<PAGE>
===============================================================================
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
------------
February 6, 1998 (February 6, 1998)
(Date of Report (date of earliest event reported))
CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 1-10308 06-0918165
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or organization) File No.) Identification Number)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive office) (Zip Code)
(973) 428-9700
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if applicable)
<PAGE>
Item 5. Other Events
This Current Report on Form 8-K is being filed by Cendant Corporation (the
"Registrant") for purposes of incorporating by reference the exhibits listed in
Item 7 hereof in certain Registration Statements filed with the Securities and
Exchange Commission.
Item 7. Exhibits
Exhibit
No. Description
- ------- -----------
23.1 Consent of Deloitte & Touche LLP relating to the financial
statements of Avis Rent A Car, Inc.
99.1 Consolidated Annual Financial Statements of Avis Rent A Car, Inc.
99.2 Consolidated Financial Statements of Avis Rent A Car, Inc. for the
quarterly period ended September 30, 1997.
<PAGE>
SIGNATURE
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 hereunto duly authorized.
CENDANT CORPORATION
BY: /s/ Scott E. Forbes
Scott E. Forbes
Senior Vice President
and Chief Accounting Officer
Date: February 6, 1998
<PAGE>
CENDANT CORPORATION
CURRENT REPORT ON FORM 8-K
REPORT DATED FEBRUARY 6, 1998 (FEBRUARY 6, 1998)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
23.1 Consent of Deloitte & Touche LLP relating to the financial
statements of Avis Rent A Car, Inc.
99.1 Consolidated Annual Financial Statements of Avis Rent A Car, Inc.
99.2 Consolidated Financial Statements of Avis Rent A Car, Inc.
for the quarterly period ended September 30, 1997.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-63237, 33-95126, 333-11035, 333-13537, 333-17323, 333-17411, 333-20391,
333-26927, 333-35709, 333-35707, 333-45155, 333-45227 and 333-23063 for Cendant
Corporation on Forms S-3 and in Registration Statement Nos. 33-26875, 33-75682,
33-93322, 33-41823, 33-48175, 33-58896, 33-91656, 333-03241, 33-74068,
33-74066, 33-91658, 333-00475, 333-03237, 33-75684, 33-80834, 33-93372,
333-09633, 333-09637, 333-09655, 333-22003, 333-34517-2, 333-42503, 333-30649,
333-45183 and 333-42549 for Cendant Corporation on Forms S-8 of our report
dated May 12, 1997 (August 20, 1997 as to Note 15), related to the Avis Rent A
Car, Inc. financial statements appearing in the Current Report on Form 8-K for
Cendant Corporation dated on or about February 4, 1998.
/s/ DELOITTE & TOUCHE LLP
New York, New York
January 29, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder of
Avis Rent A Car, Inc.
Garden City, New York
We have audited the accompanying consolidated statements of financial
position of Avis Rent A Car, Inc. and subsidiaries (successor to Avis Rent A
Car Systems Holdings, Inc. and subsidiaries, Avis International, Ltd. and
subsidiaries, Avis Enterprises, Inc. and subsidiaries, Pathfinder Insurance
Company and Global Excess & Reinsurance, Ltd., all previously wholly-owned by
Avis, Inc., collectively the "Predecessor Companies"), (collectively referred
to as "Avis Rent A Car, Inc." or the "Company") as of December 31, 1996 and
as to the Predecessor Companies as of December 31, 1995, and the related
consolidated statements of operations, stockholder's equity and cash flows
for the period October 17, 1996 (Date of Acquisition) to December 31, 1996
and as to the Predecessor Companies the related consolidated statements of
operations, stockholder's equity and cash flows for each of the two years in
the period ended December 31, 1995 and the period January 1, 1996 to October
16, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 1996, and the results of its operations and its cash flows for
the period October 17, 1996 to December 31, 1996 (period after the change in
control referred to in Note 1 to the consolidated financial statements), and
with respect to the Predecessor Companies as of December 31, 1995, and for
each of the two years in the period ended December 31, 1995 and the period
January 1, 1996 to October 16, 1996 (period up to the change in control
referred to in Note 1 to the consolidated financial statements) in conformity
with generally accepted accounting principles.
As more fully discussed in Note 1 to the consolidated financial statements,
the Predecessor Companies were acquired in a business combination accounted
for as a purchase. As a result of the acquisition, the consolidated financial
statements for the period subsequent to the acquisition are presented on a
different basis of accounting than those for the periods prior to the
acquisition and, therefore, are not directly comparable.
/s/ Deloitte & Touche LLP
New York, New York
May 12, 1997
(August 20, 1997 as to Note 15)
1
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 39,081 $ 50,886
Accounts receivable, net......................................... 194,971 311,179
Due from affiliates, net......................................... 61,807
Prepaid expenses................................................. 35,053 40,155
Vehicles, net.................................................... 2,167,167 2,243,492
Property and equipment, net...................................... 140,992 98,887
Other assets..................................................... 20,882 14,526
Deferred income tax assets....................................... 81,974 113,660
Cost in excess of net assets acquired, net....................... 144,778 196,765
-------------- --------------
Total assets................................................. $2,824,898 $3,131,357
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable................................................. $ 228,146 $ 175,535
Accrued liabilities.............................................. 183,595 329,245
Due to affiliates, net........................................... 385,687
Current income tax liabilities................................... 6,696 4,790
Deferred income tax liabilities.................................. 27,990 35,988
Public liability, property damage and other insurance
liabilities..................................................... 194,677 213,785
Debt............................................................. 1,109,747 2,295,474
-------------- --------------
Total liabilities............................................ 2,136,538 3,054,817
-------------- --------------
Commitments and contingencies
Stockholder's equity:
Common stock ($.01 par value, 1,000 shares authorized;
100 shares outstanding at December 31, 1996)................... 2,977 --
Additional paid-in capital...................................... 344,531 75,000
Retained earnings............................................... 340,596 1,184
Foreign currency translation adjustment......................... 256 356
-------------- --------------
Total stockholder's equity................................... 688,360 76,540
-------------- --------------
Total liabilities and stockholder's equity................... $2,824,898 $3,131,357
============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES OCTOBER 17, 1996
-------------------------------------------- (DATE OF
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 ACQUISITION)
-------------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
------------ ------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Revenue........................ $1,412,400 $1,615,951 $1,504,673 $362,844
------------ ------------ ---------------- -------------------
Cost and expenses:
Direct operating.............. 664,993 724,759 650,750 167,682
Vehicle depreciation, net .... 266,637 324,186 275,867 66,790
Vehicle lease charges......... 42,778 86,916 100,318 22,658
Selling, general and
administrative............... 252,024 269,434 283,180 68,215
Interest, net................. 128,898 145,199 120,977 34,212
Amortization of cost in
excess of net assets
acquired .................... 4,754 4,757 3,782 1,026
------------ ------------ ---------------- -------------------
1,360,084 1,555,251 1,434,874 360,583
------------ ------------ ---------------- -------------------
Income before provision for
income taxes.................. 52,316 60,700 69,799 2,261
Provision for income taxes .... 30,213 34,635 31,198 1,040
------------ ------------ ---------------- -------------------
Net income..................... $ 22,103 $ 26,065 $ 38,601 $ 1,221
============ ============ ================ ===================
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
-------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994..................... $2,827 $318,125 $309,902 $(2,598) $628,256
Net income for the year ended December
31, 1994.................................... 22,103 22,103
Tax benefit of ESOP income tax deductions ... 13,104 13,104
Foreign currency translation adjustment ..... 3,466 3,466
Cash dividends............................... (8,578) (8,578)
Stock dividends.............................. 150 (150)
-------- ------------ ---------- ------------- ----------
Balance, December 31, 1994................... 2,977 331,229 323,277 868 658,351
Net income for the year ended December
31, 1995.................................... 26,065 26,065
Tax benefit of ESOP income tax deductions ... 13,302 13,302
Foreign currency translation adjustment ..... (612) (612)
Cash dividends............................... (8,746) (8,746)
-------- ------------ ---------- ------------- ----------
Balance, December 31, 1995................... 2,977 344,531 340,596 256 688,360
Net income for the period ended October
16, 1996.................................... 38,601 38,601
Tax benefit of ESOP income tax deductions ... 12,939 12,939
Foreign currency translation adjustment ..... 2,805 2,805
Cash dividends............................... (1,398) (1,398)
-------- ------------ ---------- ------------- ----------
Balance, October 16, 1996.................... $2,977 $357,470 $377,799 $ 3,061 $741,307
======== ============ ========== ============= ==========
Avis Rent A Car, Inc. ($.01 par value, 1,000
shares authorized; 100 shares outstanding
at October 17, 1996 (Date of Acquisition)) . $-- $ 75,000 $ 75,000
Net income for the period from
October 17, 1996 to December 31, 1996 ...... $ 1,221 1,221
Foreign currency translation adjustment for
the period October 17, 1996 to December 31,
1996........................................ $ 356 356
Additional minimum pension liability
for the period October 17, 1996 to December
31, 1996.................................... (37) (37)
-------- ------------ ---------- ------------- ----------
Balance, December 31, 1996................... $-- $ 75,000 $ 1,184 $ 356 $ 76,540
======== ============ ========== ============= ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES OCTOBER 17, 1996
---------------------------------------------- (DATE OF
YEARS ENDED DECEMBER 31, JANUARY 1, 1996 ACQUISITION)
---------------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
------------- ------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 22,103 $ 26,065 $ 38,601 $ 1,221
Adjustments to reconcile net income to net cash
provided by operating activities:
Vehicle depreciation............................ 291,360 342,048 306,159 71,343
Depreciation and amortization of property and
equipment...................................... 12,782 13,387 12,333 2,212
Amortization of cost in excess of net assets
acquired....................................... 4,754 4,757 3,782 1,026
Amortization of debt issuance costs ............ 3,454 2,660 2,423
Deferred income tax provision................... 19,384 25,852 22,342 33
Undistributed earnings of associated companies . (65) (376) (232)
Provision for (benefit from) losses on accounts
receivable..................................... 305 (48) 1,238 227
Provision for public liability, property damage
and other insurance liabilities................ 73,900 81,800 74,109 17,355
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable .... 53 (22,644) (204,137) 10,327
Decrease (increase) in prepaid expenses ....... 4,640 (863) (2,125) (2,664)
(Increase) decrease in other assets............ (595) 1,988 3,266 (3,459)
(Decrease) increase in accounts payable ....... (44,087) (5,733) 82,354 (18,712)
Increase (decrease) in accrued liabilities .... 26,399 42,176 101,069 (24,718)
Decrease in public liability, property damage
and other insurance liabilities............... (72,363) (71,159) (56,364) (16,015)
------------- ------------- ---------------- -------------------
Net cash provided by operating activities .... 342,024 439,910 384,818 38,176
------------- ------------- ---------------- -------------------
Cash flows from investing activities:
Payments for vehicle additions.................. (3,218,613) (2,553,324) (2,325,460) (561,117)
Vehicle deletions............................... 2,680,535 2,028,474 1,795,562 565,896
Payments for additions to property and
equipment...................................... (24,487) (36,939) (25,953) (3,484)
Sales of property and equipment................. 2,898 3,715 1,849 361
Investment in associated companies.............. (100)
Investment in Canadian Licensees................ (3,134)
------------- ------------- ---------------- -------------------
Net cash (used in) provided by investing
activities.................................... (559,767) (558,074) (557,136) 1,656
------------- ------------- ---------------- -------------------
Cash flows from financing activities:
Changes in debt:
Proceeds....................................... 423,502 320,940 519,167 63,903
Repayments..................................... (161,523) (287,271) (267,317) (133,457)
------------- ------------- ---------------- -------------------
Net increase (decrease) in debt................ 261,979 33,669 251,850 (69,554)
Deferred debt issuance costs.................... (4,637) (5,515) (2,604)
(Payments on) proceeds from intercompany loans . (29,090) 104,209 (27,696) (6,661)
Cash dividends.................................. (8,578) (8,746) (1,398)
------------- ------------- ---------------- -------------------
Net cash provided by (used in) financing
activities.................................... 219,674 123,617 220,152 (76,215)
------------- ------------- ---------------- -------------------
Effect of exchange rate changes on cash ......... 119 (197) 260 94
------------- ------------- ---------------- -------------------
Net increase (decrease) in cash and cash
equivalents..................................... 2,050 5,256 48,094 (36,289)
Cash and cash equivalents at beginning of
period.......................................... 31,775 33,825 39,081 87,175
------------- ------------- ---------------- -------------------
Cash and cash equivalents at end of period ...... $ 33,825 $ 39,081 $ 87,175 $ 50,886
============= ============= ================ ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest....................................... $ 131,877 $ 149,885 $ 135,733 $ 28,170
============= ============= ================ ===================
Income taxes................................... $ 7,576 $ 8,688 $ 6,220 $ 827
============= ============= ================ ===================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTION -- Recapitalization at
Date of Acquisition ........................... $ -- $ -- $ -- $ 666,307
============= ============= ================ ===================
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include Avis Rent A
Car, Inc. (name changed from and formerly known as Rental Car System
Holdings, Inc. which was incorporated on October 17, 1996) and subsidiaries
(including the carved out corporate operations of HFS Car Rental, Inc. (name
changed from and formerly known as, and hereinafter referred to as, Avis,
Inc.), which is the holding company of Rental Car System Holdings, Inc., and
Prime Vehicles Trust (the "Vehicle Trust")), Avis International, Ltd. and
subsidiaries, Avis Enterprises, Inc. and subsidiaries, Pathfinder Insurance
Company and Global Excess & Reinsurance, Ltd. (collectively referred to as
"Avis Rent A Car, Inc."). All of the foregoing companies are ultimately
wholly-owned subsidiaries of Avis, Inc., which was acquired by HFS
Incorporated ("HFS") on October 17, 1996 (the "Date of Acquisition") for
approximately $806.5 million. The purchase price was comprised of
approximately $367.2 million in cash, $100.9 million of indebtedness and
$338.4 million of HFS common stock. Prior to October 16, 1996, the
above-named entities were wholly-owned by Avis, Inc. and are referred to
collectively as the "Predecessor Companies". Avis Rent A Car, Inc. and the
Predecessor Companies are referred to throughout the notes as the "Company".
The major shareholder of Avis, Inc. was an Employee Stock Ownership Plan
("ESOP") and the minority shareholder was General Motors Corporation
("General Motors"). The Company purchases a significant portion of its
vehicles, obtains financing, and receives certain financial incentives and
allowances from General Motors (see Notes 2, 4, 7 and 14). As a result of the
acquisition, the consolidated financial statements for the period subsequent
to the acquisition are presented on a different basis of accounting than
those for the periods prior to the acquisition and, therefore, are not
directly comparable. On January 1, 1997, Avis, Inc. contributed the net
assets of its corporate operations and all of its common stock ownership in
Avis International, Ltd., Avis Enterprises, Inc., Pathfinder Insurance
Company and Global Excess & Reinsurance, Ltd. to the Company. After the
transfer, the remaining operations of Avis, Inc. consist of an investment in
a wholly-owned subsidiary which owns the Avis trade names and trademarks.
Pursuant to a plan developed by HFS prior to the Date of Acquisition, HFS
will cause the Company to undertake an initial public offering ("IPO") within
one year of the Date of Acquisition, which will reduce HFS' equity interest
in the Company to 25%. HFS owns and operates the reservation system as well
as the telecommunications and computer processing systems which service the
rental car operations for reservations, rental agreement processing,
accounting and vehicle control. HFS will charge a fee for such services (see
Note 3). In addition, HFS will retain the Avis trade name and charge the
Company a royalty fee for the use of the Avis name.
The acquisition was accounted for under the purchase method and includes
the operations of the Company subsequent to the Date of Acquisition. A
portion of this purchase price has been allocated to the estimated fair value
of the Company. This estimate is calculated assuming that the Company is an
independent franchisee of Avis, Inc. and is required to pay certain fees for
use of the Avis trade name, reservation services and other franchise related
services. HFS and its advisors have estimated that the value of the Company
at the Date of Acquisition was $75 million. The value of the Company is
expected to increase to approximately $300 million upon completion of the IPO
(with the IPO proceeds retained by the Company) with HFS's equity interest to
be reduced to 25% equal to $75 million. If the results of the IPO do not
confirm the preliminary value as of the Date of Acquisition, then the
allocated purchase price will be adjusted with a corresponding adjustment to
cost in excess of net assets acquired. The estimated fair value of the
Company has been allocated to individual assets and liabilities based on
their estimated fair value at the Date of Acquisition. The final asset and
liability fair values may differ from those set forth in the accompanying
consolidated statement of financial position on December 31, 1996; however,
the changes are not expected to have a material effect on the consolidated
financial position of the Company.
6
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The preliminary purchase cost allocation at the Date of Acquisition has
been allocated to the Company as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Allocated purchase cost ........................... $ 75,000
-----------
Fair Value of:
Liabilities assumed .............................. 3,145,395
Assets acquired .................................. 3,022,712
-----------
Net Liabilities ................................... 122,683
-----------
Excess of purchase price over net assets acquired $ 197,683
===========
</TABLE>
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES
Generally accepted accounting principles require the use of estimates,
which are subject to change, in the preparation of financial statements.
Significant accounting estimates used include estimates for determining
public liability, property damage and other insurance liabilities, and the
realization of deferred income tax assets. Management has exercised
reasonableness at deriving these estimates. However, actual results may
differ.
REVENUE RECOGNITION
Revenue is recognized over the period the vehicle is rented.
CASH AND CASH EQUIVALENTS
The Company considers deposits and short-term investments with an original
maturity of three months or less to be cash equivalents.
VEHICLES
Vehicles are stated at cost net of accumulated depreciation. In accordance
with industry practice, when vehicles are sold, gains or losses are reflected
as an adjustment to depreciation. Vehicles are generally depreciated at rates
ranging from 10% to 25% per annum. Manufacturers provide the Company with
incentives and allowances (such as rebates and volume discounts) which are
amortized to income over the holding period of the vehicles.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost net of accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful life of the assets. Estimated useful lives range
from five to ten years for furniture and office equipment, to thirty years
for buildings. Leasehold improvements are amortized over the shorter of
twenty years or the remaining life of the lease. Maintenance and repairs are
expensed; renewals and improvements are capitalized. When depreciable assets
are retired or sold, the cost and related accumulated depreciation are
removed from the accounts with any resulting gain or loss reflected in the
consolidated statement of operations.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is amortized over a 40 year period
and is shown net of accumulated amortization of $37.5 million and $1.0
million at December 31, 1995 and 1996, respectively.
7
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IMPAIRMENT ACCOUNTING
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". The Company reviews the recoverability
of its long-lived assets, including cost in excess of net assets acquired,
when events or changes in circumstances occur that indicate that the carrying
value of the assets may not be recoverable. The measurement of possible
impairment is based on the Company's ability to recover the carrying value of
the asset from the expected future pre-tax undiscounted future cash flows
generated. The measurement of impairment requires management to use estimates
of expected future cash flows. If an impairment loss existed, the amount of
the loss would be recorded under the caption Costs and Expenses in the
consolidated statement of operations. It is at least reasonably possible that
future events or circumstances could cause these estimates to change. The
adoption of this statement had no material effect on the consolidated
financial statements of the Company.
PUBLIC LIABILITY, PROPERTY DAMAGE AND OTHER INSURANCE LIABILITIES
Insurance liabilities on the accompanying consolidated statements of
financial position include additional liability insurance, personal effects
protection insurance, public liability and property damage ("PLPD") and
personal accident insurance claims for which the Company is self-insured. The
Company is self-insured up to $1 million per claim under its automobile
liability insurance program for PLPD and additional liability insurance.
Costs in excess of $1 million per claim are insured under various contracts
with commercial insurance carriers. The liability for claims up to $1 million
is estimated based on the Company's historical loss and loss adjustment
expense experience and adjusted for current trends.
The insurance liabilities include a provision for both claims reported to
the Company as well as claims incurred but not yet reported to the Company.
This method is an actuarially accepted loss reserve method. Adjustments to
this estimate and differences between estimates and the amounts subsequently
paid are reflected in operations as they occur.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign companies are translated at the
year-end exchange rates. The resultant translation adjustment is included as
a component of consolidated stockholder's equity. Results of operations are
translated at the average rates of exchange in effect during the year.
INCOME TAXES
The Company is included in the consolidated federal income tax return of
HFS. Pursuant to the regulations under the Internal Revenue Code, the
Company's pro rata share of the consolidated federal income tax liability of
HFS is allocated to the Company on a separate return basis. The Predecessor
Companies were included in the consolidated federal income tax return of
Avis, Inc. The Company files separate income tax returns in states where a
consolidated return is not permitted. In accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), deferred income tax assets and liabilities are measured based upon the
difference between the financial accounting and tax bases of assets and
liabilities.
PENSIONS
Costs of the defined benefit plans are actuarially determined under the
projected unit credit cost method and include amounts for current service and
interest on projected benefit obligations and plan assets. The Company's
policy is to fund at least the minimum contribution amount required by the
Employee Retirement Income Security Act of 1974.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs were $60.4
million, $48.4 million, $66.1 million and $10.3 million for the periods ended
December 31, 1994, December 31, 1995, October 16, 1996 and December 31, 1996,
respectively.
8
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENVIRONMENTAL COSTS
The Company's operations include the storage and dispensing of gasoline.
The Company accrues losses associated with the remediation of accidental fuel
discharges when such losses are probable and reasonably estimable. Accruals
for estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances
change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value. Recoveries from
insurance companies and other reimbursements are generally not significant.
In October 1996, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 96-1
Environmental Remediation Liabilities ("SOP 96-1"). SOP 96-1 provides
guidance on the timing and measurement of liabilities associated with
environmental remediation. The statement is effective for fiscal years
beginning after December 15, 1996. The adoption of this statement is not
expected to have a material effect on the results of operations or financial
position of the Company.
NOTE 2 -- ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1995 and 1996 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Vehicle rentals....................... $ 90,290 $ 94,480
Due from vehicle manufacturers ...... 11,308 14,758
Due from General Motors .............. 69,504 168,546
Damage claims ........................ 5,969 10,697
Due from licensees ................... 3,297 3,903
Other ................................ 17,349 19,022
---------- ---------
197,717 311,406
Less allowance for doubtful accounts (2,746) (227)
---------- ---------
$194,971 $311,179
========== =========
</TABLE>
Amounts due from vehicle manufacturers include receivables for vehicles
sold under guaranteed repurchase contracts and amounts due for incentives and
allowances. Incentives and allowances are based on the volume of vehicles to
be purchased for a model year, or from the manufacturers' willingness to
encourage the Company to retain vehicles rather than return the vehicles back
to the manufacturer or arise from the purchase of particular models not
subject to repurchase under "buyback" arrangements. Incentives and allowances
are amortized to income over the holding period of the vehicles (see Notes 4
and 14).
NOTE 3 -- DUE (TO) FROM AFFILIATES, NET
Due (to) from affiliates, net at December 31, 1995 and 1996 consist of the
following balances due to or from HFS or its consolidated subsidiaries which
will be settled on or before the previously mentioned IPO (in thousands):
9
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
------------- -----------
<S> <C> <C>
Note receivable from Wizard Co., Inc. (a) .. $ 196,965
Subordinated vehicle financing notes (b) .... $ (180,000) (247,500)
Due to Avis, Inc. for tax advantaged vehicle
financing (c) .............................. (1,000,000)
Non-interest bearing advances (d) ........... 794,313 112,342
------------- -----------
$ (385,687) $ 61,807
============= ===========
</TABLE>
NOTES:
(a) Consists of a $194.1 million note receivable from Wizard Co., Inc., an
indirect wholly-owned subsidiary of HFS, plus accrued interest. The
note bears interest at 7.13% and is due on October 1, 2006 and is
guaranteed by HFS.
(b) Represents loans from Avis, Inc. to the Vehicle Trust, as described in
Note 7, to provide additional subordinated financing. The amounts
provided reduce, within certain limits, the amount of subordinated
financing required from other lenders. The loans are made under terms
of a credit agreement which terminates on October 29, 2003. At December
31, 1995 and 1996, the weighted average interest rate under these loans
was 11.16% and 10.75%, respectively.
(c) Represents a $1 billion ESOP related tax advantaged vehicle trust
financing consisting of loans under various agreements with banks,
insurance companies and vehicle manufacturer finance companies. The tax
advantaged notes were issued in September 1987 with a final maturity of
25 years and annual principal reductions commencing in 1998. At
December 31, 1995, the weighted average interest rate under these loans
was 6.0%. Included within the $1 billion ESOP related vehicle trust
financing is $118 million that is ultimately due to General Motors.
This loan was retired as of the Date of Acquisition.
(d) Primarily represents the transfer of assets from the Company to HFS and
subsidiaries, recorded in connection with the October 17, 1996
acquisition of Avis, Inc. by HFS, as well as intercompany transactions
relating to management, service and administrative fees since the Date
of Acquisition. The amounts due to or from HFS and subsidiaries are
interest free and are guaranteed by HFS.
Expense and (income) items of the Company include the following charges
from (to) Avis, Inc. and subsidiaries prior to the Date of Acquisition for
the period ended December 31, 1994, December 31, 1995 and October 16, 1996
(in thousands).
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, JANUARY 1, 1996
--------------------- TO
1994 1995 OCTOBER 16, 1996
--------- ---------- ----------------
<S> <C> <C> <C>
Vehicle related costs ........ $(3,954) $(25,134)
Data processing .............. $28,671 29,833 30,209
Employee benefits allocation (2,975) (3,385) (2,776)
Rent ......................... (1,730) (2,188) (2,459)
</TABLE>
These charges seek to reimburse the affiliated company for the actual
costs incurred. These amounts reflect the effect of various intercompany
agreements, which are subject to renegotiation from time to time, and certain
allocations which are based upon such factors as square footage, employee
salaries, computer usage time, etc.
10
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Expense items of the Company include the following charges from HFS and
affiliates of HFS for the period October 17, 1996 (Date of Acquisition) to
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Reservations ................................ $10,900
Data processing ............................. 8,772
Management, service and administrative fees 8,568
Interest on intercompany debt, net .......... 2,561
Rent ........................................ 950
----------
$31,751
==========
</TABLE>
Reservations and data processing services are charged to the Company based
on actual cost. Effective January 1, 1997, HFS will charge the Company a
royalty fee of 4.0% of revenue for the use of the Avis trade name. On an
unaudited pro forma basis, had the royalty fee been charged to the Company
beginning on October 17, 1996, net income for the period October 17, 1996 to
December 31, 1996 would have been reduced by $4.3 million resulting in a pro
forma net loss of $3.1 million.
NOTE 4 -- VEHICLES
Vehicles at December 31, 1995 and 1996 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Vehicles ................................................ $2,283,003 $2,250,309
Vehicles acquired under long-term capital lease (Note 7) 95,084 19,324
Buses and support vehicles .............................. 42,075 45,868
Vehicles held for sale .................................. 42,332 36,378
------------ ------------
2,462,494 2,351,879
Less accumulated depreciation ........................... (295,327) (108,387)
------------ ------------
$2,167,167 $2,243,492
============ ============
</TABLE>
Depreciation expense recorded for vehicles was $266.6 million, $324.2
million, $275.9 million and $66.8 million, for the periods ended December 31,
1994, December 31, 1995, October 16, 1996 and December 31, 1996,
respectively. Depreciation expense reflects a net gain on the disposal of
vehicles of $24.8 million, $17.8 million, $30.3 million and $4.5 million for
the periods ended December 31, 1994, December 31, 1995, October 16, 1996 and
December 31, 1996, respectively. It also reflects the amortization of certain
incentives and allowances from various vehicle manufacturers (the most
significant of which was received from General Motors) of approximately $74
million, $77 million, $61 million and $14 million for the periods ended
December 31, 1994, December 31, 1995, October 16, 1996 and December 31, 1996,
respectively.
During the periods ended December 31, 1994, December 31, 1995, October 16,
1996 and December 31, 1996, the Company purchased from General Motors $2.7
billion, $2.0 billion, $1.8 billion and $0.4 billion of vehicles, net of
incentives and allowances, respectively (see Notes 1 and 14).
In November 1988 and April 1990, the Company entered into seven year
operating leases under which an original amount of $324.3 million of vehicles
were leased, with the ability to exchange such leased vehicles for newly
manufactured vehicles with the same value to the lessor. The leases are
cancelable at the Company's option, however, additional costs may be incurred
upon termination based upon the fair value of the vehicles at the time the
option is exercised. At the termination of the leases, the Company may
purchase the vehicles at the agreed upon fair market value or return them to
the lessor.
11
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1994, the Company entered into a financing arrangement
whereby it may lease up to $503 million of vehicles. This arrangement was
amended on October 17, 1996 to increase the amount to $650 million. Under
this arrangement, at December 31, 1995 and 1996, there were $219 million and
$322 million of vehicles under operating leases. The vehicles leased under
this arrangement may be leased for periods of up to 18 months. The lease cost
charged to the Company varies with the number of vehicles leased and the
repurchase agreement offered by the vehicle manufacturer to the lessor and
includes all expenses including the interest costs of the financing company.
The rental payments due in each of the years ending December 31 for the
operating leases as described above are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ... $69,444
1998 ... 15,388
</TABLE>
Rental expense for those vehicles under operating leases as described
above was $59.2 million, $106.1 million, $93.0 million and $16.1 million for
the periods ended December 31, 1994, December 31, 1995, October 16, 1996 and
December 31, 1996, respectively.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Land .......................................... $ 19,702 $ 19,523
Buildings ..................................... 13,321 11,862
Leasehold improvements ........................ 139,938 48,898
Furniture, fixtures and equipment ............. 30,779 10,997
Construction-in-progress ...................... 15,813 9,946
---------- ---------
219,553 101,226
Less accumulated depreciation and
amortization.................................. (78,561) (2,339)
---------- ---------
$140,992 $ 98,887
========== =========
</TABLE>
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities at December 31, 1995 and 1996 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Payroll and related costs ..... $ 54,706 $ 73,142
Taxes, other than income taxes 10,740 29,522
Rents and property related .... 10,594 30,889
Interest ....................... 12,081 18,531
Sales and marketing ............ 20,567 20,395
Vehicle related ................ 24,492 18,784
Other various .................. 50,415 137,982
---------- ---------
$183,595 $329,245
========== =========
</TABLE>
12
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- FINANCING AND DEBT
Debt outstanding at December 31, 1996 is not guaranteed by HFS and debt
outstanding at December 31, 1995 and 1996 is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
VEHICLE TRUST FINANCING
Commercial paper........................................... $ 3,000
Short-term vehicle trust financing--revolving credit
facilities ............................................... $1,970,000
Current portion of long-term debt ......................... 56,000
------------ ------------
Total current portion of vehicle trust financing ......... 59,000 1,970,000
------------ ------------
Long-term vehicle trust revolving credit facilities ...... 476,000
Vehicle manufacturer's floating rate notes due September
1998 ($50,719 senior at 8.50% and $16,281 subordinated at
10.00%) .................................................. 67,000
Vehicle manufacturer's floating rate notes due October
2001 ($63,731 senior at 7.16% and $54,269 subordinated at
8.91%) ................................................... 118,000
Floating rate notes due September 1998 .................... 115,000
Insurance company notes due from December 1997 to December
1999 at 7.53% to 8.23% ................................... 112,000
Insurance company notes due from June 1998 to June 2003 at
6.75% to 7.92% ........................................... 150,500
------------ ------------
Total long-term portion of vehicle trust financing ..... 853,500 185,000
------------ ------------
OTHER FINANCING
Short-term notes--foreign at 6.63% to 18.00% in 1995 and
3.89% to 13.00% in 1996 .................................. 37,264 65,516
Short-term floating rate capital lease terminating in 1996 12,801
Current portion of 7.50% capital lease terminating
November 1997 ............................................ 19,153 40,169
Current portion of long-term debt--other .................. 13,605 1,060
------------ ------------
Total current portion of other financing ................ 82,823 106,745
------------ ------------
7.50% capital lease terminating November 1997 ............. 40,169
Other domestic............................................. 3,974 2,916
Debt of foreign subsidiaries:
Floating rate notes due April 1997 at 8.26% to 8.44% .... 51,891
Floating rate notes due July 1997 at 9.42% to 9.63% ..... 10,378
Floating rate notes due February 1998 at 7.65% in 1995
and 4.75% in 1996 ....................................... 8,012 2,935
Floating rate notes due August 1998 at 6.94% to 8.65% ... 27,878
------------ ------------
Total long-term portion of other financing .............. 114,424 33,729
------------ ------------
$1,109,747 $2,295,474
============ ============
</TABLE>
13
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Currently, the primary source of funding for domestic vehicles is
provided by the Vehicle Trust (a grantor trust). The Vehicle Trust consists
of loans from banks, vehicle manufacturer finance companies and Avis, Inc.
The Predecessor Companies' financing structure of the Vehicle Trust consisted
of loans from banks, insurance companies, vehicle manufacturer finance
companies and Avis, Inc. Amounts drawn against this facility may be used to
purchase vehicles and pay certain expenses of the Vehicle Trust. The security
for the Vehicle Trust financing facility consists of a lien on the vehicles
acquired under the facility, which at December 31, 1995 and 1996, totaled
approximately $1.9 billion and $2.1 billion, respectively, exclusive of
related valuation reserves. The security for the Vehicle Trust financing
facility also consists of security interests in certain other assets of the
Vehicle Trust. In addition, the Vehicle Trust and its security agreement
require that there be outstanding, at all times, subordinated debt in a
specified percentage range (10% -25%) of the net book value of the vehicles
owned by the Vehicle Trust. Pursuant to the agreement, the subordinated debt
is to be provided by vehicle manufacturer finance companies and Avis, Inc. At
December 31, 1995 and 1996, subordinated debt of $292.1 million and $318.0
million, respectively, was required under the Vehicle Trust financing of
which $180.0 million and $247.5 million, respectively, was due to Avis, Inc.
(Note 3).
At December 31, 1995, the weighted average interest rate on commercial
paper was 6.4%. For the periods ended December 31, 1994, December 31, 1995
and October 16, 1996, the average outstanding borrowings of commercial paper
were $19.9 million, $33.5 million and $30.4 million, respectively, with a
weighted average interest rate of 5.3%, 6.5% and 6.0%, respectively.
The short-term notes are issued pursuant to a $2.5 billion revolving
credit facility dated as of October 17, 1996 which matures on October 16,
1997. At December 31, 1996, the weighted average interest rate on borrowings
under this facility was 6.00%. For the period from October 17, 1996 to
December 31, 1996, the average outstanding borrowings under this facility
were $2.0 billion with a weighted average interest rate of 5.98%. This
facility requires a fee of 1/8 of 1% on the committed amount.
The long-term vehicle trust revolving credit facility consisted of $850
million revolving credit facility expiring on September 30, 1997. The
interest rate on these loans is based on the London interbank rate ("LIBOR")
plus a spread negotiated at the time of borrowing. At December 31, 1995, the
weighted average interest rate on outstanding borrowings under this facility
was 6.3%. For the periods ended December 31, 1994, December 31, 1995 and
October 16, 1996, the average outstanding borrowings under this facility were
$366.5 million, $288.0 million and $516.9 million, respectively, with a
weighted average interest rate of 5.2%, 6.5% and 5.7%, respectively. This
facility was retired on the Date of Acquisition.
The Company also had Vehicle Trust financing outstanding from vehicle
manufacturer finance companies under terms of loan agreements dated October
17, 1996. Under these agreements, the maximum amount of borrowings allowed is
$267 million, of which up to $260 million may be used as subordinated debt.
On December 31, 1996, $185 million was outstanding of which $70.5 million of
the outstanding debt was deemed subordinated. At December 31, 1996, the
weighted average interest rate of borrowings under this facility was 8.5%.
For the period October 17, 1996 to December 31, 1996, the average outstanding
borrowings under this facility was $185 million with a weighted average
interest rate of 8.41%. The Predecessor Companies, through its parent, Avis,
Inc., had substantially similar financing arrangements under a portion of a
$1 billion ESOP related tax advantaged vehicle trust financing facility (Note
3). At December 31, 1995, the outstanding borrowings under this arrangement
was $185 million, of which $112.1 million was subordinated. The average
borrowings under this facility for the periods ended December 31, 1994,
December 31, 1995 and October 16, 1996 were $317.0 million, $268.2 million
and $185.0 million, respectively. The weighted average interest rate on these
average borrowings were 6.2%, 7.7% and 7.3%.
The floating rate notes were issued pursuant to a loan agreement, dated
September 1, 1995, for a period of three years. The interest rate on these
notes is based on the LIBOR, plus a spread of 0.45%. The
14
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interest rate on these notes at December 31, 1995 was 6.2%. For the periods
ended December 31, 1995 and October 16, 1996, the average outstanding
borrowings under this facility were $35.1 million and $115.0 million,
respectively, with a weighted average interest rate of 6.2% and 6.0%,
respectively. The notes were retired on the Date of Acquisition.
In December 1992 and May 1993, the Company borrowed a total of $318.5
million from a group of insurance companies. The maturities on these notes
ranged from 3 to 10 years, with an average life, when issued, of 6.1 years.
The effective interest rate on these notes was 7.3% at December 31, 1995. The
average amounts outstanding for the periods ended December 31, 1994, December
31, 1995 and October 16, 1996 were $318.5 million, $318.5 million and $287.1
million, respectively, with a weighted average interest rate of 7.3%, 7.3%
and 7.4%, respectively. These notes were retired as of the Date of
Acquisition.
In November 1992, the Predecessor Companies entered into a five year
capital lease under which $96.7 million of vehicles were leased. The lease is
cancelable at the Company's option, however, additional costs may be incurred
upon termination based upon the fair value of the vehicles at the time the
option is exercised. At the termination of the lease, the Company may
purchase the vehicles at an agreed upon fair market value or return them to
the lessor. The future minimum lease payments due under the Company's capital
lease obligation, which terminates on November 30, 1997, are $41.5 million
(including interest of $1.3 million).
Included in total debt at December 31, 1995 and 1996 is indebtedness to
General Motors of $10.1 million and $118.3 million, respectively (see Note
14).
Under the terms of the Company's loan agreements, the Company must
maintain a minimum net worth, minimum earnings and cash flow ratios.
Mandatory maturities of long-term obligations for each of the next five
years ending December 31, and thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ......... $ 41,229
1998 ......... 98,950
1999 ......... 1,086
2000 ......... 209
2001 ......... 118,228
Thereafter .. 256
</TABLE>
OTHER CREDIT FACILITIES
At December 31, 1995 and 1996, the Company has letters of credit/working
capital agreements totaling $102.6 million and $102.6 million, respectively,
which may be renewed biannually at the Company's option and the banks'
discretion. The collateral for certain of these agreements consists of a lien
on property and equipment and certain receivables with a carrying value of
$140.9 million and $136.9 million, respectively. At December 31, 1995 and
1996, the Company has outstanding letters of credit amounting to $47.6
million and $55.1 million, respectively.
In addition, for certain of its international operations, the Company has
available at December 31, 1995 and 1996, unused lines of credit of $176.9
million and $224.3 million, respectively. The unused lines of credit
agreements require an annual fee of 0.2% to 0.5% of the unused line.
INTEREST RATE SWAP AGREEMENTS
The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on certain outstanding debt obligations.
These agreements effectively change the Company's interest rate exposure on
$29.1 million and $44.0 million of its outstanding debt from a weighted
average
15
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
variable interest rate to a fixed rate of 7.7% and 7.1% at December 31, 1995
and 1996, respectively. The variable interest element with respect to these
interest rate swap agreements is reset quarterly. The interest rate swap
agreements will terminate in March 1997, July 1998 and November 1998. The
differential to be paid or received is recognized ratably as interest rates
change over the life of the agreements as an adjustment to interest expense.
The net interest differential charged to interest expense for the periods
ended December 31, 1994, December 31, 1995, October 16, 1996 and December 31,
1996 was $179,000, $146,000, $582,000 and $285,000, respectively. The Company
is exposed to credit risk in the event of nonperformance by counterparties to
its interest rate swap agreements. Credit risk is limited by entering into
such agreements with primary dealers only; therefore, the Company does not
anticipate that nonperformance by counterparties will occur. Notwithstanding
this, the Company's treasury department monitors counterparty credit ratings
at least quarterly through reviewing independent credit agency reports. Both
current and potential exposure are evaluated as necessary, by obtaining
replacement cost information from alternative dealers. Potential loss to the
Company from credit risk on these agreements is limited to amounts
receivable, if any.
NOTE 8 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and the estimated fair value of the Company's interest
rate swap agreements represent liabilities of approximately $123,600 and
$843,100 at December 31, 1995, and $578,000 and $1.4 million at December 31,
1996, respectively.
For instruments including cash and cash equivalents, accounts receivable
and accounts payable, the carrying amount approximates fair value because of
the short maturity of these instruments. The fair value of floating-rate debt
approximates carrying value because these instruments re-price frequently at
current market prices. The fair value of fixed-rate debt approximates
carrying value.
The Company believes that it is not practicable to estimate the current
fair value of the amounts due from (to) affiliates because of the related
party nature of the instruments.
NOTE 9 -- INCOME TAXES
The provision for income taxes for the periods ended December 31, 1994,
December 31, 1995, October 16, 1996 and December 31, 1996 consists of the
following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
YEARS ENDED DECEMBER (DATE OF
31, JANUARY 1, 1996 ACQUISITION)
-------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
--------- --------- ---------------- -------------------
<S> <C> <C> <C> <C>
Current:
State..................... $ 735 $ 1,422 $ 2,176 $ 719
Foreign .................. 10,094 7,361 6,680 288
--------- --------- ---------------- -------------------
10,829 8,783 8,856 1,007
--------- --------- ---------------- -------------------
Deferred:
Federal .................. 16,020 19,057 19,614 (85)
Foreign .................. 3,364 6,795 2,728 118
--------- --------- ---------------- -------------------
19,384 25,852 22,342 33
--------- --------- ---------------- -------------------
Provision for income
taxes..................... $30,213 $34,635 $31,198 $1,040
========= ========= ================ ===================
</TABLE>
16
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective income tax rate for the periods ended December 31, 1994,
December 31, 1995, October 16, 1996 and December 31, 1996 varies from the
statutory U.S. federal income tax rate due to the following (dollars amounts
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995
------------------ ------------------
<S> <C> <C> <C> <C>
Statutory U.S. federal
income tax rate........... $18,311 35.0% $21,245 35.0%
Tax effect of foreign
operations and dividends 9,447 18.1 8,984 14.8
Amortization of cost in
excess of net assets
acquired and other
intangibles .............. 1,633 3.1 1,633 2.7
State income taxes, net of
federal tax benefit ...... 478 .9 924 1.5
Other non-deductible
business expenses ........ 550 .9
Other ..................... 344 .7 1,299 2.2
--------- ------- --------- -------
Effective income tax rate . $30,213 57.8% $34,635 57.1%
========= ======= ========= =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF
JANUARY 1, 1996 ACQUISITION)
TO TO
OCTOBER 16, 1996 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C> <C> <C>
Statutory U.S. federal
income tax rate........... $24,429 35.0% $ 791 35.0%
Tax effect of foreign
operations and dividends 5,134 7.4 (1,073) (47.5)
Amortization of cost in
excess of net assets
acquired and other
intangibles .............. 1,045 1.5 359 15.9
State income taxes, net of
federal tax benefit ...... 1,413 2.0 469 20.8
Other non-deductible
business expenses ........ 462 .6 494 21.8
Other ..................... (1,285) (1.8)
--------- ------- --------- --------
Effective income tax rate . $31,198 44.7% $ 1,040 46.0%
========= ======= ========= ========
</TABLE>
In accordance with SFAS 109, the net deferred income tax assets at
December 31, 1995 and 1996 include the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
GROSS DEFERRED INCOME TAX ASSETS:
Accrued liabilities ........................................ $ 108,914 $ 171,050
Net operating loss carryforwards ........................... 68,474 78,172
Alternative minimum income tax credit carryforwards ....... 3,025 3,025
----------- -----------
180,413 252,247
----------- -----------
GROSS DEFERRED INCOME TAX LIABILITIES:
Tax depreciation in excess of book depreciation ........... (116,304) (152,346)
Tax amortization in excess of book amortization of cost in
excess of net assets acquired and difference in book and
tax basis of intangibles .................................. (13,547)
Prepaids and other ......................................... (10,125) (8,682)
----------- -----------
(126,429) (174,575)
----------- -----------
Net deferred income tax assets.............................. $ 53,984 $ 77,672
=========== ===========
</TABLE>
The Company, under its tax disaffiliation agreement with HFS, has
allocated alternative minimum tax net operating loss carryforwards of $139.8
million. The net operating loss carryforward is $223.3 million. The net
operating loss carryforwards expire as follows: 2001, $4.3 million; 2002,
$2.5 million; 2005, $32.6 million; 2008, $23.7 million; 2009, $15.1 million.
The Company also has available unused investment tax credits of approximately
$5.8 million which expire on February 28, 2002.
17
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- RETIREMENT BENEFITS
The Company, through its subsidiary, Avis Rent A Car System, Inc.
("ARACS"), sponsors non-contributory defined benefit plans covering employees
who are members of certain collective bargaining units and non-union
full-time employees hired prior to December 31, 1983 who were age 25 or above
on January 1, 1985. ARACS also contributes to union sponsored pension plans.
Through ARACS, the Company sponsors a Voluntary Investment Savings Plan
under a "qualified cash or deferred arrangement" under Section 401(k) of the
Internal Revenue Code. For the periods ended December 31, 1994, December 31,
1995, October 16, 1996, and December 31, 1996, the cost of the plan was $1.6
million, $1.7 million, $1.4 million and $352,000, respectively. Included in
the Investment Savings Plan, ARACS sponsors a defined contribution plan for
substantially all non-union full-time employees not otherwise covered. Costs
for this plan are determined at 2% of each covered employee's compensation.
Employer contributions and costs of the plan for the periods ended December
31, 1994, December 31, 1995, October 16, 1996 and December 31, 1996 amounted
to $1.7 million, $1.8 million, $1.5 million and $394,000, respectively.
The defined benefit plans provide benefits based upon years of credited
service, highest average compensation and social security benefits. Annual
retirement benefits, at age 65, are equal to 1 1/2% of the participating
employee's final average compensation (average compensation during the
highest five consecutive years of employment in the ten years prior to
retirement) less 1 3/7% of the Social Security benefits for each year of
service up to a maximum of 35 years. In addition, the plan provides for
reduced benefits before age 65 and for a joint and survivor annuity option.
The Company also sponsors several foreign pension plans. The most
significant of these is the Canadian pension plan.
The status of the defined benefit plans at December 31, 1995 and 1996 is
as follows (in thousands):
<TABLE>
<CAPTION>
1995
----------------------------
U.S. PLANS
----------------------------
SALARIED AND
HOURLY
EMPLOYEES
AS OF JUNE BARGAINING CANADIAN
30, 1985 PLAN PLAN
-------------- ------------ ----------
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested................................................ $(37,040) $(5,327) $(2,349)
Nonvested ............................................ (4,186) (201)
-------------- ------------ ----------
Total ............................................... $(41,226) $(5,528) $(2,349)
============== ============ ==========
Actuarial present value of projected benefit
obligation............................................ $ 57,780 $ 5,528 $ 2,566
Plan assets at fair value ............................. 51,633 4,426 7,072
-------------- ------------ ----------
Projected benefit obligation (in excess of) less than
plan assets .......................................... (6,147) (1,102) 4,506
Unrecognized net actuarial loss (gain) ................ 4,713 455 (557)
Prior service cost (gain) not yet recognized in net
periodic pension cost ................................ (2,798) 996
Remaining unrecognized obligation ..................... (1,451)
Unrecognized net transition asset ..................... (2,944)
-------------- ------------ ----------
Pension (liability) asset included in the statement of
financial position.................................... $ (4,232) $(1,102) $ 1,005
============== ============ ==========
</TABLE>
18
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1996
----------------------------
U.S. PLANS
----------------------------
SALARIED AND
HOURLY
EMPLOYEES
AS OF JUNE BARGAINING CANADIAN
30, 1985 PLAN PLAN
-------------- ------------ ----------
<S> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested ............................................... $(43,406) $(7,147) $(3,389)
Nonvested ............................................ (4,671) (284)
-------------- ------------ ----------
Total ............................................... $(48,077) $(7,431) $(3,389)
============== ============ ==========
Actuarial present value of projected benefit
obligation ........................................... $ 66,083 $ 7,431 $ 3,703
Plan assets at fair value ............................. 60,697 6,623 8,323
-------------- ------------ ----------
Projected benefit obligation (in excess of) less than
plan assets .......................................... (5,386) (808) 4,620
Unrecognized net actuarial loss (gain) ................ 1,440 37 (336)
Prior service cost not yet recognized in net periodic
pension cost ......................................... 878
Remaining unrecognized obligation ..................... (915)
Unrecognized net transition asset ..................... (2,833)
-------------- ------------ ----------
Pension (liability) asset included in the statement of
financial position.................................... $ (3,946) $ (808) $ 1,451
============== ============ ==========
</TABLE>
Net pension costs of the defined benefit plans for the periods ended
December 31, 1994, December 31, 1995, October 16, 1996 and December 31, 1996,
include the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
--------------------- ----------------------
U.S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Service cost--benefits earned during the
period .................................. $ 2,820 $ 102 $ 2,566 $ 76
Interest cost on projected benefit
obligation .............................. 3,708 271 4,069 304
Return on assets--Actual loss (gain) on
plan assets ............................. 1,626 (586) (10,768) (578)
Net amortization of actuarial (gain) loss
and prior service cost .................. (5,702) 6,184
Contributions to union plans and other .. 2,057 2,211
Amortization of unrecognized net asset at
transition .............................. (134) (130)
--------- ---------- ---------- ----------
Net pension cost (benefit) ............... $ 4,509 $ (347) $ 4,262 $(328)
========= ========== ========== ==========
</TABLE>
19
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF
JANUARY 1, 1996 ACQUISITION)
TO TO
OCTOBER 16, 1996 DECEMBER 31, 1996
--------------------- --------------------
U.S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Service cost--benefits earned during the
period .................................. $ 2,401 $ 59 $ 302 $ 28
Interest cost on projected benefit
obligation .............................. 3,679 206 357 54
Return on assets--Actual (gain) on plan
assets .................................. (3,194) (538) (551) (115)
Net amortization of actuarial (gain) loss
and prior service cost .................. (794) 390
Contributions to union plans and other .. 2,029 733
Amortization of unrecognized net asset at
transition .............................. (106) (28)
--------- ---------- -------- ----------
Net pension cost (benefit) ............... $ 4,121 $ (379) $1,231 $ (61)
========= ========== ======== ==========
</TABLE>
At December 31, 1995 and 1996, the measurement of the projected benefit
obligation was based upon the following:
<TABLE>
<CAPTION>
1995 1996
------------------ ------------------
U.S. CANADIAN U.S. CANADIAN
PLANS PLAN PLANS PLAN
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Discount rate ................... 7.50% 9.50% 7.75% 7.00%
Compensation increase ........... 5.00 5.50 5.00 4.00
Long-term return on plan assets 8.75 9.50 8.75 7.00
</TABLE>
The U.S. plans' assets are invested in corporate bonds, U.S. government
securities and common stock mutual funds. The Canadian plan's assets are
invested in Canadian stocks, bonds, mutual funds, real estate and money
market funds.
The Company also sponsors a non-qualified defined benefit pension plan.
The liability for this unfunded plan was $4.6 million and $8.8 million at
December 31, 1995 and 1996, respectively, and is included in accrued
liabilities on the accompanying statement of financial position. The
projected benefit obligation of the plan was $6.0 million and $10.0 million
at December 31, 1995 and 1996, respectively.
NOTE 11 -- LEASES, AIRPORT CONCESSION FEES AND COMMITMENTS
The Company is committed to make rental payments under noncancelable
operating leases relating principally to vehicle rental facilities and
equipment. Under certain leases, the Company is obligated to pay certain
additional costs, such as property taxes, insurance and maintenance. Airport
concession agreements usually require a guaranteed minimum amount plus
contingent fees which are generally based on a percentage of revenues.
20
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating lease payments and airport concession fees charged to expense
for the periods ended December 31, 1994, December 31, 1995, October 16, 1996
and December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
YEARS ENDED DECEMBER (DATE OF
31, JANUARY 1, 1996 ACQUISITION)
---------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
---------- ---------- ---------------- -------------------
<S> <C> <C> <C> <C>
Minimum fees........... $102,104 $108,965 $ 88,787 $23,576
Contingent fees ....... 45,633 56,624 61,290 13,220
---------- ---------- ---------------- -------------------
147,737 165,589 150,077 36,796
Less sublease rentals (4,082) (4,427) (3,843) (1,000)
---------- ---------- ---------------- -------------------
$143,655 $161,162 $146,234 $35,796
========== ========== ================ ===================
</TABLE>
Future minimum rental commitments under noncancelable operating leases
amounted to approximately $338.0 million at December 31, 1996. The minimum
rental payments due in each of the next five years ending December 31, and
thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ......... $86,264
1998 ......... 62,400
1999 ......... 43,179
2000 ......... 32,669
2001 ......... 20,805
Thereafter .. 92,709
</TABLE>
In addition to the Company's lease commitments, the Company has
outstanding purchase commitments of approximately $1.5 billion at December
31, 1996, which relate principally to vehicle purchases.
21
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- SEGMENT INFORMATION
The Company operates in the United States and in foreign countries. The
operations within major geographic areas for the periods ended December 31,
1994, December 31, 1995, October 16, 1996 and December 31, 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(DATE OF
YEARS ENDED DECEMBER 31, JANUARY 1, 1996 ACQUISITION)
-------------------------- TO TO
1994 1995 OCTOBER 16, 1996 DECEMBER 31, 1996
------------ ------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Revenue:
United States................. $1,241,465 $1,414,380 $1,313,619 $ 312,194
Australia/New Zealand ........ 92,929 113,744 105,401 31,107
Canada ....................... 59,571 67,809 69,814 13,467
Other foreign operations .... 18,435 20,018 15,839 6,076
------------ ------------ ---------------- -------------------
$1,412,400 $1,615,951 $1,504,673 $ 362,844
============ ============ ================ ===================
Income (loss) before provision
for income taxes:
United States................. $ 21,759 $ 32,122 $ 48,098 $ (2,346)
Australia/New Zealand ........ 14,736 17,198 15,884 4,706
Canada ....................... 7,434 6,838 8,433 (1,752)
Other foreign operations .... 8,387 4,542 (2,616) 1,653
------------ ------------ ---------------- -------------------
$ 52,316 $ 60,700 $ 69,799 $ 2,261
============ ============ ================ ===================
Total assets at end of period:
United States................. $2,344,723 $2,535,621 $2,859,202 $2,750,119
Australia/New Zealand ........ 109,649 133,629 115,082 120,216
Canada ....................... 96,660 97,426 147,617 122,657
Other foreign operations .... 52,081 58,222 65,796 138,365
------------ ------------ ---------------- -------------------
$2,603,113 $2,824,898 $3,187,697 $3,131,357
============ ============ ================ ===================
</TABLE>
NOTE 13 -- LITIGATION
Certain litigation has been initiated against the Company which has arisen
during the normal course of operations. Since litigation is subject to many
uncertainties, the outcome of any individual matter is not predictable with
any degree of certainty, and it is reasonably possible that one or more of
these matters could be decided unfavorably against the Company. The Company
maintains insurance policies that cover most of the actions brought against
the Company. Two legal actions have been filed against ARACS alleging
discrimination in the rental of vehicles. HFS has agreed to indemnify the
Company from any unfavorable outcome with respect to these matters upon the
consummation of an IPO. The Company is currently not involved in any legal
proceeding which it believes would have a material adverse effect upon its
consolidated financial condition or results of operations.
NOTE 14 -- RELATED PARTY TRANSACTIONS
The Company and Avis Europe, plc cooperate jointly in marketing and
promotional activities, the exchange of reservations, the honoring of charge
cards and vouchers, and the transfer of the related billings. A member of the
board of directors and an executive officer of HFS serve on the board of Avis
Europe Limited (formerly Cilva), the parent company of Avis Europe, plc.
22
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Vehicle manufacturers offer vehicle repurchase programs on an ongoing
basis to assist in the acquisition and disposition of vehicles. These
programs generally allow the Company, at its option, subject to certain
provisions, to sell the vehicles back to the manufacturers at pre-determined
prices. Amounts included under these programs are reflected in "Accounts
receivable" (see Note 2). Under the terms of certain financing agreements
with General Motors, the Company is required to purchase a significant
percentage of its fleet from local dealers of General Motors subject to
market conditions. In addition, the Company participates in an arrangement
whereby General Motors provides payments for purchasing and promoting a
specified number and mix of vehicles (see Note 4). At December 31, 1995 and
1996, the Company has a $450.0 million and a $250.0 million line of credit,
respectively, from General Motors which may be used for either ESOP or
vehicle trust financing (see Note 7). Of this facility, $300.0 million and
$200.0 million is available for subordinated debt at December 31, 1995 and
1996, respectively. As of December 31, 1995 and 1996, the Company utilized
$118.0 million of this facility, of which $93.4 million and $54.3 million was
subordinated, respectively. This facility requires a fee of 1/4 of 1% on the
unused portion.
NOTE 15 -- SUBSEQUENT EVENTS
On August 20, 1997, the Company purchased The First Gray Line Corporation
and its subsidiaries for approximately $210 million, including expenses. The
fair value of unaudited assets and liabilities, exclusive of cost in excess
of the fair value of net assets acquired, at June 30, 1997 are $332.3 million
and $296.3 million, respectively. The transaction is subject to customary
closing conditions and regulatory approval.
On July 31, 1997, the Company refinanced all of its domestic debt. This
debt was refinanced by utilizing a $3.65 billion asset-backed structure,
which consisted of (i) a $2.0 billion Commercial Paper Program and (ii) a
$1.65 billion Medium Term Note Issuance with maturities of 3 and 5 years.
ARACS is party to a $470.0 million secured credit agreement that provides
for (i) a revolving credit facility in the amount of up to $125.0 million
which is available on a revolving basis until December 31, 2000 (the "Final
Maturity Date") in order to finance the general corporate needs of ARACS in
the ordinary course of business (with up to $75.0 million of such amount
available for the issuance of standby letters of credit to support worker's
compensation and other insurance and bonding requirements of ARACS, the
Company and their subsidiaries in the ordinary course of business), (ii) a
term loan facility in the amount of $120.0 million to finance general
corporate needs in the ordinary course of business, which will be repayable
in four installments, the first three of which shall be in the amount of $1.0
million payable on June 30, 1998, June 30, 1999 and June 30, 2000 and the
remainder of which will be due on the Final Maturity Date, and (iii) a
standby letter of credit facility of up to $225.0 million available on a
revolving basis to fund (a) any shortfall in certain payments owing pursuant
to fleet lease agreements and (b) maturing Commercial Paper Notes if such
Commercial Paper Notes cannot be repaid through the issuance of additional
Commercial Paper Notes or draws under the Liquidity Facility. Under terms of
this facility, the Company will be required to meet the following covenants
(i) certain maximum leverage ratios, (ii) certain minimum interest coverage
ratios, and (iii) certain minimum fixed charge coverage. In addition, the
Credit Facility prohibits the payment of cash dividends until the fiscal year
ending December 31, 1998 and, thereafter, permits the payment of dividends
only if the Company meets a minimum leverage ratio, the amount of such
dividend does not exceed a designated percentage of the Company's cash flow
and no default exists. Interest rates under these new facilities ranged from
5.6% to 7.8% at July 31, 1997.
23
<PAGE>
<TABLE>
<CAPTION>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
UNAUDITED
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
Predecessor Predecessor
Companies Companies
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue $ 580,049 $531,478 $1,525,696 $1,419,044
---------- --------- ---------- ----------
Costs and expenses:
Direct operating 242,997 225,939 641,545 616,064
Vehicle depreciation, net 143,937 93,828 323,355 257,574
Vehicle lease charges 6,766 33,480 75,791 94,342
Selling, general and 110,256 96,290 313,639 264,332
administrative
Interest, net 49,465 42,012 117,808 115,165
Amortization of cost in
excess of net assets
acquired 1,675 1,193 4,245 3,575
---------- --------- ---------- ----------
555,096 492,742 1,476,383 1,351,052
---------- --------- ---------- ----------
Income before provision
for income taxes 24,953 38,736 49,313 67,992
Provision for income taxes 11,085 17,315 22,339 30,392
---------- --------- ---------- ----------
Net income $ 13,868 $ 21,421 $ 26,974 $ 37,600
========== ========= ========== ==========
Earnings per share $ 0.45 $ 0.69 $ 0.87 $ 1.22
========== ========= ========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 159,551 $ 50,886
Accounts receivable, net 400,653 311,179
Due from affiliates, net 61,807
Prepaid expenses 46,025 40,155
Vehicles, net 3,364,660 2,243,492
Property and equipment, net 117,290 98,887
Deferred income tax assets 106,500 113,660
Cost in excess of net assets acquired, 402,701 196,765
net
Other assets 119,727 14,526
---------- ----------
Total assets $4,717,107 $3,131,357
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 232,065 $ 175,535
Accrued liabilities 386,823 329,245
Due to affiliates, net 62,633
Current income tax liabilities 7,448 4,790
Deferred income tax liabilities 38,618 35,988
Public liability, property damage
and other insurance liabilities 249,866 213,785
Debt 3,285,548 2,295,474
---------- ----------
Total liabilities 4,263,001 3,054,817
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common Stock 309 85
Additional paid-in capital 430,507 74,915
Retained earnings 28,158 1,184
Foreign currency translation (4,868) 356
adjustment
---------- ----------
Total stockholders' equity 454,106 76,540
---------- ----------
Total liabilities and stockholders'
equity $4,717,107 $3,131,357
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
Predecessor
Companies
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,974 $ 37,600
Adjustments to reconcile net income to
net cash provided by operating activities:
Vehicle depreciation 332,183 287,836
Depreciation and amortization of property
and equipment 8,382 11,634
Amortization of cost in excess of net assets
acquired 4,245 3,575
Amortization of debt issuance costs 1,630 2,363
Deferred income tax provision 11,680 21,870
Undistributed (earings) losses of associated
companies, net 130 (219)
Provision for losses on accounts receivable 2,127 1,178
Provision for public liability, property
damage and other insurance liabilities, net 19,315 16,659
Change in operating assets and liabilities:
Accounts receivable (82,985) (32,168)
Prepaid expenses 4,583 (7,361)
Other assets (73,903) 1,909
Accounts payable 79,713 1,501
Accrued liabilities (39,680) 99,962
---------- ----------
Net cash provided by operating activities 294,394 446,339
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions (3,169,229) (2,085,689)
Vehicle deletions 1,987,853 1,414,507
Payments for additions to property
and equipment (30,297) (23,998)
Retirements of property and equipment 18,070 2,179
Payments for purchase of Licensees (199,381) (164)
---------- ----------
Net cash used in investing activities (1,392,984) (693,165)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in debt:
Proceeds 3,195,292 594,029
Repayments (2,390,528) (271,705)
---------- ----------
Net increase in debt 804,764 322,324
Payments for debt issuance costs (28,202) (2,429)
Proceeds from initial public offering 359,316
Proceeds (payments on) from intercompany
loans 71,945 (22,142)
---------- ----------
Net cash used in financing activities 1,207,823 297,753
---------- ----------
Effect of exchange rate changes on cash (568) 256
---------- ----------
Net increase in cash and cash equivalents 108,665 51,183
Cash and cash equivalents at
beginning of period 50,886 39,081
---------- ----------
Cash and cash equivalents at end of period 159,551 90,264
========== ==========
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 129,802 $ 123,809
========== ==========
Income taxes $ 7,946 $ 6,179
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
AVIS RENT A CAR, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include Avis Rent
A Car, Inc. and subsidiaries which includes certain carved out corporate
operations of HFS Car Rental, Inc., which was formerly known as, Avis, Inc.
Avis, Inc. was acquired by HFS Incorporated ("HFS") on October 17, 1996. Prior
to October 16, 1996, Avis Rent A Car, Inc. and subsidiaries and the carved out
corporate operations of Avis , Inc. 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".
These unaudited consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) 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 necessarily indicative of the results that can be
expected for a full year. These interim financial statements should be read in
conjunction with the Company's audited annual consolidated financial
statements and notes thereto.
NOTE 2 - CHANGES IN STOCKHOLDERS' EQUITY
On September 24, 1997, the Company effected an 85,000 to 1 common stock split
and increased its authorized shares to 100 million shares. After giving effect
to the stock split, the Company issued and sold 22,425,000 shares of its
common stock, $.01 par value, in an initial public offering and received net
proceeds of $359.3 million.
NOTE 3 - EARNINGS PER SHARE
Earnings per share is computed by dividing net income in each of the
three-months and nine-months ended September 30, 1997 and 1996 by 30,925,000
shares outstanding after the initial public offering.
NOTE 4 - 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 franchise 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 $171.8 million.
The following is the preliminary purchase cost allocation for the acquisitions
mentioned above:
Purchase cost $ 199,381
---------
Fair value of:
Assets acquired 353,832
Liabilities assumed 326,251
---------
Net assets 27,581
---------
Cost in excess of net assets acquired $ 171,800
=========
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 unaudited statement of financial
position at September 30, 1997. However, the changes are not expected to have
a material effect on the financial position of the Company. These acquisitions
have all been accounted for by the purchase method. The financial statements
include the operating results of these acquisitions subsequent to their
respective dates of acquisition.
4
<PAGE>
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, of each period. These unaudited pro
forma results are not necessarily indications of the actual results of
operations that would have occurred had the acquisition of The First Gray Line
Corporation actually been made at January 1, of each period.
<TABLE>
<CAPTION>
Pro forma
Nine-months ended
September 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenue $ 1,655,439 $1,563,017
=========== ==========
Income before provision for income
taxes $ 65,247 $ 83,705
=========== ==========
Net income $ 36,147 $ 46,904
=========== ==========
Earnings per share $ 1.17 $ 1.52
=========== ==========
</TABLE>
The above unaudited pro forma results of operations of the Company do not give
effect, for the period ended September 30, 1996 to the acquisition of the
Company by HFS and the establishment of a franchisor/franchisee relationship
and do not give effect in each period presented to the repayment of debt with
the net proceeds (after the purchase of The First Gray Line Corporation) from
the initial public offering. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
NOTE 5 - FINANCING AND DEBT
Debt outstanding at September 30, 1997 and December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
CURRENT DEBT
<S> <C> <C>
Commercial paper (average rate 5.7%) $ 1,459,149
Short-term vehicle trust financing-revolving credit
facilities $1,970,000
Short-term notes - foreign at 3.89% to 13.00% in
1997 133,774 65,516
Current portion of 7.5% capital lease 40,169
Other current debt 11,443 1,060
----------- ----------
Total current debt 1,604,366 2,076,745
----------- ----------
LONG TERM DEBT
Term loan due December 2000 at 7.94%: 29,000
Medium term note due July 2000 at 6.22% 800,000
Medium term note 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 2,182 2,916
Debt of foreign subsidiaries:
Floating rate notes due February 1998 at 4.75% in
1996 2,935
Floating rate notes due August 1998 at 6.94% to
8.65% 27,878
----------- ----------
Total long-term debt 1,681,182 218,729
----------- ----------
$ 3,285,548 $2,295,474
=========== ==========
</TABLE>
5
<PAGE>
NOTE 6 - SEGMENT INFORMATION
Operations within major geographic areas for the three and nine-months ended
September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Three months ended Nine months
September 30, ended September 30,
--------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenue:
United States $ 510,406 $459,419 $1,340,674 $1,237,717
Australia/
New Zealand 30,036 33,219 98,322 99,906
Canada 32,818 33,019 67,452 66,114
Other foreign
operations 6,789 5,821 19,248 15,307
========= ======== ========== ==========
$ 580,049 $531,478 $1,525,696 $1,419,044
========= ======== ========== ==========
Income (loss) before provision
for income taxes:
United States $ 12,112 $ 26,550 $ 24,803 $ 45,991
Australia/
New Zealand 5,076 5,499 17,309 13,916
Canada 6,964 6,848 7,190 7,411
Other foreign
operations 801 (161) 11 674
========= ======== ========== ==========
$ 24,953 $ 38,736 $ 49,313 $ 67,992
========= ======== ========== ==========
</TABLE>
NOTE 7- STOCK OPTIONS
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. Shares of common
stock totaling 4,602,977 are reserved for issuance upon the exercise of
options granted to officers, key employees, and directors of the Company
pursuant to the Stock Option Plan. As of September 30, 1997, 3,963,900 options
were granted at the fair market value of the Company's common stock on the
date of grant. Options become exercisable as to 20% of the shares covered by
such options on the first anniversary of the date of grant, with an additional
20% of the shares covered by such options on each of the four succeeding
anniversaries of the date of grant. 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 or disability or
(iii) one year following the optionee's termination of employment for any
other reason.
6
