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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-13315
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AVIS RENT A CAR, INC.
(Exact Name Of Registrant As Specified In Its Charter)
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DELAWARE 11-3347585
(State of Incorporation) (I.R.S. Employer Identification No.)
900 OLD COUNTRY ROAD
GARDEN CITY, NEW YORK 11530
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 222-3000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X__ No _________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X__________
As of March 23, 1998, the registrant had 35,925,000 shares of Common Stock
outstanding and, at such date, the aggregate market value of the shares of
Common Stock held by non-affiliates of the registrant was approximately
$1,149,600,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1997 are incorporated by reference in Items 5-8 of Part II and certain portions
of the Registrant's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held May 21, 1998 are incorporated by reference in Items
10-13 of Part III of this Annual Report on Form 10-K.
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INDEX
TO FORM 10-K
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PAGE NUMBER
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PART I
Item 1. Business.......................................................................... 2
Item 2. Properties........................................................................ 13
Item 3. Legal Matters..................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............................... 14
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PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......... 15
Item 6. Selected Financial Data........................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of
Operations........................................................................ 15
Item 8. Financial Statements and Supplementary Data....................................... 15
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure........................................................................ 15
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PART III
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Item 10. Directors and Executive Officers of the Registrant................................ 16
Item 11. Executive Compensation............................................................ 16
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 16
Item 13. Certain Relationships and Related Transactions.................................... 16
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PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 16
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PART I
ITEM 1.
BUSINESS
Unless the context otherwise requires, each reference in this Annual Report
to (i) the "Company" refers to Avis Rent A Car, Inc. and its operating
subsidiaries and predecessors, (ii) "ARACS" refers to Avis Rent A Car System,
Inc., a wholly-owned subsidiary of the Company, (iii) "Cendant" refers to
Cendant Corporation and its subsidiaries, (iv) the "Franchisor" refers to
Cendant Car Rental, Inc., a wholly-owned subsidiary of Cendant, and (v) "Wizcom"
refers to Wizcom International Ltd., an indirect wholly-owned subsidiary of
Cendant. 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.
Cendant owns all of the outstanding equity of the Franchisor which, in turn,
owns the Avis worldwide vehicle rental system (the "Avis System"). In 1997, the
Franchisor entered into a 50 year franchise agreement with the Company granting
the Company the right to operate as a franchisee under the Avis System (the
"Master License Agreement"). WizCom, the owner of the data processing and
information system used in connection with the vehicle rental business and which
forms a part of the Avis System (the "Wizard System"), entered into a 50 year
computer services agreement with the Company with respect to its use of the
Wizard System.
The Company is a holding company which, through its operating subsidiary,
ARACS, operates the second largest general use car rental business in the world,
based on total revenue and volume of rental transactions. The Company rents
vehicles to business and leisure travelers through approximately 612 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. On August 20, 1997, ARACS purchased The First Gray
Line Corporation ("First Gray Line"), the then second largest Avis System
franchisee in North America. During 1997, including First Gray Line on a pro
forma basis from January 1, 1997, the Company completed over 14.5 million rental
transactions with a fleet that averaged approximately 200,000 vehicles and
generated total revenue of approximately $2.2 billion, of which approximately
89% was derived from its operations in the United States. On February 20, 1998,
ARACS signed an agreement with Hayes Leasing Company, Inc. ("Hayes"), the second
largest Avis System franchisee in North America with six locations in the state
of Texas, including Dallas/Fort Worth Airport ("DFW"), San Antonio Airport and
Austin Municipal Airport, to acquire the assets of its car rental business for
approximately $85 million in cash, plus the refinancing of fleet-related
indebtedness. See Note 15 to the Audited Consolidated Financial Statements for
financial information presented based upon the Company's major geographic areas.
The Avis brand name is owned by the Franchisor and is licensed for use by
its franchisees, including the Company, which is the largest Avis System
franchisee in the world. As an Avis System franchisee, the Company has entered
into certain arrangements with the Franchisor and its affiliates that require
the Company to make payments to the Franchisor and its affiliates, including
monthly payments under the Master License Agreement consisting of a monthly base
royalty of 3.0% of the Company's gross revenue and a supplemental royalty of
1.0% of gross revenue payable quarterly in arrears (which will increase 0.1% per
year commencing in 1999 and in each of the following four years thereafter to a
maximum of 1.5%). Until July 30, 2002, the supplemental royalty or a portion
thereof may be deferred if the Company does not attain certain financial
targets. 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
378,000 vehicles during the peak season, all of which
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are operated by franchisees. During 1997, the Company's 485 domestic rental
locations (including First Gray Line) produced approximately 87% of the Avis
System's revenue in the United States, with the balance derived from 391
locations operated by 71 other Avis System franchisees, of which five (including
Hayes) accounted for approximately 7% 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 plc, which is not
affiliated with the Company. Management believes that the strong recognition of
the Avis brand name, the breadth of the Avis System and the sophistication of
the Wizard System enable the Company and other Avis System franchisees to
provide consistent quality, pricing and service to business and leisure
customers worldwide.
The Company has historically targeted its marketing efforts toward business
travelers, who accounted for approximately 63% of the Company's domestic revenue
in 1997. 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 1997, leisure travelers accounted for approximately 37% 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.
On October 17, 1996 the Franchisor (formerly Avis, Inc.) and its
subsidiaries were purchased by Cendant (formerly HFS Incorporated) for
approximately $806.5 million. The purchase price was comprised of approximately
$367.2 million in cash, $100.9 million in indebtedness and $338.4 million of
common stock (the "Acquisition"). The Company is the successor to the car rental
operations previously owned by the Franchisor and its subsidiaries (collectively
referred to as the "Predecessor Companies"). On September 24, 1997, the Company
completed an initial public offering (the "IPO") of its Common Stock at a price
of $17 per share. After the IPO, Cendant owned approximately 27.5% of the
outstanding shares of Common Stock of the Company. On March 23, 1998, the
Company sold 5,000,000 shares of its common stock through a public offering (the
"Offering") and received proceeds of approximately $162 million. The Company
granted it's Underwriters a 30-day option to purchase in the aggregate up to
900,000 shares of Common Stock to cover over-allotments. In addition, in the
same offering, Cendant reduced its ownership in the Company by selling 1,000,000
shares of the Company's common stock and retained the proceeds. Prior to the
Offering, Cendant beneficially owned 8,500,000 shares of Common Stock. Following
the Offering, Cendant beneficially owned 7,500,000 shares of Common Stock
representing approximately 20.4% of the outstanding shares of Common Stock if
the underwriters' over-allotment is exercised. If the underwriters'
over-allotment is not exercised, Cendant will own approximately 20.9% of the
outstanding shares. Cendant is a global provider of consumer and business
services and operates in three principal segments: Membership, Travel and Real
Estate Services. In Membership Services, Cendant provides access to travel,
shopping, auto, dining and other services through more than 66.5 million
memberships worldwide. In Travel Services, Cendant is the leading franchisor of
hotels and rental car agencies worldwide, the
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premier provider of vacation exchange services and the second largest fleet
management company. In Real Estate Services, Cendant is the world's premier
franchisor of residential real estate brokerage offices, a major provider of
mortgage services to consumers and a global leader in corporate employee
relocation. Cendant is also a major online commerce facilitator, with more than
$1 billion in yearly sales through its netMarket-Registered Trademark- and other
interactive services.
The Company is the successor to the car rental operations previously owned
by the Predecessor Companies. Prior to the Acquisition, the principal
shareholder of the Franchisor and the Predecessor Companies was an Employee
Stock Ownership Plan and the minority shareholder was GM. The Company was
incorporated in Delaware on October 17, 1996 in connection with the Acquisition.
ARACS was incorporated in Delaware on September 18, 1956. The principal
executive offices of the Company are located at 900 Old Country Road, Garden
City, New York 11530, and its telephone number at that location is (516)
222-3000.
THE FIRST GRAY LINE ACQUISITION
On August 20, 1997, ARACS purchased all of the outstanding capital stock of
First Gray Line for approximately $195 million in cash, plus expenses. At that
time, First Gray Line was the second largest Avis System franchisee in North
America with 70 locations in Southern California, Nevada and Arizona. Its
operations represented approximately 9.0% of the Avis System's domestic revenue
in 1997.
The Company, through First Gray Line, operates 12 airport vehicle rental
locations, including Los Angeles International Airport ("LAX"), McCarran
International Airport (Las Vegas) and San Diego International Airport. The
Company estimates that First Gray Line's share of the overall airport markets
which it serves was approximately 20% for the first eleven months of 1997. First
Gray Line also operates 58 other locations throughout Southern California and in
Las Vegas, Nevada, and Yuma, Arizona.
First Gray Line's principal operation is located at LAX, one of the world's
largest airport rental vehicle markets based on vehicle rental revenues. First
Gray Line's operation at LAX is well-integrated with most of its other Southern
California operations, which operate largely in contiguous geographical areas.
First Gray Line's Las Vegas and San Diego operations have experienced
substantial growth in recent years, reflecting the continued high growth of
these areas as destination resorts and convention sites.
THE HAYES TRANSACTION
On February 20, 1998, ARACS signed an agreement with Hayes to purchase the
assets of its car rental business, including the Avis System franchises for the
cities of Austin, Fort Worth and San Antonio, and the counties of Dallas and
Tarrant, Texas, for approximately $85 million in cash, plus the refinancing of
fleet related indebtedness (the "Hayes Transaction" ). It is anticipated that
the Hayes Transaction will close in the second quarter of 1998, subject to the
satisfaction or waiver of certain conditions, including, but not limited to, the
expiration or termination of any waiting periods required pursuant to the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended; the obtaining of
all necessary approvals of any governmental entities and third parties; and
there having not been any changes in the vehicle rental business which would, in
the aggregate, have a material adverse effect.
Hayes is the second largest Avis System franchisee in North America with a
fleet averaging 8,000 vehicles in 1997, serving six locations in the state of
Texas, including DFW, San Antonio Airport and Austin Municipal Airport. Business
travelers account for a substantial portion of Hayes' rentals. In 1997, Hayes
completed approximately 640,000 transactions and recorded $77 million in
revenues, representing approximately 3.7% of the Avis System's domestic revenues
for the year. The Company estimates that Hayes' overall share of the airport
markets it serves was approximately 25% for the first eleven months of 1997.
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Hayes' principal operating location is at DFW, one of the nation's largest
airport rental vehicle markets based on vehicle rental revenues.
STRATEGY
The Company's objective is to improve its profitability through a strategy
that consists of the following key elements:
CAPITALIZING ON CHANGING INDUSTRY DYNAMICS. The domestic car rental
industry is emerging from a period during which rental rates did not keep pace
with rising fleet and operating costs. Management believes that the recent
restructuring of ownership of the Company's major competitors is leading to an
increased focus on profitability and shareholder return, rather than upon
transaction volume and market share, and to more rational pricing behavior.
During 1997, average domestic vehicle rental rates for the Company, increased by
6.1%. Management intends to use the proprietary software applications of the
Avis System, 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 has begun to increase its marketing efforts toward the
leisure market in order to improve fleet utilization and extend the average
length of rental. The Company's acquisition of First Gray Line has better
positioned the Company to improve its fleet management, primarily in the United
States. 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 operations including,
where feasible, other Avis System franchises.
INCREASING BRAND LOYALTY THROUGH TARGET MARKETING. Management believes that
the domestic car rental industry is becoming 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 Avis System's proprietary software applications
to analyze the Company's 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
CENDANT. The Company has initiated and is expanding cross-marketing
relationships with Cendant'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, its real estate brokerage franchise
systems, including the CENTURY 21-Registered Trademark- and Coldwell
Banker-Registered Trademark- brands and its membership-based consumer services.
The Company also has begun to reduce its costs of purchasing media and other
non-fleet goods and services through arrangements with Cendant.
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RENTAL OPERATIONS
GENERAL. The Company's fleet includes various categories of automobiles,
most of which are of the current and immediately preceding model years. Rentals
are generally made on a daily, weekend, weekly or monthly basis. Rental charges
in the United States usually are computed on the basis of the duration of the
rental and may include a mileage charge and vary based upon vehicle category,
the day on which the rental begins and local competitive and cost factors.
Additional charges are made for optional refueling services, loss damage waivers
(a waiver of the Company's right to make a renter pay for damage to the
vehicle), personal accident insurance, personal effects protection, optional
products such as cellular phones, child seats and ski racks and, in some
instances, additional liability insurance. Most rentals are made utilizing rate
plans under which the customer is responsible for gasoline used during the
rental. The Company also generally offers its customers the convenience of
leaving a rented vehicle at an Avis location in a city other than the one in
which it was rented under Avis's "Rent it Here--Leave it There" program,
although, consistent with industry practices, a drop-off charge or special
intercity rate may be imposed.
UNITED STATES OPERATIONS. At December 31, 1997, the Company operated 485
vehicle rental facilities at airport, near-airport and downtown locations
throughout the United States. During 1997, approximately 86% of the Company's
United States revenue was generated at 183 airports in the United States with
the balance generated at the Company's 302 non-airport locations. The Company's
emphasis on airport traffic has resulted in a 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 concessionable 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 and 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 44%, respectively, of international revenue in 1997. Revenue from
international operations in 1997 were approximately $242 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.
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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. 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:
- an advanced graphical interface reservation system;
- "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;
- "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;
- "Wizard on Wheels," which enables the Avis System locations to assign
vehicles and complete rental agreements while customers are being
transported to the vehicle;
- 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;
- "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;
- "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;
- interactive interfaces through third-party computerized reservation
systems described under "-- "MARKETING"; and
- 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 1997, 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 certain management information systems proprietary to the
Avis System 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:
- 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.
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- YIELD MANAGEMENT. The Company has also created a yield management system
which 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
this 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.
- PRICING DECISION SUPPORT SYSTEM. Pricing in the vehicle rental industry is
highly competitive and complex. To ensure its ability to respond to rental
rate changes in the marketplace, the Company has developed sophisticated
systems to gather and report competitive industry rental rate changes each
day. The system, using data from third-party reservation systems as its
source of information, automatically scans rate movements and reports
significant changes to a staff of pricing analysts for evaluation. The
system greatly enhances the Company's ability to gather and respond to
rate changes in its markets.
- 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 and the fleet and revenue
management systems, along with management objectives and targets, the
model develops business mix and fleet optimization recommendations.
- 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.
- 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 1997 for its U.S. rental fleet was
approximately $17,340. For the 1997 model year, approximately 69% of new vehicle
purchases were comprised of GM vehicles, 14% of Chrysler vehicles and 17% of
Toyota, Nissan, Subaru, Hyundai, Ford and Land Rover vehicles. In model year
1998, approximately 77% of the Company's fleet in the United States will consist
of GM vehicles, approximately 10% 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,
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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 150,150 GM
vehicles for model year 1998 and maintain at least 51% GM vehicles in the
Company's domestic fleet at all times. The GM Repurchase Program is available
for all vehicles purchased pursuant to the agreement.
IMPACT OF SEASONALITY
The Company's business is subject to seasonal variations in customer demand,
with the summer vacation period representing the peak season for vehicle
rentals. This general seasonal variation in demand, along with more localized
changes in demand at each of the Company's operations, causes the Company to
vary its fleet size over the course of the year. In 1997, the Company's average
monthly fleet size ranged from a low of 186,000 vehicles in January to a high of
217,000 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 64% in December to 82% in August and averaged
74% for all of 1997.
VEHICLE DISPOSITION
The Company's current operating strategy is to hold vehicles for not more
than 12 months with the average fleet age being less than six months.
Approximately 91% 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
3.5% of the Repurchase Program vehicles purchased by the Company and returned in
1997 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.
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 1997 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,
9
<PAGE>
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 $275 million in 1997.
The Company solicits contractual arrangements with corporate accounts by
emphasizing the Wizard System's customer service, rental rates, a worldwide
rental network, advanced technology and centralized account servicing. The
Wizard System plays a significant part in securing business of this type because
the Wizard System enables the Company to offer a wide variety of rental rate
combinations, special reports and tracking techniques tailored to the particular
needs of each account, and to assure adherence to agreed-upon rates.
The Company's presence in the leisure market is substantially less than its
presence in the business market. Leisure rental activity is important in
enabling the Company to balance the use of its fleet. Typically, business
renters use vehicles from Monday through Thursday, while in most areas of the
United States leisure renters use vehicles primarily over weekends. The
Company's concentration on serving business travelers has led to excess capacity
from Friday through Sunday of most weeks. The Company intends to increase its
leisure market penetration by capitalizing on its strength at airports and by
increased focusing of its marketing efforts toward leisure travelers. An
important part of the Company's leisure marketing strategy is to develop and
maintain contractual arrangements with associations that provide member benefits
to their constituents. In addition to developing arrangements with traditional
organizations, the Company has created innovative programs such as the Affinity
Link Program that cross references bankcard numbers with Avis Worldwide
identification numbers and provides discounts to the cardholders for
participating bankcard programs. The Company also uses coupons in dine-out books
and provides discounts to members of shopping and travel clubs whose members
generated approximately $60 million of leisure business revenue in 1997.
Preferred supplier agreements with select travel agencies and contracts with
tour operators have also succeeded in generating leisure business for the
Company.
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 Cendant 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).
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COMPETITION
The vehicle rental industry is characterized by intense price and service
competition. In any given location, the Company may encounter competition from
national, regional and local companies, many of which, particularly those owned
by the major automobile manufacturers, have greater financial resources than the
Company. The Company's principal competitors for commercial accounts in the
United States are The Hertz Corporation ("Hertz") and National Car Rental
System, Inc. ("National"). Its principal competitors for unaffiliated business
and leisure travelers in the United States are Budget Rent A Car Corporation,
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 in certain markets until
June 13, 2000 pursuant to an agreement relating to the sale of its replacement
vehicle rental business). In part because of the Wizard System, the Company has
been particularly successful in competing for commercial accounts. There have
been many occasions during the history of the vehicle rental industry in which
all of the major vehicle rental companies have been adversely affected by severe
industry-wide rental rate cutting, and the Company has, on such occasions,
lowered its rates in response to such rate cutting. However, during the past two
years, industry-wide rates have increased, reflecting, in part, both increased
costs of owning and maintaining vehicles and the need to generate returns on
invested capital.
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 & Reinsurance, Ltd., a wholly-owned subsidiary established under
the laws of Bermuda ("Global Excess"). These carriers provide coverage
supplemental to minimum local requirements.
To further control its insurance costs, the Company reinsures some of its
risks through its wholly-owned subsidiary, Constellation Reinsurance Company
Limited ("Constellation"), an insurance company established under the laws of
Barbados.
Under its standard rental contract, the Company provides its renters
liability coverage up to the minimum financial responsibility limits required by
applicable law. Higher limits are provided to some United States national
corporate accounts and the Company makes available to renters, for an additional
daily charge, participation in a group policy of "Additional Liability
Insurance" underwritten by CNA (Continental Group), which increases renters'
liability coverage up to $1.0 million. The Company also offers renters, for
additional daily charges, "Personal Accident Insurance," which pays medical
expenses
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and accidental death benefits for accidents during the rental period, and
"Personal Effects Protection," which insures against loss or damage to the
renters' personal belongings during the rental period. Coverages are
underwritten by Gulf Insurance Company.
REGULATORY MATTERS
The Company is subject to federal, state and local laws and regulations
including those relating to taxing and licensing of vehicles, franchising,
consumer credit, environmental protection, retail vehicle sales and labor
matters. The principal environmental regulatory requirements applicable to the
Company's operations relate to the ownership or use of tanks for the storage of
petroleum products, such as gasoline, diesel fuel and waste oils; the treatment
or discharge of waste waters; and the generation, storage, transportation and
off-site treatment or disposal of solid or liquid wastes. The Company operates
239 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.
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 3.4% of the Company's revenue during
1997 was generated by the sale of loss damage waivers. The U.S. House of
Representatives has from time to time considered legislation that would regulate
the conditions under which loss damage waivers may be sold by vehicle rental
companies. House Bill H.R. 175, introduced in January 1995, seeks to prohibit
the imposition of liability on renters for loss of, or damage to, rented
vehicles, except in certain circumstances, and would prohibit the sale of loss
damage waivers. To date, no action has been taken on this bill. In addition,
approximately 40 states have considered legislation affecting the loss damage
waivers. To date, 24 states have enacted legislation which requires disclosure
to each customer at the time of rental that damage to the rented vehicle may be
covered by the customer's personal automobile insurance and that loss damage
waivers may not be necessary. In addition, in the late 1980's, New York enacted
legislation which eliminated the Company's right to offer loss damage waivers
for sale and limited potential customer liability to $100. Moreover, California
and Nevada have capped rates that may be charged for loss damage waivers to
$9.00 and $10.00 per day, respectively. Texas requires that the rate charged for
loss damage waivers be reasonably related to the direct cost of the repairs.
Adoption of national or additional state legislation affecting or limiting the
sale of loss damage waivers could result in the loss of this revenue source and
additional limitations on potential customers liability could increase the
Company's costs.
The Company is also subject to regulation under the insurance statutes,
including insurance holding company statutes, of the jurisdictions in which its
insurance company subsidiaries are domiciled. These regulations vary from state
to state, but generally require insurance holding companies and insurers that
12
<PAGE>
are subsidiaries of insurance holding companies to register and file certain
reports including information concerning their capital structure, ownership,
financial condition and general business operations with the state regulatory
authority, and require prior regulatory agency approval of changes in control of
an insurer and intercorporate transfers of assets within the holding company
structure.
Pathfinder, as a licensed stock insurance company in the State of Colorado,
is subject to the applicable rules and regulations of the Colorado Insurance
Department. The Colorado Insurance Law provides that no person may acquire
control of the Company, and thus indirect control of Pathfinder, unless it has
obtained prior approval of the Colorado Insurance Commissioner for such
acquisition. "Control" is generally presumed to exist through the ownership of
10% or more of the voting securities of a Colorado domestic insurance company or
of any company which controls a Colorado domestic insurance company. Any
purchaser of 10% or more of the outstanding Common Stock would be presumed to
have acquired control of the Company, unless such presumption is rebutted by a
showing that such control does not 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.
Global Excess is subject to Bermuda Insurance Laws, which require Global
Excess to file at least a Bermuda statutory financial return in the form
prescribed by Bermuda Insurance Laws. Furthermore, any transfer of shares of
Global Excess by the Company will require the approval of the Bermuda Monetary
Authority, Foreign Exchange Control. In addition, Constellation is required to
file an annual financial return in accordance with Barbados Insurance
Regulations.
The payment of dividends to the Company by its insurance company
subsidiaries, Pathfinder, Global Excess and Constellation, will be restricted by
government regulations in Colorado, Bermuda and Barbados affecting insurance
companies domiciled in those jurisdictions.
EMPLOYEES
The Company has more than 18,000 employees worldwide, of whom approximately
17,000 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 33% of the Company's employees are
represented by various unions under contracts expiring at various dates. No
local union represents more than 2.5% of the Company's employees. The Company
believes its relationships with its employees are good.
ITEM 2.
PROPERTIES
The Company leases or has concessions relating to space at 402 locations in
the United States and 127 locations outside the United States. Of those
locations, 182 in the United States and 59 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
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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 250,000 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 Cendant from leased space in
Tulsa and Drumright, Oklahoma where the Company subleases approximately 26,000
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 61,000 square feet in a building owned by WizCom in Virginia Beach,
Virginia that serves as a satellite administrative and reservation facility.
ITEM 3.
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. 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. However the Company is involved in the
following litigation:
In the case of LINDA A. PUGH, ET AL., V. AVIS RENT A CAR SYSTEMS, INC. AND
NEW HANOVER RENT-A-CAR, INC., 7-96-CV-91-F(2), (E.D.N.C.), a suit in federal
court in North Carolina alleging race discrimination, the Company and the
plaintiffs have entered into a Settlement Agreement, subject to court approval,
providing for payment of $1.875 million plus approximately $1.4 million in
attorneys fees, administration costs and costs of notice to potential class
members, to settle and dismiss all plaintiffs'claims against the Company. In the
case of DAVID RUTSTEIN V. AVIS RENT A CAR SYSTEMS, INC., 97-0807 CIV-G
(S.D.FL.), a suit brought as a purported class action suit in federal court in
Florida alleging discrimination based upon religion, the Company has filed a
motion to dismiss the action, which is pending before the court. Following the
commencement of the PUGH and RUTSTEIN suits described above, certain
governmental agencies initiated inquiries and made requests for information in
connection with allegations of discrimination involving the Company and certain
of its licensees. The Company has been cooperating with all such governmental
requests. To date, an administrative proceeding has been commenced at the
Commonwealth of Pennsylvania Human Rights Commission. In that proceeding, the
Attorney General of the Commonwealth of Pennsylvania has filed an administrative
complaint alleging that the Company is vicariously liable for race
discrimination allegedly committed by a licensee. The Company has not yet been
apprised of the specifics underlying these allegations, but the Company believes
that the claims are without merit. The Company does not believe that the outcome
of those inquiries or the administrative proceeding will have a material adverse
effect on its financial condition or results of operations.
In connection with the IPO, the Company and Cendant entered into an
agreement whereby Cendant agreed to indemnify the Company for the costs and
expenses of defending all such claims described above, any other claims of
illegal discrimination related to customers and alleged to have occurred prior
to the IPO and from any liability arising therefrom.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1997.
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PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Reference is made to Page 13 ("Market Information") of the Registrant's 1997
Annual Report to Shareholders filed as Exhibit 13 hereto, which information is
incorporated herein by reference.
ITEM 6.
SELECTED FINANCIAL DATA
Reference is made to Page 5 of the Registrant's 1997 Annual Report to
shareholders filed as Exhibit 13 hereto, which information is incorporated
herein by reference.
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Registrant's 1997 Annual Report to
Shareholders filed as Exhibit 13 hereto, which information is incorporated
herein by reference.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements and Notes to the
Consolidated Financial Statements (which includes the Supplementary Data) are
incorporated herein by reference to Pages 14 to 42 of the Registrant's Annual
Report to Shareholders for the year ended December 31, 1997 filed as Exhibit 13
hereto:
<TABLE>
<S> <C>
AVIS RENT A CAR, INC.
Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Statements of Financial Position at December 31, 1996 and 1997
Consolidated Statements of Operations for the year ended December 31, 1995, and
for the periods January 1, 1996 to October 16, 1996 and October 17, 1996 (Date
of Acquisition) to December 31, 1996 and for the year ended December 31, 1997
Consolidated Statements of Stockholders' Equity for the year ended December 31,
1995, and for the periods January 1, 1996 to October 16, 1996 and October 17,
1996 (Date of Acquisition) to December 31, 1996 and for the year ended December
31, 1997
Consolidated Statements of Cash Flows for the year ended December 31, 1995, and
for the periods January 1, 1996 to October 16, 1996 and October 17, 1996 (Date
of Acquisition) to December 31, 1996 and for the year ended December 31, 1997
Notes to the Consolidated Financial Statements
</TABLE>
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
15
<PAGE>
PART III
The information required by Items 10, 11, 12 and 13 of Part III of Form 10-K
will be set forth in the Proxy Statement of the Company relating to the 1998
Annual Meeting of Stockholders filed as Exhibit 20 hereto, which information is
incorporated herein by reference.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements--see Consolidated Financial
Statements and Notes to the Consolidated Financial Statements of
the Company listed in Item 8 and set forth in the Registrant's
Annual Report to Shareholders included as Exhibit 13 hereto.
(2) Index to Financial Statement Schedules--Valuation and Qualifying
Accounts.
(3) Exhibits--(See Index to Exhibits included elsewhere herein).
All Schedules, except those set forth above have been omitted since the
information required to be submitted has been included in the Consolidated
Financial Statements or notes thereto or has been omitted as not applicable or
not required.
(b) The Registrant did not file any reports on form 8-K during the quarter
ended December 31, 1997.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Avis Rent A Car, Inc.
We have audited the consolidated statements of financial position of Avis
Rent A Car, Inc. and subsidiaries (successors to Rental Car System 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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997 and 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, stockholders' equity and cash
flows for the period January 1, 1996 to October 16, 1996 and for the year ended
December 31, 1995, and have issued our report thereon dated January 29, 1998
(March 23, 1998 as to Note 19); such financial statements and report are
included in your 1997 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedule of the
Company and the Predecessor Companies, listed in Item 14. 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
January 29, 1998
(March 23, 1998 as to Note 19)
17
<PAGE>
AVIS RENT A CAR, INC.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ADDITIONS, END OF
DESCRIPTION OF PERIOD EXPENSES NET(A) DEDUCTIONS PERIOD
- ---------------------------------------------------------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
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
October 17, 1996 (Date of Acquisition) to
December 31, 1996:
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
Year Ended December 31, 1997:
Allowance for doubtful accounts--accounts receivable...... $ 227 $ 3,208 $ 2,556 $ 879
Accumulated amortization--goodwill........................ $ 1,026 $ 6,860 $ 7,886
Public liability and property damage and other insurance
liabilities............................................. $ 213,785 $ 96,663 $ 16,670 $ 71,089 $ 256,029
</TABLE>
- ------------------------
a) Includes additions of $16,838 relating to the acquisition of The First Gray
Line Corporation on
August 20, 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on March 26, 1998.
<TABLE>
<S> <C> <C>
AVIS RENT A CAR, INC.
(Registrant)
By: /s/ KEVIN M. SHEEHAN
------------------------------------------
Name: Kevin M. Sheehan
Title: Executive Vice President
and Chief Financial Officer
</TABLE>
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<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- ------------------------------------------ -----------------
<C> <S> <C>
/s/ R. CRAIG HOENSHELL Chairman of the Board, Chief Executive March 26, 1998
- --------------------------------------- Officer and Director
R. Craig Hoenshell (Principal Executive Officer)
/s/ F. ROBERT SALERNO President, Chief Operating Officer and March 26, 1998
- --------------------------------------- Director
F. Robert Salerno
/s/ KEVIN M. SHEEHAN Executive Vice President and Chief March 26, 1998
- --------------------------------------- Financial Officer
Kevin M. Sheehan (Principal Financial Officer)
/s/ TIMOTHY M. SHANLEY Vice President and Controller March 26, 1998
- --------------------------------------- (Principal Accounting Officer)
Timothy M. Shanley
/s/ STEPHEN P. HOLMES Director March 26, 1998
- ---------------------------------------
Stephen P. Holmes
/s/ MICHAEL P. MONACO Director March 26, 1998
- ---------------------------------------
Michael P. Monaco
/s/ W. ALUN CATHCART Director March 26, 1998
- ---------------------------------------
W. Alun Cathcart
/s/ LEONARD S. COLEMAN, JR. Director March 26, 1998
- ---------------------------------------
Leonard S. Coleman, Jr.
/s/ MICHAEL J. KENNEDY Director March 26, 1998
- ---------------------------------------
Michael J. Kennedy
/s/ MARTIN L. EDELMAN Director March 26, 1998
- ---------------------------------------
Martin L. Edelman
/s/ DEBORAH L. HARMON Director March 26, 1998
- ---------------------------------------
Deborah L. Harmon
/s/ MICHAEL L. TARNOPOL Director March 26, 1998
- ---------------------------------------
Michael L. Tarnopol
</TABLE>
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ITEM 14(A)(3)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
3. CERTIFICATE OF INCORPORATION AND BY-LAWS
3.1 Amended and Restated Certificate of Incorporation of the Registrant***
3.2 Amended and Restated By-Laws of the Registrant***
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITYHOLDERS, INCLUDING INDENTURES
4.1 Form of Certificate of Common Stock**
4.2 Amended and Restated Base Indenture, dated as of July 30, 1997, between AESOP Funding II
L.L.C., as issuer, and Harris Trust and Savings Bank, as trustee.**
4.3 Series 1997-1 Supplement, dated as of July 30, 1997 between AESOP Funding II L.L.C. and Harris
Trust and Savings Bank, as trustee, to the Amended and Restated Base Indenture, dated as of
July 30, 1997, between AESOP Funding II and the Trustee.**
4.4 Series 1997-2 Supplement, dated as of July 30, 1997 between AESOP Funding II L.L.C. and Harris
Trust and Savings Bank, as trustee, to the Amended and Restated Base Indenture, dated as of
July 30, 1997, between AESOP Funding II and the Trustee.**
4.5 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing L.P., as borrower, and AESOP
Funding II L.L.C., as lender.**
4.6 Loan Agreement, dated as of July 30, 1997, among AESOP Leasing L.P., as borrower, PV Holding
Corp., as a permitted nominee of the borrower, Quartx Fleet Management, Inc., as a permitted
nominee of the borrower, and AESOP Funding II L.L.C., as lender.**
4.7 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing Corp. II, as borrower, AESOP
Leasing Corp., as permitted nominee of the borrower, and AESOP Funding II L.L.C., as lender.**
4.8 Master Motor Vehicle Finance Lease Agreement, dated as of July 30, 1997, by and among AESOP
Leasing L.P., as lessor, Avis Rent A Car System, Inc., as lessee, individually and as the
Administrator and Avis Rent A Car, Inc., as guarantor.**
4.9 Master Motor Vehicle Operating Lease Agreement, dated as of July 30, 1997, by and among AESOP
Leasing L.P., as lessor, Avis Rent A Car System, Inc., individually and as the Administrator,
certain Eligible Rental Car Companies, as lessees, and Avis Rent A Car, Inc., as guarantor.**
4.10 Master Motor Vehicle Operating Lease Agreement, dated as of July 30, 1997, by and among AESOP
Leasing Corp. II, as lessor, Avis Rent A Car System, Inc., individually and as the
Administrator, certain Eligible Rental Car Companies, as lessees and Avis Rent A Car, Inc., as
guarantor.**
4.11 Credit Agreement, dated as of July 30, 1997, among Avis Rent A Car, Inc., Avis Rent A Car
System, Inc., The Chase Manhattan Bank, as administrative agent, Lehman Commercial Paper,
Inc., as syndication agent and the other lenders party thereto (the "Credit Agreement").**
4.12 Guarantee, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as administrative
agent for the lenders from time to time parties to the Credit Agreement.**
4.13 Security Agreement, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as
administrative agent for the lenders from time to time parties to the Credit Agreement.**
4.14 Pledge Agreement, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as
administrative agent for the lenders from time to time parties to the Credit Agreement.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
10. MATERIAL CONTRACTS
10.1 Form of Registration Rights Agreement**
10.2 Separation Agreement between Cendant Car Rental, Inc. and Avis Rent A Car, Inc.**
10.3 Master License Agreement among Cendant 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 Cendant Incorporated and Avis Rent A Car System, Inc.**
10.6 Form of Tax Disaffiliation Agreement among Cendant Incorporated, Cendant Car Rental, Inc. and
Avis Rent A Car, Inc.**
10.7 Form of Lease Agreement by and between WizCom International, Ltd., as lessor, and Avis Rent A
Car System, Inc. as lessee (Virginia Beach, Virginia).**
10.8 Form of Sublease Agreement by and between WizCom International, Ltd., as sublessor, and Avis
Rent A Car System, Inc., as sublessee (Tulsa, Oklahoma).**
10.9 Form of Sublease Agreement by and between WizCom International, Ltd., as sublessor, and Avis
Rent A Car System, Inc., as sublessee (Garden City, New York).**
10.10 Wizard Note Assignment, Assumption and Release Agreement, dated as of July 30, 1997 by and
between Wizard Co., Inc., Avis Rent A Car System, Inc. and Reserve Claims Management Co.**
10.11 Termination Services Agreement, among Harris Trust and Savings Bank, AESOP Funding II L.L.C.,
Avis Rent A Car System, Inc., and Wizcom International, Ltd.**
10.13 Call Transfer Agreement, dated March 4, 1997, between HFS Incorporated and Avis Rent A Car
System, Inc.**
10.14 Form of Amended and Restated Employment Agreement, dated as of February 9, 1996, between HFS
Car Rental, Inc. and F. Robert Salerno**
10.15 Offer Letter, dated as of February 24, 1997, between Craig Hoenshell and HFS Incorporated.**
10.16 Amended and Restated Employment Agreement, dated February 9, 1996, between HFS Car Rental,
Inc. and John Forsythe.**
10.17 Avis Rent A Car, Inc. 1997 Stock Option Plan**
13 Annual Report to Shareholders for the year ended December 31, 1997*
20 Proxy Statement of the Registrant for Annual Meeting of Stockholders--May 21, 1998*
21 Subsidiaries of the Registrant**
23.1 Consent of Deloitte & Touche LLP, Independent Auditors of the Company.***
23.2 Consent of Ernst & Young LLP, Independent Auditors of The First Gray Line Corporation.***
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5)***
27 FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule--December 31, 1996***
27.2 Financial Data Schedule--December 31, 1997***
</TABLE>
- ------------------------
* Filed herewith
** Incorporated by reference to the Registrant's Registration Statement on Form
S-1, 333-28609.
*** Incorporated by reference to the Registrant's Registration Statement on Form
S-1, 333-46737.
<PAGE>
[LOGO]
1997 Annual Report
Avis Rent A Car, Inc.
<PAGE>
[LOGO]
A MESSAGE FROM THE CHAIRMAN
Dear Avis Shareholder:
On behalf of the Board of Directors and our 18,000 Avis colleagues, we are
pleased to present Avis' first annual report to shareholders highlighting the
Company's impressive financial results and the major milestones achieved in
1997. Avis has emerged from this past year as a stronger and more focused
company, dedicated to building customer loyalty and increasing value to our
shareholders.
On September 24, 1997, as a result of its successful IPO, the Company
completed its transition from being a wholly-owned subsidiary of HFS
Incorporated (now Cendant Corporation) to a publicly traded company on the New
York Stock Exchange. Just prior to this major event, Avis completed the purchase
of The First Gray Line Corporation, the second largest Avis System franchisee in
North America, on August 20, 1997.
In recent years, the car rental industry has undergone significant change.
Our major competitors have either been sold to public companies or gone public
themselves. In addition, the industry has enjoyed the benefit of meaningful
price increases--the first in many years.
As we prepared to go public, we made a commitment to our shareholders to
focus on the U.S. car rental market and take advantage of significant and unique
opportunities that present themselves with a mission to build shareholder value.
We are pleased to report that this commitment was kept in 1997.
A YEAR OF CHANGE AND ACCOMPLISHMENTS: 1997 MILESTONES
RECORD PRO FORMA FINANCIAL RESULTS
On a pro forma basis, for the year ended December 31, 1997, the Company
reported revenue of $2.2 billion, a 5.9 percent increase over 1996. Net income
and diluted earnings per share were $39.4 million and $1.26, respectively,
representing increases of 360 percent and 350 percent from net income and
diluted earnings per share of $8.6 million and 28 cents, respectively, for 1996.
Our record results reflect the positive impact of price increases in the
industry, the successful integration of The First Gray Line Corporation into our
existing operations, and our persistent focus on improving operating margins.
1
<PAGE>
INITIAL PUBLIC OFFERING
On September 24, 1997, on our first day of trading on the New York Stock
Exchange, a total of 18.5 million shares of Avis common stock were sold in the
United States and Canada and 3.9 million shares sold outside the U.S. and
Canada. The initial offering price of $17 per share and closing stock price of
$22 yielded a 32 percent gain as more than 14.5 million shares changed hands
that day. Officials at the New York Stock Exchange said the Avis IPO was the
most heavily traded issue, on a percentage basis, in the 205-year history of the
Exchange.
STRATEGIC ACQUISITION OPPORTUNITY
On August 20, 1997, Avis Rent A Car System, Inc. the Company's car rental
subsidiary in the United States, purchased all of the outstanding capital stock
of The First Gray Line Corporation for approximately $195 million in cash, plus
expenses. At that time, First Gray Line, through its subsidiary, Grand Rent A
Car Corp., was the second largest Avis System franchisee in North America with
70 locations in Southern California, Nevada and Arizona. Overall, Grand's
operations accounted for approximately ten percent of the total Avis U.S. system
car rental revenues. More importantly, the acquisition became immediately
accretive to our earnings. We will continue to explore other acquisitions that
we feel will immediately enhance shareholder value.
INNOVATIVE FLEET FUNDING
In 1997, the Company refinanced the entire fleet through an innovative
financing program that "locked-in" a significant portion of fleet debt at very
attractive rates to mitigate the Company's interest rate risk over the
long-term.
DISCRIMINATION SUIT SETTLEMENT
Avis' new management team has moved aggressively to enforce our
"zero-tolerance" policy on discrimination and to promote diversity and
inclusiveness among Avis' workforce. On December 22, 1997, Avis Rent A Car
System, Inc. and the Washington Lawyer's Committee for Civil Rights and Urban
Affairs announced a settlement dismissing all claims against Avis in PUGH ET AL.
V. AVIS RENT A CAR SYSTEMS, INC. AND NEW HANOVER RENT A CAR, INC. The settlement
is pending approval by the U.S. District Court in Wilmington, NC.
IMPROVING BUSINESS MIX
Combined with Avis' continuing focus on commercial customers, the growing
leisure segment offers new opportunities for earnings growth and better fleet
utilization. Today, the Avis customer profile is mostly comprised of business
travelers who account for approximately 63 percent of rental transactions. The
Company is seeking to focus on profitable transactions and balance its business
mix between the commercial and leisure segments. The Company feels that it has
the opportunity to leverage its brand power in continuing to better balance its
business mix between leisure and commercial customers.
INCREASING BRAND LOYALTY
The Company has developed a marketing data base that allows it to focus on
the individual customers who produce the most profit annually. We are developing
unique services tailored to these customers designed to increase their loyalty
to the Avis brand. In addition, we are training our management and staff to
recognize these individual customers and to become adept at delivering tailored
services. The Company believes that enhancement of Avis loyalty with our most
profitable customers will ultimately lead to significantly improved
profitability.
2
<PAGE>
LEVERAGING SYNERGIES WITH CENDANT
The Company is fortunate to enjoy a close relationship with Cendant
Corporation. We are exploring ways to leverage cross-marketing synergies with
Cendant to access an enormous pool of customers in the expansive hospitality,
relocation, and time share sector as well as those available from their
formidable direct marketing data base. The Company is also realizing cost
savings by using Cendant preferred alliances for improved purchasing power,
including telecommunications, printing services, and media purchasing.
EMPLOYEE SURVEY
For the first time at all locations, Avis initiated a major company-wide
employee survey designed to determine attitudes and perceptions about Avis and
provide an opportunity to offer feedback to senior management on items that are
either working well or need attention. This annual survey will be used as a
benchmark for determining how the Company is performing in terms of its newly
established values.
EXECUTIVE CHANGES
In addition to my appointment as Chairman and Chief Executive Officer in
March 1997, a new executive management team was formed, consisting of: F. Robert
Salerno, President and Chief Operating Officer; Kevin M. Sheehan, Executive Vice
President and Chief Financial Officer; John H. Carley, Executive Vice President
and General Counsel; Kevin Carey, Senior Vice President, Human Resources; and
Patricia D. Yoder, Senior Vice President, Corporate Communications.
On September 24, 1997, the Avis Board of Directors was established. The new
Board members, in addition to myself, are: Alun Cathcart, Leonard S. Coleman,
Jr., Martin L. Edelman, Esq., Deborah L. Harmon, Stephen P. Holmes, Michael
Kennedy, Esq., Michael P. Monaco, F. Robert Salerno and Michael L. Tarnopol. We
feel that the varied executive expertise of the Board and the specialized
abilities of the executive management team, provide the Company with excellent
leadership.
INDUSTRY OVERVIEW
After years of rising operating costs and flat rental car rates, the car
rental industry experienced strong results this past year. Here are some of the
reasons the U.S. car rental industry did well in 1997:
RATES INCREASING
For the past ten years, the cost of renting a car has only increased, on
average, at the rate of one percent per year. In 1997, car rental companies are
reporting that their rates have increased between five and seven percent.
Negotiated corporate travel rates, which in past years stayed constant, have
also increased. The general industry rate increase has been bolstered by the
investment in revenue/yield management systems by the major car rental
companies.
DEMAND STRONG
Approximately two-thirds of the industry's revenue is derived at airports.
For 1997, airline travel increased by 2.7 percent. Looking ahead in 1998, car
rental volume should be up anywhere from three percent to five percent.
PUBLIC OWNERSHIP IMPACT
Recently, several car rental companies have gone public, or were purchased
by publicly-traded companies. This change in ownership has resulted in industry
management's strong focus on delivering shareholder value.
3
<PAGE>
AVIS STRATEGY MOVING FORWARD
The Company's overall objective is to maintain our commitment to improve
profitability through five key elements:
- Capitalizing on changing industry dynamics
- Improving business mix and fleet utilization
- Increasing brand loyalty through targeted marketing
- Pursuing strategic acquisition opportunities to increase operating
leverage
- Capitalizing on cross marketing and other synergistic arrangements with
Cendant
A number of environmental factors are driving overall growth of the car
rental industry and will help the company increase profitability. These include
increased air travel; trends toward shorter, more frequent vacations; an aging
and more affluent U.S. population; and increased business travel.
At the same time, the $16.4 billion car rental industry is experiencing
strong, consistent growth. Small-and medium-sized businesses have emerged as
major players in the domestic and global economies. These fast growing companies
have become a more significant portion of Avis' commercial accounts.
A significant Avis advantage is its technological leadership. The Wizard
System remains the state-of-the-art management information system in the
industry, with the most comprehensive range of applications. Avis' global
communications network is directly linked to major travel webs, allowing greater
access by customers around the world.
We feel that the true potential of the Cendant relationship is still
unrealized and we will continue to focus on this opportunity.
Moving forward, we are pleased with our accomplishments in 1997. I would
like to thank our Avis colleagues for their hard work and dedication this past
year, especially under such demanding circumstances. However, there is still
much to be done in the coming year. All of us at Avis are excited about the
challenges ahead as we begin the process of reaffirming our commitment to
shareholder value and customer service.
Our vision is to become the world's pre-eminent rent a car brand. We have
the people, resources and commitment to make our vision a reality.
Sincerely,
[LOGO]
R. Craig Hoenshell
Chairman and Chief Executive Officer
4
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND AVERAGE REVENUE PER RENTAL
TRANSACTION)
The selected financial data for the year ended December 31, 1993 are derived
from the Unaudited Consolidated Financial Statements of the Company. The
financial data for the years ended December 31, 1994 and 1995, the periods ended
October 16, 1996 and December 31, 1996 and the year ended December 31, 1997 are
derived from the Company's Audited Consolidated Financial Statements of the
Company. The financial data for the year ended December 31, 1993 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.
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES(A)
------------------------------------------------------ OCTOBER 17, 1996
JANUARY 1, 1996 (DATE OF
YEARS ENDED DECEMBER 31, TO ACQUISITION)
------------------------------------- OCTOBER 16, TO
1993 1994 1995 1996 DECEMBER 31, 1996(D)
----------- ----------- ----------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................... $ 1,333,477 $ 1,412,400 $ 1,615,951 $ 1,504,673 $ 362,844
Costs and expenses:
Direct operating, net............. 646,821 664,993 724,759 650,750 167,682
Vehicle depreciation and lease
charges, net.................... 257,723 309,415 411,102 376,185 89,448
Selling, general and
administrative(c)(d)............ 222,629 252,024 269,434 283,180 68,215
Interest, net..................... 114,036 128,898 145,199 120,977 34,212
Amortization of cost in excess of
net assets acquired............. 4,439 4,754 4,757 3,782 1,026
----------- ----------- ----------- --------------- -----------
Income before provision for
income taxes.................... 87,829 52,316 60,700 69,799 2,261
Provision for income taxes........ 34,375 30,213 34,635 31,198 1,040
----------- ----------- ----------- --------------- -----------
Net income........................ $ 53,454 $ 22,103 $ 26,065 $ 38,601 $ 1,221
----------- ----------- ----------- --------------- -----------
----------- ----------- ----------- --------------- -----------
Earnings per share:(e)
Basic........................... $ 1.73 $ .72 $ .84 $ 1.25 $ .04
Diluted......................... $ 1.73 $ .72 $ .84 $ 1.25 $ .04
STATEMENTS OF FINANCIAL POSITION
DATA:
Vehicles, net..................... $ 1,716,518 $ 1,873,158 $ 2,167,167 $ 2,404,275 $ 2,243,492
Total assets...................... $ 2,419,684 $ 2,603,113 $ 2,824,898 $ 3,187,697 $ 3,131,357
Debt.............................. $ 842,541 $ 1,060,123 $ 1,109,747 $ 1,355,595 $ 2,295,474
Vehicle financing notes--due to
affiliates...................... $ 1,010,000 $ 1,050,000 $ 1,180,000 $ 1,289,500 $ 247,500
Stockholders' equity.............. $ 628,256 $ 658,351 $ 688,360 $ 741,307 $ 76,540
Total liabilities and
stockholders' equity............ $ 2,419,684 $ 2,603,113 $ 2,824,898 $ 3,187,697 $ 3,131,357
SELECTED OPERATING DATA:
Number of vehicle rental locations
at period end................... 656 576 541 550 546
Peak number of vehicles during
period.......................... 151,964 150,966 167,511 196,077 177,839
Average number of vehicles during
period.......................... 134,926 137,715 150,853 174,813 172,461
Number of rental transactions
during period (in thousands).... 10,003 10,577 11,544 10,272 2,534
Average revenue per rental
transaction during period....... $ 133 $ 134 $ 140 $ 146 $ 143
<CAPTION>
COMBINED YEAR ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1996(B) 1997
-------------------- ------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................... $ 1,867,517 $2,046,154
Costs and expenses:
Direct operating, net............. 818,432 863,839
Vehicle depreciation and lease
charges, net.................... 465,633 542,090
Selling, general and
administrative(c)(d)............ 351,395 415,728
Interest, net..................... 155,189 167,314
Amortization of cost in excess of
net assets acquired............. 4,808 6,860
----------- ------------
Income before provision for
income taxes.................... 72,060 50,323
Provision for income taxes........ 32,238 22,850
----------- ------------
Net income........................ $ 39,822 $ 27,473
----------- ------------
----------- ------------
Earnings per share:(e)
Basic........................... -- $ .89
Diluted......................... -- $ .88
STATEMENTS OF FINANCIAL POSITION
DATA:
Vehicles, net..................... $ 2,243,492 $3,018,856
Total assets...................... $ 3,131,357 $4,278,956
Debt.............................. $ 2,295,474 $2,826,422
Vehicle financing notes--due to
affiliates...................... $ 247,500 $ --
Stockholders' equity.............. $ 76,540 $ 450,021
Total liabilities and
stockholders' equity............ $ 3,131,357 $4,278,956
SELECTED OPERATING DATA:
Number of vehicle rental locations
at period end................... 546 612
Peak number of vehicles during
period.......................... 196,077 212,104
Average number of vehicles during
period.......................... 174,226 186,317
Number of rental transactions
during period (in thousands).... 12,806 13,667
Average revenue per rental
transaction during period....... $ 146 $ 150
</TABLE>
- ------------------------
(a) See Note 1 to the Audited Consolidated Financial Statements of the Company.
The 1993 amounts are unaudited.
(b) Presented on a combined twelve-month basis and includes 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.
(c) The year ended December 31, 1997 includes a 4% royalty fee payable to
Cendant.
(d) The amounts for the periods October 17, 1996 (Date of Acquisition) to
December 31, 1996 include charges from Cendant. See Note 4 to the Audited
Consolidated Financial Statements.
(e) Basic and diluted earnings per share are computed based on 30,925,000 shares
of Common Stock, the number of shares of Common Stock outstanding before
this offering for all periods presented, except for diluted earnings per
share for 1997. Diluted earnings per share is calculated based on 31,181,134
shares of Common Stock which includes the dilutive effect of the assumed
exercise of outstanding stock options.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
On October 17, 1996, Cendant acquired the Franchisor and its subsidiaries,
which included the operations presently conducted by the Company (the
"Acquisition"). The Acquisition was accounted for as a purchase.
On August 20, 1997, the Company purchased First Gray Line. First Gray Line
was the then second largest Avis System franchisee in North America with
locations in Southern California, Nevada and Arizona.
On September 24, 1997, the Company issued and sold 22,425,000 shares of its
common stock in an initial public offering ("IPO") and received net proceeds of
$359.3 million. The net proceeds were used to repay amounts outstanding under a
credit facility established to complete the First Gray Line acquisition, pay
certain acquisition expenses incurred to complete the First Gray Line
acquisition and to prepay outstanding indebtedness. The Franchisor has entered
into the Master License Agreement with the Company granting the Company the
right to operate as a franchisee under the Avis System. As an Avis System
franchisee, the Company is required to make payments consisting of a base
royalty of 3.0% of the Company's revenue payable monthly and a supplemental
royalty of 1.0% of revenue payable quarterly in arrears (which will increase
0.1% per year commencing in 1999, and in each of the following four years
thereafter to a maximum of 1.5%). Until July 30, 2002, the supplemental royalty
or a portion thereof may be deferred if the Company does not attain certain
financial targets.
The Company conducts vehicle rental operations through wholly-owned
subsidiaries in the United States, Canada, Puerto Rico, the U.S. Virgin Islands,
Argentina, Australia and New Zealand. Revenue is derived principally from time
and mileage charges for vehicle rentals and, to a lesser extent, fees for loss
damage waivers, liability insurance and other products and services.
The Company's expenses consist primarily of:
- 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).
- Depreciation and lease charges relating to the rental fleet (including
net gains or losses upon the disposition of vehicles).
- Selling, general and administrative expenses (including royalties,
advertising, reservations and marketing costs, and commissions paid to
airlines and travel agencies).
- 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, because the Company is required
to pay royalties based on its revenue, not its profits, royalty payments could
increase 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.
Management believes that a more meaningful comparison of the results of
operations for the years ended December 31, 1997 and 1996 is obtained by
presenting results on a pro forma basis to give effect to the following
transactions as if they had occurred on January 1 of each period presented: the
acquisition of the Company by Cendant and the establishment of a
franchisor/franchisee relationship; the acquisition of First Gray Line and the
repayment of debt with net proceeds (after the acquisition of First Gray Line)
from the IPO.
6
<PAGE>
The following discussion and analysis provides information that management
believes to be relevant to understanding the Company's consolidated financial
position and results of operations. For comparative purposes, results for 1996
are presented on a combined twelve-month basis and include the results of the
Predecessor Companies for the period January 1, 1996 to October 16, 1996 and the
results of the Company for the period October 17, 1996 (Date of Acquisition) to
December 31, 1996. As a result of the Acquisition, the Consolidated Financial
Statements for the period subsequent to the Acquisition are presented on a
different basis of accounting than those for the period prior to the Acquisition
and, therefore, are not directly comparable. A separate discussion of the
results of operations for the Company has been presented for the period October
17, 1996 through December 31, 1996 compared to October 17, 1995 through December
31, 1995 in light of the reporting of separate results from October 17, 1996
(Date of Acquisition) and the different basis of accounting for the period prior
to the Acquisition. This discussion should be read in conjunction with the
Audited Consolidated Financial Statements and related notes thereto included
elsewhere in this Annual Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of operations (dollars in thousands):
<TABLE>
<CAPTION>
HISTORICAL UNAUDITED PRO FORMA(C)
---------------------------------------------- ----------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF COMBINED OF OF OF
1995(A) REVENUE 1996(B) REVENUE 1996 REVENUE 1997 REVENUE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue..................... $1,615,951 100.0 $1,867,517 100.0 $2,055,519 100.0 $2,175,897 100.0
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Costs and Expenses:
Direct operating, net..... 724,759 44.9 818,432 43.8 905,534 44.0 920,283 42.3
Vehicle depreciation,
and lease charges,
net..................... 411,102 25.4 465,633 25.0 493,306 24.0 559,433 25.7
Selling, general and
administrative.......... 269,434 16.7 351,395 18.8 439,674 21.4 422,053 19.4
Interest, net............. 145,199 9.0 155,189 8.3 183,115 8.9 192,598 8.9
Amortization of cost in
excess of net assets
acquired................ 4,757 0.3 4,808 0.3 9,295 0.5 9,743 0.4
--------- ----------- --------- ----------- --------- ----------- --------- -----------
1,555,251 96.3 1,795,457 96.2 2,030,924 98.8 2,104,110 96.7
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Income before provision for
income taxes.............. 60,700 3.7 72,060 3.8 24,595 1.2 71,787 3.3
Provision for income
taxes..................... 34,635 2.1 32,238 1.7 16,028 0.8 32,355 1.5
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Net income.................. $ 26,065 1.6 $ 39,822 2.1 $ 8,567 0.4 $ 39,432 1.8
--------- ----------- --------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- ----------- --------- -----------
</TABLE>
- ------------------------------
(a) Represents the results of operations of the Predecessor Companies. See Note
1 to the Audited Consolidated Financial Statements.
(b) For comparative purposes, results for 1996 are presented on a combined
twelve-month basis and include the results of the Predecessor Companies for
the period January 1, 1996 to October 16, 1996 and the results of the
Company for the period October 17, 1996 (Date of Acquisition) to December
31, 1996. See Note 1 to the Audited Consolidated Financial Statements. A
separate discussion has been presented below for the period October 17, 1996
to December 31, 1996 compared to the period October 17, 1995 to December 31,
1995.
(c) Includes the effects of the following transactions as if they had occurred
on January 1 of each period presented: (i) the acquisition of the Company by
Cendant and the establishment of a franchisor/franchisee relationship, (ii)
the acquisition of First Gray Line and (iii) the repayment of debt with the
net proceeds (after the purchase of First Gray Line) from the IPO.
7
<PAGE>
PRO FORMA YEAR ENDED DECEMBER 31, 1997 COMPARED TO PRO FORMA YEAR ENDED DECEMBER
31, 1996
REVENUE
Revenue for the year ended December 31, 1997 increased 5.9%, from $2,055.5
million to $2,175.9 million, over 1996, primarily reflecting a 3.5% increase in
the number of rental transactions and a 2.3% increase in revenue per rental
transaction. The revenue increase resulted from greater overall market demand.
COSTS AND EXPENSES
Total costs and expenses for 1997 increased 3.6%, from $2,030.9 million to
$2,104.1 million, over 1996. Direct operating expenses for 1997 increased 1.6%,
from $905.5 million to $920.3 million, over 1996. As a percentage of revenue,
direct operating expenses for 1997 declined to 42.3% from 44.0% for 1996.
Operating efficiencies were derived primarily from lower vehicle damage costs
(0.3% of revenue), lower facility costs (0.3% of revenue), lower vehicle
insurance costs (0.2% of revenue), lower vehicle registration costs (0.6% of
revenue) and a decline in wages and benefits as a percentage of revenue (0.2% of
revenue).
Vehicle depreciation and lease charges for 1997 increased 13.4%, from $493.3
million to $559.4 million, over 1996. As a percentage of revenue, vehicle
depreciation and lease charges for 1997 was 25.7% of revenue, as compared to
24.0% of revenue for 1996. The change reflected a 3.2% increase in the average
rental fleet required to service higher rental day activity. In addition, due to
favorable market conditions for the sale of certain model vehicles, the net
proceeds received in excess of book value upon the disposition of used vehicles
was $30.0 million higher in 1996 as compared to 1997. This resulted in a 1.7%
reduction in vehicle depreciation and lease charges as a percentage of revenue
in 1996.
Selling, general and administrative expenses for 1997 decreased 4.0%, from
$439.7 million to $422.1 million, over 1996. As a percentage of revenue,
selling, general and administrative expenses for 1997 decreased to 19.4% from
21.4% for 1996. This decrease was the result of lower reservation costs due to
operating efficiencies and reduced marketing costs as a result of the
elimination of certain marketing programs in place during the first half of
1996, partially offset by higher royalty fees due to increased revenue.
Interest expense, net, for 1997 increased 5.2%, from $183.1 million to
$192.6 million, over 1996, due primarily to (i) higher borrowings required to
finance the growth of the rental fleet, partially offset by lower average
interest rates.
The provision for income taxes for 1997 increased 101.9%, from $16.0 million
to $32.4 million, over 1996. The effective tax rate for 1997 was 45.1% as
compared to 65.2% for 1996. The increase in the tax provision and the decrease
in the effective tax rate were primarily due to higher domestic income before
provision for income taxes. The effective tax rate includes differences between
the foreign income tax rates and the statutory income tax rate, tax on the
repatriation of foreign earnings, and foreign withholding taxes on dividends
paid to the Company.
Net income for 1997 increased 360.3%, from $8.6 million to $39.4 million,
over 1996. The increase reflects higher revenue and decreased operating costs
and expenses as a percentage of revenue in 1997 as explained above.
8
<PAGE>
PERIOD FROM OCTOBER 17, 1996 TO DECEMBER 31, 1996 COMPARED TO PERIOD FROM
OCTOBER 17, 1995 TO DECEMBER 31, 1995 (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
OCTOBER 17, 1995 (DATE OF
TO ACQUISITION)
DECEMBER 31, 1995 PERCENTAGE TO DECEMBER 31, PERCENTAGE
PREDECESSOR COMPANIES OF REVENUE 1996 OF REVENUE
--------------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
<S> <C> <C> <C> <C>
Revenue....................................... $ 333,503 100.0 $ 362,844 100.0
Costs and expenses:
Direct operating, net....................... 154,141 46.2 167,682 46.2
Vehicle depreciation, net and lease
charges................................... 87,862 26.3 89,448 24.7
Selling, general and administrative......... 62,774 18.8 68,215 18.8
Interest, net............................... 31,222 9.4 34,212 9.4
Amortization of cost in excess of net assets
acquired.................................. 987 0.3 1,026 0.3
---------- ----- -------- -----
336,986 101.0 360,583 99.4
---------- ----- -------- -----
Income (loss) before provision (benefit) for
income taxes................................ (3,483) (1.0) 2,261 0.6
Provision (benefit) for income taxes.......... (1,989) (0.6) 1,040 0.3
---------- ----- -------- -----
Net income (loss)............................. $ (1,494) (0.4) $ 1,221 0.3
---------- ----- -------- -----
---------- ----- -------- -----
</TABLE>
REVENUE
Revenue for the period October 17, 1996 to December 31, 1996 (the "1996
Period") increased 8.8%, from $333.5 million to $362.8 million, over the
corresponding period in 1995 (the "1995 Period"), reflecting a 7.0% increase in
the number of rental transactions and a 1.7% increase in revenue per rental
transaction. The revenue increase resulted from greater overall market demand.
COSTS AND EXPENSES
Total costs and expenses for the 1996 Period increased 7.0%, from $337.0
million to $360.6 million, over the 1995 Period. Direct operating expenses for
the 1996 Period increased 8.8%, from $154.1 million to $167.7 million, over the
1995 Period. For both the 1996 and 1995 Periods, direct operating expenses were
46.2% of revenue. The 1996 Period reflected lower manpower (0.8% of revenue), as
well as lower facility costs (1.2% of revenue), offset by higher maintenance and
damage costs (2.0% of revenue).
Vehicle depreciation and lease charges for the 1996 Period increased 1.8%,
from $87.9 million to $89.4 million, over the 1995 Period. As a percentage of
revenue, vehicle depreciation and lease charges for the 1996 Period decreased to
24.7% of revenue as compared to 26.3% of revenue for the 1995 Period. The change
reflected a 10.8% increase in the average rental fleet required to service
higher rental day activity and a 7.5% decrease in the average monthly cost per
vehicle. In addition, the net proceeds received in excess of book value upon the
disposition of used vehicles improved by $1.7 million or 0.4% of revenue in the
1996 Period over the 1995 Period. This was primarily due to favorable market
conditions for the sale of certain model vehicles.
Selling, general and administrative expenses for the 1996 Period increased
8.7%, from $62.8 million to $68.2 million, over the 1995 Period. The increase
was due primarily to fees of $6.5 million payable to Cendant for the 1996
Period.
9
<PAGE>
Interest expense, net, for the 1996 Period increased 9.6%, from $31.2
million to $34.2 million, over the 1995 Period, primarily due to higher
borrowings required to finance the increased cost and size of the rental fleet.
The provision for income taxes for the 1996 Period increased to $1.0 million
from a benefit for income taxes of $2.0 million for the 1995 Period. The
increase in the tax provision was primarily due to having income before taxes
for the 1996 Period as compared to a loss before taxes for the 1995 Period. The
effective tax rate for the 1996 Period was 46.0% as compared to 57.1% for the
1995 Period. The decrease in the effective tax rate was primarily due to a
reduction in the tax effect of foreign operations. The tax effect of foreign
operations includes differences between the foreign income tax rates and the
statutory U.S. income tax rate, tax on the repatriation of foreign earnings, and
foreign withholding taxes on dividends paid to the Company.
COMBINED YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE
Revenue for the year ended December 31, 1996 increased 15.6%, from $1,616.0
million to $1,867.5 million, over 1995, reflecting a 10.9% increase in the
number of rental transactions and a 4.3% increase in revenue per rental
transaction. The revenue increase resulted from greater overall market demand as
well as the benefits of specific marketing initiatives implemented by the
Company.
COSTS AND EXPENSES
Total costs and expenses for 1996 increased 15.4%, from $1,555.3 million to
$1,795.5 million, over 1995. Direct operating expenses for 1996 increased 12.9%,
from $724.8 million to $818.4 million, over 1995. As a percentage of revenue,
direct operating expenses for 1996 decreased to 43.8% of revenue as compared to
44.9% of revenue for 1995. The improvement was primarily attributable to lower
vehicle insurance costs (0.4% of revenue) resulting from improved claims
experience, as well as lower facility costs (0.6% of revenue), offset in part by
higher maintenance and damage costs (0.8% of revenue). In addition, 1995
expenses included environmental remediation costs and organizational
restructuring charges which approximated 0.6% of revenue.
Vehicle depreciation and lease charges for 1996 increased 13.3%, from $411.1
million to $465.6 million, over 1995. As a percent of revenue, vehicle
depreciation and lease charges for 1996 were 24.9% of revenue in 1996, as
compared to 25.4% of revenue in 1995. The change reflected a 15.5% increase in
the average rental fleet required to service higher rental day activity, and a
1.0% increase in the average monthly cost per vehicle. In addition, the net
proceeds received in excess of book value upon the disposition of used vehicles
improved by $17.0 million or 0.7% of revenue in 1996 over 1995. This was
primarily due to favorable market conditions for the sale of certain model
vehicles.
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 Cendant 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 both the tax provision and the
effective tax rate were 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
10
<PAGE>
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
1997, the Company's expenditures for new vehicles were approximately $4.4
billion and its proceeds from the disposition of used vehicles were
approximately $3.4 billion. The increase in vehicles was due to the inclusion of
vehicles previously financed under operating leases, the acquisition of First
Gray Line and an increase in domestic fleet levels. For 1998, the Company
expects its expenditures for new vehicles (net of proceeds from the disposition
of used vehicles) to be higher than in 1997. 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.
The Company expects that cash flows from operations and funds from available
credit facilities will be sufficient to enable the Company to meet its
anticipated cash requirements for operating purposes for the
next twelve months.
The Company also makes capital investments for property improvements and
non-revenue earning equipment. Capital investments for property improvements and
non-revenue earning equipment were $24.7 million in 1997, and management
estimates such expenditures will approximate $35 million in 1998. The Company's
customer receivables also provide liquidity with approximately 12 days of daily
sales outstanding.
The Company has a consolidated fleet financing program that provides for up
to $3.55 billion in financing for vehicles covered by Repurchase Programs, with
up to 25% of the facility available for vehicles not covered by Repurchase
Programs. The fleet program provides for the issuance of up to $1.9 billion of
asset backed variable funding notes (the "Commercial Paper Notes") and $1.65
billion of asset-backed medium term notes (the "Medium Term Notes"). The
Commercial Paper Notes and the Medium Term Notes are backed by, among other
things, a first priority security interest in the Company's vehicle fleet. The
Commercial Paper Notes are rated A-1 by Standard & Poor's Ratings Group
("Standard & Poor's") and P-1 by Moody's Investors Services, Inc. ("Moody's").
The Medium Term Notes are supported by a Surety Bond issued by MBIA and rated
AAA by Standard & Poor's and Aaa by Moody's. At December 31, 1997, the Company
had approximately $2.8 billion of debt outstanding under its fleet financing
facilities. In addition, at December 31, 1997, the Company had approximately
$828 million of additional credit available for vehicle purchases.
On February 26, 1998 the Company issued an additional $600 million of
asset-backed medium term notes (the "New MTNs"), the proceeds of which will be
used to repay borrowings under its Commercial Paper Notes. The New MTNs will
rank equal in right of payment with the Medium Term Notes and the Commercial
Paper Notes and will be supported by a Surety Bond issued by CapMAC and rated
AAA by Standard and Poor's and Aaa by Moody's.
ARACS is party to a $350.0 million secured credit agreement (the "Credit
Agreement") that provides for (i) a revolving credit facility in the amount of
up to $125.0 million which is available on a revolving basis until December 31,
2000 (the "Final Maturity Date") in order to finance the general corporate needs
of ARACS in the ordinary course of business (with up to $75.0 million of such
amount available for the issuance of standby letters of credit to support
worker's compensation and other insurance and bonding
11
<PAGE>
requirements of ARACS, the Company and their subsidiaries in the ordinary course
of business), and (ii) a standby letter of credit facility of up to $225.0
million available on a revolving basis to fund (a) any shortfall in certain
payments owing pursuant to fleet lease agreements and (b) maturing Commercial
Paper Notes if such Commercial Paper Notes cannot be repaid through the issuance
of additional Commercial Paper Notes or draws under the liquidity facility
supporting the Commercial Paper Notes (the "Liquidity Facility"). Borrowings
under the Credit Agreement are secured by substantially all of the tangible and
intangible assets of the Company, including its intellectual property and its
rights under the Master License Agreement, except for those assets which are
subject to a negative pledge. At December 31, 1997, the Company had issued
letters of credit under the Credit Facility of $34.5 million to support (i)
certain insurance requirements and (ii) certain airport concession agreements
and $200 million to support its Commercial Paper Notes.
Approximately 42% of the Company's outstanding debt at December 31, 1997 was
interest rate sensitive and had a weighted average interest rate at such date of
5.9%. The Company has developed an interest rate management policy, including a
target mix for average fixed rate and floating rate indebtedness on a
consolidated basis. However, an increase in interest rates may have a material
adverse impact on the Company's profitability.
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 December 31,
1997, the total debt for the Company's international operations was $81.7
million, of which $18.0 million was short-term (with original maturity of one
year or less) and $63.7 million was long-term. The impact on liquidity and
financial condition due to exchange rate fluctuations regarding the Company's
foreign operations is not material.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The agreements with the Company's lenders include a number of significant
covenants that, among other things, restrict its ability to dispose of non-fleet
assets, incur additional indebtedness, create liens, pay dividends, enter into
certain investments or acquisitions, repurchase or redeem capital stock, engage
in mergers or consolidations or engage in certain transactions with affiliates
and otherwise restrict corporate activities. Certain of these agreements also
require the Company to maintain specified financial ratios. A breach of any of
these covenants or the inability of the Company to maintain the required
financial ratios could result in a default in respect of the related
indebtedness. In the event of a default, the lenders could elect, among other
options, to declare the indebtedness, together with accrued interest and other
fees, to be immediately due and payable, failing which the lenders could proceed
against the collateral securing such indebtedness. As of December 31, 1997, the
Company was in compliance with all such covenants related to these agreements.
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 46% of the
Company's revenue and pre-tax income, respectively, in 1997. Any occurrence that
disrupts travel patterns during the summer period could have a
12
<PAGE>
material adverse effect on the Company's annual operating results. The Company's
fourth 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 PRONOUNCEMENT OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") is a recent pronouncement of the
Financial Accounting Standards Board, which is not required to be adopted at
this date. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal year ending December
31, 1998. The adoption of this statement will not have a material effect on the
Company's consolidated financial statements.
YEAR 2000
The Company has evaluated the effect on its information systems, primarily
computer software programs, to properly recognize and process date-sensitive
information related to the Year 2000. A preliminary assessment indicates that
ensuring the Company is Year 2000 compliant will involve a mix of purchasing new
systems, modifying existing systems and confirming vendor compliance. The
Company currently anticipates that incremental capital expenditures associated
with the Year 2000 will not have a material impact on the Company's operations.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issue. There can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
currently believes that its information systems will be Year 2000 compliant by
first quarter 1999.
FORWARD LOOKING INFORMATION
This report contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition. These
statements are based upon a number of assumptions and estimates which are
inherently subject to uncertainties and contingencies, many of which are beyond
the control of the Company, and reflect future business decisions which are
subject to change. Some of the assumptions may not materialize and unanticipated
events may occur which can affect the Company's results.
MARKET INFORMATION
The Company's Common Stock is listed on the NYSE under the symbol "AVI". The
following table sets forth for the period September 24, 1997 (date of IPO) to
December 31, 1997 the high and low sales price per share of the Common Stock on
the NYSE Composite Tape. As of March 18, 1998, there were approximately 4,752
holders of record. No dividends were paid in 1997.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Fourth Quarter (from September 24)............................................. 36 9/16 21 1/2
</TABLE>
13
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES OCTOBER 17,
------------------------- 1996
JANUARY 1, (DATE OF
1996 ACQUISITION)
YEAR ENDED TO TO YEAR ENDED
DECEMBER OCTOBER 16, DECEMBER 31, DECEMBER
31, 1995 1996 1996 31, 1997
----------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Revenue............................ $1,615,951 $1,504,673 $ 362,844 $2,046,154
----------- ------------ --------------- -----------
Costs and expenses:
Direct operating, net............ 724,759 650,750 167,682 863,839
Vehicle depreciation, net........ 324,186 275,867 66,790 460,629
Vehicle lease charges............ 86,916 100,318 22,658 81,461
Selling, general and
administrative................. 269,434 283,180 68,215 415,728
Interest, net.................... 145,199 120,977 34,212 167,314
Amortization of cost in excess of
net assets acquired............ 4,757 3,782 1,026 6,860
----------- ------------ --------------- -----------
1,555,251 1,434,874 360,583 1,995,831
----------- ------------ --------------- -----------
Income before provision for income
taxes............................ 60,700 69,799 2,261 50,323
Provision for income taxes......... 34,635 31,198 1,040 22,850
----------- ------------ --------------- -----------
Net income......................... $ 26,065 $ 38,601 $ 1,221 $ 27,473
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings per share:
Basic.............................. $ .84 $ 1.25 $ .04 $ .89
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Diluted............................ $ .84 $ 1.25 $ .04 $ .88
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
14
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
--------------- ---------------
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
Cash and cash equivalents...................................................... $ 50,886 $ 76,663
Accounts receivable, net....................................................... 311,179 359,463
Due from affiliates, net....................................................... 61,807
Prepaid expenses............................................................... 40,155 47,360
Vehicles, net.................................................................. 2,243,492 3,018,856
Property and equipment, net.................................................... 98,887 122,860
Other assets................................................................... 14,526 115,689
Deferred income tax assets..................................................... 113,660 142,025
Cost in excess of net assets acquired, net..................................... 196,765 396,040
--------------- ---------------
Total assets................................................................... $ 3,131,357 $ 4,278,956
--------------- ---------------
--------------- ---------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Accounts payable............................................................... $ 175,535 $ 329,706
Accrued liabilities............................................................ 329,245 328,411
Due to affiliates, net......................................................... 44,512
Current income tax liabilities................................................. 4,790 9,749
Deferred income tax liabilities................................................ 35,988 34,106
Public liability, property damage and other insurance liabilities, net......... 213,785 256,029
Debt........................................................................... 2,295,474 2,826,422
--------------- ---------------
Total liabilities.......................................................... 3,054,817 3,828,935
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.01 par value 20,000,000 shares authorized; none issued).....
Common stock ($.01 par value, 100,000,000 shares authorized; 30,925,000 shares
outstanding at December 31, 1997; 8,500,000 shares outstanding at December
31, 1996 after restatement for a 85,000 to 1 stock split on September 24,
1997)........................................................................ 85 309
Additional paid-in capital..................................................... 74,915 430,507
Retained earnings.............................................................. 1,184 28,294
Foreign currency translation adjustment........................................ 356 (9,089)
--------------- ---------------
Total stockholders' equity................................................. 76,540 450,021
--------------- ---------------
Total liabilities and stockholders' equity..................................... $ 3,131,357 $ 4,278,956
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' 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, 1995........................................ $ 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, 100,000,000 shares of
Common Stock authorized; 8,500,000 shares of Common Stock
outstanding at October 17, 1996 (Date of Acquisition) after
restatement for a 85,000 to 1 stock split on September 24,
1997)......................................................... $ 85 $ 74,915 $ 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...................................... 85 74,915 1,184 356 76,540
Net income for the year ended December 31, 1997................. 27,473 27,473
Sale of Class A common shares of Common Stock ($.01 par value)
through an initial public offering of 22,425,000 shares of
Common Stock on September 24, 1997............................ 224 355,592 355,816
Foreign currency translation adjustment......................... (9,445) (9,445)
Additional minimum pension liability............................ (363) (363)
----------- ----------- ----------- ----------- ---------
Balance, December 31, 1997...................................... $ 309 $ 430,507 $ 28,294 $ (9,089) $ 450,021
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
16
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
----------------------------- OCTOBER 17, 1996
JANUARY 1, 1996 (DATE OF
YEAR ENDED TO ACQUISITION) YEAR ENDED
DECEMBER 31, OCTOBER 16, TO DECEMBER 31,
1995 1996 DECEMBER 31, 1996 1997
------------ --------------- ----------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 26,065 $ 38,601 $ 1,221 $ 27,473
Adjustments to reconcile net income to net cash provided by
operating activities:
Vehicle depreciation........................................... 342,048 306,159 71,343 466,799
Depreciation and amortization of property and equipment........ 13,387 12,333 2,212 11,791
Amortization of cost in excess of net assets acquired.......... 4,757 3,782 1,026 6,860
Amortization of debt issuance costs............................ 2,660 2,423 3,653
Amortization of capitalized computer software costs............ 718
Deferred income tax provision.................................. 25,852 22,342 33 9,161
Undistributed (earnings) losses of associated companies........ (376) (232) 146
Provision for (benefit from) losses on accounts receivable..... (48) 1,238 227 3,208
Provision for public liability, property damage and other
insurance liabilities, net................................... 10,641 17,745 1,340 25,574
Changes in operating assets and liabilities:
Accounts receivable............................................ (22,644) (204,137) 10,327 (15,201)
Prepaid expenses............................................... (863) (2,125) (2,664) 3,914
Other assets................................................... 1,988 3,266 (3,459) (74,915)
Accounts payable............................................... (5,733) 82,354 (18,712) 152,777
Accrued liabilities............................................ 42,176 101,069 (24,718) (84,150)
------------ --------------- ----------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 439,910 384,818 38,176 537,808
------------ --------------- ----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions................................. (2,553,324) (2,325,460) (561,117) (4,406,183)
Vehicle deletions.............................................. 2,028,474 1,795,562 565,896 3,382,177
Payments for additions to property and equipment............... (36,939) (25,953) (3,484) (24,733)
Retirements of property and equipment.......................... 3,715 1,849 361 3,971
Payments for purchase of licensees............................. (3,134) (199,381)
------------ --------------- ----------------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES............ (558,074) (557,136) 1,656 (1,244,149)
------------ --------------- ----------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net....................... 359,316
Changes in debt:
Proceeds....................................................... 320,940 519,167 63,903 3,381,173
Repayments..................................................... (287,271) (267,317) (133,457) (3,031,885)
------------ --------------- ----------------- ------------
Net increase (decrease) in debt................................ 33,669 251,850 (69,554) 349,288
Payments for debt issuance costs................................. (5,515) (2,604) (29,302)
Proceeds (payments on) from intercompany loans................... 104,209 (27,696) (6,661) 53,761
Cash dividends................................................... (8,746) (1,398)
------------ --------------- ----------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ 123,617 220,152 (76,215) 733,063
------------ --------------- ----------------- ------------
Effect of exchange rate changes on cash.......................... (197) 260 94 (945)
------------ --------------- ----------------- ------------
Net increase (decrease) in cash and cash equivalents............. 5,256 48,094 (36,289) 25,777
Cash and cash equivalents at beginning of period................. 33,825 39,081 87,175 50,886
------------ --------------- ----------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 39,081 $ 87,175 $ 50,886 $ 76,663
------------ --------------- ----------------- ------------
------------ --------------- ----------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest....................................................... $ 149,885 $ 135,733 $ 28,170 $ 189,086
------------ --------------- ----------------- ------------
------------ --------------- ----------------- ------------
Income taxes................................................... $ 8,688 $ 6,220 $ 827 $ 8,899
------------ --------------- ----------------- ------------
------------ --------------- ----------------- ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
17
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include Avis Rent A Car,
Inc. (name changed from and formerly known as Rental Car System Holdings, Inc.
which was incorporated on October 17, 1996) and subsidiaries (including the
carved out corporate operations of HFS Car Rental, Inc. (name changed from and
formerly known as, and hereinafter referred to as, Avis, Inc.), which is the
holding company of Rental Car System Holdings, Inc., and Prime Vehicles Trust
(the "Vehicle Trust")), Avis International, Ltd. and subsidiaries, Avis
Enterprises, Inc. and subsidiaries, Pathfinder Insurance Company and Global
Excess & Reinsurance, Ltd. (collectively referred to as "Avis Rent A Car,
Inc."). All of the foregoing companies are ultimately wholly-owned subsidiaries
of Avis, Inc., which was acquired by Cendant Corporation (formerly HFS
Incorporated ("Cendant")) 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
common stock. Prior to October 17, 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, and receives certain financial incentives
and allowances from General Motors (see Notes 3, 5, 8, and 17). 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. and subsidiaries, Avis Enterprises, Inc. and subsidiaries,
Pathfinder Insurance Company and Global Excess & Reinsurance, Ltd. to the
Company. After the transfer, the remaining operations of Avis, Inc. consist of
an investment in a wholly-owned subsidiary which owns the Avis trade names and
trademarks. Pursuant to a plan developed by Cendant prior to the Date of
Acquisition, Cendant caused the Company to undertake an initial public offering
("IPO"), which reduced Cendant's equity interest in the Company to approximately
27.5%. On September 24, 1997, the Company issued and sold 22,425,000 shares of
its common stock through such IPO and received net proceeds of $359.3 million.
The net proceeds were used to repay amounts outstanding under the acquisition
credit facility utilized to complete the acquisition of The First Gray Line
Corporation (see Note 2), pay certain acquisition expenses incurred to complete
The First Gray Line Corporation acquisition and to prepay outstanding
indebtedness. A Cendant subsidiary 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. Cendant is reimbursed for such services at cost (see Note
4). In addition, a Cendant subsidiary charges the Company a royalty fee for the
use of the Avis trade name (see Note 4).
The acquisition of the Company was accounted for under the purchase method
and includes the operations of the Company subsequent to the Date of
Acquisition. A portion of the purchase price has been allocated to the fair
value of the Company. This fair value was calculated on the basis 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 fair value of the Company has been allocated to
individual assets and liabilities based on their fair value at the Date of
Acquisition.
18
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The purchase cost allocation at the Date of Acquisition has been allocated
to the Company as follows (in thousands):
<TABLE>
<S> <C>
Allocated purchase cost......................................... $ 75,000
---------
Fair value of:
Liabilities assumed........................................... 3,215,677
Assets acquired............................................... 3,059,186
---------
Net liabilities................................................. 156,491
---------
Cost in excess of net assets acquired........................... $ 231,491
---------
---------
</TABLE>
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES
Generally accepted accounting principles require the use of estimates, which
are subject to change, in the preparation of financial statements. Significant
accounting estimates used include estimates for determining public liability,
property damage and other insurance liabilities, and the realization of deferred
income tax assets. However, actual results may differ.
REVENUE RECOGNITION
Revenue is recognized over the period the vehicle is rented.
CASH AND CASH EQUIVALENTS
The Company considers deposits and short-term investments with an original
maturity date of three months or less to be cash equivalents.
VEHICLES, NET
Vehicles are stated at cost net of accumulated depreciation, incentives and
allowances. 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, NET
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, fixtures and 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
19
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, NET
Cost in excess of net assets acquired is amortized over a 40 year period and
is shown net of accumulated amortization of $1.0 million and $7.9 million at
December 31, 1996 and 1997, respectively.
IMPAIRMENT ACCOUNTING
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 cash flows generated. The measurement of impairment
requires management to use estimates of expected future cash flows. If an
impairment loss existed, the amount of the loss would be recorded under the
caption Costs and expenses in the consolidated statements of operations. It is
at least reasonably possible that future events or circumstances could cause
these estimates to change.
PUBLIC LIABILITY, PROPERTY DAMAGE AND OTHER INSURANCE LIABILITIES, NET
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, which is
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 year-end
exchange rates. The resultant translation adjustment is included as a component
of consolidated stockholders' equity. Results of operations are translated at
the average rates of exchange in effect during the year.
INCOME TAXES
Effective September 30, 1997, the Company files a U.S. consolidated federal
income tax return. The Company has adopted the calendar year as its fiscal year.
The Company files separate income tax returns in states where a consolidated
return is not permitted. The Company was included in the consolidated federal
income tax return of Cendant through September 29, 1997. Pursuant to the
regulations under the Internal Revenue Code, the Company's pro rata share of the
consolidated federal income tax liability of Cendant is allocated to the Company
on a separate return basis. The Predecessor Companies were
20
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in the consolidated federal income tax return of Avis, Inc. In
accordance with Statement of Financial Accounting Standards ("SFAS") 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 basis 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 $48.4
million, $66.1 million, $10.3 million and $65.6 million for the periods ended
December 31, 1995, October 16, 1996, December 31, 1996, and December 31, 1997,
respectively.
ENVIRONMENTAL COSTS
The Company's operations include the storage and dispensing of gasoline. The
Company accrues losses associated with the remediation of accidental fuel
discharges when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries from insurance companies and other
reimbursements are generally not significant. In 1997, the Company adopted the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants Statement of Position 96-1 "Environmental Remediation
Liabilities" ("SOP 96-1"). SOP 96-1 provides guidance on the timing and
measurement of liabilities associated with environmental remediation. The
adoption of this statement did not have a material effect on the results of
operations or financial position of the Company.
RECENT PRONOUNCEMENT OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
A recent pronouncement of the Financial Accounting Standards Board, which is
not required to be adopted at this date, is SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 130 is effective for fiscal
year ending December 31, 1998. The adoption of SFAS No. 130 is not expected to
have a material effect on the Company's consolidated financial statements. In
1997, the Company has elected early adoption of SFAS No. 131 which did not have
a material effect on the Company's consolidated financial statements (see Note
15).
21
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS
On August 20, 1997, the Company purchased The First Gray Line Corporation.
On September 18, 1997, the Company purchased certain assets and repurchased the
franchise rights of a licensee based in Albany, New York. These acquisitions had
an aggregate purchase cost of $199.4 million. The excess purchase cost over net
assets acquired was approximately $173.0 million.
The following is the preliminary purchase cost allocation for the
acquisitions mentioned above (in thousands):
<TABLE>
<S> <C>
Purchase cost..................................................... $ 199,381
---------
Fair value of:
Assets acquired................................................. 354,637
Liabilities assumed............................................. 328,269
---------
Net assets........................................................ 26,368
---------
Cost in excess of net assets acquired............................. $ 173,013
---------
---------
</TABLE>
The preliminary purchase cost allocations for these acquisitions are subject
to adjustment when additional information concerning asset and liability
valuations are obtained. The final asset and liability fair values may differ
from those set forth in the accompanying statement of financial position at
December 31, 1997. However, the changes are not expected to have a material
effect on the financial position of the Company. These acquisitions have been
accounted for by the purchase method. The financial statements include the
operating results of these acquisitions subsequent to their respective dates of
acquisition.
The acquisition of the franchise rights of the Albany, New York licensee, if
it had occurred on January 1, 1996 would not have had a material impact on the
results of operations of the Company.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition of The First Gray Line
Corporation had taken place on January 1, 1996 and 1997 (in thousands, except
earnings per share amounts):
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revenue........................................................... $ 2,065,347 $ 2,175,897
------------ ------------
------------ ------------
Net income........................................................ $ 49,999 $ 36,295
------------ ------------
------------ ------------
Basic earnings per share.......................................... $ 1.62 $ 1.17
------------ ------------
------------ ------------
Diluted earnings per share........................................ $ 1.62 $ 1.16
------------ ------------
------------ ------------
</TABLE>
22
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACCOUNTS RECEIVABLE, NET
Accounts receivable, net at December 31, 1996 and 1997 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Vehicle rentals....................................................... $ 94,480 $ 83,686
Due from General Motors............................................... 168,546 166,941
Due from other vehicle manufacturers.................................. 14,758 71,461
Damage claims......................................................... 10,697 11,938
Due from licensees.................................................... 3,903 4,361
Other................................................................. 19,022 21,955
---------- ----------
311,406 360,342
Less allowance for doubtful accounts.................................. (227) (879)
---------- ----------
$ 311,179 $ 359,463
---------- ----------
---------- ----------
</TABLE>
Amounts due from vehicle manufacturers include receivables for vehicles sold
under guaranteed repurchase contracts ("Repurchase Programs") and amounts due
for incentives and allowances. Incentives and allowances are based on all of the
following: the volume of vehicles to be purchased for a model year, the
manufacturers' willingness to encourage the Company to retain vehicles rather
than return the vehicles back to the manufacturer and 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 5 and 17).
NOTE 4--DUE FROM (TO) AFFILIATES, NET
Due from (to) affiliates, net at December 31, 1996 and 1997 consist of the
following balances with Cendant or its consolidated subsidiaries (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Note receivable from Wizard Co., Inc.(a).............................. $ 196,965
Subordinated vehicle financing notes(b)............................... (247,500)
Non-interest bearing advances(c)...................................... 112,342 $ (44,512)
---------- ----------
$ 61,807 $ (44,512)
---------- ----------
---------- ----------
</TABLE>
NOTES:
(a) Consists of a $194.1 million note receivable from Wizard Co., Inc., an
indirect wholly-owned subsidiary of Cendant, plus accrued interest (the
"Wizard Note"). The Wizard Note bears interest at 7.13% and is due on
October 1, 2006 and is guaranteed by Cendant. The Company assumed Wizard
Co., Inc.'s obligations under the Wizard Note pursuant to an Assignment,
Assumption and Release Agreement dated July 30, 1997 among Avis Rent A Car
System, Inc. and subsidiaries ("ARACS"), a wholly-owned subsidiary of the
Company, Wizard Co., Inc. and Reserve Claims Management Inc., a wholly-owned
subsidiary of the Company in exchange for payment by Wizard Co., Inc. to the
Company of the amount due under the Wizard Note.
23
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DUE FROM (TO) AFFILIATES, NET (CONTINUED)
(b) Represents loans from Avis, Inc. to the Vehicle Trust, as described in Note
8, to provide additional subordinated financing. The amounts provided
reduced, within certain limits, the amount of subordinated financing
required from other lenders. At December 31, 1996, the weighted average
interest rate under these loans was 10.75%. These loans were settled on July
31, 1997 upon the commencement of the domestic integrated fleet leasing
program (see Note 8).
(c) Primarily represents the transfer of assets from the Company to Cendant and
subsidiaries, recorded in connection with the October 17, 1996 acquisition
of Avis, Inc. by Cendant, as well as intercompany transactions relating to
management, service and administrative fees (since the Date of Acquisition)
and a royalty fee (since January 1, 1997). The amounts due from or (to)
Cendant and subsidiaries are interest free.
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
periods ended December 31, 1995 and October 16, 1996 (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, OCTOBER 16,
1995 1996
------------ ---------------
<S> <C> <C>
Vehicle related costs......................................... $ (3,954) $ (25,134)
Data processing............................................... 29,833 30,209
Employee benefits allocation.................................. (3,385) (2,776)
Rent.......................................................... (2,188) (2,459)
------------ ---------------
$ 20,306 $ (160)
------------ ---------------
------------ ---------------
</TABLE>
Expense and (income) items of the Company include the following charges from
Cendant and affiliates of Cendant for the period October 17, 1996 (Date of
Acquisition) to December 31, 1996 and for the year ended December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 17,
1996
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
--------------- ------------
<S> <C> <C>
Royalty fee................................................... $ 81,846
Reservations.................................................. $ 10,900 43,240
Data processing............................................... 8,772 38,826
Management, service and administrative fees................... 8,568 11,023
Interest on intercompany debt, net............................ 2,561 (8,073)
Rent.......................................................... 950 4,927
------- ------------
$ 31,751 $ 171,789
------- ------------
------- ------------
</TABLE>
These charges seek to reimburse the affiliated company for the actual costs
incurred. These amounts reflect the effect of various intercompany agreements
and certain allocations which are based upon such factors as square footage,
employee salaries, computer usage time, etc. Included in Management, service and
administrative fees for the year ended December 31, 1997 is a non-recurring
management fee charged until July 1997 which totaled $8,073,000. Effective
January 1, 1997, Cendant charged 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
24
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DUE FROM (TO) AFFILIATES, NET (CONTINUED)
October 17, 1996 to December 31, 1996 would have been reduced by $4.3 million
resulting in a pro forma net loss of $3.1 million. The royalty fee of 4.0%
consists of a base royalty of 3.0% of the Company's gross revenue and a
supplemental royalty of 1.0% of gross revenue payable quarterly in arrears
(which will increase 0.1% per year commencing in 1999 and each of the following
four years thereafter to a maximum of 1.5%) until July 30, 2002, the
supplemental royalty or a portion thereof may be deferred if the Company does
not meet certain financial targets.
NOTE 5--VEHICLES, NET
Vehicles at December 31, 1996 and 1997 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Vehicles............................................................... $ 2,250,309 $ 3,173,526
Vehicles acquired under long-term capital lease (see Note 8)........... 19,324
Buses and support vehicles............................................. 45,868 55,761
Vehicles held for sale................................................. 36,378 51,645
------------ ------------
2,351,879 3,280,932
Less accumulated depreciation.......................................... (108,387) (262,076)
------------ ------------
$ 2,243,492 $ 3,018,856
------------ ------------
------------ ------------
</TABLE>
Depreciation expense recorded for vehicles was $324.2 million, $275.9
million, $66.8 million and $460.6 million for the periods ended December 31,
1995, October 16, 1996, December 31, 1996 and December 31, 1997, respectively.
Depreciation expense reflects a net gain on the disposal of vehicles of $17.8
million, $30.3 million, $4.5 million and $6.2 million for the periods ended
December 31, 1995, October 16, 1996, December 31, 1996 and December 31, 1997,
respectively. It also reflects the amortization of certain incentives and
allowances from various vehicle manufacturers of approximately $77 million, $61
million, $14 million and $84 million for the periods ended December 31, 1995,
October 16, 1996, December 31, 1996 and, December 31, 1997, respectively.
During the periods ended December 31, 1995 and October 16, 1996, the Company
purchased from General Motors approximately $2.0 billion and $1.8 billion of
vehicles, net of incentives and allowances, respectively (see Notes 1 and 17).
In April 1990, the Company entered a seven year operating lease under which
vehicles were leased, with the ability to exchange such leased vehicles for
newly manufactured vehicles with the same value to the lessor. The lease was
terminated in 1997 and the remaining vehicles under the lease were purchased at
fair market value.
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, 1996, there were $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. These leases were terminated and refinanced on July 31, 1997
under a domestic integrated fleet financing program (see Note 8).
25
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--VEHICLES, NET (CONTINUED)
Rental expense for those vehicles under operating leases as described above
was $106.1 million, $93.0 million, $16.1 million, and $58.4 million for the
periods ended December 31, 1995, October 16, 1996, December 31, 1996 and
December 31, 1997, respectively.
NOTE 6--PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1996 and 1997 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Land.................................................................. $ 19,523 $ 25,269
Buildings............................................................. 11,862 12,775
Leasehold improvements................................................ 48,898 64,779
Furniture, fixtures and equipment..................................... 10,997 13,456
Construction-in-progress.............................................. 9,946 18,714
---------- ----------
101,226 134,993
Less accumulated depreciation and amortization........................ (2,339) (12,133)
---------- ----------
$ 98,887 $ 122,860
---------- ----------
---------- ----------
</TABLE>
NOTE 7--ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 and 1997 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Payroll and related costs............................................. $ 73,142 $ 101,962
Taxes, other than income taxes........................................ 29,522 22,353
Rents and property related............................................ 30,889 35,644
Interest.............................................................. 18,531 7,294
Sales and marketing................................................... 20,395 21,722
Vehicle related....................................................... 18,784 25,475
Other various......................................................... 137,982 113,961
---------- ----------
$ 329,245 $ 328,411
---------- ----------
---------- ----------
</TABLE>
26
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--FINANCING AND DEBT
Debt outstanding at December 31, 1996 and 1997 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Commercial Paper Notes (at an average rate of 5.9%).................................. $1,091,800
Short-term vehicle trust financing--revolving credit facilities...................... $1,970,000
Short-term notes--foreign at 3.89% to 13.00% in 1996 and 5.77% to 13.5% in 1997...... 65,516 17,996
Current portion of long-term debt.................................................... 49,644
Current portion of 7.5% capital lease................................................ 40,169
Other current debt................................................................... 1,060
------------ ------------
Total current debt............................................................. 2,076,745 1,159,440
------------ ------------
Medium Term Notes due July 2000 at 6.22%............................................. 800,000
Medium Term Notes due July 2002 at 6.40%............................................. 850,000
Vehicle manufacturer's floating rate notes due September 1998
($50,719 senior at 8.50% and $16,281 subordinated at 10.00%)....................... 67,000
Vehicle manufacturer's floating rate notes due October 2001
($63,731 senior at 7.16% and $54,269 subordinated at 8.91%)........................ 118,000
Other domestic debt.................................................................. 2,916 1,777
Debt of foreign subsidiaries:
Floating rate notes due July 2000 at rates from 5.81% to 7.02%................... 15,205
Floating rate notes due February 1998 at 4.75%................................... 2,935
Floating rate notes due August 1998 at 6.94% to 8.65%............................ 27,878
------------ ------------
$2,295,474 $2,826,422
------------ ------------
------------ ------------
</TABLE>
On July 31, 1997, the Company through ARACS entered into a domestic
integrated fleet financing program that provided for up to $3.65 billion in
financing for vehicles covered by Repurchase Programs, with up to 25% of the
facility available for vehicles not covered by Repurchase Programs. As of
December 31, 1997, the availability of the domestic integrated fleet financing
program is $3.55 billion. The domestic integrated fleet financing program
provides for the issuance of up to $1.9 billion of asset backed variable funding
notes (the "Commercial Paper Notes") and $1.65 billion of asset backed medium
term notes (the "Medium Term Notes"). The Commercial Paper Notes and the Medium
Term Notes are backed by a first priority security interest in the Company's
vehicle fleet. Additional credit enhancement was provided for the Medium Term
Notes by establishing an escrow account totaling $66 million which is included
in "Other assets" on the accompanying consolidated statement of financial
position at December 31, 1997. The weighted average interest rate on commercial
paper was 5.6% for the year ended December 31, 1997. Average commercial paper
borrowings during 1997 amounted to $1.3 billion.
As part of the acquisition of The First Gray Line Corporation (see Notes 1
and 2), the Company assumed a $200 million vehicle financing facility between
Grand Rent A Car, Inc. (a subsidiary of The First Gray Line Corporation) and
Atlantic Asset Securitization Corporation, under a credit agreement originally
dated as of September 15, 1995. This agreement provides for the financing of
vehicles used in The First Gray Line Corporation's rental business, and is
scheduled to expire on August 15, 1998. At December 31, 1997 under this credit
agreement there was $115 million outstanding and included in Commercial
27
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--FINANCING AND DEBT (CONTINUED)
Paper Notes. The weighted average interest rate and average borrowing under this
credit agreement was 5.7% and $171.1 million respectively for the period August
20, 1997 to December 31, 1997.
On July 31, 1997, ARACS entered into a $470.0 million secured credit
facility (the "Credit Facility") which is guaranteed by the Company and certain
of ARACS' subsidiaries to replace the Company's prior credit facility. The
following is a summary of the material terms and conditions of the Credit
Facility:
The Credit Facility consists of (i) a revolving credit facility in the
amount of up to $125.0 million and is available on a revolving basis until
December 31, 2000 in order to finance the working capital needs of ARACS in the
ordinary course of business (with up to $75.0 million of such amount available
for the issuance of standby letters of credit to support worker's compensation
and other insurance and bonding requirements of ARACS, the Company and their
subsidiaries in the ordinary course of business), (ii) a standby letter of
credit facility of up to $225.0 million available on a revolving basis to fund
(a) any shortfall in certain payments owing to AESOP Leasing, a subsidiary of
ARACS, pursuant to fleet agreements and (b) maturing Commercial Paper Notes if
such Commercial Paper Notes cannot be repaid through the issuance of additional
Commercial Paper Notes or draws under the liquidity facility supporting the
Commercial Paper Notes, (iii) a term loan facility in the amount of $120.0
million to finance working capital needs in the ordinary course of business,
which was due to be repayable in installments. This term loan facility was paid
in full on December 1, 1997. For the period July 31, 1997 through December 1,
1997 the average outstanding borrowings on the term loan facility were $74.6
million with a weighted average interest rate of 8.0%. As a result of this
repayment, the Credit Facility has been reduced to $350 million. At December 31,
1997, the Company had issued letters of credit of $34.5 million to support (i)
certain insurance requirements and (ii) certain airport concession agreements
and $200 million to support its Commercial Paper Notes under the Credit
Facility. At December 31, 1997, no amounts were outstanding under the Credit
Facility.
Interest accrues on borrowings outstanding under the Credit Facility, at a
rate equal to, at the option of ARACS, (A) the sum of (i) the highest of (a) the
rate of interest publicly announced by Chase Securities Inc. as its prime rate
in effect at its principal office in New York City, (b) the secondary market
rate for three-month certificates of deposit (adjusted for statutory reserve
requirements) plus 1% and (c) the federal funds effective rate from time to time
plus 0.5%, and (ii) an applicable margin; or (B) the sum of (i) the rate
(adjusted for statutory reserve requirements) at which eurodollar deposits for
one, two, three or six months (as selected by ARACS) are offered in the
interbank eurodollar market and (ii) an applicable margin.
The Credit Facility is secured by the tangible and intangible assets of
ARACS and the Company (including, without limitation, its intellectual property,
its rights under the Master License Agreement and related agreements, real
property and all of the capital stock or equivalent equity ownership interests
of ARACS and each of its direct and indirect domestic subsidiaries and 65% of
ARACS first-tier foreign subsidiaries), except for those assets which are
subject to a negative pledge or as to which the agents for the Credit Facility
shall determine in their sole discretion that the costs of obtaining such a
security interest are excessive in relation to the value of the security to be
afforded thereby.
The weighted average interest rate of the short-term notes--foreign as of
December 31, 1996 and December 31, 1997 was 6.2% and 8.7%, respectively.
Through July 30, 1997, the primary source of funding for domestic vehicles
was provided by the Vehicle Trust (a grantor trust). Amounts drawn against this
facility were used to purchase vehicles and pay
28
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--FINANCING AND DEBT (CONTINUED)
certain expenses of the Vehicle Trust. The security for the Vehicle Trust
financing facility consisted of a lien on the vehicles acquired under the
facility, which at December 31, 1996, totaled approximately $2.1 billion,
exclusive of related valuation reserves. The security for the Vehicle Trust
financing facility also consisted of security interests in certain other assets
of the Vehicle Trust. Additionally, the Vehicle Trust and its security agreement
required 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 was to be
provided by vehicle manufacturer finance companies and by Avis, Inc.
Consequently, the Vehicle Trust financing facility consisted of loans from
banks, vehicle manufacturer finance companies and Avis, Inc. short-term notes
were issued pursuant to a $2.5 billion revolving credit facility dated as of
October 17, 1996 which matured on October 16, 1997. On December 31, 1996, the
weighted average interest rate of borrowings under this revolving credit
facility was 6.00%. For the period from October 17, 1996 to December 31, 1996,
the average outstanding borrowings under this facility was $2 billion with a
weighted average interest rate of 5.98%. This revolving credit facility required
a fee of 1/8 of 1% on the committed amount. Subordinated debt of $318 million
was required under the Vehicle Trust financing. At December 31, 1996, the
Company 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 was $267 million, of
which up to $260 million may have been used as subordinated debt. On December
31, 1996, $185 million was outstanding of which $70.5 million of the outstanding
debt was deemed subordinated. On December 31, 1996, the weighted average
interest rate of borrowings under these loan agreements was 8.5%. For the period
October 17, 1996 to December 31, 1996, the average outstanding borrowings under
these loan agreements was $185 million with a weighted average interest rate of
8.41%.
In November 1992, the Predecessor Companies entered into a five year capital
lease under which $96.7 million of vehicles were leased. This lease terminated
on September 24, 1997.
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, prohibit the payment of
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. As of December 31, 1997, the Company was in compliance with
all such covenants related to these agreements.
Mandatory maturities of long-term obligations, including current maturities,
for each of the next five years ending December 31, and thereafter, are as
follows (in thousands):
<TABLE>
<S> <C>
1998.............................................................. $ 49,644
1999.............................................................. 1,084
2000.............................................................. 815,414
2001.............................................................. 228
2002.............................................................. 850,220
Thereafter........................................................ 36
</TABLE>
29
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--FINANCING AND DEBT (CONTINUED)
OTHER CREDIT FACILITIES
At December 31, 1997, the Company has available letters of credit/working
capital agreements totaling $33.5 million 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.
At December 31, 1997, the Company has outstanding letters of credit totaling
$26.8 million.
In addition, for certain of its international operations, the Company has
available at December 31, 1997, unused lines of credit of $203.2 million. 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
$44.0 million and $24.6 million of its outstanding debt from a weighted average
variable interest rate to a fixed rate of 7.1% and 6.3% at December 31, 1996 and
1997, respectively. The variable interest element with respect to these interest
rate swap agreements is reset quarterly and interest is settled on a net basis
for each agreement semi-annually. The interest rate swap agreements will
terminate in 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, 1995, October 16, 1996, December 31, 1996 and December 31,
1997 was $146,000, $582,000, $285,000 and $909,000, 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 9--FAIR VALUE OF FINANCIAL INSTRUMENTS
The net interest payable and the estimated fair value of the Company's
interest rate swap agreements represent liabilities of approximately $578,000
and $1,400,000 at December 31, 1996, and $193,000 and $366,000 at December 31,
1997, 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. At December 31, 1997, the carrying value of the Medium
Term Notes exceeds fair value by approximately $9.9 million.
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.
30
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
JANUARY 1, 1996 (DATE OF
TO ACQUISITION)
YEAR ENDED OCTOBER 16, TO YEAR ENDED
DECEMBER 31, 1995 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- --------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Current:
State............................. $ 1,422 $ 2,176 $ 719 $ 1,013
Foreign........................... 7,361 6,680 288 12,676
------- ------- ------ -------
8,783 8,856 1,007 13,689
------- ------- ------ -------
Deferred:
Federal........................... 19,057 19,614 (85) 12,463
State............................. 410
Foreign........................... 6,795 2,728 118 (3,712)
------- ------- ------ -------
25,852 22,342 33 9,161
------- ------- ------ -------
Provision for income taxes.......... $ 34,635 $ 31,198 $ 1,040 $ 22,850
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
The effective income tax rate for the periods ended December 31, 1995,
October 16, 1996, December 31, 1996 and December 31, 1997 varies from the
statutory U.S. federal income tax rate due to the following (dollars amounts in
thousands):
<TABLE>
<CAPTION>
JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, 1995 OCTOBER 16, 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
Statutory U.S. federal income tax rate............................... $ 21,245 35.0% $ 24,429 35.0%
Tax effect of foreign operations and dividends....................... 8,984 14.8 5,134 7.4
Amortization of cost in excess of net assets acquired and
other intangibles.................................................. 1,633 2.7 1,045 1.5
State income taxes, net of federal tax benefit....................... 924 1.5 1,413 2.0
Other non-deductible business expenses............................... 550 .9 462 .6
Other................................................................ 1,299 2.2 (1,285) (1.8)
--------- --- --------- ---
Effective income tax rate............................................ $ 34,635 57.1% $ 31,198 44.7%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF
ACQUISITION)
TO YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Statutory U.S. federal income tax rate........................... $ 791 35.0% $ 17,613 35.0%
Tax effect of foreign operations and dividends................... (1,073) (47.5) 1,436 2.9
Amortization of cost in excess of net assets acquired and
other intangibles.............................................. 359 15.9 2,369 4.7
State income taxes, net of federal tax benefit................... 469 20.8 924 1.8
Other non-deductible business expenses........................... 494 21.8 508 1.0
--------- --------- --------- ---------
Effective income tax rate........................................ $ 1,040 46.0% $ 22,850 45.4%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
31
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
In accordance with SFAS 109, the net deferred income tax assets at December
31, 1996 and 1997, include the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
GROSS DEFERRED INCOME TAX ASSETS:
Accrued liabilities...................................................................... $ 157,503 $ 220,180
Net operating loss carryforwards......................................................... 78,172 96,253
Alternative minimum income tax credit carryforwards...................................... 3,025 3,025
---------- -----------
238,700 319,458
---------- -----------
GROSS DEFERRED INCOME TAX LIABILITIES:
Tax depreciation in excess of book depreciation.......................................... (152,346) (197,082)
Prepaids and other....................................................................... (8,682) (14,457)
---------- -----------
(161,028) (211,539)
---------- -----------
Net deferred income tax assets........................................................... $ 77,672 $ 107,919
---------- -----------
---------- -----------
</TABLE>
The Company has alternative minimum tax net operating loss carryforwards of
$184.4 million. The net operating loss carryforward is $275.0 million; the net
operating loss carryforwards expire as follows: 2000, $12.2 million; 2001, $7.1
million; 2004, $93.1 million; 2007, $67.7 million; 2008, $41.1 million; 2009,
$18.3 million; and 2012, $35.5 million.
NOTE 11--RETIREMENT BENEFITS
The Company, through its subsidiary 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, 1995, October 16,
1996, December 31, 1996 and December 31, 1997, the cost of the plan was $1.7
million, $1.4 million, $352,000 and $1.8 million, 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, 1995,
October 16, 1996, December 31, 1996 and December 31, 1997 amounted to $1.8
million, $1.5 million, $394,000 and $2.1 million, 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.
32
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--RETIREMENT BENEFITS (CONTINUED)
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, 1996 and 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
1996
---------------------------------------
U.S. PLANS
--------------------------
SALARIED AND
HOURLY
EMPLOYEES AS
OF JUNE 30, BARGAINING CANADIAN
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)..................................... 1,440 283 (336)
Prior service cost not yet recognized in net periodic pension cost......... 632
Remaining unrecognized obligation.......................................... (915)
Unrecognized net transition asset.......................................... (2,833)
------------- ----------- -----------
Pension (liability) asset included in the consolidated statement of
financial position....................................................... $ (3,946) $ (808) $ 1,451
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------
U.S. PLANS
--------------------------
SALARIED AND
HOURLY
EMPLOYEES AS
OF JUNE 30, BARGAINING CANADIAN
1985 PLAN PLAN
------------- ----------- -----------
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested................................................................... $ (55,366) $ (8,810) $ (3,848)
Nonvested................................................................ (5,665) (358)
------------- ----------- -----------
Total.................................................................. $ (61,031) $ (9,168) $ (3,848)
------------- ----------- -----------
------------- ----------- -----------
Actuarial present value of projected benefit obligation.................... $ 80,715 $ 9,168 $ 4,204
Plan assets at fair value.................................................. 71,623 7,309 8,360
------------- ----------- -----------
Projected benefit obligation (in excess of) less than plan assets.......... (9,092) (1,859) 4,156
Unrecognized net actuarial loss (gain)..................................... 6,600 401 (137)
Prior service cost not yet recognized in net periodic pension cost......... 1,228
Remaining unrecognized obligation.......................................... (1,629)
Unrecognized net transition asset.......................................... (2,586)
------------- ----------- -----------
Pension (liability) asset included in the consolidated statement of
financial position....................................................... $ (2,492) $ (1,859) $ 1,433
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
33
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--RETIREMENT BENEFITS (CONTINUED)
Net pension costs of the defined benefit plans for the periods ended
December 31, 1995, October 16, 1996, December 31, 1996 and December 31, 1997,
include the following components (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, 1995 OCTOBER 16, 1996
----------------------- ----------------------
U.S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Service cost--benefits earned during the period...................... $ 2,566 $ 76 $ 2,401 $ 59
Interest cost on projected benefit obligation........................ 4,069 304 3,679 206
Return on assets--Actual gain on plan assets......................... (10,768) (578) (3,194) (538)
Net amortization of actuarial loss (gain) and prior service cost..... 6,184 (794)
Contributions to union plans and other............................... 2,211 2,029
Amortization of unrecognized net asset at transition................. (130) (106)
---------- ----- --------- -----
Net pension cost (benefit)........................................... $ 4,262 $ (328) $ 4,121 $ (379)
---------- ----- --------- -----
---------- ----- --------- -----
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF ACQUISITION)
TO YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31,1997
---------------------- ----------------------
U.S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Service cost--benefits earned during the period....................... $ 302 $ 28 $ 3,197 $ 113
Interest cost on projected benefit obligation......................... 357 54 5,783 269
Return on assets--Actual gain on plan assets.......................... (551) (115) (8,857) (573)
Net amortization of actuarial loss and prior service cost............. 390 3,050
Contributions to union plans and other................................ 733 2,773
Amortization of unrecognized net asset at transition.................. (28) (132)
--------- ----- --------- -----
Net pension cost (benefit)............................................ $ 1,231 $ (61) $ 5,946 $ (323)
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
At December 31, 1996 and 1997, the measurement of the projected benefit
obligation was based upon the following:
<TABLE>
<CAPTION>
1996 1997
---------------------- ----------------------
U. S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Discount rate............................................................. 7.75% 7.00% 7.25% 7.00%
Compensation increase..................................................... 5.00 4.00 4.75 4.00
Long-term return on plan assets........................................... 8.75 7.00 9.00 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 $10.2 million and $11.0 million at December
31, 1996 and 1997, respectively, and is included in accrued liabilities on the
accompanying statement of financial position. The projected benefit obligation
of the plan was $12.1 million and $12.7 million at December 31, 1996 and 1997,
respectively.
34
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EARNINGS PER SHARE ("EPS")
During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". The adoption of this pronouncement did not have a material
impact on the Company. In calculating basic earnings per share, the shares
issued in the initial public offering of 22,425,000 shares together with
8,500,000 shares, resulting from the 85,000 to 1 stock split, were used for all
periods presented. Diluted EPS for the year ended December 31, 1997 was
calculated as follows (in thousands, except share amounts):
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
DILUTED EPS
Income available to common stockholders............................................................ $ 27,473
-------------
Weighted average common shares outstanding......................................................... 30,925,000
Plus: Dilutive effect of the assumed exercise of stock options (i)................................. 256,134
-------------
Adjusted weighted average shares outstanding....................................................... 31,181,134
-------------
-------------
Diluted EPS (i).................................................................................... $ 0.88
-------------
-------------
</TABLE>
- ------------------------
(i) Prior to September 23, 1997 there were no stock options outstanding.
NOTE 13--STOCK OPTION PLAN
On September 23, 1997, the Avis Rent A Car, Inc. 1997 Stock Option Plan (the
"Stock Option Plan") was adopted by the Board of Directors under which 4,620,977
shares of Common Stock were reserved for issuance upon the exercise of options
granted to officers, key employees, independent contractors and non-employee
Directors of the Company and its designated subsidiaries. On September 23, 1997,
3,963,900 options were granted at $17.00 per share, the fair market value of the
Company's common stock on the date of grant. The primary purpose of the Stock
Option Plan is to provide additional incentive to officers, key employees,
independent contractors and non-employee Directors of the Company and to
strengthen their commitment to the Company and its subsidiaries.
Each non-employee Director of the Company received an initial automatic
grant of an option to purchase 50,000 shares of Common Stock under the Stock
Option Plan. Subsequently elected non-employee Directors will receive a like
grant under the Stock Option Plan upon election or appointment to the Board of
Directors.
The exercise price of each option under the Stock Option Plan may not be
less than the fair market value of a share of Common Stock on the date the
option is granted. Options held by an optionee will generally become exercisable
as to 20% of the shares covered by such options on the first anniversary of the
date of grant and with respect to an additional 20% of the shares covered by
such options on each of the four succeeding anniversaries of the date of grant
if the optionee continues to be employed or retained as an independent
contractor by the Company, on each such date. All options held by an optionee
will become fully exercisable (to the extent not already exercisable) if a
"change of control transaction" (as defined in the Stock Option Plan) occurs.
Shares of Common Stock acquired upon the exercise of the options may be subject
to restrictions on transfer which will be set forth in the agreement evidencing
the grant of the option. All options granted under the Stock Option Plan, to the
extent not exercised, expire on the earliest of (i) the tenth anniversary of the
date of grant, (ii) two years following the optionee's termination of employment
on account of death, retirement, disability or (iii) one year following the
35
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STOCK OPTION PLAN (CONTINUED)
termination of optionee's employment for any other reason. Grants of options
under the Stock Option Plan are subject to an annual per-participant maximum
grant of shares of Common Stock.
Generally, the Board of Directors of the Company may from time to time amend
or terminate the Stock Option Plan, provided that (i) no such amendment or
termination may adversely affect the rights of any participant without the
consent of such participant and (ii) to the extent required by any law,
regulation or stock exchange rule, no amendment shall be effective without the
approval of the Company's stockholders.
The Company makes no recognition of the options in the financial statements
until they are exercised. The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans and does not recognize compensation
expense for its stock-based compensation plans. The Company has adopted only the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123").
The following is a summary of stock option activity for the period September
23, 1997 through December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Granted September 23, 1997 (inception of the stock option
plan)........................................................ 3,963,900 $ 17.00
Forfeited...................................................... (78,200) $ 17.00
----------
Outstanding at end of year..................................... 3,885,700 $ 17.00
----------
----------
No options were exercisable at December 31, 1997.
</TABLE>
Pro forma disclosures are provided for 1997 as if the Company adopted the
cost recognition requirements under SFAS 123. The fair value of each option
granted is (estimated on the date of grant using the Black-Scholes
option-pricing model) $9.80 using the following assumptions: (1) expected
volatility of 45.0%, (2) risk-free interest rate of 5.7% and (3) expected life
of 7.5 years. The weighted-average remaining contractual life of the stock
options is 9.6 years at December 31, 1997. Had compensation expense been
recognized for the year ended December 31, 1997, grants for stock-based
compensation plans in accordance with provisions of SFAS 123, the Company would
have recorded net income and earnings per share as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net income................................................. $ 27,473 $ 26,330
----------- -----------
----------- -----------
Basic earnings per share................................... $ .89 $ .85
----------- -----------
----------- -----------
Diluted earnings per share................................. $ .88 $ .84
----------- -----------
----------- -----------
</TABLE>
36
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--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.
Operating lease payments and airport concession fees charged to expense for
the periods ended December 31, 1995, October 16, 1996 , December 31, 1996 and
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
JANUARY 1, 1996 (DATE OF
TO ACQUISITION)
YEAR ENDED OCTOBER 16, TO YEAR ENDED
DECEMBER 31, 1995 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- --------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Minimum fees........................ $ 108,965 $ 88,787 $ 23,576 $ 122,015
Contingent fees..................... 56,624 61,290 13,220 72,954
----------------- --------------- -------- --------
165,589 150,077 36,796 194,969
Less sublease rentals............... (4,427) (3,843) (1,000) (4,741)
----------------- --------------- -------- --------
$ 161,162 $ 146,234 $ 35,796 $ 190,228
----------------- --------------- -------- --------
----------------- --------------- -------- --------
</TABLE>
Future minimum rental commitments under noncancelable operating leases
amounted to approximately $446.1 million at December 31, 1997. The minimum
rental payments due in each of the next five years ending December 31, and
thereafter, are as follows (in thousands):
<TABLE>
<S> <C>
1998...................................................................... $ 93,110
1999...................................................................... 68,265
2000...................................................................... 55,282
2001...................................................................... 42,249
2002...................................................................... 30,530
Thereafter................................................................ 156,655
</TABLE>
At December 31, 1997, future minimum rental commitments include $81.2
million due to a subsidiary of Cendant.
In addition to the Company's lease commitments, the Company has (i)
outstanding purchase commitments of approximately $1.4 billion at December 31,
1997, which relate principally to vehicle purchases and (ii) employment
agreements with certain executives.
37
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION
The Company operates in one industry segment, the rental car business. The
Company's rental car business rents vehicles to business and leisure travelers,
and is divided into four main geographic areas; the United States, Australia/New
Zealand, Canada, and other Foreign Operations. Revenue generated from the car
rental business is recorded in the country in which the vehicle is rented. The
accounting policies of each geographic area are the same as those described in
the summary of significant accounting policies (see Note 1). The operations
within major geographic areas for the periods ended December 31, 1995, October
16, 1996, December 31, 1996, and December 31, 1997 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------
OTHER
UNITED AUSTRALIA/ FOREIGN
STATES NEW ZEALAND CANADA OPERATIONS CONSOLIDATED
------------ ----------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue.................................... $ 1,414,380 $ 113,744 $ 67,809 $ 20,018 $1,615,951
------------ -------- --------- ----------- ------------
------------ -------- --------- ----------- ------------
Total assets............................... $ 2,535,621 $ 133,629 $ 97,426 $ 58,222 $2,824,898
------------ -------- --------- ----------- ------------
------------ -------- --------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED OCTOBER 16, 1996
----------------------------------------------------------------------
OTHER
UNITED AUSTRALIA/ FOREIGN
STATES NEW ZEALAND CANADA OPERATIONS CONSOLIDATED
------------ ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 1,313,619 $ 105,401 $ 69,814 $ 15,839 $1,504,673
------------ -------- ---------- ----------- ------------
------------ -------- ---------- ----------- ------------
Total assets............................. $ 2,859,202 $ 115,082 $ 147,617 $ 65,796 $3,187,697
------------ -------- ---------- ----------- ------------
------------ -------- ---------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
OTHER
UNITED AUSTRALIA/ FOREIGN
STATES NEW ZEALAND CANADA OPERATIONS CONSOLIDATED
------------ ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 312,194 $ 31,107 $ 13,467 $ 6,076 $ 362,844
------------ -------- ---------- ----------- ------------
------------ -------- ---------- ----------- ------------
Total assets............................. $ 2,839,313 $ 120,216 $ 122,657 $ 49,171 $3,131,357
------------ -------- ---------- ----------- ------------
------------ -------- ---------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------
OTHER
UNITED AUSTRALIA/ FOREIGN
STATES NEW ZEALAND CANADA OPERATIONS CONSOLIDATED
------------ ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 1,804,478 $ 131,228 $ 85,021 $ 25,427 $2,046,154
------------ -------- ---------- ----------- ------------
------------ -------- ---------- ----------- ------------
Total assets............................. $ 3,997,485 $ 98,145 $ 131,987 $ 51,339 $4,278,956
------------ -------- ---------- ----------- ------------
------------ -------- ---------- ----------- ------------
</TABLE>
38
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
------------------------------------------------------
THE COMPANY
-------------------
QUARTERS ENDED
OCTOBER 17, 1996
OCTOBER 1, 1996 (DATE OF
TO ACQUISITION)
MARCH 31, JUNE 30, SEPTEMBER 30, OCTOBER 16, TO
1996 1996 1996 1996 DECEMBER 31, 1996
---------- ---------- ------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Revenue................................... $ 418,118 $ 469,448 $ 531,478 $ 85,629 $ 362,844
Costs and expenses........................ 416,585 441,725 492,742 83,822 360,583
---------- ---------- ------------- --------------- -------------------
Income before provision for income
taxes................................... 1,533 27,723 38,736 1,807 2,261
Provision for income taxes................ 685 12,392 17,315 806 1,040
---------- ---------- ------------- --------------- -------------------
Net income................................ $ 848 $ 15,331 $ 21,421 $ 1,001 $ 1,221
---------- ---------- ------------- --------------- -------------------
---------- ---------- ------------- --------------- -------------------
Earnings per share:
Basic..................................... $ .03 $ .50 $ .69 $ .03 $ .04
---------- ---------- ------------- --------------- -------------------
---------- ---------- ------------- --------------- -------------------
Diluted................................... $ .03 $ .50 $ .69 $ .03 $ .04
---------- ---------- ------------- --------------- -------------------
---------- ---------- ------------- --------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
QUARTERS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
---------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue................................... $ 456,014 $ 489,633 $ 580,049 $ 520,458
Costs and expenses........................ 449,031 472,256 555,096 519,448
---------- ---------- ------------- ---------------
Income before provision for income
taxes................................... 6,983 17,377 24,953 1,010
Provision for income taxes................ 2,778 8,476 11,085 511
---------- ---------- ------------- ---------------
Net income................................ $ 4,205 $ 8,901 $ 13,868 $ 499
---------- ---------- ------------- ---------------
---------- ---------- ------------- ---------------
Earnings per share:
Basic..................................... $ .14 $ .29 $ .45 $ .02
---------- ---------- ------------- ---------------
---------- ---------- ------------- ---------------
Diluted................................... $ .14 $ .29 $ .45 $ .02
---------- ---------- ------------- ---------------
---------- ---------- ------------- ---------------
Shares of Common Stock outstanding:
Basic................................... 30,925,000
---------------
---------------
Diluted................................. 31,949,535
---------------
---------------
</TABLE>
For all periods presented through September 30, 1997, the weighted average
shares of common stock outstanding for both basic and diluted earnings per share
computations are 30,925,000.
NOTE 17--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. Two members of the
Company's board of directors are executive officers of Cendant and also serve on
the board of Avis Europe Limited (formerly Cilva), the parent company of Avis
Europe, plc.
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, net" on the
accompanying consolidated statement of financial position at December 31, 1997
(see Note 3). Under the terms of certain financing agreements with General
Motors, the Company is required to purchase a significant percentage
39
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--RELATED PARTY TRANSACTIONS (CONTINUED)
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 5). At December 31, 1996, the Company had a $250.0 million
line of credit, respectively, from General Motors which may be used for the
Vehicle Trust financing (see Note 8). Of this facility, $200.0 million was
available for subordinated debt at December 31, 1996. As of December 31, 1996,
the Company utilized $118.0 million of this facility, of which $54.3 million was
subordinated. This facility required a fee of 1/4 of 1% on the unused portion.
At December 31, 1997, the Company is affiliated with Cendant which owns
approximately 27.5% of the Company. For the year ended December 31, 1997, the
Company earned revenues of approximately $2.2 million from Cendant and its
subsidiary companies, of which approximately $76 thousand was outstanding and is
included in Accounts receivable on the accompanying consolidated statement of
financial position at December 31, 1997. The Company purchased approximately
$90.6 million of goods and services from these affiliated companies.
NOTE 18--LITIGATION
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. The Company is not currently involved in
any legal proceeding which it believes would have a material adverse effect upon
its financial condition or results of operations. However, the Company is
involved in the following litigation:
In the case of LINDA A. PUGH, ET AL., V. AVIS RENT A CAR SYSTEMS, INC. AND
NEW HANOVER RENT-A-CAR, INC., 7-96-CV-91-F(2), (E.D.N.C.), a suit in federal
court in North Carolina alleging race discrimination, the Company and the
Plaintiffs have entered into a Settlement Agreement, subject to court approval,
providing for payment of $1.875 million plus approximately $1.4 million in
attorneys fees, administration costs and costs of notice to potential class
members, to settle and dismiss all claims against the Company. In the case of
DAVID RUTSTEIN V. AVIS RENT A CAR SYSTEMS, INC., 97-0807 CIV-G (S.D.FL.), a suit
brought as a purported class action suit in Federal Court in Florida alleging
discrimination based upon religion, the Company has filed a motion to dismiss
the action, which is pending before the court. Following the commencement of the
PUGH and RUTSTEIN suits described above, certain governmental agencies initiated
inquiries and made requests for information in connection with allegations of
discrimination involving the Company and certain of its licensees. The Company
has been cooperating with all such governmental requests. To date, an
administrative proceeding has been commenced at the Commonwealth of Pennsylvania
Human Rights Commission. In that proceeding, the Attorney General of the
Commonwealth of Pennsylvania has filed an administrative complaint alleging that
the Company is vicariously liable for race discrimination allegedly committed by
a licensee. The Company has not yet been apprised of the specifics underlying
these allegations, but the Company believes that the claims are without merit.
The Company does not believe that the outcome of those inquiries or the
administrative proceeding will have a material adverse effect on its financial
condition or results of operations.
In connection with the IPO, the Company and Cendant entered into an
agreement whereby Cendant agreed to indemnify the Company for the costs and
expenses of defending all such claims described above, any other claims of
illegal discrimination related to customers and alleged to have occurred prior
to the IPO and from any liability arising therefrom.
40
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--SUBSEQUENT EVENTS
On January 7, 1998, the Company closed a transaction refinancing the fleet
debt of its Canadian car rental operation which provided for borrowings of up to
$210.9 million. The vehicles were transferred to a partnership in which a
wholly-owned subsidiary of the Company, Aviscar, Inc., is the general partner
and a financing source is the limited partner. Aviscar, Inc. continues to
operate and service the vehicles in the fleet. The partnership structure allows
Aviscar, Inc. to finance vehicles at a more advantageous interest rate.
On February 20, 1998, the Company signed a purchase agreement with Hayes
Leasing Company, Inc. ("Hayes") to acquire the assets of its car rental business
for approximately $85 million in cash, plus the refinancing of fleet-related
indebtedness (approximately $117 million at January 31, 1998). The unaudited
assets, exclusive of cost in excess of the fair value of net assets acquired at
January 31, 1998, are approximately $120 million. The transaction is subject to
customary closing conditions and regulatory approval.
On March 23, 1998, the Company sold 5,000,000 shares of its common stock
through a public offering and received net proceeds of approximately $162
million. The Company expects that the proceeds of the common stock issuance will
be used to finance the Hayes transaction, mentioned above, working capital and
general corporate purposes, including the repayment of certain indebtedness. The
proceeds are exclusive of a 30-day option granted the Company's Underwriters to
purchase in the aggregate up to 900,000 additional shares of common stock from
the Company. In addition, in the same offering, Cendant reduced its ownership of
the Company by selling 1,000,000 shares of the Company's common stock and
retained the net proceeds.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders 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 Rental Car
System 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, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1997 and 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, stockholders'
equity and cash flows for the period January 1, 1996 to October 16, 1996 and for
the year ended December 31, 1995. 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, 1997 and 1996, and the results of its operations and its cash flows
for the year ended December 31, 1997 and 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 for 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) and for the year ended December 31, 1995 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.
[LOGO]
New York, New York
January 29, 1998
(March 23, 1998 as to Note 19)
42
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS OFFICERS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
R. CRAIG HOENSHELL R. CRAIG HOENSHELL
Chairman of the Board and Chief Executive Officer Chairman of the Board and Chief Executive Officer
F. ROBERT SALERNO F. ROBERT SALERNO
President, Chief Operating Officer and Director President, Chief Operating Officer and Director
STEPHEN P. HOLMES KEVIN M. SHEEHAN
Vice Chairman, Cendant Corporation Executive Vice President and Chief Financial Officer
MICHAEL P. MONACO JOHN H. CARLEY
Vice Chairman and Chief Financial Officer, Cendant Executive Vice President and General Counsel
Corporation KEVIN P. CAREY
W. ALUN CATHCART Senior Vice President--Human Resources
Chairman and Chief Executive, PATRICIA D. YODER
Avis Europe plc Senior Vice President--Corporate Communications
LEONARD S. COLEMAN, JR. THOMAS J. BYRNES
President, National League of Professional Baseball Senior Vice President--Sales
Clubs MARIA M. MILLER
MARTIN L. EDELMAN Senior Vice President--Marketing
President and Director, GERARD J. KENNELL
Chartwell Leisure Inc. Vice President and Treasurer
DEBORAH L. HARMON TIMOTHY M. SHANLEY
Principal, Office of the President Vice President and Controller
at JER Real Estate Partner, L.P. JOHN FORSYTHE
MICHAEL J. KENNEDY Vice President--Operations U.S. Rent A Car
Attorney with his own law firm MICHAEL P. COLLINS
MICHAEL L. TARNOPOL Vice President--International
Vice Chairman of The Bear Stearns
Companies Inc.
</TABLE>
- --------------------------------------------------------------------------------
REGISTRAR AND TRANSFER AGENT
Harris Trust and Savings Bank
311 West Monroe, 11th Floor
P.O. Box A3504
Chicago, Illinois 60690-3504
<TABLE>
<S> <C>
AUDITORS: THE ANNUAL REPORT TO THE SECURITIES
Deloitte & Touche LLP AND EXCHANGE COMMISSION ON
Two World Financial Center FORM 10-K MAY BE OBTAINED UPON
New York, New York 10281-1418 REQUEST TO:
Corporate Communications Department
AVIS World Headquarters
900 Old Country Road
Garden City, New York 11530
516-222-4727
</TABLE>
<PAGE>
[LOGO]
Avis Rent A Car, Inc.
World Heaquarters
900 Old Country Road
Garden City, New York 11530
516-222-3000
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
AVIS RENT A CAR, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
AVIS RENT A CAR, INC.
[LOGO]
900 OLD COUNTRY ROAD
GARDEN CITY, NEW YORK 11530
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
MAY 21, 1998
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of Avis Rent
A Car, Inc. (the "Company") will be held on Thursday, May 21, 1998 at 10:00 a.m.
Eastern Daylight Time at the Garden City Hotel, 45 Seventh Street, Garden City,
NY 11530 (the "Meeting") for the following purposes:
1. To elect ten directors for a one-year term and until their successors
are duly elected and qualified;
2. To approve and adopt an amendment to the Company's 1997 Stock Option
Plan;
3. To ratify the appointment of Deloitte & Touche LLP as the auditors of
the Company's financial statements for the fiscal year ending December 31, 1998;
and
4. To transact such other business as may properly come before the Meeting
or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on Wednesday, March
25, 1998 as the record date for the Meeting. Only stockholders of record at that
time are entitled to notice of, and to vote at, the Meeting and any adjournment
or postponement thereof. A list of stockholders entitled to vote at the Meeting
will be available for examination 10 days before the Meeting during ordinary
business hours at the offices of the Company, 900 Old Country Road, Garden City,
New York 11530.
The enclosed proxy is solicited by the Board of Directors of the Company.
Reference is made to the attached Proxy Statement for further information with
respect to the business to be transacted at the Meeting. The Board of Directors
urges you to date, sign and return the enclosed proxy promptly. A reply envelope
is enclosed for your convenience. You are cordially invited to attend the
Meeting in person. The return of the enclosed proxy will not affect your right
to vote if you attend the Meeting in person.
By Order of the Board of Directors
KAREN C. SCLAFANI
Secretary
Dated: March 30, 1998
<PAGE>
AVIS RENT A CAR, INC.
900 OLD COUNTRY ROAD
GARDEN CITY, NEW YORK 11530
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON THURSDAY, MAY 21, 1998
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Avis Rent A Car, Inc., a Delaware
corporation (the "Company'), to be voted at the 1998 Annual Meeting of
Stockholders, and any adjournment or postponement thereof (the "Meeting"), to be
held on the date, at the time and place, and for the purposes set forth in the
foregoing notice. This Proxy Statement, the accompanying notice and the enclosed
proxy card are first being mailed to stockholders on or about March 30, 1998.
The Board of Directors does not intend to bring any matter before the
Meeting except as specifically indicated in the notice, nor does the Board of
Directors know of any matters which anyone else proposes to present for action
at the Meeting. However, if any other matters properly come before the Meeting,
the persons named in the enclosed proxy, or their duly constituted substitutes
acting at the Meeting, will be authorized to vote or otherwise act thereon in
accordance with their judgment on such matters.
Shares of the Company's Common Stock, par value $.01 per share (the "Common
Stock"), represented by proxies received by the Company, where the stockholder
has specified his or her choice with respect to the proposals described in this
Proxy Statement (including the election of directors), will be voted in
accordance with the specification(s) so made. In the absence of such
specification(s), the shares will be voted "For" the election of all ten
nominees for the Board of Directors, "For" the amendment to the Company's 1997
Stock Option Plan (the "Plan") and "For" the ratification of the appointment of
Deloitte & Touche LLP as auditors of the Company's financial statements for the
fiscal year ending December 31, 1998.
Except as provided below, any proxy may be revoked at any time prior to its
exercise by notifying the Secretary in writing, by delivering a duly executed
proxy bearing a later date or by attending the Meeting and voting in person.
The accompanying form of proxy is being solicited on behalf of the Board of
Directors of the Company. The expenses of solicitation of proxies for the
Meeting will be paid by the Company. In addition to the mailing of the proxy
material, such solicitation may be made in person or by telephone by directors,
officers and employees of the Company, who will receive no additional
compensation therefor. Upon request, the Company will reimburse brokers,
dealers, banks and trustees, or their nominees, for reasonable expenses incurred
by them in forwarding material to beneficial owners of shares of Common Stock.
A copy of the Annual Report on Form 10-K filed by the Company with the
Securities and Exchange Commission for its latest fiscal year is available
without charge to stockholders upon written request to the Corporate
Communications Department, Avis Rent A Car, Inc., 900 Old Country Road, Garden
City, New York 11530.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
OUTSTANDING SHARES AND VOTING RIGHTS
Only holders of record of the Company's Common Stock at the close of
business on March 25, 1998 are entitled to notice of, and to vote at, the
Meeting. On that date, the Company had outstanding
1
<PAGE>
35,925,000 shares of Common Stock, excluding shares subject to the
over-allotment option of Bear, Stearns & Co. with respect to the Company's
recent offering.
The presence, in person or by proxy, of the holders of a majority of the
issued and outstanding shares of Common Stock entitled to vote at the Meeting
will constitute a quorum. On all matters voted upon at the Meeting and any
adjournment or postponement thereof, the holders of the Common Stock vote
together as a single class, with each record holder of Common Stock entitled to
one vote per share.
Directors shall be elected by a plurality of the votes cast in the election
of directors. Under applicable Delaware law, in tabulating the vote for the
election of directors, broker non-votes will be disregarded and will have no
effect on the outcome of the vote.
Approval of the proposals relating to the amendment of the Plan and
ratification of the appointment of auditors of the Company's financial
statements require the affirmative vote of the holders of a majority of the
shares of Common Stock present at the Meeting, in person or by proxy, and
entitled to vote. Under applicable Delaware law, in determining whether such
proposal has received the requisite number of affirmative votes, abstentions and
broker non-votes will be counted and will have the same effect as a vote against
this proposal.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth on the following table is furnished as of March
18, 1998 with respect to any person (including any "group" as that term is used
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) who is known to the Company to be the beneficial owner of more
than 5% of any class of the Company's voting securities, and as to those shares
of the Company's equity securities beneficially owned by each of its directors,
certain of its executive officers, and all of its executive officers and
directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OWNERSHIP CLASS
- ----------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS
Cendant Corporation ("Cendant") (1) ..................................................... 7,500,000 20.8%
6 Sylvan Way
Parsippany, NJ 07054
Putnam Investments, Inc. (2) ............................................................ 4,506,516 14%
One Post Office Square
Boston, MA 02109
Strong Capital Management Inc. (3) ...................................................... 2,690,850 8.7%
100 Heritage Reserve
Menomonee Falls, WI 53051
DIRECTORS AND EXECUTIVE OFFICERS
R. Craig Hoenshell....................................................................... 20,000 *
F. Robert Salerno........................................................................ 6,000 *
Kevin M. Sheehan......................................................................... 3,000 *
John H. Carley........................................................................... 500 *
Kevin P. Carey........................................................................... 2,000 *
Patricia D. Yoder........................................................................ 100 *
Thomas J. Byrnes......................................................................... 0 *
Maria M. Miller.......................................................................... 0 *
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OWNERSHIP CLASS
- ----------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Gerard J. Kennell........................................................................ 100 *
Timothy M. Shanley....................................................................... 200 *
John Forsythe............................................................................ 0 *
Michael P. Collins....................................................................... 1,000 *
Stephen P. Holmes........................................................................ 1,000 *
Michael P. Monaco........................................................................ 1,000 *
W. Alun Cathcart......................................................................... 0 *
Leonard S. Coleman, Jr................................................................... 0 *
Martin L. Edelman........................................................................ 0 *
Deborah L. Harmon........................................................................ 0 *
Michael J. Kennedy....................................................................... 0 *
Michael L. Tarnopol...................................................................... 0 *
EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (20 persons) (4)............................. 34,900 *
</TABLE>
- ------------------------
* Less than 1%
(1) Cendant beneficially owns 7,500,000 shares of Common Stock after giving
effect to the offering of Comon Stock completed on March 23, 1998, which
shares are held of record by its indirect wholly-owned subsidiary, Cendant
Car Holdings, Inc.
(2) Based upon the information contained in a Schedule 13G dated January 16,
1998 by Putnam Investments, Inc., an affiliate of Marsh & McLennan
Companies, Inc., on behalf of itself and the other reporting persons named
therein. Putnam Investments, Inc. beneficially owns 4,506,516 shares of
Common Stock. According to the Schedule 13G, neither Putnam Investments,
Inc. nor the other reporting persons named in such filing have sole voting
or investment power with respect to such shares of Common Stock.
(3) Based upon the information contained in a CDA Spectrum transportation
industry report dated December 31, 1997, Strong Capital Management Inc.
beneficially owns 2,690,850 shares of Common Stock.
(4) Represents shares purchased by the named executive officers and officers of
Cendant in the Company's directed share program prior to the Company's
initial public offering on September 24, 1997.
3
<PAGE>
ELECTION OF DIRECTORS
[PROPOSAL 1]
GENERAL
The Board of Directors presently consists of ten members. The Board of
Directors has nominated ten candidates to be elected at the Meeting to serve as
directors for a one-year term ending at the 1999 Annual Meeting of Stockholders
and when their successors are duly elected and qualified. Each nominee is
currently serving as a director of the Company.
Each nominee has consented to being named in the Proxy Statement and to
serve if elected. If prior to the Meeting any nominee should become unavailable
to serve, the shares of Common Stock represented by a properly executed and
returned proxy will be voted for such additional person as shall be designated
by the Board of Directors, unless the Board determines to reduce the number of
directors in accordance with the Charter and the By-Laws.
Certain information regarding each nominee is set forth below, including
such individual's age and principal occupation, a brief account of such
individual's business experience during the last five years and other
directorships currently held by such nominee.
INFORMATION REGARDING THE NOMINEES
<TABLE>
<S> <C>
R. Craig Hoenshell Leonard S. Coleman, Jr.
F. Robert Salerno Martin L. Edelman
Stephen P. Holmes Deborah L. Harmon
Michael P. Monaco Michael J. Kennedy
W. Alun Cathcart Michael L. Tarnopol
</TABLE>
MR. HOENSHELL, age 53, has been Chairman and Chief Executive Officer of the
Company and its car rental subsidiary, Avis Rent A Car System, Inc. ("ARACS"),
since March 1997. From 1995 to March 1997, Mr. Hoenshell was the principal in
his own consulting firm which focused on future payment technologies. From 1993
to 1995, Mr. Hoenshell was President of American Express International. From
1990 to 1993, Mr. Hoenshell was 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, age 46, 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 Avis, Inc., the predecessor of the
Company, and ARACS. From July 1990 to September, 1995, Mr. Salerno was Senior
Vice President and General Manager Rent A Car of Avis, Inc. and ARACS.
MR. HOLMES, age 41, has been a Director of the Company since October 1996.
Mr. Holmes was appointed Vice Chairman of Cendant in December 1997 and has
served as a director of Cendant since December 1997. From September 1996 through
December 1997 Mr. Holmes served as Vice Chairman of HFS Incorporated ("HFS"),
the predecessor company of Cendant. 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 Cendant and as a director of Avis Europe plc. 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 Leisure, Inc. Mr. Holmes was
a director of AMRE, Inc. within two years prior to January 20, 1997 when AMRE,
Inc. filed a bankruptcy petition.
MR. MONACO, age 50, has been a Director of the Company since May 1997. Mr.
Monaco has been Vice Chairman and Chief Financial Officer of Cendant since
December 1997 and has been a Director of Cendant since December 1997. From
October 1996 to December 1997, Mr. Monaco served as Vice
4
<PAGE>
Chairman and Chief Financial Officer of HFS. Mr. Monaco also serves as a
director and officer of several subsidiaries of Cendant. Mr. Monaco served as
Executive Vice President and Chief Financial Officer of the American Express
Company from September 1990 to June 1996.
MR. CATHCART, age 54, has been a Director of the Company since September
1997. Mr. Cathcart has been Chairman and Chief Executive Officer of Avis Europe
plc since February 1988.
MR. COLEMAN, age 49, has been a Director of the Company since September
1997. Mr. Coleman has been President of the National League of Professional
Baseball Clubs since March 1994. From 1992 to March 1994, Mr. Coleman served as
Executive Director-Market Development of Major League Baseball. Mr. Coleman also
serves on the Board of Directors of Cendant, Beneficial Corporation, New Jersey
Resources, Omnicom Group, Owens-Corning, the Advisory Board of the Martin Luther
King, Jr. Center for Non-Violent Social Change, The Metropolitan Opera, The
Newark Museum, the Schuman Fund, the Clark Foundation, the Children's Defense
Fund and Seton Hall University.
MR. EDELMAN, age 56, has been a Director of the Company since September
1997. Mr. Edelman has been a Director of Cendant since December 1997. Mr.
Edelman also serves as President and a Director of Chartwell Leisure, Inc. He
was a partner with Battle Fowler, a New York City law firm, from 1972 through
1993 and since January 1, 1994 has been Of Counsel to that firm. Mr. Edelman is
also a partner of Chartwell Hotels Associates, Chartwell Leisure Associates
L.P., Chartwell Leisure Associates L.P. II, and of certain of their respective
affiliates.
MS. HARMON, age 38, has been a Director of the Company since September 1997.
Ms. Harmon has been a Principal in the Office of the President at JER Real
Estate Partners, L.P., an institutional, private equity fund for investment in
real estate assets, since 1991. Prior to joining JER, Ms. Harmon served as
Managing Director of the Real Estate Finance Group at Banker's Trust Company.
Ms. Harmon also serves as a Director of North East Insurance Co.
MR. KENNEDY, age 60, has been a Director of the Company since September
1997. Mr. Kennedy has been an attorney with his own law firm since 1976. Mr.
Kennedy also serves as a Director of Chartwell Leisure, Inc.
MR. TARNOPOL, age 61, has been a Director of the Company since September
1997. Mr. Tarnopol has been Vice Chairman of The Bear Stearns Companies Inc.
since July 1996 and has been a Director of The Bear Stearns Companies Inc. since
1985. Mr. Tarnopol has been Vice Chairman of Bear, Stearns & Co. Inc. since
1997, a Senior Managing Director of Bear, Stearns & Co. Inc. since 1985 and the
Chairman of the Investment Banking Division of Bear, Stearns & Co. Inc. since
1987. Mr. Tarnopol also serves as a director of Plant Hollywood International
Inc. and NRT, Inc.
COMMITTEES, MEETINGS AND COMPENSATION OF THE BOARD OF DIRECTORS
The Board of Directors held one meeting in person during 1997 and conducted
all other action by unanimous written consent. All incumbent directors attended
that meeting of the Board and meetings of the committees of the Board on which
they served.
The Executive Committee of the Board of Directors, which was designated by
the Board in September 1997, is composed of Messrs. Hoenshell, Edelman and
Holmes. The Executive Committee is authorized to exercise all powers and
authority of the Board of Directors in the management of the business and
affairs of the Company except those powers reserved, by law or resolution, to
the Board of Directors. The Executive Committee did not meet in 1997.
The Board of Directors has designated an Audit Committee composed of Messrs.
Edelman and Tarnopol, who were appointed to the Committee in September 1997. The
Audit Committee reviews and evaluates the Company's internal accounting and
auditing procedures; recommends to the Board of Directors the firm to be
appointed as independent accountants to audit the Company's financial
statements; reviews with management and the independent accountants the
Company's year-end operating results; reviews the scope and results of the audit
with the independent accountants; reviews with
5
<PAGE>
management the Company's interim operating results; and reviews the non-audit
services to be performed by the firm of independent accountants and considers
the effect of such performance on the accountants' independence. The Audit
Committee met one time in 1997.
The Board of Directors has designated a Compensation Committee composed of
Ms. Harmon and Mr. Kennedy, who were appointed to the Committee in September
1997. The Compensation Committee determines compensation arrangements for
executives, reviews and makes recommendations to the full Board regarding the
adoption or amendment of employee benefit plans, and administers the Plan. The
Compensation Committee did not meet in 1997.
The Policy Committee of the Board of Directors, which was designated by the
Board in September 1997, is composed of Ms. Harmon and Mr. Coleman. The Policy
Committee establishes and implements corporate policy with respect to the
business operations of the Company, including its code of conduct. The Policy
Committee did not meet in 1997.
The Company has no standing nominating committee. The Board of Directors
makes nominations for the Board. In accordance with Delaware law, stockholders
may make nominations for the Board of Directors in advance of or at the Meeting.
Non-employee directors receive an annual retainer of $30,000, plus $4,000
for chairing a committee and $2,000 for serving as a member of a committee other
than Chair. Non-employee directors also are paid $1,000 for each Board meeting
attended and $500 ($1,000 for committee chair) for each Board committee meeting
if held on the same day as a Board meeting and $1,000 ($2,000 for committee
chair) for each Board committee meeting attended on a day on which there is no
Board meeting. Non-employee directors are reimbursed for expenses incurred in
attending meetings of the Board of Directors and committees.
Under the Plan, each non-employee director was granted options to purchase
50,000 shares of Common Stock on September 23, 1997, the date of his or her
initial election to the Board of Directors. Such options have an exercise price
of the fair market value on the date of grant and vest over a five year period
from the date of grant at the rate of 20% per year, and otherwise have the same
terms as all other options granted under the Plan.
Directors shall be elected by a plurality of the votes cast in the election
of directors. Pursuant to applicable Delaware law, in tabulating the vote for
the election of directors, broker non-votes will be disregarded and will have no
effect on the outcome of the vote.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME OFFICE OR POSITION HELD
- --------------------------------------- ------------------------------------------------------------------------
<S> <C>
R. Craig Hoenshell..................... Chairman of the Board and Chief Executive Officer
F. Robert Salerno...................... President, Chief Operating Officer and Director
Kevin M. Sheehan....................... Executive Vice President and Chief Financial Officer
John H. Carley......................... Executive Vice President and General Counsel
Kevin P. Carey......................... Senior Vice President--Human Resources
Patricia D. Yoder...................... Senior Vice President -- Corporate Communications
Thomas J. Byrnes....................... Senior Vice President -- Sales
Maria M. Miller........................ Senior Vice President -- Marketing
Gerard J. Kennell...................... Vice President and Treasurer
Timothy M. Shanley..................... Vice President and Controller
John Forsythe.......................... Vice President--Operations U.S. Rent A Car
Michael P. Collins..................... Vice President--International
</TABLE>
For biographical information concerning Messrs. Hoenshell and Salerno see
"Election of Directors".
MR. SHEEHAN, age 44, has been Executive Vice President and Chief Financial
Officer of the Company and ARACS since December 1996. From September 1996 to
September 1997, Mr. Sheehan was a Senior
6
<PAGE>
Vice President of HFS. From December 1994 to September 1996, Mr. Sheehan was
Chief Financial Officer for STT Video Partners, a joint venture between Time
Warner, Telecommunications, Inc., Sega of America and HBO. Prior thereto, he was
with Reliance Group Holdings, Inc., an insurance holding company, and some of
its affiliated companies for ten years and was involved with the formation of
the Spanish language television network, Telemundo Group, Inc. and from 1991
through 1994 was Senior Vice President-- Finance and Controller.
MR. CARLEY, age 56, 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, age 49, has been Senior Vice President--Human Resources of the
Company and ARACS since April 1997. From 1987 to 1996, Mr. Carey was Senior Vice
President--Human Resources for American Express International. From June 1982 to
September 1985, Mr. Carey was Vice President-- Human Resources and
Administration for Warner Leisure Inc. (a division of Time Warner).
MS. YODER, age 56, has been Senior Vice President--Corporate Communications
of the Company since August 1997. From 1995 through 1996, Ms. Yoder was
Corporate Vice President, Public Affairs and Communications for GTE Corporation,
where she was a member of the Executive Leadership Committee. From 1991 through
1995, Ms. Yoder held the position of Vice President, Corporate Public Relations
and Advertising and was a member of the Corporate Executive Council for GE
Capital, the financial services arm of the General Electric Company.
MR. BYRNES, age 53, has been Senior Vice President--Sales of the Company and
ARACS since February 1998 and Vice President--Sales North America for the
Company or its predecessor and ARACS since 1987.
MS. MILLER, age 41, has been Senior Vice President--Marketing of the Company
since February 1998. From January 1997 to February 1998, Ms. Miller was the
principal in her own consulting firm, which provided marketing consulting
services to small and mid-sized businesses and nonprofit organizations. From
1987 to 1995, Ms. Miller held various positions with American Express Company
including Vice President, Platinum Card Operations from September 1993 to
October 1995 and Vice President, Small Business Services Marketing from December
1990 to August 1993.
MR. KENNELL, age 53, has been Vice President and Treasurer of the Company or
its predecessor and ARACS since February 1987.
MR. SHANLEY, age 49, 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 Avis, Inc. and ARACS.
MR. FORSYTHE, age 52, has been Vice President--Operations U.S. Rent A Car
for the Company or its predecessor and ARACS since 1990. From 1982 until 1990,
Mr. Forsythe was Vice President -Fleet and Vehicle Sales of ARACS.
MR. COLLINS, age 50, has been Vice President--International for the Company
or its predecessor and ARACS, and General Manager of their international
operations, since 1987.
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the 1996 and 1997 cash and non-cash
compensation awarded to or earned by the Chief Executive Officer of the Company
and the four other most highly compensated executive officers of the Company:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
----------------------
SECURITIES UNDERLYING
ANNUAL COMPENSATION
--------------------------------------- OPTIONS(1)
OTHER ANNUAL(4) ----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AVIS CENDANT
- ---------------------------------------- --------- --------- --------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. Craig Hoenshell...................... 1997 $ 468,462 $ 568,800 -- 1,066,400 720,930
Chairman & Chief Executive Officer
F. Robert Salerno....................... 1996 244,288 103,825 $ 7,750 -- 480,620
President & Chief Operating Officer 1997 335,000 351,750 -- 533,200 --
Kevin M. Sheehan........................ 1997 263,721 289,330 -- 355,500 --
Executive Vice President & Chief
Financial Officer
John H. Carley.......................... 1997 236,058 245,000 -- 177,700 240,310
Executive Vice President & General
Counsel
John Forsythe........................... 1996 170,154 56,430 7,750 -- 144,186
Vice President-Operations U.S. Rent A 1997 178,692 135,420 -- 80,000 24,031
Car
Joseph V. Vittoria(2)................... 1996 550,000 251,646 23,000 -- --
Chairman & Chief Executive Officer 1997 42,308 -- -- -- --
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION(2)
- ---------------------------------------- ----------------
<S> <C>
R. Craig Hoenshell...................... $ 18,536
Chairman & Chief Executive Officer
F. Robert Salerno....................... 7,298
President & Chief Operating Officer 6,197
Kevin M. Sheehan........................ 4,155
Executive Vice President & Chief
Financial Officer
John H. Carley.......................... 14,435
Executive Vice President & General
Counsel
John Forsythe........................... 5,225
Vice President-Operations U.S. Rent A 4,972
Car
Joseph V. Vittoria(2)................... 44,370
Chairman & Chief Executive Officer 6,432,194(3)
</TABLE>
- ------------------------
(1) Amounts listed represent options to acquire the Company's Common Stock and
the common stock of Cendant.
(2) Includes the value of group term life insurance and the Company matching
contribution to 401(k) and Deferred Compensation Plans, unless otherwise
indicated.
(3) Mr. Vittoria's employment with the Company was terminated on January 21,
1997. All Other Compensation contains Mr. Vittoria's contractual payment.
(4) Includes the value of management preferential lease arrangement and
insurance associated with leased cars.
OPTION GRANTS TABLES
The following table describes the options to acquire shares of Common Stock
of the Company granted to the Chief Executive Officer and certain other
executive officers of the Company in the last fiscal year:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED EXERCISE OR GRANT DATE
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME GRANTED IN FISCAL YEAR PER SHARE DATE VALUE $(1)
- --------------------------------------------- ---------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
R. Craig Hoenshell........................... 1,066,400 26.9% 17.00 9/23/2007 $ 10,450,720
F. Robert Salerno............................ 533,200 13.5% 17.00 9/23/2007 5,225,360
Kevin M. Sheehan............................. 355,500 9.0% 17.00 9/23/2007 3,483,900
John H. Carley............................... 177,700 4.5% 17.00 9/23/2007 1,741,460
John Forsythe................................ 80,000 2.0% 17.00 9/23/2007 784,000
Joseph V. Vittoria(2)........................ -- -- -- --
</TABLE>
- ------------------------
(1) The amount shown in this column represents the Grant Date Present Value
using the "Black-Scholes" valuation method.
(2) Mr. Vittoria ceased to serve as an employee of the Company prior to the
adoption of the Company's Stock Option Plan.
8
<PAGE>
Pursuant to the Plan, prior to the effectiveness of the amendment to the
Plan proposed under Proposal 3 herein, options for up to 4,620,977 shares of
common Stock may be granted to key employees and non-employee directors of the
Company. In 1997, a total of 3,963,900 options were granted under the Plan to a
broad group of executives of the Company, including Messrs. Hoenshell, Salerno,
Sheehan, Carley and Forsythe as noted in the Option Grants Table above, and to
non-employee directors of the Company on September 23, 1997 at an exercise price
of $17.00 per share and vesting 20% per year beginning September 23, 1998.
The following table describes the options to acquire shares of common stock
of Cendant granted to the Chief Executive Officer and certain other officers of
the Company in the last fiscal year:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED
UNDERLYING TO EMPLOYEES EXERCISE OR GRANT DATE
OPTIONS IN FISCAL BASE PRICE EXPIRATION PRESENT
NAME GRANTED YEAR PER SHARE DATE VALUE $(1)
- ----------------------------------------------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
R. Craig Hoenshell............................. 720,930 1% $ 27.10 3/17/2007 $ 9,845,381
F. Robert Salerno.............................. -- -- -- -- --
Kevin M. Sheehan............................... -- -- -- -- --
John H. Carley................................. 240,310 -- (2) 24.40 1/02/2007 2,954,828
John Forsythe.................................. 24,031 -- (2) 23.88 4/30/2007 289,184
Joseph V. Vittoria(3).......................... -- -- -- -- --
</TABLE>
- ------------------------
(1) The amount shown in this column represents the Grant Date Present Value
using the "Black-Scholes" valuation method.
(2) Represents less than 1% of all options to acquire Cendant common stock
granted within the last fiscal year.
(3) Options granted to Mr. Vittoria were cancelled in connection with his
termination of employment in January 1997.
YEAR END OPTION VALUE TABLES
The following table describes the value of unexercised in-the-money options
to acquire Common Stock of the Company held by the Chief Executive Officer and
certain other executive officers of the Company at December 31, 1997:
<TABLE>
<CAPTION>
FY-END OPTION VALUES(1)
-------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-END
NAME OPTIONS AT FY-END (#) ($)
- -------------------------------------------------------------------- --------------------- --------------------
<S> <C> <C>
R. Craig Hoenshell.................................................. 1,066,400 $ 15,932,016
F. Robert Salerno................................................... 533,200 7,966,008
Kevin M. Sheehan.................................................... 355,500 5,311,170
John H. Carley...................................................... 177,700 2,654,838
John Forsythe....................................................... 80,000 1,195,200
Joseph V. Vittoria(2)............................................... -- --
</TABLE>
- ------------------------
(1) None of the options shown in the table were exercisable at December 31,
1997.
(2) Mr. Vittoria ceased to serve as an employee of the Company prior to the
adoption of the Plan.
9
<PAGE>
The following table describes the value of unexercised in-the-money options
to acquire common stock of Cendant held by the Chief Executive Officer and
certain other executive officers of the Company at December 31, 1997:
<TABLE>
<CAPTION>
FY-END OPTION VALUES(1)
-------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-END
OPTIONS AT FY-END (#) ($)
NAME EXERCISABLE EXERCISABLE
- -------------------------------------------------------------------- --------------------- --------------------
<S> <C> <C>
R. Craig Hoenshell.................................................. 720,930 $ 5,248,370
F. Robert Salerno................................................... 480,620 2,148,372
Kevin M. Sheehan.................................................... 300,388 3,270,625
John H. Carley...................................................... 240,310 2,398,294
John Forsythe....................................................... 168,217 604,140
Joseph V. Vittoria(2)............................................... -- --
</TABLE>
- ------------------------
(1) None of the Cendant options held by the Chief Executive Officer and other
executive officers above were exercised in 1997.
(2) Options granted to Mr. Vittoria were cancelled in connection with his
termination of employment in January 1997.
DEFINED BENEFIT PLAN
The Company maintains a defined benefit pension plan for employees who met
the eligibility requirements as of December 31, 1983. The eligibility
requirements were non-union, full time employees hired prior to December 31,
1983 who were age 25 or above on January 1, 1985. The plan provides that the
benefit for each participant, payable monthly, be equal to 1 1/2% of his or her
final average compensation (average compensation being the average of the
highest five consecutive years of compensation in the last ten years of
employment) for each year of service, not to exceed 35, minus 1 3/7% of the
estimated Social Security benefit for each year of service.
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 1998 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 1998
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.
10
<PAGE>
PENSION PLAN TABLE
ESTIMATED ANNUAL PENSION BENEFIT(A)
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------
ANNUAL PAY 15 20 25 30 35
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$200,000............................................. $ 39,778 $ 53,036 $ 66,296 $ 79,555 $ 92,814
250,000............................................. 50,465 67,286 84,109 100,930 117,752
300,000............................................. 61,153 81,536 101,921 122,305 142,689
350,000............................................. 71,840 95,786 119,734 143,680 167,627
400,000............................................. 82,528 110,036 137,546 165,055 192,564
450,000............................................. 93,215 124,286 155,359 186,430 217,502
500,000............................................. 103,903 138,536 173,171 207,805 242,439
</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.
As of December 31, 1997, the named executives had the following years of
service under the defined benefit plan: Mr. Salerno, fifteen years, seven
months; Mr. Forsythe, fifteen years, eight months.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERALL POLICY. The Compensation Committee of the Board of Directors, which
was established in September 1997 and the members of which are non- employee
directors, is responsible for administering the Company's executive compensation
policies and programs. However, prior to September 1997 all executive
compensation programs for the Company were administered under the general
executive compensation guidelines of HFS as sole shareholder.
The Compensation Committee's goal is to attract and retain the best possible
executive talent, to motivate these executives to achieve the goals inherent in
the Company's business strategy and to link executive and stockholder interests
through equity-based compensation plans.
The key elements of the Company's executive compensation program include
base salary, annual bonus and stock options. Each executive's compensation
package is designed to condition a significant portion of the executive's
overall anticipated compensation on the Company's success in achieving specified
performance targets or on appreciation in the value of the Common Stock or both.
BASE SALARIES. The 1997 base salaries for Messrs. Hoenshell, Salerno,
Carley and Forsythe are set forth in their respective employment agreements.
Base salary levels for other executive officers are designed to be consistent
with competitive practice and level of responsibility.
ANNUAL BONUS. In 1997 the executive officers were eligible to earn bonuses
equal to a percentage of base salary based upon the degree of achievement of
target levels of earnings before interest, taxes, depreciation and amortization
(EBITDA). The percentages of base salary for the executive officers ranged from
30%, if the minimum level of earnings was achieved, to a maximum of 120%, if the
highest level of earnings was achieved. The bonuses for the five named executive
officers who received such bonuses in 1997 are set forth in the Summary
Compensation Table.
STOCK OPTIONS. On September 23, 1997, the Plan was approved by the Board of
Directors and stock options were granted to the Company's executive officers
pursuant thereto. Information with respect to option grants to the named
executive officers is set forth in the "Option Grants Tables". The stock option
awards for the named executive officers, which were approved at the time of
grant by the Board of Directors and HFS as sole shareholder, are intended to
provide a long term incentive to such executives.
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<PAGE>
CEO COMPENSATION. Mr. Hoenshell was elected Chairman of the Board and Chief
Executive Officer of the Company in March 1997. His compensation package was
determined by HFS and the Compensation Committee of the Board of Directors of
HFS in accordance with their executive compensation guidelines.
DEDUCTIBILITY OF COMPENSATION. Due to recent changes in tax law, the
deductibility for corporate tax purposes of compensation paid to individual
executive officers of the Company in excess of $1 million in any year commencing
with 1994 may be restricted. However, where it is deemed necessary, in the best
interests of the Company, to continue to attract and retain the best possible
executive talent, and to motivate such executives to achieve the goals inherent
in the Company's business strategy, the Compensation Committee will recommend,
and the Company is expected to pay, compensation to executive officers which may
exceed the limits of deductibility.
THE COMPENSATION COMMITTEE
Michael J. Kennedy, Chair
Deborah L. Harmon
PERFORMANCE GRAPH
Set forth below is a line graph comparing percentage change in the
cumulative total return of the Common Stock, the Standard & Poor's 400 Stock
Index and the Company's Peer Group for the period from September 1, 1997
(September 24, 1997 for the Company) through December 31, 1997.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF CUMULATIVE TOTAL RETURN*
<S> <C> <C> <C>
AVIS RENT A CAR S&P 400 PEER GROUP
9/24/97 $ 100 $ 100 $ 100
12/31/97 187.86 106.63 100.64
DOLLARS
</TABLE>
<TABLE>
<CAPTION>
9/97* 12/31/97
<S> <C> <C>
Avis Rent A Car, Inc. $ 100 $ 187.86
Standard and Poor's 400 Index $ 100 $ 106.63
Peer Group $ 100 $ 100.64
</TABLE>
* Assumes $100.00 invested on September 1, 1997 for the Standard & Poor's
400 Stock Index and the Company's Peer Group and September 24, 1997 for the
Company (the first day of trading in the Common Stock).
12
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION, SEVERANCE AND CHANGE OF CONTROL
ARRANGEMENTS
Only four named executive officers of the Company have a written employment
agreement.
Pursuant to the terms of an offer letter from Cendant, Mr. Hoenshell is
entitled to an annual base salary of $600,000 and a target bonus of 60%. The
letter does not contain a specified term of employment. However, if Mr.
Hoenshell's employment is involuntarily terminated for reasons other than
willful misconduct, Mr. Hoenshell is entitled to receive a payment equal to one
year's base salary or such greater payment as the Board may determine.
Pursuant to the terms of an offer letter from Cendant, Mr. Carley is
entitled to an annual base salary of $250,000 and a target bonus of between 30%
and 40%. The letter does not contain a specified term of employment. However, if
Mr. Carley's employment is terminated other than as a result of death, permanent
disability, voluntary termination, retirement or for cause, Mr. Carley is
entitled to receive a payment equal to the greater of one year's base salary or
the amount to which he is entitled under the then effective severance policy of
the Company.
Mr. Salerno and Mr. Forsythe have employment agreements with a predecessor
company of the Company which terminate on February 8, 2001. Under the terms of
their agreements, Mr. Salerno and Mr. Forsythe are entitled to receive an annual
base salary of not less than $335,000 and $183,000, respectively, which salary
may be increased by the Board of Directors during the term of their agreements.
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 his agreement. However, if the employment of either of these
executives is terminated by the Company on or after a change-in-control, the
executive is entitled to receive his remaining salary, full bonus and certain
perquisites under the agreement in a single lump sum within 30 days following
his termination.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH CENDANT
Cendant, which beneficially owns 21.6% of the Company's outstanding Common
Stock, was formed through the merger of HFS and CUC International Inc. in
December 1997. Cendant is a global provider of consumer and business services
and operates in three principal segments: Membership, Travel and Real Estate
Services. In Membership Services, Cendant provides access to travel, shopping,
auto, dining and other services through more than 66.5 million memberships
worldwide. In Travel Services, Cendant is the leading franchisor of hotels and
rental car agencies worldwide, the premier provider of vacation exchange
services and the second largest fleet management company. In Real Estate
Services, Cendant is the world's premier franchisor of residential real estate
brokerage offices, a major provider of mortgage services to consumers and a
global leader in corporate employee relocation. Cendant is also a major online
commerce facilitator, with more than $1 billion in yearly sales through its
netMarket-Registered Trademark- and other interactive services.
The Company, or its subsidiary, ARACS, 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. The agreements summarized below
set forth the on-going responsibilities of the Company to HFS's successor
company, Cendant, and its subsidiaries.
SEPARATION AGREEMENT
In connection with the Company's initial public offering on September 24,
1997 (the "IPO"), the Company and Cendant Car Rental, Inc. (formerly HFS Car
Rental, Inc.) (the "Franchisor"), a wholly-owned subsidiary of Cendant, entered
into a Separation Agreement which provides for, among other things, the
assumption by the Company of all liabilities relating to the vehicle rental
business, other than
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<PAGE>
liabilities related to alleged acts of illegal discrimination against customers
in the rental of vehicles which are alleged to have occurred prior to the IPO,
and the allocation between the Company and the Franchisor of certain other
liabilities and certain indemnification obligations of the Company and the
Franchisor.
CROSS-INDEMNIFICATION. Subject to certain exceptions, the Company has
agreed to indemnify the Franchisor and its subsidiaries against any loss,
liability or expense incurred or suffered by the Franchisor or its subsidiaries
arising out of or related to the failure by the Company to perform or otherwise
discharge liabilities allocated to and assumed by the Company under the
Separation Agreement, and the Franchisor has agreed to indemnify the Company and
its subsidiaries against any loss, liability or expense incurred or suffered by
the Company or its subsidiaries arising out of or related to the failure by the
Franchisor to perform or otherwise discharge the liabilities retained by the
Franchisor under the Separation Agreement, including any liabilities arising out
of alleged acts of illegal discrimination against customers in the rental of
vehicles which are alleged to have occurred prior to the IPO. 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.
MASTER LICENSE AGREEMENT
The Company's status as an Avis System franchisee is governed by an
agreement (the "Master License Agreement") among ARACS, the Franchisor and
Wizard Co., Inc. ("Wizard Co."), a wholly-owned subsidiary of the Franchisor,
which grants to ARACS the non-exclusive right to operate the Avis vehicle rental
business in the territories specified therein and the exclusive right to operate
the Avis vehicle rental business in certain specified territories for a period
of 50 years, through 2047.
Pursuant to the Master License Agreement, ARACS has agreed to pay the
Franchisor a monthly base royalty of 3.0% of ARACS's gross revenue. In addition,
ARACS has agreed to pay a supplemental royalty of 1.0% of gross revenue payable
quarterly in arrears which will increase 0.1% per year commencing in 1999 and in
each of the following four years thereafter to a maximum of 1.5% (the
"Supplemental Fee"). These fees have been paid by ARACS since January 1, 1997.
Until July 30, 2002 the Supplemental Fee, or a portion thereof, may be deferred
if ARACS does not attain certain financial targets. Any Supplemental Fees that
are deferred will bear interest at a market rate until paid and will be
expressly subordinated to indebtedness of ARACS. The royalties charged to ARACS
for the twelve months ended December 31, 1997 amounted to $81.8 million and
resulted in a reduction in net income of approximately $44.7 million.
ARACS has the exclusive right to open Avis franchises in 28 selected
standard metropolitan statistical areas in the United States, in territories
outside the United States that are not currently licensed to other Avis System
franchisees and in territories that ARACS purchases from existing franchisees
that have exclusivity. ARACS has the non-exclusive right to open new franchises
in any other market not currently served by another Avis System franchisee. In
the markets where ARACS has a non-exclusive right to open new franchises, ARACS
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 Cendant acquires
another car rental company, ARACS has a right of first refusal to negotiate a
grant of a license to operate the rental locations for such car rental company
within any territory in which ARACS operates.
The Master License Agreement provides the Franchisor with significant rights
regarding the business and operations of ARACS. ARACS 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
promotional expenditures. In general, the Master License Agreement provides that
ARACS may 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, ARACS agreed not to use any
of the licensed trademarks other than in its vehicle rental business without the
Franchisor's consent.
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<PAGE>
The Master License Agreement will terminate without offering ARACS an
opportunity to cure its default, if (i) certain bankruptcy and insolvency events
occur, (ii) ARACS purports to transfer any rights and obligations under the
Master License Agreement without compliance with the terms of the Master License
Agreement, (iii) ARACS competes with the Franchisor in violation of the Master
License Agreement, (iv) ARACS discloses the confidential information of the
Franchisor in violation of the Master License Agreement, (v) ARACS challenges
Wizard Co.'s rights to the licensed proprietary marks, (vi) upon a Change of
Control Event (as defined) or (vii) ARACS receives three or more notices of
termination for Curable Defaults (as defined) which are cured or not cured
(collectively, the "Non-Curable Defaults"); provided that, except for (i) above,
the Franchisor must give ARACS 30 days notice of such Non-Curable Default. The
Franchisor may also terminate the Master License Agreement if ARACS (i) fails,
refuses or neglects to promptly pay monies owing to the Franchisor, WizCom
International, Ltd., an indirect wholly-owned subsidiary of Cendant ("WizCom"),
or Cendant under certain specified agreements, (ii) misuses or makes any
unauthorized use of the licensed proprietary marks or otherwise materially
impairs the goodwill associated with such marks, (iii) engages in any business
or markets any service or product under a name or mark which, in the
Franchisor's opinion, is similar to the licensed proprietary marks, (iv) fails
to maintain material compliance with the standards prescribed by the Franchisor
in the Master License Agreement, in the Operating Manual or otherwise in writing
or (v) with respect to any facility, fails to maintain compliance with the
standards or procedures prescribed by the Franchisor at such facility
(collectively, the "Curable Defaults"); provided, however, that ARACS will 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 ARACS has commenced to cure such default within 30 days
and is diligently prosecuting such cure to completion, ARACS will have up to an
additional 60 days to cure such default. In the event of a termination of the
agreement, the Franchisor has the option to acquire ARACS's rental locations,
leases and fleet for fair value.
Change of Control Event means a transaction or series of related
transactions by which (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) other than Cendant or an affiliate
or successor to Cendant, is or becomes after the date hereof the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act as in effect
on the date hereof) of more than 25% of the total voting power of all voting
stock of the Company then outstanding when Cendant controls 25% or more of such
voting power and otherwise 20% of the total voting power (the "Relevant
Percentage"); (b)(1) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation or (2) the Company
conveys, transfers or leases all or substantially all of 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
In connection with the IPO, the Company entered into the Registration Rights
Agreement, pursuant to which Cendant and certain transferees of Common Stock
held by the Franchisor (the "Holders") have the right to require the Company to
register all or part of the Common Stock owned by such Holders
15
<PAGE>
under the Securities Act (a "Demand Registration"); provided that the Company
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. Cendant has advised the Company that it
does not have any present intention to request any such registration. In
addition, the Holders 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, together with the
associated back office and accounting systems, are owned and operated by WizCom
at a computer center in Garden City, New York. ARACS purchases use of the Wizard
System for the purpose of processing reservation and rental transactions, and
for accounting purposes, under the terms of a Computer Services Agreement
entered into with WizCom in connection with the IPO. The Computer Services
Agreement provides ARACS with access to all functions of the Wizard System.
ARACS 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 ARACS. WizCom will charge
ARACS the full cost of providing computer services each month. The method of
calculating costs chargeable to ARACS will vary depending on the service being
provided. The Computer Services Agreement is coterminous with the Master License
Agreement. However, WizCom has agreed to provide services to ARACS for a period
of up to six months in the event the Computer Services Agreement is terminated
in accordance with certain provisions thereof.
RESERVATION SERVICES AGREEMENT
In connection with the IPO, the Company entered into a Reservation Services
Agreement with HFS, pursuant to which HFS agreed to operate and maintain
(directly or by subcontracting with affiliates or one or more third parties)
reservation center services consistent with the services historically provided
to the Company. The Company is obligated to obtain and maintain at its vehicle
rental locations the computer equipment and communication equipment and service
required to participate in the reservation system. The Company 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 are subject to adjustment annually to reflect the cost of
providing such service. The Reservation Services Agreement will terminate upon
the termination of the Master License Agreement, unless earlier terminated in
accordance with the terms thereof.
PURCHASING SERVICES AGREEMENT
In connection with the IPO, HFS and ARACS entered into a Purchasing Services
Agreement pursuant to which HFS 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 will be
shared by the parties.
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<PAGE>
CALL TRANSFER AGREEMENT
ARACS and HFS are parties to a Call Transfer Agreement (the "Call
Agreement") pursuant to which HFS 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. ARACS
recorded $2.9 million in fees payable to Cendant for the fiscal year ended
December 31, 1997.
TAX DISAFFILIATION AGREEMENT
In connection with the IPO, HFS and the Company entered into a tax
disaffiliation agreement (the "Tax Disaffiliation Agreement") that sets forth
each party's rights and obligations with respect to payments and refunds, if
any, for taxes relating to taxable periods before and after the IPO and related
matters such as the filing of tax returns and the conduct of audits and other
proceedings involving claims made by taxing authorities.
On or prior to October 17, 1996 (the "Acquisition Date"), the Franchisor was
the common parent of an affiliated group of corporations within the meaning of
Section 1504(a) of the Internal Revenue Code of 1986, as amended, whose members
included the Franchisor, the Company and certain of their respective
subsidiaries (the "Old Avis Group"). Generally, under the Tax Disaffiliation
Agreement, the Company agreed to indemnify HFS for (i) taxes of or attributable
to the Old Avis Group, any member of the Old Avis Group and any nonconsolidated
subsidiary of the Franchisor for any period or portion thereof ending on or
before the Acquisition Date, (ii) taxes incurred pursuant to Section 1.1502-6 of
the U.S. Treasury regulations (or similar provisions under state, local or
foreign law imposing several liability upon members of a consolidated, combined,
affiliated or unitary group) as a result of any member of the Old Avis Group
having been a member of another affiliated group, (iii) taxes of or attributable
to the Company and its subsidiaries for periods or portions thereof beginning
the day after the Acquisition Date and (iv) transfer taxes incurred as a result
of the transactions contemplated by the IPO.
LEASE AGREEMENTS
The Company and WizCom currently share three facilities which are located in
(i) Virginia Beach, Virginia, (ii) Tulsa, Oklahoma and (iii) Garden City, New
York. The Virginia Beach property is owned by WizCom. The Garden City property
(which houses the Company's principal executive offices) and the Tulsa property
are each owned by third parties unrelated to the Company or WizCom and are
leased by WizCom.
In connection with the IPO, ARACS and WizCom entered into a lease or a
sublease agreement with respect to each property, as applicable. WizCom leases
space at its Virginia Beach property to ARACS pursuant to a lease agreement. The
lease agreement has a term of 18 years and requires ARACS to pay WizCom its
proportionate share, based on allocated space, of the cost of operating such
facility. In addition, WizCom subleases space at its Tulsa and Garden City
properties to ARACS pursuant to sublease agreements for each respective
property. The sublease agreements have a term coterminous with the terms under
WizCom's existing lease agreements and require ARACS to reimburse WizCom for its
proportionate share, based on allocated space, of the rent and other charges
required under WizCom's existing leases relating to such properties, together
with its proportionate share, based on allocated space, of the cost of operating
such facilities.
RELATIONSHIP WITH BEAR, STEARNS
Bear, Stearns & Co. Inc. was the lead underwriter for the Company in
connection with the IPO and the Company's offering of Common Stock completed on
March 23, 1998. Mr. Tarnopol is Vice Chairman
17
<PAGE>
and Senior Managing Director of Bear, Stearns & Co. Inc. and Vice Chairman and
Executive Vice President of its parent company, The Bear Stearns Companies Inc.
It is expected that Bear, Stearns & Co. Inc. will continue to do business with
the Company from time to time in the future.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission and
the New York Stock Exchange. Officers, directors and greater than ten percent
owners are required to furnish the Company with copies of all Forms 3, 4 and 5
they file.
Based solely on the Company's review of the copies of such forms it has
received and written representations from certain reporting persons, the Company
believes that all of its officers, directors, and greater than ten percent
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during 1997.
18
<PAGE>
AMENDMENT TO THE AVIS RENT A CAR, INC. 1997 STOCK OPTION PLAN
[PROPOSAL 2]
INTRODUCTION
The Plan was adopted by the Board of Directors on September 23, 1997. The
following description of the proposed amendment to the Plan (the "1998
Amendment") is qualified in its entirety by the terms of the 1998 Amendment,
which is attached hereto as Exhibit A, with the proposed amendment highlighted
in bold type. The primary purpose of the 1998 Amendment is to provide additional
incentive to officers, key employees and non-employee directors and to further
align their interests with the interests of stockholders.
1998 AMENDMENT
Subject to stockholder approval, the Plan will be amended to provide for an
increase of 1,379,023 shares in the total number of shares of Common Stock
currently authorized for issuance under the Plan (which would bring the total
number of shares authorized for issuance pursuant to the Plan to 6,000,000).
If the 1998 Amendment is not approved by stockholders, the Plan will remain
in full force and effect, without the 1998 Amendment.
Options granted under the Plan may be "incentive stock options" ("ISOs")
(within the meaning of Section 422 of the Code) or options not subject to
Section 422 of the Code ("NSOs"). Each such option (ISO or NSO), when it becomes
exercisable, entitles the holder thereof to purchase a share of Common Stock for
an amount equal to the exercise price of the option, payable in cash, in shares
of Common Stock with an aggregate value equal to the exercise price of the
option, or in a combination thereof. The exercise price of each option under the
Plan may not be less than the fair market value of a share of Common Stock on
the date the option is granted. Generally, options held by an optionee will
become exercisable as to 20% of the shares covered by such options on the first
anniversary of the date of grant (if the optionee continues to be employed by
the Company on that date) and with respect to an additional 20% of the shares
covered by such options on each of the four succeeding anniversaries of the date
of grant (if the optionee continues to be employed by the Company on each such
date).
A limitation is placed on the number of shares available to any individual
participant. The Plan provides that no participant may receive options relating
to shares of Common Stock which in the aggregate exceed 50% of the total number
of shares reserved for issuance under the Plan. Such provision is intended to
permit the Plan to qualify as a performance-based compensation plan pursuant to
Section 162(m) of the Code, thereby preserving the deductibility to the Company
of amounts realized by certain executive officers in connection with the
exercise of NSOs (or the disqualifying disposition of shares acquired upon
exercise of ISOs).
Options granted to directors who are not employees of the Company or a
subsidiary are subject to pre-determined rules and procedures such that neither
the Board of Directors nor the Compensation Committee has any discretion in
connection with the granting of such options. Options are granted to non-
employee directors based on a formula whereby non-employee directors, upon
initial appointment or election to the Board of Directors, are granted options
to purchase 50,000 shares of Common Stock. Options granted to non-employee
directors are exercisable as to 20% of the shares covered by the option on the
first, second, third, fourth and fifth anniversaries of the date the option is
granted.
All options held by an optionee will become fully exercisable (to the extent
not already exercisable) if a "change of control transaction" (as defined in the
Plan) occurs. All options granted under the Plan, to the extent not exercised,
expire on the earliest of (i) the tenth anniversary of the date of grant, (ii)
two years following the optionee's termination of employment on account of
death, retirement or disability or (iii) one year following the optionee's
termination of employment for any other reason.
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<PAGE>
The Board of Directors of the Company may from time to time amend or
terminate the Plan, provided that (i) no such amendment or termination may
adversely affect the rights of any participant without the consent of such
participant and (ii) to the extent required by any law, regulation or stock
exchange rule, no amendment shall be effective without the approval of the
Company's stockholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a brief summary of the principal federal income
tax consequences under current federal income tax laws relating to awards under
the Plan. This summary is not intended to be exhaustive and, among other things,
does not describe state, local or foreign income and other tax consequences.
NONSTATUTORY STOCK OPTIONS. An optionee generally will not be taxed upon
the grant of an NSO. Rather, at the time of exercise of such NSO (and in the
case of an untimely exercise of an ISO), the optionee will recognize ordinary
income for federal income tax purposes in an amount equal to the excess of the
fair market value of the shares purchased over the option price. The Company
will generally be entitled to a tax deduction at such time and in the same
amount that the optionee recognizes ordinary income.
If shares acquired upon exercise of an NSO (or upon untimely exercise of an
ISO) are later sold or exchanged, then the difference between the sales price
and the fair market value of such stock on the date that ordinary income was
recognized with respect thereto will generally be taxable as long-term or short-
term capital gain or loss (if the stock is a capital asset of the optionee)
depending upon whether the stock has been held for more than one year after such
date.
INCENTIVE STOCK OPTIONS. An optionee will not be in receipt of taxable
income upon the grant of an ISO. Exercise of an ISO will be timely if made
during its term and if the optionee remains an employee of the Company or a
subsidiary at all times during the period beginning on the date of grant of the
ISO and ending on the date three months before the date of exercise (or one year
before the date of exercise in the case of a disabled optionee). Exercise of an
ISO will also be timely if made by the legal representative of an optionee who
dies (i) while in the employ of the Company or a subsidiary or (ii) within three
months after termination of employment. The tax consequences of an untimely
exercise of an ISO will be determined in accordance with the rules applicable to
NSOs.
If stock acquired pursuant to the timely exercise of an ISO is later
disposed of, the optionee will, except as noted below, recognize long-term
capital gain or loss (if the stock is a capital asset of the optionee) equal to
the difference between the amount realized upon such sale and the option price.
The Company, under these circumstances, will not be entitled to any federal
income tax deduction in connection with either the exercise of the ISO or the
sale of such stock by the optionee.
If however, stock acquired pursuant to the exercise of an ISO is disposed of
by the optionee prior to the expiration of two years from the date of grant of
the ISO or within one year from the date such stock is transferred to him upon
exercise (a "disqualifying disposition"), any gain realized by the optionee
generally will be taxable at the time of such disqualifying disposition as
follows: (i) at ordinary income rates to the extent of the difference between
the option price and the lesser of the fair market value of the stock on the
date the ISO is exercised or the amount realized on such disqualifying
disposition and (ii) if the stock is a capital asset of the optionee, as
short-term or long-term capital gain to the extent of any excess of the amount
realized on such disqualifying disposition over the fair market value of the
stock on the date which governs the determination of his ordinary income. In
such case, the Company may claim a federal income tax deduction at the time of
such disqualifying disposition for the amount taxable to the optionee as
ordinary income. Any capital gain recognized by the optionee will be long-term
capital gain if the optionee's holding period for the stock at the time of
disposition is more than one year; otherwise it will be short-term.
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<PAGE>
REASONS FOR THE PLAN AMENDMENT
Under the Plan, as currently in effect, 4,620,977 shares were authorized for
issuance in connection with the grant of options. As of March 18, 1998, options
to purchase a total of 3,935,700 shares of Common Stock have been granted (net
of cancelled grants) under the Plan, of which 2,212,800 were granted to the
named executive officers and 1,722,900 were granted to other employees and
directors of the Company. Of the shares authorized for issuance pursuant to the
Plan, only 685,277 shares remain available for grant. The Board of Directors
believes that the proposed increase in the number of shares available for
issuance under the Plan is necessary in order to continue the effectiveness of
the Plan in permitting the Company to compete with other companies offering
similar plans in attracting and retaining the most experienced and able
employees and in order to continue to provide incentives to existing and future
officers and employees of the Company and its subsidiaries.
PLAN BENEFITS
Awards under the Plan will be granted at the sole discretion of the
Compensation Committee and performance criteria, if any, may vary from year to
year and from participant to participant. Therefore, benefits under the Plan are
not determinable. Compensation paid and other benefits granted to directors and
certain executive officers of the Company for the 1997 fiscal year are set forth
elsewhere herein. See "COMPENSATION OF THE BOARD OF DIRECTORS" and "EXECUTIVE
COMPENSATION."
THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL.
21
<PAGE>
RATIFICATION OF APPOINTMENT OF AUDITORS
[PROPOSAL 3]
Deloitte & Touche LLP has been appointed by the Board of Directors as the
auditors for the Company's financial statements for the fiscal year ending
December 31, 1998. A representative of Deloitte & Touche LLP is expected to be
present at the Meeting and will have the opportunity to make a statement if he
desires to do so and will be available to respond to appropriate questions from
stockholders.
Pursuant to applicable Delaware law, the ratification of the appointment of
auditors of the Company requires the affirmative vote of the holders of a
majority of the shares of Common Stock present at the Meeting, in person or by
proxy, and entitled to vote. Abstentions and broker non-votes will be counted
and will have the same effect as a vote against this proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THIS PROPOSAL.
STOCKHOLDER PROPOSALS
Any proposal of a stockholder intended to be presented at the Company's 1999
annual meeting of stockholders must be received by the Company for inclusion in
the proxy statement and form of proxy for that meeting no later than November
30, 1998.
By Order of the Board of Directors
KAREN C. SCLAFANI
SECRETARY
Dated: March 30, 1998
22
<PAGE>
EXHIBIT A
PROPOSED AMENDMENT TO PLAN
FIRST AMENDMENT TO
AVIS RENT A CAR, INC.
1997 STOCK OPTION PLAN
The Avis Rent a Car, Inc. 1997 Stock Option Plan (the "Plan") is hereby
amended as follows:
1. Section 4(a) of the Plan is hereby amended and restated in its entirety
to read as follows:
"(A) THE MAXIMUM NUMBER OF SHARES THAT MAY BE ISSUED OR TRANSFERRED
PURSUANT TO OPTIONS IS 6,000,000 (OR THE NUMBER AND KIND OF SHARES OF STOCK
OR OTHER SECURITIES WHICH ARE SUBSTITUTED FOR THOSE SHARES OR TO WHICH THOSE
SHARES ARE ADJUSTED UPON A CHANGE IN CAPITALIZATION), AND THE COMPANY SHALL
RESERVE FOR THE PURPOSES OF THE PLAN, OUT OF ITS AUTHORIZED BUT UNISSUED
SHARES OR OUT OF SHARES HELD IN THE COMPANY'S TREASURY, OR PARTLY OUT OF
EACH SUCH NUMBER OF SHARES AS SHALL BE DETERMINED BY THE BOARD."
2. RATIFICATION. Except as expressly set forth in this First Amendment to
the Plan, the Plan is hereby ratified and confirmed without modification.
3. EFFECTIVE DATE. The effective date of this First Amendment to the Plan
shall be the date of the 1998 annual meeting of stockholders.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 76,663
<SECURITIES> 0
<RECEIVABLES> 360,462
<ALLOWANCES> (879)
<INVENTORY> 3,018,856
<CURRENT-ASSETS> 0
<PP&E> 134,993
<DEPRECIATION> (12,133)
<TOTAL-ASSETS> 4,278,956
<CURRENT-LIABILITIES> 0
<BONDS> 2,826,422
0
0
<COMMON> 309
<OTHER-SE> 449,712
<TOTAL-LIABILITY-AND-EQUITY> 4,278,956
<SALES> 2,046,154
<TOTAL-REVENUES> 2,046,154
<CGS> 0
<TOTAL-COSTS> 1,818,449
<OTHER-EXPENSES> 6,860
<LOSS-PROVISION> 3,208
<INTEREST-EXPENSE> 167,314
<INCOME-PRETAX> 50,323
<INCOME-TAX> 22,850
<INCOME-CONTINUING> 27,473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,473
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.88
</TABLE>
