<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 1998
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13315
AVIS RENT A CAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3347585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Old Country Road, Garden City, New York 11530
(Address of principal executive offices)
(Zip Code)
(516)222-3000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of November 9, 1998: Common Stock, $.01 par value - Class A
33,541,000 shares.
<PAGE>
AVIS RENT A CAR, INC.
INDEX
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Page
Condensed Consolidated Statements of
Operations for the Three and Nine months ended
September 30, 1998 and 1997..................................1
Condensed Consolidated Statements of Financial
Position as of September 30 1998
and December 31, 1997........................................2
Condensed Consolidated Statements of Cash
Flows for the Nine months ended
September 30, 1998 and 1997..................................3
Notes to the Condensed Consolidated
Financial Statements ........................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................6
<PAGE> 1
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue......................................... $652,385 $580,049 $1,739,055 $1,525,696
--------- -------- ---------- ----------
Direct operating................................ 266,863 242,997 706,290 641,545
Vehicle depreciation and lease charges, net..... 166,788 148,068 444,182 382,199
Selling, general and administrative............. 109,811 110,256 324,182 313,639
Interest, net................................... 53,051 52,100 149,869 134,755
Amortization of cost in excess of
net assets acquired ......................... 3,166 1,675 8,687 4,245
--------- -------- ---------- ----------
599,679 555,096 1,633,210 1,476,383
---------- -------- ---------- ----------
Income before provision for income taxes ....... 52,706 24,953 105,845 49,313
Provision for income taxes...................... 22,568 11,085 45,949 22,339
--------- -------- ---------- ----------
Net income ..................................... $ 30,138 $13,868 $ 59,896 $ 26,974
========= ======== ========== ==========
Earnings per share:
Basic ..................................... $ 0.85 $ 0.45 $ 1.74 $ 0.87
========= ======== =========== ==========
Diluted ........................................ $ 0.83 $ 0.45 $ 1.70 $ 0.87
========= ======== =========== =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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<PAGE> 2
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents................................ $ 64,381 $ 44,899
Accounts receivable, net................................. 471,689 359,463
Prepaid expenses......................................... 45,372 47,360
Vehicles, net ........................................... 3,256,496 3,018,856
Property and equipment, net.............................. 140,560 122,860
Deferred income tax assets............................... 111,509 142,025
Cost in excess of net assets acquired, net............... 479,012 396,040
Other assets ............................................ 173,553 147,453
-------------- --------------
Total assets........................................... $ 4,742,572 $ 4,278,956
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................ $ 204,583 $ 329,706
Accrued liabilities ..................................... 345,039 328,411
Due to affiliates, net................................... 15,196 44,512
Current income tax liabilities........................... 7,417 9,749
Deferred income tax liabilities ......................... 34,179 34,106
Public liability, property damage and
other insurance liabilities .......................... 267,909 256,029
Debt .................................................... 3,232,466 2,826,422
-------------- --------------
Total liabilities ................................... 4,106,789 3,828,935
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Common stock ......................................... 359 309
Additional paid-in capital ........................... 591,651 430,507
Retained earnings..................................... 88,190 28,294
Foreign currency translation adjustment .............. (15,730) (9,089)
Treasury stock........................................ (28,687)
-------------- --------------
Total stockholders' equity........................ 635,783 450,021
-------------- --------------
Total liabilities and stockholders' equity ....... $ 4,742,572 $ 4,278,956
============== ==============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
-2-
<PAGE>3
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 59,896 $ 26,974
Adjustments to reconcile net income to cash provided
by operating activities ....................... 390,089 327,324
------------- -----------
Net cash provided by operating activities.... 449,985 354,298
------------- -----------
Cash flows from investing activities:
Vehicle additions .................................... (2,904,178) (3,169,229)
Vehicle deletions .................................... 2,197,359 1,987,853
Additions to property and equipment................... (34,280) (30,297)
Retirements of property and equipment ................ 4,494 18,070
Payments for purchase of licensees ................... (232,843) (199,381)
------------- ------------
Net cash used in investing activities ............ (969,448) (1,392,984)
------------- ------------
Cash flows from financing activities:
Changes in debt:
Proceeds ......................................... 1,253,383 3,195,292
Repayments ....................................... (842,559) (2,390,528)
------------- ------------
Net increase in debt ............................. 410,824 804,764
Payments for debt issuance costs ................... (3,949) (28,202)
Proceeds from public offering ....................... 161,194 359,316
Purchases of treasury stock........................... (28,687)
------------- ------------
Net cash provided by financing activities......... 539,382 1,135,878
------------- ------------
Effect of exchange rate changes on cash ................. (437) (568)
------------- ------------
Net increase in cash and cash equivalents................ 19,482 96,624
Cash and cash equivalents at beginning of period ........ 44,899 29,718
------------- ------------
Cash and cash equivalents at end of period .............. $ 64,381 $ 126,342
============= ============
Supplemental disclosure of cash flow information Cash
paid during the period for:
Interest................................................. $ 154,414 $ 129,802
============= ============
Income taxes ............................................ $ 10,261 $ 7,946
============= ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
-3-
<PAGE> 4
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
Avis Rent A Car, Inc. and its subsidiaries (the "Company"). These consolidated
financial statements reflect, in the opinion of management, all material
adjustments (which include normal recurring adjustments only) necessary to
fairly state the financial position, the results of operations and cash flows
for the periods presented. Operating results for interim periods are not
indicative of the results that can be expected for a full year. These
consolidated financial statements should be read in conjunction with the
Company's audited annual consolidated financial statements and notes thereto,
included in the Company's annual report on Form 10-K filed with the Securities
and Exchange Commission. Certain amounts in the prior period have been
reclassified to conform to current period presentation.
Note 2- Earnings Per Share
Basic earnings per share is computed by dividing net income for the three month
periods ended September 30, 1998 and 1997 by 35,608,000 and 30,925,000 weighted
average shares outstanding, respectively, and for the nine month periods ended
September 30, 1998 and 1997 by 34,334,000 and 30,925,000 weighted average shares
outstanding, respectively. Diluted earnings per share is computed by dividing
net income for the three month periods ended September 30, 1998 and 1997 by,
36,180,000 and 30,925,000 weighted average shares outstanding, respectively, and
for the nine month periods ended September 30, 1998 and 1997 by 35,222,000 and
30,925,000 weighted average shares outstanding, respectively. Shares used in
calculating diluted earnings per share include the effects of the assumed
exercise of dilutive stock options.
Note 3 - Treasury Stock
During September 1998, the Company completed a program to repurchase 1,500,000
shares of common stock at a total cost of $28,687,000. The Board of Directors
subsequently authorized the repurchase of 3,500,000 additional shares. At
September 30, 1998, there are 34,425,000 issued and outstanding shares of
common stock. In October 1998, the Company repurchased an additional 884,000
shares of common stock for $16,464,500.
Note 4 - Acquisitions
On August 20, 1997, the Company purchased The First Gray Line Corporation. The
following unaudited pro forma information presents the results of operations of
the Company as if the acquisition of The First Gray Line Corporation, the
repayment of debt with the net proceeds (after the purchase of The First Gray
Line Corporation) from the initial public offering (the "IPO") on September 24,
1997 and related adjustments had taken place on January 1, 1997. These unaudited
pro forma results are not necessarily an indication of the actual results of
operations that would have occurred had the acquisition of The First Gray Line
Corporation and the IPO actually occurred on January 1, 1997 (in thousands,
except share data).
<TABLE>
<CAPTION>
Pro forma Pro forma
Three months ended Nine months ended
September 30, 1997 September 30, 1997
------------------- -------------------
<S> <C> <C>
Revenue........................................... $ 609,920 $ 1,655,439
=================== ===================
Income before provision for income taxes.......... $ 33,065 $ 70,777
=================== ===================
Net income........................................ $ 18,162 $ 38,877
=================== ===================
Earnings per share:
Basic............................................. $ .59 $ 1.26
=================== ===================
Diluted........................................... $ .59 $ 1.26
=================== ===================
</TABLE>
-4-
<PAGE> 5
On May 1, 1998, the Company acquired the assets of the car rental business of
Hayes Leasing Company, Inc. (the "Hayes transaction"), 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 $86 million in cash plus
the refinancing of fleet-related indebtedness, which totaled approximately $136
million for a total purchase price of approximately $222 million. In addition,
during the nine month period ended September 30, 1998, the Company purchased the
assets, including the Avis System franchises, of the car rental businesses of
Amelco Leasing , Hazqu Car Inc., The Champ Car, Inc. and Economy Leasing Corp.,
for approximately $10.3 million in cash. If these Acquisitions had occurred on
January 1, 1998 or 1997, they would not have had a material impact on the
Company's results of operations. The excess purchase price over the net assets
acquired for the Acquisitions was approximately $89 million.
The preliminary purchase cost allocations for the 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 September 30,
1998. However, the changes are not expected to have a material effect on the
financial position of the Company. The 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.
Note 5 - Comprehensive Income
Comprehensive income is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Net income.................................................. $30,138 $13,868 $59,896 $26,974
Foreign currency translation adjustment..................... (864) (2,664) (6,641) (5,224)
-------- -------- ---------- --------
Comprehensive income........................................ $29,274 $11,204 $53,255 $21,750
======== ======== ========== ========
</TABLE>
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<PAGE> 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
General Overview
The Company conducts vehicle rental operations through wholly-owned subsidiaries
in the United States, Canada, Puerto Rico, the U.S. Virgin Islands, Argentina,
Australia and New Zealand. Revenue is derived principally from time and mileage
charges for vehicle rentals and, to a lesser extent, the sale of loss damage
waivers, liability insurance and other products and services.
On October 17, 1996, Cendant Corporation, ("Cendant"), formerly HFS
Incorporated, acquired the Company and its subsidiaries (the "Acquisition"). The
Acquisition was accounted for as a purchase. As of September 30, 1998, Cendant
owned 7,500,000 shares (approximately 22%) of the Company's common stock.
On September 24, 1997, the Company issued and sold 22,425,000 shares of its
common stock in an IPO and received net proceeds of $359.3 million. The net
proceeds were used to repay amounts outstanding under the acquisition credit
facility utilized to complete the acquisition of The First Gray Line
Corporation, pay certain acquisition expenses incurred to complete The First
Gray Line acquisition and to prepay outstanding indebtedness.
Management believes that a more meaningful comparison of the results of
operations for the three and nine month periods ended September 30, 1998 and
1997 is obtained by presenting the results for the three and nine months ended
September 30, 1997 on a pro forma basis to give effect to the following
transactions as if they had occurred on January 1, 1997: the acquisition of The
First Gray Line Corporation and the repayment of debt with the net proceeds
(after the purchase of The First Gray Line Corporation) from the IPO and related
adjustments.
Three Months Ended September 30, 1998 Compared to Pro Forma Three Months Ended
September 30, 1997
The following table sets forth for the periods indicated, certain items in the
Company's condensed consolidated statement of operations (dollars in thousands):
<TABLE>
<CAPTION>
Actual Pro forma
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------------------ ----------------------------------
Percentage Percentage
of Revenue of Revenue
--------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenue............................... $652,385 100.0% $ 609,920 100.0%
--------------- -------------- ------------------ ---------------
Costs and expenses:
Direct operatiang................ 266,863 40.9 255,437 41.9
Vehicle depreciation and
lease charges, net............. 166,788 25.6 155,595 25.5
Selling, general and 109,811 16.8 112,269 18.4
administrative.................
Interest, net 53,051 8.1 51,171 8.4
Amortization of cost in excess
of net assets acquired......... 3,166 0.5 2,383 0.4
--------------- -------------- ------------------ --------------
599,679 91.9 576,855 94.6
--------------- -------------- ------------------ --------------
Income before provision for
income taxes....................... 52,706 8.1 33,065 5.4
Provision for income taxes............ 22,568 3.5 14,903 2.4
=============== ============== ================== ==============
Net income $ 30,138 4.6% $ 18,162 3.0%
=============== ============== ================== ==============
</TABLE>
-6-
<PAGE> 7
Revenue
Revenue increased 7.0%, from $609.9 million to $652.4 million, compared to the
same period in 1997. The increase in revenue is due primarily to the Hayes
transaction (3.7%) and overall market demand (3.3%). The revenue increase
reflected a 6.4% increase in the number of rental transactions and a 0.6%
increase in revenue per rental transaction.
Costs and Expenses
Total costs and expenses increased 4.0%, from $576.9 million to $599.7 million,
compared to the same period in 1997. Direct operating expenses increased 4.5%,
from $255.4 million to $266.9 million, compared to the same period in 1997. As a
percentage of revenue, direct operating expenses declined to 40.9%, from 41.9 %
for the corresponding period in 1997. Operating efficiencies were derived
primarily from lower vehicle insurance costs (0.3% of revenue), lower airport
commissions (1.5% of revenue), and lower computer services costs (0.4% of
revenue). These were partially offset by higher vehicle damage costs (0.4% of
revenue), higher compensation costs (0.5% of revenue) and higher facility costs
(0.3% of revenue).
Vehicle depreciation and lease charges increased 7.2%, from $155.6 million to
$166.8 million, compared to the same period in 1997. As a percentage of revenue,
vehicle depreciation and lease charges were 25.6% of revenue, as compared to
25.5% of revenue for the corresponding period in 1997. The change reflected a
4.7% increase in the average rental fleet combined with a higher monthly cost
per vehicle. Selling, general and administrative expenses decreased 2.2%, from
$112.3 million to $109.8 million, compared to the same period in 1997. The
decrease was due to lower marketing costs and lower frequent traveler costs.
Interest expense increased 3.7%, from $51.2 million to $53.1 million, compared
to the same period in 1997, due to higher borrowings required to finance the
growth of the rental fleet.
The provision for income taxes for the three months ended September 30, 1998
increased to $22.6 million, from $14.9 million for the same period in 1997. The
effective income tax rate was 42.8%, down from 45.1% for the corresponding
period in 1997. The effective tax rate reflects differences between foreign
income tax rates and the U.S. federal statutory income tax rate, taxes on the
repatriation of foreign earnings, and foreign withholding taxes on dividends
paid to the Company.
Net income increased 65.9%, from $18.2 million to $30.1 million, compared to the
same period in 1997. The increase reflects higher revenue, decreased costs and
expenses as a percentage of revenue and a lower effective income tax rate.
Nine Months Ended September 30, 1998 Compared to Pro Forma Nine Months Ended
September 30, 1997
The following table sets forth for the periods indicated, certain items in the
Company's condensed consolidated statement of operations (dollars in thousands):
<TABLE>
<CAPTION>
Actual Pro forma
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------------------ ------------------------------
Percentage Percentage
of Revenue of Revenue
--------------- -------------- ------------------ -----------
<S> <C> <C> <C> <C>
Revenue.................................. $1,739,055 100.0% $ 1,655,439 100.0%
--------------- -------------- ------------------ -----------
Costs and expenses:
Direct operating.................... 706,290 40.6 697,989 42.2
Vehicle depreciation and
lease charges, net................ 444,182 25.6 416,489 25.2
Selling, general and
administrative.................... 324,182 18.6 319,964 19.3
Interest, net....................... 149,869 8.6 143,092 8.6
Amortization of cost in
excess of net assets acquired 8,687 0.5 7,128 0.4
--------------- -------------- ------------------ -----------
1,633,210 93.9 1,584,662 95.7
--------------- -------------- ------------------ -----------
Income before provision for
income taxes.......................... 105,845 6.1 70,777 4.3
Provision for income taxes............... 45,949 2.7 31,900 1.9
=============== ============== ================== ===========
Net income............................... $ 59,896 3.4% $ 38,877 2.4%
=============== ============== ================== ===========
</TABLE>
-7-
<PAGE> 8
Revenue
Revenue increased 5.1%, from $1,655.4 million to $1,739.1 million, compared to
the same period in 1997. The increase in revenue is due primarily to the Hayes
transaction (2.2%) and overall market demand (2.9%). The revenue increase
reflected a 4.7% increase in the number of rental transactions and a 0.4%
increase in revenue per rental transaction.
Costs and Expenses
Total costs and expenses increased 3.1%, from $1,584.7 million to $1,633.2
million, compared to the same period in 1997. Direct operating expenses
increased 1.2%, from $698.0 million to $706.3 million, compared to the same
period in 1997. As a percentage of revenue, direct operating expenses declined
to 40.6%, from 42.2% for the corresponding period in 1997. Operating
efficiencies were derived primarily from lower vehicle insurance costs (0.5% of
revenue), lower airport commissions (1.4% of revenue), and lower computer
services costs (0.3% of revenue). These efficiencies were partially offset by
higher vehicle damage costs (0.3% of revenue) and higher compensation costs
(0.4% of revenue).
Vehicle depreciation and lease charges increased 6.6%, from $416.5 million to
$444.2 million, compared to the same period in 1997. As a percentage of revenue,
vehicle depreciation and lease charges were 25.6% of revenue, as compared to
25.2% of revenue for the corresponding period in 1997. The change reflected a
3.1% increase in the average rental fleet combined with a higher monthly cost
per vehicle. In addition, the net proceeds received in excess of book value from
the disposition of used vehicles was $4.0 million lower (0.3% of revenue) in the
first nine months of 1998 compared to the same period in 1997. This was
primarily due to favorable market conditions for the sale of certain model
vehicles during 1997.
Selling, general and administrative expenses increased 1.3%, from $320.0 million
to $324.2 million, compared to the same period in 1997. The increase was due to
higher reservation costs and higher general and administrative expenses,
partially offset by lower marketing costs and lower frequent flyer traveler
costs.
Interest expense increased 4.7%, from $143.1 million to $149.9 million, compared
to the same period in 1997, due to higher borrowings required to finance the
growth of the rental fleet.
The provision for income taxes for the nine months ended September 30, 1998
increased to $45.9 million, from $31.9 million for the same period in 1997. The
effective income tax rate was 43.4%, down from 45.1% for the corresponding
period in 1997. The effective tax rate reflects differences between foreign
income tax rates and the U.S. federal statutory income tax rate, taxes on the
repatriation of foreign earnings, and foreign withholding taxes on dividends
paid to the Company.
Net income increased 54.1%, from $38.9 million to $59.9 million, compared to the
same period in 1997. The increase reflects higher revenue, decreased costs and
expenses as a percentage of revenue and a lower effective income tax rate.
Liquidity and Capital Resources
The Company's operations are funded by cash provided by operating activities and
by financing arrangements maintained by the Company in the markets in which it
operates. The Company's primary use of funds is for the acquisition of new
vehicles. For the three and nine month periods ended September 30, 1998, the
Company's expenditures for new vehicles were approximately $1.0 billion and $2.9
billion, respectively, and proceeds from the disposition of used vehicles were
approximately $800 million and $2.2 billion, respectively. In 1998, the Company
expects its expenditures for new vehicles (net of proceeds from the disposition
of used vehicles) to be higher than in 1997. The financing requirements for
vehicles typically reaches an annual peak in the third calendar quarter, 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. The Company's customer receivables also provide liquidity
with approximately 11 days of daily sales outstanding.
The Company made capital investments for property improvements totaling $13.2
million and $34.3 million for the three months and nine months ended September
30, 1998, respectively, compared to $20.8 million and $30.3 million for the same
periods in 1997.
The Company's fleet financing program provides for borrowings up to $ 3.75
billion, comprised of $2.25 billion of asset-backed medium term notes (the
"Medium Term Notes") and the issuance of up to $1.5 billion of asset-backed
variable funding notes (the "Commercial Paper Notes"). The Medium Term Notes and
the Commercial Paper Notes are backed by, among other things, a first priority
security interest in the vehicles.
-8-
<PAGE>9
Avis Rent A Car System, Inc. ("ARACS"), a wholly-owned subsidiary of the
Company, is party to a $350 million secured credit agreement that provides for
(i) a revolving credit facility which is available until December 31, 2001 to
finance the general corporate needs of ARACS and (ii) a standby letter of credit
facility available on a revolving basis until April 20, 1999 to fund (a) any
shortfall in certain payments owing 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. At September 30, 1998, the Company had approximately
$975 million of additional credit available.
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 operating cash requirements for the next twelve months. Based on
current market conditions and the Company's current banking relationships, the
Company expects to fund maturities of the Medium Term Notes by the issuance of
either new medium term notes or commercial paper depending on market conditions
at the time the Medium Term Notes mature. However, the Company can give no
assurance that will occur.
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. At September 30, 1998, the total debt for the
Company's international operations was $150.5 million, of which $143.6 million
is due in less than 12 months. At September 30, 1998, the impact on the
Company's liquidity and financial condition due to exchange rate fluctuations of
its foreign operations is not material.
On March 23, 1998, the Company sold 5,000,000 shares of its common stock through
a public offering and received proceeds of approximately $162 million, which
were used to finance the Hayes transaction and for working capital and general
corporate purposes, including the repayment of certain indebtedness.
In September 1998, the Company completed a program to repurchase 1,500,000
shares of common stock at a total cost of $28,687,000. In addition, the Board of
Directors subsequently authorized the repurchase of an additional 3,500,000
shares. In October 1998, the Company repurchased 884,000 shares of common stock
for $16,464,500.
Seasonality
Car rental is a seasonal business, with decreased travel in winter months and
heightened activity in spring and summer. To accommodate increased demand, the
Company increases its available fleet during the second and third quarters.
Certain of the Company's operating expenses are fixed and cannot be reduced
during periods of decreased rental demand. In certain geographic markets, the
impact of seasonality has been reduced by emphasizing leisure or business travel
in the off-peak season.
Recent Accounting Standards
Recent pronouncements of the Financial Accounting Standards Board which are not
required to be adopted at this date, include Statement of Financial Accounting
Standards ("SFAS") No. 132 - "Employer's Disclosures about Pensions and Other
Post Retirement Benefits," ("SFAS 132") and SFAS No. 133 - "Accounting for
Derivative Instruments and Hedging Activities, ("SFAS 133"), which are effective
for the Company's consolidated financial statements for the years ending
December 31, 1998 and December 31, 2000, respectively. SFAS 132 revises
employers' disclosures about pension and other post retirement benefit plans and
does not change the measurement or recognition of pension or other post
retirement benefit plans. This Statement standardizes the disclosure
requirements for pension and other post retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position at fair value.
-9-
<PAGE> 10
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued a Statement of Position ("SOP") No. 98-5,
"Accounting for Start-Up Costs". The SOP requires that all start-up costs should
be expensed as incurred, unless the costs incurred were to acquire or develop
tangible assets or to acquire intangible assets from a third party. The SOP is
effective for fiscal years beginning after December 15, 1998.
The adoption of SFAS 132, SFAS 133 and the SOP will not have a material effect
on the Company's consolidated financial statements.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. Consequently, these software and computer
systems need to be either reprogrammed, upgraded or replaced in order to
properly function when Year 2000 arrives.
The Company's state of readiness, risks assessment, contingency plans and
estimated costs to meet Year 2000 requirements are as follows:
(i) State of Readiness
The Company has implemented a comprehensive plan to address the Year 2000
requirements in its mission critical systems. Mission critical systems are
those whose failure poses a risk of disruption to the Company's ability to
provide car reservation and rental services. The Company's plan includes
(i) the identification of all mission critical systems and the complete
inventory of the hardware and software affected by the Year 2000; (ii)
assessment of its systems including prioritization; (iii) modification,
upgrading and replacement of the affected systems; and (iv) testing of the
systems. The Company is using both internal and external sources to
implement its plan. The Company has generally completed the inventory and
assessment of its consolidated mission critical systems and is at various
stages of modification and testing of these systems.
Much of the Company's technology, including technology associated with its
mission critical systems, is purchased from third parties. The Company is
dependent on those third parties to assess the impact of Year 2000 on the
technology they have supplied and to take any necessary corrective action.
The Company is monitoring the progress of these third parties and
conducting tests to determine whether they have accurately assessed the
problem and taken corrective action. The Company currently believes its
information systems will be Year 2000 compliant in the second quarter of
1999.
(ii) Contingency Plans
Based upon the progress of its comprehensive plan, the Company expects that
it will not experience a disruption of its operations as a result of the
change to the new millennium. However, there can be no assurance that the
third parties who have supplied technology used in the Company's mission
critical systems will be successful in taking corrective action in a timely
manner. The Company is developing contingency plans with respect to certain
key technology used in its mission critical systems, which are intended to
enable the Company to continue to operate. The contingency plans include
performing certain processes manually; repairing systems and changing
suppliers if necessary, although there can be no assurance that these
contingency plans will successfully avoid service disruption in the
reservation and rental of vehicles. The Company believes, that due to the
widespread nature of potential Year 2000 issues, the contingency planning
process is an ongoing one which will require further modifications as the
Company obtains additional information regarding (1) the Company's internal
systems and equipment during the remediation and testing phases of its Year
2000 program; and (2) the status of third party Year 2000 readiness.
(iii) Year 2000 Costs
Costs of software and hardware remediation were approximately $3.2 million
in 1997, $5.2 million for the nine months ended September 30, 1998 and are
estimated to be approximately $4.7 million for the fourth quarter of 1998,
$6.2 million in 1999 and $400 thousand in 2000. These estimates include the
costs of certain equipment and software for which planned replacement was
accelerated due to Year 2000 requirements. In addition, the Company has
redeployed internal resources to address the Year 2000. This estimate
assumes that third party suppliers have accurately assessed the compliance
of their products and that they will successfully correct the issue in
non-compliant products. Because of the complexity of correcting the Year
2000 issue, actual costs may vary from these estimates.
-10-
<PAGE> 11
(iv) Possible Consequences of Year 2000 Problems
The Company believes that completed and planned modifications and
conversions of its internal systems and equipment will allow it to be Year
2000 compliant in a timely manner. There can be no assurance, however, that
the Company's internal systems or equipment or those of third parties on
which the Company relies will be Year 2000 compliant in a timely manner or
that the Company's or third parties' contingency plans will mitigate the
effects of any noncompliance. The failure of the systems or equipment of
the Company or third parties (which the Company believes is the most
reasonably likely worst case scenario) could effect reservation and rental
operations and could have a material adverse effect on the Company's
business or consolidated financial statements.
Forward Looking Information
Certain matters discussed in this report that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements involve risks and uncertainties including the impact of competitive
products and pricing, changing market conditions, the ability of the Company and
its vendors to complete the necessary actions to achieve a Year 2000 conversion
for its computer systems and applications, and other risks which were detailed
from time to time in the Company's publicly-filed documents, including its
Annual Report on Form 10-K for the period ended December 31, 1997. Actual
results may differ materially from those projected. These forward-looking
statements represent the Company's judgement as of the date of this report.
-10-
<PAGE> 11
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Avis Rent A Car, Inc.
----------------------------
(Registrant)
Dated: November 9, 1998 By: /s/ Kevin M. Sheehan
----------------------------
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Dated: November 9, 1998 By: /s/ Timothy M. Shanley
----------------------------
Vice President and Controller
(principal accounting officer)
-11-
<PAGE> 12
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
filed with
Form 10 - Q
for the quarter ended
September 30, 1998
under
THE SECURITIES EXCHANGE ACT OF 1934
AVIS RENT A CAR, INC.
Commission file number 1-13315
EXHIBIT INDEX
Exhibit
No. Description Page No.
27 Financial Data Schedule for 13
the Nine months ended September 30, 1998
-12-
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 64,381
<SECURITIES> 0
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