-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BsguSKQk+npPAnHMqh9txVrsWXZYW79aIRTxerCXY8Mooin/q1tI3ePU9t+XfzLa lttTOXdrX+JseCp5NCw9Dg== 0001040445-98-000009.txt : 19981110 0001040445-98-000009.hdr.sgml : 19981110 ACCESSION NUMBER: 0001040445-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIS RENT A CAR INC CENTRAL INDEX KEY: 0001040445 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-AUTO RENTAL & LEASING (NO DRIVERS) [7510] IRS NUMBER: 113347585 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13315 FILM NUMBER: 98740765 BUSINESS ADDRESS: STREET 1: 900 OLD COUNTRY RD CITY: GARDEN CITY STATE: NY ZIP: 11530 BUSINESS PHONE: (516) 222-3000 MAIL ADDRESS: STREET 1: 900 OLD COUNTRY RD CITY: GARDEN CITY STATE: NY ZIP: 11530 10-Q 1 AVIS RENT A CAR, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For the quarterly period ended September 30, 1998 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13315 AVIS RENT A CAR, INC. (Exact name of registrant as specified in its charter) Delaware 11-3347585 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 900 Old Country Road, Garden City, New York 11530 (Address of principal executive offices) (Zip Code) (516)222-3000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report.) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the registrant's classes of common stock as of November 9, 1998: Common Stock, $.01 par value - Class A 33,541,000 shares. AVIS RENT A CAR, INC. INDEX PART I. Financial Information ITEM 1. FINANCIAL STATEMENTS Page Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 1998 and 1997..................................1 Condensed Consolidated Statements of Financial Position as of September 30 1998 and December 31, 1997........................................2 Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 1998 and 1997..................................3 Notes to the Condensed Consolidated Financial Statements ........................................4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................6 1 AVIS RENT A CAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three months ended Nine months ended September 30, September 30, 1998 1997 1998 1997 --------- -------- ---------- ---------- Revenue......................................... $652,385 $580,049 $1,739,055 $1,525,696 --------- -------- ---------- ---------- Direct operating................................ 266,863 242,997 706,290 641,545 Vehicle depreciation and lease charges, net..... 166,788 148,068 444,182 382,199 Selling, general and administrative............. 109,811 110,256 324,182 313,639 Interest, net................................... 53,051 52,100 149,869 134,755 Amortization of cost in excess of net assets acquired ......................... 3,166 1,675 8,687 4,245 --------- -------- ---------- ---------- 599,679 555,096 1,633,210 1,476,383 ---------- -------- ---------- ---------- Income before provision for income taxes ....... 52,706 24,953 105,845 49,313 Provision for income taxes...................... 22,568 11,085 45,949 22,339 --------- -------- ---------- ---------- Net income ..................................... $ 30,138 $13,868 $ 59,896 $ 26,974 ========= ======== ========== ========== Earnings per share: Basic ..................................... $ 0.85 $ 0.45 $ 1.74 $ 0.87 ========= ======== =========== ========== Diluted ........................................ $ 0.83 $ 0.45 $ 1.70 $ 0.87 ========= ======== =========== =========
See accompanying notes to the condensed consolidated financial statements. -1- 2 AVIS RENT A CAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands)
September 30, December 31, 1998 1997 -------------- -------------- (Unaudited) ASSETS Cash and cash equivalents................................ $ 64,381 $ 44,899 Accounts receivable, net................................. 471,689 359,463 Prepaid expenses......................................... 45,372 47,360 Vehicles, net ........................................... 3,256,496 3,018,856 Property and equipment, net.............................. 140,560 122,860 Deferred income tax assets............................... 111,509 142,025 Cost in excess of net assets acquired, net............... 479,012 396,040 Other assets ............................................ 173,553 147,453 -------------- -------------- Total assets........................................... $ 4,742,572 $ 4,278,956 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable........................................ $ 204,583 $ 329,706 Accrued liabilities ..................................... 345,039 328,411 Due to affiliates, net................................... 15,196 44,512 Current income tax liabilities........................... 7,417 9,749 Deferred income tax liabilities ......................... 34,179 34,106 Public liability, property damage and other insurance liabilities .......................... 267,909 256,029 Debt .................................................... 3,232,466 2,826,422 -------------- -------------- Total liabilities ................................... 4,106,789 3,828,935 -------------- -------------- Commitments and contingencies Stockholders' equity: Common stock ......................................... 359 309 Additional paid-in capital ........................... 591,651 430,507 Retained earnings..................................... 88,190 28,294 Foreign currency translation adjustment .............. (15,730) (9,089) Treasury stock........................................ (28,687) -------------- -------------- Total stockholders' equity........................ 635,783 450,021 -------------- -------------- Total liabilities and stockholders' equity ....... $ 4,742,572 $ 4,278,956 ============== ==============
See accompanying notes to the condensed consolidated financial statements. -2- 3 AVIS RENT A CAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine months ended September 30, 1998 1997 ------------- ------------ Cash flows from operating activities: Net income ......................................... $ 59,896 $ 26,974 Adjustments to reconcile net income to cash provided by operating activities ....................... 390,089 327,324 ------------- ----------- Net cash provided by operating activities.... 449,985 354,298 ------------- ----------- Cash flows from investing activities: Vehicle additions .................................... (2,904,178) (3,169,229) Vehicle deletions .................................... 2,197,359 1,987,853 Additions to property and equipment................... (34,280) (30,297) Retirements of property and equipment ................ 4,494 18,070 Payments for purchase of licensees ................... (232,843) (199,381) ------------- ------------ Net cash used in investing activities ............ (969,448) (1,392,984) ------------- ------------ Cash flows from financing activities: Changes in debt: Proceeds ......................................... 1,253,383 3,195,292 Repayments ....................................... (842,559) (2,390,528) ------------- ------------ Net increase in debt ............................. 410,824 804,764 Payments for debt issuance costs ................... (3,949) (28,202) Proceeds from public offering ....................... 161,194 359,316 Purchases of treasury stock........................... (28,687) ------------- ------------ Net cash provided by financing activities......... 539,382 1,135,878 ------------- ------------ Effect of exchange rate changes on cash ................. (437) (568) ------------- ------------ Net increase in cash and cash equivalents................ 19,482 96,624 Cash and cash equivalents at beginning of period ........ 44,899 29,718 ------------- ------------ Cash and cash equivalents at end of period .............. $ 64,381 $ 126,342 ============= ============ Supplemental disclosure of cash flow information Cash paid during the period for: Interest................................................. $ 154,414 $ 129,802 ============= ============ Income taxes ............................................ $ 10,261 $ 7,946 ============= ============
See accompanying notes to the condensed consolidated financial statements. -3- 4 AVIS RENT A CAR, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1- Basis of Presentation The accompanying unaudited condensed consolidated financial statements include Avis Rent A Car, Inc. and its subsidiaries (the "Company"). These consolidated financial statements reflect, in the opinion of management, all material adjustments (which include normal recurring adjustments only) necessary to fairly state the financial position, the results of operations and cash flows for the periods presented. Operating results for interim periods are not indicative of the results that can be expected for a full year. These consolidated financial statements should be read in conjunction with the Company's audited annual consolidated financial statements and notes thereto, included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. Certain amounts in the prior period have been reclassified to conform to current period presentation. Note 2- Earnings Per Share Basic earnings per share is computed by dividing net income for the three month periods ended September 30, 1998 and 1997 by 35,608,000 and 30,925,000 weighted average shares outstanding, respectively, and for the nine month periods ended September 30, 1998 and 1997 by 34,334,000 and 30,925,000 weighted average shares outstanding, respectively. Diluted earnings per share is computed by dividing net income for the three month periods ended September 30, 1998 and 1997 by, 36,180,000 and 30,925,000 weighted average shares outstanding, respectively, and for the nine month periods ended September 30, 1998 and 1997 by 35,222,000 and 30,925,000 weighted average shares outstanding, respectively. Shares used in calculating diluted earnings per share include the effects of the assumed exercise of dilutive stock options. Note 3 - Treasury Stock During September 1998, the Company completed a program to repurchase 1,500,000 shares of common stock at a total cost of $28,687,000. The Board of Directors subsequently authorized the repurchase of 3,500,000 additional shares. At September 30, 1998, there are 34,425,000 issued and outstanding shares of common stock. In October 1998, the Company repurchased an additional 884,000 shares of common stock for $16,464,500. Note 4 - Acquisitions On August 20, 1997, the Company purchased The First Gray Line Corporation. The following unaudited pro forma information presents the results of operations of the Company as if the acquisition of The First Gray Line Corporation, the repayment of debt with the net proceeds (after the purchase of The First Gray Line Corporation) from the initial public offering (the "IPO") on September 24, 1997 and related adjustments had taken place on January 1, 1997. These unaudited pro forma results are not necessarily an indication of the actual results of operations that would have occurred had the acquisition of The First Gray Line Corporation and the IPO actually occurred on January 1, 1997 (in thousands, except share data).
Pro forma Pro forma Three months ended Nine months ended September 30, 1997 September 30, 1997 ------------------- ------------------- Revenue........................................... $ 609,920 $ 1,655,439 =================== =================== Income before provision for income taxes.......... $ 33,065 $ 70,777 =================== =================== Net income........................................ $ 18,162 $ 38,877 =================== =================== Earnings per share: Basic............................................. $ .59 $ 1.26 =================== =================== Diluted........................................... $ .59 $ 1.26 =================== ===================
-4- 5 On May 1, 1998, the Company acquired the assets of the car rental business of Hayes Leasing Company, Inc. (the "Hayes transaction"), including the Avis System franchises for the cities of Austin, Fort Worth and San Antonio, and the counties of Dallas and Tarrant, Texas for approximately $86 million in cash plus the refinancing of fleet-related indebtedness, which totaled approximately $136 million for a total purchase price of approximately $222 million. In addition, during the nine month period ended September 30, 1998, the Company purchased the assets, including the Avis System franchises, of the car rental businesses of Amelco Leasing , Hazqu Car Inc., The Champ Car, Inc. and Economy Leasing Corp., for approximately $10.3 million in cash. If these Acquisitions had occurred on January 1, 1998 or 1997, they would not have had a material impact on the Company's results of operations. The excess purchase price over the net assets acquired for the Acquisitions was approximately $89 million. The preliminary purchase cost allocations for the Acquisitions are subject to adjustment when additional information concerning asset and liability valuations are obtained. The final asset and liability fair values may differ from those set forth in the accompanying statement of financial position at September 30, 1998. However, the changes are not expected to have a material effect on the financial position of the Company. The Acquisitions have been accounted for by the purchase method. The financial statements include the operating results of these acquisitions subsequent to their respective dates of acquisition. Note 5 - Comprehensive Income Comprehensive income is comprised of the following (in thousands):
Three months ended Nine months ended September 30, September 30, 1998 1997 1998 1997 -------- -------- ---------- -------- Net income.................................................. $30,138 $13,868 $59,896 $26,974 Foreign currency translation adjustment..................... (864) (2,664) (6,641) (5,224) -------- -------- ---------- -------- Comprehensive income........................................ $29,274 $11,204 $53,255 $21,750 ======== ======== ========== ========
-5- 6 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) General Overview The Company conducts vehicle rental operations through wholly-owned subsidiaries in the United States, Canada, Puerto Rico, the U.S. Virgin Islands, Argentina, Australia and New Zealand. Revenue is derived principally from time and mileage charges for vehicle rentals and, to a lesser extent, the sale of loss damage waivers, liability insurance and other products and services. On October 17, 1996, Cendant Corporation, ("Cendant"), formerly HFS Incorporated, acquired the Company and its subsidiaries (the "Acquisition"). The Acquisition was accounted for as a purchase. As of September 30, 1998, Cendant owned 7,500,000 shares (approximately 22%) of the Company's common stock. On September 24, 1997, the Company issued and sold 22,425,000 shares of its common stock in an IPO and received net proceeds of $359.3 million. The net proceeds were used to repay amounts outstanding under the acquisition credit facility utilized to complete the acquisition of The First Gray Line Corporation, pay certain acquisition expenses incurred to complete The First Gray Line acquisition and to prepay outstanding indebtedness. Management believes that a more meaningful comparison of the results of operations for the three and nine month periods ended September 30, 1998 and 1997 is obtained by presenting the results for the three and nine months ended September 30, 1997 on a pro forma basis to give effect to the following transactions as if they had occurred on January 1, 1997: the acquisition of The First Gray Line Corporation and the repayment of debt with the net proceeds (after the purchase of The First Gray Line Corporation) from the IPO and related adjustments. Three Months Ended September 30, 1998 Compared to Pro Forma Three Months Ended September 30, 1997 The following table sets forth for the periods indicated, certain items in the Company's condensed consolidated statement of operations (dollars in thousands):
Actual Pro forma Three Months Ended Three Months Ended September 30, 1998 September 30, 1997 ------------------------------ ---------------------------------- Percentage Percentage of Revenue of Revenue --------------- -------------- ------------------ --------------- Revenue............................... $652,385 100.0% $ 609,920 100.0% --------------- -------------- ------------------ --------------- Costs and expenses: Direct operatiang................ 266,863 40.9 255,437 41.9 Vehicle depreciation and lease charges, net............. 166,788 25.6 155,595 25.5 Selling, general and 109,811 16.8 112,269 18.4 administrative................. Interest, net 53,051 8.1 51,171 8.4 Amortization of cost in excess of net assets acquired......... 3,166 0.5 2,383 0.4 --------------- -------------- ------------------ -------------- 599,679 91.9 576,855 94.6 --------------- -------------- ------------------ -------------- Income before provision for income taxes....................... 52,706 8.1 33,065 5.4 Provision for income taxes............ 22,568 3.5 14,903 2.4 =============== ============== ================== ============== Net income $ 30,138 4.6% $ 18,162 3.0% =============== ============== ================== ==============
-6- 7 Revenue Revenue increased 7.0%, from $609.9 million to $652.4 million, compared to the same period in 1997. The increase in revenue is due primarily to the Hayes transaction (3.7%) and overall market demand (3.3%). The revenue increase reflected a 6.4% increase in the number of rental transactions and a 0.6% increase in revenue per rental transaction. Costs and Expenses Total costs and expenses increased 4.0%, from $576.9 million to $599.7 million, compared to the same period in 1997. Direct operating expenses increased 4.5%, from $255.4 million to $266.9 million, compared to the same period in 1997. As a percentage of revenue, direct operating expenses declined to 40.9%, from 41.9 % for the corresponding period in 1997. Operating efficiencies were derived primarily from lower vehicle insurance costs (0.3% of revenue), lower airport commissions (1.5% of revenue), and lower computer services costs (0.4% of revenue). These were partially offset by higher vehicle damage costs (0.4% of revenue), higher compensation costs (0.5% of revenue) and higher facility costs (0.3% of revenue). Vehicle depreciation and lease charges increased 7.2%, from $155.6 million to $166.8 million, compared to the same period in 1997. As a percentage of revenue, vehicle depreciation and lease charges were 25.6% of revenue, as compared to 25.5% of revenue for the corresponding period in 1997. The change reflected a 4.7% increase in the average rental fleet combined with a higher monthly cost per vehicle. Selling, general and administrative expenses decreased 2.2%, from $112.3 million to $109.8 million, compared to the same period in 1997. The decrease was due to lower marketing costs and lower frequent traveler costs. Interest expense increased 3.7%, from $51.2 million to $53.1 million, compared to the same period in 1997, due to higher borrowings required to finance the growth of the rental fleet. The provision for income taxes for the three months ended September 30, 1998 increased to $22.6 million, from $14.9 million for the same period in 1997. The effective income tax rate was 42.8%, down from 45.1% for the corresponding period in 1997. The effective tax rate reflects differences between foreign income tax rates and the U.S. federal statutory income tax rate, taxes on the repatriation of foreign earnings, and foreign withholding taxes on dividends paid to the Company. Net income increased 65.9%, from $18.2 million to $30.1 million, compared to the same period in 1997. The increase reflects higher revenue, decreased costs and expenses as a percentage of revenue and a lower effective income tax rate. Nine Months Ended September 30, 1998 Compared to Pro Forma Nine Months Ended September 30, 1997 The following table sets forth for the periods indicated, certain items in the Company's condensed consolidated statement of operations (dollars in thousands):
Actual Pro forma Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 ------------------------------ ------------------------------ Percentage Percentage of Revenue of Revenue --------------- -------------- ------------------ ----------- Revenue.................................. $1,739,055 100.0% $ 1,655,439 100.0% --------------- -------------- ------------------ ----------- Costs and expenses: Direct operating.................... 706,290 40.6 697,989 42.2 Vehicle depreciation and lease charges, net................ 444,182 25.6 416,489 25.2 Selling, general and administrative.................... 324,182 18.6 319,964 19.3 Interest, net....................... 149,869 8.6 143,092 8.6 Amortization of cost in excess of net assets acquired 8,687 0.5 7,128 0.4 --------------- -------------- ------------------ ----------- 1,633,210 93.9 1,584,662 95.7 --------------- -------------- ------------------ ----------- Income before provision for income taxes.......................... 105,845 6.1 70,777 4.3 Provision for income taxes............... 45,949 2.7 31,900 1.9 =============== ============== ================== =========== Net income............................... $ 59,896 3.4% $ 38,877 2.4% =============== ============== ================== ===========
-7- 8 Revenue Revenue increased 5.1%, from $1,655.4 million to $1,739.1 million, compared to the same period in 1997. The increase in revenue is due primarily to the Hayes transaction (2.2%) and overall market demand (2.9%). The revenue increase reflected a 4.7% increase in the number of rental transactions and a 0.4% increase in revenue per rental transaction. Costs and Expenses Total costs and expenses increased 3.1%, from $1,584.7 million to $1,633.2 million, compared to the same period in 1997. Direct operating expenses increased 1.2%, from $698.0 million to $706.3 million, compared to the same period in 1997. As a percentage of revenue, direct operating expenses declined to 40.6%, from 42.2% for the corresponding period in 1997. Operating efficiencies were derived primarily from lower vehicle insurance costs (0.5% of revenue), lower airport commissions (1.4% of revenue), and lower computer services costs (0.3% of revenue). These efficiencies were partially offset by higher vehicle damage costs (0.3% of revenue) and higher compensation costs (0.4% of revenue). Vehicle depreciation and lease charges increased 6.6%, from $416.5 million to $444.2 million, compared to the same period in 1997. As a percentage of revenue, vehicle depreciation and lease charges were 25.6% of revenue, as compared to 25.2% of revenue for the corresponding period in 1997. The change reflected a 3.1% increase in the average rental fleet combined with a higher monthly cost per vehicle. In addition, the net proceeds received in excess of book value from the disposition of used vehicles was $4.0 million lower (0.3% of revenue) in the first nine months of 1998 compared to the same period in 1997. This was primarily due to favorable market conditions for the sale of certain model vehicles during 1997. Selling, general and administrative expenses increased 1.3%, from $320.0 million to $324.2 million, compared to the same period in 1997. The increase was due to higher reservation costs and higher general and administrative expenses, partially offset by lower marketing costs and lower frequent flyer traveler costs. Interest expense increased 4.7%, from $143.1 million to $149.9 million, compared to the same period in 1997, due to higher borrowings required to finance the growth of the rental fleet. The provision for income taxes for the nine months ended September 30, 1998 increased to $45.9 million, from $31.9 million for the same period in 1997. The effective income tax rate was 43.4%, down from 45.1% for the corresponding period in 1997. The effective tax rate reflects differences between foreign income tax rates and the U.S. federal statutory income tax rate, taxes on the repatriation of foreign earnings, and foreign withholding taxes on dividends paid to the Company. Net income increased 54.1%, from $38.9 million to $59.9 million, compared to the same period in 1997. The increase reflects higher revenue, decreased costs and expenses as a percentage of revenue and a lower effective income tax rate. Liquidity and Capital Resources The Company's operations are funded by cash provided by operating activities and by financing arrangements maintained by the Company in the markets in which it operates. The Company's primary use of funds is for the acquisition of new vehicles. For the three and nine month periods ended September 30, 1998, the Company's expenditures for new vehicles were approximately $1.0 billion and $2.9 billion, respectively, and proceeds from the disposition of used vehicles were approximately $800 million and $2.2 billion, respectively. In 1998, the Company expects its expenditures for new vehicles (net of proceeds from the disposition of used vehicles) to be higher than in 1997. The financing requirements for vehicles typically reaches an annual peak in the third calendar quarter, as fleet levels build up in response to increased rental demand during that period. The typical low point for cash requirements occurs during the end of the fourth quarter and the beginning of the first quarter, coinciding with lower levels of fleet and rental demand. The Company has established methods for disposition of its used vehicles. The Company's customer receivables also provide liquidity with approximately 11 days of daily sales outstanding. The Company made capital investments for property improvements totaling $13.2 million and $34.3 million for the three months and nine months ended September 30, 1998, respectively, compared to $20.8 million and $30.3 million for the same periods in 1997. The Company's fleet financing program provides for borrowings up to $ 3.75 billion, comprised of $2.25 billion of asset-backed medium term notes (the "Medium Term Notes") and the issuance of up to $1.5 billion of asset-backed variable funding notes (the "Commercial Paper Notes"). The Medium Term Notes and the Commercial Paper Notes are backed by, among other things, a first priority security interest in the vehicles. -8- 9 Avis Rent A Car System, Inc. ("ARACS"), a wholly-owned subsidiary of the Company, is party to a $350 million secured credit agreement that provides for (i) a revolving credit facility which is available until December 31, 2001 to finance the general corporate needs of ARACS and (ii) a standby letter of credit facility available on a revolving basis until April 20, 1999 to fund (a) any shortfall in certain payments owing AESOP Leasing, a subsidiary of ARACS, pursuant to fleet agreements and (b) maturing Commercial Paper Notes, if such Commercial Paper Notes cannot be repaid through the issuance of additional Commercial Paper Notes, or draws under the liquidity facility supporting the Commercial Paper Notes. At September 30, 1998, the Company had approximately $975 million of additional credit available. The Company expects that cash flows from operations and funds from available credit facilities will be sufficient to enable the Company to meet its anticipated operating cash requirements for the next twelve months. Based on current market conditions and the Company's current banking relationships, the Company expects to fund maturities of the Medium Term Notes by the issuance of either new medium term notes or commercial paper depending on market conditions at the time the Medium Term Notes mature. However, the Company can give no assurance that will occur. Borrowings for the Company's international operations consist mainly of loans obtained from local and international banks. All borrowings for international operations are in the local currencies of the countries in which those operations are conducted. At September 30, 1998, the total debt for the Company's international operations was $150.5 million, of which $143.6 million is due in less than 12 months. At September 30, 1998, the impact on the Company's liquidity and financial condition due to exchange rate fluctuations of its foreign operations is not material. On March 23, 1998, the Company sold 5,000,000 shares of its common stock through a public offering and received proceeds of approximately $162 million, which were used to finance the Hayes transaction and for working capital and general corporate purposes, including the repayment of certain indebtedness. In September 1998, the Company completed a program to repurchase 1,500,000 shares of common stock at a total cost of $28,687,000. In addition, the Board of Directors subsequently authorized the repurchase of an additional 3,500,000 shares. In October 1998, the Company repurchased 884,000 shares of common stock for $16,464,500. Seasonality Car rental is a seasonal business, with decreased travel in winter months and heightened activity in spring and summer. To accommodate increased demand, the Company increases its available fleet during the second and third quarters. Certain of the Company's operating expenses are fixed and cannot be reduced during periods of decreased rental demand. In certain geographic markets, the impact of seasonality has been reduced by emphasizing leisure or business travel in the off-peak season. Recent Accounting Standards Recent pronouncements of the Financial Accounting Standards Board which are not required to be adopted at this date, include Statement of Financial Accounting Standards ("SFAS") No. 132 - "Employer's Disclosures about Pensions and Other Post Retirement Benefits," ("SFAS 132") and SFAS No. 133 - "Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133"), which are effective for the Company's consolidated financial statements for the years ending December 31, 1998 and December 31, 2000, respectively. SFAS 132 revises employers' disclosures about pension and other post retirement benefit plans and does not change the measurement or recognition of pension or other post retirement benefit plans. This Statement standardizes the disclosure requirements for pension and other post retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position at fair value. -9- 10 The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued a Statement of Position ("SOP") No. 98-5, "Accounting for Start-Up Costs". The SOP requires that all start-up costs should be expensed as incurred, unless the costs incurred were to acquire or develop tangible assets or to acquire intangible assets from a third party. The SOP is effective for fiscal years beginning after December 15, 1998. The adoption of SFAS 132, SFAS 133 and the SOP will not have a material effect on the Company's consolidated financial statements. Year 2000 Readiness Disclosure Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field and cannot distinguish 21st century dates from 20th century dates. Consequently, these software and computer systems need to be either reprogrammed, upgraded or replaced in order to properly function when Year 2000 arrives. The Company's state of readiness, risks assessment, contingency plans and estimated costs to meet Year 2000 requirements are as follows: (i) State of Readiness The Company has implemented a comprehensive plan to address the Year 2000 requirements in its mission critical systems. Mission critical systems are those whose failure poses a risk of disruption to the Company's ability to provide car reservation and rental services. The Company's plan includes (i) the identification of all mission critical systems and the complete inventory of the hardware and software affected by the Year 2000; (ii) assessment of its systems including prioritization; (iii) modification, upgrading and replacement of the affected systems; and (iv) testing of the systems. The Company is using both internal and external sources to implement its plan. The Company has generally completed the inventory and assessment of its consolidated mission critical systems and is at various stages of modification and testing of these systems. Much of the Company's technology, including technology associated with its mission critical systems, is purchased from third parties. The Company is dependent on those third parties to assess the impact of Year 2000 on the technology they have supplied and to take any necessary corrective action. The Company is monitoring the progress of these third parties and conducting tests to determine whether they have accurately assessed the problem and taken corrective action. The Company currently believes its information systems will be Year 2000 compliant in the second quarter of 1999. (ii) Contingency Plans Based upon the progress of its comprehensive plan, the Company expects that it will not experience a disruption of its operations as a result of the change to the new millennium. However, there can be no assurance that the third parties who have supplied technology used in the Company's mission critical systems will be successful in taking corrective action in a timely manner. The Company is developing contingency plans with respect to certain key technology used in its mission critical systems, which are intended to enable the Company to continue to operate. The contingency plans include performing certain processes manually; repairing systems and changing suppliers if necessary, although there can be no assurance that these contingency plans will successfully avoid service disruption in the reservation and rental of vehicles. The Company believes, that due to the widespread nature of potential Year 2000 issues, the contingency planning process is an ongoing one which will require further modifications as the Company obtains additional information regarding (1) the Company's internal systems and equipment during the remediation and testing phases of its Year 2000 program; and (2) the status of third party Year 2000 readiness. (iii) Year 2000 Costs Costs of software and hardware remediation were approximately $3.2 million in 1997, $5.2 million for the nine months ended September 30, 1998 and are estimated to be approximately $4.7 million for the fourth quarter of 1998, $6.2 million in 1999 and $400 thousand in 2000. These estimates include the costs of certain equipment and software for which planned replacement was accelerated due to Year 2000 requirements. In addition, the Company has redeployed internal resources to address the Year 2000. This estimate assumes that third party suppliers have accurately assessed the compliance of their products and that they will successfully correct the issue in non-compliant products. Because of the complexity of correcting the Year 2000 issue, actual costs may vary from these estimates. -10- 11 (iv) Possible Consequences of Year 2000 Problems The Company believes that completed and planned modifications and conversions of its internal systems and equipment will allow it to be Year 2000 compliant in a timely manner. There can be no assurance, however, that the Company's internal systems or equipment or those of third parties on which the Company relies will be Year 2000 compliant in a timely manner or that the Company's or third parties' contingency plans will mitigate the effects of any noncompliance. The failure of the systems or equipment of the Company or third parties (which the Company believes is the most reasonably likely worst case scenario) could effect reservation and rental operations and could have a material adverse effect on the Company's business or consolidated financial statements. Forward Looking Information Certain matters discussed in this report that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties including the impact of competitive products and pricing, changing market conditions, the ability of the Company and its vendors to complete the necessary actions to achieve a Year 2000 conversion for its computer systems and applications, and other risks which were detailed from time to time in the Company's publicly-filed documents, including its Annual Report on Form 10-K for the period ended December 31, 1997. Actual results may differ materially from those projected. These forward-looking statements represent the Company's judgement as of the date of this report. -10- 11 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Avis Rent A Car, Inc. ---------------------------- (Registrant) Dated: November 9, 1998 By: /s/ Kevin M. Sheehan ---------------------------- Executive Vice President and Chief Financial Officer (principal financial officer) Dated: November 9, 1998 By: /s/ Timothy M. Shanley ---------------------------- Vice President and Controller (principal accounting officer) -11- 12 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS filed with Form 10 - Q for the quarter ended September 30, 1998 under THE SECURITIES EXCHANGE ACT OF 1934 AVIS RENT A CAR, INC. Commission file number 1-13315 EXHIBIT INDEX Exhibit No. Description Page No. 27 Financial Data Schedule for 13 the Nine months ended September 30, 1998 -12- EX-27 2 9/30/98 FINANCIALS
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 64,381 0 472,422 (733) 3,256,496 0 160,985 (20,425) 4,742,572 0 3,232,466 0 0 359 635,424 4,742,572 1,739,055 1,739,055 0 1,472,315 8,687 2,339 149,869 105,845 45,949 59,896 0 0 0 59,896 1.74 1.70
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