<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
Form 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
____________
December 5, 1996 (August 29, 1996)
(Date of Report (date of earliest event reported))
HFS Incorporated
(Exact name of Registrant as specified in its charter)
Delaware 1-11402 22-3059335
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive office) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
<PAGE>
This Current Report on Form 8-K/A amends the Current Report on Form 8-K of
HFS Incorporated (the "Company" or "Registrant") dated August 29, 1996.
Item 7. Exhibits
Exhibit
No. Description
23.1 Consent of Price Waterhouse LLP
99.1 The audited consolidated statements of financial position of Avis, Inc. and
its subsidiaries at February 29, 1996 and February 28,1995, and the related
consolidated statements of operations, of changes in stockholders' equity,
of changes in redeemable preferred stock, and of cash flows for each of the
three years in the period ended February 29, 1996.
99.2 The unaudited consolidated financial statements of Avis, Inc. and its
subsidiaries at May 31, 1996 and for the three months ended May 31, 1996
and 1995.
99.3 The unaudited consolidated financial statements of Avis, Inc. and its
subsidiaries at August 31, 1996 and for the six months ended August 31,
1996 and 1995.
<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 hereunto duly authorized.
HFS INCORPORATED
By: /s/ Michael P. Monaco
Michael P. Monaco
Vice Chairman
and Chief Financial Officer
Date: December 5, 1996
<PAGE>
HFS INCORPORATED
CURRENT REPORT ON FORM 8-K
Report Dated December 5, 1996 (August 29, 1996)
EXHIBIT INDEX
Exhibit No. Description
23.1 Consent of Price Waterhouse, LLP
99.1 The audited consolidated statements of financial position of Avis, Inc. and
its subsidiaries at February 29, 1996 and February 28,1995, and the related
consolidated statements of operations, of changes in stockholders' equity,
of changes in redeemable preferred stock, and of cash flows for each of the
three years in the period ended February 29, 1996.
99.2 The unaudited consolidated financial statements of Avis, Inc. and its
subsidiaries at May 31, 1996 and for the three months ended May 31, 1996
and 1995.
99.3 The unaudited consolidated financial statements of Avis, Inc. and its
subsidiaries at August 31, 1996 and for the six months ended August 31,
1996 and 1995.
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 333-11029 and
333-11031), and Form S-8 (Nos. 33-56354, 33-70632, 33-72752, 33-83956,
333-06733, 33-94756, 333-03532 and 333-06939) of HFS, Inc. of our report dated
April 25, 1996 relating to the consolidated financial statements of Avis, Inc.,
which appears in the Current Report on Form 8-K/A of HFS, Inc. dated August 29,
1996.
Price Waterhouse LLP
New York, New York
December 4, 1996
EXHIBIT 99. 1
Report of Independent Accountants
To the Board of Directors and
Stockholders of Avis, Inc.
In our opinion, the accompanying consolidated statements of financial
position and the related consolidated statements of operations, of changes in
stockholders' equity, of changes in redeemable preferred stock, and of cash
flows present fairly, in all material respects, the financial position of Avis,
Inc. and its subsidiaries at February 29, 1996 and February 28, 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended February 29, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
April 25, 1996
<PAGE>
AVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(In thousands)
ASSETS
1996 1995
----------- -----------
Cash and cash equivalents .......................... $ 49,326 $ 36,643
Accounts receivable, net ........................... 144,842 109,408
Due from affiliated company ........................ 75,635 71,570
Prepaid expenses ................................... 40,227 32,612
Vehicles, net ...................................... 2,064,943 1,767,050
Property and equipment, net ........................ 146,429 125,019
Other assets ....................................... 176,368 153,908
Cost in excess of fair value of net assets acquired 506,683 503,051
----------- -----------
Total assets .................................. $ 3,204,453 $ 2,799,261
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................... $ 181,920 $ 182,103
Accrued liabilities ................................ 200,870 166,542
Current and deferred income taxes .................. 36,339 30,191
Public liability and property damage ............... 205,698 198,180
Debt ............................................... 2,043,143 1,570,482
Due to affiliated company .......................... 122,111 273,298
Redeemable preferred stock ......................... 72,409 77,274
Redeemable portion of common stock ................. 295,482 213,523
Unearned compensation .............................. (263,024) (277,787)
Participating convertible preferred stock (par value
$.01 per share, 15,000,000 shares authorized,
9,788,623 shares outstanding in 1996 and 1995) ... 132,000 132,000
Common stock (par value $.01 per share,
100,000,000 shares authorized; 23,619,703
shares and 23,619,828 shares outstanding
in 1996 and 1995, respectively) .................. 290 290
Additional paid in capital ......................... 215,644 275,071
Treasury stock ..................................... (102,252) (102,251)
Retained earnings .................................. 62,095 59,818
Foreign currency equity adjustment ................. 1,728 527
----------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity .... $ 3,204,453 $ 2,799,261
=========== ===========
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 29, 1996, FEBRUARY
28, 1995 AND FEBRUARY 28, 1994
(In thousands)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
February 29, February 28, February 28,
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Revenues ...................................... $ 1,716,677 $ 1,455,588 $ 1,371,324
----------- ----------- -----------
Cost and expenses:
Direct operating ............................ 749,406 688,287 643,272
Vehicle depreciation ........................ 379,501 313,778 254,346
Vehicle lease charges ....................... 125,483 81,568 78,670
Selling, general and administrative ......... 244,999 211,040 186,294
Interest .................................... 149,534 135,607 125,505
Unrealized foreign exchange (gain) loss ....... 410 (777) (360)
Amortization of unearned compensation -
Employee Stock Ownership Plan ............... 15,875 15,804 15,804
Amortization of cost in excess of fair value of
net assets acquired and other intangibles ... 16,420 16,219 15,983
----------- ----------- -----------
Income (loss) before income taxes and
preferred stock dividends ................... 35,049 (5,938) 51,810
Provision for income taxes .................... 23,977 13,160 28,322
----------- ----------- -----------
Net income (loss) ............................. 11,072 (19,098) 23,488
Preferred stock dividends ..................... (8,769) (8,769) (7,015)
----------- ----------- -----------
Income (loss) available for common shares ..... $ 2,303 $ (27,867) $ 16,473
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 29, 1996
(In thousands)
<TABLE>
<CAPTION>
Participating
Convertible
Common Stock Preferred Stock
-------------------- ----------------- Foreign
Additional Additional Treasury currency
Par paid-in Par paid-in stock Retained equity
value capital value capital (at cost) earnings adjustment
------- ---------- ----- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 1, 1995 ......................... $ 290 $ 275,071 $ 98 $ 131,902 $(102,251) $ 59,818 $ 527
Amortization of unearned compensation expense
for the year ended February 29, 1996 ....... 20
Net income for the year ended
February 29, 1996 .......................... 11,072
Tax benefit of ESOP income tax deductions
for the year ended February 29, 1996 ........ 22,885
Increase in pension liability over unrecognized
prior service cost .......................... (373)
Foreign currency equity adjustment for the
year ended February 29, 1996 ................ 1,201
Payment of common and preferred stock dividends (8,781)
Change in redeemable portion of common stock .. (81,959)
Purchase of treasury stock (125 shares) ....... (1)
Appropriation for amortization of discount
from redemption value of preferred stock .... (14)
------- --------- ----- --------- --------- --------- ---------
Balance February 29, 1996 ..................... $ 290 $ 215,644 $ 98 $ 131,902 $(102,252) $ 62,095 $ 1,728
======= ========= ===== ========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
AVIS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1995
(In thousands)
<TABLE>
<CAPTION>
Participating
Convertible
Common Stock Preferred Stock
----------------- ------------------ Foreign
Additional Additional Treasury currency
Par paid-in Par paid-in stock Retained equity
value capital value capital (at cost) earnings adjustment
------ ---------- ------ --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 1, 1994 .......................... $ 290 $ 56,038 $ 98 $ 131,902 $(100,712) $ 87,698 $ (837)
Net loss for the year ended
February 28, 1995 ........................... (19,098)
Tax benefit of ESOP income tax deductions
for the year ended February 28, 1995 ......... 6,627
Reduction of pension liability over unrecognized
prior service cost ........................... 178
Foreign currency equity adjustment for the
year ended February 28, 1995 ................. 1,364
Payment of preferred stock dividends ........... (8,769)
Change in redeemable portion of common stock ... 212,228
Appropriation for amortization of discount
from redemption value of preferred stock ..... (13)
Purchase of treasury stock (85,696 shares) ..... (1,539)
------ ------- ------ --------- --------- --------- -------
Balance February 28, 1995 ...................... $ 290 $275,071 $ 98 $ 131,902 $(102,251) $ 59,818 $ 527
====== ======== ===== ========= ========= ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1994
(In thousands)
<TABLE>
<CAPTION>
Participating
Convertible
Common Stock Preferred Stock Foreign
------------------ ---------------- Common Currency
Additional Additional Treasury stock equity
Par paid-in Par paid-in stock purchase Retained Adjust-
value capital value capital (at cost) warrants earnings ment
------ ---------- ----- ---------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March 1, 1993 .............................. $ 284 $(118,916) $ 98 $ 131,902 $ (25,089) $ 155 $71,242 $ 282
Net income for the year ended February 28, 1994 .... 23,488
Cumulative effect of change in accounting for
income taxes (SFAS No. 109) ...................... 68,100
Tax benefit derived from change in statutory
income tax rates under the Revenue
Reconciliation Act of 1993 ....................... 2,000
Tax benefit of ESOP income tax deductions
for the year ended February 28, 1994 ............. 16,855
Excess of additional pension liability over
unrecognized prior service cost .................. (258)
Foreign currency equity adjustment for the
year ended February 28, 1994 ..................... (1,119)
Payment of common and preferred stock dividends .... (7,019)
Change in redeemable portion of common stock ....... 86,600
Appropriation for amortization of discount
from redemption value of preferred stock ......... (13)
Exchange of common stock for Series C preferred
stock (2,889,057 shares) ......................... (53,968)
Purchase of treasury stock (1,147,890 shares) ...... (21,655)
Common stock issued under stock option plan (77,462) 1 403
Common stock purchase warrants exercised (599,452
shares @ $2.37; redeemed 19,045 shares @ $16.56) . 5 1,254 (155)
----- -------- ----- --------- --------- ------ ------- -------
Balance February 28, 1994 .......................... $ 290 $ 56,038 $ 98 $ 131,902 $(100,712) $ $87,698 $ (837)
====== ======== ===== ========= ========== ====== ======= =======
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
AVIS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE PREFERRED STOCK
FOR THE YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND
FEBRUARY 28, 1994
(In thousands)
<TABLE>
<CAPTION>
Series A Series B Series C
preferred preferred preferred Additional Discount on Total
stock stock stock paid-in preferred preferred
par value par value par value capital stock stock
--------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance March 1, 1993 ............ $ 2 $ 2 - $ 23,369 $ (93) $ 23,280
Accretion in preferred stock for
amortization of discount from
redemption value ................. 13 13
Issuance of Series C preferred stock $ 29 53,939 53,968
------ ------ ------- -------- ------ --------
Balance February 28, 1994 .......... 2 2 29 77,308 (80) 77,261
------ ------ ------- -------- ------ --------
Accretion in preferred stock for
amortization of discount from
redemption value ................. 13 13
------ ------ ------- -------- ------ -------
Balance February 28, 1995 .......... 2 2 29 77,308 (67) 77,274
------ ------ ------- -------- ------ -------
Accretion in preferred stock for
amortization of discount from
redemption value ................. 14 14
Redemption of preferred stock ...... (4,879) (4,879)
------ ------ ------- -------- ------ --------
Balance February 29, 1996 .......... $ 2 $ 2 $ 29 $ 72,429 $ (53) $ 72,409
====== ====== ======= ======== ====== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND FEBRUARY 28, 1994
(In thousands)
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------
February 29, February 28, February 28,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................... $ 11,072 $ (19,098) $ 23,488
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................... 444,498 388,066 326,200
Deferred income tax provision ........................... 15,404 2,018 20,673
Provision for losses on accounts receivable ............. 1,803 85 1,815
Gain on sale of the Canadian Car Lease Division ......... (2,629)
Change in operating assets and liabilities:
Finance lease receivable .............................. 2,321 3,117
Accounts receivable and due from affiliated company ... (31,965) 5,255 10,400
Prepaid expenses ...................................... (7,362) (4,425) 2,321
Other assets .......................................... (3,373) (3,888) (11,085)
Accounts payable ...................................... (6,183) 20,844 39,768
Accrued liabilities ................................... 38,247 25,538 846
Public liability and property damage .................. 7,455 15,417 5,883
----------- ----------- -----------
Net cash provided by operating activities ............. 469,596 432,133 420,797
----------- ----------- -----------
Cash flows from investing activities:
Payments for vehicle additions .......................... (2,557,368) (3,105,223) (2,745,150)
Proceeds received from vehicle sales ................... 1,867,111 2,699,944 2,613,457
Payments for additions to property and equipment, net ... (37,177) (26,434) (15,076)
Purchase of Agency Rent A Car ........................... (20,524)
Proceeds from the sale of the Canadian Car Lease Division 87,192
Investment in associated companies ...................... (7,525) (100) (4,495)
----------- ----------- -----------
Net cash used in investing activities ................. (755,483) (431,813) (64,072)
----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in debt and due to affiliated
company ............................................... 316,302 (100,911) (20,484)
Increase in deferred debt issuance costs ................ (3,028) (1,200) (7,151)
Principal payments on ESOP acquisition debt ............. (73,250) (61,750)
Payment of common and preferred stock dividends ......... (8,781) (8,769) (7,019)
Purchase of treasury stock .............................. (1) (1,539) (21,655)
Increase in unearned compensation ....................... (1,092)
Decrease in debt due to the sale of the Canadian
Car Lease Division .................................... (77,842)
Redemption of preferred stock ........................... (4,879)
Other financing activities, net ......................... 1,508
----------- ----------- -----------
Net cash provided by (used in) financing activities ......... 298,521 (185,669) (194,393)
----------- ----------- -----------
Effect of exchange rate changes on cash ..................... 49 (272) 381
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ........ 12,683 (185,621) 162,713
Cash and cash equivalents at beginning of period ............ 36,643 222,264 59,551
----------- ----------- -----------
Cash and cash equivalents at end of period .................. $ 49,326 $ 36,643 $ 222,264
=========== =========== ===========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest .............................................. $ 147,960 $ 137,351 $ 128,572
Income taxes .......................................... 7,747 9,307 4,299
</TABLE>
Disclosure of accounting policy: For purposes of reporting cash flows, the
Company considers deposits and short-term investments with an initial maturity
of three months or less to be cash equivalents. The effect of unrealized foreign
currency revaluations on the assets and liabilities of foreign subsidiaries has
been eliminated. Changes in vehicles and vehicle related accounts are included
in the cash flows from investing activities.
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND FEBRUARY 28, 1994
Note 1 - ESOP Transaction
In 1987, the trust for the Employee Stock Ownership Plan (ESOP) of Avis,
Inc. (the "Company") acquired all the outstanding common stock of Avis, Inc.
This transaction has been accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16. Accordingly, the purchase price has
been allocated based on the estimated fair value of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of the
Company's net assets is included in "Cost in excess of fair value of net assets
acquired" on the consolidated balance sheet.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The Company's primary business is the rental of automobiles. The
consolidated financial statements include the accounts of all majority-owned
subsidiaries of Avis, Inc. combined with related accounts of the ESOP and Prime
Vehicles Trust. Intercompany accounts and transactions among Avis, Inc., its
subsidiaries, the ESOP and Prime Vehicles Trust (Vehicle Trust) have been
eliminated. During the year ended February 29, 1996, the Company acquired the
rights to the name and certain assets of Agency Rent A Car, Inc., a company
primarily engaged in the insurance replacement car rental business. Investments
in associated companies in which the Company has a 20 percent or greater
interest are accounted for under the equity method of accounting. Generally
accepted accounting principles require the use of estimates, which are subject
to change, in the preparation of financial statements. Certain amounts of the
prior period have been reclassified for comparability.
Revenue Recognition
Revenue derived from the rental of automobiles is recognized when earned
and expenses are recorded when incurred.
Vehicles
Vehicles are stated at cost net of accumulated depreciation. When vehicles
are sold, gains or losses are reflected as an adjustment to depreciation.
Vehicles are generally depreciated at a rate of 10% to 25% per annum.
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
thirty years for buildings to five to ten years for furniture and office
equipment. 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 income.
<PAGE>
Cost in Excess of Net Assets Acquired and Other Intangibles
Cost in excess of net assets acquired is amortized over a 40 year period
and is shown net of accumulated amortization of approximately $126 million and
$110 million at February 29, 1996 and February 28, 1995, respectively.
Impairment Accounting
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The Company reviews the recoverability of its
long-lived assets, including goodwill and other intangible assets, 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 asset from the expected future pre-tax
undiscounted cash flows of the related asset. The measurement of impairment
requires management to use estimates of expected future cash flows related to
long-lived assets. It is at least reasonably possible that future events or
circumstances could cause these estimates to change. The Company's policy on
impairment in prior years was not materially different.
Public Liability and Property Damage
Provision for public liability and property damage on claims for which the
Company is self-insured is made by a charge to expense based upon evaluations of
estimated ultimate liabilities on reported and unreported claims. The Company is
self-insured up to $1 million per claim. The liability for public liability and
property damage is calculated using an accepted actuarial method and is not
discounted or calculated on a present-value basis.
Income Taxes
Effective March 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). The
provision for income taxes includes current and deferred income taxes. Deferred
income taxes arise from temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities. The Company
derives income tax benefits for contributions, distributions and dividends
remitted to the ESOP (see note 15). The Company reflects the tax benefit of ESOP
income tax deductions as an increase to stockholders' equity. The Company does
not provide for federal income taxes on the undistributed portion of the
Company's earnings of foreign subsidiaries and affiliates that is anticipated to
be permanently reinvested for growth and expansion.
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.
Foreign Currency Translation
The balance sheets of foreign operations are translated at rates of
exchange at the balance sheet date and income statements are translated at
average exchange rates for the periods presented. Translation gains and losses
are included as a component of stockholders' equity.
<PAGE>
Advertising
Advertising costs are expensed as incurred. There are no deferred costs for
advertising at February 29, 1996, February 28, 1995 and February 28, 1994.
Environmental Costs
The Company's operations include the storage and dispensing of gasoline.
Expenses in connection with the remediation of accidental fuel discharges at
various locations are provided for when it is probable that obligations have
been incurred and amounts can be reasonably estimated. Recoveries from insurance
companies and other reimbursements are generally immaterial. The Company
provided $6,894,000, $2,850,000 and $2,822,000 for remediation costs during the
years ended February 29, 1996, February 28, 1995 and February 28, 1994,
respectively.
Note 3 - Accounts Receivable and Due from Affiliated Company
Accounts receivable is comprised of the following (in thousands):
February February
29, 1996 28, 1995
--------- ---------
Vehicle rentals .................................. $103,731 $ 73,963
Damage claims .................................... 7,134 7,997
Due from licensees ............................... 3,336 2,271
Due from vehicle manufacturers ................... 87,977 78,792
Other ............................................ 22,765 21,224
-------- --------
224,943 184,247
Less allowance for doubtful accounts ............. 4,466 3,269
-------- --------
$220,477 $180,978
======== ========
The provision for losses on accounts receivable was $1,803,000, $85,000 and
$1,815,000 for the years ended February 29, 1996, February 28, 1995 and February
28, 1994, respectively.
Note 4 - Vehicles
Vehicles are stated at cost, net of accumulated depreciation as follows (in
thousands):
February February
29, 1996 28, 1995
----------- -----------
Vehicles ............................... $ 2,358,936 $ 1,927,995
Accumulated depreciation ............... (293,993) (160,945)
----------- -----------
$ 2,064,943 $ 1,767,050
=========== ===========
<PAGE>
Included in vehicles are vehicles acquired under short and long-term
capital leases, as described in Note 9, of $30,098,000 and $47,291,000 (net of
accumulated depreciation of $54,834,000 and $37,641,000) at February 29, 1996
and February 28, 1995, respectively. Also included in vehicles are $34,924,000
and $29,441,000 of buses and other support vehicles used in the operation of the
Company's business at February 29, 1996 and February 28, 1995, respectively.
Vehicles also include vehicles held for sale as follows (in thousands):
February February
29, 1996 28, 1995
-------- --------
Vehicles held for sale ..................... $ 27,041 $ 6,733
Accumulated depreciation ................... (4,092) (1,051)
-------- --------
$ 22,949 $ 5,682
======== ========
Depreciation expense recorded for vehicles was $392,946,000, $337,038,000
and $277,230,000, net of a gain on the disposal of vehicles of $13,445,000,
$23,260,000 and $22,884,000 for the years ended February 29, 1996, February 28,
1995 and February 28, 1994, respectively.
Costs and expenses are offset by certain incentives and allowances from
various vehicle manufacturers, the most significant of which was received from
the General Motors Corporation. Approximately $99 million, $103 million and $104
million was recognized from these incentives and allowances in the Consolidated
Statement of Operations for the years ended February 29, 1996, February 28, 1995
and February 28, 1994, respectively.
In November 1988 and April 1990, the Company entered into seven year
operating leases under which a combined original amount of $324.3 million of
vehicles were leased. 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 an agreed-upon fair market
value or return them to the lessor.
In December 1994, the Company entered into a financing arrangement whereby
it may lease up to $500 million of vehicles. Under this arrangement at February
29, 1996, there were $357.7 million of vehicles acquired 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.
<PAGE>
The rental payments due in each of the succeeding years for these leases,
as described above, are as follows (in thousands):
February 28, 1997 ....................................... $96,276
February 28, 1998 ....................................... 5,729
Rental expense for those vehicles acquired under operating leases as
described above was $106,024,000, $65,241,000 and $57,055,000 for the years
ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively.
Note 5 - Property and Equipment
Property and equipment is comprised of the following (in thousands):
February February
29, 1996 28, 1995
-------- --------
Land ........................................... $ 19,652 $ 19,975
Buildings ...................................... 14,767 12,643
Leasehold improvements ......................... 144,488 134,833
Furniture, fixtures and equipment .............. 31,669 28,743
Construction in progress ....................... 15,670 6,254
-------- --------
226,246 202,448
Less accumulated depreciation
and amortization ............................. 79,817 77,429
-------- --------
$146,429 $125,019
======== ========
Depreciation and amortization expense was $16,404,000, $14,572,000 and
$14,665,000 for the years ended February 29, 1996, February 28, 1995 and
February 28, 1994, respectively.
Note 6 - Investments in Associated Companies
Investments in associated companies, included in other assets, consist of
the following (in thousands):
February February
29, 1996 28, 1995
-------- --------
Avis Europe Limited and Subsidiaries ............. $59,614 $52,499
Other ............................................ 2,325 1,945
------- -------
$61,939 $54,444
======= =======
<PAGE>
At February 28, 1995 the Company owned 7.4% of the common stock of Cilva
Holdings, Plc (Cilva). During 1996, the Company also acquired additional common
stock in Cilva for $7.5 million, resulting in total holdings of 8.7% at February
29, 1996. On February 28, 1996 Cilva recapitalized its shareholder debt
instruments whereby the Company exchanged its holdings in debt securities for
newly issued common stock in a successor company, Avis Europe Limited. The
Company accounts for its investment on the cost method of accounting. The
Company may redeem a portion of its investment in Avis Europe Limited between
March 1, 2000 and July 15, 2000. The Company also has an investment of
approximately $1 million in the preferred shares of Avis Europe, Plc, a
subsidiary of Avis Europe Limited.
In 1992, the Company discontinued accruing interest income and recorded a
provision for possible loss on its investments in Cilva, including interest
income accrued but yet unpaid. The Company recorded and fully reserved
$6,631,000, $5,931,000 and $5,370,000 of interest income for the years ended
February 29, 1996, February 28, 1995 and February 28, 1994, respectively.
The equity in earnings of other associated companies was $366,000, $334,000
and $460,000 for the years ended February 29, 1996, February 28, 1995 and
February 28, 1994, respectively.
Note 7 - Accrued Liabilities
Accrued liabilities is comprised of the following (in thousands):
February February
29, 1996 28, 1995
-------- --------
Payroll and related costs .................... $ 60,986 $ 41,249
Taxes, other than income taxes ............... 10,206 6,335
Interest ..................................... 20,073 15,782
Sales and marketing .......................... 20,697 23,257
Remediation of fuel discharges ............... 9,726 5,747
Other various ................................ 79,182 74,172
-------- --------
$200,870 $166,542
======== ========
<PAGE>
Note 8 - Debt and Due to Affiliated Company
Debt outstanding is comprised of the following (in thousands):
February February
29, 1996 28, 1995
--------- ----------
Commercial paper - vehicle trust financing ....... $ 29,550 $ 1,000
Short-term capital lease obligation .............. 142
Short-term notes - foreign ....................... 46,635 38,356
Current portion of long-term debt -
vehicle trust financing ....................... 46,000 10,000
Current portion of long-term debt - other ........ 32,337 21,742
--------- ----------
Total current debt .......................... 154,664 71,098
--------- ----------
Vehicle trust financing:
Guaranteed ESOP notes ......................... 1,000,000 1,000,000
Revolving credit facility ...................... 412,500 195,700
Manufacturer's financing due June 1996 ......... 132,000
Floating rate notes due September 1998 ......... 115,000
Insurance company notes due from
December 1995 to December 1999
at 6.50% - 8.23% .......................... 112,000 112,000
Insurance company notes due from June
1996 to June 2003 at 5.78% - 7.92% .......... 150,500 196,500
--------- ---------
Vehicle trust financing - long term ...... 1,790,000 1,636,200
Floating rate notes due September 1996 ........... 15,000
7.50% capital lease terminating November 1997..... 40,615 59,984
Floating rate notes due November 1998 ............ 62,000
Insurance company notes due from June
1998 to June 2000 at 9.98% - 10.30% ............ 52,500
Other domestic ................................... 3,820 5,394
Debt of foreign subsidiaries:
Floating rate notes due April 1997 ............. 46,000 27,643
Floating rate notes due July 1997 .............. 10,557 15,689
7.00% notes due February 1998 .................. 5,098
Other foreign .................................. 12,772
---------- ----------
Total long-term debt ......................... 2,010,590 1,772,682
---------- ----------
$2,165,254 $1,843,780
========== ==========
<PAGE>
At February 29, 1996, February 28, 1995 and February 28, 1994, the weighted
average interest rate on commercial paper was 5.9%, 6.6% and 3.9%, respectively.
The weighted average interest rate of the short-term notes payable - foreign as
of February 29, 1996, February 28, 1995 and February 28, 1994 was 7.2%, 8.6% and
5.9%, respectively.
The primary source of financing for domestic vehicles is provided by a
vehicle trust. 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, together with security interests in certain other assets of
the trust. Additionally, the vehicle trust and 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 trust.
Pursuant to the agreement, the subordinated debt is to be provided by the
vehicle manufacturer finance companies and by Avis, Inc.
The $1 billion ESOP related tax advantaged vehicle trust financing consists
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 mandatory annual principal
reductions commencing in 1998. These notes are issued by the Company and are
guaranteed by the vehicle trust. As of February 29, 1996, February 28, 1995 and
February 28, 1994, the weighted average interest rate under these loans was
6.1%, 6.3% and 5.0%, respectively.
The vehicle trust financing consists of bank notes, commercial paper and
loans from insurance companies. The notes are issued by a group of banks under a
$850 million three year revolving credit facility, which expires on September
30, 1997. As of February 29, 1996, February 28, 1995 and February 28, 1994, the
weighted average interest rate of borrowings under this facility was 6.0%, 6.6%
and 4.2%, respectively.
As of February 29, 1996, $95,601,000 of vehicle manufacturer finance
companies subordinated debt is included in vehicle financing.
At February 29, 1996, the Company has a $67 million line of credit from a
non-affiliated vehicle manufacturer finance company which may be used for either
ESOP or vehicle trust financing. Of this facility, $60 million is available for
subordinated debt. As of February 29, 1996, the Company utilized $67 million of
this facility, of which $15,933,500 was subordinated. This facility requires a
fee of 1/4 of 1% on the unused portion.
In November 1992, the Company 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.
<PAGE>
The future minimum lease payments due under the Company's short and
long-term capital lease obligations in each of the succeeding years ending
February 28, together with the present value of minimum lease payments, are as
follows (in thousands):
1997.................................................. $22,192
1998.................................................. 41,500
-------
Total minimum lease payments ......................... 63,692
Less: interest .................................... 3,566
short-term capital lease obligation ......... 142
current portion of long-term capital
lease obligation ............................ 19,369
-------
Capital lease obligation - long term ................. $40,615
=======
Under the terms of the Company's loan agreements, the Company must maintain
a minimum net worth, minimum earnings and cash flow ratios. The most restrictive
covenant of certain of these agreements has a limitation on the total debt of
the Company.
Mandatory maturities of long-term obligations for each of the succeeding
years is as follows (in thousands):
February 28, 1997 ...................................... $ 78,337
February 28, 1998 ...................................... 528,842
February 28, 1999 ...................................... 366,806
February 29, 2000 ...................................... 130,096
February 28, 2001 ...................................... 123,377
Thereafter ............................................. 861,469
Other Credit Facilities
The Company has letters of credit/working capital agreements totaling
$102,549,000, which may be renewed biannually at its option and the banks'
discretion. The collateral for certain of these agreements consists of a lien on
property and equipment and certain receivables. At February 29, 1996 and
February 28, 1995, the Company has outstanding letters of credit amounting to
$53,627,000 and $34,303,000, respectively. There were no working capital loans
outstanding at February 29, 1996. At February 28, 1995, there were $15 million
of working capital loans outstanding. A facility fee of 1/4 of 1% on the unused
portion is required by the 1995 agreement.
In addition, for certain of its international operations, the Company has
available at February 29, 1996 and February 28, 1995, unused lines of credit of
$186,718,000 and $161,537,000, respectively. The unused lines of credit
agreements require a quarterly fee of 0.1% to 1.0% of the unused line.
<PAGE>
Note 9 - Income Taxes
The provision (benefit) for income taxes is comprised of the following (in
thousands):
Years Ended
---------------------------------
February February February
29, 1996 28, 1995 28, 1994
-------- -------- --------
Current:
State ................................. $ 2,477 $ 912 $ 504
Federal ............................... 98 22,545
Foreign ............................... 6,096 10,132 6,645
-------- -------- --------
8,573 11,142 29,694
-------- -------- --------
Deferred:
Federal ............................... 9,730 (1,299) (5,190)
Foreign ............................... 5,674 3,317 3,818
-------- -------- --------
15,404 2,018 (1,372)
-------- -------- --------
Provision for income taxes ................. 23,977 13,160 28,322
Less: Federal tax benefit of ESOP income
tax deductions credited to stock-
holders' equity under SFAS No. 109 (22,885) (6,627) (16,855)
-------- ------- --------
$ 1,092 $ 6,533 $ 11,467
======== ======== ========
The Company derives an income tax deduction for dividend distributions to
the ESOP. The ESOP repays the same amount to the Company to reduce the ESOP debt
due to the Company (see note 2).
<PAGE>
The effective income tax rate varies from the federal statutory income tax
rate due to the following:
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------------
February 29, 1996 February 28, 1995 February 28, 1994
------------------ --------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. federal income tax rate $ 12,267 35.0% $ (2,078) (35.0)% $ 18,133 35.0%
Tax effect of foreign operations ...... 3,546 10.1 2,760 46.4 4,207 8.1
Alternative minimum tax provision ..... 98 1.7 500 1.0
Amortization of cost in excess of net
assets acquired and other intangibles 4,094 11.7 4,410 74.2 4,331 8.4
Foreign dividends and withholding tax . 2,589 7.4 7,460 125.6 1,034 2.0
State income taxes, net of federal
tax benefit ......................... 1,610 4.6 593 10.0 328 0.6
Other ................................. (129) (0.4) (83) (1.3) (211) (0.4)
------- ---- ------ ----- ------- -----
Provision for income taxes ........ 23,977 68.4 13,160 221.6 28,322 54.7
------- ---- ------ ----- ------ ----
Tax benefit of ESOP income tax
deductions credited to stockholders'
equity under SFAS No. 109 .......... (22,885) (65.3) (6,627) (111.6) (16,855) (32.6)
------- ----- ------ ------ ------- -----
Effective income tax rate ............. $ 1,092 3.1% $ 6,533 110.0% $ 11,467 22.1%
======== === ======== ===== ======== ====
</TABLE>
<PAGE>
In accordance with SFAS 109, the deferred tax asset includes the following
(in thousands):
February February
29, 1996 28, 1995
-------- --------
Gross Deferred Tax Asset:
Public liability and property damage
book expense in excess of tax expense $ 66,151 $ 64,947
Other accrued expenses in excess of
tax expense ........................ 41,563 38,812
Net operating loss carryforward ........ 124,176 98,318
Alternative minimum income tax
credit carryover .................... 3,025 3,025
-------- --------
234,915 205,102
-------- --------
Gross Deferred Tax Liabilities:
Tax depreciation in excess of book
depreciation ......................... (133,579) (112,830)
Prepaids and other ..................... (10,497) (9,166)
--------- --------
(144,076) (121,996)
--------- --------
Valuation allowance .................... (30,395) (29,412)
--------- --------
Net deferred tax asset ................. $ 60,444 $ 53,694
========= =========
The Company has net operating loss carryforwards of $354,789,000,
$280,909,000 and $249,601,000 at February 29, 1996, February 28, 1995 and
February 28, 1994, respectively. The Company has alternative minimum tax net
operating loss carryforwards of $162,729,000, $85,422,000 and $37,879,000 at
February 29, 1996, February 28, 1995 and February 28, 1994, respectively. These
carryforwards expire in various years commencing February 28, 2003 through
February 28, 2011. The Company also has available unused investment tax credits
of approximately $5,834,000 which expire on February 28, 2002. The valuation
allowance is management's best estimate of the potential net operating loss
carryforwards which may expire before utilization.
<PAGE>
Deferred income taxes were not provided on accumulated undistributed
earnings of certain foreign subsidiaries of $30,308,000, $25,534,000 and
$21,842,000 at February 29, 1996, February 28, 1995 and February 28, 1994,
respectively, because such accumulated undistributed earnings are considered to
be permanently reinvested. If these amounts were not considered permanently
reinvested, additional deferred income taxes of approximately $13,246,000,
$11,138,000 and $9,524,000 would have been provided at February 29, 1996,
February 28, 1995 and February 28, 1994, respectively.
Note 10 - Redeemable Preferred Stock
The Company has authorized 2,500,000 shares each of Series A and Series B
$.01 par value cumulative, redeemable preferred stock at February 29, 1996 and
February 28, 1995. There are 186,986.8 shares, 233,733.5 shares and 233,733.5
shares of each series issued and outstanding at February 29, 1996, February 28,
1995 and February 28, 1994, respectively.
The preferred series A and B are subject to redemption at the option of the
Company, providing certain financial tests are met. The redemption price will
decline each succeeding September 25 by $.75 per share until September 25, 1997
when the redemption price will be fixed at $50 per share plus accrued dividends.
At February 29, 1996, the Company may redeem the preferred stock for $51.50 per
share plus accrued dividends. In addition, upon the occurrence of certain
events, including the sale of all or substantially all the common stock by the
Company, or the payment in full of its acquisition indebtedness (originally $395
million), the Company is required to redeem 20% of the outstanding preferred
stock on the anniversary of such an event and an equal amount in each of the
ensuing four years at a price of $50 per share plus accrued but unpaid
dividends. Since the acquisition indebtedness was paid in full in February 1995,
the Company is required to redeem 20% of the preferred stock by February 28,
1996 and annually thereafter to the year 2000 at a redemption price of $50 per
share plus accrued but unpaid dividends. During the year ended February 29,
1996, the Company redeemed 46,746.7 shares of each series of preferred stock.
All the preferred shares must be redeemed at $50 per share if there is a change
in control of the Company upon a sale of all or substantially all of the assets
of the Company or upon merger or other business combination.
Dividends are cumulative and are payable quarterly at an annual rate of 15%
of the liquidation preference amount. The Series B Preferred Stock is junior to
the Series A Preferred Stock as to the payment of dividends and liquidation
preferences.
In November 1992, the Board of Directors of the Company authorized the
issuance of up to 5,000,000 shares of Series C, $.01 par value, cumulative
redeemable preferred stock with a liquidation preference value of $18.68 per
share. At February 29, 1996, February 28, 1995 and February 28, 1994, there are
2,878,112, 2,889,057 and 2,889,057 shares of Series C preferred stock issued and
outstanding, respectively.
<PAGE>
The Company may, at its option, redeem the Series C Preferred Stock after
June 1, 2001 and is required to redeem all the Series C Preferred Stock
outstanding on May 30, 2004 in three equal annual installments commencing June
30, 2004 at a price equal to the liquidation preference value of $18.68 per
share plus accrued but unpaid dividends. In addition, the Company may, at its
option, redeem the Series C Preferred Stock upon the consummation of a primary
public offering and is required to redeem all the Series C Preferred Stock in
the event of the occurrence of certain major corporate transactions involving a
change in control, at a price equal to the lower of the liquidation preference
value or the fair market value of the common stock (as adjusted for any
recapitalization) plus, in either case, accrued but unpaid dividends.
Dividends on the Series C Preferred Stock are cumulative and are payable
quarterly in cash at an annual rate of 9.75% of the liquidation preference
value.
The Series C Preferred Stock ranks junior to the Series A and Series B
Preferred Stock and senior to the participating convertible preferred stock and
common stock, with respect to dividends and liquidation preference.
Note 11 - Participating Convertible Preferred Stock
The Company has authorized 15,000,000 shares of $.01 par value
participating convertible preferred stock. At February 29, 1996, February 28,
1995 and February 28, 1994, the Company has issued and outstanding 9,788,623
shares. Each share is convertible into one share of common stock of the Company
at the option of the holder. The stock is held by the General Motors Corporation
(described herein as an affiliated company or a vehicle manufacturer).
Note 12 - Common Stock
The Company has authorized 100,000,000 shares of $.01 par value common
stock. There are 29,042,916 shares issued at February 29, 1996, February 28,
1995 and February 28, 1994, of which 23,619,703, 23,619,828 and 23,705,524 are
outstanding and held by the ESOP trustee and former employees at February 29,
1996, February 28, 1995 and February 28, 1994, respectively. ESOP shares are
allocated for the account of employees, pro rata, as the ESOP acquisition debt
is repaid. At February 29, 1996, February 28, 1995 and February 28, 1994,
5,423,213, 5,423,088 and 5,337,392 shares are held as treasury stock,
respectively.
The Company is obligated under certain conditions to repurchase common
stock issued to employees and former employees to the extent legally required
and as permitted under the Company's loan agreements.
<PAGE>
Under the Company's loan agreements, the payment of cash dividends on its
common stock is restricted except where such dividends are used to retire ESOP
debt.
The unearned compensation represents the unamortized amount of deferred
compensation to be received by employees in the form of shares of the Company's
common stock, which they will receive from the ESOP. The initial amount of
unearned compensation ($395 million) generally represents cash proceeds of the
acquisition debt less amounts used to refinance existing debt.
In 1993, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." The SOP gives accounting guidance for shares acquired by the
ESOP after December 31, 1992 (new ESOP shares). The Company may continue to use
the earlier accounting rules to measure compensation expense for shares acquired
by the ESOP prior to December 31, 1992 (old ESOP shares).
Accordingly, as old ESOP shares are allocated to employees, compensation
expense is charged based on the amortization of the original unearned
compensation amount on a straight line basis over 25 years. As new ESOP shares
are allocated to employees, compensation expense is charged based on the fair
value of those shares. Unearned compensation is released based on the cost of
the shares acquired. Any difference between the cost and fair value of the
shares allocated is charged or credited to additional paid-in capital. Shares
are generally allocated annually in January for the prior calendar year.
The shares held by the ESOP and former employees are as follows:
February February February
29, 1996 28, 1995 28, 1994
---------- ---------- ----------
Shares held by the ESOP:
Unallocated shares:
Old ESOP shares ........... 14,465,131 15,333,722 16,175,629
New ESOP shares ........... 115,170
Allocated shares:
Old ESOP shares ........... 9,026,899 8,281,603 7,525,683
New ESOP shares ........... 5,680
Shares held by former employees .. 6,823 4,503 4,212
---------- ---------- ----------
Total outstanding ................ 23,619,703 23,619,828 23,705,524
========== ========== ==========
<PAGE>
The Company's common stock is redeemable at the option of the holders,
subject to certain significant vesting and other financial restrictions on the
Company. If however, all outstanding shares of the Company were fully vested,
the Company's maximum cash obligation related to these shares based upon the
annual valuation of the Company's common stock would have been approximately
$295,482,000, $213,523,000 and $425,751,000 at February 29, 1996, February 28,
1995 and February 28, 1994, respectively.
Redeemable Appraised Redeemable
Shares Value Portion of
Outstanding Per Share Common Stock
----------- --------- ------------
Balance March 1, 1993 ......... 27,065,557 $ 18.93 $512,350,994
============
Warrants exercised for
common stock ............... 599,452
Options exercised for
common stock ............... 77,462
Exchange of common shares
for Series C Preferred Stock (2,889,057)
Purchase of treasury shares ... (1,147,890)
------------
Balance February 28, 1994 ..... 23,705,524 $ 17.96 $425,751,211
============
Purchase of treasury shares ... (85,696)
------------
Balance February 28, 1995 ..... 23,619,828 $ 9.04 $213,523,245
============
Purchase of treasury shares ... (125)
------------
Balance February 29, 1996 ..... 23,619,703 $ 12.51 $295,482,485
=========== ============
<PAGE>
Note 13 - Long-Term Compensation Plan
In April 1993, the Company adopted a long-term compensation plan which took
the form of a unit appreciation rights plan. Under this plan, a total of 5
million units were eligible for distribution, with full vesting over a four year
period. At February 29, 1996, February 28, 1995 and February 28, 1994, there
were approximately 70,000, 4,000,000 and 4,000,000 appreciation units
outstanding, respectively, with no appreciation in value.
In 1995, the Board of Directors adopted a long-term compensation plan for
key management employees in the form of a stock appreciation rights plan which
substantially replaced the April, 1993 plan. A total of 5 million units are
eligible for distribution. The units granted to each participating employee
under a single grant shall vest in three equally proportioned allotments
(aggregating approximately 1.4 million each) to start on the third anniversary
of the date of grant, with all units to be fully vested on the fifth anniversary
of the grant or the occurrence of certain events including a change in control.
The value of each grant's units are measured by the fair market value of one
share of the Company's common stock on the date of grant ($9.04), such
measurement value being subject to a readjustment for the second and third
allotments based upon the fair market value of one share of common stock on the
first anniversary of the grant ($12.51 at January 1, 1996) and the second
anniversary of the grant (to be determined at January 1, 1997), respectively.
Under the Plan, the holder of each vested unit is entitled to receive in cash
the appreciation in the fair market value of one share of the Company's common
stock at the date of exercise over the measurement value. The exercise periods
expire in varying years through 2007. Compensation expense is recorded as the
fair market value of one share of the Company's common stock appreciates over
the grant price for each allotment. Approximately 4.3 million units are
outstanding at February 29, 1996 with none eligible for exercise. During the
year ended February 29, 1996, approximately $4.9 million was charged to expense
under this plan.
In addition, in 1995, the Company issued a "Management Long-Term Incentive
Plan" for certain key employees. The Plan is in the form of a performance unit
award. Income is charged and payment is determined by the performance ratio,
which is measured as a percentage of the increase in a share of the Company's
common stock, over the performance period (three fiscal years). At the
conclusion of the performance period, one-third of the payment will be made to
participants with the remaining two equal installments made on the first and
second anniversaries thereof. Generally, participants must be employees of the
Company at the time each installment is made. There are approximately 720,000
units outstanding at February 29, 1996, with a base value of $9.04 (the value of
one share of the Company's stock on March 1, 1995). The amount charged to
expense under this plan for the year ended February 29, 1996 was immaterial.
<PAGE>
Note 14 - Fair Value of Financial Instruments
The carrying value of the Company's financial instruments approximates fair
value except for debt and redeemable preferred stock and certain other financial
instruments which are not material. At February 29, 1996 and February 28, 1995,
the carrying value of debt and redeemable preferred stock is $2,237,663,000 and
$1,921,054,000 with fair values of approximately $2,255,250,000 and
$1,914,000,000, respectively. The fair value is estimated by reference to
various market data, including borrowing rates currently available to the
Company with similar terms and maturities.
Note 15 - Retirement Benefits
The Company 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. It also contributes to union sponsored pension plans.
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 years ended February 29, 1996, February 28, 1995 and February 28, 1994,
the cost of this plan was approximately $1,718,000, $1,625,000 and $1,477,000,
respectively. Included in the Investment Savings Plan, the Company sponsors a
defined contribution plan for substantially all non-union full-time employees
not otherwise covered. Employer contributions and costs for this plan are
determined as 2% of each covered employee's compensation. The cost of the plan
for the years ended February 29, 1996, February 28, 1995 and February 28, 1994
amounted to $1,798,000, $1,718,000 and $1,550,000, respectively.
In addition, the Company sponsors an Employee Stock Ownership Plan (ESOP).
The ESOP is a defined contribution retirement plan sponsored by Avis, Inc. and
its domestic subsidiaries. The Avis ESOP Committee is appointed by the Company's
Board of Directors to administer the ESOP.
In September 1987, the ESOP, through the use of funds borrowed from the
Company, purchased all of the then outstanding common stock of the Company. The
Company remits funds for payment of the ESOP debt principal and interest to the
ESOP in the form of contributions, distributions and dividends. The ESOP repays
principal and interest to the Company for the borrowed funds. As the ESOP repays
the amount borrowed plus interest, redeemable common stock is released and
allocated to the accounts of participants in the ESOP up to the deductible
amount permitted by the Internal Revenue Code. The common stock is held by the
ESOP trustee as collateral for the amount borrowed by the ESOP.
Most domestic non-union and certain union employees of the Company are
eligible to participate in the ESOP. Participants do not contribute to the ESOP.
A similar, nonqualified plan exists for certain employees ineligible to
participate in the ESOP. Units are allocated in a manner consistent with the
stock allocation for participants in the ESOP. Benefits are paid in cash to
terminated participants in a manner similar to distributions from the ESOP. The
measurement value of each unit is equivalent to one share of the Company's
common stock at the date of payment. There are approximately 532,000, 495,000
and 446,000 vested units outstanding at February 29, 1996, February 28, 1995 and
February 28, 1994, respectively. The amount charged to expense for the
nonqualified plan was immaterial for the years ended February 29, 1996, February
28, 1995 and February 28, 1994.
<PAGE>
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 after age 55
and for a joint and survivor annuity option.
The status of the U.S. defined benefit plans at February 29, 1996, February
28, 1995 and February 28, 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ----------------------
Salaried & Salaried & Salaried &
Hourly Hourly Hourly
Employees Employees Employees
as of June as of June as of June
30, 1985 Bargaining 30, 1985 Bargaining 30, 1995 Bargaining
----------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation ...... $ 37,864 $ 5,400 $ 27,871 $ 4,244 $ 26,800 $ 4,093
======== ======== ======== ======== ======== ========
Accumulated benefit obligation.. $ 42,182 $ 5,606 $ 30,682 $ 4,428 $ 29,800 $ 4,308
======== ======== ======== ======== ======== ========
Projected benefit obligation ... $ 58,695 $ 5,606 $ 44,550 $ 4,428 $ 46,500 $ 4,308
Plan assets at fair value .......... 52,294 4,572 44,408 3,653 40,230 3,505
-------- -------- -------- -------- -------- --------
Projected benefit obligation (in
excess of) plan assets ........... (6,401) (1,034) (142) (775) (6,270) (803)
Unrecognized net actuarial loss .... 4,635 453 939 80 4,642 258
Unrecognized prior service cost .... (2,749) 985 (3,047) 981 (3,387) 837
Additional minimum liability ....... (1,438) (1,061) (1,095)
-------- -------- -------- -------- ------- --------
Accrued pension cost ............... $ (4,515) $ (1,034) $ (2,250) $ (775) $ (5,015) $ (803)
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
At February 29, 1996, February 28, 1995 and February 28, 1994, the
measurement of the projected benefit obligation was based on a 7.5%, 8.5% and
7.5% assumed discount rate, respectively. Compensation increases were assumed at
a rate of 5.0%, at February 29, 1996, February 28, 1995 and February 28, 1994.
The assumed long-term rate of return on plan assets was 8.75% at February 29,
1996 and February 28, 1995 and 9.0% at February 28, 1994. The plan assets are
invested in corporate bonds, U.S. government securities and common stock mutual
funds.
Net pension cost for the defined benefit plans includes the following
components (in thousands):
Years Ended
------------------------------------
February February February
29, 1996 28, 1995 28, 1994
-------- -------- --------
Service cost ................... $ 2,508 $ 3,077 $ 2,538
Interest cost .................. 4,128 4,078 3,200
Actual return on plan assets ... (9,939) 7 (3,727)
Net amortization of actuarial
gains and prior service cost.. 5,288 (4,564) 404
Union contributions ............ 2,104 1,978 1,928
Foreign plans .................. 140 116 110
------- ------- -------
Net pension cost ............... $ 4,229 $ 4,692 $ 4,453
======= ======= =======
The Company also sponsors several foreign pension plans. The most
significant of these is the Canadian pension plan.
The status of the Canadian defined benefit plans at February 29, 1996,
February 28, 1995 and February 28, 1994 is as follows (in thousands):
1996 1995 1994
Canadian Canadian Canadian
Plan Plan Plan
-------- -------- --------
Actuarial present value of
benefit obligations:
Vested benefit obligation ............... $ 2,884 $ 2,872 $ 2,477
======= ======= =======
Accumulated benefit obligation .......... $ 2,884 $ 2,872 $ 2,477
======= ======= =======
Projected benefit obligation ............ $ 3,150 $ 3,138 $ 2,706
Plan assets at fair value ............... 7,275 6,250 6,264
------- ------- -------
Plan assets in excess of projected
benefit obligation .................... 4,125 3,112 3,558
Unrecognized net actuarial loss (gain)... (125) 597 65
Unrecognized net transition asset ....... (2,922) (2,993) (3,237)
------- ------- -------
Prepaid pension cost .................... $ 1,078 $ 716 $ 386
======= ======= =======
<PAGE>
At February 29, 1996, February 28, 1995 and February 28, 1994 the
measurement of the projected benefit obligation was based on a 9.5% assumed
discount rate. Compensation increases were assumed at a rate of 5.0%, at
February 29, 1996, February 28, 1995 and February 28, 1994. The assumed
long-term rate of return on plan assets was 9.50% at February 29, 1996, February
28, 1995 and at February 28, 1994. The plan assets are held in mutual funds
which are invested in Canadian stocks, bonds, real estate and money market
funds.
Net prepaid pension cost for the Canadian defined benefit plan includes the
following components (in thousands):
Years Ended
-----------------------------------
February February February
29, 1996 28, 1995 28, 1994
-------- -------- --------
Service cost ......................... $ 72 $ 97 $ 56
Interest cost ........................ 301 271 252
Expected return on plan assets........ (587) (586) (570)
Amortization of unrecognized
net asset at transition ............ (133) (133) (141)
------- ------ ------
Net prepaid pension cost ............. $(347) $(351) $(403)
======= ====== ======
Note 16 - Leases, Airport Concession Fees and Commitments
The Company is committed to make rental payments under noncancelable
operating leases relating principally to vehicle rental facilities and
equipment. Under certain leases, the Company is obligated to pay certain
additional costs, such as property taxes, insurance and maintenance. Airport
concession agreements usually require a guaranteed minimum amount plus
contingent fees which are generally based on a percentage of revenues. Operating
lease payments and airport concession fees charged to income amount to (in
thousands):
Years Ended
-------------------------------------
February February February
29, 1996 28, 1995 28, 1994
-------- -------- --------
Minimum fees .................. $117,766 $108,479 $103,360
Contingent fees ............... 59,687 46,390 43,720
-------- -------- --------
177,453 154,869 147,080
Less sublease rentals ......... 4,536 4,119 3,584
-------- -------- --------
$172,917 $150,750 $143,496
======== ======== ========
<PAGE>
Future minimum rental commitments under noncancelable operating leases
amounted to approximately $392,867,000 at February 29, 1996. The minimum rental
payments due in each of the succeeding five years are as follows (in thousands):
February 28, 1997 ........................... $ 95,175
February 28, 1998 ........................... 78,197
February 28, 1999 ........................... 50,066
February 29, 2000 .......................... 34,158
February 28, 2001 ........................... 25,930
Thereafter .................................. 109,341
At February 29, 1996, the Company has guaranteed up to $149,000 of an
affiliated company's credit facility obligation.
In addition to the Company's lease commitments, the Company has outstanding
purchase commitments of approximately $772 million and $588 million at February
29, 1996 and February 28, 1995, of which approximately $760 million and $561
million relate to vehicle purchases, respectively.
Note 17 - Related Party Transactions
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 "Due from affiliated company."
Under the terms of certain financing agreements with the General Motors
Corporation (General Motors), the Company is required to purchase a significant
percentage (70%) of its fleet from 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. At February 29, 1996, the Company has a $450 million line of credit
from General Motors which may be used for either ESOP or vehicle trust
financing. Of this facility, $300 million is available for subordinated debt. As
of February 29, 1996, the Company utilized $118 million of this facility, of
which $79,667,500 was subordinated. This facility requires a fee of 1/4 of 1% on
the unused portion.
The Company and Avis Europe, Plc cooperate jointly in marketing and
promotion activities, the exchange of reservations, the honoring of charge cards
and vouchers and the transfer of the related billings. In addition, the Company
provides certain data processing services to Avis Europe, Plc for which it
charged approximately $9.9 million, $9.2 million and $7.3 million for the years
ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively.
Two members of the Company's board of directors serve on the board of Avis
Europe Limited (formerly Cilva) (the parent company of Avis Europe, Plc) and one
member of the Avis Europe Limited board serves as a director of the Company.
<PAGE>
Note 18 - Segment Information
The Company operates in the United States and in foreign countries. The
operations within major geographic areas are summarized as follows (in
thousands):
February February February
29, 1996 28, 1995 28, 1994
----------- ----------- -----------
Revenues
United States .............. $ 1,504,484 $ 1,275,132 $ 1,195,556
Australia .................. 95,968 79,222 64,440
Canada ..................... 69,319 60,092 72,778
Other foreign operations ... 46,906 41,142 38,550
----------- ----------- -----------
Total ................ $ 1,716,677 $ 1,455,588 $ 1,371,324
=========== =========== ===========
Income (loss) before income taxes
United States .............. $ 2,015 $ (40,027) $ 16,726
Australia .................. 15,920 13,638 10,296
Canada ..................... 4,944 7,171 13,026
Other foreign operations ... 12,170 13,280 11,762
----------- ----------- -----------
Total ................ $ 35,049 $ (5,938) $ 51,810
=========== =========== ===========
Total assets at end of year
United States .............. $ 2,805,438 $ 2,466,962 $ 2,623,337
Australia .................. 113,093 90,732 58,212
Canada ..................... 115,849 90,226 108,152
Other foreign operations ... 170,073 151,341 135,002
----------- ----------- -----------
Total ................ $ 3,204,453 $ 2,799,261 $ 2,924,703
=========== =========== ===========
Note 19 - Purchase of Agency Rent A Car
On October 2, 1995, the Company acquired the rights to the name and certain
assets of Agency Rent A Car, Inc. (Agency), a company primarily engaged in the
insurance replacement rent a car business, for a total purchase price of $20.5
million. The acquisition has been accounted for as a purchase, and the results
of Agency have been included in the accompanying consolidated financial
statements since the date of acquisition. The cost of the acquisition has been
allocated on the basis of the estimated fair market value of the assets
acquired. This allocation resulted in goodwill of approximately $18 million,
which is being amortized over 40 years.
<PAGE>
The unaudited consolidated results of operations on a pro forma basis as
though Agency had been acquired as of the beginning of 1996 and 1995 are as
follows (in thousands):
Unaudited
--------------------------------------
February 29, 1996 February 28, 1995
----------------- -----------------
Net sales ................ 1,760,179 1,587,699
Income before income taxes 29,739 12,781
Net loss ................. (1,506) (15,700)
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the Agency acquisition been consummated as of the above dates, nor
are they necessarily indicative of the future operating results. The pro forma
results above reflect the operations of Agency during a period in which
significant downsizing was in effect. By the time of the acquisition of Agency
by the Company, Agency's operations were significantly reduced compared with the
periods presented above.
Note 20 - Litigation
There are various matters of litigation involving the Company and its
subsidiaries which have arisen during the normal course of operations. As
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 or its subsidiaries. In the opinion of management, the ultimate
liability, if any, resulting from these matters will not have a material adverse
effect on the Company's consolidated financial statements.
Note 21 - Subsequent Event - (unaudited)
A. Acquisition of Avis, Inc. - On October 17, 1996, HFS Incorporated
("HFS") completed the acquisition of all of the outstanding capital stock of the
Company, including payments under certain employee stock plans of the Company
and the redemption of certain series of preferred stock of the Company for an
aggregate $806.5 million. The purchase price was comprised of approximately
$367.2 million in cash, $100.9 million in indebtedness and $338.4 million
(approximately 4.6 million shares) in HFS common stock.
B. Litigation - On May 22, 1996 a complaint was filed in the United States
District Court for Eastern District of North Carolina against Avis Rent A Car
System, Inc. ("ARACS") and one of its licensees, New Hanover Rent-A-Car, Inc.
("New Hanover") alleging discrimination by New Hanover in the rental of
automobiles based on race. Plaintiff seeks an unspecified amount of compensatory
and punitive damages and a permanent injunction barring ARACS and New Hanover
from continuing to engage in illegally discriminatory conduct. ARACS has
asserted claims for indemnification against New Hanover and intends to
vigorously defend the complaint. ARACS believes that it has meritorious
defenses against the complaint. In the opinion of management, the ultimate
liability, if any, resulting from this matter will not have a material adverse
effect on the Company's consolidated financial position.
EXHIBIT 2
AVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
MAY 31, 1996 AND FEBRUARY 29, 1996
(In thousands)
(Unaudited)
May 31, February 29,
1996 1996
---------------------------
ASSETS
Cash and cash equivalents ........................ $ 75,122 $ 49,326
Accounts receivable, net ......................... 152,224 144,842
Due from affiliated company ...................... 44,098 75,635
Prepaid expenses ................................. 45,755 40,227
Vehicles, net .................................... 2,330,630 2,064,943
Property and equipment, net ...................... 150,538 146,429
Other assets ..................................... 165,881 176,368
Cost in excess of
fair value of net assets acquired .............. 503,037 506,883
----------- -----------
Total assets ................................ $ 3,467,285 $ 3,204,453
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................. $ 205,443 $ 181,920
Accrued liabilities .............................. 195,371 200,870
Current and deferred income taxes ................ 36,959 36,339
Public liability and property damage ............. 208,692 205,698
Debt ............................................. 2,262,223 2,043,143
Due to affiliated company ........................ 122,002 122,111
Redeemable preferred stock ....................... 72,412 72,409
Redeemable portion of common stock ............... 295,465 295,482
Unearned compensation ............................ (261,702) (263,024)
Participating convertible preferred stock ........ 132,000 132,000
Common stock ..................................... 290 290
Additional paid in capital ....................... 217,445 215,644
Treasury stock ................................... (102,269) (102,252)
Retained earnings ................................ 79,120 62,095
Foreign currency equity adjustment ............... 3,834 1,728
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity .. $ 3,467,285 $ 3,204,453
=========== ===========
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MAY 31, 1996 AND
MAY 31, 1995
(In thousands)
(Unaudited)
Three Months Ended
-------------------------
May 31, May 31,
1996 1995
--------- ----------
Revenues ......................................... $ 496,994 $ 394,258
--------- ---------
Cost and expenses:
Direct operating ............................... 210,611 167,225
Vehicle depreciation ........................... 90,746 84,208
Vehicle lease charges .......................... 36,924 34,446
Selling, general and administrative ............ 79,288 49,393
Interest ....................................... 37,971 34,456
Unrealized foreign exchange loss ................. 62
Amortization of unearned compensation -
Employee Stock Ownership Plan .................. 3,951 3,951
Amortization of cost in excess of fair value of net
assets acquired and other intangibles ............ 4,178 4,056
--------- ---------
Income before income taxes and preferred
stock dividends ................................ 33,325 16,461
Provision for income taxes ....................... 14,280 10,706
--------- ---------
Net income ....................................... 19,045 5,755
Preferred stock dividends ........................ (2,017) (2,192)
--------- ---------
Income available for common shares ............... $ 17,028 $ 3,563
========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MAY 31, 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Participating
Convertible
Common Stock Preferred Stock
----------------- ----------------- Foreign
Additional Additional Treasury currency
Par paid-in Par paid-in stock Retained equity
value capital value capital (at cost) earnings adjustment
----- --------- ----- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 1, 1996 ......................... $ 290 $ 215,644 $ 98 $ 131,902 $(102,252) $ 62,095 $ 1,728
Net income for the three months ended
May 31, 1996 ............................... 19,045
Tax benefit of ESOP income tax deductions
for the three months ended May 31, 1996 ..... 1,784
Foreign currency equity adjustment for the
three months ended May 31, 1996 ............. 2,106
Payment of common and preferred stock dividends (2,017)
Change in redeemable portion of common stock .. 17
Purchase of treasury stock (1,381 shares) ..... (17)
Appropriation for amortization of discount
from redemption value of preferred stock .... (3)
------ --------- ------ --------- --------- --------- ---------
Balance May 31, 1996 .......................... $ 290 $ 217,445 $ 98 $ 131,902 $(102,269) $ 79,120 $ 3,834
====== ========= ====== ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
AVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995
(In thousands)
Increase (decrease) in cash and cash equivalents
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
May 31, May 31,
1996 1995
---------- ---------
<S> <C> <C>
Net cash provided by operating activities ............... $ 149,485 $ 104,437
Cash flows from investing activities:
Payments for vehicle additions ...................... (734,439) (454,963)
Proceeds received from vehicle sales ............... 408,981 351,445
Payments for additions to property and equipment, net (8,276) (8,749)
--------- ---------
Net cash used in investing activities ................... (333,734) (112,267)
Cash flows from financing activities:
Increase in debt and due to affiliated company ...... 214,518 25,281
Increase in deferred debt issuance costs ............ (56) (391)
Payment of preferred stock dividends ................ (2,017) (2,192)
Purchase of treasury stock .......................... (17) (977)
Increase in unearned compensation ................... (2,629)
--------- ---------
Net cash provided by financing activities ............... 209,799 21,721
Effect of exchange rate changes on cash ................. 246 (72)
--------- ---------
Net increase in cash and cash equivalents ............... 25,796 13,819
Cash and cash equivalents at beginning of period ........ 49,326 36,643
--------- ---------
Cash and cash equivalents at end of period .............. $ 75,122 $ 50,462
========= =========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest .......................................... $ 29,997 $ 26,224
Income taxes ...................................... 3,539 2,157
</TABLE>
Disclosure of accounting policy: For purposes of reporting cash flows, the
Company considers deposits and short-term investments with an initial maturity
of three months or less to be cash equivalents. The effect of unrealized foreign
currency revaluations on the assets and liabilities of foreign foreign
subsidiaries has been eliminated. Changes in vehicles and vehicle related
accounts are included in the cash flows from investing activities. See
accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND MAY 31, 1995
(Unaudited)
Note 1 - Organization and Significant Accounting Policies
In 1987, the trust for the Employee Stock Ownership Plan (ESOP) of Avis,
Inc. (the Company) acquired all the outstanding common stock of Avis, Inc. This
transaction has been accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Accordingly, the purchase price has been
allocated based on the estimated fair value of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of the
Company's net assets is included in "Cost in excess of fair value of net assets
acquired" on the consolidated balance sheet.
The Company's primary business is the rental of automobiles. The
consolidated financial statements include the accounts of all majority-owned
subsidiaries of Avis, Inc. combined with related accounts of the ESOP and Prime
Vehicles Trust. Intercompany accounts and transactions among Avis, Inc., its
subsidiaries, the ESOP and Prime Vehicles Trust (Vehicle Trust) have been
eliminated. During the year ended February 29, 1996, the Company acquired the
rights to the name and certain assets of Agency Rent A Car, Inc., a company
primarily engaged in the insurance replacement car rental business. Investments
in associated companies in which the Company has a 20 percent or greater
interest are accounted for under the equity method of accounting. Generally
accepted accounting principles require the use of estimates, which are subject
to change, in the preparation of financial statements. Certain amounts of the
prior period have been reclassified for comparability.
The unaudited interim financial statements at May 31, 1996 and for the
three months ended May 31, 1996 and 1995 have been prepared in accordance with
generally accepted accounting principles, and in the opinion of the Company
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the interim period.
Note 2 - Gain on Sale of Leasehold Right
In April, 1996 the Company sold a leasehold right and recognized a pre-tax
gain of approximately $4.4 million.
<PAGE>
Note 3 - Vehicles
Vehicles are stated at cost, net of accumulated depreciation as follows (in
thousands):
May May
31, 1996 31, 1995
---------- -----------
Vehicles ............................... $ 2,663,301 $ 2,056,855
Accumulated depreciation ............... (332,671) (214,332)
----------- -----------
$ 2,330,630 $ 1,842,523
=========== ===========
Included in vehicles are vehicles acquired under long-term capital leases
of $25,795,000 and $42,992,000 (net of accumulated depreciation of $59,138,000
and $41,941,000) at May 31, 1996 and May 31, 1995, respectively.
Vehicles also include vehicles held for sale as follows (in thousands):
May May
31, 1996 31, 1995
-------- ---------
Vehicles held for sale ..................... $ 31,423 $ 17,884
Accumulated depreciation ................... (4,827) (2,219)
-------- --------
$ 26,596 $ 15,665
======== ========
Depreciation expense recorded for vehicles was $104,986,000 and
$89,384,000, net of a gain on disposal of vehicles of $14,240,000 and $5,176,000
for the three months ended May 31, 1996 and May 31, 1995, respectively.
<PAGE>
Note 4 - Income Taxes
The provision (benefit) for income taxes is comprised of the following (in
thousands):
Three Months Ended
------------------------
May 31, May 31,
1996 1995
--------- ---------
Current:
State ......................................... $ 546 $ 252
Foreign ....................................... 1,568 2,112
-------- --------
2,114 2,364
-------- --------
Deferred:
Federal ....................................... 11,282 6,956
Foreign ....................................... 884 1,386
-------- --------
12,166 8,342
-------- --------
Provision for income taxes ....................... 14,280 10,706
Less: Federal tax benefit of ESOP income tax
deductions credited to stockholders'
equity under SFAS No. 109 .............. (1,784) (1,912)
-------- --------
$ 12,496 $ 8,794
======== ========
The Company derives an income tax deduction for dividend distributions to
the ESOP. The ESOP repays the same amount to the Company to reduce the ESOP debt
due to the Company.
<PAGE>
The effective income tax rate varies from the federal statutory income tax
rate due to the following:
Three Months Ended
------------------------
May 31, May 31,
1996 1995
--------- --------
Statutory U.S. federal income tax rate ............... 35.0% 35.0%
Tax effect of foreign operations .................... 1.9 1.5
Amortization of cost in excess of net
assets acquired and other intangibles .............. 3.5 5.9
Foreign dividends and withholding tax ................ 0.6 21.3
State income taxes, net of federal
tax benefit ........................................ 0.9 0.9
Other ................................................ 1.0 0.4
----- ------
Provision for income taxes ....................... 42.9 65.0
----- ------
Tax benefit of ESOP income tax
deductions credited to stockholders'
equity under SFAS No. 109 (5.4) (11.6)
------ -------
Effective income tax rate ....... .................... 37.5% 53.4%
====== =======
Note 5 - Subsequent Event
On October 17, 1996, HFS Incorporated ("HFS") completed the acquisition of
all of the outstanding capital stock of the Company, including payments under
certain employee stock plans of the Company and the redemption of certain series
of preferred stock of the Company for an aggregate $806.5 million. The purchase
price was comprised of approximately $367.2 million in cash, $100.9 million in
indebtedness and $338.4 million (approximately 4.6 million shares) in HFS common
stock.
Note 6 - Litigation
On May 22, 1996 a complaint was filed in the United States District Court
for Eastern District of North Carolina against Avis Rent A Car System, Inc.
(ARACS) and one of its licensees, New Hanover Rent-A-Car, Inc. (New Hanover)
alleging discrimination by New Hanover in the rental of automobiles based on
race. Plaintiff seeks an unspecified amount of compensatory and punitive damages
and a permanent injunction barring ARACS and New Hanover from continuing to
engage in illegally discriminatory conduct. ARACS has asserted claims for
indemnification against New Hanover and intends to vigorously defend the
complaint. ARACS believes that it has meritorious defenses against the
complaint. In the opinion of management, the ultimate liability, if any,
resulting from this matter will not have a material adverse effect on the
Company's consolidated financial position.
EXHIBIT 99.3
AVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AUGUST 31, 1996 AND FEBRUARY 29, 1996
(In thousands)
(Unaudited)
August 31, February 29,
1996 1996
---------------------------
ASSETS
Cash and cash equivalents ........................ $ 75,683 $ 49,326
Accounts receivable, net ......................... 174,047 144,842
Due from affiliated company ...................... 114,976 75,635
Prepaid expenses ................................. 45,296 40,227
Vehicles, net .................................... 2,567,517 2,064,943
Property and equipment, net ...................... 151,854 146,429
Other assets ..................................... 154,035 176,368
Cost in excess of
fair value of net assets acquired .............. 499,143 506,683
----------- -----------
Total assets ................................ $ 3,782,551 $ 3,204,453
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................. $ 231,159 $ 181,920
Accrued liabilities .............................. 208,669 200,870
Current and deferred income taxes ................ 39,609 36,339
Public liability and property damage ............. 215,135 205,698
Debt ............................................. 2,488,651 2,043,143
Due to affiliated company ........................ 132,563 122,111
Redeemable preferred stock ....................... 72,416 72,409
Redeemable portion of common stock ............... 295,465 295,482
Unearned compensation ............................ (257,751) (263,024)
Participating convertible preferred stock ........ 132,000 132,000
Common stock ..................................... 290 290
Additional paid in capital ....................... 220,401 215,644
Treasury stock ................................... (102,269) (102,252)
Retained earnings ................................ 103,339 62,095
Foreign currency equity adjustment ............... 2,874 1,728
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity .. $ 3,782,551 $ 3,204,453
=========== ===========
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND
AUGUST 31, 1995
(In thousands)
(Unaudited)
Six Months Ended
-------------------------
August 31, August 31,
1996 1995
--------- ----------
Revenues ......................................... $1,069,005 $ 851,724
--------- ---------
Cost and expenses:
Direct operating ............................... 454,302 353,413
Vehicle depreciation ........................... 199,927 186,257
Vehicle lease charges .......................... 74,080 67,358
Selling, general and administrative ............ 163,559 109,460
Interest ....................................... 80,938 72,365
Unrealized foreign exchange loss ................. - 471
Amortization of unearned compensation -
Employee Stock Ownership Plan .................. 7,902 7,902
Amortization of cost in excess of fair value of net
assets acquired and other intangibles ............ 8,355 8,112
--------- ---------
Income before income taxes and preferred
stock dividends ................................ 79,942 46,386
Provision for income taxes ....................... 35,363 24,948
--------- ---------
Net income ....................................... 44,579 21,438
Preferred stock dividends ........................ (3,328) (4,384)
--------- ---------
Income available for common shares ............... $ 41,251 $ 17,054
========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
AVIS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 31, 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Participating
Convertible
Common Stock Preferred Stock
----------------- ----------------- Foreign
Additional Additional Treasury currency
Par paid-in Par paid-in stock Retained equity
value capital value capital (at cost) earnings adjustment
----- --------- ----- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 1, 1996 ......................... $ 290 $ 215,644 $ 98 $ 131,902 $(102,252) $ 62,095 $ 1,728
Net income for the six months ended
August 31, 1996 ............................... 44,579
Tax benefit of ESOP income tax deductions
for the six months ended August 31, 1996 ..... 4,740
Foreign currency equity adjustment for the
six months ended August 31, 1996 ............. 1,146
Payment of common and preferred stock dividends (3,328)
Change in redeemable portion of common stock .. 17
Purchase of treasury stock (1,381 shares) ..... (17)
Appropriation for amortization of discount
from redemption value of preferred stock .... (7)
------ --------- ------ --------- --------- --------- ---------
Balance August 31, 1996 ....................... $ 290 $ 220,401 $ 98 $ 131,902 $(102,269) $ 103,339 $ 2,874
====== ========= ====== ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
AVIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND AUGUST 31, 1995
(In thousands)
Increase (decrease) in cash and cash equivalents
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
August 31, August 31,
1996 1995
------------ ----------
<S> <C> <C>
Net cash provided by operating activities ............... $ 362,655 $ 232,207
Cash flows from investing activities:
Payments for vehicle additions ...................... (1,518,932) (1,066,329)
Proceeds received from vehicle sales ............... 750,245 549,648
Payments for additions to property and equipment, net (14,379) (14,962)
---------- -----------
Net cash used in investing activities ................... (783,066) (531,643)
Cash flows from financing activities:
Increase in debt and due to affiliated company ...... 452,714 318,387
Increase in deferred debt issuance costs ............ (98) (1,530)
Payment of preferred stock dividends ................ (3,328) (4,384)
Purchase of treasury stock .......................... (17) -
Increase in unearned compensation ................... (2,629) (1,092)
-------- ---------
Net cash provided by financing activities ............... 446,642 311,381
Effect of exchange rate changes on cash ................. 126 (34)
--------- ---------
Net increase in cash and cash equivalents ............... 26,357 11,911
Cash and cash equivalents at beginning of period ........ 49,326 36,643
--------- ---------
Cash and cash equivalents at end of period .............. $ 75,683 $ 48,554
========= =========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest .......................................... $ 78,717 $ 69,621
Income taxes ...................................... 5,355 3,204
</TABLE>
Disclosure of accounting policy: For purposes of reporting cash flows, the
Company considers deposits and short-term investments with an initial maturity
of three months or less to be cash equivalents. The effect of unrealized foreign
currency revaluations on the assets and liabilities of foreign subsidiaries has
been eliminated. Changes in vehicles and vehicle related accounts are included
in the cash flows from investing activities. See accompanying notes to the
consolidated financial statements.
<PAGE>
AVIS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and Significant Accounting Policies
In 1987, the trust for the Employee Stock Ownership Plan (ESOP) of Avis,
Inc. (the Company) acquired all the outstanding common stock of Avis, Inc. This
transaction has been accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Accordingly, the purchase price has been
allocated based on the estimated fair value of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of the
Company's net assets is included in "Cost in excess of fair value of net assets
acquired" on the consolidated balance sheet.
The Company's primary business is the rental of automobiles. The
consolidated financial statements include the accounts of all majority-owned
subsidiaries of Avis, Inc. combined with related accounts of the ESOP and Prime
Vehicles Trust. Intercompany accounts and transactions among Avis, Inc., its
subsidiaries, the ESOP and Prime Vehicles Trust (Vehicle Trust) have been
eliminated. During the year ended February 29, 1996, the Company acquired the
rights to the name and certain assets of Agency Rent A Car, Inc., a company
primarily engaged in the insurance replacement car rental business. Investments
in associated companies in which the Company has a 20 percent or greater
interest are accounted for under the equity method of accounting. Generally
accepted accounting principles require the use of estimates, which are subject
to change, in the preparation of financial statements. Certain amounts of the
prior period have been reclassified for comparability.
The unaudited interim financial statements at August 31, 1996 and for the
six months ended August 31, 1996 and 1995 have been prepared in accordance with
generally accepted accounting principles, and in the opinion of the Company
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the interim period.
Note 2 - Gain on Sale of Leasehold Right
In April, 1996 the Company sold a leasehold right and recognized a pre-tax
gain of approximately $4.4 million.
<PAGE>
Note 3 - Vehicles
Vehicles are stated at cost, net of accumulated depreciation as follows (in
thousands):
August August
31, 1996 31, 1995
---------- -----------
Vehicles ............................... $ 2,946,820 $ 2,435,234
Accumulated depreciation ............... (379,303) (307,896)
----------- -----------
$ 2,567,517 $ 2,127,338
=========== ===========
Included in vehicles are vehicles acquired under long-term capital leases
of $21,496,000 and $38,693,000 (net of accumulated depreciation of $63,437,000
and $46,240,000) at August 31, 1996 and August 31, 1995, respectively.
Vehicles also include vehicles held for sale as follows (in thousands):
August August
31, 1996 31, 1995
-------- ---------
Vehicles held for sale ..................... $ 26,572 $ 23,873
Accumulated depreciation ................... (4,145) (3,693)
-------- --------
$ 22,427 $ 20,180
======== ========
Depreciation expense recorded for vehicles was $199,927,000 and
$186,257,000, net of a gain on disposal of vehicles of $31,109,000 and
$9,461,000 for the six months ended August 31, 1996 and August 31, 1995,
respectively.
<PAGE>
Note 4 - Income Taxes
The provision (benefit) for income taxes is comprised of the following (in
thousands):
Six Months Ended
------------------------
August 31, August 31,
1996 1995
--------- ---------
Current:
State ......................................... $ 1,092 $ 704
Foreign ....................................... 2,852 3,789
-------- --------
3,944 4,493
-------- --------
Deferred:
Federal ....................................... 27,255 17,106
Foreign ....................................... 4,164 3,349
-------- --------
31,419 20,455
-------- --------
Provision for income taxes ....................... 35,363 24,948
Less: Federal tax benefit of ESOP income tax
deductions credited to stockholders'
equity under SFAS No. 109 .............. (4,740) (6,482)
-------- --------
$ 30,623 $ 18,466
======== ========
The Company derives an income tax deduction for dividend distributions to
the ESOP. The ESOP repays the same amount to the Company to reduce the ESOP debt
due to the Company.
<PAGE>
The effective income tax rate varies from the federal statutory income tax
rate due to the following:
Six Months Ended
------------------------
August 31 August 31
1996 1995
--------- --------
Statutory U.S. federal income tax rate ............... 35.0% 35.0%
Tax effect of foreign operations .................... 4.9 5.6
Amortization of cost in excess of net
assets acquired and other intangibles .............. 2.7 4.8
Foreign dividends and withholding tax ................ 0.5 7.0
State income taxes, net of federal
tax benefit ........................................ 0.9 1.0
Other ................................................ 0.2 0.4
----- ------
Provision for income taxes ....................... 44.2 53.8
----- ------
Tax benefit of ESOP income tax
deductions credited to stockholders'
equity under SFAS No. 109 (5.9) (14.0)
------ -------
Effective income tax rate ....... .................... 38.3% 39.8%
====== =======
Note 5 - Subsequent Event
On October 17, 1996, HFS Incorporated ("HFS") completed the acquisition of
all of the outstanding capital stock of the Company, including payments under
certain employee stock plans of the Company and the redemption of certain series
of preferred stock of the Company for an aggregate $806.5 million. The purchase
price was comprised of approximately $367.2 million in cash, $100.9 million in
indebtedness and $338.4 million (approximately 4.6 million shares) in HFS common
stock.
Note 6 - Litigation
On May 22, 1996 a complaint was filed in the United States District Court
for Eastern District of North Carolina against Avis Rent A Car System, Inc.
(ARACS) and one of its licensees, New Hanover Rent-A-Car, Inc. (New Hanover)
alleging discrimination by New Hanover in the rental of automobiles based on
race. Plaintiff seeks an unspecified amount of compensatory and punitive damages
and a permanent injunction barring ARACS and New Hanover from continuing to
engage in illegally discriminatory conduct. ARACS has asserted claims for
indemnification against New Hanover and intends to vigorously defend the
complaint. ARACS believes that it has meritorious defenses against the
complaint. In the opinion of management, the ultimate liability, if any,
resulting from this matter will not have a material adverse effect on the
Company's consolidated financial position.
