 1,440 37 (336)
Prior service cost not yet recognized in net periodic
pension cost ......................................... 878
Remaining unrecognized obligation ..................... (915)
Unrecognized net transition asset ..................... (2,833)
-------------- ------------ ----------
Pension (liability) asset included in the statement of
financial position.................................... $ (3,946) $ (808) $ 1,451
============== ============ ==========
</TABLE>
Net pension costs of the defined benefit plans for the periods ended
December 31, 1994, December 31, 1995, October 16, 1996 and December 31, 1996,
include the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
-------------------- ---------------------
U.S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Service cost--benefits earned during the
period .................................. $ 2,820 $ 102 $ 2,566 $ 76
Interest cost on projected benefit
obligation .............................. 3,708 271 4,069 304
Return on assets--Actual loss (gain) on
plan assets ............................. 1,626 (586) (10,768) (578)
Net amortization of actuarial (gain) loss
and prior service cost .................. (5,702) 6,184
Contributions to union plans and other .. 2,057 2,211
Amortization of unrecognized net asset at
transition .............................. (134) (130)
--------- ---------- ---------- ----------
Net pension cost (benefit) ............... $ 4,509 $(347) $ 4,262 $(328)
========= ========== ========== ==========
</TABLE>
F-25
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF
JANUARY 1, 1996 ACQUISITION)
TO TO
OCTOBER 16, 1996 DECEMBER 31, 1996
-------------------- -------------------
U.S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Service cost--benefits earned during the
period .................................. $ 2,401 $ 59 $ 302 $ 28
Interest cost on projected benefit
obligation .............................. 3,679 206 357 54
Return on assets--Actual (gain) on plan
assets .................................. (3,194) (538) (551) (115)
Net amortization of actuarial (gain) loss
and prior service cost .................. (794) 390
Contributions to union plans and other .. 2,029 733
Amortization of unrecognized net asset at
transition .............................. (106) (28)
--------- ---------- -------- ----------
Net pension cost (benefit) ............... $ 4,121 $ (379) $1,231 $ (61)
========= ========== ======== ==========
</TABLE>
At December 31, 1995 and 1996, the measurement of the projected benefit
obligation was based upon the following:
<TABLE>
<CAPTION>
1995 1996
------------------ ------------------
U.S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Discount rate ................... 7.50% 9.50% 7.75% 7.00%
Compensation increase ........... 5.00 5.50 5.00 4.00
Long-term return on plan assets 8.75 9.50 8.75 7.00
</TABLE>
The U.S. plans' assets are invested in corporate bonds, U.S. government
securities and common stock mutual funds. The Canadian plan's assets are
invested in Canadian stocks, bonds, mutual funds, real estate and money
market funds.
The Company also sponsors a non-qualified defined benefit pension plan.
The liability for this unfunded plan was $4.6 million and $8.8 million at
December 31, 1995 and 1996, respectively, and is included in accrued
liabilities on the accompanying statement of financial position. The
projected benefit obligation of the plan was $6.0 million and $10.0 million
at December 31, 1995 and 1996, respectively.
NOTE 11 -- LEASES, AIRPORT CONCESSION FEES AND COMMITMENTS
The Company is committed to make rental payments under noncancelable
operating leases relating principally to vehicle rental facilities and
equipment. Under certain leases, the Company is obligated to pay certain
additional costs, such as property taxes, insurance and maintenance. Airport
concession agreements usually require a guaranteed minimum amount plus
contingent fees which are generally based on a percentage of revenues.
F-26
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating lease payments and airport concession fees charged to expense
for the periods ended December 31, 1994, December 31, 1995, October 16, 1996
and December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF
YEARS ENDED DECEMBER 31, JANUARY 1, 1996 ACQUISITION)
------------------------ TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
---------- ---------- ---------------- -------------------
<S> <C> <C> <C> <C>
Minimum fees........... $102,104 $108,965 $ 88,787 $23,576
Contingent fees ....... 45,633 56,624 61,290 13,220
---------- ---------- ---------------- -------------------
147,737 165,589 150,077 36,796
Less sublease rentals (4,082) (4,427) (3,843) (1,000)
---------- ---------- ---------------- -------------------
$143,655 $161,162 $146,234 $35,796
========== ========== ================ ===================
</TABLE>
Future minimum rental commitments under noncancelable operating leases
amounted to approximately $338.0 million at December 31, 1996. The minimum
rental payments due in each of the next five years ending December 31, and
thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ......... $86,264
1998 ......... 62,400
1999 ......... 43,179
2000 ......... 32,669
2001 ......... 20,805
Thereafter .. 92,709
</TABLE>
In addition to the Company's lease commitments, the Company has
outstanding purchase commitments of approximately $1.5 billion at December
31, 1996, which relate principally to vehicle purchases.
F-27
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- SEGMENT INFORMATION
The Company operates in the United States and in foreign countries. The
operations within major geographic areas for the periods ended December 31,
1994, December 31, 1995, October 16, 1996 and December 31, 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
YEARS ENDED DECEMBER 31, (DATE OF
------------------------- JANUARY 1, 1996 ACQUISITION)
TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
------------ ------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Revenue:
United States................. $1,241,465 $1,414,380 $1,313,619 $ 312,194
Australia/New Zealand ........ 92,929 113,744 105,401 31,107
Canada ....................... 59,571 67,809 69,814 13,467
Other foreign operations .... 18,435 20,018 15,839 6,076
------------ ------------ ---------------- -------------------
$1,412,400 $1,615,951 $1,504,673 $ 362,844
============ ============ ================ ===================
Income (loss) before provision
for income taxes:
United States................. $ 21,759 $ 32,122 $ 48,098 $ (2,346)
Australia/New Zealand ........ 14,736 17,198 15,884 4,706
Canada ....................... 7,434 6,838 8,433 (1,752)
Other foreign operations .... 8,387 4,542 (2,616) 1,653
------------ ------------ ---------------- -------------------
$ 52,316 $ 60,700 $ 69,799 $ 2,261
============ ============ ================ ===================
Total assets at end of period:
United States................. $2,344,723 $2,535,621 $2,859,202 $2,750,119
Australia/New Zealand ........ 109,649 133,629 115,082 120,216
Canada ....................... 96,660 97,426 147,617 122,657
Other foreign operations .... 52,081 58,222 65,796 138,365
------------ ------------ ---------------- -------------------
$2,603,113 $2,824,898 $3,187,697 $3,131,357
============ ============ ================ ===================
</TABLE>
NOTE 13 -- LITIGATION
Certain litigation has been initiated against the Company which has arisen
during the normal course of operations. Since litigation is subject to many
uncertainties, the outcome of any individual matter is not predictable with
any degree of certainty, and it is reasonably possible that one or more of
these matters could be decided unfavorably against the Company. The Company
maintains insurance policies that cover most of the actions brought against
the Company. Two legal actions have been filed against ARACS alleging
discrimination in the rental of vehicles. HFS has agreed to indemnify the
Company from any unfavorable outcome with respect to these matters upon the
consummation of an IPO. The Company is currently not involved in any legal
proceeding which it believes would have a material adverse effect upon its
consolidated financial condition or results of operations.
NOTE 14 -- RELATED PARTY TRANSACTIONS
The Company and Avis Europe, plc cooperate jointly in marketing and
promotional activities, the exchange of reservations, the honoring of charge
cards and vouchers, and the transfer of the related billings. A member of the
board of directors and an executive officer of HFS serve on the board of Avis
Europe Limited (formerly Cilva), the parent company of Avis Europe, plc.
F-28
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Vehicle manufacturers offer vehicle repurchase programs on an ongoing
basis to assist in the acquisition and disposition of vehicles. These
programs generally allow the Company, at its option, subject to certain
provisions, to sell the vehicles back to the manufacturers at pre-determined
prices. Amounts included under these programs are reflected in "Accounts
receivable" (see Note 2). Under the terms of certain financing agreements
with General Motors, the Company is required to purchase a significant
percentage of its fleet from local dealers of General Motors subject to
market conditions. In addition, the Company participates in an arrangement
whereby General Motors provides payments for purchasing and promoting a
specified number and mix of vehicles (see Note 4). At December 31, 1995 and
1996, the Company has a $450.0 million and a $250.0 million line of credit,
respectively, from General Motors which may be used for either ESOP or
vehicle trust financing (see Note 7). Of this facility, $300.0 million and
$200.0 million is available for subordinated debt at December 31, 1995 and
1996, respectively. As of December 31, 1995 and 1996, the Company utilized
$118.0 million of this facility, of which $93.4 million and $54.3 million was
subordinated, respectively. This facility requires a fee of 1/4 of 1% on the
unused portion.
NOTE 15 -- SUBSEQUENT EVENTS
On August 20, 1997, the Company purchased The First Gray Line Corporation
and its subsidiaries for approximately $210 million, including expenses. The
fair value of unaudited assets and liabilities, exclusive of cost in excess
of the fair value of net assets acquired, at June 30, 1997 are $332.3 million
and $296.3 million, respectively. The transaction is subject to customary
closing conditions and regulatory approval.
On July 31, 1997, the Company refinanced all of its domestic debt. This
debt was refinanced by utilizing a $3.65 billion asset-backed structure,
which consisted of (i) a $2.0 billion Commercial Paper Program and (ii) a
$1.65 billion Medium Term Note Issuance with maturities of 3 and 5 years.
ARACS is party to a $470.0 million secured credit agreement that provides
for (i) a revolving credit facility in the amount of up to $125.0 million
which is available on a revolving basis 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 of business, which will be repayable
in four installments, the first three of which shall be in the amount of $1.0
million payable on June 30, 1998, June 30, 1999 and June 30, 2000 and the
remainder of which will be due on the Final Maturity Date, 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 pursuant
to fleet lease agreements and (b) maturing Commercial Paper Notes if such
Commercial Paper Notes cannot be repaid through the issuance of additional
Commercial Paper Notes or draws under the Liquidity Facility. Under terms of
this facility, the Company will be required to meet the following covenants
(i) certain maximum leverage ratios, (ii) certain minimum interest coverage
ratios, and (iii) certain minimum fixed charge coverage. In addition, the
Credit Facility prohibits the payment of cash dividends until the fiscal year
ending December 31, 1998 and, thereafter, permits the payment of dividends
only if the Company meets a minimum leverage ratio, the amount of such
dividend does not exceed a designated percentage of the Company's cash flow
and no default exists. Interest rates under these new facilities ranged from
5.6% to 7.8% at July 31, 1997.
F-29
<PAGE>
THE FIRST GRAY LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash...................................................................... $ 3,585
Accounts receivable, less allowance for doubtful Accounts of $248 ........ 9,025
Prepaid expenses.......................................................... 5,120
Rental cars, at cost less accumulated depreciation of $30,278 ............ 299,941
Property and equipment (including land of $7,140) at cost less
accumulated depreciation of $16,505...................................... 18,328
Franchises and other intangibles, at cost................................. 1,705
----------
Total assets.............................................................. $337,704
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable......................................................... $ 20,488
Accrued liabilities...................................................... 12,083
Self-insurance liability accrual......................................... 17,068
Revenue equipment obligations and other debt............................. 218,500
Deferred taxes based on income........................................... 22,984
----------
Total liabilities....................................................... 291,123
Stockholders' equity:
Capital stock, 1,000,000 shares authorized and 640,000 shares issued .... 715
Retained earnings........................................................ 91,265
Less unearned ESOP shares................................................ (45,384)
Less treasury stock, at cost............................................. (15)
----------
Total stockholders' equity.............................................. 46,581
----------
Total liabilities and stockholders' equity................................ $337,704
==========
</TABLE>
See accompanying notes.
F-30
<PAGE>
THE FIRST GRAY LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Revenues............................ $156,384 $143,918
Costs and expenses:
Payroll and fringe benefits ....... 26,421 24,712
Vehicle owning and operating
costs.............................. 60,081 55,898
Commissions, rents and fees ....... 36,236 33,860
Other costs........................ 9,190 7,913
Interest........................... 11,904 11,095
---------- ----------
143,832 133,478
---------- ----------
Income before taxes based on
income............................. 12,552 10,440
Provision for taxes based on
income............................. 5,010 4,232
---------- ----------
Net income.......................... $ 7,542 $ 6,208
========== ==========
</TABLE>
See accompanying notes.
F-31
<PAGE>
THE FIRST GRAY LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ..................................................... $ 7,542 $ 6,208
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation .................................................. 46,885 41,520
ESOP compensation expense ..................................... 1,559 1,500
Increase in accounts receivable ............................... (1,234) (1,438)
Increase in prepaid expenses .................................. 1,321 710
Decrease in accounts payable and accrued liabilities ......... 9,737 9,409
Increase in self-insurance liability accrual .................. 1,241 1,504
Increase in deferred taxes based on income .................... 2,577 2,600
----------- -----------
Net cash provided by operating activities .................... 69,628 62,013
----------- -----------
INVESTING ACTIVITIES
Additions to rental cars........................................ (251,328) (208,862)
Book value of rental cars sold.................................. 184,485 127,643
Net additions to property and equipment ........................ (2,343) (1,831)
----------- -----------
Net cash used in investing activities ......................... (69,186) (83,050)
FINANCING ACTIVITIES
Net borrowings under revenue equipment obligations ............ (1,000) 27,500
Payments of other debt ......................................... (7,527) (7,574)
Purchase of Capital Stock....................................... (9) (3)
----------- -----------
Net cash provided by financing activities ..................... (8,536) 19,923
----------- -----------
Decrease in cash ................................................ (8,094) (1,114)
Cash at beginning of period ..................................... 11,679 4,965
----------- -----------
Cash at end of period ........................................... $ 3,585 $ 3,851
=========== ===========
</TABLE>
See accompanying notes.
F-32
<PAGE>
THE FIRST GRAY LINE CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the financial
position at June 30, 1997 and the results of operations and cash flows for
the nine month periods ended June 30, 1997 and 1996. The results of
operations for the interim periods are not indicative of the results for a
full year.
NOTE 2. PRINCIPLES OF CONSOLIDATION
The First Gray Line Corporation, through its operating subsidiary Grand
Rent A Car Corp., d.b.a. Avis Licensee, provides car rental services in
Southern California, Las Vegas, Nevada, and Yuma, Arizona. Grand Rent A Car
Corp. operates independently under exclusive Avis Rent A Car licenses.
The accompanied consolidated financial statements includes the accounts of
The First Gray Line Corporation and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
the consolidation.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The First Gray Line Corporation
We have audited the accompanying consolidated balance sheets of The First
Gray Line Corporation as of September 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The First Gray
Line Corporation at September 30, 1996 and 1995, and the consolidated results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
November 22, 1996
F-34
<PAGE>
THE FIRST GRAY LINE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
<S> <C> <C>
ASSETS
Cash..................................................................... $ 11,679 $ 4,965
Accounts receivable, less allowance for doubtful accounts of $207 in
1996 and $195 in 1995................................................... 7,791 5,666
Prepaid expenses......................................................... 4,100 3,499
Rental cars, at cost less accumulated depreciation of $29,807 in 1996
and $23,873 in 1995..................................................... 278,781 231,625
Property and equipment (including land of $7,140 in 1996 and 1995), at
cost less accumulated depreciation of $15,701 in 1996 and $14,871 in
1995.................................................................... 17,187 15,984
Franchises and other intangibles, at cost ............................... 1,705 1,705
---------- ----------
Total assets............................................................. $321,243 $263,444
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities ............................... $ 16,493 $ 12,885
Self-insurance liability accrual........................................ 15,827 13,931
Revenue equipment obligations and other debt............................ 231,027 196,627
Deferred taxes based on income ......................................... 20,441 14,472
---------- ----------
Total liabilities........................................................ 283,788 237,915
Commitments .............................................................
Stockholders' equity:
Capital stock, 1,000,000 shares authorized and 640,000 shares issued in
1996 and 1995, at stated value ........................................ 715 715
Retained earnings....................................................... 83,692 74,130
Less unearned ESOP shares............................................... (46,946) (49,313)
Less treasury stock, at cost............................................ (6) (3)
---------- ----------
Total stockholders' equity............................................... 37,455 25,529
---------- ----------
Total liabilities and stockholders' equity............................... $321,243 $263,444
========== ==========
</TABLE>
See accompanying notes.
F-35
<PAGE>
THE FIRST GRAY LINE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues ........................... $198,557 $172,535
Costs and expenses:
Payroll and fringe benefits ....... 33,049 29,296
Vehicle owning and operating
costs............................. 76,718 66,476
Commissions, rents and fees ....... 46,184 39,948
Other costs........................ 11,688 8,659
Interest........................... 15,030 18,799
---------- ----------
182,669 163,178
---------- ----------
Income before taxes based on
income............................. 15,888 9,357
Provision for taxes based on
income............................. 6,100 3,671
---------- ----------
Net income.......................... $ 9,788 $ 5,686
========== ==========
</TABLE>
See accompanying notes.
F-36
<PAGE>
THE FIRST GRAY LINE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED TOTAL
CAPITAL RETAINED ESOP TREASURY STOCKHOLDERS'
STOCK EARNINGS SHARES STOCK EQUITY
--------- ---------- ----------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 ........... $715 $68,907 $(52,142) $17,480
Net income ............................. 5,686 5,686
Shares released for allocation, at cost 2,829 2,829
Cost of ESOP shares released in excess
of fair value, net of tax ............. (463) (463)
Purchase of capital stock .............. $(3) (3)
--------- ---------- ----------- ---------- ---------------
Balance at September 30, 1995 ........... 715 74,130 (49,313) (3) 25,529
Net income ............................. 9,788 9,788
Shares released for allocation, at cost 2,367 2,367
Cost of ESOP shares released in excess
of fair value, net of tax ............. (226) (226)
Purchase of capital stock .............. (3) (3)
--------- ---------- ----------- ---------- ---------------
Balance at September 30, 1996 ........... $715 $83,692 $(46,946) $(6) $37,455
========= ========== =========== ========== ===============
</TABLE>
See accompanying notes.
F-37
<PAGE>
THE FIRST GRAY LINE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................ $ 9,788 $ 5,686
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation..................................................... 56,676 48,652
ESOP compensation expense ....................................... 1,998 2,070
Increase in accounts receivable.................................. (2,125) (464)
(Increase) decrease in prepaid expenses.......................... (601) 2,009
Increase (decrease) in accounts payable and accrued liabilities . 3,608 (1,338)
Increase (decrease) in self-insurance liability accrual ......... 1,896 (799)
Increase in deferred taxes based on income....................... 6,112 2,854
----------- -----------
Net cash provided by operating activities ........................ 77,352 58,670
----------- -----------
INVESTING ACTIVITIES
Additions to rental cars.......................................... (289,862) (296,760)
Book value of rental cars sold.................................... 187,628 260,627
Net additions to property and equipment........................... (2,801) (2,856)
----------- -----------
Net cash used in investing activities............................. (105,035) (38,989)
----------- -----------
FINANCING ACTIVITIES
Net borrowings (payments) under revenue equipment obligations ... 27,000 (30,154)
Borrowings of other debt.......................................... 15,000 20,000
Payments of other debt ........................................... (7,600) (7,687)
Purchase of capital stock......................................... (3) (3)
----------- -----------
Net cash provided by (used in) financing activities............... 34,397 (17,844)
----------- -----------
Increase in cash.................................................. 6,714 1,837
Cash at beginning of year......................................... 4,965 3,128
----------- -----------
Cash at end of year............................................... $ 11,679 $ 4,965
=========== ===========
</TABLE>
See accompanying notes.
F-38
<PAGE>
THE FIRST GRAY LINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS
The First Gray Line Corporation, through its operating subsidiary Grand
Rent A Car Corp., d.b.a. Avis Licensee, provides car rental services in
Southern California; Las Vegas, Nevada; and Yuma, Arizona. Grand Rent A Car
Corp. operates independently under exclusive Avis Rent A Car licenses.
The accompanying consolidated financial statements include the accounts of
The First Gray Line Corporation and its wholly owned subsidiaries (the
Company). All significant intercompany transactions and balances have been
eliminated in consolidation.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Included in costs and expenses are selling, general and administrative
expenses of $32,366,000 in 1996 and $25,422,000 in 1995.
DEPRECIATION
The Company depreciates rental cars and property and equipment on the
straight-line method.
RENTAL CARS
The Company recognizes car rental revenue at the time the car is returned.
Included in rental cars are amounts receivable from car manufacturers of
$15,304,000 in 1996 and $10,307,000 in 1995 for cars disposed of under
various repurchase and guaranteed value programs. The majority of rental cars
are acquired from one of the U.S. automobile manufacturers.
SELF INSURANCE
The Company self-insures for automobile liability losses and workers'
compensation losses up to specified limits. Insurance coverage is maintained
for losses in excess of those limits. Accruals have been provided to fully
reserve for the Company's loss responsibility.
CREDIT RISK
The Company has no significant off-balance sheet risks or concentrations
of credit risk.
2. REVENUE EQUIPMENT OBLIGATIONS AND OTHER DEBT
Revenue equipment obligations and other debt at September 30, 1996,
include $151,000,000 due under the credit line and $80,027,000 of other debt.
The Company has a secured bank credit line available for the purchase of
rental cars and other working capital requirements of $175,000,000 and a
secured credit line from a car manufacturer's finance subsidiary of
$25,000,000, which expire at various dates through 1999. The bank credit line
provides for borrowings and the issuance of letters of credit equal to the
lesser of the credit commitment or the eligible vehicle and vehicle
receivable collateral. At September 30, 1996, borrowings of $151,000,000 and
letters
F-39
<PAGE>
THE FIRST GRAY LINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. REVENUE EQUIPMENT OBLIGATIONS AND OTHER DEBT (Continued)
of credit of $4,473,000 were outstanding under the bank credit line with
$18,000,000 available for borrowings and $1,527,000 available for letters of
credit. There was no outstanding balance with the manufacturer's finance
subsidiary at September 30, 1996. Interest on the bank credit line is based
on market-directed commercial paper rates and at September 30, 1996, the
effective interest rate on the bank credit line was 6.0%. During 1995, the
Company wrote off $3,000,000 of capitalized loan costs, related to a prior
year financing, to interest expense.
Other debt consists of the following at September 30 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Notes payable at various rates ranging from 7.55% to 10.23%, secured
by eligible vehicle and vehicle receivable collateral, due in
varying amounts through 2007 ....................................... $80,000 $72,500
Note payable at 9.25%, secured by assets (net book value of $29 in
1996 and $115 in 1995), due in 1997 ................................ 27 127
--------- ---------
$80,027 $72,627
========= =========
</TABLE>
The effective interest rates on Other debt at September 30, 1996 and 1995,
were 8.8% and 9.1%, respectively.
The bank credit line and the other debt contain certain covenants
restricting payments of dividends, incurrence of additional long-term debt
and requiring maintenance of certain financial ratios.
The aggregate amount of maturities for other debt for the five years
following September 30, 1996, and beyond are: $7,527,000 in 1997, $7,500,000
in 1998, $10,000,000 in 1999, $9,375,000 in 2000, $9,375,000 in 2001, and
$36,250,000 in 2002 and beyond
Interest payments were $14,130,000 in 1996 and $15,887,000 in 1995.
3. TAXES BASED ON INCOME
Significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1995
--------- ---------
<S> <C> <C>
Tax over book depreciation .......... $29,947 $21,658
Prepaid expenses..................... 1,737 1,610
Other................................ 1,848 1,985
--------- ---------
Deferred tax liabilities............ 33,532 25,253
Self insurance liability accrual .... 6,569 5,796
Payroll and payroll related
expenses............................ 1,695 1,013
Other accrued expenses............... 3,206 2,717
Other................................ 1,621 1,255
Deferred tax assets ................ 13,091 10,781
--------- ---------
Net deferred tax liabilities ....... $20,441 $14,472
========= =========
</TABLE>
Deferred tax liabilities relate primarily to the use of accelerated
depreciation for tax purposes, while deferred tax assets relate primarily to
estimated self-insurance expenses on automobile liability and workers'
compensation and other expenses that are accrued for book purposes but are
not deductible currently for income tax purposes.
F-40
<PAGE>
THE FIRST GRAY LINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. TAXES BASED ON INCOME (Continued)
During 1995, the Company adopted a qualified like-kind exchange program
under which the Company can defer the gain associated with the sale of
certain vehicles in its rental fleet by reducing, for income tax purposes,
the basis in the replacement vehicle.
The provision for taxes based on income is composed of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996
-------------------------
FEDERAL STATE TOTAL
--------- ------- -------
<S> <C> <C> <C>
Current.... $ 113 $ 20 $ 133
Deferred .. 5,753 214 5,967
--------- ------- -------
Total...... $5,866 $234 $6,100
========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995
-------------------------
FEDERAL STATE TOTAL
--------- ------- -------
<S> <C> <C> <C>
Current.... $ 630 $248 $ 878
Deferred .. 2,316 477 2,793
--------- ------- -------
Total...... $2,946 $725 $3,671
========= ======= =======
</TABLE>
A reconciliation of income tax expense computed by applying the statutory
federal income tax rate to income before taxes and reported tax expense is
summarized in the following table (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
-----------------
1996 1995
-------- --------
<S> <C> <C>
Federal income tax at 34%...................... $5,402 $3,181
State income taxes, net of federal tax
benefit....................................... 154 479
Other.......................................... 544 11
-------- --------
Income tax expense as reported................. $6,100 $3,671
======== ========
</TABLE>
Tax payments made during 1996 and 1995 were $1,340,000 and $2,887,000,
respectively. Tax refunds received during 1996 were $549,000.
4. COMMITMENTS
The Company and its subsidiaries are committed under the terms of
operating lease agreements, principally for sales facilities, for aggregate
minimum rental payments of $19,481,000 due as follows: $9,550,000 in 1997;
$4,893,000 in 1998; $3,195,000 in 1999; $1,186,000 in 2000; $539,000 in 2001;
and $118,000 in 2002 and beyond. Certain major leases require minimum
payments plus a percentage of revenue. Minimum rent expense amounted to
$10,193,000 in 1996 and $10,331,000 in 1995. Additional rent expense based on
a percentage of revenue amounted to $6,191,000 in 1996 and $4,486,000 in
1995.
5. PENSION PLANS
Substantially all car rental employees are covered by a defined
contribution Section 401(k) plan. Certain employees covered by the 401(k)
plan are also covered by a nonqualified supplemental employee retirement
plan. The plans provide for participant contributions based on salaries.
F-41
<PAGE>
THE FIRST GRAY LINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a leveraged Employee Stock Ownership Plan (ESOP) that
covers all eligible employees. The Company makes annual contributions to the
ESOP equal to the ESOP's debt service. The ESOP shares initially were pledged
as collateral for its debt. As payments are made for debt and interest,
shares are released from collateral and allocated to active employee
accounts, based on the proportion of debt service paid in the year. The
Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as unearned ESOP
shares in the consolidated balance sheet. As shares are released from
collateral, the Company reports compensation expense equal to the fair value
of the shares (based upon the valuation at the beginning of the period). ESOP
compensation expense was $1,998,000 and $2,070,000 for 1996 and 1995,
respectively. As employees retire or otherwise terminate their employment,
the Company would be obligated to buy back their ESOP shares at the fair
value at the time of repurchase. The ESOP shares are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------
1996 1995
------------- ------------
<S> <C> <C>
Allocated shares ........................ 29,214 19,757
Less shares purchased from participants (32) (16)
------------- ------------
Net allocated shares .................... 29,182 19,741
Shares released for allocation .......... 3,003 2,990
Unreleased shares ....................... 187,783 197,253
------------- ------------
Total ESOP shares ....................... 219,968 219,984
============= ============
Fair value of unreleased shares ........ $39,622,000 $36,097,000
============= ============
</TABLE>
F-42
<PAGE>
AVIS RENT A CAR, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1996 and for the six month period ended June 30, 1997 give
effect to the following transactions as if they had occurred on January 1 of
the earliest period presented: (a) the Acquisition, (b) settlement of a net
intercompany receivable with HFS and its affiliated companies, (c)
adjustments to reflect a 4% royalty fee pursuant to the Master License
Agreement with HFS and (d) the refinancing of substantially all of the
Company's domestic fleet under facilities which consist of:
(i) a $2.0 billion commercial paper program,
(ii) a $1.65 billion medium term notes program with maturities extending
3 and 5 years and
(iii) a $470 million credit facility (the "Refinancing").
(See "Description of Certain Indebtedness -- New Credit Facility.")
The unaudited pro forma consolidated statement of financial position as of
June 30, 1997 gives effect to the following transactions as if they had
occurred on June 30, 1997: (a) the application of the proceeds from the
settlement of a net intercompany receivable from HFS and its affiliated
companies and (b) the Refinancing.
The "Pro Forma as Adjusted" consolidated statement of financial position
amounts give effect to: the Offering and the application of the net proceeds
therefrom to purchase The First Gray Line Corporation and repay certain debt
as if they had been consumated on June 30, 1997. The "Pro Forma as Adjusted"
consolidated statements of operations for the year ended December 31, 1996
and for the six month period ended June 30, 1997 give effect to the purchase
of The First Gray Line Corporation and the repayment of certain debt as if
they had occurred on January 1 of the earliest period presented.
The Company believes that the accounting used to reflect the above
transactions provides a reasonable basis on which to present these unaudited
pro forma financial data. The pro forma consolidated statement of financial
position and consolidated statements of operations are unaudited and were
derived by adjusting the historical financial statements of the Company. THE
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ARE PROVIDED FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF
THE COMPANY'S CONSOLIDATED FINANCIAL POSITION OR RESULTS OF OPERATIONS HAD
THE TRANSACTIONS BEEN CONSUMMATED ON THE DATES ASSUMED AND DO NOT PROJECT THE
COMPANY'S CONSOLIDATED FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY
FUTURE DATE OR PERIOD.
The unaudited pro forma consolidated financial statements and accompanying
notes should be read in conjunction with the audited consolidated financial
statements and the unaudited condensed consolidated financial statements of
the Company and The First Gray Line Corporation and the financial information
pertaining to the Company, in each case included elsewhere in this
Registration Statement.
P-1
<PAGE>
AVIS RENT A CAR, INC.
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
(3)
HISTORICAL PRO FORMA HISTORICAL OFFERING AND
AVIS RENT A AND REFINANCING PRO FORMA FIRST GRAY LINE FIRST GRAY LINE PRO FORMA
CAR, INC. ADJUSTMENTS CONSOLIDATED CORPORATION ACQUISITION AS ADJUSTED
------------- --------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ..... $ 57,479 $ 57,479 $ 3,585 $ 61,064
Accounts receivable, net ...... 190,292 190,292 9,025 $ 1,094 (4) 200,411
Due from affiliates, net ...... 15,477 $ (203,885)(1a)
254,029 (1b)
(65,621)(1c)
Prepaid expenses............... 35,076 35,076 5,120 2,877 (4) 43,073
Vehicles, net.................. 2,312,109 540,719 (2) 2,852,828 299,941 (7,647)(4) 3,145,122
Property and equipment, net ... 100,331 100,331 18,328 (16)(4) 118,643
Other assets................... 13,320 34,000 (2)
68,000 (2) 115,320 1,705 (1,705)(4) 115,320
Deferred income tax assets .... 105,937 105,937 105,937
Cost in excess of net assets
acquired, net................. 199,052 199,052 174,000 (4) 373,052
------------- --------------- -------------- --------------- --------------- -------------
Total assets................. $3,029,073 $ 627,242 $3,656,315 $337,704 $168,603 $4,162,622
============= =============== ============== =============== =============== =============
LIABILITIES AND STOCKHOLDER'S
EQUITY
Accounts payable............... $ 228,264 $ (12,863)(2)
(14,000)(2) $ 201,401 $ 20,488 $ 221,889
Accrued liabilities............ 268,209 268,209 12,083 $ 12,438 (4) 292,730
Current income tax
liabilities................... 3,794 3,794 3,794
Deferred income tax
liabilities................... 34,478 34,478 22,984 (7,254)(4) 50,208
Public liability, property
damage and other insurance
liabilities................... 223,473 223,473 17,068 240,541
Debt........................... 2,183,769 (2,024,700)(2)
2,678,805 (2) 2,837,874 218,500 (80,000)(5) 2,976,374
------------- --------------- -------------- --------------- --------------- -------------
Total liabilities............ 2,941,987 627,242 3,569,229 291,123 (74,816) 3,785,536
------------- --------------- -------------- --------------- --------------- -------------
Commitments and contingencies
Stockholder's equity:
195 (5)
Common stock.................. 85(17) 85 715 (715)(4) 280
Additional paid-in capital ... 74,915(17) 74,915 289,805 (5) 364,720
Retained earnings............. 14,290 14,290 91,265 (91,265)(4) 14,290
Less unearned ESOP shares .... (45,384) 45,384 (4)
Less treasury stock, at cost . (15) 15 (4)
Foreign currency translation
adjustment................... (2,204) (2,204) (2,204)
------------- --------------- -------------- --------------- --------------- -------------
Total stockholder's equity .. 87,086 87,086 46,581 243,419 377,086
------------- --------------- -------------- --------------- --------------- -------------
Total liabilities and
stockholder's equity........ $3,029,073 $ 627,242 $3,656,315 $337,704 $168,603 $4,162,622
============= =============== ============== =============== =============== =============
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
P-2
<PAGE>
AVIS RENT A CAR, INC.
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL AVIS RENT A
CAR, INC.
------------------------
PREDECESSOR OCTOBER 17,
COMPANIES 1996
JANUARY 1, (DATE OF
1996 ACQUISITION)
TO TO COMBINED PRO FORMA AND
OCTOBER 16, DECEMBER 31, YEAR ENDED REFINANCING PRO FORMA
1996 1996 DECEMBER 31, 1996 ADJUSTMENTS CONSOLIDATED
----------- ------------ ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue............................. $1,504,673 $362,844 $1,867,517 $1,867,517
----------- ------------ ----------------- ------------- ------------
Costs and expenses:
Direct operating................... 650,750 167,682 818,432 818,432
Vehicle depreciation............... 275,867 66,790 342,657 $ 72,527 (7) 415,184
Vehicle lease charges.............. 100,318 22,658 122,976 (93,768)(7) 29,208
Selling, general and
administrative.................... 283,180 68,215 351,395 (6,499)(8)
74,701 (9) 419,597
Interest, net....................... 120,977 34,212 155,189 14,083 (6)
21,241 (7)
2,865 (10)
(9,917)(11) 183,461
Amortization of cost in excess of
net assets acquired................ 3,782 1,026 4,808 137 (12) 4,945
----------- ------------ ----------------- ------------- ------------
1,434,874 360,583 1,795,457 75,370 1,870,827
----------- ------------ ----------------- ------------- ------------
Income (loss) before provision for
(benefit from) income taxes........ 69,799 2,261 72,060 (75,370) (3,310)
Provision for (benefit from) income
taxes.............................. 31,198 1,040 32,238 (29,341)(16) 2,897
----------- ------------ ----------------- ------------- ------------
Net income (loss)................... $ 38,601 $ 1,221 $ 39,822 $(46,029) $ (6,207)
=========== ============ ================= ============= ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
(3) OFFERING
HISTORICAL AND
FIRST FIRST
GRAY LINE GRAY LINE PRO FORMA
CORPORATION ACQUISITION AS ADJUSTED
----------- ------------ -----------
<S> <C> <C> <C>
Revenue............................. $197,830 $2,065,347
----------- ------------ -----------
Costs and expenses:
Direct operating................... 97,480 $(2,165)(13) 913,747
Vehicle depreciation............... 46,811 461,995
Vehicle lease charges.............. 2,102 31,310
Selling, general and
administrative....................
19,812 (8,830)(14)
7,913 (14) 438,492
Interest, net.......................
15,087 (4,504)(15) 194,044
Amortization of cost in excess of
net assets acquired................ 4,350 (12) 9,295
----------- ------------ -----------
181,292 (3,236) 2,048,883
----------- ------------ -----------
Income (loss) before provision for
(benefit from) income taxes........ 16,538 3,236 16,464
Provision for (benefit from) income
taxes.............................. 6,361 2,883 (16) 12,141
----------- ------------ -----------
Net income (loss)................... $ 10,177 $ 353 $ 4,323
=========== ============ ===========
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
P-3
<PAGE>
AVIS RENT A CAR, INC.
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
(3)
HISTORICAL PRO FORMA AND HISTORICAL
AVIS RENT A REFINANCING PRO FORMA FIRST GRAY LINE
CAR, INC. ADJUSTMENTS CONSOLIDATED CORPORATION
------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue................................... $945,647 $945,647 $103,594
------------- -------------- ---------------
Costs and expenses:
Direct operating......................... 398,548 398,548 47,889
Vehicle depreciation..................... 179,418 $ 43,880 (7) 223,298 26,514
Vehicle lease charges.................... 69,025 (58,192) (7) 10,833 9
Selling, general and administrative ..... 203,383 (6,920)(8) 196,463 10,231
Interest, net............................ 68,343 5,085 (6)
14,312 (7)
6,920 (10)
(4,958)(11) 89,702 8,067
Amortization of cost in excess of net
assets acquired......................... 2,570 2,570
------------- --------------- -------------- ---------------
921,287 127 921,414 92,710
------------- --------------- -------------- ---------------
Income (loss) before provision for
(benefit from) income taxes.............. 24,360 (127) 24,233 10,884
Provision for (benefit from) income
taxes.................................... 11,254 (48)(16) 11,206 4,343
------------- --------------- -------------- ---------------
Net income (loss) ........................ $ 13,106 $ (79) $ 13,027 6,541
============= =============== ============== ===============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OFFERING AND
FIRST GRAY LINE PRO FORMA
ACQUISITION AS ADJUSTED
--------------- -------------
<S> <C> <C>
Revenue................................... $1,049,241
--------------- -------------
Costs and expenses:
Direct operating......................... $ (1,163) (13) 445,274
Vehicle depreciation..................... 249,812
Vehicle lease charges.................... 10,842
Selling, general and administrative ..... (4,683) (14)
4,144 (14) 206,155
Interest, net............................
(2,252)(15) 95,517
Amortization of cost in excess of net
assets acquired......................... 2,175 (12) 4,745
--------------- -------------
(1,779) 1,012,345
--------------- -------------
Income (loss) before provision for
(benefit from) income taxes.............. 1,779 36,896
Provision for (benefit from) income
taxes.................................... 1,582 (16) 17,131
--------------- -------------
Net income (loss) ........................ $ 197 $ 19,765
=============== =============
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
P-4
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) The due from affiliates net account represents an intercompany
account with HFS and its affiliates (together, the "affiliates") and
is net of intercompany payables to (i.e., loans and advances from)
the affiliates.
(a) Reflects the proceeds from the settlement of a $194,100 note
receivable from Wizard Co., Inc., an indirectly wholly-owned
subsidiary of HFS (the "Wizard Note"), which bears interest at
7.13% and is due October 1, 2006. The principal amount of the
note plus accrued interest of $9,785 at June 30, 1997 is
guaranteed by HFS.
(b) Reflects the repayment of loans from an HFS affiliate (HFS Car
Rental, Inc. formerly known as Avis, Inc.), which provided
additional subordinated fleet financing.
(c) Reflects the settlement of net non-interest bearing intercompany
receivables at June 30, 1997 with HFS and its affiliated
companies. The net intercompany receivables principally consist
of assets transferred from the Company to HFS in connection with
the October 17, 1996 acquisition of Avis, Inc. by HFS, as well as
intercompany transactions relating to management, service and
administrative fees since the Date of Acquisition.
(2) Reflects the Refinancing of $2,125,223 debt and the inclusion of
$553,582 of additional debt related to vehicles which were previously
accounted for under operating leases. In connection with the
Refinancing and the settlement of the Wizard Note discussed in Note
(1a), financing and other fees of $48,000 and an escrow account of
$68,000 was funded.
(3) Represents The First Gray Line Corporation historical consolidated
financial statements as of and for the six months ended June 30, 1997
and for the year ended December 31, 1996.
(4) To allocate the purchase price of The First Gray Line Corporation
based on the estimated fair values of the assets acquired and the
liabilities assumed. The allocation of the purchase price is 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 pro forma
consolidated balance sheet; however, the changes are not expected to
have a material effect on the consolidated financial position of the
Company.
(5) Reflects net proceeds of $290,000 from the Offering used to purchase
The First Gray Line Corporation for $210,000 (including expenses) and
the retirement of $80,000 of commercial paper included in the
Refinancing discussed in Note (2).
(6) Reflects the change in interest expense resulting from the
Refinancing including amortization of deferred financing costs as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
RATE 1996 1997
------ -------------- --------------
<S> <C> <C> <C>
Assumed interest on the new credit
facility................................... 6.6% $171,795 $87,712
Interest on historical debt................. 6.4% 166,912 86,727
-------------- --------------
Incremental interest on debt............... 4,883 985
Amortization of deferred financing costs ... 9,200 4,100
-------------- --------------
$ 14,083 $ 5,085
============== ==============
</TABLE>
P-5
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS)
An increase or decrease in the interest rate of 1/8 percent (.00125)
with respect to the pro forma balances on the above New Credit Facility
would increase or decrease interest expense and income before provision
for income taxes by approximately $3,200 and $1,600 for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively,
based on the average outstanding balance of the debt to be refinanced for
these periods.
(7) Reflects the reclassification of lease charges to depreciation and
interest on vehicles which were capitalized pursuant to the
Refinancing discussed in Note (2).
(8) Reflects the elimination of management, service and administrative
fees from HFS for the year ended December 31, 1996, which was
replaced effective January 1, 1997 by a royalty fee calculated at 4%
of revenue pursuant to the Master License Agreement with HFS. The six
month period ended June 30, 1997 amount represents the elimination of
an administration fee from HFS related to the Wizard Note.
(9) Reflects the royalty fee of 4% of revenue pursuant to the Master
License Agreement with HFS.
(10) Reflects the elimination of the interest income relating to the
Wizard Note described in Note (1a).
(11) Reflects the reduction to interest expense as a result of the
application of the net proceeds realized from the settlement of the
Wizard Note and the net non-interest bearing intercompany receivables
due from HFS and its affiliated companies described in Note (1a) and
(1c) adjusted for the effects of the refinancing transactions
described in Note (2).
<TABLE>
<CAPTION>
SIX MONTHS
ASSUMED YEAR ENDED ENDED
REDUCTIONS DECEMBER 31, JUNE 30,
OF PRINCIPALS 1996 1997
--------------- -------------- ------------
<S> <C> <C> <C>
Interest expense on commercial paper
(interest rate of 5.63%).................. $94,777 $5,336 $2,668
Interest expense on the Term Loan Facility
(interest rate of 7.8%)................... 58,729 4,581 2,290
-------------- ------------
Reduction in interest expense.............. $9,917 $4,958
============== ============
</TABLE>
(12) Reflects the amortization of cost in excess of net assets acquired as
a result of the acquisition of the Company by HFS and the acquisition
by the Company of The First Gray Line Corporation; as if it had
occurred on January 1 of each period presented and the elimination of
the amortization of cost in excess of net assets acquired of the
Predecessor Companies. The unamortized cost in excess of net assets
acquired is being amortized over 40 years.
(13) Reflects the elimination of ESOP related compensation expense for The
First Gray Line Corporation.
(14) Reflects the elimination of advertising, marketing and franchise fee
due to the Company from The First Gray Line Corporation under its
former franchise agreement and the recognition of the 4% royalty fee
described in Note (9).
(15) Reflects the reduction in interest expense at the commercial paper
rate of 5.63%, as a result of the application of the net proceeds of
the Offering described in Note (5).
(16) Reflects the income tax effects of the pro forma adjustments at
statutory income tax rates.
(17) Reflects the 85,000 to 1 stock split which will be effective
immediately prior to consummation of the Offerings.
P-6
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE U.S. UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ......................... 3
Risk Factors ............................... 11
Special Note Regarding Forward-Looking
Statements ................................ 17
Use of Proceeds ............................ 18
Dividend Policy ............................ 18
Dilution ................................... 19
Capitalization ............................. 20
Selected Financial Data .................... 21
Management's Discussion and Analysis of
Financial Conditions and Results
of Operations ............................. 23
Business ................................... 30
Management ................................. 42
Relationship with HFS ...................... 51
Shares Eligible for Future Sale ............ 56
Description of Capital Stock ............... 57
Description of Certain Indebtedness ....... 59
Certain United States Federal Tax
Consequences to Non-United States Holders 61
Underwriting ............................... 63
Legal Matters .............................. 66
Experts .................................... 66
Available Information ...................... 66
Index to Consolidated Financial
Statements ................................ F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS U.S. UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
19,500,000 SHARES
COMMON STOCK
PROSPECTUS
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS &
COMPANY
BLAYLOCK & PARTNERS, L.P.
CHASE SECURITIES INC.
, 1997
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
[INTERNATIONAL PROSPECTUS--ALTERNATE PAGES]
SUBJECT TO COMPLETION, DATED AUGUST 28, 1997
PROSPECTUS
19,500,000 SHARES
AVIS RENT A CAR, INC.
COMMON STOCK
All of the shares of Common Stock offered hereby will be sold by Avis Rent
A Car, Inc. (the "Company"). A total of 3,900,000 shares (the "International
Shares") are being offered outside the United States and Canada (the
"International Offering") by the managers of the International Offering named
herein (the "Managers") and 15,600,000 shares (the "U.S. Shares") are being
offered in the United States and Canada (the "U.S. Offering") by the
underwriters of the U.S. Offering named herein (the "U.S. Underwriters"). The
initial public offering price and the underwriting discounts and commissions
are identical for both the International Offering and the U.S. Offering
(collectively, the "Offerings").
Prior to the Offerings, there has been no public market for the Company's
Common Stock. It is currently estimated that the initial public offering
price will be between $15.00 and $17.00 per share. For a discussion of the
factors to be considered in determining the initial public offering price,
see "Underwriting."
The Company is a wholly owned indirect subsidiary of HFS Incorporated
("HFS"). Upon consummation of the Offerings, HFS will beneficially own
approximately 30% of the then outstanding shares of the Company's Common
Stock (approximately 27.5% if the over-allotment options granted to the
Managers and the U.S. Underwriters are exercised in full). HFS has informed
the Company that it has no present plans to reduce its ownership interest
through sales or other dispositions.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "AVI," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
Per Share..... $ $ $
- ------------- ---------------- ----------------- ---------------
Total (3)..... $ $ $
- ------------- ---------------- ----------------- ---------------
</TABLE>
- -----------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Managers
and the U.S. Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Managers and the U.S. Underwriters 30-day
options to purchase in the aggregate up to 2,925,000 additional shares
of Common Stock, solely to cover over-allotments, if any. If the
options are exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The International Shares are offered by the several Managers, subject to
prior sale, when, as and if delivered to and accepted by them and subject to
certain conditions, including the approval of certain legal matters by
counsel. The Managers reserve the right to withdraw, cancel or modify the
International Offering and to reject orders in whole or in part. It is
expected that delivery of the International Shares will be made against
payment therefor on or about , 1997, at the offices of Bear, Stearns &
Co. Inc., 245 Park Avenue, New York, New York 10167.
<PAGE>
BEAR, STEARNS INTERNATIONAL LIMITED
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
BAYERISCHE VEREINSBANK AG
CREDIT LYONNAIS SECURITIES CHASE MANHATTAN INTERNATIONAL LIMITED
, 1997
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE MANAGERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ......................... 3
Risk Factors ............................... 11
Special Note Regarding Forward-Looking
Statements ................................ 17
Use of Proceeds ............................ 18
Dividend Policy ............................ 18
Dilution ................................... 19
Capitalization ............................. 20
Selected Financial Data .................... 21
Management's Discussion and Analysis of
Financial Conditions and Results
of Operations ............................. 23
Business ................................... 30
Management ................................. 42
Relationship with HFS ...................... 51
Shares Eligible for Future Sale ............ 56
Description of Capital Stock ............... 57
Description of Certain Indebtedness ....... 59
Certain United States Federal Tax
Consequences to Non-United States Holders 61
Underwriting ............................... 63
Legal Matters .............................. 66
Experts .................................... 66
Available Information ...................... 66
Index to Consolidated Financial Statements . F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS MANAGERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
19,500,000 SHARES
[LOGO]
COMMON STOCK
PROSPECTUS
BEAR, STEARNS INTERNATIONAL LIMITED
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
BAYERISCHE VEREINSBANK AG
CREDIT LYONNAIS SECURITIES
CHASE MANHATTAN INTERNATIONAL LIMITED
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses in connection with the issuance
and distribution of the securities being registered, all of which will be
paid by the Company:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration
fee................................................ $115,523
NASD filing and expenses............................ 30,500
NYSE listing fee.................................... *
Transfer agents' fees............................... *
Printing and engraving expenses..................... *
Legal fees and expenses............................. *
Accounting fees and expenses........................ *
Miscellaneous....................................... *
----------
Total............................................. $
==========
</TABLE>
- ------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the General Corporation Law of the State of Delaware
("GCL") provides that a corporation has the power to indemnify any director
or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) against
expenses, (including attorney's fees), judgments, fines or amounts paid in
settlement actually and reasonably incurred by them in connection with the
defense of any action by reason of being or having been directors or
officers, if such person shall have acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceedings,
provided that such person had no reasonable cause to believe his conduct was
unlawful, except that, if such action shall be in the right of the
corporation, no such indemnification shall be provided as to any claim, issue
or matter as to which such person shall have been judged to have been liable
to the corporation unless and to the extent that the Court of Chancery of the
State of Delaware, or any court in which such suit or action was brought,
shall determine upon application that, in view of all of the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses as such court shall deem proper.
As permitted by Section 102(b)(7) of the GCL, the Amended and Restated
Certificate of Incorporation of the Company (filed herewith as Exhibit 3.1)
(the "Restated Certificate of Incorporation") provides that no director shall
be liable to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director other that (i) for breaches of the director's
duty of loyalty to the Company and its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for the unlawful payment of dividends or
unlawful stock purchases or redemptions under Section 174 of the GCL and (iv)
for any transaction from which the director derived an improper personal
benefit.
The Company's Amended and Restated Bylaws (filed herewith as Exhibit 3.2)
(the "Bylaws") provide indemnification of the Company's directors and
officers, both past and present, to the fullest extent permitted by the GCL,
and allow the Company to advance or reimburse litigation expenses upon
submission by the director or officer of an undertaking to repay such
advances or reimbursements if it is ultimately determined that
indemnification is not available to such director or officer pursuant to the
Bylaws. The Company's Bylaws will also authorize the Company to purchase and
maintain insurance on
II-1
<PAGE>
behalf of an officer or director, past or present, against any liability
inserted against him in any such capacity whether or not the Company would
have the power to indemnify him against such liability under the provisions
of the Restated Certificate of Incorporation or Section 145 of the GCL.
The Company has entered into indemnification agreements with each of its
directors and certain of its executive officers. The indemnification
agreements require the Company, among other things, to indemnify such
directors and officers against certain liabilities that may arise by reason
of their status or service as directors of officers (other than liabilities
arising from willful misconduct of a culpable nature), and to advance their
expenses incurred as a result of any preceding against them as to which they
could be indemnified.
The Underwriting Agreements filed herewith as Exhibits 1.1 and 1.2 provide
for the indemnification by the U.S. Underwriters and the Managers of
directors and certain officers of the Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
<S> <C> <C>
1. UNDERWRITING AGREEMENTS
1.1 Form of U.S. Underwriting Agreement**
1.2 Form of International Underwriting Agreement**
3. CERTIFICATE OF INCORPORATION AND BY-LAWS
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant*
3.2 Form of Amended and Restated By-Laws of the Registrant*
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITYHOLDERS, INCLUDING INDENTURES
4.1 Form of Certificate of Common Stock**
4.2 Amended and Restated Base Indenture, dated as of July 30, 1997, between AESOP Funding II
L.L.C., as issuer, and Harris Trust and Savings Bank, as trustee.***
4.3 Series 1997-1 Supplement, dated as of July 30, 1997 between AESOP Funding II L.L.C. and
Harris Trust and Savings Bank, as trustee, to the Amended and Restated Base Indenture,
dated as of July 30, 1997, between AESOP Funding II and the Trustee.***
4.4 Series 1997-2 Supplement, dated as of July 30, 1997 between AESOP Funding II L.L.C. and
Harris Trust and Savings Bank, as trustee, to the Amended and Restated Base Indenture,
dated as of July 30, 1997, between AESOP Funding II and the Trustee.***
4.5 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing L.P., as borrower, and
AESOP Funding II L.L.C., as lender.***
4.6 Loan Agreement, dated as of July 30, 1997, among AESOP Leasing L.P., as borrower, PV
Holding Corp., as a permitted nominee of the borrower, Quartx Fleet Management, Inc., as
a permitted nominee of the borrower, and AESOP Funding II L.L.C., as lender.***
4.7 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing Corp. II, as borrower,
AESOP Leasing Corp., as permitted nominee of the borrower, and AESOP Funding II L.L.C.,
as lender.***
II-2
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
4.8 Master Motor Vehicle Finance Lease Agreement, dated as of July 30, 1997, by and among
AESOP Leasing L.P., as lessor, Avis Rent A Car System, Inc., as lessee, individually and
as the Administrator and Avis Rent A Car, Inc., as guarantor.***
4.9 Master Motor Vehicle Operating Lease Agreement, dated as of July 30, 1997, by and among
AESOP Leasing L.P., as lessor, Avis Rent A Car System, Inc., individually and as the
Administrator, certain Eligible Rental Car Companies, as lessees, and Avis Rent A Car,
Inc., as guarantor.***
4.10 Master Motor Vehicle Operating Lease Agreement, dated as of July 30, 1997, by and among
AESOP Leasing Corp. II, as lessor, Avis Rent A Car System, Inc., individually and as the
Administrator, certain Eligible Rental Car Companies, as lessees and Avis Rent A Car,
Inc., as guarantor.***
4.11 Credit Agreement, dated as of July 30, 1997, among Avis Rent A Car, Inc., Avis Rent A
Car System, Inc., The Chase Manhattan Bank, as administrative agent, Lehman Commercial
Paper, Inc., as syndication agent and the other lenders party thereto.***
5 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding legality of the Common
Stock**
10. MATERIAL CONTRACTS
10.1 Form of Registration Rights Agreement**
10.2 Separation Agreement between HFS Car Rental, Inc. and Avis Rent A Car, Inc.***
10.3 Master License Agreement among HFS Car Rental, Inc., Avis Rent A Car System, Inc. and
Wizard Co., Inc.***
10.4 Computer Services Agreement between Avis Rent A Car System, Inc. and WizCom
International, Ltd.***
10.5 Reservation Services Agreement between HFS Incorporated and Avis Rent A Car System,
Inc.***
10.6 Tax Disaffiliation Agreement among HFS Incorporated, HFS Car Rental, Inc. and Avis Rent
A Car, Inc.*
10.7 Form of Lease Agreement dated as of , 1997 by and between WizCom International,
Ltd., as lessor, and Avis Rent A Car System, Inc., as lessee (Virginia Beach,
Virginia).*
10.8 Form of Sublease Agreement dated as of , 1997 by and between WizCom International,
Ltd., as sublessor, and Avis Rent A Car System, Inc., as sublessee (Tulsa, Oklahoma).*
10.9 Form of Sublease Agreement dated as of , 1997 by and between WizCom International,
Ltd., as sublessor, and Avis Rent A Car System, Inc., as sublessee (Garden City, New
York).*
10.10 Wizard Note Assignment, Assumption and Release Agreement, dated as of July 30, 1997 by
and between Wizard Co., Inc., Avis Rent A Car System, Inc. and Reserve Claims Management
Co.***
10.11 Termination Services Agreement, among Harris Trust and Savings Bank, AESOP Funding II
L.L.C., Avis Rent A Car System, Inc. and Wizcom International, Ltd.***
10.12 Agreement, dated October 23, 1996, between General Motors Corporation and HFS Car
Rental, Inc.***
10.13 Call Transfer Agreement, dated March 4, 1997, between HFS Incorporated and Avis Rent A
Car System, Inc.***
II-3
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
10.14 Form of Amended and Restated Employment Agreement, dated as of February 9, 1996, between
HFS Car Rental, Inc. and F. Robert Salerno***
10.15 Offer Letter, dated as of February 24, 1997, between Craig Hoenshell and HFS
Incorporated.***
10.16 Amended and Restated Employment Agreement, dated February 9, 1996, between HFS Car
Rental, Inc. and John Forsythe.***
10.17 Employment Agreement, dated September 28, 1987, between HFS Car Rental, Inc. and Michael P.
Collins.***
10.18 Avis Rent A Car, Inc. 1997 Stock Option Plan*
21 Subsidiaries of the Registrant**
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the Company.**
23.2 Consent of Ernst & Young LLP, Independent Auditors of The First Gray Line Corporation.**
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5)**
23.4 Consent of Alun Cathcart***
23.5 Consent of Michael L. Tarnopol***
23.6 Consent of Martin K. Edelman***
23.7 Consent of Leonard S. Coleman, Jr.***
23.8 Consent of Michael J. Kennedy***
23.9 Consent of Deborah L. Harmon***
24 Powers of Attorney (included on signature page)***
27 FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule--December 31, 1996***
27.2 Financial Data Schedule--June 30, 1997***
</TABLE>
- ------------
* To be filed by amendment
** Filed herewith
*** Previously filed
(b) Financial Statement Schedule. Schedule II -- Valuation and Qualifying
Accounts
All other schedules are omitted because the information is not required
or because the information is included in the combined financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions referred to in Item 14 or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
The Company hereby undertakes to provide to the U.S. Underwriters and the
Managers at the closing specified in the Underwriting Agreements (filed
herewith as Exhibits 1.1 and 1.2) certificates in such denominations and
registered in such names as required by the U.S. Underwriters and the
Managers to permit prompt delivery to each purchaser.
The Company hereby undertakes that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York, on August 28, 1997.
AVIS RENT A CAR, INC.
(Registrant)
By: /s/ Kevin M. Sheehan
Name: Kevin M. Sheehan
Title: Executive Vice President
and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------- ---------------------------------------- ------------------
<S> <C> <C>
/s/ R. Craig Hoenshell Chairman of the Board, August 28, 1997
-------------------------- Chief Executive Officer and Director
R. Craig Hoenshell (Principal Executive Officer)
/s/ F. Robert Salerno President, Chief Operating Officer August 28, 1997
-------------------------- and Director
F. Robert Salerno
/s/ Kevin M. Sheehan Executive Vice President and August 28, 1997
-------------------------- Chief Financial Officer
Kevin M. Sheehan (Principal Financial Officer)
/s/ Timothy M. Shanley Vice President and Controller August 28, 1997
-------------------------- (Principal Accounting Officer)
Timothy M. Shanley
/s/ Stephen P. Holmes Director August 28, 1997
--------------------------
Stephen P. Holmes
/s/ Michael P. Monaco Director August 28, 1997
--------------------------
Michael P. Monaco
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Avis Rent A Car, Inc.
We have audited the accompanying consolidated statements of financial
position of Avis Rent A Car, Inc. and subsidiaries (successors to Avis Rent A
Car Systems Holdings, Inc. and subsidiaries, Avis International, Ltd. and
subsidiaries, Avis Enterprises, Inc. and subsidiaries, Pathfinder Insurance
Company and Global Excess & Reinsurance, Ltd., all previously wholly-owned by
Avis, Inc., collectively the "Predecessor Companies") (collectively referred
to as "Avis Rent A Car, Inc." or the "Company") as of December 31, 1996 and
as to the Predecessor Companies as of December 31, 1995, and the related
consolidated statements of operations, stockholder's equity and cash flows
for the period October 17, 1996 (Date of Acquisition) to December 31, 1996
and as to the Predecessor Companies the related consolidated statements of
operations, stockholder's equity and cash flows for each of the two years in
the period ended December 31, 1995, and the period January 1, 1996 to October
16, 1996, and have issued our report thereon dated May 12, 1997 (August 20,
1997 as to Note 15); such report is included elsewhere in this Registration
Statement. Our audits also included the financial statement schedule of the
Company and the Predecessor Companies, listed in Item 16.(b). This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
May 12, 1997
(August 20, 1997 as to Note 15)
S-1
<PAGE>
AVIS RENT A CAR, INC.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------------------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
PREDECESSOR COMPANIES
YEAR ENDED
DECEMBER 31, 1994:
Allowance for doubtful
accounts--accounts receivable ...... $ 3,363 $ 305 $ (63) $ 3,731
============== ============ ============ ============
Accumulated amortization--goodwill .. $ 27,960 $ 4,754 $ 32,714
============== ============ ============ ============
Public liability and property damage
and other insurance liabilities .... $182,556 $73,900 $72,454 $184,002
============== ============ ============ ============
YEAR ENDED
DECEMBER 31, 1995:
Allowance for doubtful
accounts--accounts receivable ...... $ 3,731 $ (48) $ 937 $ 2,746
============== ============ ============ ============
Accumulated amortization--goodwill .. $ 32,714 $ 4,757 $ 37,471
============== ============ ============ ============
Public liability and property damage
and other insurance liabilities .... $184,002 $81,800 $71,125 $194,677
============== ============ ============ ============
JANUARY 1, 1996 TO
OCTOBER 16, 1996:
Allowance for doubtful
accounts--accounts receivable ...... $ 2,746 $ 1,238 $ 794 $ 3,190
============== ============ ============ ============
Accumulated amortization--goodwill .. $ 37,471 $ 3,782 $ 41,253
============== ============ ============ ============
Public liability and property damage
and other insurance liabilities .... $194,677 $74,109 $56,315 $212,471
============== ============ ============ ============
</TABLE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 17, 1996 (DATE OF ACQUISITION)
TO DECEMBER 31, 1996:
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts--accounts receivable......... $ 227 $ 227
Accumulated amortization--goodwill .... $ 1,026 $ 1,026
Public liability and property damage
and other insurance liabilities ...... $212,471 $17,355 $16,041 $213,785
</TABLE>
S-2
<PAGE>
APPENDIX DESCRIBING GRAPHIC MATERIAL
PURSUANT TO RULE 304 OF REGULATION S-T
INSIDE FRONT COVER
Picture of five Avis employees with a rental car in front of an Avis
rental station.
INSIDE BACK COVER.
Picture 1.
Picture of a family on vacation with an Avis rental car.
Picture 2.
Picture of a preferred representative helping a businessman to a rental
car.
Picture 3.
Picture of two businessmen checking into an Avis rental counter.
Picture 4.
Picture of four General Motors cars.
OUTSIDE BACK COVER.
Picture of the Avis logo with a "We Try Harder" button.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- ---------------------------------------------------------------------------------------- ------------
<S> <C> <C>
1. UNDERWRITING AGREEMENTS
1.1 Form of U.S. Underwriting Agreement**
1.2 Form of International Underwriting Agreement**
3. CERTIFICATE OF INCORPORATION AND BY-LAWS
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant*
3.2 Form of Amended and Restated By-Laws of the Registrant*
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITYHOLDERS, INCLUDING INDENTURES
4.1 Form of Certificate of Common Stock**
4.2 Amended and Restated Base Indenture, dated as of July 30, 1997, between AESOP Funding II
L.L.C., as issuer, and Harris Trust and Savings Bank, as trustee.***
4.3 Series 1997-1 Supplement, dated as of July 30, 1997 between AESOP Funding II L.L.C. and
Harris Trust and Savings Bank, as trustee, to the Amended and Restated Base Indenture,
dated as of July 30, 1997, between AESOP Funding II and the Trustee.***
4.4 Series 1997-2 Supplement, dated as of July 30, 1997 between AESOP Funding II L.L.C. and
Harris Trust and Savings Bank, as trustee, to the Amended and Restated Base Indenture,
dated as of July 30, 1997, between AESOP Funding II and the Trustee.***
4.5 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing L.P., as borrower, and
AESOP Funding II L.L.C., as lender.***
4.6 Loan Agreement, dated as of July 30, 1997, among AESOP Leasing L.P., as borrower, PV
Holding Corp., as a permitted nominee of the borrower, Quartx Fleet Management, Inc., as
a permitted nominee of the borrower, and AESOP Funding II L.L.C., as lender.***
4.7 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing Corp. II, as borrower,
AESOP Leasing Corp., as permitted nominee of the borrower, and AESOP Funding II L.L.C.,
as lender.***
4.8 Master Motor Vehicle Finance Lease Agreement, dated as of July 30, 1997, by and among
AESOP Leasing L.P., as lessor, Avis Rent A Car System, Inc., as lessee, individually and
as the Administrator and Avis Rent A Car, Inc., as guarantor.***
4.9 Master Motor Vehicle Operating Lease Agreement, dated as of July 30, 1997, by and among
AESOP Leasing L.P., as lessor, Avis Rent A Car System, Inc., individually and as the
Administrator, certain Eligible Rental Car Companies, as lessees, and Avis Rent A Car,
Inc., as guarantor.***
4.10 Master Motor Vehicle Operating Lease Agreement, dated as of July 30, 1997, by and among
AESOP Leasing Corp. II, as lessor, Avis Rent A Car System, Inc., individually and as the
Administrator, certain Eligible Rental Car Companies, as lessees and Avis Rent A Car,
Inc., as guarantor.***
4.11 Credit Agreement, dated as of July 30, 1997, among Avis Rent A Car, Inc., Avis Rent A
Car System, Inc., The Chase Manhattan Bank, as administrative agent, Lehman Commercial
Paper, Inc., as syndication agent and the other lenders party thereto.***
5 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding legality of the Common
Stock**
10. MATERIAL CONTRACTS
10.1 Form of Registration Rights Agreement**
10.2 Separation Agreement between HFS Car Rental, Inc. and Avis Rent A Car, Inc.***
10.3 Master License Agreement among HFS Car Rental, Inc., Avis Rent A Car System, Inc. and
Wizard Co., Inc.***
10.4 Computer Services Agreement between Avis Rent A Car System, Inc. and WizCom
International, Ltd.***
10.5 Reservation Services Agreement between HFS Incorporated and Avis Rent A Car System,
Inc.***
10.6 Tax Disaffiliation Agreement among HFS Incorporated, HFS Car Rental, Inc. and Avis Rent
A Car, Inc.*
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- ---------------------------------------------------------------------------------------- ------------
10.7 Form of Lease Agreement dated as of , 1997 by and between WizCom International,
Ltd., as lessor, and Avis Rent A Car System, Inc., as lessee (Virginia Beach,
Virginia).*
10.8 Form of Sublease Agreement dated as of , 1997 by and between WizCom International,
Ltd., as sublessor, and Avis Rent A Car System, Inc., as sublessee (Tulsa, Oklahoma).*
10.9 Form of Sublease Agreement dated as of , 1997 by and between WizCom International,
Ltd., as sublessor, and Avis Rent A Car System, Inc., as sublessee (Garden City, New
York).*
10.10 Wizard Note Assignment, Assumption and Release Agreement, dated as of July 30, 1997 by
and between Wizard Co., Inc., Avis Rent A Car System, Inc. and Reserve Claims Management
Co.***
10.11 Termination Services Agreement, among Harris Trust and Savings Bank, AESOP Funding II
L.L.C., Avis Rent A Car System, Inc. and Wizcom International, Ltd.***
10.12 Agreement, dated October 23, 1996, between General Motors Corporation and HFS Car
Rental, Inc.***
10.13 Call Transfer Agreement, dated March 4, 1997, between HFS Incorporated and Avis Rent A
Car System, Inc.***
10.14 Form of Amended and Restated Employment Agreement, dated as of February 9, 1996, between
HFS Car Rental, Inc. and F. Robert Salerno***
10.15 Offer Letter, dated as of February 24, 1997, between Craig Hoenshell and HFS
Incorporated.***
10.16 Amended and Restated Employment Agreement, dated February 9, 1996, between HFS Car
Rental, Inc. and John Forsythe.***
10.17 Employment Agreement, dated September 28, 1987, between HFS Car Rental, Inc. and Michael P.
Collins.***
10.18 Avis Rent A Car, Inc. 1997 Stock Option Plan*
21 Subsidiaries of the Registrant**
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the Company.**
23.2 Consent of Ernst & Young LLP, Independent Auditors of The First Gray Line Corporation.**
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5)**
23.4 Consent of Alun Cathcart***
23.5 Consent of Michael L. Tarnopol***
23.6 Consent of Martin K. Edelman***
23.7 Consent of Leonard S. Coleman, Jr.***
23.8 Consent of Michael J. Kennedy***
23.9 Consent of Deborah L. Harmon***
24 Powers of Attorney (included on signature page)***
27 FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule--December 31, 1996***
27.2 Financial Data Schedule--June 30, 1997***
</TABLE>
- ------------
* To be filed by amendment
** Filed herewith
*** Previously filed
<PAGE>
19,500,000 SHARES OF COMMON STOCK
AVIS RENT A CAR, INC.
FORM OF U.S. UNDERWRITING AGREEMENT
-----------------------------------
________ __, 1997
Bear, Stearns & Co. Inc.
Blaylock & Partners, L.P.
Chase Securities Inc.
Goldman, Sachs & Co.
Lehman Brothers Inc.
Montgomery Securities
Robertson, Stephens & Company LLC
as Representatives of the
several U.S. Underwriters named
in Schedule I annexed hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Ladies and Gentlemen:
Avis Rent A Car, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreements with you as follows:
1. U.S. UNDERWRITERS. The term "U.S. Underwriters", as used
herein, refers collectively to you and the other underwriters named in
Schedule I hereto, for whom you are acting as representatives. Except as may
be expressly set forth below, any reference to you in this Agreement shall be
solely in your capacity as representatives of the U.S. Underwriters, and the
Company shall be entitled to act and rely upon any statement, request, notice,
consent, waiver or agreement purportedly on behalf of any U.S. Underwriter
made or given by Bear, Stearns & Co. Inc. ("Bear, Stearns").
2. DESCRIPTION OF STOCK.
(a) The Company proposes to sell to the U.S. Underwriters an
aggregate of 15,600,000 shares (the "Firm U.S. Shares") of Common Stock, par
value $.01 per share (the "Common Stock"), of the Company, upon the terms and
subject to the conditions set forth herein. The Company also proposes to grant
to the U.S. Underwriters the option to purchase from the Company, for the sole
purpose of covering over-allotments, if any, in connection with the sale of
the Firm U.S. Shares, an aggregate of
<PAGE>
up to 2,340,000 additional shares (the "Additional U.S. Shares") of Common
Stock upon the terms and subject to the conditions set forth herein and for
the purposes set forth in Section 4(b) hereof. The Firm U.S. Shares and the
Additional U.S. Shares are hereinafter referred to collectively as the "U.S.
Shares."
(b) It is understood and agreed to by all the parties that
the Company is concurrently entering into an agreement (the "International
Underwriting Agreement") providing for the sale by the Company of an aggregate
of 3,900,000 shares (the "Firm International Shares") of Common Stock through
arrangements with certain underwriters outside the United States and Canada
(the "Managers"), for which Bear, Stearns International Limited, Bayerische
Vereinsbank AG, Chase Manhattan International Limited, Credit Lyonnais
Securities, Goldman Sachs International, Lehman Brothers International
(Europe), Montgomery Securities and Robertson, Stephens & Company LLC are
acting as representatives. The Company also proposes to grant to the Managers
the option to purchase, for the sole purpose of covering over-allotments in
connection with the sale of the Firm International Shares, up to an aggregate
of 585,000 additional shares (the "Additional International Shares") of Common
Stock. The Firm International Shares and the Additional International Shares
are collectively referred to herein as the "International Shares," the U.S.
Shares and the International Shares are collectively referred to herein as the
"Shares" and this Agreement and the International Underwriting Agreement are
collectively referred to herein as the "Underwriting Agreements." Two forms of
prospectus are to be used in connection with the offering and sale of the
Shares contemplated by the foregoing, one relating to the U.S. Shares and the
other relating to the International Shares. The latter form of prospectus will
be identical to the former except for certain substitute pages as included in
the registration statement and amendments thereto as mentioned below. Except
as the context otherwise may require, references hereinafter to any
prospectus, whether in preliminary or final form and whether as amended or
supplemented, shall include the U.S. and the international versions thereof.
(c) It is also understood and agreed to by all the parties
that the U.S. Underwriters have entered into an agreement with the Managers
(the "Agreement Between U.S. Underwriters and Managers") contemplating the
coordination of certain transactions between the U.S. Underwriters and the
Managers and that, pursuant thereto and subject to the conditions set forth
therein, the U.S. Underwriters may (i) purchase from the Managers a portion of
the International Shares to be sold to the Managers pursuant to the
2
<PAGE>
International Underwriting Agreement or (ii) sell to the Managers a portion of
the U.S. Shares to be sold to the U.S. Underwriters pursuant to this
Agreement. The Company also understands that any such purchases and sales
between the U.S. Underwriters and the Managers shall be governed by the
Agreement Between U.S. Underwriters and Managers and shall not be governed by
the terms of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to, and agrees with, each U.S. Underwriter
that:
(a) The Company meets the requirements for the use of a
Registration Statement on Form S-1 under the Securities Act of 1933
(the "Act"), and has prepared and filed with the Securities and
Exchange Commission (the "Commission"), pursuant to the Act and the
rules and regulations promulgated by the Commission thereunder (the
"Regulations"), a registration statement on Form S-1 (File No.
333-28609) relating to the Shares and may have filed one or more
amendments thereto, including in each case preliminary prospectuses
relating to the offerings of the Shares. The Company next proposes to
file with the Commission a further amendment to the registration
statement, including therein a final prospectus, necessary to permit
the registration statement to become effective or, if no amendment is
required for that purpose, then promptly following the effectiveness
of the registration statement, the Company proposes to file with the
Commission, in accordance with Rules 430A and 424(b)(1) or Rule
424(b)(4) of the Regulations, final prospectuses with respect to the
offerings of the Shares, the final prospectus so filed in either case
to include all Rule 430A Information (as hereinafter defined) and to
conform, in content and form, to the last printer's proof thereof
furnished to and approved by you immediately prior to such filing. As
used in this Agreement, (i) "Effective Date" means the date that the
registration statement hereinabove referred to, or the most recent
post-effective amendment thereto, if any, is declared effective by
the Commission, (ii) "Registration Statement" means such registration
statement as last amended prior to the time the same was declared
effective by the Commission, including all exhibits and schedules
thereto and all Rule 430A Information deemed to be included therein
at the Effective Date pursuant to Rule 430A of the Regulations, (iii)
"Rule 430A Information" means information with respect to the Shares
and the public offerings thereof permitted, pursuant to the
provisions of paragraph (a) of Rule 430A of
3
<PAGE>
the Regulations, to be omitted from the form of prospectus included
in the Registration Statement at the time it is declared effective by
the Commission, (iv) "U.S. Prospectus" means the form of final
prospectus relating to the U.S. Shares first filed with the
Commission pursuant to Rule 424(b) of the Regulations or, if no
filing pursuant to Rule 424(b) is required, the form of final
prospectus included in the Registration Statement at the Effective
Date, (v) "International Prospectus" means the form of final
prospectus relating to the International Shares first filed with the
Commission pursuant to Rule 424(b) of the Regulations or, if no
filing pursuant to Rule 424(b) is required, the form of final
prospectus included in the Registration Statement at the Effective
Date (the U.S. Prospectus and the International Prospectus are
referred to collectively as the "Prospectuses") and (vi) "Preliminary
Prospectus" means any preliminary prospectus (as described in Rule
430 of the Regulations) with respect to the Shares that omits Rule
430A Information.
(b) The Registration Statement conforms and on the Effective
Date will conform, and the Prospectuses on the date thereof and on
the date first filed with the Commission pursuant to Rule 424(b) of
the Regulations (if required) will conform, in all material respects
with the applicable requirements of the Act and the Regulations. On
the Effective Date, the date the Prospectuses are first filed with
the Commission pursuant to Rule 424(b) of the Regulations (if
required), at all times subsequent thereto to and including the
Closing Date (as defined in Section 4(a)(ii) hereof) and, if later,
the Additional Closing Date (as defined in Section 4(b)(ii) hereof),
when any post-effective amendment to the Registration Statement
becomes effective or any supplement to the Prospectuses is filed with
the Commission, and during such longer period as the Prospectuses may
require to be delivered under the Act in connection with sales of
Shares by the U.S. Underwriters, the Managers or a dealer, the
Registration Statement and the Prospectuses (as amended or
supplemented if the Company shall have filed with the Commission an
amendment or supplement thereto) did not and will not contain an
untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements made therein (in the case of the Prospectuses, in light of
the circumstances under which they were made) not misleading. No
order preventing or suspending the use of any Preliminary Prospectus
has been issued by the Commission, and when any Preliminary
4
<PAGE>
Prospectus was first filed with the Commission (whether filed as part
of the Registration Statement or an amendment thereof or pursuant to
Rule 424(a) of the Regulations) and when any amendment thereof or
supplement thereto was first filed with the Commission, such
Preliminary Prospectus and any amendments thereof and supplements
thereto conformed in all material respects with the applicable
requirements of the Act and the Regulations thereunder and did not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which
they were made, not misleading. No representation and warranty,
however, is made in this subsection 3(b) by the Company with respect
to written information contained in or omitted from the Registration
Statement, the Prospectuses, any Preliminary Prospectus, or any
amendment or supplement in reliance upon and in conformity with
written information with respect to the U.S. Underwriters and the
Managers and the plan of distribution of the Shares furnished to the
Company on behalf of any U.S. Underwriter or Manager by Bear, Stearns
expressly for use in connection with the preparation thereof.
(c) Each contract, agreement, instrument, lease, license or
other item required to be described in the Registration Statement or
the Prospectuses or filed as an exhibit to the Registration Statement
has been so described or filed, as the case may be.
(d) Deloitte & Touche LLP, whose separate reports appear in
the Prospectuses, are independent public accountants with respect to
the Company and Ernst & Young LLP, whose separate reports appear in
the Prospectuses, are independent public accountants with respect to
The First Gray Line Corporation ("First Gray Line"), in each case as
required by and within the meaning of the Act and the Regulations.
The consolidated financial statements and schedules (including the
related notes) of the Company, its subsidiaries and their
predecessors (the "Company Financials") included in the Registration
Statement or any Preliminary Prospectus, or to be included in the
Prospectuses fairly present the consolidated financial position,
results of operations and cash flows of the Company, its subsidiaries
and their predecessors and the other information purported to be
shown therein at the respective dates and for the respective periods
to which they apply. The Company Financials have been prepared in
accordance with generally accepted accounting principles as
5
<PAGE>
in effect in the United States ("US GAAP") consistently applied
throughout the periods involved, and are, in all material respects,
in accordance with the books and records of the Company, its
subsidiaries and their predecessors, as the case may be. The
consolidated financial statements and schedules (including the
related notes) of First Gray Line and its subsidiaries (the "First
Gray Line Financials") included in the Registration Statement or any
Preliminary Prospectus, or to be included in the Prospectuses fairly
present the consolidated financial position, results of operations
and cash flows of First Gray Line and its subsidiaries and the other
information purported to be shown therein at the respective dates and
for the respective periods to which they apply. The First Gray Line
Financials have been prepared in accordance with US GAAP consistently
applied throughout the periods involved, and are, in all material
respects, in accordance with the books and records of First Gray Line
and its subsidiaries, as the case may be. The "pro forma" financial
information included in the Registration Statement or any Preliminary
Prospectus, or to be included in the Prospectuses, fairly present the
information purported to be shown therein at the respective dates
thereof and for the respective periods covered thereby and all
adjustments have been properly applied. The assumptions in such pro
forma financial information are reasonable. No other financial
statements are required by Form S-1 or otherwise to be included in
the Registration Statement or the Prospectuses other than those
included therein.
(e) Subsequent to the respective dates as of which
information is given in the Registration Statement, except as set
forth in the Registration Statement or as may be set forth in the
Prospectuses, there has not been any material adverse change in the
business, properties, operations, condition (financial or other) or
results of operations of the Company and the subsidiaries (as defined
below) taken as a whole, whether or not arising from transactions in
the ordinary course of business, and since the date of the latest
balance sheet of the Company included in the Registration Statement,
and except as described in the Registration Statement or as may be
described in the Prospectuses, (i) neither the Company nor any of its
subsidiaries (A) has incurred or undertaken any liabilities or
obligations, direct or contingent, that are, individually or in the
aggregate, material to the Company and its subsidiaries taken as a
whole, or (B) entered into any transaction not in the ordinary course
of business that is
6
<PAGE>
material to the Company and its subsidiaries taken as a whole; and
(ii) the Company has not declared or paid any dividend on or made any
distribution of or with respect to any shares of its capital stock or
redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its or its subsidiaries'
capital stock. As used in this Agreement, the term "subsidiary" means
any corporation, partnership, joint venture, association, company,
business trust or other entity in which the Company or First Gray
Line, as the case may be, directly or indirectly (i) beneficially
owns or controls a majority of the outstanding voting securities
having by the terms thereof ordinary voting power to elect a majority
of the board of directors (or other body fulfilling a substantially
similar function) of such entity (irrespective of whether or not at
the time any class or classes of such voting securities shall have or
might have voting power by reason of the happening of any
contingency) or (ii) has the authority or ability to control the
policies of such entity (including, but without limitation thereto,
any partnership of which the Company or First Gray Line, as the case
may be, or a subsidiary is a general partner or owns or has the right
to obtain a majority of limited partnership interests and any joint
venture in which the Company or First Gray Line, as the case may be,
or a subsidiary has liability similar to the liability of a general
partner of a partnership or owns or has the right to obtain a
majority of the joint venture interests).
(f) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under each
of the Underwriting Agreements and to issue, sell and deliver the
Shares in accordance with the terms and conditions thereof. Each of
the Underwriting Agreements has been duly and validly authorized,
executed and delivered by the Company and is a legal and binding
obligation of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws affecting creditors' rights and remedies
generally, and subject, as to enforceability, to general principles
of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought
in a proceeding at law or in equity), and except insofar as rights to
indemnification and contribution contained therein may be limited by
federal or state securities laws or related public policy.
7
<PAGE>
(g) The Company's execution and delivery of, and its
performance of its obligations under, each of the Underwriting
Agreements and the consummation of the transactions contemplated
thereby, will not (i) conflict with or result in a breach of any of
the terms and provisions of, or constitute a default under (or an
event that with notice or lapse of time, or both, would constitute a
default under) or require approval or consent under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant
to the terms of (A) any agreement, contract, indenture, mortgage,
lease, license, arrangement or understanding to which the Company or
any of its subsidiaries is a party, or to which any of its properties
is subject, that is material to the Company and the subsidiaries
taken as a whole (hereafter, collectively, "Material Contracts")
(except for those conflicts, breaches or defaults for which consent
or approval has been obtained by the Company prior to the date
hereof, and copies evidencing such consent or approval have been
provided to Bear, Stearns) or (B) any governmental franchise, license
or permit heretofore issued to the Company or any of its subsidiaries
that is material to the Company and its subsidiaries taken as a whole
(hereafter, collectively, "Material Permits"), (ii) violate or
conflict with any provision of the certificate of incorporation,
by-laws or similar governing instruments of the Company or any of its
subsidiaries listed on Schedule II hereto (the "Material
Subsidiaries") or (iii) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction
over the Company or any Material Subsidiary or any of its respective
properties or assets, except for those violations or conflicts, that,
individually or in the aggregate, would not have a material adverse
effect on the Company and its subsidiaries taken as a whole
(hereafter, a "Material Adverse Effect").
(h) No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
its respective properties or assets is required for the Company's
execution and delivery of, and its performance of its obligations
under, each of the Underwriting Agreements, and the consummation of
the transactions contemplated thereby, except the registration of the
Shares under the Act and the Securities Exchange Act
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of 1934, as amended (the "Exchange Act"), the authorization of the
Shares for listing on the New York Stock Exchange (the "NYSE") and
such filings and registrations as may be required under state
securities or "Blue Sky" laws and the securities laws of foreign
jurisdictions in connection with the purchase and distribution of the
Shares by the U.S. Underwriters and the Managers.
(i) All of the currently outstanding shares of capital stock
of the Company, and all of the outstanding shares of capital stock
(or similar interests) of each of its subsidiaries, have been duly
and validly authorized and issued, are fully paid and nonassessable
and were not issued in violation of or subject to any preemptive
rights. The shares of Common Stock of the Company to be outstanding
on the Closing Date, including the Shares, have been duly authorized
and, when issued (and, in the case of the Shares, delivered and sold
in accordance with the terms of the Underwriting Agreements) will be
validly issued, fully paid and nonassessable, and will not have been
issued in violation of or be subject to any preemptive rights. Upon
delivery of and payment for the Shares in accordance with the
Underwriting Agreements, the U.S. Underwriters and the Managers will
receive valid title to those of the Shares to be purchased by them
from the Company, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders' agreements and voting
trusts. The Company has, as of the date hereof, and will have, as of
the Closing Date and the Additional Closing Date, if any, an
authorized and outstanding capitalization as set forth in the
Registration Statement and as shall be set forth in the Prospectuses,
both on an historical basis and as adjusted to give effect to the
offering of the Shares. The Company's capital stock conforms to the
description thereof set forth in the Registration Statement and as
shall be set forth in the Prospectuses. The Company owns directly or
indirectly such percentage of the outstanding capital stock (or
similar interests) of each of its subsidiaries as is set forth
opposite the name of such subsidiary in Schedule III hereto, free and
clear of all claims, liens, security interests, pledges, charges,
encumbrances, stockholders agreements and voting trusts, except as
otherwise described in said Schedule III.
(j) There is no commitment, plan or arrangement to issue,
and no outstanding option, warrant or other right calling for the
issuance of, any shares of capital stock (or similar interests) of
the Company or of any of its
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subsidiaries or any security or other instrument that by its terms is
convertible into, exchangeable for or evidencing the right to
purchase capital stock (or similar interests) of the Company or such
subsidiary, except as described in the Registration Statement and as
shall be described in the Prospectuses.
(k) The Company has no subsidiaries other than those listed
in Schedule III hereto. Each of the Company and its subsidiaries has
been duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdictions of incorporation. Each
of the Company and the Material Subsidiaries is duly qualified and in
good standing as a foreign corporation in each jurisdiction in which
the character or location of its properties (owned, leased or
licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified
or in good standing that will not in the aggregate have a Material
Adverse Effect. Each of the Company and the Material Subsidiaries has
all requisite corporate power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and
operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and as shall
be described in the Prospectuses (except for those the absence of
which, individually or in the aggregate, would not have a Material
Adverse Effect), and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction that is not adequately disclosed in the
Registration Statement and the Prospectuses. Neither the Company nor
any Material Subsidiary has received any notice of proceedings
relating to revocation or modification of any such consents,
approvals, authorizations, orders, registrations, filings,
qualifications, licenses or permits (except for those the revocation
or modification of which would not have a Material Adverse Effect).
(l) Neither the Company nor any of its subsidiaries, nor to
the knowledge of the Company, any other party, is in violation or
breach of, or in default under (nor has an event occurred that with
notice, lapse of time or both, would constitute a default under), any
Material Contract, and each Material Contract is in full force and
effect, and is the legal, valid and binding obligation of the Company
or
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such subsidiary, as the case may be, and (subject to applicable
bankruptcy, insolvency, and other laws affecting the enforceability
of creditors' rights generally) is enforceable as to the Company or
such subsidiary, as the case may be, in accordance with its terms.
Neither the Company nor any Material Subsidiary is in violation of
its certificate of incorporation, by-laws or similar governing
instrument.
(m) There is no litigation, arbitration, claim, governmental
or other proceeding or investigation pending or, to the best
knowledge of the Company, threatened with respect to the Company or
any of its subsidiaries, or any of its respective operations,
businesses, properties or assets, except as described in the
Registration Statement and as shall be described in the Prospectuses,
that, individually or in the aggregate, would have a Material Adverse
Effect. Neither the Company nor any Material Subsidiary is, or, to
the best knowledge of the Company, with the giving of notice or lapse
of time or both would be, in violation of or in non-compliance with
the requirements of any Material Permit or the provisions of any law,
rule, regulation, order, judgment or decree, including, without
limitation, all applicable federal, state and local laws and
regulations relating to (i) zoning, land use, protection of the
environment, human health and safety or hazardous or toxic
substances, wastes, pollutants or contaminants and (ii) employee or
occupational safety, discrimination in hiring, promotion or pay of
employees, employee hours and wages or employee benefits, except for
such violations or failures of compliance that, individually or in
the aggregate, would not have a Material Adverse Effect.
(n) Except as described in the Registration Statement and as
shall be described in the Prospectuses, the Company and each of its
subsidiaries have (i) good and marketable title to all real and
personal properties owned by them, free and clear of all liens,
security interests, pledges, charges, encumbrances and mortgages, and
(ii) valid, subsisting and enforceable leases for all real and
personal properties leased by them, in each case, subject to such
exceptions as, individually or in the aggregate, do not have and are
not reasonably likely to have a Material Adverse Effect. No real
property owned, leased, licensed or used by the Company or by a
Material Subsidiary lies in an area that is, or to the best knowledge
of the Company will be, subject to zoning, use or building code
restrictions that would prohibit, and no state of facts relating to
the actions or
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inaction of another person or entity or his, her or its ownership,
leasing, licensing or use of any real or personal property exists
that would prevent, the continued effective ownership, leasing,
licensing or use of such real property in the business of the Company
or such Material Subsidiary as presently conducted or as the
Prospectuses indicate are contemplated to be conducted, subject to
such exceptions as, individually or in the aggregate, do not have and
are not reasonably likely to have a Material Adverse Effect.
(o) The Company, directly or through one or more of its
subsidiaries, owns or has the right under license to use all patents,
patent rights, licenses, inventions, copyrights, trademarks, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
service marks and trade names (collectively, "Intellectual Property")
necessary to conduct its business as now conducted and proposed to be
conducted as disclosed in the Registration Statement and as shall be
disclosed in the Prospectuses. Neither the Company nor any of its
subsidiaries has received notice of infringement of or conflict with
the asserted rights of others with respect to any Intellectual
Property. To the best knowledge of the Company, there is no
infringement by others of any Intellectual Property of the Company or
any of its subsidiaries that has had or may in the future have a
Material Adverse Effect.
(p) To the Company's best knowledge, neither the Company or
any of its subsidiaries, nor any director, officer or employee of the
Company or any such subsidiary has, directly or indirectly, used any
corporate funds for unlawful contributions, gifts, entertainment, or
other unlawful expenses relating to political activity; made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff,
influence payment, kickback, or other unlawful payment.
(q) Except as set forth in the Registration Statement, no
person or entity has the right, by contract or otherwise, to require
registration under the Act of shares of capital stock or other
securities of the Company or any of its subsidiaries solely because
of the filing or effectiveness
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of the Registration Statement and the consummation of the
transactions contemplated by the Underwriting Agreements.
(r) Neither the Company nor any of its officers, directors
or affiliates (as defined in the Regulations) has taken or will take,
directly or indirectly, prior to the termination of the offerings of
the Shares contemplated by the Underwriting Agreements, any action
designed to stabilize or manipulate the price of the Common Stock, or
that might reasonably be expected to cause or result in stabilization
or manipulation of the price of the Common Stock.
(s) Neither the Company nor any of its subsidiaries is, or
intends to conduct its business in such a manner that it would
become, and after giving effect to the offering and sale of the
Shares and the application of the proceeds thereof as described in
the Prospectuses, neither the Company nor any subsidiary will be, an
"investment company" or a company "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "Investment Company Act").
(t) Except as may be set forth in the Prospectuses, the
Company has not incurred any liability for a fee, commission or other
compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by the Underwriting
Agreements.
(u) The Company and each of its subsidiaries maintain
systems of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with US GAAP and to maintain
accountability for assets; (iii) the access to the respective assets
of the Company and each such subsidiary, as the case may be, is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(v) Other than as disclosed in the Registration Statement
and as shall be disclosed in the Prospectuses, no labor dispute with
the employees of the Company or any of its subsidiaries exists or, to
the best knowledge of the
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Company, is imminent that, individually or in the aggregate, is or is
reasonably likely to have a Material Adverse Effect, and the Company
is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers or contractors that
reasonably can be expected to have a Material Adverse Effect.
(w) (i) All United States Federal income tax returns of the
Company and each of its subsidiaries required by law to be filed have
been filed and all taxes shown by such returns or otherwise assessed
that are due and payable have been paid, except assessments against
which appeals have been or will be promptly taken and (ii) the
Company and its subsidiaries have filed all other tax returns that
are required to have been filed by them pursuant to the applicable
laws of all other jurisdictions, except, as to each of the foregoing
clauses (i) and (ii), insofar as the failure to file such returns,
individually or in the aggregate, would not have a Material Adverse
Effect, and the Company and its subsidiaries have paid all taxes due
pursuant to said returns or pursuant to any assessment received by
the Company or any such subsidiary, except for such taxes, if any, as
are being contested in good faith and as to which adequate reserves
have been provided in accordance with US GAAP. The charges, accruals
and reserves on the consolidated books of the Company in respect of
any tax liability for any years not finally determined are adequate
to meet any assessments or re-assessments for additional tax for any
years not finally determined, except to the extent of any inadequacy
that would not have a Material Adverse Effect.
(x) Each of the Company and its subsidiaries is insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which the Company and its subsidiaries are engaged.
Neither the Company nor any of its subsidiaries has any reason to
believe that it will not be able to renew its existing insurance
coverage from similar insurers as may be necessary to continue its
business.
(y) Except as disclosed in the Registration Statement and as
shall be disclosed in the Prospectuses, there are no business
relationships or related party transactions of the nature described
in Item 404 of Regulation S-K of the Commission involving the Company
or any other persons
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referred to in such Item 404, except for such transactions that would
be considered immaterial under such Item 404.
4. PURCHASE, SALE AND DELIVERY OF THE U.S. SHARES.
(a)(i) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to each of
the U.S. Underwriters an aggregate of 15,600,000 shares of Common Stock, and
each U.S. Underwriter agrees, severally and not jointly, to purchase from the
Company, the number of Firm U.S. Shares set forth opposite the name of such
U.S. Underwriter in Schedule I hereto, all at a purchase price per share of
$_________ (the "Purchase Price"). Subject to Section 12, the number of Firm
U.S. Shares to be purchased from the Company by each U.S. Underwriter (as
adjusted by Bear, Stearns to eliminate fractions) shall be determined by
multiplying the aggregate number of Firm U.S. Shares to be sold by the
Company, as set forth above by a fraction (A) the numerator of which is the
total number of Firm U.S. Shares set forth opposite the name of such U.S.
Underwriter in Schedule I hereto and (B) the denominator of which is the total
number of Firm U.S. Shares.
(ii) Delivery of the Firm U.S. Shares and payment of the
Purchase Price therefor shall be made at the offices of Bear, Stearns & Co.
Inc. at 245 Park Avenue, New York, New York 10167, or such other location in
the New York City metropolitan area as Bear, Stearns shall determine and
advise the Company upon at least two full business days' (as defined in
Section 18 hereof) notice in writing. Such delivery and payment shall be made
at 10:00 A.M., New York City time, on the third full business day following
the determination of the Purchase Price, or at such other time as may be
agreed upon by Bear, Stearns and the Company. The time and date of such
delivery and payment are herein called the "Closing Date." Delivery of the
Firm U.S. Shares shall be made to or upon the order of Bear, Stearns, for the
respective accounts of the U.S. Underwriters, against payment to the Company
of the aggregate Purchase Price therefor by wire transfer of same day funds to
the account of the Company designated in writing to Bear, Stearns at least two
business days prior to the Closing Date.
(iii) Certificates for the Firm U.S. Shares shall be
registered in such name or names and in such authorized denominations as Bear,
Stearns may request in writing at least two full business days prior to the
Closing Date, provided that, if so specified by Bear, Stearns, the Firm U.S.
Shares may be
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<PAGE>
represented by a global certificate registered in the name of Cede & Co., as
nominee of the Depositary Trust Company ("Cede"). Bear, Stearns shall be
permitted to examine and package such certificates for delivery at least one
full business day prior to the Closing Date, unless the Firm U.S. Shares are
to be represented by a global certificate.
(b)(i) The Company hereby grants to the U.S. Underwriters an
option (the "U.S. Option") to purchase from the Company the Additional U.S.
Shares at the Purchase Price, for the sole purpose of covering
over-allotments, if any, in the offering of the Firm U.S. Shares by the U.S.
Underwriters. The U.S. Option shall be exercisable by the U.S. Underwriters on
one occasion only, at any time before the expiration of 30 days from the date
of the U.S. Prospectus, for the purchase of all or part of the Additional U.S.
Shares, such exercise to be made by notice, given by Bear, Stearns to the
Company in the manner specified in Section 14 hereof, which notice shall set
forth the aggregate number of Additional U.S. Shares with respect to which the
U.S. Option is being exercised, the denominations and the name or names in
which certificates evidencing the Additional U.S. Shares so purchased are to
be registered, and the date and time of delivery of such Additional U.S.
Shares, which date may be at or subsequent to the Closing Date and shall not
be less than two nor more than ten days after such notice. Subject to Section
12, the aggregate number of Additional U.S. Shares so purchased from the
Company by each U.S. Underwriter (as adjusted by Bear, Stearns to eliminate
fractions) shall be determined by multiplying the total number of such
Additional U.S. Shares to be sold by the Company by a fraction (A) the
numerator of which is the number of Firm U.S. Shares set forth opposite the
name of such U.S. Underwriter in Schedule I hereto and (B) the denominator of
which is the total number of Firm U.S. Shares.
(ii) Delivery of the Additional U.S. Shares so purchased and
payment of the Purchase Price therefor shall be made at the offices of Bear,
Stearns & Co. Inc. at 245 Park Avenue, New York, New York 10167, or such other
location in the New York City metropolitan area as Bear, Stearns shall
determine and advise the Company upon at least two full business days' notice
in writing. Such delivery and payment shall be made at 10:00 A.M., New York
City time, on the date designated in such notice or at such other time and
date as may be agreed upon by Bear, Stearns and the Company. The time and date
of such delivery and payment are herein called the "Additional Closing Date."
Delivery of the Additional U.S. Shares shall be made to or upon the order of
Bear, Stearns, for the respective accounts of the U.S. Underwriters, against
payment to the Company of the
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<PAGE>
aggregate Purchase Price therefor by wire transfer of same day funds to the
account of the Company designated in writing to Bear, Stearns at least two
business days prior to the Additional Closing Date.
(iii) Certificates for the Additional U.S. Shares purchased
by the U.S. Underwriters, when so delivered, shall be registered in such name
or names and in such authorized denominations as Bear, Stearns shall have
requested in the notice of exercise of the U.S. Option, provided that, if so
specified therein, such Additional U.S. Shares may be represented by a global
certificate registered in the name of Cede. Bear, Stearns shall be permitted
to examine and package such certificates for delivery at least one full
business day prior to the Additional Closing Date, unless the Additional U.S.
Shares are to be represented by a global certificate.
(c) The U.S. Underwriters shall not be obligated to purchase
any Firm U.S. Shares from the Company except upon tender to the U.S.
Underwriters by the Company of all of the Firm U.S. Shares and the U.S.
Underwriters shall not be obligated to purchase any Additional U.S. Shares
from the Company except upon tender to the U.S. Underwriters by the Company of
all of the Additional U.S. Shares specified in the notice of exercise of the
U.S. Option. The Company shall not be obligated to sell or deliver any Firm
U.S. Shares or Additional U.S. Shares, as the case may be, except upon tender
of payment by the U.S. Underwriters for all the Firm U.S. Shares or the
Additional U.S. Shares, as the case may be, agreed to be purchased by the U.S.
Underwriters hereunder.
5. OFFERING. The Company has been advised by you that the
U.S. Underwriters propose to make a public offering of their respective
portions of the U.S. Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company
is further advised by you that the U.S. Shares are to be offered to the public
initially at a price of $_____ per share and to certain dealers selected by
you at a price that represents a concession not in excess of $____ per share,
and that any U.S. Underwriter may allow, and such dealers may reallow, a
further concession, not in excess of $____ a share, to any U.S. Underwriter or
to certain other dealers, and that after the initial offering of the U.S.
Shares, the public offering price and such concessions may be changed by you.
6. COVENANTS OF THE COMPANY. The Company covenants
and agrees with each U.S. Underwriter that:
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(a) The Company shall use its best efforts to cause the
Registration Statement to become effective as promptly as possible
and to maintain it in effect. If the Registration Statement has
become or becomes effective pursuant to Rule 430A of the Regulations,
or filing of the Prospectuses with the Commission is otherwise
required under Rule 424(b) of the Regulations, the Company shall file
the Prospectuses, properly completed, with the Commission pursuant to
Rule 424(b) of the Regulations within the time period therein
prescribed and shall provide evidence satisfactory to you of such
timely filing. The Company shall promptly advise you (and, if
requested, confirm such advice in writing), (i) when the Registration
Statement or any post-effective amendment thereto has become
effective, (ii) of the initiation or threatening of any proceedings
for, or receipt by the Company of any notice with respect to, the
suspension of the qualification of the Shares for sale in any
jurisdiction or the issuance by the Commission of any order
suspending the effectiveness of the Registration Statement and (iii)
of receipt by the Company or any representative of or attorney for
the Company of any other communications from the Commission relating
to the Company, the Registration Statement, any Preliminary
Prospectus, the Prospectuses or the transactions contemplated by the
Underwriting Agreements. The Company shall make every reasonable
effort to prevent the issuance of an order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereto and, if any such order is issued, to obtain its
lifting as soon as possible. The Company shall not file any amendment
to the Registration Statement or any amendment of or supplement to
the Prospectuses before or after the Effective Date to which you
shall reasonably object after being timely furnished in advance a
copy thereof unless the Company shall conclude, upon the advice of
counsel, that any such amendment must be filed at a time prior to
obtaining such consent.
(b) Within the time during which the Prospectuses are
required to be delivered under the Act, the Company shall comply with
all requirements imposed upon it by the Act, as now or hereafter
amended, and by the Regulations, as from time to time in force, so
far as necessary to permit the continuance of sales of or dealings in
the Shares as contemplated by the provisions hereof and by the
Prospectuses. If, during such period, any event shall occur as a
result of which the Prospectuses as then amended or supplemented
include any untrue statement of a material fact or omit to state any
material fact required to be stated
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<PAGE>
therein or necessary to make the statements made therein, in the
light of the circumstances under which they were made, not
misleading, or if it shall be necessary at any time to amend the
Registration Statement or supplement the Prospectuses to comply with
the Act and the Regulations, the Company shall notify you promptly
and prepare and file with the Commission an appropriate
post-effective amendment to the Registration Statement or supplement
to each Prospectus (in form and substance reasonably satisfactory to
you) that will correct such statement or omission and shall use its
best efforts to have any such post-effective amendment to the
Registration Statement declared effective as soon as possible.
(c) The Company shall promptly deliver to you two
manually-signed copies of the Registration Statement, including
exhibits and all amendments thereto, and to those persons (including
your counsel) whom you identify to the Company, such number of
conformed copies of the Registration Statement, with exhibits, each
Preliminary Prospectus, the Prospectuses and all amendments of and
supplements to such documents, if any, as you may reasonably request.
(d) The Company shall cooperate with the U.S. Underwriters,
the Managers and Weil, Gotshal & Manges LLP ("Underwriters' Counsel")
in connection with their efforts to qualify or register the Shares
for sale under the state securities (or "Blue Sky") or foreign laws
of such jurisdictions as you shall request, shall execute such
applications and documents and furnish such information as reasonably
may be required for such purpose and shall comply with such laws so
as to continue such registrations and qualifications in effect for so
long as may be required to complete the distribution of the Shares;
provided, however, that in connection therewith the Company shall not
be required to (i) qualify as a foreign corporation in any
jurisdiction in which it is not so qualified as of the date hereof,
(ii) file a consent to service of process in any jurisdiction in any
action other than one arising out of the offering or sale of the
Shares in such jurisdiction or (iii) become subject to taxation in
any jurisdiction in which it is not now so subject.
(e) The Company shall make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to
you, in such numbers as you reasonably may request for distribution
to the U.S. Underwriters, as soon as practicable but in no event
later than 45 days after the
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end of its fiscal quarter in which the first anniversary date of the
Effective Date occurs, an earnings statement, covering a period of at
least twelve consecutive full calendar months commencing after the
effective date of the Registration Statement, that satisfies the
provisions of Section 11(a) of the Act and Rule 158 of the
Regulations.
(f) During a period of 180 days from the date of this
Agreement, the Company shall not, without the prior written consent
of Bear, Stearns, (i) issue, sell, offer or agree to sell, or
otherwise dispose of, directly or indirectly, any shares of its
capital stock (or any securities convertible into, exercisable for or
exchangeable for shares of its capital stock) other than the
Company's issuance and sale of Shares in accordance with the
Underwriting Agreements and the issuance of up to 4,621,000 shares of
Common Stock (or options exercisable for up to such number of shares)
reserved for issuance pursuant to the Company's Stock Option Plan, or
(ii) acquire, or agree or commit to acquire or publicly announce its
intention to acquire, directly or through a subsidiary, assets or
securities of any other person, firm or corporation in a transaction
or series of related transactions that would be material to the
Company and its subsidiaries, taken as a whole. In addition, the
Company has obtained and delivered to you a written undertaking from
HFS Incorporated that, during the period of 180 days from the date of
this Agreement, without the prior written consent of Bear, Stearns,
such entity will not sell, offer or agree to sell, or otherwise
dispose of, directly or indirectly, any shares of capital stock (or
any securities convertible into, exercisable for or exchangeable for
shares of capital stock) of the Company or any of its subsidiaries.
(g) During the three years following the Effective Date, the
Company shall furnish to Bear, Stearns, in such quantity as Bear,
Stearns may reasonably request for distribution to the U.S.
Underwriters, copies of (i) all reports of the Company to its
stockholders, (ii) all reports, financial statements, and proxy or
information statements filed by the Company with the Commission or
any national securities exchange and (iii) such other information
concerning the Company and its affairs as Bear, Stearns may
reasonably request from time to time.
(h) The Company shall apply the proceeds from the sale of
the Shares to be sold by it under the Underwriting Agreements in the
manner set forth under "Use of Proceeds" in the Prospectuses. The
Company shall take such steps as
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shall be necessary to ensure that neither the Company nor any
subsidiary shall become an "investment company" or a company
"controlled" by an "investment company" within the meaning of such
terms under the Investment Company Act.
(i) The Company shall use its best efforts promptly to cause
the Shares to be listed on the NYSE and shall take all actions
necessary to comply with the rules and regulations of the NYSE in
order to maintain the listing of the Shares on the NYSE.
(j) The Company shall comply with all registration, filing
and reporting requirements of the Exchange Act and the rules and
regulations thereunder, which may from time to time be applicable to
the Company.
(k) The Company shall comply with all provisions of all
undertakings contained in Part II of the Registration Statement.
(l) Prior to the Closing Date and, if the U.S. Option is
exercised, until the Additional Closing Date, the Company shall issue
no press release or other communication or hold any press conference
with respect to the offerings of the Shares, or the financial
condition, results of operations, operations, business properties,
assets, liabilities, or prospects of the Company, without your prior
consent.
7. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated by the Underwriting Agreements are consummated or this Agreement
is terminated, and subject to Section 13(d) hereof, the Company agrees to pay
all costs and expenses incident to the performance of its obligations under
the Underwriting Agreements, including those in connection with (i) preparing,
printing, duplicating, filing and distributing the Registration Statement
(including all amendments thereof and exhibits thereto), any Preliminary
Prospectus, the Prospectuses and any supplements thereto, the Underwriting
Agreements and all related agreements, and all other documents relating to the
public offering of the Shares, (ii) the issuance, transfer and delivery of the
Shares to the U.S. Underwriters and the Managers, including any transfer or
other taxes payable thereon, (iii) the registration and qualification if any,
of the Shares under the securities laws of foreign jurisdictions, or where
applicable the obtaining of exemptions therefrom, including the reasonable
fees and disbursements of Underwriters' Counsel and local counsel in
connection therewith, (iv) the listing of the Shares on the NYSE, (v) the
review of the terms of the public offering of the Shares
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by the National Association of Securities Dealers, Inc. (the "NASD") and the
reasonable fees and disbursements of Underwriters' Counsel in connection
therewith, (vi) the printing of certificates representing the Shares and (vii)
the cost and charges of any transfer agent and registrar for the Shares.
8. CONDITIONS OF THE U.S. UNDERWRITERS' OBLIGATIONS. The
obligations of the several U.S. Underwriters to purchase and pay for the U.S.
Shares, as provided herein, shall be subject to (i) the accuracy of the
representations and warranties of the Company herein contained, as of the date
hereof, as of the Closing Date and, with respect to the Additional U.S.
Shares, the accuracy of the representations and warranties of the Company as
of the Additional Closing Date, (ii) the absence from any certificates,
opinions, written statements or letters furnished pursuant to this Section 8
to you or to Underwriters' Counsel of any qualification or limitation not
previously approved in writing by you, (iii) the performance by the Company of
its obligations hereunder and (iv) the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 5:00 P.M., New York City time, on the date of this
Agreement or at such later time and date as shall have been consented
to in writing by Bear, Stearns. All post-effective amendments to the
Registration Statement shall have become effective. If the Company
shall have relied upon Rule 430A of the Regulations, the Prospectuses
shall have been filed with the Commission in a timely fashion in
accordance with Section 6(a) hereof. All filings required by Rule 424
of the Regulations shall have been made and no such filings shall
have been made without your consent. No stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereof shall have been issued by the Commission or any
state securities commission and no proceedings therefor shall have
been initiated or threatened by the Commission or any state
securities commission.
(b) At the Closing Date (and, with respect to the Additional
U.S. Shares, the Additional Closing Date), you shall have received
the written opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
counsel for the Company, dated the date of its delivery, addressed to
the U.S. Underwriters and the Managers, and in form and scope
satisfactory to Underwriters' Counsel, to the effect that:
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(i) Each of the Company and the domestic
subsidiaries listed in Schedule II hereto (the "Material
Domestic Subsidiaries") (x) has been duly organized and is
validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and (y) has all
requisite corporate power and authority, and all necessary
consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits of and from
all public, regulatory or governmental agencies and bodies,
to own, lease and license its respective properties and
conduct its business as now being conducted and as described
in the Registration Statement and the Prospectuses, except
for those the absence of which, individually or in the
aggregate, would not have a Material Adverse Effect.
(ii) The authorized capital stock of the Company is
as set forth in the Prospectuses under the caption
"Capitalization". All of the outstanding shares of such
capital stock have been duly and validly authorized and
issued, are fully paid and nonassessable and were not issued
in violation of or subject to any preemptive rights. The
shares of Common Stock to be outstanding on the Closing
Date, including the Shares, have been duly authorized and
when issued (and, in the case of the Shares, delivered and
sold in accordance with the terms of the Underwriting
Agreements) will be validly issued, fully paid and
nonassessable. Upon delivery of and payment for the Shares
to be sold by the Company to each U.S. Underwriter and
Manager in accordance with the Underwriting Agreements, each
U.S. Underwriter and each Manager (assuming that it acquires
such Shares without notice of any adverse claim, as such
term is used in Section 8-302 of the Uniform Commercial Code
in effect in the State of New York) will acquire good and
marketable title to the Shares so sold and delivered to it,
free and clear of all liens, pledges, charges, claims,
security interests, restrictions on transfer, agreements or
other defects of title whatsoever (other than those
resulting from any action taken by such U.S. Underwriter or
such Manager). The capital stock of the Company conforms in
all material respects to the description thereof contained
in the Registration Statement and the Prospectuses.
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(iii) The Company has all requisite corporate
right, power and authority to execute, deliver and perform
its obligations under each of the Underwriting Agreements
and to issue, sell and deliver the Shares in accordance with
the terms and conditions thereof. Each of the Underwriting
Agreements has been duly and validly authorized, executed
and delivered by the Company.
(iv) To the best of such counsel's knowledge, no
consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any
court or any public, governmental, or regulatory agency or
body having jurisdiction over the Company or any Material
Domestic Subsidiary or any of its respective properties or
assets is required for the Company's execution and delivery
of, and its performance of its obligations under, each of
the Underwriting Agreements, and the consummation of the
transactions contemplated thereby, including, without
limitation, of the issuance, sale and delivery of the
Shares, except for (A) such as may be required under state
securities or Blue Sky laws and the securities laws of
foreign jurisdictions in connection with the purchase and
distribution of the Shares by the U.S. Underwriters and the
Managers (as to which such counsel need express no opinion)
and (B) such as have been made or obtained under the Act,
the Exchange Act or the rules of the NYSE.
(v) The Registration Statement and the Prospectuses
(except for the financial statements and the notes thereto,
the financial statement schedules and the other financial
and accounting data included therein, as to which no opinion
need be expressed) comply as to form in all material
respects with the requirements of the Act and the
Regulations.
(vi) The Registration Statement has become
effective under the Act, and such counsel is not aware of
any stop order suspending the effectiveness of the
Registration Statement and to such counsel's knowledge no
proceedings therefor have been initiated or threatened by
the Commission, and there are no other filings on the part
of the Company required by the Act or the Regulations,
including those required by Rule 424(b) of the Regulations,
that to such counsel's knowledge have not been made.
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(vii) The Company is not an "investment company" or
a company "controlled" by an "investment company" as defined
in the Investment Company Act.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives
of the Company, representatives of the independent certified public
accountants of the Company, representatives of the U.S. Underwriters
and the Managers and Underwriters' Counsel at which the contents of
the Registration Statement, the Prospectuses and any amendments
thereof or supplements thereto and related matters were discussed
and, although such counsel has not undertaken to investigate or
verify independently and are not passing upon, and does not assume
any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the
Prospectuses or any amendments thereof or supplements thereto (except
as to matters referred to in the last sentence of clause (ii) above),
no facts have come to such counsel's attention which lead such
counsel to believe that the Registration Statement, on the effective
date thereof (or any post-effective amendment thereof as of the date
of such amendment), contained an untrue statement of a material fact
or omitted to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or that
the Prospectuses, on the date thereof or the date of such opinion,
contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under
which they were made, not misleading (it being understood that such
counsel need express no view with respect to the financial statements
and related notes, the financial statement schedules and the other
financial and accounting data included therein).
In rendering such opinion, such counsel (i) may limit its
opinions to the corporate laws of the State of Delaware, the laws of
the State of New York and the federal laws of the United States of
America, and (ii) may rely (A) as to matters involving the
application of laws other than the laws of the State of New York and
the corporate laws of the State of Delaware and the federal laws of
the United States of America, to the extent such counsel deems proper
and to the extent specified in such opinion letter, if at all, upon a
written opinion or opinions (in form and scope reasonably
satisfactory to Underwriters' Counsel) of other counsel
25
<PAGE>
reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws; and (B) as to matters of fact, to the extent such
counsel may deem proper, on certificates of responsible officers of
the Company and certificates or other written statements of officers
of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company
and the subsidiaries. The opinion of such counsel shall specifically
state that the opinion of any such other counsel is in form and scope
satisfactory to such counsel and, in such counsel's opinion, such
counsel and you are justified in relying thereon. A copy of the
opinion of any such other counsel shall be delivered to Underwriters'
counsel.
(c) At the Closing Date (and, with respect to the Additional
U.S. Shares, the Additional Closing Date), you shall have received
the written opinion of the General Counsel of the Company, dated the
date of its delivery, addressed to the U.S. Underwriters and the
Managers, and in form and scope satisfactory to Underwriters'
Counsel, to the effect that:
(i) Each of the Company and the Material Domestic
Subsidiaries is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the
character or location of its properties (owned, leased or
licensed) or the nature or conduct of its business makes
such qualification necessary, except for those failures to
be so qualified or in good standing that will not in the
aggregate have a Material Adverse Effect. All of the issued
and outstanding capital stock (or similar interests) of each
Material Domestic Subsidiary has been duly and validly
authorized and issued, is fully paid and nonassessable and
was not issued in violation of or subject to any preemptive
rights and is owned by the Company or one of its
subsidiaries, free and clear of all claims, liens, security
interests, pledges, charges, encumbrances, stockholders
agreements and voting trusts, except as otherwise described
in Schedule II to this Agreement.
(ii) The shares of Common Stock to be outstanding
on the Closing Date, including the Shares, will not have
been issued in violation of or be subject to any preemptive
rights. To such counsel's knowledge, there is no outstanding
option, warrant or other right calling for the issuance of
any share of capital stock
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(or similar interests) of the Company or of any of its
subsidiaries or any security or other instrument that by its
terms is convertible into, exercisable for or exchangeable
for capital stock (or similar interests) of the Company or
any subsidiary, except as described in the Registration
Statement and the Prospectuses.
(iii) The Company's execution and delivery of, and
its performance of its obligations under, each of the
Underwriting Agreements and the consummation of the
transactions contemplated thereby, do not and, when such
performance is required pursuant to the terms thereof, will
not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default under (or
an event that with notice or lapse of time, or both, would
constitute a default under) or require approval or consent
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to the terms of
any Material Contract or any Material Permit, except for
those conflicts, breaches or defaults for which consent or
approval has been obtained by the Company prior to the date
hereof, (B) violate or conflict with any provision of the
certificate of incorporation, by-laws or similar governing
instruments of the Company or any Material Domestic
Subsidiary, or (C) to such counsel's knowledge, violate or
conflict with any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the
Company or any Material Domestic Subsidiary or any of its
respective properties or assets, except, with respect to
clauses (A) and (C) of this subparagraph (iii), for those
violations or conflicts that, individually or in the
aggregate, would not have a Material Adverse Effect.
(iv) Insofar as statements in the Prospectuses
purport to summarize the nature and status of litigation or
the provisions of laws, rules, regulations, orders,
judgments or decrees, or the terms of any Material Contracts
or Material Permits, such statements are correct in all
material respects and are fair summaries of the matters
referred to therein.
(v) To the best of such counsel's knowledge, except
as set forth in the Registration Statement and
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<PAGE>
the Prospectuses, no person or entity has the right, by
contract or otherwise, to require registration under the Act
of shares of capital stock or other securities of the
Company or any of its subsidiaries solely because of the
filing or effectiveness of the Registration Statement and
the consummation of the transactions contemplated by the
Underwriting Agreements.
(vi) The Shares have been duly authorized for
listing on the NYSE, subject only to official notice of
issuance.
(vii) To the best of such counsel's knowledge,
there is no litigation, arbitration or governmental or other
action, suit, proceeding or investigation before any court
or before or by any public, regulatory or governmental
agency or body pending or threatened against, or involving
the properties or business of, the Company or any of its
subsidiaries, that, if resolved against the Company or such
subsidiary, individually or, to the extent involving related
claims or issues, in the aggregate, is of a character
required to be disclosed in the Registration Statement and
the Prospectuses that has not been properly disclosed
therein; and to the best such counsel's knowledge, there is
no contract or document concerning the Company or any of its
subsidiaries of a character required to be described in the
Registration Statement and the Prospectuses or to be filed
as an exhibit to the Registration Statement, that is not so
described or filed.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives
of the Company, representatives of the independent certified public
accountants of the Company, representatives of the U.S. Underwriters
and the Managers and Underwriters' Counsel at which the contents of
the Registration Statement, the Prospectuses and any amendments
thereof or supplements thereto and related matters were discussed
and, although such counsel has not undertaken to investigate or
verify independently and are not passing upon, and does not assume
any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the
Prospectuses or any amendments thereof or supplements thereto (except
as to matters referred to in clause (iv) above), no facts have
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<PAGE>
come to such counsel's attention which lead such counsel to believe
that the Registration Statement, on the effective date thereof (or
any post-effective amendment thereof as of the date of such
amendment), contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectuses, on the date thereof or the date of such opinion,
contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under
which they were made, not misleading (it being understood that such
counsel need express no view with respect to the financial statements
and related notes, the financial statement schedules and the other
financial and accounting data included therein).
In rendering such opinion, such counsel (i) may limit its
opinions to the corporate laws of the State of Delaware, the laws of
the State of New York and the federal laws of the United States of
America, and (ii) may rely (A) as to matters involving the
application of laws other than the laws of the State of New York and
the corporate laws of the State of Delaware and the federal laws of
the United States of America, to the extent such counsel deems proper
and to the extent specified in such opinion letter, if at all, upon a
written opinion or opinions (in form and scope reasonably
satisfactory to Underwriters' Counsel) of other counsel reasonably
acceptable to Underwriters' Counsel, familiar with the applicable
laws; and (B) as to matters of fact, to the extent such counsel may
deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company
and the subsidiaries. The opinion of such counsel shall specifically
state that the opinion of any such other counsel is in form and scope
satisfactory to such counsel and, in such counsel's opinion, such
counsel and you are justified in relying thereon. A copy of the
opinion of any such other counsel shall be delivered to Underwriters'
counsel.
(d) At the Closing Date (and, with respect to the Additional
U.S. Shares, the Additional Closing Date), you shall have received a
certificate of the Company executed by each of the Chief Executive
Officer and the Chief Financial Officer of the Company, dated the
date of its delivery, to
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the effect that the conditions set forth in subsection (a) of this
Section 8 have been satisfied, that as of the date of such
certificate the representations and warranties of the Company set
forth in Section 3 hereof are true and correct as of such Closing
Date and the obligations of the Company to be performed hereunder on
or prior thereto have been duly performed.
(e) At the time this Agreement is executed and at the
Closing Date (and, with respect to the Additional U.S. Shares, the
Additional Closing Date), you shall have received a letter, from
Deloitte & Touche LLP, dated the date of its delivery, addressed to
the U.S. Underwriters and the Managers and in form and substance
reasonably satisfactory to you, to the effect that: (i) they are
independent accountants with respect to the Company within the
meaning of the Act and the Regulations; (ii) in their opinion, the
Company Financials audited by such firm and included in the
Registration Statement and the Prospectuses comply as to form in all
material respects with the applicable accounting requirements of the
Act and the applicable published rules and regulations thereunder;
(iii) on the basis of procedures (but not an audit made in accordance
with generally accepted auditing standards) consisting of a reading
of the latest available unaudited interim consolidated financial
statements of the Company and its subsidiaries, a reading of the
minutes of meetings and consents of the stockholders and boards of
directors of the Company and the subsidiaries and the committees of
such boards subsequent to December 31, 1996, inquiries of certain
officials of the Company and its subsidiaries who have responsibility
for financial and accounting matters of such companies with respect
to transactions and events subsequent to December 31, 1996, and other
specified procedures and inquiries to a date not more than five days
prior to the date of such letter, nothing has come to their attention
that would cause them to believe that: (A) the unaudited historical
consolidated financial statements of the Company, its subsidiaries
and their predecessors included in the Registration Statement and the
Prospectuses do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the published
rules and regulations thereunder or that any material modification
should be made to such unaudited consolidated financial statements
for them to be in conformity with US GAAP; (B) with respect to the
period subsequent to December 31, 1996 there were, as of the date of
the most recent available monthly consolidated financial data of the
Company and the
30
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subsidiaries, if any, and as of a specified date not more than five
days prior to the date of such letter, any changes in the capital
stock or increases in long-term indebtedness of the Company or any
decrease in stockholders' equity of the Company, in each case as
compared with the amounts shown in the most recent balance sheet
included in the Registration Statement and the Prospectuses, except
for changes or decreases that the Registration Statement and the
Prospectuses disclose have occurred or may occur; (C) the unaudited
pro forma consolidated financial statements included in the
Prospectuses do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the applicable
published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts
in the compilation of such financial statements; or (D) that during
the period from December 31, 1996 to the date of the most recent
available monthly consolidated financial data of the Company and its
subsidiaries, if any, and to a specified date not more than five days
prior to the date of such letter, there was any decrease, as compared
with the corresponding period in the prior fiscal year, in total
revenues, or total or per share net income, except for decreases that
the Prospectuses disclose have occurred or may occur; and (iv)
stating that they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings and other financial
information pertaining to the Company and its subsidiaries set forth
in the Prospectuses, which have been specified by you prior to the
date of this Agreement, to the extent that such dollar amounts,
numbers, percentages and information may be derived from the general
accounting and financial records that are subject to the internal
control structure policies and procedures of the Company's and its
subsidiaries' accounting systems or that have been derived directly
from such accounting records by analysis or computation, and
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by you (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in such letter, and
found them to be in agreement.
(f) At the time this Agreement is executed and at the
Closing Date (and, with respect to the Additional U.S. Shares, the
Additional Closing Date), you shall have received a letter, from
Ernst & Young LLP, dated the date of
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its delivery, addressed to the U.S. Underwriters and the Managers and
in form and substance reasonably satisfactory to you, to the effect
that: (i) they are independent accountants with respect to First Gray
Line within the meaning of the Act and the Regulations; (ii) in their
opinion, the First Gray Line Financials audited by such firm and
included in the Registration Statement and the Prospectuses comply as
to form in all material respects with the applicable accounting
requirements of the Act and the applicable published rules and
regulations thereunder; (iii) on the basis of procedures (but not an
audit made in accordance with generally accepted auditing standards)
consisting of a reading of the latest available unaudited interim
consolidated financial statements of First Gray Line and its
subsidiaries, a reading of the minutes of meetings and consents of
the stockholders and boards of directors of First Gray Line and its
subsidiaries and the committees of such boards subsequent to
September 30, 1996, inquiries of certain officials of First Gray Line
and its subsidiaries who have responsibility for financial and
accounting matters of such companies with respect to transactions and
events subsequent to September 30, 1996, and other specified
procedures and inquiries to a date not more than five days prior to
the date of such letter, nothing has come to their attention that
would cause them to believe that: (A) the unaudited historical
condensed consolidated financial statements of First Gray Line and
its subsidiaries included in the Registration Statement and the
Prospectuses do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the published
rules and regulations thereunder or that any material modification
should be made to such unaudited consolidated financial statements
for them to be in conformity with US GAAP; (B) with respect to the
period subsequent to September 30, 1996 there were, as of the date of
the most recent available monthly consolidated financial data of
First Gray Line and its subsidiaries, if any, and as of a specified
date not more than five days prior to the date of such letter, any
changes in the capital stock or increases in long-term indebtedness
of First Gray Line or any decrease in stockholders' equity of First
Gray Line, in each case as compared with the amounts shown in the
most recent balance sheet included in the Registration Statement and
the Prospectuses, except for changes or decreases that the
Registration Statement and the Prospectuses disclose have occurred or
may occur; or (C) that during the period from September 30, 1996 to
the date of the most recent available monthly consolidated financial
data of First Gray
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Line and its subsidiaries, if any, and to a specified date not more
than five days prior to the date of such letter, there was any
decrease, as compared with the corresponding period in the prior
fiscal year, in total revenues, or total or per share net income,
except for decreases that the Prospectuses disclose have occurred or
may occur; and (iv) stating that they have compared certain financial
information pertaining to First Gray Line and its subsidiaries set
forth in the Prospectuses, which have been specified by you prior to
the date of this Agreement, to the extent that such information may
be derived from the general accounting and financial records that are
subject to the internal control structure policies and procedures of
First Gray Line's and its subsidiaries' accounting systems or that
have been derived directly from such accounting records by analysis
or computation, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate
procedures specified by you (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in such letter, and found them to be in agreement.
(g) All proceedings taken in connection with the sale of the
Shares as contemplated by the Underwriting Agreements shall be
reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have received from Underwriters'
Counsel a written opinion, dated as of the Closing Date and addressed
to the U.S. Underwriters and the Managers, with respect to the sale
of the Firm U.S. Shares, and dated as of the Additional Closing Date
with respect to the sale of the Additional U.S. Shares, as to such
matters as you reasonably may require, and the Company shall have
furnished to Underwriters' Counsel such documents as Underwriters'
Counsel may request for the purpose of enabling Underwriters' Counsel
to pass upon such matters.
(h) The NASD, upon review of the terms of the underwriting
arrangements for the public offering of the Shares, shall have raised
no objections thereto.
(i) The Shares shall have been listed on the NYSE, subject
to official notice of issuance.
(j) At the time this Agreement is executed, the Company
shall have furnished to you the written undertakings
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referred to in the last sentence of Section 6(f) hereof, in form and
substance satisfactory to Underwriters' Counsel.
(k) Prior to the Closing Date, and with respect to the
Additional U.S. Shares, the Additional Closing Date, the Company
shall have furnished to you such further information, certificates
and documents as you may reasonably request.
(l) The closing of the purchase of the International Shares
pursuant to the International Underwriting Agreement shall occur
concurrently with (i) the closing described in Section 4(a)(ii)
hereof, in the case of the Firm U.S. Shares , and (ii) the closing
described in Section 4(b)(ii) hereof, in the case of the Additional
U.S. Shares.
If any of the conditions specified in this Section 8 shall
not have been fulfilled when and as required by this Agreement, or if any of
the certificates, opinions, written statements, or letters furnished to you or
to Underwriters' Counsel pursuant to this Section 8 shall not be in all
material respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the U.S. Underwriters hereunder not
theretofore discharged may be canceled by you at, or at any time prior to, the
Closing Date and with respect to the Additional U.S. Shares, the Additional
Closing Date. Notice of such cancellation shall be given to the Company in
writing, or by telephone or telephonic facsimile, confirmed in writing.
9. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
U.S. Underwriter, including Bear, Stearns in its capacity as U.S. Underwriter
and in its capacity as Qualified Independent Underwriter, as such term is
defined in the Registration Statement, and each person, if any, who controls
any U.S. Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any and all losses, liabilities, claims,
damages and expenses whatsoever (including but not limited to attorneys' fees
and any and all expenses reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation, provided that such settlement was effected with the Company's
written consent in accordance with Section 9(c) hereof), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act
or
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otherwise, insofar as such losses, liabilities, claims, damages or expenses
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact made by the Company
contained in the Registration Statement or the U.S. Prospectus or any
Preliminary Prospectus, or in any supplement thereto or amendment thereof, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein (in the case of the U.S. Prospectus, in light of the
circumstances under which they were made) not misleading; provided, however,
that the Company shall not be liable under this subsection 9(a) to any U.S.
Underwriter in any such case to the extent but only to the extent that any
such loss, liability, claim, damage or expense arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by or on your behalf with respect to the U.S.
Underwriters; and provided further, that with respect to any Preliminary
Prospectus, such indemnity shall not inure to the benefit of any U.S.
Underwriter (or the benefit of any person controlling such U.S. Underwriter)
if the person asserting any such losses, liabilities, claims, damages or
expenses purchased the Shares that are the subject thereof from such U.S.
Underwriter and if such person was not sent or given a copy of the U.S.
Prospectus at or prior to confirmation of the sale of such Shares to such
person in any case where such sending or giving is required by the Act and the
untrue statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the U.S. Prospectus. This indemnity agreement will
be in addition to any liability that the Company may otherwise have to any
U.S. Underwriter or to any controlling person of such U.S. Underwriter,
including under this Agreement.
(b) Each U.S. Underwriter, severally and not jointly, agrees
to indemnify and hold harmless the Company, each of the directors of the
Company, each of the officers of the Company who shall have signed the
Registration Statement, and each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any losses, liabilities, claims, damages and expenses
whatsoever (including but not limited to attorneys' fees and any and all
expenses reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation, provided that such
settlement was effected with such U.S. Underwriter's written consent in
accordance with Section 9(c) hereof), joint or several, to which
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<PAGE>
they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the U.S. Prospectus or any Preliminary Prospectus,
or in any amendment thereof or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein (in
the case of the U.S. Prospectus, in light of the circumstances under which
they were made) not misleading, in each case to the extent, but only to the
extent, that any such loss, liability, claim, damage or expense arises out of
or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by you or on your behalf with
respect to such U.S. Underwriter expressly for use in the Registration
Statement or U.S. Prospectus; provided, however, that in no case shall such
U.S. Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such U.S.
Underwriter hereunder. This indemnity will be in addition to any liability
that the U.S. Underwriter may otherwise have to the Company or any such
director, officer or controlling person, including under this Agreement. The
Company acknowledges that the statements set forth in the last paragraph of
the cover page, the legend concerning stabilization on page two of the U.S.
Prospectus and the statements set forth under the captions "Underwriting" and
"Notice to Canadian Residents" in the U.S. Prospectus constitute the only
information furnished in writing by or on behalf of any U.S. Underwriter
expressly for use in the Registration Statement, any related Preliminary
Prospectus and the U.S. Prospectus.
(c) Promptly after receipt by an indemnified party under
subsection 9(a) or (b) above of notice of the assertion of any claim, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability that it may have under this Section 9 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability that it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein, and to the extent it may elect by written notice
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<PAGE>
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of such indemnified party or parties unless (i) the employment
of such counsel shall have been authorized in writing by one of the
indemnifying parties in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel to take charge of the
defense of such action within a reasonable time after notice of commencement
of the action, or (iii) such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them that
are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties with respect to such different defenses), in any of which
events such fees and expenses shall be borne by the indemnifying parties. The
indemnifying party under subsection 9(a) or (b) above shall only be liable for
the legal expenses of one counsel for all indemnified parties in each
jurisdiction in which any claim or action is brought; provided, however, that
the indemnifying party shall be liable for separate counsel for any
indemnified party in a jurisdiction, if counsel to the indemnified parties
shall have reasonably concluded that there may be defenses available to such
indemnified party that are different from or additional to those available to
one or more of the other indemnified parties and that separate counsel for
such indemnified party is prudent under the circumstances. Anything in this
subsection to the contrary notwithstanding, an indemnifying party shall not be
liable for any settlement of any claim or action effected without its written
consent; provided, however, that such written consent was not unreasonably
withheld.
10. CONTRIBUTION. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 9(a) hereof
is for any reason held to be unavailable from the Company or is insufficient
to hold harmless a party indemnified thereunder, the Company and the U.S.
Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provisions (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the case of
losses, claims, damages, liabilities and expenses
37
<PAGE>
suffered by the Company, any contribution received by the Company from
persons, other than one or more of the U.S. Underwriters, who may also be
liable for contribution, including persons who control the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
officers of the Company who signed the Registration Statement and directors of
the Company) to which the Company and one or more of the U.S. Underwriters may
be subject, in such proportions as are appropriate to reflect the relative
benefits received by the Company, on the one hand, and the U.S. Underwriters,
on the other hand, from the offering of the U.S. Shares or, if such allocation
is not permitted by applicable law or indemnification is not available as a
result of the indemnifying party not having received notice as provided in
Section 9 hereof, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the
Company, on the one hand, and the U.S. Underwriters, on the other hand, in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, on
the one hand, and the U.S. Underwriters, on the other hand, shall be deemed to
be in the same proportion as (x) the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and (y) the underwriting discounts received by the U.S.
Underwriters, respectively, in each case as set forth in the table on the
cover page of the U.S. Prospectus. The relative fault of the Company, on the
one hand, and of the U.S. Underwriters, on the other hand, shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, on the one hand,
or the U.S. Underwriters, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the U.S. Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 10
were determined by pro rata allocation or by any other method of allocation
that does not take account of the equitable considerations referred to above.
The Underwriters' obligations in this Section 10 to contribute are several and
not joint. Notwithstanding the provisions of this Section 10, (i) in no case
shall any U.S. Underwriter be required to contribute any amount in excess of
the amount by which the aggregate public offering price of the U.S. Shares
underwritten by it and distributed to the public exceeds the amount of any
damages that such U.S. Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or such omission or alleged
38
<PAGE>
omission, and (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 10, each person, if any, who controls any U.S.
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act shall have the same rights to contribution as such U.S.
Underwriter and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 10. Any
party entitled to contribution shall, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect
of which a claim for contribution may be made against another party or parties
under this Section 10, notify such party or parties from whom contribution may
be sought, but the omission to so notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have under this Section 10 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its written consent; provided, however, that such written consent was
not unreasonably withheld.
11. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All
representations and warranties, covenants and agreements of the U.S.
Underwriters and the Company contained in this Agreement, including without
limitation the agreements contained in Sections 5, 6 and 7 hereof, the
indemnity agreements contained in Section 9 hereof and the contribution
agreements contained in Section 10 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of the
U.S. Underwriters or any controlling person of any U.S. Underwriter or by or
on behalf of the Company, any of its officers and directors, and shall survive
delivery of the U.S. Shares to and payment for the U.S. Shares by the U.S.
Underwriters. The representations contained in Section 3 hereof and the
agreements contained in this Section 11 and Sections 5, 6, 7, 9, 10 and 13(d)
hereof shall survive the termination of this Agreement including pursuant to
Section 12 or 13 hereof; provided, however, that if this Agreement is
terminated pursuant to Section 12 or 13 hereof or if for any reason the
purchase of the U.S. Shares by the U.S. Underwriters as contemplated hereunder
is not consummated, the agreements contained in Sections 5 and 6 hereof shall
not survive.
39
<PAGE>
12. DEFAULT BY A U.S. UNDERWRITER.
(a) If any U.S. Underwriter or U.S. Underwriters shall
default in its or their obligation to purchase Firm U.S. Shares or Additional
U.S. Shares hereunder, and if the Firm U.S. Shares or Additional U.S. Shares
with respect to which such default relates do not (after giving effect to
arrangements, if any, made pursuant to subsection 12(b) below) exceed in the
aggregate 10% of the number of shares of Firm U.S. Shares or Additional U.S.
Shares, as the case may be, that all U.S. Underwriters have agreed to purchase
hereunder, then such Firm U.S. Shares or Additional U.S. Shares to which the
default relates shall be purchased by the non-defaulting U.S. Underwriters in
proportion to the respective proportions that the numbers of Firm U.S. Shares
set forth opposite their respective names in Schedule I hereto bear to the
aggregate number of Firm U.S. Shares set forth opposite the names of the
non-defaulting U.S. Underwriters.
(b) If such default relates to more than 10% of the Firm
U.S. Shares or Additional U.S. Shares, as the case may be, you may, in your
discretion, arrange for another party or parties (including any non-defaulting
U.S. Underwriter or U.S. Underwriters who so agree) to purchase such Firm U.S.
Shares or Additional U.S. Shares, as the case may be, to which such default
relates on the terms contained herein. If within five (5) calendar days after
such a default you do not arrange for the purchase of the Firm U.S. Shares or
Additional U.S. Shares, as the case may be, to which such default relates as
provided in this Section 12, this Agreement (or, in the case of a default with
respect to the Additional U.S. Shares, the obligations of the U.S.
Underwriters to purchase and of the Company to sell the Additional U.S.
Shares) shall thereupon terminate, without liability on the part of the
Company with respect thereto (except in each case as provided in Sections 7,
9(a) and 10 hereof) or the several non-defaulting U.S. Underwriters (except as
provided in Sections 9(b) and 10 hereof), but nothing in this Agreement shall
relieve a defaulting U.S. Underwriter or U.S. Underwriters of its or their
liability, if any, to the other several U.S. Underwriters and the Company for
damages occasioned by its or their default hereunder.
(c) If the Firm U.S. Shares or Additional U.S. Shares to
which the default relates are to be purchased by the non-defaulting U.S.
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the Closing Date or
Additional Closing Date, as the case may be, for a period not exceeding five
(5) business days, in order to effect whatever changes may thereby be made
40
<PAGE>
necessary in the Registration Statement or the U.S. Prospectus or in any other
documents and arrangements, and the Company agrees to file promptly any
amendment or supplement to the Registration Statement or the U.S. Prospectus
that, in the opinion of Underwriters' Counsel, may thereby be made necessary
or advisable. The term "U.S. Underwriter" as used in this Agreement shall
include any party substituted under this Section 12 with like effect as if it
had originally been a party to this Agreement with respect to such Firm U.S.
Shares and Additional U.S. Shares.
13. EFFECTIVE DATE OF U.S. UNDERWRITING AGREEMENT;
TERMINATION.
(a) This Agreement shall become effective upon the later of
(i) when you and the Company shall have received notification of the
effectiveness of the Registration Statement and (ii) the execution and
delivery of this Agreement by the parties hereto. Until this Agreement becomes
effective as aforesaid, this Agreement may be terminated by the Company by
notifying you or by you by notifying the Company without any liability of any
party to any party hereunder. Notwithstanding the foregoing, the provisions of
this Section 13 and of Sections 6, 9, 10 and 11 hereof shall at all times be
in full force and effect.
(b) This Agreement and the obligations of the U.S.
Underwriters hereunder may be terminated by you by written notice to the
Company at any time at or prior to the Closing Date (and, with respect to the
Additional U.S. Shares, the Additional Closing Date), without liability (other
than with respect to Sections 9 and 10) on the part of any U.S. Underwriter to
the Company if, on or prior to such date, (i) the Company shall have failed,
refused or been unable to perform in any material respect any agreement on its
part to be performed hereunder, (ii) any other condition to the obligations of
the U.S. Underwriters set forth in Section 8 hereof is not fulfilled when and
as required in any material respect, (iii) trading in securities generally on
the NYSE or the American Stock Exchange or in the over-the-counter market
shall have been suspended or materially limited, or minimum prices shall have
been established on either exchange or such market by the Commission, or by
either exchange or other regulatory body or governmental authority having
jurisdiction, (iv) a general banking moratorium shall have been declared by
Federal or New York State authorities, (v) there shall have occurred any
outbreak or escalation of armed hostilities involving the United States on or
after the date hereof, or if there has been a declaration by the United States
of a national
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<PAGE>
emergency or war, the effect of which shall be, in your judgment, to make it
inadvisable or impracticable to proceed with the sale and delivery of the
Shares on the terms and in the manner contemplated in the Prospectuses, (vi)
in your reasonable opinion any material adverse change shall have occurred
since the respective dates as of which information is given in the
Registration Statement or the Prospectuses affecting the business, prospects,
condition (financial or other) or results of operations of the Company and its
subsidiaries taken as a whole, whether or not arising in the ordinary course
of business, other than as set forth in the Prospectuses or contemplated
thereby, (vii) there shall have occurred such a material adverse change in the
financial markets in the United States such as, in your judgment, makes it
inadvisable or impracticable to proceed with the sale and delivery of the
Shares on the terms and in the manner contemplated in the Prospectuses, or
(viii) there shall have been any enactment, proposal, publication, decree or
other promulgation of any foreign or United States federal or state statute,
regulation, rule or order of any court or other governmental authority that
would, in your reasonable judgment, make it inadvisable or impracticable to
proceed with the sale and delivery of the Shares on the terms and in the
manner contemplated in the Prospectuses. Your right to terminate this
Agreement will not be waived or otherwise relinquished by failure to give
notice of termination prior to the time that the event giving rise to the
right to terminate shall have ceased to exist, provided that notice is given
prior to the Closing Date (and, with respect to the Additional U.S. Shares,
the Additional Closing Date).
(c) Any notice of termination pursuant to this Section 13
shall be by telephone or telephonic facsimile, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of
the provisions hereof (otherwise than pursuant to notification by you as
provided in subsection 13(a) or 13(b) hereof), or if the sale of the U.S.
Shares provided for herein is not consummated because any condition to the
obligations of the U.S. Underwriters set forth herein is not satisfied (other
than with respect to Section 8(l) hereof as a result of a default by the
Managers in the purchase of the International Shares) or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or to comply with any provision hereof (other than by reason
of a default of the U.S. Underwriters), the Company agrees, subject to demand
by you, to reimburse the U.S. Underwriters for all reasonable out-of-pocket
expenses (including the reasonable fees and expenses of
42
<PAGE>
Underwriters' Counsel), incurred by the U.S. Underwriters in connection
herewith.
14. NOTICES. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to
any one or more of the U.S. Underwriters, shall be hand delivered or faxed to
each such U.S. Underwriter in care of Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, Attention: Corporate Finance Department (Fax
No. 212-272-3092); and if sent to the Company, shall be hand delivered or
faxed to the Company, 900 Old Country Road, Garden City, New York 11530,
Attention: Corporate Secretary (Fax No. 516-222-4700).
15. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original but all of which
together shall constitute one instrument.
16. PARTIES. This Agreement shall inure solely to the
benefit of, and shall be binding upon, each of the U.S. Underwriters and the
Company, and the controlling persons, directors, officers, employees and
agents referred to in Sections 9 and 10 hereof, and their respective
successors and assigns, and no other person shall have or be construed to have
any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained. The term
"successors and assigns" shall not include a purchaser, in its capacity as
such, of U.S. Shares from the U.S.
Underwriters.
17. CONSTRUCTION. This Agreement shall be construed in
accordance with the laws of the State of New York, but without regard to
principles of conflicts of laws.
18. DEFINITION OF BUSINESS DAY. For the purposes of this
Agreement, "business day" means any day on which the NYSE is open for trading.
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If the foregoing correctly sets forth the complete agreement
among the U.S. Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
AVIS RENT A CAR, INC.
By:
-------------------------------
Name:
Title:
Accepted as of the date first above written.
BEAR, STEARNS & CO. INC.
BLAYLOCK & PARTNERS, L.P.
CHASE SECURITIES INC.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS INC.
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY LLC
as Representatives of the several
U.S. Underwriters named in Schedule I
annexed hereto.
By: BEAR, STEARNS & CO. INC.
By:
---------------------------------
Name:
Title:
44
<PAGE>
19,500,000 SHARES OF COMMON STOCK
AVIS RENT A CAR, INC.
FORM OF INTERNATIONAL UNDERWRITING AGREEMENT
--------------------------------------------
________ __, 1997
Bear, Stearns International Limited
Bayerische Vereinsbank AG
Chase Manhattan International Limited
Credit Lyonnais Securities
Goldman Sachs International
Lehman Brothers
International (Europe)
Montgomery Securities
Robertson, Stephens & Company LLC
as Lead Managers of the
several Managers named
in Schedule I annexed hereto
c/o Bear, Stearns International Limited
One Canada Square
London E14 5AD, England
Ladies and Gentlemen:
Avis Rent A Car, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreements with you as follows:
1. MANAGERS. The term "Managers", as used herein, refers
collectively to you and the other underwriters named in Schedule I hereto, for
whom you are acting as representatives. Except as may be expressly set forth
below, any reference to you in this Agreement shall be solely in your capacity
as representatives of the Managers, and the Company shall be entitled to act
and rely upon any statement, request, notice, consent, waiver or agreement
purportedly on behalf of any Manager made or given by Bear, Stearns
International Limited ("Bear, Stearns").
2. DESCRIPTION OF STOCK.
(a) The Company proposes to sell to the Managers an
aggregate of 3,900,000 shares (the "Firm International Shares") of Common
Stock, par value $.01 per share (the "Common Stock"), of the Company, upon the
terms and subject to the conditions set forth herein. The Company also
proposes to grant to the Managers the option to purchase from the Company, for
the sole purpose of
<PAGE>
covering over-allotments, if any, in connection with the sale of the Firm
International Shares, an aggregate of up to 585,000 additional shares (the
"Additional International Shares") of Common Stock upon the terms and subject
to the conditions set forth herein and for the purposes set forth in Section
4(b) hereof. The Firm International Shares and the Additional International
Shares are hereinafter referred to collectively as the "International Shares."
(b) It is understood and agreed to by all the parties that
the Company is concurrently entering into an agreement (the "U.S. Underwriting
Agreement") providing for the sale by the Company of an aggregate of
15,600,000 shares (the "Firm U.S. Shares") of Common Stock through
arrangements with certain underwriters in the United States and Canada (the
"U.S. Underwriters"), for which Bear, Stearns & Co. Inc., Blaylock & Partners,
L.P., Chase Securities Inc., Goldman, Sachs & Co., Lehman Brothers Inc.,
Montgomery Securities and Robertson, Stephens & Company LLC are acting as
representatives. The Company also proposes to grant to the U.S. Underwriters
the option to purchase, for the sole purpose of covering over-allotments in
connection with the sale of the Firm U.S. Shares, up to an aggregate of
2,340,000 additional shares (the "Additional U.S. Shares") of Common Stock.
The Firm U.S. Shares and the Additional U.S. Shares are collectively referred
to herein as the "U.S. Shares," the International Shares and the U.S. Shares
are collectively referred to herein as the "Shares" and this Agreement and the
U.S. Underwriting Agreement are collectively referred to herein as the
"Underwriting Agreements." Two forms of prospectus are to be used in
connection with the offering and sale of the Shares contemplated by the
foregoing, one relating to the International Shares and the other relating to
the U.S. Shares. The former form of prospectus will be identical to the latter
except for certain substitute pages as included in the registration statement
and amendments thereto as mentioned below. Except as the context otherwise may
require, references hereinafter to any prospectus, whether in preliminary or
final form and whether as amended or supplemented, shall include the
international and the U.S. versions thereof.
(c) It is also understood and agreed to by all the parties
that the U.S. Underwriters have entered into an agreement with the Managers
(the "Agreement Between U.S. Underwriters and Managers") contemplating the
coordination of certain transactions between the U.S. Underwriters and the
Managers and that, pursuant thereto and subject to the conditions set forth
therein, the U.S. Underwriters may (i) purchase from the Managers a portion of
the
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International Shares to be sold to the Managers pursuant to this Agreement or
(ii) sell to the Managers a portion of the U.S. Shares to be sold to the U.S.
Underwriters pursuant to the U.S. Underwriting Agreement. The Company also
understands that any such purchases and sales between the U.S. Underwriters
and the Managers shall be governed by the Agreement Between U.S. Underwriters
and Managers and shall not be governed by the terms of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to, and agrees with, each Manager
that:
(a) The Company meets the requirements for the use of a
Registration Statement on Form S-1 under the Securities Act of 1933
(the "Act"), and has prepared and filed with the Securities and
Exchange Commission (the "Commission"), pursuant to the Act and the
rules and regulations promulgated by the Commission thereunder (the
"Regulations"), a registration statement on Form S-1 (File No.
333-28609) relating to the Shares and may have filed one or more
amendments thereto, including in each case preliminary prospectuses
relating to the offerings of the Shares. The Company next proposes to
file with the Commission a further amendment to the registration
statement, including therein a final prospectus, necessary to permit
the registration statement to become effective or, if no amendment is
required for that purpose, then promptly following the effectiveness
of the registration statement, the Company proposes to file with the
Commission, in accordance with Rules 430A and 424(b)(1) or Rule
424(b)(4) of the Regulations, final prospectuses with respect to the
offerings of the Shares, the final prospectus so filed in either case
to include all Rule 430A Information (as hereinafter defined) and to
conform, in content and form, to the last printer's proof thereof
furnished to and approved by you immediately prior to such filing. As
used in this Agreement, (i) "Effective Date" means the date that the
registration statement hereinabove referred to, or the most recent
post-effective amendment thereto, if any, is declared effective by
the Commission, (ii) "Registration Statement" means such registration
statement as last amended prior to the time the same was declared
effective by the Commission, including all exhibits and schedules
thereto and all Rule 430A Information deemed to be included therein
at the Effective Date pursuant to Rule 430A of the Regulations, (iii)
"Rule 430A Information" means information with respect to the Shares
and the public offerings thereof permitted,
3
<PAGE>
pursuant to the provisions of paragraph (a) of Rule 430A of the
Regulations, to be omitted from the form of prospectus included in
the Registration Statement at the time it is declared effective by
the Commission, (iv) "U.S. Prospectus" means the form of final
prospectus relating to the U.S. Shares first filed with the
Commission pursuant to Rule 424(b) of the Regulations or, if no
filing pursuant to Rule 424(b) is required, the form of final
prospectus included in the Registration Statement at the Effective
Date, (v) "International Prospectus" means the form of final
prospectus relating to the International Shares first filed with the
Commission pursuant to Rule 424(b) of the Regulations or, if no
filing pursuant to Rule 424(b) is required, the form of final
prospectus included in the Registration Statement at the Effective
Date (the U.S. Prospectus and the International Prospectus are
referred to collectively as the "Prospectuses") and (vi) "Preliminary
Prospectus" means any preliminary prospectus (as described in Rule
430 of the Regulations) with respect to the Shares that omits Rule
430A Information.
(b) The Registration Statement conforms and on the Effective
Date will conform, and the Prospectuses on the date thereof and on
the date first filed with the Commission pursuant to Rule 424(b) of
the Regulations (if required) will conform, in all material respects
with the applicable requirements of the Act and the Regulations. On
the Effective Date, the date the Prospectuses are first filed with
the Commission pursuant to Rule 424(b) of the Regulations (if
required), at all times subsequent thereto to and including the
Closing Date (as defined in Section 4(a)(ii) hereof) and, if later,
the Additional Closing Date (as defined in Section 4(b)(ii) hereof),
when any post-effective amendment to the Registration Statement
becomes effective or any supplement to the Prospectuses is filed with
the Commission, and during such longer period as the Prospectuses may
require to be delivered under the Act in connection with sales of
Shares by the Managers, the U.S. Underwriters or a dealer, the
Registration Statement and the Prospectuses (as amended or
supplemented if the Company shall have filed with the Commission an
amendment or supplement thereto) did not and will not contain an
untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements made therein (in the case of the Prospectuses, in light of
the circumstances under which they were made) not misleading. No
order preventing or suspending the use of any Preliminary Prospectus
has been
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issued by the Commission, and when any Preliminary Prospectus was
first filed with the Commission (whether filed as part of the
Registration Statement or an amendment thereof or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or
supplement thereto was first filed with the Commission, such
Preliminary Prospectus and any amendments thereof and supplements
thereto conformed in all material respects with the applicable
requirements of the Act and the Regulations thereunder and did not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which
they were made, not misleading. No representation and warranty,
however, is made in this subsection 3(b) by the Company with respect
to written information contained in or omitted from the Registration
Statement, the Prospectuses, any Preliminary Prospectus, or any
amendment or supplement in reliance upon and in conformity with
written information with respect to the Managers and the U.S.
Underwriters and the plan of distribution of the Shares furnished to
the Company on behalf of any U.S. Underwriter or Manager by Bear,
Stearns expressly for use in connection with the preparation thereof.
(c) Each contract, agreement, instrument, lease, license or
other item required to be described in the Registration Statement or
the Prospectuses or filed as an exhibit to the Registration Statement
has been so described or filed, as the case may be.
(d) Deloitte & Touche LLP, whose separate reports appear in
the Prospectuses, are independent public accountants with respect to
the Company and Ernst & Young LLP, whose separate reports appear in
the Prospectuses, are independent public accountants with respect to
The First Gray Line Corporation ("First Gray Line"), in each case as
required by and within the meaning of the Act and the Regulations.
The consolidated financial statements and schedules (including the
related notes) of the Company, its subsidiaries and their
predecessors (the "Company Financials") included in the Registration
Statement or any Preliminary Prospectus, or to be included in the
Prospectuses fairly present the consolidated financial position,
results of operations and cash flows of the Company, its subsidiaries
and their predecessors and the other information purported to be
shown therein at the respective dates and for the respective periods
to which
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they apply. The Company Financials have been prepared in accordance
with generally accepted accounting principles as in effect in the
United States ("US GAAP") consistently applied throughout the periods
involved, and are, in all material respects, in accordance with the
books and records of the Company, its subsidiaries and their
predecessors, as the case may be. The consolidated financial
statements and schedules (including the related notes) of First Gray
Line and its subsidiaries (the "First Gray Line Financials") included
in the Registration Statement or any Preliminary Prospectus, or to be
included in the Prospectuses fairly present the consolidated
financial position, results of operations and cash flows of First
Gray Line and its subsidiaries and the other information purported to
be shown therein at the respective dates and for the respective
periods to which they apply. The First Gray Line Financials have been
prepared in accordance with US GAAP consistently applied throughout
the periods involved, and are, in all material respects, in
accordance with the books and records of First Gray Line and its
subsidiaries, as the case may be. The "pro forma" financial
information included in the Registration Statement or any Preliminary
Prospectus, or to be included in the Prospectuses, fairly present the
information purported to be shown therein at the respective dates
thereof and for the respective periods covered thereby and all
adjustments have been properly applied. The assumptions in such pro
forma financial information are reasonable. No other financial
statements are required by Form S-1 or otherwise to be included in
the Registration Statement or the Prospectuses other than those
included therein.
(e) Subsequent to the respective dates as of which
information is given in the Registration Statement, except as set
forth in the Registration Statement or as may be set forth in the
Prospectuses, there has not been any material adverse change in the
business, properties, operations, condition (financial or other) or
results of operations of the Company and the subsidiaries (as defined
below) taken as a whole, whether or not arising from transactions in
the ordinary course of business, and since the date of the latest
balance sheet of the Company included in the Registration Statement,
and except as described in the Registration Statement or as may be
described in the Prospectuses, (i) neither the Company nor any of its
subsidiaries (A) has incurred or undertaken any liabilities or
obligations, direct or contingent, that are, individually or in the
aggregate, material to the Company and its
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subsidiaries taken as a whole, or (B) entered into any transaction
not in the ordinary course of business that is material to the
Company and its subsidiaries taken as a whole; and (ii) the Company
has not declared or paid any dividend on or made any distribution of
or with respect to any shares of its capital stock or redeemed,
purchased or otherwise acquired or agreed to redeem, purchase or
otherwise acquire any shares of its or its subsidiaries' capital
stock. As used in this Agreement, the term "subsidiary" means any
corporation, partnership, joint venture, association, company,
business trust or other entity in which the Company or First Gray
Line, as the case may be, directly or indirectly (i) beneficially
owns or controls a majority of the outstanding voting securities
having by the terms thereof ordinary voting power to elect a majority
of the board of directors (or other body fulfilling a substantially
similar function) of such entity (irrespective of whether or not at
the time any class or classes of such voting securities shall have or
might have voting power by reason of the happening of any
contingency) or (ii) has the authority or ability to control the
policies of such entity (including, but without limitation thereto,
any partnership of which the Company or First Gray Line, as the case
may be, or a subsidiary is a general partner or owns or has the right
to obtain a majority of limited partnership interests and any joint
venture in which the Company or First Gray Line, as the case may be,
or a subsidiary has liability similar to the liability of a general
partner of a partnership or owns or has the right to obtain a
majority of the joint venture interests).
(f) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under each
of the Underwriting Agreements and to issue, sell and deliver the
Shares in accordance with the terms and conditions thereof. Each of
the Underwriting Agreements has been duly and validly authorized,
executed and delivered by the Company and is a legal and binding
obligation of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws affecting creditors' rights and remedies
generally, and subject, as to enforceability, to general principles
of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought
in a proceeding at law or in equity), and except insofar as rights to
indemnification and
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contribution contained therein may be limited by federal or state
securities laws or related public policy.
(g) The Company's execution and delivery of, and its
performance of its obligations under, each of the Underwriting
Agreements and the consummation of the transactions contemplated
thereby, will not (i) conflict with or result in a breach of any of
the terms and provisions of, or constitute a default under (or an
event that with notice or lapse of time, or both, would constitute a
default under) or require approval or consent under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant
to the terms of (A) any agreement, contract, indenture, mortgage,
lease, license, arrangement or understanding to which the Company or
any of its subsidiaries is a party, or to which any of its properties
is subject, that is material to the Company and the subsidiaries
taken as a whole (hereafter, collectively, "Material Contracts")
(except for those conflicts, breaches or defaults for which consent
or approval has been obtained by the Company prior to the date
hereof, and copies evidencing such consent or approval have been
provided to Bear, Stearns) or (B) any governmental franchise, license
or permit heretofore issued to the Company or any of its subsidiaries
that is material to the Company and its subsidiaries taken as a whole
(hereafter, collectively, "Material Permits"), (ii) violate or
conflict with any provision of the certificate of incorporation,
by-laws or similar governing instruments of the Company or any of its
subsidiaries listed on Schedule II hereto (the "Material
Subsidiaries") or (iii) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction
over the Company or any Material Subsidiary or any of its respective
properties or assets, except for those violations or conflicts, that,
individually or in the aggregate, would not have a material adverse
effect on the Company and its subsidiaries taken as a whole
(hereafter, a "Material Adverse Effect").
(h) No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
its respective properties or assets is required for the Company's
execution and delivery of, and its performance of its obligations
under, each of
8
<PAGE>
the Underwriting Agreements, and the consummation of the transactions
contemplated thereby, except the registration of the Shares under the
Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the authorization of the Shares for listing on the
New York Stock Exchange (the "NYSE") and such filings and
registrations as may be required under state securities or "Blue Sky"
laws and the securities laws of foreign jurisdictions in connection
with the purchase and distribution of the Shares by the Managers and
the U.S. Underwriters.
(i) All of the currently outstanding shares of capital stock
of the Company, and all of the outstanding shares of capital stock
(or similar interests) of each of its subsidiaries, have been duly
and validly authorized and issued, are fully paid and nonassessable
and were not issued in violation of or subject to any preemptive
rights. The shares of Common Stock of the Company to be outstanding
on the Closing Date, including the Shares, have been duly authorized
and, when issued (and, in the case of the Shares, delivered and sold
in accordance with the terms of the Underwriting Agreements) will be
validly issued, fully paid and nonassessable, and will not have been
issued in violation of or be subject to any preemptive rights. Upon
delivery of and payment for the Shares in accordance with the
Underwriting Agreements, the Managers and the U.S. Underwriters will
receive valid title to those of the Shares to be purchased by them
from the Company, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders' agreements and voting
trusts. The Company has, as of the date hereof, and will have, as of
the Closing Date and the Additional Closing Date, if any, an
authorized and outstanding capitalization as set forth in the
Registration Statement and as shall be set forth in the Prospectuses,
both on an historical basis and as adjusted to give effect to the
offering of the Shares. The Company's capital stock conforms to the
description thereof set forth in the Registration Statement and as
shall be set forth in the Prospectuses. The Company owns directly or
indirectly such percentage of the outstanding capital stock (or
similar interests) of each of its subsidiaries as is set forth
opposite the name of such subsidiary in Schedule III hereto, free and
clear of all claims, liens, security interests, pledges, charges,
encumbrances, stockholders agreements and voting trusts, except as
otherwise described in said Schedule III.
9
<PAGE>
(j) There is no commitment, plan or arrangement to issue,
and no outstanding option, warrant or other right calling for the
issuance of, any shares of capital stock (or similar interests) of
the Company or of any of its subsidiaries or any security or other
instrument that by its terms is convertible into, exchangeable for or
evidencing the right to purchase capital stock (or similar interests)
of the Company or such subsidiary, except as described in the
Registration Statement and as shall be described in the Prospectuses.
(k) The Company has no subsidiaries other than those listed
in Schedule III hereto. Each of the Company and its subsidiaries has
been duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdictions of incorporation. Each
of the Company and the Material Subsidiaries is duly qualified and in
good standing as a foreign corporation in each jurisdiction in which
the character or location of its properties (owned, leased or
licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified
or in good standing that will not in the aggregate have a Material
Adverse Effect. Each of the Company and the Material Subsidiaries has
all requisite corporate power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and
operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and as shall
be described in the Prospectuses (except for those the absence of
which, individually or in the aggregate, would not have a Material
Adverse Effect), and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction that is not adequately disclosed in the
Registration Statement and the Prospectuses. Neither the Company nor
any Material Subsidiary has received any notice of proceedings
relating to revocation or modification of any such consents,
approvals, authorizations, orders, registrations, filings,
qualifications, licenses or permits (except for those the revocation
or modification of which would not have a Material Adverse Effect).
(l) Neither the Company nor any of its subsidiaries,
nor to the knowledge of the Company, any other party, is in
violation or breach of, or in default under (nor has an
10
<PAGE>
event occurred that with notice, lapse of time or both, would
constitute a default under), any Material Contract, and each Material
Contract is in full force and effect, and is the legal, valid and
binding obligation of the Company or such subsidiary, as the case may
be, and (subject to applicable bankruptcy, insolvency, and other laws
affecting the enforceability of creditors' rights generally) is
enforceable as to the Company or such subsidiary, as the case may be,
in accordance with its terms. Neither the Company nor any Material
Subsidiary is in violation of its certificate of incorporation,
by-laws or similar governing instrument.
(m) There is no litigation, arbitration, claim, governmental
or other proceeding or investigation pending or, to the best
knowledge of the Company, threatened with respect to the Company or
any of its subsidiaries, or any of its respective operations,
businesses, properties or assets, except as described in the
Registration Statement and as shall be described in the Prospectuses,
that, individually or in the aggregate, would have a Material Adverse
Effect. Neither the Company nor any Material Subsidiary is, or, to
the best knowledge of the Company, with the giving of notice or lapse
of time or both would be, in violation of or in non-compliance with
the requirements of any Material Permit or the provisions of any law,
rule, regulation, order, judgment or decree, including, without
limitation, all applicable federal, state and local laws and
regulations relating to (i) zoning, land use, protection of the
environment, human health and safety or hazardous or toxic
substances, wastes, pollutants or contaminants and (ii) employee or
occupational safety, discrimination in hiring, promotion or pay of
employees, employee hours and wages or employee benefits, except for
such violations or failures of compliance that, individually or in
the aggregate, would not have a Material Adverse Effect.
(n) Except as described in the Registration Statement and as
shall be described in the Prospectuses, the Company and each of its
subsidiaries have (i) good and marketable title to all real and
personal properties owned by them, free and clear of all liens,
security interests, pledges, charges, encumbrances and mortgages, and
(ii) valid, subsisting and enforceable leases for all real and
personal properties leased by them, in each case, subject to such
exceptions as, individually or in the aggregate, do not have and are
not reasonably likely to have a Material Adverse Effect. No real
property owned, leased, licensed or used by
11
<PAGE>
the Company or by a Material Subsidiary lies in an area that is, or
to the best knowledge of the Company will be, subject to zoning, use
or building code restrictions that would prohibit, and no state of
facts relating to the actions or inaction of another person or entity
or his, her or its ownership, leasing, licensing or use of any real
or personal property exists that would prevent, the continued
effective ownership, leasing, licensing or use of such real property
in the business of the Company or such Material Subsidiary as
presently conducted or as the Prospectuses indicate are contemplated
to be conducted, subject to such exceptions as, individually or in
the aggregate, do not have and are not reasonably likely to have a
Material Adverse Effect.
(o) The Company, directly or through one or more of its
subsidiaries, owns or has the right under license to use all patents,
patent rights, licenses, inventions, copyrights, trademarks, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
service marks and trade names (collectively, "Intellectual Property")
necessary to conduct its business as now conducted and proposed to be
conducted as disclosed in the Registration Statement and as shall be
disclosed in the Prospectuses. Neither the Company nor any of its
subsidiaries has received notice of infringement of or conflict with
the asserted rights of others with respect to any Intellectual
Property. To the best knowledge of the Company, there is no
infringement by others of any Intellectual Property of the Company or
any of its subsidiaries that has had or may in the future have a
Material Adverse Effect.
(p) To the Company's best knowledge, neither the Company or
any of its subsidiaries, nor any director, officer or employee of the
Company or any such subsidiary has, directly or indirectly, used any
corporate funds for unlawful contributions, gifts, entertainment, or
other unlawful expenses relating to political activity; made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff,
influence payment, kickback, or other unlawful payment.
(q) Except as set forth in the Registration Statement,
no person or entity has the right, by contract or otherwise,
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<PAGE>
to require registration under the Act of shares of capital stock or
other securities of the Company or any of its subsidiaries solely
because of the filing or effectiveness of the Registration Statement
and the consummation of the transactions contemplated by the
Underwriting Agreements.
(r) Neither the Company nor any of its officers, directors
or affiliates (as defined in the Regulations) has taken or will take,
directly or indirectly, prior to the termination of the offerings of
the Shares contemplated by the Underwriting Agreements, any action
designed to stabilize or manipulate the price of the Common Stock, or
that might reasonably be expected to cause or result in stabilization
or manipulation of the price of the Common Stock.
(s) Neither the Company nor any of its subsidiaries is, or
intends to conduct its business in such a manner that it would
become, and after giving effect to the offering and sale of the
Shares and the application of the proceeds thereof as described in
the Prospectuses, neither the Company nor any subsidiary will be, an
"investment company" or a company "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "Investment Company Act").
(t) Except as may be set forth in the Prospectuses, the
Company has not incurred any liability for a fee, commission or other
compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by the Underwriting
Agreements.
(u) The Company and each of its subsidiaries maintain
systems of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with US GAAP and to maintain
accountability for assets; (iii) the access to the respective assets
of the Company and each such subsidiary, as the case may be, is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
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(v) Other than as disclosed in the Registration Statement
and as shall be disclosed in the Prospectuses, no labor dispute with
the employees of the Company or any of its subsidiaries exists or, to
the best knowledge of the Company, is imminent that, individually or
in the aggregate, is or is reasonably likely to have a Material
Adverse Effect, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its principal
suppliers or contractors that reasonably can be expected to have a
Material Adverse Effect.
(w) (i) All United States Federal income tax returns of the
Company and each of its subsidiaries required by law to be filed have
been filed and all taxes shown by such returns or otherwise assessed
that are due and payable have been paid, except assessments against
which appeals have been or will be promptly taken and (ii) the
Company and its subsidiaries have filed all other tax returns that
are required to have been filed by them pursuant to the applicable
laws of all other jurisdictions, except, as to each of the foregoing
clauses (i) and (ii), insofar as the failure to file such returns,
individually or in the aggregate, would not have a Material Adverse
Effect, and the Company and its subsidiaries have paid all taxes due
pursuant to said returns or pursuant to any assessment received by
the Company or any such subsidiary, except for such taxes, if any, as
are being contested in good faith and as to which adequate reserves
have been provided in accordance with US GAAP. The charges, accruals
and reserves on the consolidated books of the Company in respect of
any tax liability for any years not finally determined are adequate
to meet any assessments or re-assessments for additional tax for any
years not finally determined, except to the extent of any inadequacy
that would not have a Material Adverse Effect.
(x) Each of the Company and its subsidiaries is insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which the Company and its subsidiaries are engaged.
Neither the Company nor any of its subsidiaries has any reason to
believe that it will not be able to renew its existing insurance
coverage from similar insurers as may be necessary to continue its
business.
(y) Except as disclosed in the Registration Statement
and as shall be disclosed in the Prospectuses, there are no
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business relationships or related party transactions of the nature
described in Item 404 of Regulation S-K of the Commission involving
the Company or any other persons referred to in such Item 404, except
for such transactions that would be considered immaterial under such
Item 404.
4. PURCHASE, SALE AND DELIVERY OF THE INTERNATIONAL
SHARES.
(a)(i) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to each of
the Managers an aggregate of 3,900,000 shares of Common Stock, and each
Manager agrees, severally and not jointly, to purchase from the Company, the
number of Firm International Shares set forth opposite the name of such
Manager in Schedule I hereto, all at a purchase price per share of $_________
(the "Purchase Price"). Subject to Section 12, the number of Firm
International Shares to be purchased from the Company by each Manager (as
adjusted by Bear, Stearns to eliminate fractions) shall be determined by
multiplying the aggregate number of Firm International Shares to be sold by
the Company, as set forth above by a fraction (A) the numerator of which is
the total number of Firm International Shares set forth opposite the name of
such Manager in Schedule I hereto and (B) the denominator of which is the
total number of Firm International Shares.
(ii) Delivery of the Firm International Shares and payment
of the Purchase Price therefor shall be made at the offices of Bear, Stearns &
Co. Inc. at 245 Park Avenue, New York, New York 10167, or such other location
in the New York City metropolitan area as Bear, Stearns shall determine and
advise the Company upon at least two full business days' (as defined in
Section 18 hereof) notice in writing. Such delivery and payment shall be made
at 10:00 A.M., New York City time, on the third full business day following
the determination of the Purchase Price, or at such other time as may be
agreed upon by Bear, Stearns and the Company. The time and date of such
delivery and payment are herein called the "Closing Date." Delivery of the
Firm International Shares shall be made to or upon the order of Bear, Stearns,
for the respective accounts of the Managers, against payment to the Company of
the aggregate Purchase Price therefor by wire transfer of same day funds to
the account of the Company designated in writing to Bear, Stearns at least two
business days prior to the Closing Date.
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<PAGE>
(iii) Certificates for the Firm International Shares shall
be registered in such name or names and in such authorized denominations as
Bear, Stearns may request in writing at least two full business days prior to
the Closing Date, provided that, if so specified by Bear, Stearns, the Firm
International Shares may be represented by a global certificate registered in
the name of Cede & Co., as nominee of the Depositary Trust Company ("Cede").
Bear, Stearns shall be permitted to examine and package such certificates for
delivery at least one full business day prior to the Closing Date, unless the
Firm International Shares are to be represented by a global certificate.
(b)(i) The Company hereby grants to the Managers an option
(the "International Option") to purchase from the Company the Additional
International Shares at the Purchase Price, for the sole purpose of covering
over-allotments, if any, in the offering of the Firm International Shares by
the Managers. The International Option shall be exercisable by the Managers on
one occasion only, at any time before the expiration of 30 days from the date
of the International Prospectus, for the purchase of all or part of the
Additional International Shares, such exercise to be made by notice, given by
Bear, Stearns to the Company in the manner specified in Section 14 hereof,
which notice shall set forth the aggregate number of Additional International
Shares with respect to which the International Option is being exercised, the
denominations and the name or names in which certificates evidencing the
Additional International Shares so purchased are to be registered, and the
date and time of delivery of such Additional International Shares, which date
may be at or subsequent to the Closing Date and shall not be less than two nor
more than ten days after such notice. Subject to Section 12, the aggregate
number of Additional International Shares so purchased from the Company by
each Manager (as adjusted by Bear, Stearns to eliminate fractions) shall be
determined by multiplying the total number of such Additional International
Shares to be sold by the Company by a fraction (A) the numerator of which is
the number of Firm International Shares set forth opposite the name of such
Manager in Schedule I hereto and (B) the denominator of which is the total
number of Firm International Shares.
(ii) Delivery of the Additional International Shares so
purchased and payment of the Purchase Price therefor shall be made at the
offices of Bear, Stearns & Co. Inc. at 245 Park Avenue, New York, New York
10167, or such other location in the New York City metropolitan area as Bear,
Stearns shall determine and advise the Company upon at least two full business
days' notice in writing. Such delivery and payment shall be made at 10:00
A.M., New York City time, on the date designated in such
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<PAGE>
notice or at such other time and date as may be agreed upon by Bear, Stearns
and the Company. The time and date of such delivery and payment are herein
called the "Additional Closing Date." Delivery of the Additional International
Shares shall be made to or upon the order of Bear, Stearns, for the respective
accounts of the Managers, against payment to the Company of the aggregate
Purchase Price therefor by wire transfer of same day funds to the account of
the Company designated in writing to Bear, Stearns at least two business days
prior to the Additional Closing Date.
(iii) Certificates for the Additional International Shares
purchased by the Managers, when so delivered, shall be registered in such name
or names and in such authorized denominations as Bear, Stearns shall have
requested in the notice of exercise of the International Option, provided
that, if so specified therein, such Additional International Shares may be
represented by a global certificate registered in the name of Cede. Bear,
Stearns shall be permitted to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date,
unless the Additional International Shares are to be represented by a global
certificate.
(c) The Managers shall not be obligated to purchase any Firm
International Shares from the Company except upon tender to the Managers by
the Company of all of the Firm International Shares and the Managers shall not
be obligated to purchase any Additional International Shares from the Company
except upon tender to the Managers by the Company of all of the Additional
International Shares specified in the notice of exercise of the International
Option. The Company shall not be obligated to sell or deliver any Firm
International Shares or Additional International Shares, as the case may be,
except upon tender of payment by the Managers for all the Firm International
Shares or the Additional International Shares, as the case may be, agreed to
be purchased by the Managers hereunder.
5. OFFERING. The Company has been advised by you that the
Managers propose to make a public offering of their respective portions of the
International Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company
is further advised by you that the International Shares are to be offered to
the public initially at a price of $_____ per share and to certain dealers
selected by you at a price that represents a concession not in excess of $____
per share, and that any Manager may allow, and such dealers may reallow, a
further concession, not in excess
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of $____ a share, to any Manager or to certain other dealers, and that after
the initial offering of the International Shares, the public offering price
and such concessions may be changed by you.
6. COVENANTS OF THE COMPANY. The Company covenants
and agrees with each Manager that:
(a) The Company shall use its best efforts to cause the
Registration Statement to become effective as promptly as possible
and to maintain it in effect. If the Registration Statement has
become or becomes effective pursuant to Rule 430A of the Regulations,
or filing of the Prospectuses with the Commission is otherwise
required under Rule 424(b) of the Regulations, the Company shall file
the Prospectuses, properly completed, with the Commission pursuant to
Rule 424(b) of the Regulations within the time period therein
prescribed and shall provide evidence satisfactory to you of such
timely filing. The Company shall promptly advise you (and, if
requested, confirm such advice in writing), (i) when the Registration
Statement or any post-effective amendment thereto has become
effective, (ii) of the initiation or threatening of any proceedings
for, or receipt by the Company of any notice with respect to, the
suspension of the qualification of the Shares for sale in any
jurisdiction or the issuance by the Commission of any order
suspending the effectiveness of the Registration Statement and (iii)
of receipt by the Company or any representative of or attorney for
the Company of any other communications from the Commission relating
to the Company, the Registration Statement, any Preliminary
Prospectus, the Prospectuses or the transactions contemplated by the
Underwriting Agreements. The Company shall make every reasonable
effort to prevent the issuance of an order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereto and, if any such order is issued, to obtain its
lifting as soon as possible. The Company shall not file any amendment
to the Registration Statement or any amendment of or supplement to
the Prospectuses before or after the Effective Date to which you
shall reasonably object after being timely furnished in advance a
copy thereof unless the Company shall conclude, upon the advice of
counsel, that any such amendment must be filed at a time prior to
obtaining such consent.
(b) Within the time during which the Prospectuses are
required to be delivered under the Act, the Company shall comply with
all requirements imposed upon it by the Act, as now or hereafter
amended, and by the Regulations, as from
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time to time in force, so far as necessary to permit the continuance
of sales of or dealings in the Shares as contemplated by the
provisions hereof and by the Prospectuses. If, during such period,
any event shall occur as a result of which the Prospectuses as then
amended or supplemented include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, or if it
shall be necessary at any time to amend the Registration Statement or
supplement the Prospectuses to comply with the Act and the
Regulations, the Company shall notify you promptly and prepare and
file with the Commission an appropriate post-effective amendment to
the Registration Statement or supplement to each Prospectus (in form
and substance reasonably satisfactory to you) that will correct such
statement or omission and shall use its best efforts to have any such
post-effective amendment to the Registration Statement declared
effective as soon as possible.
(c) The Company shall promptly deliver to you two
manually-signed copies of the Registration Statement, including
exhibits and all amendments thereto, and to those persons (including
your counsel) whom you identify to the Company, such number of
conformed copies of the Registration Statement, with exhibits, each
Preliminary Prospectus, the Prospectuses and all amendments of and
supplements to such documents, if any, as you may reasonably request.
(d) The Company shall cooperate with the Managers, the
Underwriters and Weil, Gotshal & Manges LLP ("Underwriters' Counsel")
in connection with their efforts to qualify or register the Shares
for sale under the state securities (or "Blue Sky") or foreign laws
of such jurisdictions as you shall request, shall execute such
applications and documents and furnish such information as reasonably
may be required for such purpose and shall comply with such laws so
as to continue such registrations and qualifications in effect for so
long as may be required to complete the distribution of the Shares;
provided, however, that in connection therewith the Company shall not
be required to (i) qualify as a foreign corporation in any
jurisdiction in which it is not so qualified as of the date hereof,
(ii) file a consent to service of process in any jurisdiction in any
action other than one arising out of the offering or sale of the
Shares in such jurisdiction or (iii) become subject to taxation in
any jurisdiction in which it is not now so subject.
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(e) The Company shall make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to
you, in such numbers as you reasonably may request for distribution
to the Managers, as soon as practicable but in no event later than 45
days after the end of its fiscal quarter in which the first
anniversary date of the Effective Date occurs, an earnings statement,
covering a period of at least twelve consecutive full calendar months
commencing after the effective date of the Registration Statement,
that satisfies the provisions of Section 11(a) of the Act and Rule
158 of the Regulations.
(f) During a period of 180 days from the date of this
Agreement, the Company shall not, without the prior written consent
of Bear, Stearns, (i) issue, sell, offer or agree to sell, or
otherwise dispose of, directly or indirectly, any shares of its
capital stock (or any securities convertible into, exercisable for or
exchangeable for shares of its capital stock) other than the
Company's issuance and sale of Shares in accordance with the
Underwriting Agreements and the issuance of up to 4,621,000 shares of
Common Stock (or options exercisable for up to such number of shares)
reserved for issuance pursuant to the Company's Stock Option Plan, or
(ii) acquire, or agree or commit to acquire or publicly announce its
intention to acquire, directly or through a subsidiary, assets or
securities of any other person, firm or corporation in a transaction
or series of related transactions that would be material to the
Company and its subsidiaries, taken as a whole. In addition, the
Company has obtained and delivered to you a written undertaking from
HFS Incorporated that, during the period of 180 days from the date of
this Agreement, without the prior written consent of Bear, Stearns,
such entity will not sell, offer or agree to sell, or otherwise
dispose of, directly or indirectly, any shares of capital stock (or
any securities convertible into, exercisable for or exchangeable for
shares of capital stock) of the Company or any of its subsidiaries.
(g) During the three years following the Effective Date, the
Company shall furnish to Bear, Stearns, in such quantity as Bear,
Stearns may reasonably request for distribution to the Managers,
copies of (i) all reports of the Company to its stockholders, (ii)
all reports, financial statements, and proxy or information
statements filed by the Company with the Commission or any national
securities exchange and (iii) such other information concerning the
Company and its affairs as Bear, Stearns may reasonably request from
time to time.
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(h) The Company shall apply the proceeds from the sale of
the Shares to be sold by it under the Underwriting Agreements in the
manner set forth under "Use of Proceeds" in the Prospectuses. The
Company shall take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment
company" or a company "controlled" by an "investment company" within
the meaning of such terms under the Investment Company Act.
(i) The Company shall use its best efforts promptly to cause
the Shares to be listed on the NYSE and shall take all actions
necessary to comply with the rules and regulations of the NYSE in
order to maintain the listing of the Shares on the NYSE.
(j) The Company shall comply with all registration, filing
and reporting requirements of the Exchange Act and the rules and
regulations thereunder, which may from time to time be applicable to
the Company.
(k) The Company shall comply with all provisions of all
undertakings contained in Part II of the Registration Statement.
(l) Prior to the Closing Date and, if the International
Option is exercised, until the Additional Closing Date, the Company
shall issue no press release or other communication or hold any press
conference with respect to the offerings of the Shares, or the
financial condition, results of operations, operations, business
properties, assets, liabilities, or prospects of the Company, without
your prior consent.
7. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated by the Underwriting Agreements are consummated or this Agreement
is terminated, and subject to Section 13(d) hereof, the Company agrees to pay
all costs and expenses incident to the performance of its obligations under
the Underwriting Agreements, including those in connection with (i) preparing,
printing, duplicating, filing and distributing the Registration Statement
(including all amendments thereof and exhibits thereto), any Preliminary
Prospectus, the Prospectuses and any supplements thereto, the Underwriting
Agreements and all related agreements, and all other documents relating to the
public offering of the Shares, (ii) the issuance, transfer and delivery of the
Shares to the Managers and the U.S. Underwriters, including any transfer or
other taxes payable thereon, (iii) the registration and qualification if any,
of the Shares under the
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securities laws of foreign jurisdictions, or where applicable the obtaining of
exemptions therefrom, including the reasonable fees and disbursements of
Underwriters' Counsel and local counsel in connection therewith, (iv) the
listing of the Shares on the NYSE, (v) the review of the terms of the public
offering of the Shares by the National Association of Securities Dealers, Inc.
(the "NASD") and the reasonable fees and disbursements of Underwriters'
Counsel in connection therewith, (vi) the printing of certificates
representing the Shares and (vii) the cost and charges of any transfer agent
and registrar for the Shares.
8. CONDITIONS OF THE MANAGERS' OBLIGATIONS. The obligations
of the several Managers to purchase and pay for the International Shares, as
provided herein, shall be subject to (i) the accuracy of the representations
and warranties of the Company herein contained, as of the date hereof, as of
the Closing Date and, with respect to the Additional International Shares, the
accuracy of the representations and warranties of the Company as of the
Additional Closing Date, (ii) the absence from any certificates, opinions,
written statements or letters furnished pursuant to this Section 8 to you or
to Underwriters' Counsel of any qualification or limitation not previously
approved in writing by you, (iii) the performance by the Company of its
obligations hereunder and (iv) the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 5:00 P.M., New York City time, on the date of this
Agreement or at such later time and date as shall have been consented
to in writing by Bear, Stearns. All post-effective amendments to the
Registration Statement shall have become effective. If the Company
shall have relied upon Rule 430A of the Regulations, the Prospectuses
shall have been filed with the Commission in a timely fashion in
accordance with Section 6(a) hereof. All filings required by Rule 424
of the Regulations shall have been made and no such filings shall
have been made without your consent. No stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereof shall have been issued by the Commission or any
state securities commission and no proceedings therefor shall have
been initiated or threatened by the Commission or any state
securities commission.
(b) At the Closing Date (and, with respect to the Additional
U.S. Shares, the Additional Closing Date), you shall have received
the written opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
counsel for the Company, dated
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the date of its delivery, addressed to the U.S. Underwriters
and the Managers, and in form and scope satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of the Company and the domestic
subsidiaries listed in Schedule II hereto (the "Material
Domestic Subsidiaries") (x) has been duly organized and is
validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and (y) has all
requisite corporate power and authority, and all necessary
consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits of and from
all public, regulatory or governmental agencies and bodies,
to own, lease and license its respective properties and
conduct its business as now being conducted and as described
in the Registration Statement and the Prospectuses, except
for those the absence of which, individually or in the
aggregate, would not have a Material Adverse Effect.
(ii) The authorized capital stock of the Company is
as set forth in the Prospectuses under the caption
"Capitalization". All of the outstanding shares of such
capital stock have been duly and validly authorized and
issued, are fully paid and nonassessable and were not issued
in violation of or subject to any preemptive rights. The
shares of Common Stock to be outstanding on the Closing
Date, including the Shares, have been duly authorized and
when issued (and, in the case of the Shares, delivered and
sold in accordance with the terms of the Underwriting
Agreements) will be validly issued, fully paid and
nonassessable. Upon delivery of and payment for the Shares
to be sold by the Company to each U.S. Underwriter and
Manager in accordance with the Underwriting Agreements, each
U.S. Underwriter and each Manager (assuming that it acquires
such Shares without notice of any adverse claim, as such
term is used in Section 8-302 of the Uniform Commercial Code
in effect in the State of New York) will acquire good and
marketable title to the Shares so sold and delivered to it,
free and clear of all liens, pledges, charges, claims,
security interests, restrictions on transfer, agreements or
other defects of title whatsoever (other than those
resulting from any action taken by such U.S. Underwriter or
such Manager). The capital stock of the Company conforms in
all material respects to the description thereof
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<PAGE>
contained in the Registration Statement and the
Prospectuses.
(iii) The Company has all requisite corporate
right, power and authority to execute, deliver and perform
its obligations under each of the Underwriting Agreements
and to issue, sell and deliver the Shares in accordance with
the terms and conditions thereof. Each of the Underwriting
Agreements has been duly and validly authorized, executed
and delivered by the Company.
(iv) To the best of such counsel's knowledge, no
consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any
court or any public, governmental, or regulatory agency or
body having jurisdiction over the Company or any Material
Domestic Subsidiary or any of its respective properties or
assets is required for the Company's execution and delivery
of, and its performance of its obligations under, each of
the Underwriting Agreements, and the consummation of the
transactions contemplated thereby, including, without
limitation, of the issuance, sale and delivery of the
Shares, except for (A) such as may be required under state
securities or Blue Sky laws and the securities laws of
foreign jurisdictions in connection with the purchase and
distribution of the Shares by the U.S. Underwriters and the
Managers (as to which such counsel need express no opinion)
and (B) such as have been made or obtained under the Act,
the Exchange Act or the rules of the NYSE.
(v) The Registration Statement and the Prospectuses
(except for the financial statements and the notes thereto,
the financial statement schedules and the other financial
and accounting data included therein, as to which no opinion
need be expressed) comply as to form in all material
respects with the requirements of the Act and the
Regulations.
(vi) The Registration Statement has become
effective under the Act, and such counsel is not aware of
any stop order suspending the effectiveness of the
Registration Statement and to such counsel's knowledge no
proceedings therefor have been initiated or threatened by
the Commission, and there are no other filings on the part
of the Company required by the Act
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<PAGE>
or the Regulations, including those required by Rule 424(b)
of the Regulations, that to such counsel's knowledge have
not been made.
(vii) The Company is not an "investment company" or
a company "controlled" by an "investment company" as defined
in the Investment Company Act.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives
of the Company, representatives of the independent certified public
accountants of the Company, representatives of the U.S. Underwriters
and the Managers and Underwriters' Counsel at which the contents of
the Registration Statement, the Prospectuses and any amendments
thereof or supplements thereto and related matters were discussed
and, although such counsel has not undertaken to investigate or
verify independently and are not passing upon, and does not assume
any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the
Prospectuses or any amendments thereof or supplements thereto (except
as to matters referred to in the last sentence of clause (ii) above),
no facts have come to such counsel's attention which lead such
counsel to believe that the Registration Statement, on the effective
date thereof (or any post-effective amendment thereof as of the date
of such amendment), contained an untrue statement of a material fact
or omitted to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or that
the Prospectuses, on the date thereof or the date of such opinion,
contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under
which they were made, not misleading (it being understood that such
counsel need express no view with respect to the financial statements
and related notes, the financial statement schedules and the other
financial and accounting data included therein).
In rendering such opinion, such counsel (i) may limit its
opinions to the corporate laws of the State of Delaware, the laws of
the State of New York and the federal laws of the United States of
America, and (ii) may rely (A) as to matters involving the
application of laws other than the laws of the State of New York and
the corporate laws of the State of Delaware and the federal laws of
the United States
25
<PAGE>
of America, to the extent such counsel deems proper and to the extent
specified in such opinion letter, if at all, upon a written opinion
or opinions (in form and scope reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to
Underwriters' Counsel, familiar with the applicable laws; and (B) as
to matters of fact, to the extent such counsel may deem proper, on
certificates of responsible officers of the Company and certificates
or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and the subsidiaries. The
opinion of such counsel shall specifically state that the opinion of
any such other counsel is in form and scope satisfactory to such
counsel and, in such counsel's opinion, such counsel and you are
justified in relying thereon. A copy of the opinion of any such other
counsel shall be delivered to Underwriters' counsel.
(c) At the Closing Date (and, with respect to the Additional
U.S. Shares, the Additional Closing Date), you shall have received
the written opinion of the General Counsel of the Company, dated the
date of its delivery, addressed to the U.S. Underwriters and the
Managers, and in form and scope satisfactory to Underwriters'
Counsel, to the effect that:
(i) Each of the Company and the Material Domestic
Subsidiaries is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the
character or location of its properties (owned, leased or
licensed) or the nature or conduct of its business makes
such qualification necessary, except for those failures to
be so qualified or in good standing that will not in the
aggregate have a Material Adverse Effect. All of the issued
and outstanding capital stock (or similar interests) of each
Material Domestic Subsidiary has been duly and validly
authorized and issued, is fully paid and nonassessable and
was not issued in violation of or subject to any preemptive
rights and is owned by the Company or one of its
subsidiaries, free and clear of all claims, liens, security
interests, pledges, charges, encumbrances, stockholders
agreements and voting trusts, except as otherwise described
in Schedule II to this Agreement.
(ii) The shares of Common Stock to be outstanding
on the Closing Date, including the Shares, will not
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<PAGE>
have been issued in violation of or be subject to any
preemptive rights. To such counsel's knowledge, there is no
outstanding option, warrant or other right calling for the
issuance of any share of capital stock (or similar
interests) of the Company or of any of its subsidiaries or
any security or other instrument that by its terms is
convertible into, exercisable for or exchangeable for
capital stock (or similar interests) of the Company or any
subsidiary, except as described in the Registration
Statement and the Prospectuses.
(iii) The Company's execution and delivery of, and
its performance of its obligations under, each of the
Underwriting Agreements and the consummation of the
transactions contemplated thereby, do not and, when such
performance is required pursuant to the terms thereof, will
not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default under (or
an event that with notice or lapse of time, or both, would
constitute a default under) or require approval or consent
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to the terms of
any Material Contract or any Material Permit, except for
those conflicts, breaches or defaults for which consent or
approval has been obtained by the Company prior to the date
hereof, (B) violate or conflict with any provision of the
certificate of incorporation, by-laws or similar governing
instruments of the Company or any Material Domestic
Subsidiary, or (C) to such counsel's knowledge, violate or
conflict with any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the
Company or any Material Domestic Subsidiary or any of its
respective properties or assets, except, with respect to
clauses (A) and (C) of this subparagraph (iii), for those
violations or conflicts that, individually or in the
aggregate, would not have a Material Adverse Effect.
(iv) Insofar as statements in the Prospectuses
purport to summarize the nature and status of litigation or
the provisions of laws, rules, regulations, orders,
judgments or decrees, or the terms of any Material Contracts
or Material Permits, such
27
<PAGE>
statements are correct in all material respects and are
fair summaries of the matters referred to therein.
(v) To the best of such counsel's knowledge, except
as set forth in the Registration Statement and the
Prospectuses, no person or entity has the right, by contract
or otherwise, to require registration under the Act of
shares of capital stock or other securities of the Company
or any of its subsidiaries solely because of the filing or
effectiveness of the Registration Statement and the
consummation of the transactions contemplated by the
Underwriting Agreements.
(vi) The Shares have been duly authorized for
listing on the NYSE, subject only to official notice of
issuance.
(vii) To the best of such counsel's knowledge,
there is no litigation, arbitration or governmental or other
action, suit, proceeding or investigation before any court
or before or by any public, regulatory or governmental
agency or body pending or threatened against, or involving
the properties or business of, the Company or any of its
subsidiaries, that, if resolved against the Company or such
subsidiary, individually or, to the extent involving related
claims or issues, in the aggregate, is of a character
required to be disclosed in the Registration Statement and
the Prospectuses that has not been properly disclosed
therein; and to the best such counsel's knowledge, there is
no contract or document concerning the Company or any of its
subsidiaries of a character required to be described in the
Registration Statement and the Prospectuses or to be filed
as an exhibit to the Registration Statement, that is not so
described or filed.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives
of the Company, representatives of the independent certified public
accountants of the Company, representatives of the U.S. Underwriters
and the Managers and Underwriters' Counsel at which the contents of
the Registration Statement, the Prospectuses and any amendments
thereof or supplements thereto and related matters were discussed
and, although such counsel has not undertaken to investigate or
verify independently and are not passing
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upon, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectuses or any amendments thereof
or supplements thereto (except as to matters referred to in clause
(iv) above), no facts have come to such counsel's attention which
lead such counsel to believe that the Registration Statement, on the
effective date thereof (or any post-effective amendment thereof as of
the date of such amendment), contained an untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectuses, on the date thereof or the date
of such opinion, contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading (it being
understood that such counsel need express no view with respect to the
financial statements and related notes, the financial statement
schedules and the other financial and accounting data included
therein).
In rendering such opinion, such counsel (i) may limit its
opinions to the corporate laws of the State of Delaware, the laws of
the State of New York and the federal laws of the United States of
America, and (ii) may rely (A) as to matters involving the
application of laws other than the laws of the State of New York and
the corporate laws of the State of Delaware and the federal laws of
the United States of America, to the extent such counsel deems proper
and to the extent specified in such opinion letter, if at all, upon a
written opinion or opinions (in form and scope reasonably
satisfactory to Underwriters' Counsel) of other counsel reasonably
acceptable to Underwriters' Counsel, familiar with the applicable
laws; and (B) as to matters of fact, to the extent such counsel may
deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company
and the subsidiaries. The opinion of such counsel shall specifically
state that the opinion of any such other counsel is in form and scope
satisfactory to such counsel and, in such counsel's opinion, such
counsel and you are justified in relying thereon. A copy of the
opinion of any such other counsel shall be delivered to Underwriters'
counsel.
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<PAGE>
(d) At the Closing Date (and, with respect to the Additional
U.S. Shares, the Additional Closing Date), you shall have received a
certificate of the Company executed by each of the Chief Executive
Officer and the Chief Financial Officer of the Company, dated the
date of its delivery, to the effect that the conditions set forth in
subsection (a) of this Section 8 have been satisfied, that as of the
date of such certificate the representations and warranties of the
Company set forth in Section 3 hereof are true and correct as of such
Closing Date and the obligations of the Company to be performed
hereunder on or prior thereto have been duly performed.
(e) At the time this Agreement is executed and at the
Closing Date (and, with respect to the Additional U.S. Shares, the
Additional Closing Date), you shall have received a letter, from
Deloitte & Touche LLP, dated the date of its delivery, addressed to
the U.S. Underwriters and the Managers and in form and substance
reasonably satisfactory to you, to the effect that: (i) they are
independent accountants with respect to the Company within the
meaning of the Act and the Regulations; (ii) in their opinion, the
Company Financials audited by such firm and included in the
Registration Statement and the Prospectuses comply as to form in all
material respects with the applicable accounting requirements of the
Act and the applicable published rules and regulations thereunder;
(iii) on the basis of procedures (but not an audit made in accordance
with generally accepted auditing standards) consisting of a reading
of the latest available unaudited interim consolidated financial
statements of the Company and its subsidiaries, a reading of the
minutes of meetings and consents of the stockholders and boards of
directors of the Company and the subsidiaries and the committees of
such boards subsequent to December 31, 1996, inquiries of certain
officials of the Company and its subsidiaries who have responsibility
for financial and accounting matters of such companies with respect
to transactions and events subsequent to December 31, 1996, and other
specified procedures and inquiries to a date not more than five days
prior to the date of such letter, nothing has come to their attention
that would cause them to believe that: (A) the unaudited historical
consolidated financial statements of the Company, its subsidiaries
and their predecessors included in the Registration Statement and the
Prospectuses do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the published
rules and regulations thereunder or that any material modification
30
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should be made to such unaudited consolidated financial statements
for them to be in conformity with US GAAP; (B) with respect to the
period subsequent to December 31, 1996 there were, as of the date of
the most recent available monthly consolidated financial data of the
Company and the subsidiaries, if any, and as of a specified date not
more than five days prior to the date of such letter, any changes in
the capital stock or increases in long-term indebtedness of the
Company or any decrease in stockholders' equity of the Company, in
each case as compared with the amounts shown in the most recent
balance sheet included in the Registration Statement and the
Prospectuses, except for changes or decreases that the Registration
Statement and the Prospectuses disclose have occurred or may occur;
(C) the unaudited pro forma consolidated financial statements
included in the Prospectuses do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the applicable published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of such financial statements; or (D) that
during the period from December 31, 1996 to the date of the most
recent available monthly consolidated financial data of the Company
and its subsidiaries, if any, and to a specified date not more than
five days prior to the date of such letter, there was any decrease,
as compared with the corresponding period in the prior fiscal year,
in total revenues, or total or per share net income, except for
decreases that the Prospectuses disclose have occurred or may occur;
and (iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings and other
financial information pertaining to the Company and its subsidiaries
set forth in the Prospectuses, which have been specified by you prior
to the date of this Agreement, to the extent that such dollar
amounts, numbers, percentages and information may be derived from the
general accounting and financial records that are subject to the
internal control structure policies and procedures of the Company's
and its subsidiaries' accounting systems or that have been derived
directly from such accounting records by analysis or computation, and
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by you (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in such letter, and
found them to be in agreement.
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(f) At the time this Agreement is executed and at the
Closing Date (and, with respect to the Additional U.S. Shares, the
Additional Closing Date), you shall have received a letter, from
Ernst & Young LLP, dated the date of its delivery, addressed to the
U.S. Underwriters and the Managers and in form and substance
reasonably satisfactory to you, to the effect that: (i) they are
independent accountants with respect to First Gray Line within the
meaning of the Act and the Regulations; (ii) in their opinion, the
First Gray Line Financials audited by such firm and included in the
Registration Statement and the Prospectuses comply as to form in all
material respects with the applicable accounting requirements of the
Act and the applicable published rules and regulations thereunder;
(iii) on the basis of procedures (but not an audit made in accordance
with generally accepted auditing standards) consisting of a reading
of the latest available unaudited interim consolidated financial
statements of First Gray Line and its subsidiaries, a reading of the
minutes of meetings and consents of the stockholders and boards of
directors of First Gray Line and its subsidiaries and the committees
of such boards subsequent to September 30, 1996, inquiries of certain
officials of First Gray Line and its subsidiaries who have
responsibility for financial and accounting matters of such companies
with respect to transactions and events subsequent to September 30,
1996, and other specified procedures and inquiries to a date not more
than five days prior to the date of such letter, nothing has come to
their attention that would cause them to believe that: (A) the
unaudited historical condensed consolidated financial statements of
First Gray Line and its subsidiaries included in the Registration
Statement and the Prospectuses do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or that any
material modification should be made to such unaudited consolidated
financial statements for them to be in conformity with US GAAP; (B)
with respect to the period subsequent to September 30, 1996 there
were, as of the date of the most recent available monthly
consolidated financial data of First Gray Line and its subsidiaries,
if any, and as of a specified date not more than five days prior to
the date of such letter, any changes in the capital stock or
increases in long-term indebtedness of First Gray Line or any
decrease in stockholders' equity of First Gray Line, in each case as
compared with the amounts shown in the most recent balance sheet
included in the Registration Statement and the Prospectuses, except
for changes or decreases that
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<PAGE>
the Registration Statement and the Prospectuses disclose have
occurred or may occur; or (C) that during the period from September
30, 1996 to the date of the most recent available monthly
consolidated financial data of First Gray Line and its subsidiaries,
if any, and to a specified date not more than five days prior to the
date of such letter, there was any decrease, as compared with the
corresponding period in the prior fiscal year, in total revenues, or
total or per share net income, except for decreases that the
Prospectuses disclose have occurred or may occur; and (iv) stating
that they have compared certain financial information pertaining to
First Gray Line and its subsidiaries set forth in the Prospectuses,
which have been specified by you prior to the date of this Agreement,
to the extent that such information may be derived from the general
accounting and financial records that are subject to the internal
control structure policies and procedures of First Gray Line's and
its subsidiaries' accounting systems or that have been derived
directly from such accounting records by analysis or computation, and
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by you (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in such letter, and
found them to be in agreement.
(g) All proceedings taken in connection with the sale of the
Shares as contemplated by the Underwriting Agreements shall be
reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have received from Underwriters'
Counsel a written opinion, dated as of the Closing Date and addressed
to the U.S. Underwriters and the Managers, with respect to the sale
of the Firm U.S. Shares, and dated as of the Additional Closing Date
with respect to the sale of the Additional U.S. Shares, as to such
matters as you reasonably may require, and the Company shall have
furnished to Underwriters' Counsel such documents as Underwriters'
Counsel may request for the purpose of enabling Underwriters' Counsel
to pass upon such matters.
(h) The NASD, upon review of the terms of the underwriting
arrangements for the public offering of the Shares, shall have raised
no objections thereto.
(i) The Shares shall have been listed on the NYSE, subject
to official notice of issuance.
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<PAGE>
(j) At the time this Agreement is executed, the Company
shall have furnished to you the written undertakings referred to in
the last sentence of Section 6(f) hereof, in form and substance
satisfactory to Underwriters' Counsel.
(k) Prior to the Closing Date, and with respect to the
Additional U.S. Shares, the Additional Closing Date, the Company
shall have furnished to you such further information, certificates
and documents as you may reasonably request.
(l) The closing of the purchase of the U.S. Shares pursuant
to the U.S. Underwriting Agreement shall occur concurrently with (i)
the closing described in Section 4(a)(ii) hereof, in the case of the
Firm International Shares, and (ii) the closing described in Section
4(b)(ii) hereof, in the case of the Additional International Shares.
If any of the conditions specified in this Section 8 shall
not have been fulfilled when and as required by this Agreement, or if any of
the certificates, opinions, written statements, or letters furnished to you or
to Underwriters' Counsel pursuant to this Section 8 shall not be in all
material respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Managers hereunder not
theretofore discharged may be canceled by you at, or at any time prior to, the
Closing Date and with respect to the Additional International Shares, the
Additional Closing Date. Notice of such cancellation shall be given to the
Company in writing, or by telephone or telephonic facsimile, confirmed in
writing.
9. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Manager, including Bear, Stearns in its capacity as Manager and in its
capacity as Qualified Independent Underwriter, as such term is defined in the
Registration Statement, and each person, if any, who controls any Manager
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against any and all losses, liabilities, claims, damages and expenses
whatsoever (including but not limited to attorneys' fees and any and all
expenses reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation, provided that such
settlement was effected with the Company's written consent in accordance with
Section 9(c) hereof), joint or several, to which they or any of
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<PAGE>
them may become subject under the Act, the Exchange Act or otherwise, insofar
as such losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact made by the Company contained in
the Registration Statement or the International Prospectus or any Preliminary
Prospectus, or in any supplement thereto or amendment thereof, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
(in the case of the International Prospectus, in light of the circumstances
under which they were made) not misleading; provided, however, that the
Company shall not be liable under this subsection 9(a) to any Manager in any
such case to the extent but only to the extent that any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by or on your behalf with respect to the Managers; and provided
further, that with respect to any Preliminary Prospectus, such indemnity shall
not inure to the benefit of any Manager (or the benefit of any person
controlling such Manager) if the person asserting any such losses,
liabilities, claims, damages or expenses purchased the Shares that are the
subject thereof from such Manager and if such person was not sent or given a
copy of the International Prospectus at or prior to confirmation of the sale
of such Shares to such person in any case where such sending or giving is
required by the Act and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the International
Prospectus. This indemnity agreement will be in addition to any liability that
the Company may otherwise have to any Manager or to any controlling person of
such Manager, including under this Agreement.
(b) Each Manager, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any losses, liabilities, claims, damages and expenses whatsoever (including
but not limited to attorneys' fees and any and all expenses reasonably
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation, provided that such settlement was
effected with such Manager's written consent in accordance with Section
35
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9(c) hereof), joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the International
Prospectus or any Preliminary Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (in the case of the International
Prospectus, in light of the circumstances under which they were made) not
misleading, in each case to the extent, but only to the extent, that any such
loss, liability, claim, damage or expense arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by you or on your behalf with respect to such Manager
expressly for use in the Registration Statement or International Prospectus;
provided, however, that in no case shall such Manager be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Manager hereunder. This indemnity will be in addition to any
liability that the Manager may otherwise have to the Company or any such
director, officer or controlling person, including under this Agreement. The
Company acknowledges that the statements set forth in the last paragraph of
the cover page, the legend concerning stabilization on page two of the
International Prospectus and the statements set forth under the captions
"Underwriting" and "Notice to Canadian Residents" in the International
Prospectus constitute the only information furnished in writing by or on
behalf of any Manager expressly for use in the Registration Statement, any
related Preliminary Prospectus and the International Prospectus.
(c) Promptly after receipt by an indemnified party under
subsection 9(a) or (b) above of notice of the assertion of any claim, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability that it may have under this Section 9 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability that it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
36
<PAGE>
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party
or parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of
such indemnified party or parties unless (i) the employment of such counsel
shall have been authorized in writing by one of the indemnifying parties in
connection with the defense of such action, (ii) the indemnifying parties
shall not have employed counsel to take charge of the defense of such action
within a reasonable time after notice of commencement of the action, or (iii)
such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them that are different from or additional
to those available to one or all of the indemnifying parties (in which case
the indemnifying parties shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties with respect to such
different defenses), in any of which events such fees and expenses shall be
borne by the indemnifying parties. The indemnifying party under subsection
9(a) or (b) above shall only be liable for the legal expenses of one counsel
for all indemnified parties in each jurisdiction in which any claim or action
is brought; provided, however, that the indemnifying party shall be liable for
separate counsel for any indemnified party in a jurisdiction, if counsel to
the indemnified parties shall have reasonably concluded that there may be
defenses available to such indemnified party that are different from or
additional to those available to one or more of the other indemnified parties
and that separate counsel for such indemnified party is prudent under the
circumstances. Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
written consent was not unreasonably withheld.
10. CONTRIBUTION. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 9(a) hereof
is for any reason held to be unavailable from the Company or is insufficient
to hold harmless a party indemnified thereunder, the Company and the U.S.
Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provisions (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the
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case of losses, claims, damages, liabilities and expenses suffered by the
Company, any contribution received by the Company from persons, other than one
or more of the Managers, who may also be liable for contribution, including
persons who control the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, officers of the Company who signed the
Registration Statement and directors of the Company) to which the Company and
one or more of the Managers may be subject, in such proportions as are
appropriate to reflect the relative benefits received by the Company, on the
one hand, and the Managers, on the other hand, from the offering of the
International Shares or, if such allocation is not permitted by applicable law
or indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 9 hereof, in such proportion as
is appropriate to reflect not only the relative benefits referred to above but
also the relative fault of the Company, on the one hand, and the Managers, on
the other hand, in connection with the statements or omissions that resulted
in such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Managers, on the other hand, shall be deemed
to be in the same proportion as (x) the total proceeds from the offering (net
of underwriting discounts and commissions but before deducting expenses)
received by the Company and (y) the underwriting discounts received by the
Managers, respectively, in each case as set forth in the table on the cover
page of the International Prospectus. The relative fault of the Company, on
the one hand, and of the Managers, on the other hand, shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, on the one hand,
or the Managers, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Managers agree that it would not be
just and equitable if contribution pursuant to this Section 10 were determined
by pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to above. The Managers'
obligations in this Section 10 to contribute are several and not joint.
Notwithstanding the provisions of this Section 10, (i) in no case shall any
Manager be required to contribute any amount in excess of the amount by which
the aggregate public offering price of the International Shares underwritten
by it and distributed to the public exceeds the amount of any damages that
such Manager has otherwise been required to pay by reason of such untrue or
alleged untrue statement or such omission or alleged omission,
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and (ii) no person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 10, each person, if any, who controls any Manager within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Manager and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed
the Registration Statement and each director of the Company shall have the
same rights to contribution as the Company, subject in each case to clauses
(i) and (ii) of this Section 10. Any party entitled to contribution shall,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 10, notify such
party or parties from whom contribution may be sought, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 10 or otherwise. No party shall be liable for contribution with
respect to any action or claim settled without its written consent; provided,
however, that such written consent was not unreasonably withheld.
11. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All
representations and warranties, covenants and agreements of the Managers and
the Company contained in this Agreement, including without limitation the
agreements contained in Sections 5, 6 and 7 hereof, the indemnity agreements
contained in Section 9 hereof and the contribution agreements contained in
Section 10 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of the Managers or any
controlling person of any Manager or by or on behalf of the Company, any of
its officers and directors, and shall survive delivery of the International
Shares to and payment for the International Shares by the Managers. The
representations contained in Section 3 hereof and the agreements contained in
this Section 11 and Sections 5, 6, 7, 9, 10 and 13(d) hereof shall survive the
termination of this Agreement including pursuant to Section 12 or 13 hereof;
provided, however, that if this Agreement is terminated pursuant to Section 12
or 13 hereof or if for any reason the purchase of the International Shares by
the Managers as contemplated hereunder is not consummated, the agreements
contained in Sections 5 and 6 hereof shall not survive.
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12. DEFAULT BY A MANAGER.
(a) If any Manager or Managers shall default in its or their
obligation to purchase Firm International Shares or Additional International
Shares hereunder, and if the Firm International Shares or Additional
International Shares with respect to which such default relates do not (after
giving effect to arrangements, if any, made pursuant to subsection 12(b)
below) exceed in the aggregate 10% of the number of shares of Firm
International Shares or Additional International Shares, as the case may be,
that all Managers have agreed to purchase hereunder, then such Firm
International Shares or Additional International Shares to which the default
relates shall be purchased by the non-defaulting Managers in proportion to the
respective proportions that the numbers of Firm International Shares set forth
opposite their respective names in Schedule I hereto bear to the aggregate
number of Firm International Shares set forth opposite the names of the
non-defaulting Managers.
(b) If such default relates to more than 10% of the Firm
International Shares or Additional International Shares, as the case may be,
you may, in your discretion, arrange for another party or parties (including
any non-defaulting Manager or Managers who so agree) to purchase such Firm
International Shares or Additional International Shares, as the case may be,
to which such default relates on the terms contained herein. If within five
(5) calendar days after such a default you do not arrange for the purchase of
the Firm International Shares or Additional International Shares, as the case
may be, to which such default relates as provided in this Section 12, this
Agreement (or, in the case of a default with respect to the Additional
International Shares, the obligations of the Managers to purchase and of the
Company to sell the Additional International Shares) shall thereupon
terminate, without liability on the part of the Company with respect thereto
(except in each case as provided in Sections 7, 9(a) and 10 hereof) or the
several non-defaulting Managers (except as provided in Sections 9(b) and 10
hereof), but nothing in this Agreement shall relieve a defaulting Manager or
Managers of its or their liability, if any, to the other several Managers and
the Company for damages occasioned by its or their default hereunder.
(c) If the Firm International Shares or Additional
International Shares to which the default relates are to be purchased by the
non-defaulting Managers, or are to be purchased by another party or parties as
aforesaid, you or the Company shall have the right to postpone the Closing
Date or Additional Closing Date, as the case may be, for a period not
exceeding five
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(5) business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the International Prospectus or in
any other documents and arrangements, and the Company agrees to file promptly
any amendment or supplement to the Registration Statement or the International
Prospectus that, in the opinion of Underwriters' Counsel, may thereby be made
necessary or advisable. The term "Manager" as used in this Agreement shall
include any party substituted under this Section 12 with like effect as if it
had originally been a party to this Agreement with respect to such Firm
International Shares and Additional International Shares.
13. EFFECTIVE DATE OF INTERNATIONAL UNDERWRITING
AGREEMENT; TERMINATION.
(a) This Agreement shall become effective upon the later of
(i) when you and the Company shall have received notification of the
effectiveness of the Registration Statement and (ii) the execution and
delivery of this Agreement by the parties hereto. Until this Agreement becomes
effective as aforesaid, this Agreement may be terminated by the Company by
notifying you or by you by notifying the Company without any liability of any
party to any party hereunder. Notwithstanding the foregoing, the provisions of
this Section 13 and of Sections 6, 9, 10 and 11 hereof shall at all times be
in full force and effect.
(b) This Agreement and the obligations of the Managers
hereunder may be terminated by you by written notice to the Company at any
time at or prior to the Closing Date (and, with respect to the Additional
International Shares, the Additional Closing Date), without liability (other
than with respect to Sections 9 and 10) on the part of any Manager to the
Company if, on or prior to such date, (i) the Company shall have failed,
refused or been unable to perform in any material respect any agreement on its
part to be performed hereunder, (ii) any other condition to the obligations of
the Managers set forth in Section 8 hereof is not fulfilled when and as
required in any material respect, (iii) trading in securities generally on the
NYSE or the American Stock Exchange or in the over-the-counter market shall
have been suspended or materially limited, or minimum prices shall have been
established on either exchange or such market by the Commission, or by either
exchange or other regulatory body or governmental authority having
jurisdiction, (iv) a general banking moratorium shall have been declared by
Federal or New York State authorities, (v) there shall have occurred any
outbreak or escalation of armed hostilities involving the United States on or
after the date hereof, or if
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there has been a declaration by the United States of a national emergency or
war, the effect of which shall be, in your judgment, to make it inadvisable or
impracticable to proceed with the sale and delivery of the Shares on the terms
and in the manner contemplated in the Prospectuses, (vi) in your reasonable
opinion any material adverse change shall have occurred since the respective
dates as of which information is given in the Registration Statement or the
Prospectuses affecting the business, prospects, condition (financial or other)
or results of operations of the Company and its subsidiaries taken as a whole,
whether or not arising in the ordinary course of business, other than as set
forth in the Prospectuses or contemplated thereby, (vii) there shall have
occurred such a material adverse change in the financial markets in the United
States such as, in your judgment, makes it inadvisable or impracticable to
proceed with the sale and delivery of the Shares on the terms and in the
manner contemplated in the Prospectuses, or (viii) there shall have been any
enactment, proposal, publication, decree or other promulgation of any foreign
or United States federal or state statute, regulation, rule or order of any
court or other governmental authority that would, in your reasonable judgment,
make it inadvisable or impracticable to proceed with the sale and delivery of
the Shares on the terms and in the manner contemplated in the Prospectuses.
Your right to terminate this Agreement will not be waived or otherwise
relinquished by failure to give notice of termination prior to the time that
the event giving rise to the right to terminate shall have ceased to exist,
provided that notice is given prior to the Closing Date (and, with respect to
the Additional International Shares, the Additional Closing Date).
(c) Any notice of termination pursuant to this Section 13
shall be by telephone or telephonic facsimile, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of
the provisions hereof (otherwise than pursuant to notification by you as
provided in subsection 13(a) or 13(b) hereof), or if the sale of the
International Shares provided for herein is not consummated because any
condition to the obligations of the Managers set forth herein is not satisfied
(other than with respect to Section 8(l) hereof as a result of a default by
the U.S. Underwriters in the purchase of the U.S. Shares) or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or to comply with any provision hereof (other than by reason
of a default of the Managers), the Company agrees, subject to demand by you,
to reimburse the Managers for all reasonable out-of-pocket expenses
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(including the reasonable fees and expenses of Underwriters' Counsel),
incurred by the Managers in connection herewith.
14. NOTICES. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to
any one or more of the Managers, shall be hand delivered or faxed to each such
Manager in care of Bear, Stearns International Limited, One Canada Square,
London E14 5AD, England, Attention: Corporate Finance Department (Fax No. 011-
44-71-512-4090), with a copy in like manner to Bear, Stearns & Co. Inc., 245
Park Avenue, New York, New York 10167, Attention: Corporate Finance Department
(Fax No. 212-272-3092); and if sent to the Company, shall be hand delivered or
faxed to the Company, 900 Old Country Road, Garden City, New York 11530,
Attention: Corporate Secretary (Fax No. 516-222-4700).
15. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original but all of which
together shall constitute one instrument.
16. PARTIES. This Agreement shall inure solely to the
benefit of, and shall be binding upon, each of the Managers and the Company,
and the controlling persons, directors, officers, employees and agents
referred to in Sections 9 and 10 hereof, and their respective successors and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provision herein contained. The term "successors and assigns"
shall not include a purchaser, in its capacity as such, of International
Shares from the Managers.
17. CONSTRUCTION. This Agreement shall be construed in
accordance with the laws of the State of New York, but without regard to
principles of conflicts of laws.
18. DEFINITION OF BUSINESS DAY. For the purposes of this
Agreement, "business day" means any day on which the NYSE is open for trading.
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If the foregoing correctly sets forth the complete agreement
among the Managers and the Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
AVIS RENT A CAR, INC.
By:
-----------------------------
Name:
Title:
Accepted as of the date first above written.
BEAR, STEARNS INTERNATIONAL LIMITED
BAYERISCHE VEREINSBANK AG
CHASE MANHATTAN INTERNATIONAL LIMITED
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS INTERNATIONAL(EUROPE)
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY LLC
as Lead Managers of the several
Managers named in Schedule I
annexed hereto.
By: BEAR, STEARNS INTERNATIONAL LIMITED
By:
--------------------------------------
Name:
Title:
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<PAGE>
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
<PAGE>
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - Custodian
(Cust) (Minor)
under Uniform Gifts to Minors
Act
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
shares
of the capital stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
NOTICE:
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed:
<PAGE>
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
COMMON
COMMON
AVIS RENT A CAR, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 053790 10 1
<PAGE>
THIS CERTIFIES that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
AVIS RENT A CAR, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, on surrender of this certificate properly endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
SECRETARY
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED OFFICER
<PAGE>
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
TEL: (212) 735-3000
FAX: (212) 735-2000
August 28, 1997
Avis Rent A Car, Inc.
900 Old Country Road
Garden City, New York 11530
Re: Avis Rent A Car, Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as special counsel to Avis Rent A Car, Inc., a
Delaware corporation (the "Company"), in connection with the initial public
offering by the Company of up to 22,425,000 shares (including 2,925,000 shares
subject to an over-allotment option) (the "Shares") of the Company's Common
Stock, par value $.01 per share (the "Common Stock").
This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of
1933, as amended (the "Act").
In connection with this opinion, we have examined originals
or copies, certified or otherwise identified to our satisfaction, of (i) the
Registration Statement on Form S-1 (File No. 333-28609) as filed with the
Securities and Exchange Commission (the "Commission") on June 6, 1997; (ii)
Amendment No. 1 to the Registration Statement as filed with the Commission on
August 8, 1997; (iii) Amendment No. 2 to the Registration Statement as filed
with the Commission on August 20, 1997; (iv) Amendment No. 3 to the
Registration Statement to be filed with the Commission on the date hereof (such
Registration Statement, as so amended, being hereinafter referred to as the
"Registration Statement"); (v) the form of U.S.
<PAGE>
Avis Rent A Car, Inc.
August 28, 1997
Page 2
Underwriting Agreement (the "U.S. Underwriting Agreement") proposed to be
entered into between the Company, as issuer, and Bear, Stearns & Co. Inc.,
Blaylock & Partners, L.P., Chase Securities Inc., Goldman, Sachs & Co., Lehman
Brothers Inc., Montgomery Securities and Robert- son, Stephens & Company LLC,
as representatives of the several underwriters named therein (the "U.S.
Underwriters"), filed as an exhibit to the Registration Statement; (vi) the
form of International Underwriting Agreement (together with the U.S.
Underwriting Agreement, the "Underwriting Agreements") proposed to be entered
into between the Company, as issuer, and Bear, Stearns International Limited,
Bayerische Vereinsbank AG, Chase Manhattan International Limited, Credit
Lyonnais Securities, Goldman Sachs International, Lehman Brothers International
(Europe), Montgomery Securities and Robertson, Stephens & Company LLC, as
representatives of the several international managers named therein (together
with the U.S. Underwriters, the "Underwriters"), filed as an exhibit to the
Registration Statement; (vii) a specimen certificate representing the Common
Stock; (viii) the Restated Certificate of Incorporation of the Company, as
presently in effect and the form of Amended and Restated Certificate of
Incorporation of the Company to become effective upon consummation of the
offerings contemplated by the Registration Statement; (ix) the By-Laws of the
Company, as presently in effect and the form of Amended and Restated By-Laws of
the Company to become effective upon consummation of the offerings contemplated
by the Registration Statement; (x) certain resolutions of the sole shareholder
of the Company and the Board of Directors of the Company relating to the
adoption of the Amended and Restated Certificate of Incorporation of the
Company; and (xi) certain resolutions of the Board of Directors of the Company
and drafts of certain resolutions (the "Draft Resolutions") of the Pricing
Committee of the Board of Directors of the Company (the "Pricing Committee")
relating to the issuance and sale of the Shares and related matters. We have
also examined originals or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and such agreements, certificates
of public officials, certificates of officers or other representatives of the
Company and others, and such other documents, certificates and
<PAGE>
Avis Rent A Car, Inc.
August 28, 1997
Page 3
records as we have deemed necessary or appropriate as a
basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power,
corporate or other, to enter into and perform all obligations thereunder and
have also assumed the due authorization by all requisite action, corporate or
other, and execution and delivery by such parties of such documents and the
validity and binding effect thereof. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Company and others.
Members of our firm are admitted to the bar in the State of
New York, and we do not express any opinion as to the laws of any other
jurisdiction other than the Delaware General Corporation Law.
Based upon and subject to the foregoing, we are of the
opinion that when (i) the Amended and Restated Certificate of Incorporation of
the Company in the form examined by us has been duly authorized by all
requisite corporate action and duly executed and filed with the Secretary of
State of the State of Delaware and has become effective; (ii) the Registration
Statement becomes effective; (iii) the Draft Resolutions have been adopted by
the Pricing Committee; (iv) the price at which the Shares are to be sold to the
Underwriters pursuant to the Underwriting Agreements and other matters relating
to the issuance and sale of the Shares have been approved by the Pricing
Committee in accordance with the Draft Resolutions; (v) the Underwriting
Agreements have been duly executed and delivered; and (vi) certificates
representing the Shares in the form of the specimen certificates examined by us
have been manually signed by an authorized
<PAGE>
Avis Rent A Car, Inc.
August 28, 1997
Page 4
officer of the transfer agent and registrar for the Common Stock and registered
by such transfer agent and registrar, and delivered to and paid for by the
Underwriters at a price per share not less than the per share par value of the
Common Stock as contemplated by the Underwriting Agreements, the issuance and
sale of the Shares will have been duly authorized, and the Shares will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the
Commission as Exhibit 5.1 to the Registration Statement. We also consent to the
reference to our firm under the caption "Legal Matters" in the Registration
Statement. In giving this consent, we do not thereby admit that we are included
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of September ,1997, between
HFS Incorporated ("HFS") and Avis Rent A Car, Inc. (the "Company").
WHEREAS, as of the date of this Agreement, HFS Car Rental Inc. ("HFS
Car Rental"), a wholly owned subsidiary of HFS, owns 100 shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock");
WHEREAS, the Company is consummating on the date hereof underwritten
public offerings (the "Offerings") of 19,500,000 shares of the Common Stock;
WHEREAS, the Board of Directors of the Company has authorized the
officers of the Company to execute and deliver this Agreement in the name and
on behalf of the Company;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties to this Agreement hereby agree as
follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following meanings:
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Holder" means HFS Car Rental and any other person that owns
Registrable Securities, including their respective successors and assigns who
acquire Registrable Securities, directly or indirectly, from HFS Car Rental or
such other person. For purposes of this Agreement, the Company may deem and
treat the registered holder of a Registrable Security as the Holder and
absolute owner thereof, and the Company shall not be affected by any notice to
the contrary.
"Registrable Securities" means (a) the Common Stock owned by HFS Car
Rental upon completion of the Offerings, (b) any Common Stock acquired by HFS
or HFS Car Rental in the open market at a time when HFS or HFS Car Rental is
deemed to be an Affiliate (as such term is defined under Rule 144 under the
Securities Act) of the Company, and (c) any securities issued or issuable in
<PAGE>
respect of the Common Stock referred to in clauses (a) and (b) above, by way of
stock dividend or stock split or in connection with a combination of shares,
recapitalization, reclassification, merger or consolidation, and any other
securities issued pursuant to any other pro rata distribution with respect to
such Common Stock. For purposes of this Agreement, a Registrable Security
ceases to be a Registrable Security when (x) it has been effectively registered
under the Securities Act and sold or distributed to the public in accordance
with an effective registration statement covering it (and has not been
reacquired in the manner described in clause (b) above), or (y) it is sold or
distributed to the public pursuant to Rule 144 (or any successor or similar
provision) under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
2. Demand Registration. (a) Subject to Section 5 hereof, if at any
time any Holder shall request the Company in writing to register under the
Securities Act all or a part of the Registrable Securities held by such Holder
(a "Demand Registration"), the Company shall use all reasonable efforts to
cause to be filed and declared effective as soon as reasonably practicable (but
in no event later than the 45th day after such Holder's request is made) a
registration statement, on such appropriate form as the Company in its
discretion shall determine, providing for the sale of all such Registrable
Securities by such Holder. The Company agrees to use its best efforts to keep
any such registration statement continuously effective and usable for resale of
Registrable Securities for so long as the Holder whose Registrable Securities
are included therein shall request. The Company shall be obligated to file
registration statements pursuant to this Section 2(a) until all Registrable
Securities have ceased to be Registrable Securities. Each registration
statement filed pursuant to this Section 2(a) is hereinafter referred to as a
"Demand Registration Statement."
(b) The Company agrees (i) not to effect any public or private sale,
distribution or purchase of any
2
<PAGE>
of its securities which are the same as or similar to the Registrable
Securities, including a sale pursuant to Regulation D under the Securities Act,
during the 15-day period prior to, and during the 45-day period beginning on,
the closing date of each underwritten offering under any Demand Registration
Statement, and (ii) to use reasonable best efforts to cause each holder of its
securities purchased from the Company, at any time on or after the date of this
Agreement (other than in a registered public offering) to agree not to effect
any public sale or distribution of any such securities during such period,
including a sale pursuant to Rule 144 under the Securities Act.
(c) The Company may postpone for a reasonable period of time, not to
exceed 30 days, the filing or the effectiveness of any Demand Registration
Statement if the Board of Directors of the Company in good faith determines
that (A) such registration might have a material adverse effect on any plan or
proposal by the Company with respect to any financing, acquisition,
recapitalization, reorganization or other material transaction, or (B) the
Company is in possession of material non-public information that, if publicly
disclosed, could result in a material disruption of a major corporate
development or transaction then pending or in progress or in other material
adverse consequences to the Company.
(d) If at any time any Holder of Registrable Securities to be covered
by a Demand Registration Statement desires to sell Registrable Securities in an
underwritten offering, such Holder shall have the right to select any
nationally recognized investment banking firm(s) to administer the offering,
subject to the approval of the Company, which approval shall not be
unreasonably withheld, and the Company shall enter into underwriting agreements
with the underwriter(s) of such offering, which agreements shall contain such
representations and warranties by the Company, and such other terms, conditions
and indemnities as are at the time customarily contained in underwriting
agreements for similar offerings.
3. Incidental Registration. Subject to Section 5 hereof and the
other terms and conditions set forth in this Section 3, if the Company proposes
at any time to register any shares of Common Stock (the "Ini-
3
<PAGE>
tially Proposed Shares") under the Securities Act for sale, whether or not for
its own account, pursuant to an underwritten offering, the Company will
promptly give written notice to the Holders of its intention to effect such
registration (such notice to specify, among other things, the proposed offering
price, the kind and number of securities proposed to be registered and the
distribution arrangements, including identification of the underwriter(s)), and
the Holders shall be entitled to include in such registration statements, as a
part of such underwritten offering, such number of shares (the "Holder
Shares") to be sold for the account of the Holders (on the same terms and
conditions as the Initially Proposed Shares) as shall be specified in a request
in writing delivered to the Company within 15 days after the date upon which
the Company gave the aforementioned notice.
The Company's obligations to include Holder Shares in a registration
statement pursuant to this Section 3 is subject to each of the following
limitations, conditions and qualifications:
(i) If, at any time after giving written notice of its intention to
effect a registration of any of its shares of Common Stock and prior to
the effective date of any registration statement filed in connection with
such registration, the Company shall determine for any reason not to
register all of such shares, the Company may, at its election, give
written notice of such determination to the Holders and thereupon it
shall be relieved of its obligation to use any efforts to register any
Holder Shares in connection with such aborted registration.
(ii) If, in the opinion of the managing underwriter(s) of such
offering, the distribution of all or a specified portion of the Holder
Shares would materially interfere with the registration and sale, in
accordance with the intended method thereof, of the Initially Proposed
Shares, then the number of Holder Shares to be included in such
registration statement shall be reduced to such number, if any, that, in
the opinion of such managing underwriter(s), can be included without such
interference. If, as a result of the cutback provisions of the preceding
sentence, the Holders are not entitled to include all of the Holder
Shares in such
4
<PAGE>
registration, such Holders may elect to withdraw their request to
include Holder Shares in such registration (a "Withdrawal Election").
If the Company shall so request in writing, each Holder agrees not to
effect any public or private sale or distribution of any Registrable Securities
(other than the Holder Shares) during the 15-day period prior to and during the
45-day period beginning on, the closing date of any underwritten public
offering of shares of Common Stock made for the Company's own account.
4. Registration Procedures. (a) Whenever the Company is required to
use all reasonable efforts to effect the registration of any Registrable
Securities under the Securities Act pursuant to the terms and conditions of
Section 2(a) or 3 (such Registrable Securities being hereinafter referred to as
"Subject Shares"), the Company will use all reasonable efforts to effect the
registration and sale of the Subject Shares in accordance with the intended
method of disposition thereof. Without limiting the generality of the
foregoing, the Company will as soon as practicable:
(i) prepare and file with the SEC a registration statement with
respect to the Subject Shares in form and substance satisfactory to
the Holders of the Subject Shares, and use all reasonable efforts to
cause such registration statement to become effective as soon as
possible;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such
registration statement effective for the applicable period and to
comply with the provisions of the Securities Act with respect to the
disposition of all Subject Shares and other securities covered by
such registration statement;
(iii) furnish the Holders covered by such registration
statement, without charge, such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies
of the prospectus included in such regis-
5
<PAGE>
tration statement (including each preliminary prospectus), such
documents incorporated by reference in such registration statement or
prospectus, and such other documents, as such Holders may reasonably
request;
(iv) use all reasonable efforts to register or qualify the
Subject Shares covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the managing
underwriter(s) shall reasonably recommend, and do any and all other
acts and things which may be reasonably necessary or advisable to
enable the Holders to consummate the disposition in such
jurisdictions of the Subject Shares covered by such registration
statement, except that the Company shall not for any such purpose be
required to (A) qualify generally to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified, (B)
subject itself to taxation in any jurisdiction wherein it is not so
subject, or (C) consent to general service of process in any such
jurisdiction or otherwise take any action that would subject it to
the general jurisdiction of the courts of any jurisdiction in which
it is not so subject;
(v) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC;
(vi) furnish, at the Company's expense, unlegended certificates
representing ownership of the securities being sold in such
denominations as shall be requested and instruct the transfer agent
to release any stop transfer orders with respect to the Subject
Shares being sold;
(vii) notify each Holder at any time when a prospectus relating
to the Subject Shares is required to be delivered under the
Securities Act of the happening of any event as a result of which the
prospectus included in such Registration Statement contains any
untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein (in the case of the
prospectus or any preliminary prospectus, in light of the
circumstances under which they were made) not misleading,
6
<PAGE>
and the Company will, as promptly as practicable thereafter, prepare
and file with the SEC and furnish a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of
Subject Shares such prospectus will not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading;
(viii) enter into customary agreements (including an
underwriting agreement in customary form in the case of an
underwritten offering) and make such representations and warranties
to the sellers and underwriter(s) as in form and substance and scope
are customarily made by issuers to underwriters in underwritten
offerings and take such other actions as the Holders or the managing
underwriter(s) or agent, if any, reasonably require in order to
expedite or facilitate the disposition of such Subject Shares;
(ix) make available for inspection by the Holders, any
underwriter or agent participating in any disposition pursuant to
such Registration Statement, and any attorney, accountant or other
similar professional advisor retained by any such holders or
underwriter (collectively the "Inspectors"), all pertinent financial
and other records, pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably
necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
Inspector in connection with such Registration Statement. The
Holders agree that Records and other information which the Company
determines, in good faith, to be confidential and of which
determination the Inspectors are so notified shall not be disclosed
by the Inspectors unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in the
Registration Statement, (ii) the release of such Records is ordered
pursuant to a subpoena, court order or regulatory or agency request
or (iii) the information in such Records has been generally
disseminated to the public. Each
7
<PAGE>
Holder agrees that it will, upon learning that disclosure of such
Record is sought in a court of competent jurisdiction or by a
governmental agency, give notice to the Company and allow the Company,
at the Company's expense, to undertake appropriate action to
prevent disclosure of the Records deemed confidential;
(x) obtain for delivery to the Company, the underwriter(s) or
their agent, with copies to the Holders, a "cold comfort" letter
from the Company's independent public accountants in customary form
and covering such matters of the type customarily covered by "cold
comfort" letters as the Holders or the managing underwriter(s)
reasonably request;
(xi) obtain for delivery to the Holders and the underwriter(s)
or their agent an opinion or opinions from counsel for the Company
in customary form and reasonably satisfactory to the Holder,
underwriters or agents and their counsel;
(xii) make available to its security holders earnings
statements, which need not be audited, satisfying the provisions of
Section 11(a) of the Securities Act no later than 90 days after the
end of the 12-month period beginning with the first month of the
Company's first quarter commencing after the effective date of the
Registration Statement, which earnings statements shall cover said
12-month period;
(xiii) make every reasonable effort to prevent the issuance of
any stop order suspending the effectiveness of the registration
statement or of any order preventing or suspending the effectiveness
of such registration statement at the earliest possible moment;
(xiv) cause the Subject Shares to be registered with or
approved by such other governmental agencies or authorities within
the United States as may be necessary to enable the sellers thereof
or the underwriters(s), if any, to consummate the disposition of
such Subject Shares;
8
<PAGE>
(xv) cooperate with the Holders and the managing
underwriter(s), if any, or any other interested party (including any
interested broker-dealer) in making any filings or submission
required to be made, and the furnishing of all appropriate
information in connection therewith, with the National Association
of Securities Dealers, Inc. ("NASD");
(xvi) cause its subsidiaries to take action necessary to effect
the registration of the Subject Shares contemplated hereby,
including filing any required financial information;
(xvii) effect the listing of the Subject Shares on the New York
Stock Exchange or such other national securities exchange or
over-the-counter market on which shares of the Common Stock shall
then be listed; and
(xviii) take all other steps necessary to effect the
registration of the Subject Shares contemplated hereby.
(b) The Holders shall provide (in writing and signed by the Holders
and stated to be specifically for use in the related registration statement,
preliminary prospectus, prospectus or other document incident thereto) all
such information and materials and take all such action as may be required in
order to permit the Company to comply with all applicable requirements of the
SEC and any applicable state securities laws and to obtain any desired
acceleration of the effective date of any registration statement prepared and
filed by the Company pursuant to this Agreement.
(c) The Holders shall, if requested by the Company or the managing
underwriter(s) in connection with any proposed registration and distribution
pursuant to this Agreement, (i) agree to sell the Subject Shares on the basis
provided in any underwriting arrangements entered into in connection therewith
and (ii) complete and execute all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents customary in similar
offerings.
(d) Upon receipt of any notice from the Company that the Company has
become aware that the pro-
9
<PAGE>
spectus (including any preliminary prospectus) included in any registration
statement filed pursuant to Section 2(a) or 3, as then in effect, contains any
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Holders shall forthwith discontinue disposition of Subject
Shares pursuant to the registration statement covering the same until the
Holders' receipt of copies of a supplemented or amended prospectus and,
if so directed by the Company, deliver to the Company (at the Company's
expense) all copies other than permanent file copies then in the Holder's
possession, of the prospectus covering the Subject Shares that was in effect
prior to such amendment or supplement.
(e) The Holders shall pay all out-of-pocket expenses incurred in
connection with any Demand Registration Statements filed pursuant to Section
2(a) of this Agreement, including, without limitation, all SEC and blue sky
registration and filing fees (including NASD fees), printing expenses,
transfer agents and registrars' fees, underwriting discounts, commissions and
expenses attributable to securities sold for the account of the Holders
pursuant to such registration statement, fees and disbursements of the
Company's counsel and accountants and fees and disbursements of experts used
by the Company in connection with such registration statement. The Company
shall pay any such out-of-pocket expenses incurred in connection with any
registration statement filed pursuant to Section 3 of this Agreement, except
that the Holders shall pay all underwriting discounts, commissions and
expenses attributable to the Subject Shares sold pursuant to any such
registration statement.
(f) In connection with any sale of Sub- ject Shares that are
registered pursuant to this Agreement, the Company and the Holders shall enter
into an agreement providing for indemnification of the Holders by the Company,
and indemnification of the Company by the Holders, on terms customary for such
agreements at that time (it being understood that any disputes arising as to
what is customary shall be resolved by counsel to the underwriter(s)).
10
<PAGE>
5. Condition to Company's Obligations. Notwithstanding any other
provision in this Agreement to the contrary, the Company shall have no
obligation to effect any registration of Registrable Securities pursuant to
this Agreement within 180 days of the date of the prospectus for the
Offerings, unless Bear, Stearns & Co., Inc. shall have given its prior written
consent to such filing.
6. Indemnification.
(a) Indemnification by the Company. The Company will, without
limitation as to time, indemnify and hold harmless, to the fullest extent
permitted by law, each Holder of Registrable Securities registered pursuant to
this Agreement, the officers, directors, agents and employees of each of them,
each person who controls such holder (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) and the officers, directors,
agents and employees of any such controlling person, from and against all
reasonable and documented losses, claims, damages, liabilities, costs
(including without limitation the costs of investigation and attorneys' fees)
and expenses (collectively, "Losses"), as incurred, arising out of or based
upon any untrue or alleged untrue statement of a material fact contained in
any registration statement, prospectus or form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising
out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same are based solely
upon information furnished in writing to the Company by such Holder expressly
for use therein.
(b) Indemnification by Holders of Registrable Securities. In
connection with any registration statement in which a Holder is participating,
such Holder will furnish to the Company in writing such information as the
Company reasonably requests for use in connection with any registration
statement or prospectus and will indemnify, to the fullest extent permitted by
law, the Company, its officers, directors, agents and employees, each person
who controls the Company (within the meaning of Section 15 of the Securities
Act and Section 20 of the Exchange Act) and the officers, directors, agents and
em-
11
<PAGE>
ployees of any such controlling person, from and against all Losses, as
incurred, arising out of or based upon any untrue or alleged untrue statement
of a material fact contained in any registration statement, prospectus or form
of prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, to the extent, but only to the
extent, that any such statement or omission is contained in any information
furnished in writing to the Company by such Holder expressly for use therein
and was relied upon by the Company in the preparation thereof. In no event will
the liability of any selling Holder hereunder be greater in amount than the
dollar amount of the proceeds (net of payment of all expenses) received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligations.
(c) Conduct of Indemnification Proceedings. If any person shall
become entitled to indemnity hereunder (an "indemnified party"), such
indemnified party shall give prompt notice to the party from which such
indemnity is sought (the "indemnifying party") of any claim or of the
commencement of any action or proceeding with respect to which such
indemnified party seeks indemnification or contribution pursuant hereto;
provided, however, that the failure to so notify the indemnifying party will
not relieve the indemnifying party from any obligation or liability except to
the extent that the indemnifying party has been prejudiced materially by such
failure. All reasonable and documented fees and expenses (including any fees
and expenses incurred in connection with investigating or preparing to defend
such action or proceeding) will be paid to the indemnified party, as incurred,
within five calendar days of written notice thereof to the indemnifying party
(regardless of whether it is ultimately determined that an indemnified party
is not entitled to indemnification hereunder). The indemnifying party will not
consent to entry of any judgment or enter into any settlement or otherwise
seek to terminate any action or proceeding in which any indemnified party is
or could be a party and as to which indemnification or contribution could be
sought by such indemnified party under this Section 6, unless such judgment,
settlement or other termination includes as an unconditional term
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thereof the giving by the claimant or plaintiff to such indemnified party of a
release, in form and substance satisfactory to the indemnified party, from all
liability in respect of such claim or litigation for which such indemnified
party would be entitled to indemnification hereunder.
(d) Contribution. If the indemnification provided for in this Section
6 is unavailable to an indemnified party under Section 6(a) or 6(b) hereof in
respect of any Losses or is insufficient to hold such indemnified party
harmless, then each applicable indemnifying party, in lieu of indemnifying
such indemnified party, will, jointly and severally, contribute to the amount
paid or payable by such indemnified party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party or parties, on the one hand, and such indemnified party, on the other
hand, in connection with the actions, statement or omissions that resulted in
such Losses as well as any other relevant equitable considerations. The
relative fault of such indemnifying party or indemnifying parties, on the one
hand, and such indemnified party, on the other hand, will be determined by
reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or omission or
alleged omission of a material fact, has been taken or made by, or related to
information supplied by, such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses will be deemed to include any
reasonable and documented legal or other fees or expenses incurred by such
party in connection with any action or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 6(d), an
indemnifying party that is a selling Holder will not be required to contribute
any amount in excess of the amount by which the total price at which the
Registrable Securities sold by such
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indemnifying party and distributed to the public were offered to the public
exceed the amount of any damages which such indemnifying party has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
The indemnity, contribution and expense reimbursement obligations
contained in this Section 6 will be in addition to any liability that the
indemnifying party or parties may otherwise have to the indemnified party or
parties. The provisions of this Section 6 will survive so long as Registrable
Securities remain outstanding, notwithstanding any transfer of the Registrable
Securities by any Holder thereof or any termination of this Agreement.
7. Notices. Any notice or other communication required or permitted
to be given hereunder shall be in writing and shall be effective (a) upon hand
delivery or delivery by fax at the address or number designated below (if
delivered on a business day during normal business hours where such notice is
to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the third business day following the date
of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual service, fully prepaid, addressed to such address, or
upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
If to the Company, to:
Avis Rent A Car, Inc.
900 Old Country Road
Garden City, New York 11530
Attn: General Counsel
Fax: (516) 222-3751
If to HFS, to:
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HFS Incorporated
Six Sylvan Way
Parsippany, New Jersey 07054
Attn: General Counsel
Fax: (201) 359-5335
If to any other Holder, to such name at such address as such
Holder shall have indicated in a written notice delivered to
the other parties to this Agreement.
Any party hereto may from time to time change its address for notices under
this Section 6 by giving at least 10 days' notice of such changes to the
other parties hereto.
8. Waivers. No waiver by any party of any default with respect to any
provision, condition or requirement hereof shall be deemed to be a continuing
waiver in the future thereof or a waiver of any other provision, condition or
requirement hereof; nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
9. Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
10. Successors and Assigns; Amendments. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
assigns, including without limitation and without the need for an express
assignment each subsequent Holder of any Registrable Securities. Except as
provided in this Section 9, neither the Company nor any Holder shall assign
this Agreement or any rights hereunder without the prior written consent of the
other parties hereto. The assignment by a party of this Agreement or any
rights hereunder shall not affect the obligations of such party hereunder. This
Agreement may not be amended except by a written instrument executed by the
parties hereto.
11. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and
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is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
12. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of Delaware
without regard to the principles of conflicts of laws.
13. Entire Agreement. This Agreement contains the entire agreement of
the parties hereto in respect of the subject matter hereof and supersedes all
prior agreements and understandings between the parties with respect to the
subject matter hereof.
14. Execution. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
date hereof.
AVIS RENT A CAR, INC.
By:
----------------------------------
Name:
Title:
HFS INCORPORATED
By:
----------------------------------
Name:
Title:
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AVIS RENT A CAR, INC.
SUBSIDIARIES
Avis Rent A Car System, Inc.
Avis International, Ltd.
Avis Management Pty. Limited
We Try Harder Pty. Limited
Chaconne Pty. Limited
W.T.H. Pty. Limited
Auto Accident Consultants Pty. Limited
W.T.H. Fleet Leasing Pty. Limited
Avis Services Pty. Limited
Avis Management Services, Limited
Abitra S.A.
Avis Caribbean, Limited
Avis Rent A Car de Puerto Rico, Inc.
Virgin Islands Enterprises, Inc.
Avis Asia and Pacific, Limited
Avis Rent A Car Limited
Altra Auto Rental Limited
WTH Canada, Inc.
Aviscar Inc.
Avis Services Canada, Inc.
Avis Rent A Car (Hong Kong) Ltd.
West Indies Car Rental Limited
Avis Enterprises, Inc.
Avis Service, Inc.
Avis Lube, Inc.
Pathfinder Insurance Company
PF Claims Management, Ltd.
Avis Leasing Corporation
Zam, Inc.
Global Excess & Reinsurance Ltd.
Constellation Reinsurance Company Limited
<PAGE>
We Try Harder Japan Co., Ltd.
Servicios Avis S.A.
Avis Rent A Car Limited
Avis Rent A Car Sdn. Bhd.
Avis Rent A Car Sdn. Bhd.
Avis Rent A Car Limited
First Gray Line Corporation
First Gray Line West Corporation
Grand Rent A Car Corp.
AESOP Leasing L.P.
AESOP Funding II L.L.C.
Reserve Claims Management Co.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to the Registration Statement
No. 333-28609 of Avis Rent A Car, Inc. on Form S-1 of our report dated May
12, 1997 (August 20, 1997 as to Note 15), appearing in the Prospectus, which
is part of this Registration Statement and of our report dated May 12, 1997
(August 20, 1997 as to Note 15) relating to the financial statement schedule
appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
New York, New York
August 28, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 22, 1996, with respect to the financial
statements of The First Gray Line Corporation included in the Registration
Statement (Form S-1 No. 333-28609) and related Prospectus of Avis Rent A Car,
Inc. dated August 28, 1997.
Ernst & Young LLP
Los Angeles, California
August 27, 1997
