<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1997
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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> <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
- -----------------------------------------------------------------------------
<TABLE>
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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 $250,000,000 $75,758
- --------------------------------------- -------------------------- ----------------
</TABLE>
(a) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
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 underwritten public offering in the United States
and Canada (the "U.S. Prospectus"), and one to be used in a concurrent
underwritten public 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 under 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 JUNE 6, 1997
PROSPECTUS
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 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
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 $ and $ 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 25% of the then outstanding shares of the Company's Common
Stock ( % 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.
Application will be made to list the Common Stock on the New York Stock
Exchange under the symbol "AVI."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 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 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 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.
, 1997
<PAGE>
[MAP AND PHOTOS TO BE ADDED]
The Company owns, indirectly, all of the outstanding voting securities of
a licensed stock insurance company domiciled in the State of Colorado. The
Colorado Insurance Law provides that no person may acquire control of the
Company, and thus indirect control of such insurance company, unless it has
obtained prior approval of the Colorado Insurance Department 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 shares of Common Stock representing 10% or more of
the voting power of the Company will be presumed to have acquired control of
the Colorado domestic insurance subsidiary unless such presumption is
rebutted by a showing that such control does not in fact exist. 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. See "Business--Regulation."
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(Registered Trademark) and Wizard(Registered Trademark) are registered
service marks of Wizard Co. Inc., an indirect wholly owned subsidiary of HFS.
2
<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 a 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
effective 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 will enter into a long-term 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 (the "Wizard System"), will
enter into a long-term computer services agreement with the Company with
respect to its use of the Wizard System.
THE COMPANY
The Company 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 540 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.
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
3
<PAGE>
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 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. 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 locations operated by 75
other Avis System franchisees, of whom five 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 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 is a wholly owned subsidiary of the Franchisor, which was
acquired by HFS in October 1996 (the "Acquisition"). 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 25% of the then outstanding shares of Common Stock of
the Company ( % if the over-allotment options granted to the U.S.
Underwriters and the Managers are exercised in full).
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
4
<PAGE>
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 OFFERINGS
Common Stock to be sold by the
Company:
U.S. Offering .............. shares
International Offering ..... shares
Total .................... shares
Common Stock to be outstanding
after the Offerings .......... shares(a)
Use of Proceeds ............... To prepay outstanding indebtedness and for
general corporate purposes, including
possible acquisitions.
Proposed New York Stock
Exchange ("NYSE") symbol ..... AVI
- ------------
(a) Does not include shares of Common Stock reserved for issuance under
the Company's stock option plan (the "Stock Option Plan"), of which
options to purchase shares are 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.
6
<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, and (iii) adjustments to reflect a 4% royalty
fee pursuant to the Master License Agreement (as defined) with HFS. The "Pro
Forma as Adjusted" net income and earnings per share amounts give effect, as
of January 1 of the earliest period presented, to 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 three months
ended March 31, 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>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Statements of Operations Data:
Revenue.............................................. $1,867,517 $456,014
Costs and expenses:
Direct operating.................................... 818,432 198,286
Vehicle depreciation, net........................... 342,657 90,368
Vehicle lease charges............................... 122,976 30,241
Selling, general and administrative (a)............. 419,597 93,562
Interest, net (b)................................... 139,254 33,107
Amortization of cost in excess of net assets
acquired........................................... 4,945 1,236
----------------- --------------
Income before provision for income taxes............. 19,656 9,214
Provision for income taxes (c)....................... 13,897 4,482
----------------- --------------
Net income .......................................... $ 5,759 $ 4,732
================= ==============
Pro Forma as Adjusted: (d)
Net income ......................................... $ $
================= ==============
Earnings per share.................................. $ $
================= ==============
</TABLE>
- ------------
(a) Reflects a $68.2 million pro forma increase and a $1.4 million pro
forma decrease for the year ended December 31, 1996 and the three
months ended March 31, 1997, respectively, resulting from the net
adjustments relating to a 4% royalty fee payable to HFS pursuant to
the Master License Agreement.
(b) Reflects pro forma reductions in net interest expense of $15.9
million and $1.1 million for the year ended December 31, 1996 and the
three months ended March 31, 1997, respectively, resulting from the
settlement of a net intercompany receivable with HFS and its
affiliated companies, and the application of proceeds therefrom to
reduce outstanding borrowings.
(c) Reflects the income tax effects of the pro forma adjustments
described in (a) and (b) at statutory income tax rates resulting in a
pro forma income tax benefit of $18.3 million and a pro forma income
tax provision of $872 for the year ended December 31, 1996 and the
three months ended March 31, 1997, respectively.
(d) Pro forma net income amounts reflect the reduction in interest
expense resulting from the use of the estimated net proceeds from the
Offerings of $ to repay certain indebtedness. See "Use of
Proceeds."
(e) The pro forma earnings per share amounts were computed using the
number of Common Stock shares outstanding after giving effect to a
for 1 stock split declared on and the issuance of approximately
shares of common stock in the Offerings.
7
<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 three month periods ended March 31, 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 three month periods ended March 31, 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 three months ended March 31, 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 the settlement of a net intercompany receivable with
HFS and its affiliated companies as if it had been consummated on March 31,
1997. The "Pro Forma as Adjusted" amounts give effect to the Offerings and
the application of the net proceeds therefrom as if it had been consummated
on March 31, 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 three months ended March 31, 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.
8
<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
========== ========== ========== ========== ================
SELECTED OPERATING DATA:
Number of vehicle rental
locations at period end....... 609 632 693 556 550
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) THREE MONTHS
TO DECEMBER 31, 1996 THREE MONTHS ENDED ENDED
DECEMBER 31, 1996 (b) MARCH 31, 1996 MARCH 31, 1997
------------------- ------------------- ------------------ --------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................ $362,844 $1,867,517 $418,118 $456,014
Costs and expenses:
Direct operating.............. 167,682 818,432 189,062 198,286
Vehicle depreciation, net .... 66,790 342,657 81,804 90,368
Vehicle lease charges......... 22,658 122,976 28,646 30,241
Selling, general and
administrative (c)........... 68,215 351,395 79,820 94,913
Interest, net................. 34,212 155,189 36,062 34,247
Amortization of cost in
excess of net assets
acquired..................... 1,026 4,808 1,191 976
------------------- ------------------- ------------------ --------------
Income before provision for
income taxes.................. 2,261 72,060 1,533 6,983
Provision for income taxes .... 1,040 32,238 685 3,610
------------------- ------------------- ------------------ --------------
Net income .................... $ 1,221 $ 39,822 $ 848 $ 3,373
=================== =================== ================== ==============
SELECTED OPERATING DATA:
Number of vehicle rental
locations at period end....... 546 546 548 540
Peak number of vehicles during
period........................ 177,839 196,077 164,005 175,965
Average number of vehicles
during period................. 172,461 174,226 156,760 170,845
Number of rental transactions
during period (in thousands) 2,534 12,806 2,898 3,069
Average revenue per rental
transaction during period ... $ 143 $ 146 $ 144 $ 149
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ -------------
<S> <C> <C> <C>
STATEMENTS OF FINANCIAL POSITION DATA:
Vehicles, net.............................. $2,159,684 $2,159,684 $
Total assets............................... $3,008,858 $2,978,132 $
Debt....................................... $2,175,357 $2,144,631 $
Stockholders' equity....................... $ 79,266 $ 79,266 $
Total liabilities and stockholders'
equity.................................... $3,008,858 $2,978,132 $
</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 three months ended March 31, 1997 include
charges from HFS. See Note 3 to the Audited Consolidated Financial
Statements.
9
<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; 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. The Company is 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. 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 and upon the
occurrence of a Change of Control Event (as defined). 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 March 31, 1997, the Company had approximately $2.2 billion of
indebtedness outstanding, of which approximately $2.0 billion was incurred
for fleet financing and secured by purchased vehicles. At March 31, 1997, the
Company had approximately $925.0 million of additional credit availability
under its fleet financing facilities. 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 and other fees, to be immediately due and payable, failing which the
lenders could proceed against the collateral securing that indebtedness.
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
10
<PAGE>
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. Almost all of the
Company's total outstanding debt of $2.2 billion at March 31, 1997 was
interest rate sensitive and had a weighted average interest rate at such date
of 6.2%. The Company is in the process of refinancing its existing
indebtedness and expects that a significant portion of the new indebtedness
will not be interest rate sensitive. 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 March 31, 1997, approximately 85% 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 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 82% 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
11
<PAGE>
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 March 31, 1997, the Company was subject to
residual risk with respect to 10% of the vehicles in its domestic 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 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
12
<PAGE>
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 233 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 208 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 will not result in spills. Any 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. 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
13
<PAGE>
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 the 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 sale or
distribution 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 exceptions, not to sell or otherwise dispose of any shares of Common
Stock for a period of 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 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 application will be made to list the Common Stock on the
NYSE, 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 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."
14
<PAGE>
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. 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. See "Dividend Policy."
15
<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 systems, (vii) the cross marketing opportunities with HFS and CUC
and (viii) the effects on the Company of certain legal proceedings, 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."
16
<PAGE>
USE OF PROCEEDS
At an assumed sale price of $ per share, the net proceeds to the Company
from the Offerings (after deducting underwriting discounts and estimated
expenses) are estimated to be approximately $ million (approximately $
million if the over-allotment options granted to the U.S. Underwriters and
the Managers are exercised in full). The Company intends to use the net
proceeds from the Offerings to prepay approximately $ of the indebtedness
under debt instruments bearing interest at weighted average interest rates
ranging from % to % as of March 31, 1997 and maturities ranging from to
. The balance of the net proceeds will be used for general corporate
purposes, including possible acquisitions.
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 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
"Business -- Regulatory Matters," "Description of Certain Indebtedness" and
"Management's Discussion and Analysis of Financial Condition -- Liquidity and
Capital Resources."
The Company's predecessor paid dividends 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.
17
<PAGE>
DILUTION
At March 31, 1997, the Company had a net tangible book value of $
million, or $ per share. "Net tangible book value" per share represents the
difference between the net tangible assets (total assets less cost in excess
of net assets acquired) and liabilities of the Company on a consolidated
basis, divided by the total number of shares outstanding. Without taking into
account any changes in net tangible book value after , 1997, other than
to give effect to the Offerings and the application of the net proceeds
therefrom, the net tangible book value of the Common Stock as of , 1997
would have been approximately $ million, or $ per share. This represents
an immediate increase in net tangible book value of $ per share to the
Franchisor and an immediate dilution of $ per share to new investors as
illustrated in the following table:
<TABLE>
<CAPTION>
<S> <C>
Public offering price per share.......................... $
--------
Net tangible book value per share as of , 1997 .... $
Increase in net tangible book value per share
attributable to the Offerings........................... $
--------
Net tangible book value per share as of , 1997,
after giving effect to the Offerings ...................
--------
Immediate dilution per share to new investors in the
Offerings............................................... $
========
</TABLE>
The calculation in the table above excludes million shares reserved for
issuance under the Stock Plan, including shares subject to outstanding
options granted at the initial public offering price of the Common Stock. See
"Management."
The following table sets forth as of , 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 to the Company and the average price paid per share, at
the initial public offering price of $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
New Investors ...... % $ % $
The Franchisor .....
Total............. 100.0% 100.0%
========== =========== ========== ===========
</TABLE>
If the over-allotment options granted to the U.S. Underwriters and the
Managers are exercised in full, the number of shares held by the Franchisor
would be reduced to , or % of the total number of shares to be
outstanding after the Offerings, and the number of shares held by new
investors would be shares, or % of the total number of shares to be
outstanding after the Offerings.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 (i) on an actual basis, (ii) as adjusted to give effect to the
refinancing of the Company's outstanding indebtedness and the settlement of a
net intercompany receivable with HFS and its affiliated companies and the
application of the proceeds therefrom to reduce indebtedness and (iii) as
further adjusted to give effect to the sale of the shares 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 MARCH 31, 1997
---------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt(a):
Vehicle Trust Financing--revolving credit
facilities and floating rate notes ...... $1,983,839 $ $
Vehicle Trust Financing--subordinated .... 57,214
Debt of foreign subsidiaries .............. 113,197
Other debt ................................ 21,107
------------ ------------- ------------
Total debt ............................... 2,175,357
------------ ------------- ------------
Stockholders' equity:
Preferred Stock, $.01 par value, shares
authorized, none issued ..................
Common Stock, $.01 par value, shares
authorized, shares issued and
outstanding ( shares issued, as
adjusted)(b) ............................. --
Additional paid-in capital ................ 75,000
Retained earnings ......................... 4,557
Foreign currency translation adjustment .. (291)
------------ ------------- ------------
Total stockholders' equity................ 79,266
------------ ------------- ------------
Total capitalization .................... $2,254,623 $ $
============ ============= ============
</TABLE>
- ------------
(a) Excludes $250 million of subordinated vehicle financing due to an
affiliate of HFS.
(b) Excludes an aggregate of shares of Common Stock reserved for
issuance under the Stock Option Plan. See "Management -- Stock Option
Plan."
19
<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 three month periods ended March 31, 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 three month periods ended March 31, 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 three months ended March 31, 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 three months
ended March 31, 1997 and related notes thereto included elsewhere in this
Prospectus.
20
<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
========== ========== ========== ========== ================
Supplemental earnings per share(d) ..............
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
Stockholders' 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............................................. 609 632 693 556 550
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)
ACQUISITION) YEAR ENDED THREE MONTHS THREE MONTHS
TO DECEMBER 31, ENDED ENDED
DECEMBER 31, 1996 1996(B) MARCH 31, 1996 MARCH 31, 1997
------------------- ------------------ -------------- --------------
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenue.......................................... $ 362,844 $1,867,517 $ 418,118 $ 456,014
Costs and expenses:
Direct operating................................ 167,682 818,432 189,062 198,286
Vehicle depreciation, net ...................... 66,790 342,657 81,804 90,368
Vehicle lease charges........................... 22,658 122,976 28,646 30,241
Selling, general and administrative(c) ......... 68,215 351,395 79,820 94,913
Interest, net................................... 34,212 155,189 36,062 34,247
Amortization of cost in excess of net assets
acquired....................................... 1,026 4,808 1,191 976
------------------- ------------------ -------------- --------------
Income before provision for income taxes ........ 2,261 72,060 1,533 6,983
Provision for income taxes....................... 1,040 32,238 685 3,610
------------------- ------------------ -------------- --------------
Net income ...................................... $ 1,221 $ 39,822 $ 848 $ 3,373
=================== ================== ============== ==============
Supplemental earnings per share(d) .............. $ $
================== ==============
STATEMENTS OF FINANCIAL POSITION DATA:
Vehicles, net.................................... $2,243,492 $2,243,492 $2,111,016 $2,159,684
Total assets..................................... 3,131,357 3,131,357 2,804,159 3,008,858
Debt............................................. 2,295,474 2,295,474 1,107,685 2,175,357
Vehicle financing notes--due to affiliates ..... 247,500 247,500 1,192,500 250,000
Stockholders' equity............................. 76,540 76,540 690,920 79,266
Total liabilities and stockholders' equity ...... $3,131,357 $3,131,357 $2,804,159 $3,008,858
SELECTED OPERATING DATA:
Number of vehicle rental locations at period
end............................................. 546 546 548 540
Peak number of vehicles during period............ 177,839 196,077 164,005 175,965
Average number of vehicles during period ........ 172,461 174,226 156,760 170,845
Number of rental transactions during period
(in thousands) ................................. 2,534 12,806 2,898 3,069
Average revenue per rental transaction during
period ......................................... $ 143 $ 146 $ 144 $ 149
</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 three months ended March 31, 1997 include
charges from HFS. See Note 3 to the Audited Consolidated Financial
Statements.
(d) The supplemental earnings per share amount has been computed by
adjusting net income for the effects of the elimination of interest
expense relating to the repayment of approximately $ million of
indebtedness at December 31, 1996 and March 31, 1997, and dividing by
shares outstanding prior to the Offerings and the Common Stock
assumed to be issued from the Offerings to generate net proceeds
sufficient to repay the indebtedness.
21
<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 Company's operations. The Acquisition was accounted for as
a purchase. In connection with the Offerings, the Franchisor will enter into
a long-term 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, will enter into a long-term
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, automotive fuel 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 Company's predecessors ("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. This discussion should be read in conjunction
with the Audited Consolidated Financial Statements and the notes thereto
included elsewhere in this Prospectus.
22
<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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- -----------------
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 45.2 43.5
Vehicle depreciation, net and
lease charges ............... 21.9 25.4 25.0 26.4 26.5
Selling, general and
administrative .............. 17.9 16.7 18.8 19.1 20.8
Interest, net ................ 9.1 9.0 8.3 8.6 7.5
Amortization of cost in
excess of net assets
acquired .................... 0.3 0.3 0.3 0.3 0.2
-------- -------- ---------- -------- --------
96.3 96.3 96.2 99.6 98.5
-------- -------- ---------- -------- --------
Income before provision for
income taxes ................. 3.7 3.7 3.8 0.4 1.5
Provision for income taxes ... 2.1 2.1 1.7 0.2 0.8
-------- -------- ---------- -------- --------
Net income .................... 1.6% 1.6% 2.1% 0.2% 0.7%
======== ======== ========== ======== ========
</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.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Revenue
Revenue for the three months ended March 31, 1997 increased 9.1%, from
$418.1 million to $456.0 million, over the corresponding period in 1996,
reflecting approximately 6% and 3% increases in the number of rental
transactions and the revenue per rental transaction, respectively.
Costs and Expenses
Total costs and expenses for the three months ended March 31, 1997
increased 7.8%, from $416.6 million to $449.0 million, over the corresponding
period in 1996. The increase was consistent with increased rental activity.
Direct operating expenses for the three months ended March 31, 1997 increased
4.9%, from $189.1 million to $198.3 million, over the corresponding 1996
period. As a percent of revenue, however, direct operating expenses for the
three months ended March 31, 1997 declined to 43.5% from 45.2% for the
corresponding period in 1996. Operating efficiencies were derived primarily
from a decline in wages and benefits as a percent of revenue as well as a
decline in field administrative and facility costs.
Vehicle depreciation and lease charges for the three months ended March
31, 1997 increased 9.2%, from $110.5 million to $120.6 million, over the
corresponding period in 1996. This increase was primarily a result of a 9.0%
increase in the number of vehicles required to service higher rental day
activity, as well as higher monthly costs per vehicle, partially offset by
improved results on vehicle disposition.
23
<PAGE>
Selling, general and administrative expenses for the three months ended
March 31, 1997 increased 18.9%, from $79.8 million to $94.9 million, over the
corresponding period in 1996. This increase reflects fees of $19.6 million
paid to HFS in the 1997 period, which were partially offset by lower
reservations 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 three months ended March 31, 1997 decreased
5.0%, from $36.1 million to $34.2 million, from the corresponding period in
1996, due primarily to (i) lower average interest rates and (ii) $3.5 million
of interest income earned on a $194.1 million note receivable from a
subsidiary of HFS.
The provision for income taxes for the three months ended March 31, 1997
increased to $3.6 million from $0.7 million for the corresponding period in
1996. The effective tax rate for the three months ended March 31, 1997 was
51.7% as compared to 44.7% for the 1996 period. The increase in the tax
provision was primarily due to higher income before provision for income
taxes and an increase in the tax effect of foreign operations. The tax effect
of foreign operations include 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 tax 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 resulting from improved claims
experience, as well as lower facility costs, offset in part by higher
maintenance and damage costs. 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 25.0% 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,
partially offset by an improvement in the monthly cost per vehicle due to
extending the average vehicle holding period. In addition, the net proceeds
received in excess of book value upon the disposition of used vehicles
improved by $17.0 million in 1996 over 1995. This was primarily due to
favorable market conditions for the sale of certain model vehicles.
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
24
<PAGE>
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 higher
costs for various marketing programs implemented to stimulate rental
activity, partially offset by lower advertising expenditures and a 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 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.
25
<PAGE>
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 the foreseeable future.
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.
Historically, the Company has financed its fleet purchases from multiple
sources, primarily consisting of (i) revolving credit facilities secured by
fleet assets under a vehicle trust financing structure, (ii) off-balance
sheet issuances of asset back commercial paper (the "AESOP Program"), (iii)
senior and subordinated indebtedness from automobile manufacturer finance
affiliates, and (iv) capitalized leases and operating leases with various
finance companies. In October 1996, in connection with the Acquisition, the
Company's vehicle trust financing programs were consolidated under a single
$2.5 billion revolving credit facility and $267.0 million of credit
facilities from automobile manufacturer finance affiliates. The amount of the
borrowing capacity under the AESOP Program was expanded to $650.0 million
from $500.0 million in connection with the Acquisition. Both the revolving
credit facility and the AESOP Program financings expire on October 17, 1997.
As of March 31, 1997, the Company had outstanding borrowings of $1.86 billion
under the revolving credit facility and $185.0 million pursuant to loans from
vehicle manufacturers. In addition, as of March 31, 1997, $490.0 million was
outstanding under the AESOP Program.
The Company is in the process of refinancing its revolving credit facility
and the AESOP Program indebtedness with a consolidated fleet financing
program that will provide for up to $3.5 billion in financing for vehicles
covered by Repurchase Programs, as well as up to 25% of the facility
available for vehicles not covered by Repurchase Programs. The new fleet
program will provide for the issuance of up to $2.0 billion of asset backed
variable funding notes (the "Commercial Paper Notes") and up to $1.5 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 expected to be rated A-1 by Standard & Poor's
Ratings Group and P-1 by Moody's Investors Services, Inc. The Company also
will maintain (i) revolving credit facilities in a maximum aggregate
principal amount of $250.0 million to finance a portion of the acquisition
cost of fleet vehicles; (ii) a letter of credit facility in a maximum
aggregate amount of $245.0 million to provide credit support for commercial
paper issued by, and loans made to, an indirect wholly owned special purpose
subsidiary of the Company; and (iii) a revolving credit facility to the
special purpose subsidiary in a maximum principal amount of $1.8 billion to
provide liquidity back-up for the Commercial Paper Notes.
ARACS will enter into a new revolving credit agreement which is expected
to provide committed bank credit facilities totaling $125.0 million,
including up to $75.0 million which will be available for the issuance of
standby letters of credit. This revolving credit agreement is expected to
expire on December 31, 2000. The Company will use borrowings under the
facility to finance its working capital needs. Borrowings under the credit
agreement will be secured by substantially all of the tangible and intangible
assets of the Company including its intellectual property, its rights under
the Master Franchise Agreement and all of the capital stock of the Company's
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. See "Description of Certain Indebtedness -- New Working Capital
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 March 31, 1997, the total debt for the Company's international
operations was $113.2 million, of which $88.8 million was short term
(original maturity of one year) and $24.4 million was long term.
26
<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.
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. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129") and SFAS No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 129 and 128 specify
guidelines as to the method of computation as well as presentation and
disclosure requirements for earnings per share ("EPS"). The objective of
these statements 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. These
statements are effective for fiscal years ending after December 15, 1997 and
earlier application is not permitted. The Company does not expect that the
adoption of SFAS No. 129 and 128 will have a material effect on the Company's
consolidated financial statements.
27
<PAGE>
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 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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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 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 540 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.
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 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. 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 locations operated by 75
other Avis System franchisees, of whom five 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.
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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.
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.
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
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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 March 31, 1997, the Company operated 408
vehicle rental facilities at airport, near-airport and downtown locations
throughout the United States. During 1996, approximately 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 233 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 $242.0 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;
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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;
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
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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 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 82% of new
vehicle purchases were comprised of GM vehicles, 13% of Chrysler vehicles and
5% 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.
Most of the Company's vehicles in the United States are purchased, owned
and sold by a grantor trust created by the Company of which the Company is
the beneficiary. All decisions regarding the trust's purchases and sales of
vehicles are made by the Company, and the trust is combined with the Company
for both financial and tax accounting. The existence of the trust has no
effect on the Company's control of the vehicles in its fleet. However, the
Company believes the existence of the trust has been useful in obtaining
financing secured by its vehicles. The Company is currently negotiating a new
financing structure to finance future fleet purchases. For a description of
the new financing structure, see "Management's Discussion and Analysis of
Financial Condition -- Liquidity and Capital Resources."
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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
scheduled to be 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 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.
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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. 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
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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 to Enterprise). 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.
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 a major national underwriter, 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 major national insurers.
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
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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 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 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 to 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. 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,
37
<PAGE>
unless it has obtained prior approval of the Colorado Insurance Commissioner
for such acquisition. Any purchaser of 10% or more of the outstanding Common
Stock of the Company 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.
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 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 20% of the Company's
employees are represented by various unions under contracts expiring at
various dates. No 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.
38
<PAGE>
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
- ------------------- ----- ----------------------------------------------------------
<S> <C> <C>
R. Craig Hoenshell 53 Chairman of the Board, Chief Executive Officer and
Director
F. Robert Salerno . 46 President, Chief Operating Officer and Director
Kevin M. Sheehan .. 43 Executive Vice President and Chief Financial Officer
John H. Carley ..... 55 Executive Vice President and General Counsel
Kevin P. Carey ..... 48 Senior Vice President, Human Resources
Gerard J. Kennell . 52 Vice President and Treasurer
Timothy M. Shanley 48 Vice President and Controller
John Forsythe ...... 51 Vice President--Operations U.S. Rent A Car
Michael P. Collins 50 Vice President--International
Stephen P. Holmes . 40 Director
Michael P. Monaco . 49 Director
</TABLE>
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 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 directors who will be officers of the Company, directors
who will be officers of HFS and two 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.
MR. HOENSHELL has been Chairman and Chief Executive Officer of the Company
and ARACS since March 1997. 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
39
<PAGE>
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. and some of its affiliated companies
for ten years.
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).
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.
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.
40
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of the compensation paid by the
Company during fiscal year 1996 to the Chief Executive Officer and certain
other executive officers of the Company.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ---------------------
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION(3)
- ---------------------------- ------ ---------- ---------- --------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Joseph V. Vittoria(4) ....... 1996 $550,000 $251,646 $23,000 450,000 $ 44,370
Chairman & CEO
F. Robert Salerno ........... 1996 $239,000 $103,825 $ 7,750 200,000 $ 4,584
President and
Chief Operating Officer
Robert Cardillo ............. 1996 $171,461 $ 53,896 -- 30,000 $ 3,120
Vice President,
Worldwide Marketing
John Forsythe ............... 1996 $170,154 $ 56,430 $ 7,750 60,000 $ 5,225
Vice President,
Operations
Michael P. Collins .......... 1996 $166,615 $ 53,483 -- 40,000 $ 4,234
Vice President,
International
James E. Collins ............ 1996 $235,923 $ 79,477 $ 7,250 50,000 $1,339,148(6)
Executive Vice President(5)
Lawrence Ferezy ............. 1996 $217,211 $ 76,021 $ 7,250 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, some of
which were cancelled prior to the end of the fiscal year. See "Option
Grants During Fiscal 1996."
(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.
41
<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>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(2)
- -------------------------------------------------------------------------------- ---------------------------
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 5% 10%
- ---------------------- ------------ ---------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph V. Vittoria(4) 450,000 4% $76.45 10/17/2006 $21,636,000 $54,828,000
F. Robert Salerno .... 150,000 2% $76.45 10/17/2006 $ 7,212,000 $18,276,000
50,000 $57.25 12/17/2006 $ 1,800,000 $ 4,561,500
Robert Cardillo ....... 30,000 * $76.45 10/17/2006 $ 1,442,400 $ 3,655,200
John Forsythe ......... 60,000 * $76.45 10/17/2006 $ 2,884,800 $ 7,310,400
Michael P. Collins ... 40,000 * $76.45 10/17/2006 $ 1,923,200 $ 4,873,600
James E. Collins(4) .. 50,000 * $76.45 10/17/2006 -- --
Lawrence Ferezy(4) ... 75,000 * $76.45 10/17/2006 -- --
</TABLE>
- ------------
* Represents less than 1% of all options to acquire HFS common stock
granted within the last fiscal year.
(1) Options shown in the table are options to acquire HFS common stock.
(2) The amounts shown in these two columns represent the potential
realizable values using the options granted and the exercise price. The
assumed rates of stock price appreciation are set by the Securities and
Exchange Commission's executive compensation disclosure rules and are
not intended to forecast the future appreciation of HFS common stock.
(3) Figures represent the percentage of all options to acquire HFS common
stock granted within the last fiscal year.
(4) Options granted to Messrs. Vittoria, Ferezy and J. Collins were
cancelled in connection with the termination of their employment.
42
<PAGE>
CANCELLATION OF SARS
AND EQUIVALENT SHARES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NAME NUMBER OF SECURITIES VALUE REALIZED ($)
- ------------------- -------------------- --------------------
<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 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 250,000
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 250,000 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
43
<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. Cardillo and Mr. M. Collins have employment agreements with a
predecessor of the Company which expire on September 20, 1997. Mr. Cardillo
and Mr. M. Collins receive an annual base salary of $175,500 and $172,000,
respectively. If the employment of either of these executives 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 age 25 and one year of service. 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.
44
<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
600,000 125,319 167,091 208,864 250,637 292,410
800,000 168,069 224,091 280,114 336,137 392,160
1,000,000 210,819 281,091 351,364 421,637 491,910
</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 70-1/2 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
Upon consummation of the Offerings, the Company intends to adopt the Stock
Option Plan pursuant to which key employees, directors and consultants will
be eligible to receive awards of stock options and similar incentive awards.
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 25% of the outstanding shares of Common Stock (or
% 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 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,
45
<PAGE>
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.
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 25% of the
then outstanding shares of Common Stock of the Company ( % if the
over-allotment options granted to the U.S. Underwriters and the Managers are
exercised in full).
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
On or prior to the consummation of the Offerings, the Company and the
Franchisor will enter into the 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
discrimination in the rental of vehicles which were 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 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
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 discrimination in
the rental of vehicles which was alleged to have occured prior to the
consummation of the Offerings. The foregoing cross-indemnities do not apply
to indemnification for tax claims and liabilities, which are addressed in the
Tax Sharing Agreement described below. 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
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Company and its subsidiaries 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 at specific locations 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
revenues. In addition, the Company has agreed to pay a supplemental royalty
of 1.0% of gross revenues 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"). 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.
The Company has the exclusive right to open Avis franchises in the largest
25 standard metropolitan statistical areas in the United States. The Company
has the non-exclusive right to open new franchises in any market not
currently served by another Avis System franchisee in the United States,
Canada, Puerto Rico, the U.S. Virgin Islands, Argentina, Australia and New
Zealand. 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 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 a specified geographic proximity
to the Company's locations.
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 discloses the
confidential information of the Franchisor in violation of the Master License
Agreement, (iv) the Company challenges Wizard Co.'s rights to the licensed
proprietary marks (v) upon a Change of Control Event (as defined) or (vi) the
Company receives three or more notices of termination for Curable Defaults
(as defined) which are 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, (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 compliance with the standards prescribed by the Franchisor
in the Master License Agreement, in the Operating Manual or otherwise in
writing at % of its locations or (v) with respect to any individual
location, fails to maintain compliance with the standards or procedures
prescribed by the Franchisor (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.
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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 % 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 % (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 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 HFS 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 to be entered into in connection with the Offerings. The
Computer Services Agreement gives the Company 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. 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
will receive the exclusive right to use any such software or systems from the
date of implementation thereof.
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RESERVATION SERVICES AGREEMENT
On or prior to the consummation of the Offerings, the Company will enter
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 currently being provided to the Company. The Company will be
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 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 shall be 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.
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 $185,755
in fees payable to HFS for the period ended March 31, 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 Aquisition, the Franchisor assigned a note, dated
October 1996, made by Wizard Co., Inc. and payable to the Franchisor in the
principal amount of $194,100,000 (the "Wizard Note") to ARACS. The Wizard
Note matures on October 1, 2006 and bears interest at a rate per annum equal
to 7.13%. The Note is payable annually on each anniversary of the Wizard Note
commencing October 1, 1997. Wizard Co., Inc. will repay the principal amount
of the Wizard Note prior to the consummation of the Offerings.
Vehicle Financing Notes
At December 31, 1996 and March 31, 1997, the Company has loans outstanding
from the Franchisor of $247.5 million and $250.0 million, respectively, which
provide subordinated vehicle financing. The loans were made under terms of
the vehicle trust financing program which terminates on October 29, 2003. See
Note 3 to the Audited Consolidated Financial Statements.
Other
The Company has a net receivable due from HFS and its affiliated companies
at December 31, 1996 and March 31, 1997 of $112.3 million and $100.3 million,
respectively. These amounts primarily represent
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the 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 SHARING AGREEMENT
Prior to the consummation of the Offerings, the Company, the Franchisor
and HFS will enter into a Tax Sharing Agreement.
LEASE AGREEMENTS
The Company and WizCom currently share three facilities, which are located
in Virginia Beach, Virginia, Tulsa, Oklahoma and Garden City, New York. The
Virginia Beach property is owned by WizCom. In connection with the
Separation, the Company and WizCom will enter lease and sublease agreements,
as appropriate.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have shares of
Common Stock issued and outstanding ( shares if the overallotment 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 purchased by an "affiliate" of the Company
(as that term is defined in Rule 144 adopted under the Securities Act ("Rule
144")), which will 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."
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 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.
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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 exceptions, not to sell or otherwise dispose
of any shares of Common Stock for a period of 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
Upon consummation of the Offerings, the Company will amend its Certificate
of Incorporation to change its authorized capital stock to shares of
Common Stock, $.01 par value per share, of which shares will be issued and
outstanding, and shares of preferred stock, par value $.01 per share (the
"Preferred Stock"), of which none will be issued and to effect a to 1
stock split of its current outstanding common stock. 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 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
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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
Application will be made to list the Common Stock on the NYSE under the
symbol AVI.
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
NEW WORKING CAPITAL FACILITY
Prior to the consummation of the Offerings, ARACS will enter into a $125.0
million secured credit facility (the "New Working Capital Facility") which
will be guaranteed by the Company to replace the Company's current credit
facility. The following is a summary of the material terms and conditions of
the New Working Capital Facility.
The New Credit Facility will be available on a revolving basis until
December 31, 2000 and may be used to finance the working capital needs of
ARACS in the ordinary course of business. The New Working Capital Facility
will provide that up to $75.0 million will be 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.
Interest will accrue on borrowings outstanding under the New Working
Capital Facility, at a rate equal to, at the option of the Company, (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 (the "Prime Rate"), (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 the Company) are offered in
the interbank eurodollar market and (ii) an applicable margin.
The New Working Capital Facility will be 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 (the
"Subject Collateral")), except for those assets which are subject to a
negative pledge or as to which the agents for the New Working Capital
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 Working Capital Facility will contain 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 Working Capital Facility will also contain 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, consisting of (i) certain maximum leverage ratios and (ii) certain
minimum interest coverage ratios.
The New Working Credit Facility will include 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 covenants, to a period to cure such violations);
cross-default; default under franchise
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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.
FLEET FINANCINGS
For a description of the Company's fleet financings, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
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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 holder that, for United States federal
income tax purposes, is not a "United States person" (a "Non-United States
Holder"). For purposes of this discussion, a "United States person" means a
citizen or resident of the United States, 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, or an estate or trust whose
income is includible in gross income for United States federal income tax
purposes regardless of its source. 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 tax law now in effect, which is subject
to change, possibly retroactively.
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% (or a
lower rate prescribed by an applicable 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 earnings and profits effectively connected). 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.
GAIN ON DISPOSITION
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, (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) the Company
is or becomes a "United States real property holding corporation" for United
States federal income tax purposes and certain other requirements are met.
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).
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.
55
<PAGE>
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company or its designated paying agent (the "payor") must report
annually to the Internal Revenue Service (the "Service") and to each
Non-United States Holder the amount of dividends paid to, and the tax, if
any, withheld with respect to, such holder, regardless of whether or not any
tax was actually withheld. That information may also be made available to the
tax authorities of the country in which the Non-United States Holder resides.
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally
not apply to dividends paid on the Common Stock to a Non-United States Holder
at an address outside the United States. Dividends paid to a Non-United
States Holder at an address within the United States may be subject to backup
withholding imposed at a rate of 1% if the Non-United States Holder fails to
establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and other information to the payor.
Payments by a United States office of a broker of the proceeds of the sale
of the Common Stock is subject both to backup withholding at a rate of 31%
and information reporting unless the holder certifies its Non-United States
Holder status under penalties of perjury or otherwise establishes an
exemption. Information reporting requirements (but not backup withholding)
will also apply to the payment of proceeds of sales of the Common Stock by
foreign offices of United States brokers, or foreign brokers with certain
types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise
establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules will be refunded or credited against the
Non-United States Holder's United States federal income tax liability,
provided that required information is furnished to the Service.
These backup withholding and information reporting rules are under review
by the Treasury Department, and their application to the Common Stock could
be changed by future regulations.
56
<PAGE>
UNDERWRITING
The underwriters of the U.S. Offering named below (the "U.S.
Underwriters"), for whom Bear, Stearns & Co. Inc. is acting as
representative, 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. ....
---------------
Total...................... $
===============
</TABLE>
The Managers of the concurrent International Offering named below (the
"Managers"), for whom Bear, Stearns International Limited is acting as lead
Manager, 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 ....
-----------------
Total................................. $
=================
</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.
The Company has granted the U.S. Underwriters and the Managers options to
purchase in the aggregate up to 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,
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
57
<PAGE>
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.
The Company and its executive officers, directors and HFS have agreed
that, subject to certain limited exceptions, for a period of 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 Company's
Common Stock. Consequently, the initial public offering price will be
determined through negotiations among the Company, the representatives of the
U.S. Underwriters and the Manager. 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.
Bear, Stearns & Co. Inc. has from time to time provided, and may continue
to provide, investment banking services to the Company and certain of its
affiliates.
58
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Common Stock are effected. Accordingly, any resale
of the Common Stock in Canada must be made in accordance with applicable
securities laws, which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek
legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASER
Confirmations of the acceptance of offers to purchase shares of Common
Stock will be sent to Canadian residents to whom this Prospectus has been
sent and who have not withdrawn their offers to purchase prior to the
issuance of such confirmation. Each purchaser of Common Stock in Canada who
receives a purchase confirmation will be deemed to represent to the Company,
and the dealer from whom such purchase confirmation is received that (i) such
purchaser is entitled under applicable Canadian provincial securities laws to
purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, such purchaser is
purchasing as principal and not as agent, (iii) such purchaser has reviewed
the text above under "Notice to Canadian Residents -- Resale Restrictions",
(iv) if such purchaser is located in Manitoba, such purchaser is not an
individual and is purchasing for investment only and not with a view to
resale or distribution, (v) if such purchaser is located in Ontario, a dealer
registered as an international dealer in Ontario may sell shares of Common
Stock to such purchaser, and (vi) if such purchaser is located in Quebec,
such purchaser is a "sophisticated purchaser" within the meaning of Section
43 of the Securities Act (Quebec).
TAXATION
Canadian residents should consult their own legal and tax advisers with
respect to the tax consequences of an investment in the Common Stock in their
particular circumstances and with respect to the eligibility of the Common
Stock for investment by the purchaser under relevant Canadian legislation.
ENFORCEMENT OF LEGAL RIGHTS
The Company is organized under the laws of the State of Delaware. All or
substantially all of the directors and officers of the Company reside outside
Canada and substantially all of the assets of the Company are located outside
Canada. As a result, it may not be possible for Canadian investors to effect
service of process within Canada upon the Company or to enforce against the
Company in Canada judgements obtained in Canadian courts that are predicated
upon the contractual rights of action, if any, granted to certain purchasers
by the Company. It may also not be possible for investors to enforce against
the Company in the United States judgements obtained in Canadian courts.
Furthermore, although the requirement for an issuer to provide to certain
purchasers the contractual right of action for damages and/or rescission
described below is consistent with contractual considerations associated with
a private placement which constitutes a primary distribution of the issuer's
securities by the issuer, an investor may not be able to enforce a
contractual right of action for rescission against the issuer where the offer
or sale of the issuer's securities is a secondary distribution being made by
a third party.
NOTICE TO ONTARIO RESIDENTS
The Common Stock offered hereby is being issued by a foreign issuer and
Ontario purchasers will not receive the contractual right of action
prescribed by Section 32 of the Regulation under the Securities Act
(Ontario).
59
<PAGE>
As a result, Ontario purchasers must rely on other remedies that may be
available, including common law rights of action for damages or rescission or
rights of action under the civil liability provisions of the U.S. federal
securities laws.
All the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Ontario purchasers to effect service of process within Canada
upon the Company or such persons. All or a substantial portion of the assets
of the Company and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgement against the Company or
such persons in Canada or to enforce a judgement obtained in Canadian courts
against the Company or persons outside of Canada.
NOTICE TO NOVA SCOTIA RESIDENTS
The Securities Act (Nova Scotia) provides that where a Canadian offering
document, together with any amendments thereto, contains an untrue statement
of material fact or omits to state a material fact that is required to be
stated or that is necessary to make a statement not misleading in light of
the circumstances in which it was made (such untrue statement or omission
herein called a "misrepresentation"), a purchaser who was delivered such
offering document and who purchases such securities shall be deemed to have
relied on such misrepresentations if it was a misrepresentation at the time
of purchase and has a right of action for damages against the seller of the
securities or he may elect to exercise the right of recession against the
seller, in which case he shall have no right of action for damages against
the seller, provided that:
(a) The seller will not be liable if the seller proves that the purchaser
purchased the securities with knowledge of the misrepresentation;
(b) In an action for damages, the seller will not be liable for all or
any portion of such damages that the seller proves do not represent the
depreciation in value of the security as a result of the misrepresentation
relied upon;
(c) In no case shall the amount recoverable pursuant to the right of
action exceed the price of which the securities were offered; and
(d) The action for rescission or damage conferred by the Securities Act
(Nova Scotia) is in addition to and without derogation from any other
rights the purchaser may have at law;
but no action to enforce these rights may be commenced more than 120 days
after the date on which payment is made for the securities or after the date
on which the initial payment for the securities is made where a payment
subsequent to the initial payment are made pursuant to a contractual
commitment assumed prior to, or concurrently with, the initial payment.
NOTICE TO SASKATCHEWAN RESIDENTS
The Securities Act (Saskatchewan) provides that in the event an offering
memorandum, together with any amendment thereto, or any advertising or sales
literature (as such terms are defined in the Securities Act (Saskatchewan))
used in connection with an offering contains a misrepresentation (as defined
in the Securities Act (Saskatchewan)) that was a misrepresentation at the
time of purchase, purchasers of securities will be deemed to have relied upon
such misrepresentation and will have a statutory right of action pursuant to
the Securities Act (Saskatchewan) for damages against the issuer and the
seller of the securities, or alternatively may elect to exercise a right of
rescission against the issuer or the seller, provided that:
(a) no persons or company is liable where the person or company proves
that the purchaser purchased the securities with knowledge of the
misrepresentation;
(b) no person or company, other than the issuer or selling security
holder, is liable unless that person or company: (i) failed to conduct a
reasonable investigation sufficient to provide reasonable grounds for a
belief that there had been no misrepresentation; or (ii) believed there
had been a misrepresentation; and
60
<PAGE>
(c) in an action for damages, the defendant is not be liable for all or
any portion of such damages that it proves does not represent the
depreciation in value of the securities as a result of the
misrepresentation relied upon,
but no action to enforce these rights may be commenced:
(a) in the case of rescission, more than 180 days after the date of the
transaction that gave rise to the cause of action; and
(b) in the case of any other action, other than an action for rescission,
more than the earlier of,
(i) 180 days after the purchaser first had knowledge of the facts
giving rise to the cause of action, or
(ii) three years after the date of the transaction that gave rise to
the cause of action.
LANGUAGE OF DOCUMENTS
All Canadian purchasers of shares of Common Stock acknowledge that all
documents evidencing or relating in any way to the sale of such shares will
be drawn in the English language only. Tous les acheteurs canadiens d'actions
communes de reconnaisant par les presentes que c'est a leur volonte expresse
que tous les documents faisant foi ou se rapportant de quelque maniere a la
vente des valeurs mobilieres soient rediges en anglais seulement.
61
<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 periods 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.
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.
62
<PAGE>
AVIS RENT A CAR, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE #
----------
<S> <C>
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Statement of Financial Position at March 31, 1997 .......... F-2
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1997........................................................... F-3
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1997........................................................... F-4
Notes to the Unaudited Condensed Consolidated Financial Statements ............... F-5
Audited Consolidated Financial Statements:
Independent Auditors' Report....................................................... F-6
Consolidated Statements of Financial Position at December 31, 1995 and 1996 ....... F-7
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-8
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-9
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-10
Notes to the Audited Consolidated Financial Statements............................. F-11
Unaudited Pro Forma Consolidated Financial Statements:
Pro Forma Consolidated Statement of Financial Position at
March 31, 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 three months ended March
31, 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>
MARCH 31,
1997
------------
<S> <C>
ASSETS
Cash and cash equivalents........................................ $ 88,683
Accounts receivable, net......................................... 263,796
Due from affiliates, net......................................... 50,726
Prepaid expenses................................................. 32,031
Vehicles, net.................................................... 2,159,684
Property and equipment, net...................................... 99,734
Other assets..................................................... 11,676
Deferred income tax assets....................................... 106,609
Cost in excess of net assets acquired, net....................... 195,919
------------
Total assets................................................... $3,008,858
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable................................................. $ 211,155
Accrued liabilities.............................................. 283,360
Current income tax liabilities................................... 5,547
Deferred income tax liabilities.................................. 35,692
Public liability, property damage and other insurance
liabilities..................................................... 218,481
Debt............................................................. 2,175,357
------------
Total liabilities.............................................. 2,929,592
------------
Commitments and contingencies
Stockholder's equity:
Common stock.................................................... --
Additional paid-in capital...................................... 75,000
Retained earnings............................................... 4,557
Foreign currency translation adjustment......................... (291)
------------
Total stockholder's equity..................................... 79,266
------------
Total liabilities and stockholder's equity..................... $3,008,858
============
</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 THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1996 1997
--------------- ---------------
<S> <C> <C>
Revenue ............................................... $418,118 $456,014
--------------- ---------------
Cost and expenses:
Direct operating...................................... 189,062 198,286
Vehicle depreciation, net............................. 81,804 90,368
Vehicle lease charges................................. 28,646 30,241
Selling, general and administrative................... 79,820 94,913
Interest, net.......................................... 36,062 34,247
Amortization of cost in excess of net assets acquired 1,191 976
--------------- ---------------
416,585 449,031
--------------- ---------------
Income before provision for income taxes............... 1,533 6,983
Provision for income taxes............................. 685 3,610
--------------- ---------------
Net income ............................................ $ 848 $ 3,373
=============== ===============
</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 THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 848 $ 3,373
Adjustments to reconcile net income to net cash provided by
operating activities:
Vehicle depreciation.............................................. 77,115 92,549
Depreciation and amortization of property and equipment .......... 3,838 2,770
Amortization of cost in excess of net assets acquired ............ 1,191 976
Amortization of debt issuance costs............................... 837
Deferred income tax provision..................................... 493 1,336
Undistributed earnings of associated companies, net............... (93) 3
Provision for losses on accounts receivable....................... 413 336
Provision for public liability, property damage and other
insurance liabilities............................................ 22,677 21,787
Change in operating assets and liabilities:
(Increase) in accounts receivable................................ (19,745) (24,011)
(Increase) decrease in prepaid expenses.......................... (1,902) 8,040
Decrease in other assets......................................... 4,786 2,800
(Decrease) increase in accounts payable.......................... (4,394) 31,516
Increase (decrease) in accrued liabilities....................... 17,373 (44,643)
(Decrease) in public liability, property damage and other
insurance liabilities........................................... (17,739) (17,062)
-------------- --------------
Net cash provided by operating activities........................ 85,698 79,770
-------------- --------------
Cash flows from investing activities:
Payments for vehicle additions.................................... (504,953) (570,281)
Vehicle deletions................................................. 449,995 635,020
Payments for additions to property and equipment.................. (11,746) (4,833)
Sales of property and equipment................................... 362 1,082
-------------- --------------
Net cash (used in) provided by investing activities ............. (66,342) 60,988
-------------- --------------
Cash flows from financing activities:
Changes in debt:
Proceeds......................................................... 94,424 73,143
Repayments....................................................... (87,604) (192,983)
-------------- --------------
Net increase (decrease) in debt.................................. 6,820 (119,840)
Deferred debt issuance costs...................................... (3,028)
(Payments on) proceeds from intercompany loans.................... (6,909) 16,953
-------------- --------------
Net cash used in financing activities............................ (3,117) (102,887)
-------------- --------------
Effect of exchange rate changes on cash............................ 171 (74)
-------------- --------------
Net increase in cash and cash equivalents.......................... 16,410 37,797
Cash and cash equivalents at beginning of period................... 39,081 50,886
-------------- --------------
Cash and cash equivalents at end of period......................... $ 55,491 $ 88,683
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.......................................................... $ 26,436 $ 41,237
============== ==============
Income taxes...................................................... $ 641 $ 1,838
============== ==============
</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 March 31, 1996 and 1997, and the results of operations
and cash flows for the three 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 March 31, 1997 is not guaranteed by HFS and is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
VEHICLE TRUST FINANCING
- --------------------------------------------------------------
Short-term vehicle trust financing revolving credit facilities $1,856,053
------------
Total current portion of vehicle trust financing ........... 1,856,053
------------
Vehicle manufacturer's floating rate notes due September 1998
($53,797 senior at 8.5% and $13,203 subordinated at 10.0%) .. 67,000
Vehicle manufacturer's floating rate notes due October 2001
($73,989 senior at 7.17% and $44,011 subordinated at 8.92%) . 118,000
------------
Total long-term portion of vehicle trust financing ......... 185,000
------------
OTHER FINANCING
- --------------------------------------------------------------
Short-term notes--foreign ..................................... 88,766
7.50% capital lease terminating November 1997 and current
portion of long-term debt .................................... 18,442
------------
Total current debt .......................................... 107,208
------------
Other domestic................................................. 2,665
Debt of foreign subsidiaries:
Floating rate notes due August 1998 .......................... 24,431
------------
Total long-term debt ........................................ 27,096
------------
$2,175,357
============
</TABLE>
F-5
<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
F-6
<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-7
<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-8
<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-9
<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-10
<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. (formerly Rental Car System Holdings, Inc.) and subsidiaries
(including the carved out corporate operations of HFS Car Rental, Inc.
(formerly known as, and hereinafter referred to as, Avis, 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. 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. The estimated fair value of the Company was $75 million at the Date
of Acquisition. This amount 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.
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>
F-11
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
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. 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.
F-12
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
ENVIRONMENTAL COSTS
The Company's operations include the storage and dispensing of gasoline.
Expenses in connection with the remediation of accidental fuel discharges at
various locations are provided for when it is probable that obligations have
been incurred and amounts can be reasonably estimated. Recoveries from
insurance companies and other reimbursements are generally not significant.
F-13
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<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
F-14
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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. Commencing on the effective date of the IPO, 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 $8.7 million
resulting in a pro forma net loss of $7.5 million.
F-15
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-16
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-17
<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 debt ...................................... 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 debt .................................... 114,424 33,729
------------ ------------
$1,109,747 $2,295,474
============ ============
</TABLE>
F-18
<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 $510.5 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 $180 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 7.2%, 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-19
<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 $170.9
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-20
<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-21
<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 sharing 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-22
<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-23
<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-24
<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-25
<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
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>
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-26
<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 (DATE OF
DECEMBER 31, JANUARY 1, 1996 ACQUISITION)
------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
------------ ------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Revenue:
United States............... $1,241,330 $1,414,994 $1,303,338 $ 312,194
Australia/New Zealand ..... 93,502 113,579 106,585 31,107
Canada ..................... 59,579 67,748 69,438 13,467
Other foreign operations ... 17,989 19,630 25,312 6,076
------------ ------------ ---------------- -------------------
$1,412,400 $1,615,951 $1,504,673 $ 362,844
============ ============ ================ ===================
Income (loss) before
provision for income taxes:
United States............... $ 29,090 $ 32,391 $ 52,850 $ (2,346)
Australia/New Zealand ..... 15,100 16,302 10,518 4,706
Canada ..................... 7,753 7,679 7,367 (1,752)
Other foreign operations ... 373 4,328 (936) 1,653
------------ ------------ ---------------- -------------------
$ 52,316 $ 60,700 $ 69,799 $ 2,261
============ ============ ================ ===================
Total assets at end of year:
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-27
<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.
F-28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1996 and for the three month period ended March 31, 1997
give effect to the following transactions as if they had occurred on January
1 of the earliest period presented: (i) settlement of a net intercompany
receivable with HFS and its affiliated companies and (ii) adjustments to
reflect a 4% royalty fee pursuant to the Master License Agreement with HFS.
The unaudited pro forma consolidated statement of financial position as of
March 31, 1997 gives effect to the application of the proceeds from the
settlement of a net intercompany receivable from HFS and its affiliated
companies.
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 with 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
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ --------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 88,683 $ 88,683
Accounts receivable, net.............................. 263,796 263,796
Due from affiliates, net.............................. 50,726 $(200,425)(1)
250,000 (2)
(100,301)(3)
Prepaid expenses...................................... 32,031 32,031
Vehicles, net......................................... 2,159,684 2,159,684
Property and equipment, net........................... 99,734 99,734
Other assets.......................................... 11,676 20,000 (4) 31,676
Deferred income tax assets............................ 106,609 106,609
Cost in excess of net assets acquired, net............ 195,919 195,919
------------ --------------- --------------
Total assets........................................ $3,008,858 $ (30,726) $2,978,132
============ =============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable...................................... $ 211,155 $ 211,155
Accrued liabilities................................... 283,360 283,360
Current income tax liabilities........................ 5,547 5,547
Deferred income tax liabilities....................... 35,692 35,692
Public liability, property damage and other insurance
liabilities.......................................... 218,481 218,481
Debt.................................................. 2,175,357 $ (30,726)(5) 2,144,631
------------ --------------- --------------
Total liabilities................................... 2,929,592 (30,726) 2,898,866
------------ --------------- --------------
Commitments and contingencies
Stockholder's equity:
Common stock......................................... -- --
Additional paid-in capital........................... 75,000 75,000
Retained earnings.................................... 4,557 4,557
Foreign currency translation adjustment.............. (291) (291)
------------ --------------- --------------
Total stockholder's equity.......................... 79,266 79,266
------------ --------------- --------------
Total liabilities and stockholder's equity ......... $3,008,858 $ (30,726) $2,978,132
============ =============== ==============
</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
-----------------------------------------
OCTOBER 17, 1996
PREDECESSOR COMPANIES (DATE OF
JANUARY 1, 1996 ACQUISITION)
TO TO PRO FORMA PRO FORMA
OCTOBER 16, 1996 DECEMBER 31, 1996 SUBTOTAL ADJUSTMENTS CONSOLIDATED
--------------------- ------------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue................. $1,504,673 $362,844 $1,867,517 $1,867,517
--------------------- ------------------- ------------ --------------
Cost and expenses:
Direct operating....... 650,750 167,682 818,432 818,432
Vehicle depreciation .. 275,867 66,790 342,657 342,657
Vehicle lease charges . 100,318 22,658 122,976 122,976
Selling, general and
administrative........ 283,180 68,215 351,395 $ (6,499)(6)
74,701 (7) 419,597
Interest, net.......... 120,977 34,212 155,189 2,865 (8) 139,254
(18,800)(9)
Amortization of cost
in excess of net
assets acquired....... 3,782 1,026 4,808 (3,782)(10)
3,919 (11) 4,945
--------------------- ------------------- ------------ -------------- --------------
1,434,874 360,583 1,795,457 52,404 1,847,861
--------------------- ------------------- ------------ -------------- --------------
Income (loss) before
provision for (benefit
from) income taxes..... 69,799 2,261 72,060 (52,404) 19,656
Provision for (benefit
from) income taxes..... 31,198 1,040 32,238 (18,341)(12) 13,897
--------------------- ------------------- ------------ -------------- --------------
Net income (loss)....... $ 38,601 $ 1,221 $ 39,822 $(34,063) $ 5,759
===================== =================== ============ ============== ==============
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
P-3
<PAGE>
AVIS RENT A CAR, INC.
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ -------------- --------------
<S> <C> <C> <C>
Revenue...................................... $456,014 $456,014
------------ --------------
Cost and expenses:
Direct operating............................ 198,286 198,286
Vehicle depreciation........................ 90,368 90,368
Vehicle lease charges....................... 30,241 30,241
Selling, general and administrative ........ 94,913 $(19,591)(6) 93,562
18,240 (7)
Interest, net............................... 34,247 3,460 (8) 33,107
(4,600)(9)
Amortization of cost in excess of net
assets acquired............................ 976 (976)(10)
1,236 (11) 1,236
------------ -------------- --------------
449,031 (2,231) 446,800
------------ -------------- --------------
Income before provision for income taxes .... 6,983 2,231 9,214
Provision for income taxes................... 3,610 872 (12) 4,482
------------ -------------- --------------
Net income................................... $ 3,373 $ 1,359 $ 4,732
============ ============== ==============
</TABLE>
See accompanying notes to the unaudited pro forma consolidated financial
statements.
P-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) Reflects the proceeds from the settlement of a $194,100,000 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 $6,325,000 at March 31, 1997 is guaranteed by
HFS.
(2) Reflects the repayment of loans from Avis, Inc. which provided
additional subordinated fleet financing at March 31, 1997.
(3) Reflects the settlement of a net non-interest bearing intercompany
receivables at March 31, 1997 with HFS and its affiliated companies.
The net intercompany receivables principally consists 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.
(4) Reflects the payment of deferred financing costs relating to a
planned refinancing transaction, which will be paid from the proceeds
from the settlement of the Wizard Note. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" included elsewhere in this
Prospectus.
(5) Reflects the reduction in borrowings as a result of the application
of the net proceeds realized from the transactions described in Notes
(1) through (4).
(6) Reflects the elimination of management, service and administrative
fees from HFS, which will be replaced by a royalty fee of 4% of
revenue pursuant to the Master License Agreement with HFS.
(7) Reflects the royalty fee of 4% of revenue pursuant to the Master
License Agreement with HFS.
(8) Reflects the elimination of the interest income relating to the
Wizard Note.
(9) Reflects the reduction to interest expense as a result of the
application of the net proceeds realized from the transactions
described in notes (1) through (4):
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Interest expense on subordinated fleet financing
due to Avis, Inc. (weighted average interest
rate of 11.1% and 10.6% for the twelve months
ended December 31, 1996 and the three months
ended March 31, 1997, respectively)............. $15,660 $3,980
Interest expense on vehicle manufacturers
floating rate notes (weighted average interest
rate of 7.7% and 8.3% for the twelve months
ended December 31, 1996 and the three months
ended March 31, 1997, respectively) ............ 3,140 620
----------------- --------------
Total pro forma adjustments...................... $18,800 $4,600
================= ==============
</TABLE>
(10) Reflects the elimination of the amortization of cost in excess of net
assets acquired of the Predecessor Companies.
(11) Reflects the amortization of cost in excess of net assets acquired as
a result of the acquisition of the Company by HFS, as if it had
occurred on January 1 of the earliest period presented. The
unamortized cost in excess of net assets is being amortized over 40
years.
(12) Reflects the income tax effects of the pro forma adjustments
described in Notes (6), (7), (8) and (9), at statutory income tax
rates.
P-5
<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 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 ............................... 10
Special Note Regarding Forward-Looking
Statements ................................ 16
Use of Proceeds ............................ 17
Dividend Policy ............................ 17
Dilution ................................... 18
Capitalization ............................. 19
Selected Financial Data .................... 20
Management's Discussion and Analysis of
Financial Conditions and Results
of Operations ............................. 22
Business ................................... 28
Management ................................. 39
Relationship with HFS ...................... 45
Shares Eligible for Future Sale ............ 50
Description of Capital Stock ............... 51
Description of Certain Indebtedness ....... 53
Certain United States Federal Tax
Consequences to Non-United States Holders 55
Underwriting ............................... 57
Notice to Canadian Residents................ 59
Legal Matters .............................. 62
Experts .................................... 62
Available Information ...................... 62
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 UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[LOGO TO COME]
AVIS RENT A CAR, INC.
COMMON STOCK
PROSPECTUS
BEAR, STEARNS & CO. 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 JUNE 6, 1997
PROSPECTUS
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 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 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 $ and $ 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 25% of the then outstanding shares of the Company's Common
Stock ( % 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.
Application will be made to list the Common Stock on the New York Stock
Exchange under the symbol "AVI."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 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 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.
BEAR, STEARNS INTERNATIONAL LIMITED
, 1997
<PAGE>
[INTERNATIONAL PROSPECTUS -- ALTERNATE PAGES]
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 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 ............................... 10
Special Note Regarding Forward-Looking
Statements ................................ 16
Use of Proceeds ............................ 17
Dividend Policy ............................ 17
Dilution ................................... 18
Capitalization ............................. 19
Selected Financial Data .................... 20
Management's Discussion and Analysis of
Financial Conditions and Results
of Operations ............................. 22
Business ................................... 28
Management ................................. 39
Relationship with HFS ...................... 45
Shares Eligible for Future Sale ............ 50
Description of Capital Stock ............... 51
Description of Certain Indebtedness ....... 53
Certain United States Federal Tax
Consequences to Non-United States Holders 55
Underwriting ............................... 57
Notice to Canadian Residents ............... 59
Legal Matters .............................. 62
Experts .................................... 62
Available Information ...................... 62
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 UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[LOGO TO COME]
AVIS RENT A CAR, INC.
COMMON STOCK
PROSPECTUS
BEAR, STEARNS 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................................................ $75,758
NASD filing and expenses............................ 25,500
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>
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 Third Amendment and Restatement, dated as of September 21, 1987 to an Agreement of
Trust dated as of June 25, 1980, between Avis Rent A Car System, Inc. and Bankers
Trust Company.*
4.3 Master Trust Indenture, dated as of September 21, 1987, between HFS Car Rental, Inc.
and The Connecticut Bank and Trust Company, National Association, as Trustee.*
4.4 Contingent Purchase Agreement, dated as of September 23, 1987, among Bankers Trust
Company as Trustee for Prime Vehicles Trust, certain banks named therein and Irving
Trust Company as Agent for the banks.*
4.5 First Amendment, dated as of August 21, 1989, to Contingent Purchase Agreement, dated
as of September 23, 1987.*
4.6 Second Amendment, dated as of August 21, 1991, to Contingent Purchase Agreement,
dated as of September 23, 1987.*
4.7 Third Amendment, dated as of September 1, 1993, to Contingent Purchase Agreement,
dated as of September 23, 1987.*
4.8 Fourth Amendment, dated as of January 10, 1995, to Contingent Purchase Agreement,
dated as of September 23, 1987.*
II-2
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------
4.9 Amended and Restated Loan Agreement, dated as of September 21, 1987, among Bankers
Trust Company as trustee for Prime Vehicles Trust, General Motors Acceptance
Corporation and Chrysler Credit Corporation.*
4.10 Supplement to Amended and Restated Loan Agreement, dated as of June 26, 1991, between
Bankers Trust Company, as trustee for Prime Vehicles Trust and General Motors
Acceptance Corporation.*
4.11 Fifth Amendment to Amended and Restated Loan Agreement, dated as of May 1, 1996,
among Prime Vehicles Trust, General Motors Acceptance Corporation and Chrysler Credit
Corporation.*
4.12 Guaranty Agreement dated as of September 21, 1987, among Prime Vehicles Trust,
General Motors Acceptance Corporation and Chrysler Credit Corporation.*
4.13 Third Amendment, dated as of May 1, 1996, to the Guaranty Agreement between Prime
Vehicles Trust, General Motors Acceptance Corporation and Chrysler Credit
Corporation, dated as of September 21, 1987.*
4.14 Third Amended and Restated Credit Agreement, dated as of September 1, 1993, among
Bankers Trust Company as Trustee for Prime Vehicles Trust, the banks named therein
and the Bank of New York, as Agent.*
4.15 Amendment No. 1, dated as of January 10, 1995, to the Third Amended and Restated
Credit Agreement among Bankers Trust Company, as Trustee for Prime Vehicles Trust,
the banks named therein and The Bank of New York.*
4.16 Loan Agreement, dated as of September 1, 1995, among Bankers Trust Company as Trustee
for Prime Vehicles Trust, the banks listed therein, the Co-Agents and the Tokai Bank,
Limited, New York Branch, as Agent.*
4.17 Note Purchase Agreement, dated as of December 30, 1992, for $122 million principal
amount of Senior Secured Notes due 1995-1999 of Prime Vehicles Trust.*
4.18 Note Purchase Agreement, dated as of May 6, 1993, for $196.5 million principal amount
of Senior Secured Notes due 1996-2003 of Prime Vehicles Trust.*
4.19 Credit Agreement, dated as of June 7, 1996, among Bankers Trust Company as Trustee
for Prime Vehicles Trust, various banks and Bank of America National Trust and Saving
Association, as Agent.*
4.20 Subordinated Debt Credit Agreement, dated as of October 29, 1993, between Bankers
Trust Company as trustee for PVT and HFS Car Rental, Inc., as Lender.*
4.21 Credit Facility among the Company, ARACS, the Chase Manhattan Bank, as administrative
agent and the other lender 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.*
II-3
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------
10.6 Tax Sharing Agreement among HFS Incorporated, HFS Car Rental, Inc. and Avis Rent A
Car, Inc.*
10.7 Leases*
10.8 Purchasing Services Agreement between Avis Rent A Car System, Inc. and HFS
Incorporated.*
10.9 Agreement, dated October 23, 1996, between General Motors Corporation and HFS Car
Rental, Inc.*
10.10 Call Transfer Agreement, dated March 4, 1997, between HFS Incorporated and Avis Rent
A Car System, Inc.*
10.11 Form of Amended and Restated Employment Agreement, dated as of February 9, 1996,
between Avis Rent A Car, Inc. and F. Robert Salerno*
21 Subsidiaries of the Registrant
23.1 Independent Auditor's Consent
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5)*
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 - March 31, 1997
</TABLE>
- ------------
* To be filed by amendment
(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.
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this 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 the 6th day of June, 1997.
AVIS RENT A CAR, INC.
(Registrant)
By: /s/ Kevin M. Sheehan
-------------------------------
Name: Kevin M. Sheehan
Title: Executive Vice President
and Chief Financial
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signatures
appear below, constitutes and appoints each of Kevin M. Sheehan, John H.
Carley and Karen Sclafani, or any of them, each acting alone, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in his name, place and stead, in any and
all capacities, in connection with the Registrant's Registration Statement in
the name and on behalf of the Registrant or on behalf of the undersigned as a
director or officer of the Registrant, on Form S-1 under the Securities Act
of 1933, as amended, including, without limiting the generality of the
foregoing, to sign the Registration Statement and any and all amendments
(including post-effective amendments) to the Registration Statement, and any
subsequent registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as they might or could do in person,
thereby ratifying and confirming all that said attorneys-in-fact and agents,
or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this 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, June 6, 1997
-------------------------- Chief Executive Officer and Director
R. Craig Hoenshell (Principal Executive Officer)
/s/ F. Robert Salerno President, Chief Operating Officer June 6, 1997
-------------------------- and Director
F. Robert Salerno
/s/ Kevin M. Sheehan Executive Vice President and June 6, 1997
-------------------------- Chief Financial Officer
Kevin M. Sheehan (Principal Financial Officer)
/s/ Timothy M. Shanley Vice President and Controller June 6, 1997
-------------------------- (Principal Accounting Officer)
Timothy M. Shanley
/s/ Stephen P. Holmes Director June 6, 1997
--------------------------
Stephen P. Holmes
/s/ Michael P. Monaco Director June 6, 1997
--------------------------
Michael P. Monaco
</TABLE>
II-5
<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; 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
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>
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 Third Amendment and Restatement, dated as of September 21, 1987 to an Agreement of
Trust dated as of June 25, 1980, between Avis Rent A Car System, Inc. and Bankers Trust
Company.*
4.3 Master Trust Indenture, dated as of September 21, 1987, between HFS Car Rental, Inc.
and The Connecticut Bank and Trust Company, National Association, as Trustee.*
4.4 Contingent Purchase Agreement, dated as of September 23, 1987, among Bankers Trust
Company as Trustee for Prime Vehicles Trust, certain banks named therein and Irving
Trust Company as Agent for the banks.*
4.5 First Amendment, dated as of August 21, 1989, to Contingent Purchase Agreement, dated
as of September 23, 1987.*
4.6 Second Amendment, dated as of August 21, 1991, to Contingent Purchase Agreement, dated
as of September 23, 1987.*
4.7 Third Amendment, dated as of September 1, 1993, to Contingent Purchase Agreement, dated
as of September 23, 1987.*
4.8 Fourth Amendment, dated as of January 10, 1995, to Contingent Purchase Agreement, dated
as of September 23, 1987.*
4.9 Amended and Restated Loan Agreement, dated as of September 21, 1987, among Bankers
Trust Company as trustee for Prime Vehicles Trust, General Motors Acceptance
Corporation and Chrysler Credit Corporation.*
4.10 Supplement to Amended and Restated Loan Agreement, dated as of June 26, 1991, between
Bankers Trust Company, as trustee for Prime Vehicles Trust and General Motors
Acceptance Corporation.*
4.11 Fifth Amendment to Amended and Restated Loan Agreement, dated as of May 1, 1996, among
Prime Vehicles Trust, General Motors Acceptance Corporation and Chrysler Credit
Corporation.*
4.12 Guaranty Agreement dated as of September 21, 1987, among Prime Vehicles Trust, General
Motors Acceptance Corporation and Chrysler Credit Corporation.*
4.13 Third Amendment, dated as of May 1, 1996, to the Guaranty Agreement between Prime
Vehicles Trust, General Motors Acceptance Corporation and Chrysler Credit Corporation,
dated as of September 21, 1987.*
4.14 Third Amended and Restated Credit Agreement, dated as of September 1, 1993, among
Bankers Trust Company as Trustee for Prime Vehicles Trust, the banks named therein and
the Bank of New York, as Agent.*
4.15 Amendment No. 1, dated as of January 10, 1995, to the Third Amended and Restated Credit
Agreement among Bankers Trust Company, as Trustee for Prime Vehicles Trust, the banks
named therein and The Bank of New York.*
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- --------------------------------------------------------------------------------------- ------------
4.16 Loan Agreement, dated as of September 1, 1995, among Bankers Trust Company as Trustee
for Prime Vehicles Trust, the banks listed therein, the Co-Agents and the Tokai Bank,
Limited, New York Branch, as Agent.*
4.17 Note Purchase Agreement, dated as of December 30, 1992, for $122 million principal
amount of Senior Secured Notes due 1995-1999 of Prime Vehicles Trust.*
4.18 Note Purchase Agreement, dated as of May 6, 1993, for $196.5 million principal amount
of Senior Secured Notes due 1996-2003 of Prime Vehicles Trust.*
4.19 Credit Agreement, dated as of June 7, 1996, among Bankers Trust Company as Trustee for
Prime Vehicles Trust, various banks and Bank of America National Trust and Saving
Association, as Agent.*
4.20 Subordinated Debt Credit Agreement, dated as of October 29, 1993, between Bankers Trust
Company as trustee for PVT and HFS Car Rental, Inc., as Lender.*
4.21 Credit Facility among the Company, ARACS, the Chase Manhattan Bank, as administrative
agent and the other lender 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 Sharing Agreement among HFS Incorporated, HFS Car Rental, Inc. and Avis Rent A Car,
Inc.*
10.7 Leases*
10.8 Purchasing Services Agreement between Avis Rent A Car System, Inc. and HFS
Incorporated.*
10.9 Agreement, dated October 23, 1996, between General Motors Corporation and HFS Car
Rental, Inc.*
10.10 Call Transfer Agreement, dated March 4, 1997, between HFS Incorporated and Avis Rent A
Car System, Inc.*
10.11 Form of Amended and Restated Employment Agreement, dated as of February 9, 1996,
between Avis Rent A Car, Inc. and F. Robert Salerno*
21 Subsidiaries of the Registrant
23.1 Independent Auditor's Consent
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5)*
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 - March 31, 1997
</TABLE>
- ------------
* To be filed by amendment
<PAGE>
AVIS RENT A CAR, INC.
SUBSIDIARIES
Avis Rent A Car System, Inc.
Avis International, Ltd.
Avis Automoveis de Aluguel Ltda.
Avis Locacaeo de Veiculos Ltda.
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.
National Car Rentals (Private) Limited
Sistem Sewa Kereta Malaysia Sdn. Bhd.
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
Reserve Claims Management Co.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Avis Rent A Car, Inc.
on Form S-1 of our report dated May 12, 1997, appearing in the Prospectus,
which is part of this Registration Statement and of our report dated May 12,
1997 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
June 6, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> OCT-17-1996
<PERIOD-END> DEC-31-1996
<CASH> 50,886
<SECURITIES> 0
<RECEIVABLES> 311,406
<ALLOWANCES> 227
<INVENTORY> 2,243,492
<CURRENT-ASSETS> 0
<PP&E> 101,226
<DEPRECIATION> 2,339
<TOTAL-ASSETS> 3,131,357
<CURRENT-LIABILITIES> 3,054,817
<BONDS> 0
0
0
<COMMON> 3,902
<OTHER-SE> 72,638
<TOTAL-LIABILITY-AND-EQUITY> 3,131,357
<SALES> 362,844
<TOTAL-REVENUES> 362,844
<CGS> 0
<TOTAL-COSTS> 325,345
<OTHER-EXPENSES> 1,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,212
<INCOME-PRETAX> 2,261
<INCOME-TAX> 1,040
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