- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K/A
AMENDMENT NO. 1
TO CURRENT REPORT ON FORM 8-K DATED FEBRUARY 27, 1996
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 27, 1996
Team Rental Group, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-23962 59-3227576
-------- ------- ----------
(State of incorporation) (Commission File Number) (IRS Employer Identification No.)
</TABLE>
125 Basin Street
Daytona Beach, Florida 32114
---------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 238-7035
Not Applicable
-----------------------------------------------------------------------------
(Former name or former address, if changed since last report)
- -------------------------------------------------------------------------------
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
The following audited financial statements of Arizona
Rent-a-Car Systems, Inc., together with a manually signed
independent auditors report thereon and the notes thereto,
are included in Exhibit 99.2:
(i) Independent Auditor's Report;
(ii) Consolidated Balance Sheets as of February 29, 1996
and February 28, 1995;
(iii) Consolidated Statements of Loss and Retained
Earnings for the Years Ended February 29, 1996 and
February 28, 1995;
(iv) Consolidated Statements of Cash Flows for the Years
Ended February 29, 1996 and February 28, 1995;
(v) Notes to Consolidated Financial Statements;
(vi) Independent Auditor's Report;
(vii) Consolidated Balance Sheets as of February 28, 1995
and 1994;
(viii) Consolidated Statements of Income and Retained
Earnings for the Years Ended February 28, 1995 and
1994;
(ix) Consolidated Statements of Cash Flows for the Years
Ended February 28, 1995 and 1994; and
(x) Notes to Consolidated Financial Statements.
(b) Pro Forma Financial Information.
The unaudited Pro Forma Combined Consolidated Financial
Statements of the Registrant for the year ended December 31,
1995, and the notes thereto, are included in Exhibit 99.3.
(c) Exhibits.
*2.1 Stock Purchase Agreement by and among Registrant,
Arizona Rent-a-Car Systems, Inc., David Katzin, Bob
Katzin, Jon David Katzin, Gabrielle de Lavigne, the
David Katzin Irrevocable Trust (dated November 17,
1989), and Katzin Investments L.C., dated as of
December 21, 1995. The Exhibits and Disclosure
Schedules which are referenced in the table of
contents and elsewhere in the Stock Purchase
Agreement are hereby incorporated by reference.
Such Exhibits and Disclosure Schedules have been
omitted for purposes of this filing, but will be
furnished to the Commission supplementally upon
request.
*4.1 Registration Rights Agreement among Team Rental
Group, Inc. and Katzin Investments L.C., dated
February 27, 1996.
23.1 Consent of Michael Silver & Company
- --------
*Previously filed.
<PAGE>
*99.1 Text of Press Release of Team Rental Group, Inc.,
dated February 28, 1996.
99.2 Financial Statements of Arizona Rent-a-Car Systems,
Inc., as described in Item 7(a) of this Form 8-K/A.
99.3 Unaudited Pro Forma Financial Statements
(Unaudited) of the Registrant, as described in Item
7(b) of this Form 8-K/A.
- --------
*Previously filed.
<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.
TEAM RENTAL GROUP, INC.
Registrant
Date: May 13, 1996 By: Donald Norwalk
------------------------------
Donald Norwalk
Vice President and Treasurer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER AND DESCRIPTION PAGE
- ------------------------------ ----
<C> <S> <C>
*2.1 Stock Purchase Agreement by and among Registrant, Arizona Rent-a-Car
Systems, Inc., David Katzin, Bob Katzin, Jon David Katzin, Gabrielle de
Lavigne, the David Katzin Irrevocable Trust (dated November 17, 1989),
and Katzin Investments L.C., dated as of December 21, 1995. The Exhibits
and Disclosure Schedules which are referenced in the table of contents and
elsewhere in the Stock Purchase Agreement are hereby incorporated by
reference. Such Exhibits and Disclosure Schedules have been omitted for
purposes of this filing, but will be furnished to the Commission
supplementally upon request.
*4.1 Registration Rights Agreement among Team Rental Group, Inc. and Katzin
Investments L.C., dated February 27, 1996.
23.1 Consent of Michael Silver & Company
*99.1 Text of Press Release of Team Rental Group, Inc., dated February 28,
1996.
99.2 Financial Statements of Arizona Rent-a-Car Systems, Inc., as
described in Item 7(a) of this Form 8-K/A.
99.3 Unaudited Pro Forma Financial Statements (Unaudited) of the
Registrant, as described in Item 7(b) of this Form 8-K/A.
</TABLE>
- -----------------------------------
* Previously filed.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our auditors reports
dated May 3, 1996 (covering the years ended February 29, 1996 and February 28,
1995), and April 28, 1995 (covering the years ended February 28, 1995 and
1994) for Arizona Rent-A-Car Systems, Inc. into the registration statement on
Form S-8 of Team Rental Group, Inc.
Michael Silver & Company
Certified Public Accountants
Skokie, Illinois
May 13, 1996
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Arizona Rent-A-Car Systems, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Arizona
Rent-A-Car Systems, Inc. and Subsidiary as of February 28, 1995 and 1994, and
the related consolidated statements of income and retained earnings, and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Arizona
Rent-A-Car Systems, Inc. and Subsidiary as of February 28, 1995 and 1994, and
the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Michael Silver & Company
Certified Public Accountants
Skokie, Illinois
April 28, 1995
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28,
ASSETS
<TABLE>
<CAPTION>
1995 1994
-------------- ------------
<S> <C> <C>
Cash ....................................................... $ 775,430 $ 947,274
Accounts receivable (less allowance for doubtful accounts
of $82,549 in 1995 and $60,473 in 1994) ................... 5,339,915 5,437,417
Used vehicle inventory ..................................... 1,392,111 1,755,424
Prepaid expenses ........................................... 2,042,836 1,451,118
Other assets ............................................... 276,850 222,964
Goodwill, net of amortization .............................. 448,400 468,005
Cash surrender value of officer's life insurance .......... 182,271 --
Refundable income taxes .................................... 997,862 --
Other intangibles, net of amortization ..................... 39,777 57,014
-------------- ------------
11,495,452 10,339,216
-------------- ------------
Rental vehicles ............................................ 80,731,269 82,383,566
Less: accumulated depreciation ............................ 5,011,996 6,146,561
-------------- ------------
75,719,273 76,237,005
-------------- ------------
Net property and equipment ................................. 7,024,680 7,016,851
-------------- ------------
TOTAL ASSETS ............................................. $ 94,239,405 $93,593,072
============== ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES
Cash overdraft ...................................... $ 952,572 $ --
Notes payable -- rental vehicles .................... 76,694,826 76,816,488
Notes payable -- floor plan ......................... 1,026,837 1,062,089
Notes payable -- other .............................. 1,488,123 1,682,473
Accounts payable -- trade ........................... 1,191,664 1,501,909
Accounts payable -- other ........................... 49,496 150,735
Accrued expenses .................................... 1,468,983 1,191,223
Self-insurance reserve .............................. 1,330,592 1,373,192
Other liabilities ................................... 642,246 611,145
Income taxes payable ................................ -- 349,786
Deferred income taxes ............................... 2,175,000 1,495,000
------------- ------------
TOTAL LIABILITIES .................................. 87,020,339 86,234,040
------------- ------------
STOCKHOLDERS' EQUITY
Common stock -- no par value; 2,000 shares
authorized;
667 shares issued and outstanding .................. 66,668 66,668
Additional paid-in capital .......................... 493,343 493,343
Retained earnings ................................... 6,659,055 6,799,021
------------- ------------
TOTAL STOCKHOLDERS' EQUITY ......................... 7,219,066 7,359,032
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $94,239,405 $93,593,072
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED FEBRUARY 28,
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
REVENUE ................................. $ 70,707,352 $ 65,337,758
DIRECT EXPENSES ......................... 45,979,404 39,116,367
-------------- --------------
GROSS PROFIT ............................ 24,727,948 26,221,391
OPERATING EXPENSES ...................... 24,916,491 24,871,689
-------------- --------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES ....................... (188,543) 1,349,702
PROVISION (BENEFIT) FOR INCOME TAXES ... (48,577) 765,062
-------------- --------------
NET INCOME (LOSS) ....................... (139,966) 584,640
RETAINED EARNINGS, BEGINNING OF YEAR ... 6,799,021 6,214,381
-------------- --------------
RETAINED EARNINGS, END OF YEAR .......... $ 6,659,055 $ 6,799,021
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28,
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) .............................................. $ (139,966) $ 584,640
--------------- ---------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ................................ 14,102,116 16,998,106
Gain on sale of rental vehicles .............................. (2,570,157) (7,723,219)
Increase/(decrease) in deferred income taxes ................. 680,000 80,000
Changes in operating assets and liabilities:
(Increase)/decrease in:
Accounts receivable ........................................ 97,502 (644,853)
Used vehicle inventory ..................................... 363,313 (1,755,424)
Prepaid expenses ........................................... (591,718) (542,748)
Other assets ............................................... (68,874) 5,731
Cash surrender value of officer's life insurance ........... (182,271) --
Refundable income taxes .................................... (997,862) --
Increase/(decrease) in:
Cash overdraft ............................................. 952,572 (2,062,023)
Accounts payable, accrued expenses and other liabilities (145,223) 1,022,845
Income taxes payable ....................................... (349,786) 334,962
--------------- ---------------
TOTAL ADJUSTMENTS ......................................... 11,289,612 5,713,377
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 11,149,646 6,298,017
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of rental vehicles ....................... 82,437,479 95,772,476
Purchases of rental vehicles ................................ (104,331,473) (83,613,922)
Purchases of property and equipment ......................... (676,201) (1,290,798)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (22,570,195) 10,867,756
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of debt .............................. 107,866,534 91,765,451
Payment of debt ............................................. (96,582,577) (109,161,886)
Net borrowings of notes payable -- floor plan ............... (35,252) 1,062,089
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,248,705 (16,334,346)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH .................................. (171,844) 831,427
CASH -- BEGINNING OF YEAR ........................................ 947,274 115,847
--------------- ---------------
CASH -- END OF YEAR .............................................. $ 775,430 $ 947,274
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ....................................................... $ 5,140,244 $ 4,137,690
=============== ===============
Income taxes ................................................... $ 619,071 $ 350,100
=============== ===============
</TABLE>
Non-cash investing and financing activities:
The Company acquired vehicles under capital lease agreements totalling
$7,841,772 and $22,657,544 in the years ended February 28, 1995 and 1994,
respectively. The Company also disposed of vehicles, with a net book value of
$19,441,741, under capital lease agreements during the year ended February
28, 1995.
The accompanying notes are an integral part of these financial statements.
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Arizona
Rent-A-Car Systems, Inc. and BRAC Car Sales, Inc., a wholly owned subsidiary
(the Company). All significant inter-company accounts and transactions have
been eliminated.
Arizona Rent-A-Car Systems, Inc. operates as the exclusive licensee of
Budget Rent-A-Car Corporation for the state of Arizona. The Company is
obligated to pay certain monthly fees and meet certain other requirements
defined in the agreement. BRAC Car Sales, Inc. commenced operations on May 1,
1993 and is a retailer of used vehicles in the Phoenix, Arizona metropolitan
area.
Rental vehicles, and property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over
their useful lives ranging from three to thirty-nine and one-half years.
Used vehicle inventory is recorded at the lower of cost or market using
the specific identification method.
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets acquired and is being amortized using the
straight-line method over forty years. Other intangibles represent
acquisition costs of sub-franchisees allocated to franchise agreements,
customer lists and other items, and are being amortized on the straight-line
method over their estimated lives, ranging from five to ten years.
Deferred income taxes are provided in amounts sufficient to give effect to
timing differences between financial and tax reporting, principally related
to depreciation of rental vehicles and property and equipment, self-insurance
reserves and income tax credit carryforwards.
Certain amounts reflected on the financial statements for 1994 have been
reclassified to the presentation for 1995 without affecting the amounts
previously reported for net income or stockholders' equity.
NOTE 2 -- CHANGE IN ACCOUNTING ESTIMATE
During the year ended February 28, 1995, the Company revised the estimated
rate of depreciation of capital assets. If the Company would have continued
to use the prior depreciation rates the Company's net loss before income
taxes would have been increased by approximately $750,000.
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of February 28:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Trade .................................. $ 1,953,290 $2,316,137
Unbilled revenues ...................... 929,271 922,065
Vehicle sales -- rental ................ 2,342,215 1,881,904
Vehicle purchase incentives ............ 140,337 315,940
Warranty and maintenance ............... 57,351 61,844
------------- -------------
Total ................................ 5,422,464 5,497,890
Less: allowance for doubtful accounts 82,549 60,473
------------- -------------
ACCOUNTS RECEIVABLE .................. $ 5,339,915 $5,437,417
============= =============
</TABLE>
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1995 AND 1994
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of February 28:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Land ............................................. $ 1,303,267 $ 1,303,267
Buildings ........................................ 3,493,293 3,327,168
Leasehold improvements ........................... 1,604,578 1,443,023
Furniture and fixtures ........................... 433,965 414,713
Signs ............................................ 201,776 174,336
Equipment ........................................ 2,682,713 2,412,604
Computer software ................................ 658,193 626,837
------------- -------------
10,377,785 9,701,948
Less: accumulated depreciation and amortization 3,353,105 2,685,097
------------- -------------
NET PROPERTY AND EQUIPMENT ..................... $ 7,024,680 $ 7,016,851
============= =============
</TABLE>
Depreciation expense on property and equipment was $668,252 and $618,015
for the years ended February 28, 1995 and 1994, respectively.
NOTE 5 -- NOTES PAYABLE -- RENTAL VEHICLES
Following is a summary of notes payable -- rental vehicles as of
February 28:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Notes payable ............. $ 68,829,854 $ 54,525,008
Capital lease obligations 7,864,972 22,291,480
-------------- --------------
Total ................... $ 76,694,826 $ 76,816,488
============== ==============
</TABLE>
Notes payable are short-term borrowings with various lenders under
financing commitments totalling $115,000,000 and $145,000,000 at February 28,
1995 and 1994, respectively. The note agreements provide for principal
payments ranging from 1 1/2 % to 3% of the original note balance per month,
but may be accelerated upon the occurrence of certain events including the
sale of vehicles. The notes bear interest on formulas based on prime or the
federal reserve 30-day direct commercial paper rate. The rates ranged from
8.55% to 10.75% and 6.00% to 6.75% as of February 28, 1995 and 1994,
respectively. The notes are secured by rental vehicles and all inventories
and receivables. The Company is responsible for certain financial ratios
under the terms of their loan agreements. Waivers have been granted for those
ratios not satisfied as of February 28, 1995. One lender, whose line of
credit was $25,000,000 and had outstanding borrowings of $20,702,528 at
February 28, 1995, has subsequently advised the Company that they will no
longer fund any additional borrowings.
The Company has signed an inter-creditor agreement with all of its vehicle
lenders. This agreement generally provides for the prioritizing of debt
repayment and security interests.
The Company also entered into a capital lease agreement on December 1,
1994 to acquire rental vehicles up to an aggregate obligation of $20,000,000.
This agreement calls for lease terms, determined on an individual vehicle
basis, of six months with no additional vehicle leases allowed to be entered
into after February 28, 1995. The Company is obligated to make monthly rental
payments which are computed in a manner similar to that used in determining
the principal and interest payments due under the Company's lending agreement
with this lessor. At the conclusion of the lease, the Company is guaranteeing
certain residual values as defined in the lease.
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1995 AND 1994
NOTE 5 -- NOTES PAYABLE -- RENTAL VEHICLES (Continued)
The Company is accounting for this lease as a capital lease whereby upon
lease inception it records the cost of the related rental vehicles and the
entire lease obligation including the residual guarantee.
Following is a summary of vehicles under this capital lease as of February
28:
<TABLE>
<CAPTION>
1995 1994
------------- --------------
<S> <C> <C>
Vehicle cost ................... $ 7,975,860 $ 22,063,770
Less: accumulated depreciation 213,818 532,963
------------- --------------
Net .......................... $ 7,762,042 $ 21,530,807
============= ==============
</TABLE>
Interest expense on this debt and capital lease obligation was $5,081,542
and $3,893,650 for the years ended February 28, 1995 and 1994, respectively.
NOTE 6 -- NOTES PAYABLE -- OTHER
Notes payable -- other consisted of the following as of February 28:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Mortgages on various real estate properties requiring monthly
principal payments of $28,950 plus interest. These debts
have expiration dates ranging from 1996 to 1998, are secured
by the related properties, and bear interest at rates
ranging from 9.25% to 11.75% and 6.25% to 8.75% as of
February 28, 1995 and 1994, respectively .................... $ 1,165,859 $ 1,496,839
Loan from stockholder (See Note 8) ........................... 322,264 100,674
Notes payable on insurance premiums was secured by unearned
premiums and unpaid claims, and beared interest at 6.61% as
of February 28, 1994 ........................................ -- 84,960
------------- -------------
TOTAL NOTES PAYABLE -- OTHER ............................... $ 1,488,123 $ 1,682,473
============= =============
</TABLE>
The Company entered into a $2,000,000 line of credit agreement whereby it
may borrow up to such amount for reasons other than the purchase of rental
vehicles. The agreement calls for principal payment on demand, interest
payment at prime rate plus 1% and is collateralized by a blanket lien on the
assets of the Company. No amounts were outstanding as of February 28, 1995.
Interest expense on the above debt was $145,645 and $166,133 for the years
ended February 28, 1995 and 1994, respectively; of which $16,512 and $12,894
was related to the loan from stockholder for the years ended February 28,
1995 and 1994, respectively.
NOTE 7 -- NOTES PAYABLE -- FLOOR PLAN
The Company entered into an agreement whereby it may borrow up to
$4,000,000 for the purpose of acquiring used vehicles for resale. The
agreement calls for per vehicle limitations based on the value and age of the
vehicles, monthly interest payments at prime rate plus .75%, 9.75% as of
February 28, 1995 and prime rate plus 1 1/2 %, 7 1/2 % as of February 28,
1994, and is collateralized by the financed vehicles, virtually all other
assets of BRAC Car Sales, Inc. and a personal guarantee of the majority
stockholder of Arizona Rent-A-Car Systems, Inc. The Company incurred interest
expense of $146,007 and $87,991 under this loan during the years ended
February 28, 1995 and 1994, respectively.
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1995 AND 1994
NOTE 8 -- TRANSACTIONS WITH RELATED PARTIES
The Company is obligated under a promissory note payable to the principal
stockholder. This note is due on demand and bears interest at the prime rate
plus .50%.
The Company leases certain facilities from related entities. These leases
expire in September 1995 and January 2003, and require base monthly rentals
of $30,000. The Company is responsible for additional rentals based on a
percentage of monthly revenues in excess of those defined in the leases, as
well as real estate taxes. Rent expense on these locations was $590,050 and
$531,689 for the years ended February 28, 1995 and 1994, respectively. The
amount for the year ended February 28, 1995 includes sublease rentals of
$48,000 and an accrued loss on subleases of $21,600.
NOTE 9 -- SELF-INSURANCE RESERVE
The Company self-insures a substantial portion of its vehicle liability
insurance claims. The Company has recorded a self-insurance reserve of
$1,330,592 and $1,373,192 as of February 28, 1995 and 1994, respectively as
its estimate of loss exposure for claims incurred, but not settled as of
those dates.
NOTE 10 -- INCOME TAXES
The components of the provision (benefit) for income taxes are as follows
for the years ended February 28:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
Current ..................................................... $ (730,000) $ 685,062
Deferred .................................................... 681,423 80,000
--------------- ---------------
PROVISION (BENEFIT) FOR INCOME TAXES ....................... $ (48,577) $ 765,062
=============== ===============
The deferred tax liability consisted of the following as of February 28:
1995 1994
--------------- ---------------
Net deferred tax liabilities resulting primarily from tax
and financial reporting differences in recording
depreciation on rental vehicles and property and equipment $ (4,345,000) $ (3,145,000)
Net deferred tax asset resulting primarily from
nondeductible self-insurance reserves, bad debt allowances
and deferred compensation .................................. 695,000 700,000
Net deferred tax asset resulting from net operating loss and
credit carryforwards ....................................... 1,475,000 950,000
--------------- ---------------
NET DEFERRED TAX LIABILITY ................................ $ (2,175,000) $ (1,495,000)
=============== ===============
</TABLE>
As of February 28, 1995, the Company had alternative minimum tax credit
carryforward for income tax purposes of approximately $990,000, which has an
indefinite carryforward period, and general business tax credit carryovers of
approximately $280,000, which expire through 2001.
The income tax provisions for the years ended February 28, 1995 and 1994
do not bear the customary relationship to the federal statutory rate due to
state taxes, permanent nondeductible expenses and adjustments to the
estimates used in computing the income tax provision for the previous year.
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1995 AND 1994
NOTE 11 -- LEASE COMMITMENTS
The Company is leasing certain location facilities from related entities
under leases that expire in September 1995 and January 2003 (See Note 8).
The Company leases the land for its major airport facility from the city
of Phoenix under a noncancellable lease expiring in the year 2004. The base
annual rental is $160,860 with annual increases based on changes in the
Consumer Price Index.
The Company has a license to operate as an auto rental agency in the
Phoenix Sky Harbor International Airport which expires on October 31, 2000.
Rents due under this agreement are the greater of 10% of gross receipts, or
annual minimum rentals of $2,612,000. In addition, the Company is leasing
parking space and other related facilities for $325,000 per year.
The Company leases additional rental locations on a month-to-month basis
which call for payment of fixed amounts and contingent percentage rentals.
Future minimum lease payments under all operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
FEBRUARY 28
- ---------------------------------
<S> <C>
1996 ............................ $ 3,150,660
1997 ............................ 3,091,692
1998 ............................ 3,074,660
1999 ............................ 3,074,660
2000 ............................ 3,074,660
Thereafter ...................... 3,211,449
------------
$18,677,781
============
</TABLE>
Total minimum future rental payments have not been reduced by $96,000 of
sublease rentals to be received in the future under non-cancelable subleases.
Total rent expense on all operating leases for rental locations was
$3,910,171 and $3,820,532 for the years ended February 28, 1995 and 1994,
respectively.
NOTE 12 -- RETIREMENT PLANS
The Company has a defined contribution employee profit sharing plan. All
employees of the Company are eligible upon satisfying entrance requirements.
Contributions, not to exceed 15% of qualified compensation, are at the
discretion of management. The Company made no contribution for the year ended
February 28, 1995. The Company's contribution to the Plan was $100,000 for
the year ended February 28, 1994.
The Company has also instituted a 401(k) retirement plan whereby all
eligible employees may make contributions to the Plan. The Plan also provides
for discretionary Company contributions. The Company made contributions of
$29,179 and $28,977 during the years ended February 28, 1995 and 1994,
respectively.
NOTE 13 -- STOCK REPURCHASE AND BUY/SELL AGREEMENTS
The Company has entered into a stock redemption agreement with its
principal stockholder. This agreement provides, that upon the death of its
principal stockholder, his stock may be purchased by the Company for a price
defined in the agreement.
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1995 AND 1994
NOTE 13 -- STOCK REPURCHASE AND BUY/SELL AGREEMENTS (Continued)
The Company also has entered into buy/sell agreements with two minority
stockholders, which provide that in the event of death of either of these
stockholders, the Company is given the option to purchase all of their
Company stock under terms provided in the agreement.
NOTE 14 -- OTHER CONTINGENCIES
As of February 28, 1995, cash deposits in certain banks exceeded Federal
Deposit Insurance Corporation insured limits by approximately $930,000.
NOTE 15 -- SUBSEQUENT EVENTS
On May 1, 1995 BRAC Car Sales Inc., the subsidiary of the Company, ceased
operations. A formal plan to dispose of all of the subsidiary's assets has
not yet been adopted. The loss on disposal cannot be estimated within
reasonable limits at this time. The Company has reported unaudited losses for
the period of March 1, 1995 through April 30, 1995 of approximately $120,000.
The balance sheet of the subsidiary was comprised of the following as of
February 28, 1995:
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash ....................................... $ 475,124
Used vehicle inventories ................... 1,356,716
Accounts receivable and other assets ...... 376,620
Net property and equipment ................. 393,283
-------------
TOTAL ASSETS .............................. $ 2,601,743
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable .............................. $ 1,026,837
Intercompany payable ....................... 2,229,473
Other liabilities .......................... 351,312
-------------
TOTAL LIABILITIES ......................... 3,607,622
-------------
Stockholder's Equity ....................... (1,005,879)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 2,601,743
=============
</TABLE>
The subsidiary had future minimum lease rentals as follows:
<TABLE>
<CAPTION>
YEARS ENDING
FEBRUARY 28
- ---------------------------------
<S> <C>
1996 ............................ $ 288,000
1997 ............................ 288,000
1998 ............................ 288,000
1999 ............................ 288,000
2000 ............................ 288,000
Thereafter ...................... 840,000
-----------
$2,280,000
===========
</TABLE>
These future minimum lease rentals have not been offset by existing
subleases for $96,000.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Arizona Rent-A-Car Systems, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Arizona
Rent-A-Car Systems, Inc. and Subsidiary as of February 29, 1996 and February
28, 1995, and the related consolidated statements of loss and retained
earnings, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Arizona
Rent-A-Car Systems, Inc. and Subsidiary as of February 29, 1996 and February
28, 1995, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of computing depreciation for rental vehicles in 1996.
Michael Silver & Company
Certified Public Accountants
Skokie, Illinois
May 3, 1996
- 1 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
Cash $ 571,229 $ 775,430
Trade and vehicle receivables (net of allowance for
doubtful accounts of $315,790 in 1996 and $82,549
in 1995) 3,065,846 5,339,915
Used vehicle inventory - 1,392,111
Prepaid expenses 1,307,981 2,042,836
Other assets 83,127 276,850
Goodwill, net of amortization 428,795 448,400
Cash surrender value of officer's life insurance - 182,271
Refundable income taxes - 997,862
Deferred income taxes 245,000 -
Other intangibles, net of amortization 28,543 39,777
----------- -----------
5,730,521 11,495,452
----------- -----------
Rental vehicles 73,180,666 80,731,269
Less: accumulated depreciation 6,244,501 5,011,996
--------- ---------
66,936,165 75,719,273
----------- -----------
Net property and equipment 5,405,884 7,024,680
----------- -----------
TOTAL ASSETS $78,072,570 $94,239,405
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 2 -
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
LIABILITIES
Cash overdraft $ - $ 952,572
Notes payable - rental vehicles 68,007,223 76,694,826
Notes payable - floor plan - 1,026,837
Notes payable - other - 1,488,123
Accounts payable and accrued expenses 2,305,055 2,710,143
Vehicle self-insurance reserve 2,298,193 1,330,592
Other liabilities 1,990,644 642,246
Income taxes payable 50,000 -
Deferred income taxes - 2,175,000
----------- -----------
TOTAL LIABILITIES 74,651,115 87,020,339
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - no par value; 2,000 shares authorized;
667 shares issued and outstanding 66,668 66,668
Additional paid-in capital 493,343 493,343
Retained earnings 2,861,444 6,659,055
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,421,455 7,219,066
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $78,072,570 $94,239,405
=========== ===========
</TABLE>
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF LOSS AND RETAINED EARNINGS
FOR THE YEARS ENDED,
<TABLE>
<CAPTION>
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
REVENUE $47,336,796 $51,426,907
DIRECT EXPENSES 30,038,855 28,417,172
------------ ------------
GROSS PROFIT 17,297,941 23,009,735
OPERATING EXPENSES 22,186,578 22,631,939
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (4,888,637) 377,796
PROVISION (BENEFIT) FOR INCOME TAXES (1,879,216) 96,423
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (3,009,421) 281,373
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGING TO
DIFFERENT DEPRECIATION METHOD (LESS APPLICABLE TAXES
OF $215,000 - SEE NOTE 2) (335,000) --
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,344,421) 281,373
LOSS FROM DISCONTINUED OPERATIONS (LESS APPLICABLE
INCOME TAXES OF $180,000 IN 1996 AND $145,000 IN 1995) (283,358) (421,339)
------------ ------------
NET LOSS (3,627,779) (139,966)
RETAINED EARNINGS, BEGINNING OF YEAR 6,659,055 6,799,021
DIVIDEND PAID TO STOCKHOLDER (169,832) --
------------ ------------
RETAINED EARNINGS, END OF YEAR $ 2,861,444 $ 6,659,055
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED,
<TABLE>
<CAPTION>
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss $ (3,627,779) $ (139,966)
------------ ------------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 15,491,522 14,102,116
(Gain) loss on sale of rental vehicles and property and equipment 136,670 (2,570,157)
Deferred income taxes (2,420,000) 680,000
Changes in operating assets and liabilities:
(Increase)/decrease in:
Trade and vehicle receivables 2,274,069 97,502
Used vehicle inventory 1,392,111 363,313
Prepaid expenses 734,855 (591,718)
Other assets 14,521 (68,874)
Cash surrender value of officer's life insurance -- (182,271)
Refundable income taxes 997,862 (997,862)
Increase/(decrease) in:
Cash overdraft (952,572) 952,572
Accounts payable, accrued expenses and other liabilities 1,910,911 (145,223)
Income taxes payable 50,000 (349,786)
------------ ------------
TOTAL ADJUSTMENTS 19,629,949 11,289,612
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,002,170 11,149,646
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
February 29,1996 February 28, 1995
---------------------- ----------------------
<S> <C> <C>
Cash flows from investing activities:
Proceeds from sale of rental vehicles 75,476,655 82,437,479
Purchases of rental vehicles (58,351,448) (104,331,473)
Purchases of property and equipment (114,415) (676,201)
-------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 17,010,792 (22,570,195)
---------- ------------
Cash flows from financing activities:
Proceeds from issuance of debt 74,548,204 107,866,534
Payment of debt (106,738,530) (96,582,577)
Net payments of notes payable - floor plan (1,026,837) (35,252)
---------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (33,217,163) 11,248,705
----------- ----------
NET DECREASE IN CASH (204,201) (171,844)
CASH - BEGINNING OF YEAR 775,430 947,274
------- -------
CASH - END OF YEAR $ 571,229 $ 775,430
============ ==============
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 5,455,298 $ 5,140,244
============= ==============
Income taxes $ (902,078) $ 619,071
============= ==============
</TABLE>
Non-cash investing and financing activities:
The Company acquired vehicles under capital lease agreements
totaling $30,398,220 and $7,841,772 in the years ended
February 29, 1996 and February 28, 1995, respectively. The
Company also disposed of vehicles, with a net book value of
approximately $7,000,000 and $19,400,000, under capital lease
agreements during the years ended February 29, 1996 and
February 28, 1995, respectively.
The Company distributed a non-cash dividend to its former stockholder
totaling $169,832 during the year ended February 29, 1996. This dividend
consisted of assets in excess of liabilities owed to the former
stockholder.
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Arizona Rent-A-Car Systems, Inc. (the
Company) is engaged in the business of the daily rental of vehicles,
including cars, trucks and passenger vans. The Company operates as
the exclusive licensee of Budget Rent-A-Car Corporation (BRAC) for
the state of Arizona. The Company is obligated to pay certain monthly
fees and meet certain other requirements defined in the license
agreement.
On February 27, 1996, Team Rental Group, Inc. (TEAM) purchased all of
the outstanding stock of the Company. TEAM owns and operates Budget
vehicle rental franchises granted by BRAC.
BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of the Company and BRAC Car Sales, Inc. , a wholly-owned
subsidiary of the Company. BRAC Car Sales, Inc. ceased operations in
May 1995 and their financial results have been reflected in the
financial statements as discontinued operations for 1996 and 1995.
All significant inter-company accounts and transactions have been
eliminated.
USE OF ESTIMATES -The preparation of financial statements in
conformity with generally accepted accounting principles requires
Company management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
RENTAL VEHICLES - Rental vehicles are stated at cost less related
discounts and are depreciated over their estimated economic lives or
at rates corresponding to manufacturers' repurchase program
guidelines, where applicable. Depreciation rates range from 1% to 3%
per month. Management periodically reviews depreciable lives and
rates based on a variety of factors including general economic
conditions and estimated holding periods of the vehicles. Gains and
losses upon the sale of rental vehicles are recorded as an adjustment
to depreciation expense.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is being provided on the straight-line and accelerated
methods over the following estimated useful lives:
Buildings 31 years
Equipment, furniture and fixtures 3 - 10 years
Capital leases and leasehold
improvements lesser of estimated useful lives or
terms of related leases
- 5 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
GOODWILL AND OTHER INTANGIBLES - Goodwill represents the excess of
purchase price over the fair value of identifiable net assets
acquired and is being amortized using the straight-line method over
forty years. Other intangibles represent acquisition costs of
sub-franchisees allocated to franchise agreements, customer lists and
other items, and are being amortized on the straight-line method over
their estimated lives, ranging from five to ten years.
VEHICLE SELF INSURANCE RESERVE - At February 29, 1996, the Company
has automobile liability insurance coverage of up to $1,000,000 with
a $300,000 retention per occurrence with respect to personal injury
and damage claims arising from the use of its vehicles . The Company
estimates and records reserves on all reported claims. The Company
provides reserves on claims incurred but not reported based on
actuarial estimates. The actuarially determined reserves are
necessarily based on estimates, and while management believes that
the amounts are adequate, the ultimate liability may be in excess of,
or less than, the amounts provided. Such estimates are reviewed and
evaluated in light of emerging claim experience and existing
circumstances. Any changes in estimates from this review process are
reflected in operations currently.
ADVERTISING, PROMOTION AND SELLING - Advertising, promotion and
selling expenses are charged to expense as incurred. The Company
incurred advertising expense of $334,956 and $521,387 in 1996 and
1995, respectively.
INCOME TAXES - Deferred income taxes are provided in amounts
sufficient to give effect to timing differences between financial and
tax reporting, principally related to depreciation of rental vehicles
and property and equipment, self-insurance reserves and income tax
credit carryforwards.
RECLASSIFICATIONS - Certain reclassifications have been made to the
1995 consolidated statements to conform to the 1996 presentation.
NOTE 2 - CHANGE IN DEPRECIATION METHOD OF RENTAL VEHICLES
Depreciation of rental vehicles has been computed using the number of
days method for the year ended February 29, 1996. Depreciation in
prior years was computed using the number of months method. The new
method of depreciation was adopted to more accurately reflect the
holding cost of rental vehicles. Pro-forma amounts have not been
included due to immateriality.
- 6 -
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
<TABLE>
February 29, 1996 February 28, 1995
---------------------- ----------------------
<S> <C> <C>
Land $1,303,267 $1,303,267
Buildings 1,679,408 1,679,408
Leasehold improvements 3,101,331 3,418,463
Furniture and fixtures 881,205 433,965
Signs 174,312 201,776
Equipment 2,112,153 2,682,713
Computer software 650,947 658,193
------- -------
9,902,623 10,377,785
Less: accumulated depreciation and amortization
4,496,739 3,353,105
--------- ---------
NET PROPERTY AND EQUIPMENT $5,405,884 $7,024,680
========== ==========
</TABLE>
Effective March 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires that long-lived assets and certain identifiable assets be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts of these assets may not be
recoverable. Upon adoption of this standard, the Company reduced the
useful lives for certain leasehold improvements due to changes in the
business climate. This change resulted in an increase in amortization
expense of approximately $720,000 for the year ended February 29,
1996. This is included in Operating Expenses in the 1996 Statements
of Loss and Retained Earnings. Depreciation and amortization expense
on property and equipment was $1,427,844 and $640,986 for the years
ended February 29, 1996 and February 28, 1995, respectively.
- 7 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 4 - NOTES PAYABLE - RENTAL VEHICLES
Following is a summary of notes payable - rental vehicles as of:
<TABLE>
<CAPTION>
February 29, 1996 February 28, 1995
---------------------- ----------------------
<S> <C> <C>
Notes payable $37,477,566 $68,829,854
Capital lease obligation - TEAM 30,472,334 --
Capital lease obligation - Other 57,323 7,864,972
----------- -----------
Total $68,007,223 $76,694,826
=========== ===========
</TABLE>
Notes payable are short-term borrowings with various lenders. The
note agreements provide for principal payments ranging from 1-1/2% to
3% of the original note balance per month, but may be accelerated
upon the occurrence of certain events including the sale of vehicles.
The notes bear interest on formulas based on prime or the federal
reserve 30-day direct commercial paper rate. The rates ranged from
8.85% to 10.75% and 8.55% to 10.75% as of February 29, 1996 and
February 28, 1995, respectively. The notes are secured by rental
vehicles and all inventories and receivables. The Company is
responsible for maintaining certain financial ratios under the terms
of their loan agreements, of which certain of these ratios have not
been satisfied at February 29, 1996. Waivers have been granted or the
obligations subsequently satisfied for those ratios not satisfied.
In December 1995, the Company entered into an arrangement to lease
vehicles from TEAM under a capital lease. Lease payments are
calculated based on TEAM's borrowing interest rate and depreciation
equal to the manufacturers' depreciation rates. The Company entered
into another capital lease agreement in December 1994 to acquire
rental vehicles with no additional vehicle leases allowed after
February 28, 1995. The Company is obligated to make monthly rental
payments which are computed in a manner similar to that used in
determining the principal and interest payments due under the
Company's lending agreement with this lessor. The Company is
accounting for both of these lease arrangements as capital leases
whereby upon lease inception it records the cost of the related
rental vehicles and the entire lease obligation, including the
residual guarantee.
- 8 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 4 - NOTES PAYABLE - RENTAL VEHICLES (Continued)
Following is a summary of vehicles under these capital leases as of:
<TABLE>
<CAPTION>
February 29, 1996 February 28, 1995
---------------------- ----------------------
<S> <C> <C>
Vehicle cost $30,435,084 $7,975,860
Less: accumulated depreciation 672,132 213,818
------- -------
Net $29,762,952 $7,762,042
=========== ==========
</TABLE>
Interest expense on the vehicle notes payable and capital lease obligations
was $5,361,313 and $5,081,542 for the years ended February 29, 1996 and
February 28, 1995, respectively.
Depreciation expense for rental vehicles was approximately $13,770,000 and
$13,382,000 for the years ended February 29, 1996 and February 28, 1995,
respectively, including amortization for vehicles under capital leases.
NOTE 5 - NOTES PAYABLE - OTHER
Notes payable - other consisted of the following as of:
<TABLE>
<CAPTION>
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
Mortgages on real estate properties requiring
monthly principal payments of $28,950 plus
interest at rates ranging from 9.25% to
11.75% as of February 28, 1995. this debt
was paid by TEAM in 1996 (See Note 10). $ -- $ 1,165,859
Loan from former stockholder requiring
interest payments of prime plus .50%. This
loan was repaid concurrent with the sale of
the Company to TEAM. -- 322,264
-------- -----------
TOTAL NOTES PAYABLE - OTHER $ -- $ 1,488,123
======== ===========
</TABLE>
Interest expense on the above debt was $136,131 and $145,645 for the years
ended February 29, 1996 and February 28, 1995, respectively; of which $31,478
and $16,512 was related to the loan from stockholder for the years ended
February 29, 1996 and February 28, 1995, respectively.
- 9 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 6 - INCOME TAXES
The components of the provision (benefit) for income taxes are as follows for
the years ended:
<TABLE>
<CAPTION>
February 29, 1996 February 28, 1995
----------------- -----------------
<S> <C> <C>
Current $ 145,784 $ (730,000)
Deferred (2,420,000) 681,423
----------- ------------
PROVISION (BENEFIT) FOR INCOME TAXES $(2,274,216) $ (48,577)
=========== ============
The deferred tax asset (liability) consisted of the following as of:
February 29, 1996 February 28, 1995
----------------- -----------------
Net deferred tax liabilities resulting primarily
from tax and financial reporting differences
in recording depreciation on rental vehicles
and property and equipment $(1,645,000) $ (4,345,000)
Net deferred tax asset resulting primarily
from nondeductible self-insurance reserves,
bad debt allowances and deferred
compensation 1,210,000 695,000
Net deferred tax asset resulting from net
operating loss and credit carryforwards 680,000 1,475,000
----------- ------------
NET DEFERRED TAX ASSET (LIABILITY) $ 245,000 $ (2,175,000)
=========== ============
</TABLE>
As of February 29, 1996, the Company had an alternative minimum tax credit
carryforward for income tax purposes of approximately $400,000, which has an
indefinite carryforward period, and general business tax credit carryovers of
approximately $225,000, which expire through 2001.
The income tax provisions for the years ended February 29, 1996 and February
28, 1995 do not bear the customary relationship to the federal statutory rate
due to state taxes, permanent nondeductible expenses and adjustments to the
estimates used in computing the income tax provision for the previous year.
- 10 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 7 - FACILITY LEASE COMMITMENTS
The Company leases the land for its major airport facility from the
city of Phoenix under a noncancellable lease expiring in the year
2004. The base annual rental is $160,860 with annual increases based
on changes in the Consumer Price Index.
The Company has a license to operate as an auto rental agency in the
Phoenix Sky Harbor International Airport which expires on October 31,
2000. Rents due under this agreement are the greater of 10% of gross
receipts, or annual minimum rentals of $2,612,000. In addition, the
Company is leasing parking space and other related facilities for
$325,000 per year.
The Company also leases facilities from former stockholders (see Note
10).
The Company leases additional rental locations on a month-to-month
basis which call for payment of fixed amounts and contingent percentage
rentals.
Future minimum lease payments under all operating leases are as
follows:
Years Ending February 28:
-------------------------
1997 $ 2,875,692
1998 2,910,660
1999 2,936,660
2000 2,936,660
2001 2,029,993
Thereafter 565,955
-----------
$14,255,620
-----------
Total rent expense on all operating leases for rental locations was
$3,819,189 and $3,910,171 for the years ended February 29, 1996 and
February 28, 1995, respectively.
NOTE 8 - RETIREMENT PLANS
The Company has a defined contribution employee profit sharing plan.
All employees of the Company are eligible upon satisfying entrance
requirements. Contributions, not to exceed 15% of qualified
compensation, are at the discretion of management. The Company did
not make contributions in 1996 and 1995.
- 11 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 8 - RETIREMENT PLANS (Continued)
The Company has also instituted a 401(k) retirement plan whereby all
eligible employees may make contributions to the Plan. The Plan also
provides for discretionary Company contributions. The Company made
contributions of $18,307 and $29,179 during the years ended February
29, 1996 and February 28, 1995, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
As of February 29, 1996, cash deposits in certain banks exceeded
Federal Deposit Insurance Corporation insured limits by approximately
$535,000.
At February 29, 1996 and February 28, 1995, the Company has recorded
approximately $650,000 and $450,000, respectively, for the potential
settlement costs of various claims. It is reasonably possible that
there may be a change in this estimate in the near term.
NOTE 10 - TRANSACTIONS WITH RELATED PARTIES
Under the terms of sale of the Company's stock to TEAM, the former
stockholders accepted promissory notes which are collateralized by
the stock of the Company.
The Company leases a facility from these former stockholders. This
lease expires in September 2000, and requires base monthly rentals of
$6,000. The Company is responsible for additional rents based on a
percentage of monthly revenues in excess of those defined in the
leases, as well as real estate taxes. Rent expense on this location
was $302,799 and $310,744 for the years ended February 29, 1996 and
February 28, 1995, respectively.
The Company also leased facilities associated with BRAC Car Sales,
Inc. from the former principal stockholder. This lease was canceled
in 1995 (See Note 11). Rent expense on these locations was $136,204
and $279,306 for the years ended February 29, 1996 and February 28,
1995, respectively.
Upon acquiring the Company, TEAM satisfied the outstanding real estate notes.
This payable to TEAM of $852,422 at February 29, 1996 is included in Other
Liabilities on the Balance Sheets.
- 12 -
<PAGE>
ARIZONA RENT-A-CAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 11 - DISCONTINUED OPERATIONS
On May 1, 1995, BRAC Car Sales Inc. ceased operations. The Company
had leased facilities associated with this operation from the former
principal stockholder. These lease obligations were canceled by this
stockholder in 1995. In addition, this stockholder purchased the
leasehold improvements and certain other assets of BRAC Car Sales,
Inc. at their net book values. The used vehicle inventories were sold
and the related flooring notes were satisfied with the lenders. All
other assets and liabilities of BRAC Car Sales, Inc. were assumed by
the Company. Any losses incurred after the disposal date are
considered to be losses from operations of the discontinued segment,
and are included in the accompanying financial statements.
- 13 -
UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
As of December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Adjustments
for the
Historical Phoenix Acquisition Pro Forma
---------- ------- ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents 357 571 (4,917)(1) (3,989)
Restricted cash 67,731 67,731
Trade and vehicle receivables, net of allowances
for doubtful accounts of $2,297 20,928 3,066 23,994
Accounts receivable, related parties 61 61
Vehicle inventory 8,938 8,938
Revenue earning vehicles, net 219,927 66,936 286,863
Property and equipment, net 12,503 5,406 17,909
Deferred financing fees, net of accumulated
amortization of $425 2,266 2,266
Franchise rights, net of accumulated
amortization of $1,500 46,670 429 14,223 (2) 61,322
Other Assets 6,942 1,665 8,607
---------- ------------- ----------- ----------
Total 386,323 78,073 9,306 473,702
LIABILITES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable 318,233 68,008 10,000 (3) 396,241
Capital lease obligations 784 784
Accounts payable 14,698 2,305 17,003
Accrued and other liabilities 9,315 4,339 13,654
Deferred income taxes 1,701 - 1,701
---------- ------------- ----------- ----------
Total liabilities 344,731 74,652 10,000 429,383
COMMITMENTS AND CONTINGENCIES
COMMON STOCK WARRANT 2,000 2,000
---------- ------------- ----------- ----------
STOCKHOLDERS' EQUITY
Common stock 72 67 (65)(4) 74
Additional paid-in-capital 41,984 493 2,232 (5) 44,709
Accumulated deficit (2,134) 2,861 (2,861)(4) (2,134)
Treasury stock (330) (330)
---------- ------------- ----------- ----------
Total stockholders' equity 39,592 3,421 (694) 42,319
Total 386,323 78,073 9,306 473,702
========== ============= =========== ==========
</TABLE>
<PAGE>
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Month-Period Ended December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Adjustments
for the
Historical Phoenix Acquisition Pro Forma
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenue 149,729 42,956 192,685
---------------- --------------- --------- -------------
Operating expenses:
Direct vehicle and operating 13,704 6,501 20,205
Depreciation - vehicles 27,476 13,094 40,570
Depreciation - nonvehicle 1,341 328 1,669
Cost of vehicle sales 38,021 - 38,021
Advertising, promotion and selling 11,826 3,772 (19)(1) 15,580
Facilities 11,121 4,458 15,579
Personnel 24,515 9,403 (1,271)(2) 32,649
General and administrative 6,686 1,887 (380)(3) 8,196
Amortization 859 144 356 (4) 1,363
---------------- --------------- --------- -------------
Total operating expenses 135,549 39,587 (1,314) 173,832
---------------- --------------- --------- -------------
Operating income 14,180 3,369 1,314 18,853
---------------- --------------- --------- -------------
Other (income) expense:
Interest expense - vehicles 13,874 5,417 (1,034)(5) 18,262
Interest expense - other 632 140 900 (6) 1,678
Interest income - restricted cash (1,348) (1,348)
Interest expense - related party -
Nonrecurring income -
---------------- --------------- --------- -------------
Total other (income) expense 13,158 5,557 (134) 18,592
---------------- --------------- --------- -------------
Income before provision
for income taxes 1,022 (2,188) 1,448 282
Provision for income taxes 685 (875) 280 (7) 97
---------------- --------------- --------- -------------
Net income 337 (1,313) 1,168 185
================ =============== ========= =============
Weighted average common shares outstanding 6,641 6,641
===============
Earnings per common share 0.05 0.03
================ =============
</TABLE>
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(1) To record cash payment to seller of $4.9 million as part of acquisition
price of ARAC.
(2) Record franchise rights from the acquisition, representing the excess of
the net assets acquired over the purchase price.
(3) Record additional notes payable related to the $10 million note issued by
the Company to the seller of ARAC.
(4) Eliminate common stock and retained earnings of ARAC, net of additional
common stock from issuance of 272,727 shares as part of acquisition
price.
(5) Record additional paid-in capital from issuance of 272,727 shares as part
of acquisition price, net of elimination of additional paid-in capital of
ARAC.
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
(1) To record reduction in credit card processing rates of acquired
subsidiaries due to volume discounts earned by Team in the amount of
$19,000.
(2) To record reduction in personnel costs due to (i) reduction/elimination
of certain officers' salaries at the acquired subsidiaries resulting in a
savings of $768,000; and (ii) consolidation of duplicative positions
resulting in a savings of $503,000.
(3) To record (i) elimination of consulting and professional fees for
services Team will not require in the amount of $313,000; (ii)
elimination of country club dues of $42,000; and (iii) reduction of
charitable contributions of $25,000.
(4) To record amortization of franchise rights resulting from the acquisition
of ARAC.
(5) To record reduction in interest expense of $1.0 million due to the
reduced interest rates for vehicle financing available to Team Rental
Group through its medium term note programs and its conventional bank
financing sources.
(6) To record interest on the $10 million note issued by the Company to the
seller of ARAC.
(7) To record reduction in provision for income taxes resulting from losses
incurred by ARAC.
