SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
AUGUST 6, 1999
(Date of Report)
AVIS RENT A CAR, INC.
(Exact Name of Registrant As Specified In Its Charter)
DELAWARE 1-13315 11-3347585
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
900 Old Country Road 11530
Garden City, NY (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (516) 222-3000
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
Not applicable
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Not applicable
ITEM 3. BANKRUPTCY OR RECEIVERSHIP.
Not applicable
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
Not applicable
ITEM 5. OTHER EVENTS.
On June 30, 1999, Avis Fleet Leasing and Management Corporation ("Avis
Fleet"), a wholly-owned subsidiary of Avis Rent A Car, Inc. ("Avis Rent A Car"),
acquired the vehicle management and fuel card businesses of Cendant Corporation
and its subsidiaries (collectively "Cendant"). These businesses (collectively,
"VMS") were, prior to their acquisition by Avis Fleet (the "VMS Acquisition"),
operated through Cendant's PHH subsidiaries in the United States and Canada,
Cendant's PHH subsidiaries in Europe, and Wright Express Corporation ("WEX") in
the United States. On July 15, 1999, Avis Rent A Car filed a Current Report on
Form 8-K (the "July 15 8-K") which described the VMS Acquisition and included as
an exhibit thereto the following VMS financial statements: Audited Combined
Financial Statements as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996 (the "VMS Audited Combined Financial
Statements") and Unaudited Condensed Combined Financial Statements as of March
31, 1999 and for the three months ended March 31, 1999 and 1998 (together with
the VMS Audited Combined Financial Statements, the "VMS Historical Financial
Statements").
The following sets forth management's discussion and analysis of the
VMS Historical Financial Statements as well as a discussion of the liquidity and
capital resources requirements of Avis Rent A Car and its subsidiaries,
including VMS (collectively "New Avis"), and certain other matters.
RESULTS OF OPERATIONS
Harpur Acquisition. In January 1998, Cendant completed the acquisition
of The Harpur Group Limited ("Harpur"), a leading vehicle management company in
the United Kingdom. When acquired, Harpur had outstanding over 390,000 fuel
cards which were used to purchase over 185 million gallons of fuel during 1997.
Harpur's processing and support services have been fully integrated into the VMS
platform. The acquisition was accounted for as a purchase and, accordingly, the
operating results of Harpur have been included in the VMS Historical Financial
Statements since the date of acquisition.
VMS-Paymentech Transaction. In January 1997, VMS sold one-half of its
interest in PHH Paymentech LLC ("Paymentech") to Paymentech Inc. resulting in a
gain of $17.5 million. Paymentech included all of the card businesses of PHH
Vehicle Management Services Corporation. The entity was operated as a joint
venture with each party maintaining a 50% interest and was reflected in the 1997
VMS Historical Financial Statements under the equity method of accounting. In
December 1997, Cendant purchased the 50% interest from Paymentech Inc. in order
to allow Cendant to evaluate other structuring possibilities with its portfolio
of card businesses. The 1998 VMS Historical Financial Statements include 100% of
the operations of Paymentech.
Merger Related Costs and Other Unusual Charges. In connection with the
merger of PHH Corporation and HFS Incorporated in the second quarter of 1997 and
the merger of HFS Incorporated with CUC International, Inc. in the fourth
quarter of 1997 (the "Mergers"), VMS incurred $61.1 million of merger-related
costs and other unusual charges. Management initiated a plan to continue the
downsizing of fleet operations by providing for job reductions and eliminating
unprofitable products.
Personnel-related charges included termination benefits such as
severance, medical and other benefits as well as retirement benefits (pursuant
to pre-existing contracts) resulting from a change in control. Business
termination charges of $55 million represented costs to exit certain activities
including: (i) a $30 million payment to terminate a relationship with a
third-party associated with certain credit card operations and (ii) a $25
million goodwill impairment loss recorded as a result of abandoning certain
unprofitable closed-end leasing activities. The plan was substantially completed
by December 31, 1997. At December 31, 1997, the remaining liability of
approximately $2.1 million represented severance payments, which were paid in
1998 with the excess liability of approximately $1.3 million reversed in the
second quarter of 1998 as the plan was completed. See Note 3 to the VMS Audited
Combined Financial Statements.
Cendant Services. Prior to the VMS Acquisition, VMS was wholly owned
by Cendant. During this period, Cendant provided VMS with certain administrative
functions, such as risk management, treasury, legal, payroll, human resources,
certain information technology and taxes. Cendant has agreed to continue
providing certain of these services to Avis Rent A Car and its subsidiaries for
a limited period of time. Thereafter, Avis Rent A Car and its subsidiaries will
either perform these services internally or obtain them from one or more
third-party providers.
The following table sets forth, for the periods indicated, certain
items included in VMS' statements of operations (dollars in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------------------------
Percentage of Percentage Percentage
1996 Revenue 1997 of Revenue 1998 of Revenue
<S> <C> <C> <C> <C> <C> <C>
Revenue
Fleet leasing revenue $1,128,495 $1,187,193 $1,286,896
Fleet management services 167,512 184,047 182,356
Other 61,032 81,455 135,811
--------- ---------- ----------
Total revenue 1,357,039 100.0% 1,452,695 100.0% 1,605,063 100.0%
Expenses
Depreciation on leased vehicles 912,830 67.3 953,551 65.6 1,015,511 63.3
Interest expense 167,687 12.4 177,149 12.2 183,560 11.4
Selling, general and
administrative expenses 193,822 14.3 211,123 14.6 232,724 14.5
Depreciation and
amortization on assets other
than leased vehicles 16,585 1.2 14,943 1.0 25,680 1.6
Merger-related costs (credits) -- -- 61,090 4.2 (1,280) (0.1)
--------- ---- ---------- ---- ---------- ----
Total expenses 1,290,924 95.1 1,417,856 97.6 1,456,195 90.7
--------- ---- ---------- ---- ---------- ----
Income before income taxes 66,115 4.9 34,839 2.4 148,868 9.3
Provision for income taxes 25,323 1.9 23,649 1.6 55,800 3.5
---------- ---- ---------- ---- ---------- ----
Net income $ 40,792 3.0% $ 11,190 0.8% $ 93,068 5.8%
========== ==== ========== ==== ========= ====
Three Months ended March 31,
----------------------------------------------------
Percentage Percentage
1998 of Revenue 1999 of Revenue
<S> <C> <C> <C> <C>
Revenue
Fleet leasing revenue $312,126 $317,992
Fleet management services 49,689 50,694
Other 29,490 31,567
-------- --------
Total revenue 391,305 100.0% 400,253 100.0%
Expenses
Depreciation on leased vehicles 249,384 63.7 253,743 63.4
Interest expense 43,183 11.1 46,457 11.6
Selling, general and
administrative expenses 55,425 14.2 63,569 15.9
Depreciation and
amortization on assets other
than leased vehicles 6,341 1.6 7,332 1.8
Merger-related costs (credits) -- -- -- --
-------- ----- -------- ------
Total expenses 354,333 90.6 371,101 92.7
-------- ----- -------- ------
Income before income taxes 36,972 9.4 29,152 7.3
Provision for income taxes 13,857 3.5 11,002 2.8
-------- ----- -------- ------
Net income $23,115 5.9% $18,150 4.5%
======== ===== ======= =====
</TABLE>
COMPARISON OF THREE-MONTH PERIOD ENDED MARCH 31, 1999 AND 1998
Revenues. VMS's revenues for the three-month period ended March 31,
1999 increased 2.3% from $391.3 million in the three month period ended March
31, 1998 to $400.3 million. Vehicles under management remained stable, growing
1% from 761,000 in the 1998 period to 767,000 in the 1999 period; while fuel and
maintenance cards outstanding grew 19% from 3.7 million to 4.4 million,
primarily in the United Kingdom and at WEX.
Fleet leasing revenues increased 1.9% in the three-month period ended
March 31, 1999 from $312.1 million in the comparable period in 1998 to $318.0
million. The largest portion of the increase was due to higher depreciation and
interest pass-through costs on operating leases, which increased 2.7% to $299.4
million. VMS' leased vehicles increased 5.1% to 356,467 units.
Fleet management services revenues increased 2.0% in the three-month
period ended March 31, 1999 from $49.7 million in the comparable period in 1998
to $50.7 million. Volume increases led to a 21% increase in vehicle maintenance
assistance revenue and a 31% increase in accident and risk management revenue.
The increase was offset in part by a $2.2 million decrease in revenues from
closed-end used car dispositions in the United Kingdom as a loss of $1.8 million
was realized in the first quarter of 1999 versus a $0.4 million gain in the
first quarter of 1998.
Other revenue increased 7.0% to $31.6 million due to unit increases in
the fuel card product line. WEX's fuel cards increased 26% while the PHH
proprietary fuel card increased 12%. This increase was partially offset by lower
revenue per card due to lower fuel prices. In the United States, the average
price of a gallon of fuel dropped from $1.11 in the first three months of 1998
to $1.01 in the first three months of 1999.
Expenses. Total expenses (including interest) for the three-month
period ended March 31, 1999, increased 4.7% from $354.3 million to $371.1
million. Expenses generally increased due to higher volumes.
Selling, general and administrative expenses increased $8.1 million to
$63.6 million. This increase is due to higher transaction volumes across all
product lines.
Vehicle depreciation on leased assets for the three month period ended
March 31, 1999, increased 1.8% from $249.4 million to $253.7 million. The
increase reflects higher lease billings resulting in part from higher volumes.
Total interest cost for the three-month period ended March 31, 1999,
increased 7.6% from $43.2 million to $46.5 million. Despite relatively flat
interest rates, total interest costs increased due to PHH Corporation's
commercial paper rating downgrade to A2/P2 as of October 1998. Most of this
increased cost could not be passed through to customers.
Net Income. Net income for the three-month period ended March 31, 1999
decreased 21.5% from $23.1 million to $18.2 million. The decrease was primarily
driven by two factors: (i) interest expense grew at a faster rate than interest
income due to VMS' inability to pass-through the higher interest costs resulting
from PHH Corporation's debt rating downgrade and (ii) the pre-tax loss of $1.8
million generated by the United Kingdom on its residual realization on contract
hire units (closed-end leases in the United Kingdom).
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 AND 1997
Revenues. VMS' revenues increased 10.5% from $1.5 billion in 1997 to
$1.6 billion in 1998. The increase was due primarily to the continued growth in
all major product lines and the inclusion of the Harpur revenues. Vehicles under
management increased from 664,000 units in 1997 to 779,000 units in 1998.
Additionally, total cards increased from 2.7 million to 3.6 million in 1998 due
to increased growth in both the United Kingdom and at WEX and from the addition
of approximately 400,000 Harpur cards.
Fleet leasing revenues increased 8.4% from $1.2 billion in 1997 to
$1.3 billion in 1998. The largest portion of the increase was due to higher
depreciation and interest pass-through costs on open-end leases due to higher
volumes, which increased 6.0%, to $1.2 billion. Additionally, contract hire
revenues in the United Kingdom increased 111% to $18.3 million due to volume
increases.
Fleet management services revenues decreased 0.9% from $184.0 million
in 1997 to $182.4 million in 1998. Excluding the effects of a $17.5 million gain
from the sale of 50% of Paymentech recorded in 1997 and a $10.3 million
deterioration in closed-end used car revenues as a loss of $4.4 million was
realized in 1998 versus a gain of $5.9 million in 1997, fleet management
services revenues increased due to accounting for Paymentech as a consolidated
subsidiary in 1998 (versus the equity method in 1997) and growth in fee based
revenues.
Other revenues increased 66.7% from $81.5 million in 1997 to $135.8
million in 1998. The principal factors driving the increase were the inclusion
of $31.7 million of revenues from the Harpur acquisition, the increase in WEX
revenues of $8.6 million and increases in the U.K. fuel card business.
Expenses. Total expenses increased 2.7% from $1.4 billion in 1997 to
$1.5 billion in 1998.
Total pass-through costs of depreciation on leased vehicles and
interest expense increased $67.8 million from $1.1 billion in 1997 to $1.2
billion in 1998. The increases were related to higher volumes as leased units in
the United Kingdom increased 37% to approximately 51,000 units and leased units
in North America increased 4.4% to approximately 303,000 units. These
pass-through costs decreased as a percentage of fleet leasing revenues from
95.0% of revenues in 1997 to 92.9% of revenues in 1998.
Selling, general and administrative expenses increased 10.2% from
$211.1 million in 1997 to $232.7 million in 1998. The increase resulted from
three major factors: (i) the inclusion of $10.9 million of Harpur expenses in
1998, (ii) the consolidation of PHH Paymentech LLC in 1998 versus the accounting
under the equity method in 1997 resulting in a $20.9 million increase, and (iii)
a decrease in the corporate overhead allocated from PHH Corporation and Cendant
from $18.9 million in 1997 to $7.0 million in 1998.
Depreciation and amortization on assets other than leased vehicles
increased 71.9% from $14.9 million in 1997 to $25.7 million in 1998. Increased
capital expenditures in certain key operating systems centered in the United
Kingdom and WEX were the principal factors contributing to the increase.
Merger-related expenses decreased in 1998 as charges related to the
Mergers were recorded in 1997. The credit reflected in 1998 resulted from
changes in estimates.
Net Income. VMS' net income for the year ended December 31, 1998
increased 732% from $11.2 million to $93.1 million, compared to the same period
in 1997. The increase reflects higher revenues due to volume increases and the
impact of the merger-related expenses recognized in 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 AND 1996
Revenues. VMS' revenues increased 7.0% from $1.4 billion in 1996 to
$1.5 billion in 1997. The increase is due to growth in all major product lines.
Strong card growth in both the United Kingdom and WEX resulted in total cards
increasing from 2.3 million to 2.7 million in 1997.
Fleet leasing revenues increased 5.2% from $1.1 billion in 1996 to
$1.2 billion in 1997. The largest increase was due to higher depreciation and
interest pass-through costs on the open-end leases in North America. Total
leased vehicles increased from 316,000 units in 1996 to 327,000 units in 1997.
Fleet management services revenues increased 9.9% from $167.5 million
in 1996 to $184.0 million in 1997. The increase due to the gain from the sale of
50% of Paymentech recorded in January, 1997 of $17.5 million was offset by the
decrease in revenues of approximately $21 million resulting from Paymentech
being accounted for under the equity method by VMS in 1997. Excluding these
offsetting effects, the growth resulted from increases in the major fee based
service offerings including accident management and maintenance in both North
America and Europe.
Other revenues increased 33.5% from $61.0 million in 1996 to $81.5
million in 1997. Strong growth in both the European and WEX fuel card businesses
were the primary factors in the increase as each generated in excess of 30%
growth in revenues for the product.
Expenses. Total expenses increased 9.8% from $1.3 billion in 1996 to
$1.4 billion in 1997. Merger-related expenses of $61.1 million in 1997 related
to the merger of PHH Corporation and HFS Incorporated was the principal
increase.
Total pass-through costs of depreciation on leased vehicles and
interest expense increased $50.2 million to $1.1 billion. The increase was due
principally to the 3.5% increase in the number of leased units. These
pass-through costs decreased as a percentage of fleet leasing revenues from
95.7% of revenues in 1996 to 95.0% of revenues in 1997.
Selling, general and administrative expenses increased 8.9 % from
$193.8 million in 1996 to $211.1 million in 1997. The increases were related to
two factors: (1) an $11.9 million increase in corporate overhead allocated from
PHH Corporation and Cendant from $7.0 million in 1996 to $18.9 million in 1997,
and (2) increases in volume-related expenses.
Depreciation and amortization on assets other than leased vehicles
decreased 9.9% from $16.6 million in 1996 to $14.9 million in 1997. The decrease
resulted principally from lower amortization of goodwill due to the merger
write-off of $25 million of goodwill in 1997 and lower depreciation on
capitalized systems.
Merger-related expenses totaled $61.1 million in 1997. The principal
components of the charge were a $30 million payment to terminate a relationship
with a third-party associated with certain credit card operations and a $25
million goodwill impairment loss recorded as a result of abandoning certain
unprofitable closed-end leasing activities. There were no merger-related
expenses in 1996.
Net Income. VMS' net income for the year ended December 31, 1997
decreased 72.6% from $40.8 million to $11.2 million, compared to the same period
in 1996. The merger-related expenses of $61.1 million pre-tax were the singular
cause of the decrease.
LIQUIDITY AND CAPITAL RESOURCES
New Avis' operations are expected to be funded by cash provided by
operating activities and by financing arrangements maintained by New Avis in the
markets in which it operates. New Avis' primary use of funds will be for the
acquisition of new vehicles. In the first quarter of 1999, pro forma for the VMS
Acquisition, New Avis' expenditures for new vehicles would have been
approximately $1.8 billion and proceeds from the disposition of used vehicles
would have been approximately $834 million. In 1998, pro forma for the VMS
Acquisition, New Avis' expenditures for new vehicles would have been
approximately $6.8 billion and proceeds from the disposition of used vehicles
would have been approximately $3.8 billion. For 1999, management expects New
Avis' expenditures for new vehicles (net of proceeds from the disposition of
used vehicles) to be higher than in 1998. Since the late 1980's, Avis Rent A Car
and its subsidiaries other than VMS (collectively, "Avis") have acquired
vehicles primarily pursuant to vehicle manufacturer repurchase programs
("Repurchase Programs"). Repurchase prices under the Repurchase Programs are
based on either (1) a specified percentage of original vehicle cost determined
by the month the vehicle is returned to the manufacturer or (2) the original
capitalization cost less a set daily depreciation amount. These Repurchase
Programs limit residual risk with respect to vehicles purchased under the
programs. This enables management to better estimate depreciation expense in
advance. VMS has historically not participated in Repurchase Programs and
management does not expect to do so in the future. Generally, customers with
open-end leases, which made up approximately 85% of VMS' lease portfolio in
1998, bear the residual risk with respect to their vehicles, whereas with
respect to closed-end leases, which made up approximately 15% of VMS' lease
portfolio, the lessor bears such residual risk. Avis and VMS have established
methods for disposition of used vehicles that are not covered by Repurchase
Programs.
Historically, Avis' financing requirements for vehicles have typically
reached an annual peak during the second and third calendar quarters, as fleet
levels build 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
vehicle and rental demand. Management expects that this pattern will continue
with the addition of VMS, whose cash requirements have historically been
relatively consistent over the course of a given year.
Management expects that cash flows from operations and funds from
available credit facilities will be sufficient to meet New Avis' anticipated
cash requirements for operating purposes for the next twelve months. Avis'
customer receivables also provide liquidity with approximately 11 days of daily
sales outstanding.
Pro forma for the VMS Acquisition, New Avis would have made capital
investments for property improvements totaling $15.9 million for the first
quarter of 1999, compared to $14.0 million for the same period in 1998. Capital
investments for property improvements and equipment would have been $88.1
million in 1998, and management estimates that such expenditures will total
approximately $78.2 million in 1999.
Pro forma for the VMS Acquisition, a substantial portion of New Avis'
debt is expected to be interest rate sensitive. Management has, however,
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 New Avis'
profitability.
New Avis incurred substantial indebtedness and preferred stock
requirements in connection with the VMS Acquisition and related transactions
(collectively, the "Transactions"). As of March 31, 1999 after giving pro forma
effect to the Transactions, New Avis would have had $8.2 billion of indebtedness
(including $6.7 billion relating to vehicle indebtedness) and $362 million
liquidation preference relating to the preferred stock of Avis Fleet issued as
part of the VMS acquisition consideration. Following the Transactions, New Avis'
liquidity requirements will significantly increase, primarily due to increased
interest and preferred stock dividend requirements. Had the Transactions
occurred on January 1, 1998, non-vehicle interest expense would have been $143.6
million compared with $7.7 million actually incurred. New Avis' debt agreements
permit it to incur or guarantee additional indebtedness, subject to certain
limitations. In addition, airport concession agreements usually require a
guaranteed minimum amount plus contingent fees (which are generally based on
revenues). New Avis is committed to make rental payments under noncancelable
operating leases relating principally to vehicle rental liabilities and
equipment. Future minimum rental commitments under noncancelable operating
leases amounted to $491.5 million at March 31, 1999.
Pro forma for the VMS Acquisition, borrowings for New Avis'
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. Avis
Rent A Car will guarantee only the borrowings of its subsidiary in Argentina. At
March 31, 1999, the total debt for New Avis' international operations would have
been $1.0 billion. The impact on New Avis' liquidity and financial condition due
to exchange rate fluctuations of New Avis' foreign operations is not expected to
be material.
New Avis's credit facility entered into in connection with the VMS
Acquisition (the "New Credit Facility") provides for up to $1.35 billion of
borrowings in the form of (1) a Revolving Credit Facility in the amount of up to
$350.0 million, (2) a $250.0 million Term A Loan, (3) a $375.0 million Term B
Loan and (4) a $375.0 million Term C Loan. In connection with the consummation
of the VMS Acquisition, Avis Rent A Car borrowed as of June 30, 1999, the full
$1.0 billion under the Term A Loan, Term B Loan and Term C Loan and $73.0
million under the Revolving Credit Facility. Approximately $95.0 million was
available under the New Credit Facility as of June 30, 1999 to fund liquidity
requirements after giving effect to the Transactions. The loans under the New
Credit Facility bear interest at variable rates at fixed margin above either The
Chase Manhattan Bank's alternative base rate or the Eurodollar rate. The New
Credit Facility is guaranteed by each U.S. subsidiary of Avis Rent A Car,
including Avis Fleet, but excluding any insurance subsidiaries, banking
subsidiaries, and securitization or other vehicle financing subsidiaries. All
borrowings by Avis Rent A Car under the New Credit Facility are secured by a
first-priority perfected lien on substantially all of the tangible and
intangible assets of Avis Rent A Car and each guarantor under the New Credit
Facility excluding assets that secure New Avis' fleet financing facilities, and
by a pledge of all of the capital stock of each of Avis Rent A Car's U.S.
subsidiaries and 65% of the capital stock of its first tier non-U.S.
subsidiaries.
In connection with the VMS Acquisition, New Avis issued $500,000,000
aggregate principal amount of 11% Senior Subordinated Notes due 2009 (the
"Notes"). The Notes will mature in 2009. Avis Rent A Car's obligation under the
Notes are subordinate and junior in right of payment in all existing and future
senior indebtedness of Avis Rent A Car, including all indebtedness under the New
Credit Facility. The obligations of Avis Rent A Car under the Notes and the
indenture governing the Notes (the "Indenture") are guaranteed on a senior
subordinated basis by each of Avis Rent A Car's U.S. subsidiaries, other than
its banking subsidiaries, insurance subsidiaries and securitization and other
vehicle financing subsidiaries which have not guaranteed senior indebtedness of
Avis Rent A Car. The New Credit Facility and the Indenture contain numerous
financial and operating covenants that limit the discretion of Avis Rent A Car
management with respect to certain business matters. These covenants place
significant restrictions on, among other things, the ability of Avis Rent A Car
and certain of its subsidiaries to incur additional indebtedness, pay dividends
and other distributions, prepay subordinated indebtedness, create liens or other
encumbrances make capital expenditures, make certain investments or
acquisitions, engage in certain transaction with affiliates, sell or otherwise
dispose of assets and merge with other entities and otherwise restrict corporate
activities. The New Credit Facility also requires Avis Rent A Car to meet
certain financial ratios and tests. The New Credit Facility and the Indenture
contain customary events of default.
Any future acquisitions, joint ventures or other similar transactions
will likely require additional capital, and there can be no assurance that such
capital will be available to us on acceptable terms.
The Avis ABS Facility
Avis has a domestic integrated financing program (the "Avis ABS
Facility") that provides for up to $3.9 billion in financing for vehicles
covered by Repurchase Programs, with up to 25% of the Avis ABS Facility
available for vehicles not covered by Repurchase Programs. The Avis ABS Facility
provides for the issuance of up to $1.5 billion of asset backed variable funding
notes (the "Variable Funding Notes") and $2.4 billion of asset-backed medium
term notes are outstanding under the Avis ABS Facility (the "Medium Term
Notes"). The Variable Funding Notes and the Medium Term Notes are indirectly
secured by, among other things, a first priority security interest in Avis'
fleet. The Variable Funding Notes support the issuance by a special purpose
company of commercial paper notes that are rated A-1 by Standard & Poor's
Ratings Services ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's").
$2.25 billion of the Medium Term Notes are guaranteed under a surety bond issued
by MBIA and as a result are rated AAA by S&P and Aaa by Moody's. At March 31,
1999, Avis had approximately $3.25 billion of debt outstanding under the Avis
ABS Facility. In addition, at March 31, 1999, Avis had approximately $500
million of additional credit available for vehicle purchases.
Based on current market conditions and Avis' current banking
relationships, management expects to fund maturities of the Medium Term Notes
either by the issuance of new medium term notes or an increase in the
outstanding principal amount of the Variable Funding Notes depending on market
conditions at the time the Medium Term Notes mature. However, management cannot
be sure that that this will occur.
The Interim VMS ABS Facility
Prior to the VMS Acquisition, VMS had approximately $3.5 billion of
vehicle-related debt. New Avis refinanced this debt through an interim $3.6
billion financing program (the "Interim VMS ABS Facility" and, together with the
Avis ABS Facility, the "ABS Facilities") supported by leases and vehicles owned
by VMS and initially consisting of (1) up to $2.6 billion of variable funding
asset-backed notes supported by U.S. leases and vehicles, (2) up to $236 million
of asset-backed preferred membership interests supported by U.S. leases and
vehicles and (3) an advance of up to $830 million under an asset-backed facility
to PHH Europe guaranteed by various PHH Europe entities and supported by all of
the assets of such entities, each of which have been placed with one or more
multi-seller commercial paper conduits. New Avis intends to refinance a
significant portion of the Interim VMS ABS Facility through the issuance of
medium-term notes. At June 30, 1999, pro forma for the Transactions, VMS had
approximately $3.5 billion of debt outstanding under the Interim VMS ABS
Facility.
SEASONALITY
Avis' third quarter, which covers the peak summer travel months, has
historically been its strongest quarter, accounting for approximately 28% and
47% of Avis' rental revenue and pre-tax income from rental operations,
respectively, in 1998. Any occurrence that disrupts travel patterns during the
summer period could have a material adverse effect on New Avis' financial
condition and results of operations. Avis' fourth quarter is generally its
weakest, when there is limited leisure travel and a greater potential for
adverse weather conditions. Many of Avis' 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 Avis would
have sufficient liquidity under all conditions. Since VMS' business is generally
not seasonal, management expects these patterns to continue.
INFLATION
The increased acquisition cost of vehicles is expected to be the
primary inflationary factor affecting New Avis' operations. Many of New Avis'
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 New Avis' overall operating costs is not expected to be
greater for New Avis than for its competitors.
RECENT PRONOUNCEMENTS 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 Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). 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 any
entity recognize all derivatives as either assets or liabilities in the
statement of financial position at fair value.
The Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued a Statement of Position No. 98-5,
"Accounting for Start-Up Costs" ("SOP No. 98-5"). 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. SOP No. 98-5 is effective for fiscal years beginning after December 15,
1998.
The adoption of SFAS 133 and the SOP No. 98-5 are not expected to have
a material effect on New Avis' consolidated financial statements; however Avis
Rent A Car has not completed its assessment of the effect on New Avis'
consolidated financial statements that will result from the adoption of SFAS No.
133.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
New Avis' agreements with its various lenders, including the New
Credit Facility, the Indenture and the ABS Facilities include a number of
significant covenants that, among other things, will restrict New Avis' 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 will also require New Avis to maintain specified
financial ratios. A breach of any of these covenants or New Avis' inability 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 declare,
among other options, 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.
YEAR 2000 READINESS DISCLOSURE
General
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.
<PAGE>
Avis
Avis' state of readiness, contingency plans, Year 2000 costs and
possible consequences from Year 2000 problems are as follows:
1. State of Readiness
Avis has implemented a comprehensive plan to address the Year
2000 requirements in Avis' mission critical systems. Mission
critical systems are those whose failure poses a risk of
disruption to Avis's ability to provide vehicle reservation
and rental services. Avis' comprehensive plan includes (a) the
identification of all mission critical systems and the
inventory of all hardware and software affected by the Year
2000; (b) assessment of these systems including
prioritization; (c) modification, upgrading and replacement of
the affected systems; and (d) testing of the systems. Avis is
using both internal and external sources to implement Avis'
plan. Avis has completed the remediation of Avis' mission
critical systems including the modification, upgrading and
replacement of the affected systems. Avis has completed the
testing of approximately 70% of these mission critical
systems. Avis believes Avis's mission critical systems will be
Year 2000 compliant in the summer of 1999.
Much of Avis's technology, including technology associated
with Avis' mission critical systems, is purchased from third
parties. Avis 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. Avis is
monitoring the progress of these third parties and conducting
tests to determine whether they have accurately assessed the
problem and taken corrective action.
2. Contingency Plans
Based upon the progress of Avis' comprehensive plan, Avis
expects that it will not experience a disruption of Avis'
operations as a result of the change to the Year 2000.
However, there can be no assurance that the third parties who
have supplied technology used in Avis' mission critical
systems will be successful in taking corrective action in a
timely manner. Avis is developing contingency plans with
respect to certain key technology used in Avis' mission
critical systems, which are intended to enable Avis 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. Avis
believes, that due to the widespread nature of potential Year
2000 issues, the contingency planning process is ongoing,
which will require further modifications as we obtain
additional information regarding (1) Avis' internal systems
and equipment during the remediation and testing phases of
Avis' Year 2000 comprehensive plan; and (2) the status of
third parties' Year 2000 readiness.
3. Year 2000 Costs
Total costs of hardware and software remediation are expected
to be $22.3 million. Costs of hardware and software
remediation were approximately $3.0 million in 1997, $8.4
million in 1998 and are estimated to be approximately $10.5
million in 1999 and $400,000 in 2000. Costs of hardware and
software remediation were approximately $2.5 million for the
three months ended March 31, 1999. These estimates include the
costs of certain equipment and software for which planned
replacement was accelerated due to Year 2000 requirements. In
addition, they reflected the cost of redeploying certain
internal resources to address the Year 2000 requirements. 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. Avis expects to
finance these costs through internally generated cash flow and
existing credit facilities.
4. Possible Consequences from Year 2000 Problems
Avis believes that completed and planned modifications and
conversions of Avis' internal systems and equipment will allow
Avis to be Year 2000 compliant in a timely manner. There can
be no assurance, however, that Avis's internal systems or
equipment or those of third parties on which we rely will be
Year 2000 compliant in a timely manner or that Avis' or third
parties' contingency plans will mitigate the effects of any
non-compliance. The failure of Avis' systems or equipment or
the systems and equipment of third parties (which Avis
believes is the most reasonably likely worst case scenario)
could effect vehicle reservation and rental operations and
could have a material adverse effect on Avis' business or
consolidated financial statements.
VMS
VMS' state of readiness, contingency plans, Year 2000 costs and
possible consequences from Year 2000 problems are as follows:
1. State of Readiness
To minimize or eliminate the effect of the Year 2000 risk on
VMS' business systems and applications, VMS is continually
identifying, evaluating, implementing and testing changes to
its computer systems, applications and software necessary to
achieve Year 2000 compliance. VMS selected a team of managers
to identify, evaluate and implement a plan to bring all of its
critical business systems and applications into Year 2000
compliance prior to December 31, 1999. The Year 2000
initiative consists of four phases: (i) identification of all
critical business systems subject to Year 2000 risk (the
"Identification Phase"); (ii) assessment of such business
systems and applications to determine the method of correcting
any Year 2000 problems (the "Assessment Phase"); (iii)
implementing the corrective measures (the "Implementation
Phase"); and (iv) testing and maintaining system compliance
(the "Testing Phase"). VMS has substantially completed the
Identification and Assessment Phases and has identified and
assessed five areas of risk: (i) internally developed business
applications; (ii) third party vendor software, such as
business applications, operating systems and special function
software; (iii) computer hardware components; (iv) electronic
data transfer systems between VMS and its customers; and (v)
embedded systems, such as phone switches, check writers and
alarm systems. VMS believes that substantially all of its
systems, applications and related software that are subject to
Year 2000 compliance risk have been identified and that it has
either implemented or initiated the implementation of a plan
to correct such systems that are not Year 2000 compliant. In
addition, as part of VMS' assessment process it is developing
contingency plans as considered necessary. However, VMS cannot
directly control the timing of certain vendor products and in
certain situations, exceptions have been authorized. VMS is
closely monitoring those situations and intends to complete
testing efforts and any contingency implementation efforts
prior to December 31, 1999. Although VMS has begun the Testing
Phase, it does not anticipate completion of the Testing Phase
until sometime prior to December 1999.
2. Contingency Plans
VMS believes that its Year 2000 initiative will mitigate any
disruptions to its critical business systems and applications.
Although VMS is closely monitoring and testing the status of
its third party vendors' products, VMS cannot ensure that its
vendors will complete their corrective actions in a timely
manner. In instances where third party systems and
applications are deemed critical, VMS is developing
contingency plans to enable it to sustain operations. These
plans include: identifying alternative suppliers, replacing
automated processes with manual processes, and internally
developing programs to mitigate third party systems' Year 2000
problems. The contingency plans cannot guarantee, however,
that there will be no disruption in providing vehicle
management services to VMS' clients. VMS will continue to
monitor and modify the contingency planning process as we
obtain additional information on the status of our internal
and third party systems.
3. Total Costs
The total cost of the VMS Year 2000 compliance plan is
anticipated to be $16.7 million. Approximately $11.3 million
of these costs had been incurred through December 31, 1998,
and VMS expects to incur the balance of such costs to complete
the compliance plan. VMS is expensing and capitalizing the
costs to complete the compliance plan in accordance with
appropriate accounting policies.
4. Possible Consequences
VMS relies on third party service providers for services such
as telecommunications, internet service, utilities, components
for its embedded and other systems and other key services.
Interruption of those services due to Year 2000 issues could
have a material adverse impact on VMS' operations. VMS
initiated an evaluation of the status of such third party
service providers' efforts to determine alternative and
contingency requirements. While approaches to reducing risks
of interruption of business operations vary by business unit,
options include identification of alternative service
providers available to provide such services if a service
provider fails to become Year 2000 compliant within an
acceptable time frame prior to December 31, 1999.
In addition, variations from anticipated expenditures and the effect on VMS'
future results of operations are not anticipated to be material in any given
year. However, if Year 2000 modifications and conversions are not made,
including modifications by VMS' third party service providers, or are not
completed in time, the Year 2000 problem could have a material impact on VMS'
cash flows and financial condition. At this time, VMS believes the most likely
worst case scenario involves potential disruptions in its operations as a result
of the failure of services provided by third parties.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in the foregoing management's discussion and
analysis 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, our ability and our vendors' ability to complete the necessary
actions to achieve a Year 2000 conversion for our computer systems and
applications, and other risks which were detailed from time to time in Avis Rent
A Car's or VMS' publicly-filed documents, including Avis Rent A Car's Annual
Report on Form 10-K for the period ended December 31, 1998 and Avis Rent A Car's
Quarterly Report on Form 10-Q for the period ended March 31, 1999. Actual
results may differ materially from those projected. These forward-looking
statements represent management's judgment as of the date of this Report.
CREATION OF NEW MANAGEMENT POSITIONS
On August 5, 1999, Avis Rent A Car's Board of Directors created three
new management positions. F. Robert Salerno was appointed President and Chief
Operating Officer of Avis Rent A Car, Inc. - Car Rental Group, Mark E. Miller
was appointed President and Chief Operating Officer of Avis Rent A Car, Inc. -
Vehicle Management Services Group, and Kevin M. Sheehan was appointed President
of Avis Rent A Car, Inc. - Corporate and Business Affairs.
ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS.
Not applicable
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(c) Exhibits
Exhibit No. Exhibit Description
----------- -------------------
99.1 Press Release, dated August 6, 1999, relating
to creation of new management positions
ITEM 8. CHANGE IN FISCAL YEAR.
Not applicable
ITEM 9. SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S.
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
AVIS RENT A CAR, INC.
(Registrant)
By: /s/ Kevin M. Sheehan
----------------------------
Kevin M. Sheehan
President - Corporate and Business Affairs
and Chief Financial Officer
Date: August 6, 1999
<PAGE>
Exhibit Index
-------------
Exhibit No. Exhibit Description
----------- -------------------
99.1 Press Release, dated August 6, 1999, relating
to creation of new management positions
Exhibit 99.1
FOR IMMEDIATE RELEASE
CONTACTS:
Tony Fuller - Media Relations
516-222-4690
Elizabeth Logler - Investor Relations
516-222-4795
AVIS BOARD OF DIRECTORS ANNOUNCES STRATEGIC MANAGEMENT PLAN
GARDEN CITY, N.Y., Aug. 6 -- Avis Rent A Car, Inc. (NYSE: AVI) announced today
that the Board of Directors has finalized a management plan for the Company. The
announcement comes as a result of the acquisition of PHH's Vehicle Management
Business and Wright Express, which closed on June 30, 1999. Under the new
structure, the Avis Management Team will be comprised of F. Robert Salerno,
President and Chief Operating Officer of Avis Rent A Car, Inc. - Rental Car
Group, Kevin M. Sheehan, President of Avis Rent A Car, Inc. - Corporate and
Business Affairs, and Mark E. Miller, President and Chief Operating Officer of
Avis Rent A Car, Inc. - Vehicle Management Services Group. The combined
management team will report directly to the Executive Committee of the Board.
Mr. Salerno will continue to direct Avis' rental car business and Mr. Miller
will direct Avis' vehicle management and card service businesses. Mr. Sheehan
will be responsible for directing all of the corporate and administrative
functions, as well as directing the overall company's financial reporting and
investor communication efforts. Sheehan has also been tasked with spearheading
the Company's efforts of maximizing the revenue and synergistic opportunities
inherent with the "New" Avis.
"As the recent combination of the businesses unfolds, it has become clearer to
us that Kevin, Bob and Mark will, in fact, provide the strongest team for
leadership, direction and execution of Avis' goals. We are extremely confident
that the team will continue to effectively position Avis as a global leader of
vehicle management and transportation solutions." said Martin L. Edelman,
Chairman of the Board and Executive Committee. "We have decided to terminate our
search for a new CEO."
Avis is one of the world's leading providers of comprehensive automotive
transportation and vehicle management solutions, with strengths in car rental,
vehicle leasing, and vehicle management services. Avis operates the second
largest general-use car rental business in the world, with locations in the
United States, Canada, Australia, New Zealand and the Latin American Caribbean
region. Avis operates the vehicle management and fuel card businesses through
three separate units: PHH North America, PHH Europe and Wright Express. The
services of these units consist of vehicle leasing and a broad range of vehicle
related fee based services. The Company manages a fleet of approximately 1
million vehicles and has over 3.6 million fuel and maintenance cards
outstanding. Annually, on a pro forma basis, the Company generates approximately
$4.0 billion in total revenue.
