10-Q 1 0001.txt QUARTERLY REPORT FOR AVIS GROUP HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For the quarterly period ended June 30, 2000 [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 GROUP HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 11-3347585 (State or other jurisdiction (I.R.S. Employer of 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 August 9 , 2000: Common Stock, $.01 par value - Class A 31,131,712 shares. AVIS GROUP HOLDINGS, INC. INDEX PART I. Financial Information ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: Page Consolidated Statements of Operations for the three months and six months ended June 30, 2000 and 1999..............1 Consolidated Statements of Financial Position as of June 30, 2000and December 31, ..................................2 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999....................................3 Notes to the Condensed Consolidated Financial Statements ......4-16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.......................................17-26 ITEM 3. QUANTATIVE AND QUALITATIVE FINANCIAL DISCLOSURES ABOUT MARKET RISKS................................................27 PART II. Other ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............29 ITEM 6(a). EXHIBITS..........................................................29 ITEM 6(b). REPORT ON FORM 8-K ...............................................29 AVIS GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three months ended Six months ended June 30, June 30, -------------------------- ------------------------------ 2000 1999 2000 1999 ---------- ---------- ----------- ----------- Revenue: Vehicle rental.............................. $ 666,597 $ 637,457 $ 1,255,473 $ 1,204,374 Vehicle leasing and other fee based......... 429,871 854,028 ---------- ---------- ----------- 1,096,468 637,457 2,109,501 1,204,374 ---------- ---------- ----------- Costs and expenses: Direct operating, net....................... 229,314 242,886 456,008 461,720 Vehicle depreciation and lease charges, net. 426,505 165,417 827,502 318,471 Selling, general and administrative......... 186,192 120,381 366,275 231,182 Interest, net............................... 161,197 51,483 305,994 99,925 Non-vehicle depreciation and amortization .. 13,440 6,569 26,459 12,351 Amortization of cost in excess of net assets acquired ...................... 11,762 3,177 23,594 6,351 ---------- ---------- ----------- ----------- 1,028,410 589,913 2,005,832 1,130,000 ---------- ---------- ----------- ----------- Income before provision for income taxes ... 6 8,058 47,544 103,669 74,374 Provision for income taxes.................. 30,626 20,262 46,651 31,906 ---------- ---------- ----------- ----------- Net income.................................. 37,432 27,282 57,018 42,468 Preferred stock dividend.................... 4,667 9,335 ---------- ---------- ----------- Earnings applicable to common stockholders.. $ 32,765 $ 27,282 $ 47,683 $ 42,468 ========== ========== =========== =========== Earnings per share: Basic....................................... $ 1.05 $ 0.87 $ 1.53 $ 1.35 ========== ========== =========== =========== Diluted .................................... $ 1.05 $ 0.85 $ 1.52 $ 1.31 ========== ========== =========== ===========
See notes to the condensed consolidated financial statements. AVIS GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands)
June 30, December 31, 2000 1999 ---------------- --------------- (Unaudited) ASSETS Cash and cash equivalents............................. $ 151,114 $ 71,697 Cash held on deposit with financial institution....... 143,610 93,530 Restricted cash....................................... 243,952 253,080 Accounts receivable, net.............................. 681,150 1,115,740 Assets held for sale, net............................. 869,222 Prepaid expenses...................................... 62,222 64,316 Finance lease receivables............................. 176,916 871,034 Vehicles, net-rental.................................. 4,148,989 3,367,362 Vehicles, net-leasing................................. 3,053,234 3,134,009 Property and equipment, net........................... 182,567 197,827 Other assets.......................................... 104,797 115,273 Cost in excess of net assets acquired, net............ 1,240,826 1,794,390 ---------------- --------------- Total assets....................................... $ 11,058,599 $ 11,078,258 ================ =============== LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY Accounts payable...................................... $ 530,500 $ 588,377 Accrued liabilities .................................. 354,160 369,453 Due to affiliates, net................................ 76,659 59,396 Current income tax liabilities........................ 20,012 18,226 Deferred income tax liabilities, net ................. 161,057 181,256 Public liability, property damage and other insurance liabilities, net .................. 257,477 259,756 Vehicle debt.......................................... 7,006,064 6,969,805 Acquisition debt ..................................... 1,491,500 1,500,000 Minority interest (preferred membership interest)..... 99,305 99,305 ---------------- --------------- Total liabilitie.................................. 9,996,734 10,045,574 ---------------- --------------- Commitments and contingencies Preferred Stock: Class A Preferred stock .............................. 360,000 360,000 Class B Preferred stock............................... 18,225 9,000 Class C Preferred stock............................... 2,000 2,000 ---------------- --------------- Total preferred stock.............................. 380,225 371,000 ---------------- --------------- Common stockholders' equity: Class A Common stock ................................. 359 359 Additional paid-in capital ........................... 593,199 593,106 Retained earnings..................................... 223,373 175,690 Accumulated other comprehensive loss (31,459) (3,639) Treasury stock ....................................... (103,832) (103,832) ----------------- --------------- Total common stockholders' equity.................. 681,640 661,684 ----------------- --------------- Total liabilities, preferred stock and common stockholders' equity ............................ $ 11,058,599 $ 11,078,258 ================= ===============
See notes to the condensed consolidatedfinancial statements. AVIS GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six months ended June 30, ------------------------------------------- 2000 1999 -------------- --------------- Cash flows from operating activities: Net income ......................................... $ 57,018 $ 42,468 Adjustments to reconcile net income to net cash provided by operating activities ............... 868,101 249,395 -------------- --------------- Net cash provided by operating activities........... 925,119 291,863 -------------- --------------- Cash flows from investing activities: Payments for vehicle additions ..................... (3,957,921) (2,494,247) Vehicle deletions .................................. 2,379,842 1,526,780 Increase in finance lease receivables............... (65,906) Payments for property and equipment................. (28,779) (17,953) Retirements of property and equipment .............. 9,018 1,073 Payments for purchase of rental car franchise licensee, net of cash acquired of $11,065 in 1999 ................................. (42,503) Payment for purchase of PHH Holdings, net of cash acquired of $170,568 in 1999................ (1,330,932) -------------- --------------- Net cash used in investing activities .............. (1,663,746) (2,357,782) -------------- --------------- Cash flows from financing activities: Changes in debt: Proceeds ........................................... 1,254,649 5,882,621 Repayments ......................................... (377,470) (3,510,624) -------------- --------------- Net increase in debt ............................... 877,179 2,371,997 Payments for debt issuance costs .................. (7,775) (1,635) Purchases of treasury stock......................... (57,237) Other............................................... 3,326 -------------- --------------- Net cash provided by financing activities........... 869,404 2,316,451 -------------- --------------- Effect of exchange rate changes on cash .............. (1,280) 87 -------------- --------------- Net increase in cash and cash equivalents............. 129,497 250,619 Cash and cash equivalents and cash held on deposit with financial institution at beginning of period .. 165,227 29,751 -------------- --------------- Cash and cash equivalents and cash held on deposit with financial institution at end of period ........ $ 294,724 $ 280,370 ============== =============== Supplemental disclosure of cash flow information: Cash interest paid.................................... $ 294,979 $ 107,466 ============== =============== Cash income taxes paid ............................... $ 23,134 $ 5,329 ============== =============== Businesses acquired in 1999: Fair value of assets acquired, net of cash acquired of $181,633......................................... $ 6,218,950 Liabilities assumed................................... 4,483,515 --------------- Net assets acquired................................... 1,735,435 Less: issuance of Series A and Series C Preferred Stocks.............................................. (362,000) --------------- Net cash paid for acquisitions........................ $ 1,373,435 ===============
See notes to the condensed consolidated financial statements. AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1- Basis of Presentation The accompanying unaudited condensed consolidated financial statements include Avis Group Holdings, Inc. and its subsidiaries (the "Company" or "Avis Group."). 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. The consolidated statements of financial position include all of the assets and liabilities of the Company, including the Company's vehicle lease and vehicle management businesses in the United States and Canada ("PHH North America"), and in Europe ("PHH Europe") (see Note 5), and of Wright Express LLC (collectively "VMS") which were acquired on June 30, 1999. The consolidated statements of financial position also include all of the assets and liabilities of Rent A Car Incorporated ("Rent-A-Car, Inc.") and Motorent, Inc. of Nashville, Tennessee ("Motorent") rental car franchisees, which were purchased on March 19, 1999 and June 30, 1999, respectively. The consolidated statements of operations include the results of these operations, subsequent to their dates of acquisition. 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 for the year ended December 31, 1999, and the current report on Form 8-K, dated July 14, 2000, filed with the Securities and Exchange Commission. Certain amounts in the prior period have been reclassified to conform to current period presentation. All amounts are in thousands except share data. Note 2 - Cash Held on Deposit with Financial Institution Cash held on deposit with financial institution represents lease payments collected from the Company's vehicle leasing customers by one of the Company's lenders in connection with the Company's domestic vehicle leasing Asset Backed Financing Structure (see Note 7). Cash collected during the month by the lender net of vehicle purchases is settled with the Company in the early part of the following month. Note 3- Earnings Per Share Basic earnings per share is computed by dividing earnings applicable to common stockholders for the three months ended June 30, 2000 and 1999 by 31,131,712 and 31,188,977 weighted average shares outstanding, respectively, and for the six months ended June 30, 2000 and 1999 by 31,131,712 and 31,529,114 weighted average shares outstanding, respectively. Diluted earnings per share is computed by dividing earnings applicable to common stockholders for the three months ended June 30, 2000 and 1999 by 31,336,088 and 32,237,810 weighted average shares outstanding, respectively, and for the six months ended June 30, 2000 and 1999 by 31,339,247 and 32,380,499 weighted average shares outstanding, respectively. Shares used in calculating diluted earnings per share include the effects of the assumed exercise of stock options. Note 4 - Acquisitions On June 30, 1999, the Company acquired VMS for $1.8 billion and refinanced VMS indebtedness of approximately $3.5 billion (the "VMS Acquisition"). The acquisition financing included borrowings by the Company of $1.0 billion of term loans, the issuance by the Company of $500 million of senior subordinated notes, and the issuance by the acquisition subsidiary of $362 million of preferred stock. On March 19, 1999 and June 30, 1999, the Company also purchased Rent-A-Car, Inc. and Motorent using internally generated funds for approximately $53.8 million. The combined purchase cost allocation for the Company's acquisitions of VMS, Rent-A-Car, Inc. and Motorent are as follows (in thousands): Purchase cost....................................... $ 1,917,948 ------------- Fair value of: Assets acquired................................ 4,797,701 Liabilities assumed............................ 4,279,041 ------------- Net assets.......................................... 518,660 ------------- Cost in excess of net assets acquired before Reclassification............................... $ 1,399,288 ============= The above mentioned acquisitions have been accounted for by the purchase method. The financial statements include the operating results of these acquisitions subsequent to their dates of acquisition. AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The following unaudited pro forma information presents the results of operations of the Company as if the acquisition of VMS for $1.8 billion (including the issuance of Series A and Series C Preferred Stock) and the refinancing of VMS indebtedness and related adjustments had taken place on January 1, 1999 (in thousands, except share data):
Three months Six months ended ended June 30, 1999 June 30, 1999 ------------- ------------- Revenue......................................... $ 1,047,494 $ 2,016,317 ============ ============ Income before provision for income taxes........ $ 36,745 $ 49,843 ============ ============ Net income...................................... $ 18,449 $ 23,039 ============ ============ Preferred stock dividends....................... $ 4,555 $ 9,110 ============ ============ Earnings applicable to common stockholders...... $ 13,894 $ 13,929 ============ ============ Earnings per share: Basic........................................... $ .45 $ .44 ============ ============ Diluted......................................... $ .43 $ .43 ============ ============
If the acquisitions of Rent-A-Car, Inc. and Motorent had occurred on January 1, 1999, they would not have had a material impact on the result of operations for the three and six months ended June 30, 1999. Note 5 - Assets Held For Sale, net On June 30, 2000, the Company announced that it had signed a definitive agreement with Banque Nationale de Paris ("BNP Paribas") to form a joint venture company, that will own PHH Europe and, within one year, merge with BNP Paribas' vehicle management subsidiary, Arval Service Lease S.A. ("Arval"). As part of the agreement, BNP Paribas will acquire an 80% interest in the venture and the Company will initally retain a 20% interest in the venture, receive $800 million in cash and have its intercompany indebtedness with PHH Europe repaid. PHH Europe with its operations in the United Kingdom and Germany is engaged in the business of leasing vehicles and providing fee based services, including fuel and maintenance cards, accident management and other vehicle services to its customers. The Company will license PHH North America's fleet management technology, PHH InterActive, to the joint venture and Arval and receive an annual royalty for 10 years. Any difference between the carrying value of the net assets of PHH Europe and the proceeds from the sale is accounted for as an adjustment to cost in excess of net assets acquired relating to the VMS Acquisition (see Note 4). Accordingly, the net assets of PHH Europe, including the cost in excess of net assets acquired mentioned above, are reported as Assets Held for Sale, Net on the accompanying Consolidated Statement of Financial Position at June 30, 2000. On August 9, 2000, the Company completed it's announced agreement with BNP Paribas. At June 30, 2000 Assets Held for Sale, net consists of (in thousands): Assets.................................... $1,895,122 Liabilities............................... 1,025,900 ----------- $ 869,222 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 6- Comprehensive Income Comprehensive income is comprised of the following (in thousands):
Three months ended Six months ended June 30, June 30, --------------------- --------------------- 2000 1999 2000 1999 --------- -------- ---------- -------- Net income.................................................. $ 37,432 $ 27,282 $ 57,018 $ 42,468 Foreign currency translation adjustment, net of income taxes (18,646) 2,280 (27,820) 2,680 --------- -------- ---------- -------- Comprehensive income........................................ $ 18,786 $ 29,562 $ 29,198 $ 45,148 ========= ======== ========== ========
Note 7- Financing and Debt Debt outstanding at June 30, 2000 and December 31, 1999 consist of the following (in thousands):
June 30, December 31, 2000 1999 ------------- ------------ Vehicle Rental Commercial Paper Notes.................................................. $ 1,315,363 $ 1,026,261 Short-term notes-foreign................................................ 216,984 111,259 Series 1997-1A asset-backed Medium Term Notes due May through October 2000 at 6.22%............................................... 533,333 800,000 Series 1997-1B asset-backed Medium Term Notes due May through October 2002 at 6.40%............................................... 850,000 850,000 Series 1999-1 asset-backed Medium Term Notes due December 2004 through May 2005 at 6.14%................................................... 600,000 600,000 Series 2000-1 floating rate Rental Car Asset-Backed Notes due February 2003 through July 2003..................................... 250,000 Series 2000-2 floating rate Rental Car Asset-Backed Notes due March 2007 through August 2007..................................... 300,000 Revolving credit facility due June 2005................................. 60,000 62,000 Other................................................................... 5,685 5,902 ------------- ------------ Total Vehicle Rental Debt 4,131,365 3,455,422 ------------- ------------ Vehicle Leasing and Other Fee Based Commercial Paper Notes.................................................. 1,709,688 1,521,498 Canadian short term borrowings.......................................... 31,957 44,563 Series 1999-2 floating rate asset-backed notes, Class A-1............... 550,000 550,000 Series 1999-2 floating rate asset-backed notes, Class A-2............... 450,000 450,000 Foreign Asset Backed Securities - UK Advances (see Note 5)............. 850,443 Self-fund notes......................................................... 31,827 30,397 Wright Express Certificates of Deposit.................................. 101,227 67,482 ------------- ------------ Total Vehicle Leasing and Other Fee Based Debt 2,874,699 3,514,383 ------------- ----------- Total Vehicle Debt 7,006,064 6,969,805 ------------- ------------ Acquisition Financing Term A Loan Notes due June 2005........................................ 242,500 250,000 Term B Loan Notes due June 2006........................................ 374,500 375,000 Term C Loan Notes due June 2007........................................ 374,500 375,000 Senior Subordinated Notes due May 2009 at 11.00%........................ 500,000 500,000 ------------- ------------ Total Acquisition Financing..................................... 1,491,500 1,500,000 ------------- ------------ Total Debt...................................................... $ 8,497,564 8,469,805 ============= ============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 8 - Guarantor and Non-Guarantor Condensed Financial Statements In connection with the VMS Acquisition and as part of the financing thereof, Avis Group Holdings, Inc. (the "Parent") issued and sold the Senior Subordinated Notes (see Note 7) in a transaction exempt from registration under the Securities Act. The Senior Subordinated Notes are general unsecured obligations of the Parent, subordinated in right of payment to all existing and future senior indebtedness of the Company, and guaranteed by certain of the Parent's domestic subsidiaries. Accordingly, the following condensed consolidating financial information presents the condensed consolidating financial statements as of June 30, 2000 and December 31, 1999 and for the three and six months ended June 30, 2000 and 1999, respectively, of: (a) the Parent (b) the guarantor subsidiaries (c) the non-guarantor subsidiaries (d) elimination entries necessary to consolidate Parent with guarantor and non-guarantor subsidiaries and (e) the Company on a consolidated basis. Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principle elimination entries eliminate investments in subsidiaries and intercompany balances and transactions (in thousands): Separate financial statements and other disclosures with respect to the subsidiary guarantors have not been made because management beleives that such information is not material to holders of the Senior Subordinated Notes.
Condensed Consolidating Statements of Operations For the six months ended June 30, 2000 (in thousands) --------------------------------------------------------------------------- Non- Avis Group Guarantor Guarantor Holdings, Inc. Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ --------------- -------------- ---------------- Revenue $ 1,179,926 $ 929,575 $ 2,109,501 ------------ --------------- ---------------- Costs and expenses: Direct operating, net............................ 401,713 54,295 456,008 Vehicle depreciation and lease charges, net...... 265,060 562,442 827,502 Selling, general and administrative.............. 270,283 95,992 366,275 Interest, net.................................... $ 80,249 100,422 125,323 305,994 Non-vehicle depreciation and amortization........ 17,314 9,145 26,459 Amortization of cost in excess of net assets acquired............................... 20,536 3,058 23,594 ---------- ------------ --------------- ---------------- 80,249 1,075,328 850,255 2,005,832 ---------- ------------ --------------- ---------------- (80,249) 104,598 79,320 103,669 Equity in earnings of subsidiaries............... 107,458 62,027 $ (169,485) ---------- ------------ --------------- -------------- ---------------- Income before provision for income taxes......... 27,209 166,625 79,320 (169,485) 103,669 Provision (benefit) for income taxes........... (29,809) 59,167 17,293 46,651 ---------- ------------ --------------- -------------- ---------------- Net income................................... $ 57,018 $ 107,458 $ 62,027 $ (169,485) $ 57,018 ========== ============ =============== ============== ================
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 8 - Guarantor and Non-Guarantor Condensed Financial Statements (Continued)
Condensed Consolidating Statements of Operations For the six months ended June 30, 1999 (in thousands) --------------------------------------------------------------------------- Non- Avis Group Guarantor Guarantor Holdings, Inc. Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- -------------- ------------ -------------- Revenue $ 1,086,437 $ 117,937 $ 1,204,374 ------------ -------------- --------------- Costs and expenses: Direct operating, net............................ 407,104 54,616 461,720 Vehicle depreciation and lease charges, net...... 288,925 29,546 318,471 Selling, general and administrative.............. 214,450 16,732 231,182 Interest, net.................................... $ 6,918 91,119 1,888 99,925 Non-vehicle depreciation and amortization........ 11,091 1,260 12,351 Amortization of cost in excess of net assets acquired............................... 6,255 96 6,351 ------------- ------------- -------------- -------------- 6,918 1,018,944 104,138 1,130,000 ------------- ------------- -------------- -------------- (6,918) 67,493 13,799 74,374 Equity in earnings of subsidiaries............... 46,965 9,374 $ (56,339) ------------- ------------- -------------- ------------ -------------- Income before provision for income taxes......... 40,047 76,867 13,799 (56,339) 74,374 Provision (benefit) for income taxes........... (2,421) 29,902 4,425 31,906 ------------- ------------- -------------- ------------ -------------- Net income................................... $ 42,468 $ 46,965 $ 9,374 $ (56,339) $ 42,468 ============= ============= ============== ============ ==============
Condensed Consolidating Statements of Operations For the three months ended June 30, 2000 (in thousands) --------------------------------------------------------------------------- Non- Avis Group Guarantor Guarantor Holdings, Inc. Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- -------------- --------------- Revenue $ 619,697 $ 476,771 $ 1,096,468 ------------ ------------- --------------- Costs and expenses: Direct operating, net............................ 204,842 24,472 229,314 Vehicle depreciation and lease charges, net...... 133,722 292,783 426,505 Selling, general and administrative.............. 137,826 48,366 186,192 Interest, net.................................... $ 40,207 56,620 64,370 161,197 Non-vehicle depreciation and amortization........ 8,656 4,784 13,440 Amortization of cost in excess of net assets acquired............................... 10,266 1,496 11,762 ------------- ------------ ------------- --------------- 40,207 551,932 436,271 1,028,410 ------------- ------------ ------------- --------------- (40,207) 67,765 40,500 68,058 Equity in earnings of subsidiaries............... 63,407 32,472 $ (95,879) ------------- ------------ ------------- -------------- --------------- Income before provision for income taxes......... 23,200 100,237 40,500 (95,879) 68,058 Provision (benefit) for income taxes........... (14,233) 36,831 8,028 30,626 ------------- ------------ $ 32,472 $ (95,879) $ 37,432 ============= ============ ============= ============== ===============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 8 - Guarantor and Non-Guarantor Condensed Financial Statements (Continued)
Condensed Consolidating Statements of Operations For the three months ended June 30, 1999 (in thousands) -------------------------------------------------------------------------- Non- Avis Group Guarantor Guarantor Holdings, Inc. Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------ -------------- ------------- ------------- -------------- Revenue $ 578,867 $ 58,590 $ 637,457 -------------- ------------- -------------- Costs and expenses: Direct operating, net............................ 215,521 27,365 242,886 Vehicle depreciation and lease charges, net...... 151,031 14,386 165,417 Selling, general and administrative.............. 111,700 8,681 120,381 Interest, net.................................... $ 3,459 47,029 995 51,483 Non-vehicle depreciation and amortization........ 5,877 692 6,569 Amortization of cost in excess of net assets acquired............................... 3,128 49 3,177 ------------ -------------- ------------- -------------- 3,459 534,286 52,168 589,913 ------------ -------------- ------------- -------------- (3,459) 44,581 6,422 47,544 Equity in earnings of subsidiaries............... 29,531 4,387 $ (33,918) ------------ -------------- ------------- -------------- -------------- Income before provision for income taxes......... 26,072 48,968 6,422 (33,918) 47,544 Provision (benefit) for income taxes........... (1,210) 19,437 2,035 20,262 ------------ -------------- ------------- ------------- -------------- Net income................................... $ 27,282 $ 29,531 $ 4,387 $ (33,918) $ 27,282 ============ ============== ============= ============= ==============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 8 - Guarantor and Non-Guarantor Condensed Financial Statements (Continued)
Condensed Consolidating Statements of Financial Position June 30, 2000 (in thousands) ---------------------------------------------------------------------------- Non- Avis Group Guarantor Guarantor Holdings, Inc. Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------- ------------- -------------- --------------- ASSETS Cash and cash equivalents........................ $ 30 $ 39,204 $ 111,880 $ 151,114 Cash held on deposit with financial institution.. 143,610 143,610 Restricted cash.................................. 243,952 243,952 Accounts receivable, net......................... 241,968 439,182 681,150 Assets held for sale, net........................ 429,393 439,829 869,222 Prepaid expenses................................. 52,714 9,508 62,222 Finance lease receivables........................ 176,916 176,916 Vehicles, net-rental............................. (72,180) 4,221,169 4,148,989 Vehicles, net-leasing............................ (5,213) 3,058,447 3,053,234 Property and equipment, net...................... 167,069 15,498 182,567 Investment in subsidiaries....................... 2,192,807 1,362,888 $ (3,555,695) Other assets..................................... 1,000 67,516 36,281 104,797 Cost in excess of net assets acquired, net................................ 1,237,308 3,518 1,240,826 ------------ ------------- ------------- -------------- --------------- Total assets..................................... $ 2,193,837 $ 3,520,667 $ 8,899,790 $ (3,555,695) $ 11,058,599 ============ ============= ============= ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable................................. $ 294,681 $ 235,819 $ 530,500 Accrued liabilities.............................. $ 5,773 303,352 45,035 354,160 Due (from) to affiliates, net.................... 34,328 (82,846) 125,177 76,659 Current income tax liabilities................... 46,084 (26,072) 20,012 Deferred income tax liabilities, net............. (79,404) 174,682 65,779 161,057 Public liability, property damage and other insurance liabilities, net.................... 203,711 53,766 257,477 Debt............................................. 1,551,500 7,970 6,938,094 8,497,564 Minority interest (preferred membership interest) 99,305 99,305 Preferred stock.................................. 380,225 380,225 Common stockholders' equity...................... 681,640 2,192,808 1,362,887 $ (3,555,695) 681,640 ------------ ------------- ------------- -------------- --------------- Total liabilities, preferred stock and common stockholders' equity.................... $ 2,193,837 3,520,667 $ 8,899,790 $ (3,555,695) 11,058,599 ============ ============= ============= ============== ===============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 8 - Guarantor and Non-Guarantor Condensed Financial Statements (Continued)
Condensed Consolidating Statements of Financial Position December 31, 1999 (in thousands) ---------------------------------------------------------------------------- Non- Avis Group Guarantor Guarantor Holdings, Inc. Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------- ------------- -------------- --------------- ASSETS Cash and cash equivalents........................ $ 54 $ 42,184 $ 29,459 $ 71,697 Cash held on deposit with financial institution.. 93,530 93,530 Restricted cash.................................. 253,080 253,080 Accounts receivable, net......................... (9) 210,962 904,787 1,115,740 Prepaid expenses................................. 41,282 23,034 64,316 Finance lease receivables........................ 871,034 871,034 Vehicles, net-rental............................. (75,581) 3,442,943 3,367,362 Vehicles, net-leasing............................ 55,704 3,078,305 3,134,009 Property and equipment, net...................... 161,651 36,176 197,827 Investment in subsidiaries....................... 2,121,275 1,272,000 $ (3,393,275) Other assets..................................... 1,000 78,863 35,410 115,273 Cost in excess of net assets acquired, net................................ 1,595,529 198,861 1,794,390 ------------ ------------- -------------- -------------- --------------- Total assets..................................... $ 2,122,320 $ 3,382,594 $ 8,966,619 $ (3,393,275) $ 11,078,258 ============ ============= ============== ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable................................. $ 273,102 $ 315,275 $ 588,377 Accrued liabilities.............................. $ 16,774 366,602 (13,923) 369,453 Due (from) to affiliates, net.................... (84,266) (119,494) 263,156 59,396 Current income tax liabilities................... 17,910 316 18,226 Deferred income tax liabilities, net............. (42,982) 144,893 79,345 181,256 Public liability, property damage and other insurance liabilities, net.................... 206,111 53,645 259,756 Debt............................................. 1,562,000 10,305 6,897,500 8,469,805 Minority interest (preferred membership interest) 99,305 99,305 Preferred stock.................................. 371,000 371,000 Common stockholders' equity...................... 670,794 2,112,165 1,272,000 $ (3,393,275) 661,684 ------------ ------------- -------------- -------------- --------------- Total liabilities, preferred stock and common stockholders' equity.................... $ 2,122,320 $ 3,382,594 $ 8,966,619 $ (3,393,275) $ 11,078,258 ============ ============= ============== ============== ===============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 8 - Guarantor and Non-Guarantor Condensed Financial Statements (Continued)
Condensed Consolidating Statements of Cash Flows For the six months ended June 30, 2000 (in thousands) -------------------------------------------------------------------------- Non- Avis Group Guarantor Guarantor Holdings, Inc. Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------- --------------- Net income....................................... $ 57,018 $ 107,458 $ 62,027 $ (169,485) $ 57,018 Adjustments to reconcile net income to net cash provided by (used in) operating activities:.... 60,916 246,846 560,339 868,101 ---------- ------------ ------------- ------------- --------------- Net cash provided by (used in) operating activities 117,934 354,304 622,366 (169,485) 925,119 ---------- ------------ ------------- ------------- --------------- Cash flows from investing activities: Payments for vehicle additions................... (23,363) (3,934,558) (3,957,921) Vehicle deletions................................ (246,667) 2,626,509 2,379,842 Increase in finance lease receivables............ (1) (65,905) (65,906) Payments for property and equipment.............. (22,615) (6,164) (28,779) Retirements of property and equipment............ 5,923 3,095 9,018 Investment in subsidiaries....................... (107,458) (62,027) 169,485 ---------- ------------ ------------- ------------- --------------- Net cash (used in) provided by investing activities (107,458) (348,750) (1,377,023) 169,485 (1,663,746) ---------- ------------ ------------- ------------- --------------- Cash flows from financing activities: Net increase in (repayment of) debt.............. (10,500) (2,335) 890,014 877,179 Payments for debt issuance costs................. (6,199) (1,576) (7,775) ---------- ------------ ------------- --------------- Net cash (used in) provided by financing (10,500) (8,534) 888,438 869,404 activities.................................... ---------- ------------ ------------- --------------- Effect of exchange rate changes on cash.......... (1,280) (1,280) ------------- --------------- Net (decrease) increase in cash and cash equivalents (24) (2,980) 132,501 129,497 Cash and cash equivalents at beginning of period. 54 42,184 122,989 165,227 ---------- ------------ ------------- ------------- --------------- Cash and cash equivalents at end of period.. $ 30 $ 39,204 $ 255,490 $ $ 294,724 ========== ============ ============= ============= =============== Supplemental disclosure of cash flow information: Cash interest paid........................... $ 294,979 =============== Cash income taxes paid....................... $ 23,134 ===============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 8 - Guarantor and Non-Guarantor Condensed Financial Statements (Continued)
Condensed Consolidating Statements of Cash Flows For the six months ended June 30, 1999 ------------------------------------------------------------------------ Non- Guarantor Guarantor Avis Group Parent Subsidiaries Subsidiaries Eliminations Holdings, Inc. ----------- ------------- ------------- ------------ -------------- Cash flows from operating activities: Net income....................................... $ 42,468 $ 46,965 $ 9,374 $ (56,339) $ 42,468 Adjustments to reconcile net income to net cash (used in) provided by operating activities....... (166,712) 303,990 112,117 249,395 ---------- ------------- ------------- ------------ -------------- Net cash (used in) provided by operating activities (124,244) 350,955 121,491 (56,339) 291,863 ---------- ------------- ------------- ------------ -------------- Cash flows form investing activities: Payments for vehicle additions................... 89,213 (2,583,460) (2,494,247) Vehicle deletions................................ (252,063) 1,778,843 1,526,780 Payments for property and equipment............. (16,761) (1,192) (17,953) Retirements of property and equipment............ 1,056 17 1,073 Investment in subsidiaries....................... (46,965) (9,374) 56,339 Payment for purchase of rental car franchise licensees, net of cash acquired of $11,065..... (42,503) (42,503) Payment for purchase of PHH Holdings, net of cash acquired of $170,568........................... (1,330,932) (1,330,932) ----------- ------------- ------------- ------------ -------------- Net cash used in investing activities.......... (1,377,897) (230,432) (805,792) 56,339 (2,357,782) ----------- ------------- ------------- ------------ -------------- Cash flows from financing activities: Net increase in (repayment of) debt.............. 1,573,000 (67,953) 866,950 2,371,997 Payments for debt issuance costs................. (1,600) (35) (1,635) Purchases of treasury stock...................... (57,237) (57,237) Other............................................ 3,326 3,326 Cash dividends................................... 4,866 (4,866) ----------- ------------- ------------- -------------- Net cash provided by (used in) financing activities.................................. 1,517,489 (63,122) 862,084 2,316,451 ----------- ------------- ------------- -------------- Effect of exchange rate changes on cash.......... 87 87 ------------- -------------- Net increase in cash and cash equivalents........ 15,348 57,401 177,870 250,619 Cash and cash equivalents at beginning of period. 11 9,776 19,964 29,751 ----------- ------------- ------------- ------------ -------------- Cash and cash equivalents at end of period...... $ 15,359 $ 67,177 $ 197,834 $ $ 280,370 =========== ============= ============= ============ ============== Cash interest paid............................... $ 107,466 ============== Cash income taxes paid........................... $ 5,329 ============== Business acquired in 1999: Fair value of assets acquired, net of cash acquired $ 6,218,950 of $181,633................................... Liabilities assumed.............................. 4,483,515 -------------- Net assets acquired.............................. 1,735,435 Less: issuance of Series A and Series C Preferred Stocks........................................ (362,000) -------------- Net cash paid for acquisitions................... $ 1,373,435 ==============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 9 - Segment Information Prior to the purchase of VMS on June 30, 1999 (see Note 4), the Company operated in one industry segment; the rental car business. As of July 1, 1999, the Company began operating in two business segments as follows: Vehicle Rental The Company rents vehicles to business and leisure customers Vehicle Leasing andother fee based services The Company leases vehicles to customers under closed-end and open-end leases. Fee based services include fuel and maintenance cards, accident management and various other vehicle services which enable customers to effectively manage costs and enhance productivity. Prior to the purchase of VMS on June 30, 1999, the Company operated in four geographic areas: the United States, Australia/New Zealand, Canada and Other Foreign Operations principally in Puerto Rico, the U.S. Virgin Islands and Argentina. As a result of the VMS acquisition, the Company added an additional geographic area; the United Kingdom (see Note 5). Revenue generated from each of the Company's business segments is recorded in the country in which vehicle rental, vehicle leasing and other fee based services are provided. The accounting policies of each geographic area are the same as those described in the summary of significant accounting policies (see Note 1 of the notes audited annual 1999 consolidated financial statements). EBITDA represents net income, plus non-vehicle interest expense (acquisition interest), non-vehicle depreciation and amortization, amortization of cost in excess of net assets acquired and income taxes. Corporate represents primarily acquisition interest, of cost in excess of net assets acquired and amortization of deferred financing fees. The operations within major business segments and major geographic areas for the three and six months ended June 30, 2000 and 1999 are summarized as follows: Business Segments -----------------
Six months ended June 30, 2000 -------------------------------------------------------------- Vehicle Leasing And other Vehicle Fee Based Rental Services Corporate Consolidated ------------- --------------- -------------- -------------- Revenue.......................................... $ 1,255,473 $ 854,028 $ 2,109,501 ============= =============== ============== EBITDA........................................... $ 131,958 $ 93,392 $ 203 $ 225,553 ============= =============== ============== ============== Income (loss) before provision for income taxes.. $ 110,740 $ 79,848 $ (86,919) $ 103,669 ============= =============== ============== ============== Total assets..................................... $ 5,647,093 $ 5,411,506 $ 11,058,599 ============= =============== ==============
Business Segments -----------------
Six months ended June 30, 1999 ------------------------------------------------------------- Vehicle Leasing And other Vehicle Fee Based Rental Services Corporate Consolidated ------------- -------------- -------------- ------------- Revenue.......................................... $ 1,204,374 $ 1,204,374 ============= ============== EBITDA........................................... $ 94,511 $ (1,435) $ 93,076 ============= ============== ============== Income (loss) before provision for income taxes.. $ 75,809 $ (1,435) $ 74,374 ============= ============== ============== Total assets..................................... $ 6,644,851 $ 4,949,008 $ 11,593,859 ============= ============== ==============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 9 - Segment Information (Continued) Business Segments -----------------
Three months ended June 30, 2000 ------------------------------------------------------------- Vehicle Leasing And other Vehicle Fee Based Rental Services Corporate Consolidated ------------- --------------- -------------- ------------- Revenue.......................................... $ 666,597 $ 429,871 $ 1,096,468 ============= =============== ============= EBITDA........................................... $ 82,515 $ 46,743 $ 129,258 ============= =============== ============= Income (loss) before provision for income taxes.. $ 71,814 $ 39,899 $ (43,655) $ 68,058 ============= =============== ============== ============= Total assets..................................... $ 5,647,093 $ 5,411,506 $ 11,058,599 ============= =============== =============
Business Segments -----------------
Three months ended June 30, 1999 ------------------------------------------------------------- Vehicle Leasing And other Vehicle Fee Based Rental Services Corporate Consolidated ------------- --------------- -------------- ------------- Revenue.......................................... $ 637,457 $ 637,457 ============= ============= EBITDA........................................... $ 58,029 $ (739) $ 57,290 ============= ============== ============= Income (loss) before provision for income taxes.. $ 48,283 $ (739) $ 47,544 ============= ============== ============= Total assets..................................... $ 6,644,851 $ 4,949,008 $ 11,593,859 ============= =============== =============
Geographic Areas ----------------
Six months ended June 30, 200 ---------------------------------------------------------------------------------- Other United United Australia/ Foreign States Kingdom New Zealand Canada Operations Consolidated ----------- ----------- ------------- ------------ ----------- ------------- Revenue.......................................... $ 1,821,997 $ 132,256 $ 60,559 $ 74,491 $ 20,198 $ 2,109,501 =========== =========== ============== ============ =========== ============= EBITDA........................................... $ 164,973 $ 37,110 $ 12,401 $ 8,884 $ 2,185 $ 225,553 =========== =========== ============== ============ =========== ============= Income before provision for income taxes......... $ 54,689 $ 27,337 $ 11,781 $ 8,074 $ 1,788 $ 103,669 =========== =========== ============== ============ =========== ============= Total assets..................................... $10,051,081 $ 424,005 $ 84,406 $ 434,442 $ 64,665 $11,058,599 =========== =========== ============== ============ =========== =============
Geographic Areas ----------------
Six months ended June 30, 1999 ---------------------------------------------------------------------------------- Other United United Australia/ Foreign States Kingdom New Zealand Canada Operations Consolidated ----------- ----------- -------------- ------------ ----------- ------------- Revenue.......................................... $ 1,087,217 $ 61,063 $ 41,297 $ 14,797 $ 1,204,374 =========== ============= ============ =========== ============= EBITDA........................................... $ 80,962 $ 12,902 $ 3,076 $ (3,864) $ 93,076 =========== ============= ============ =========== ============= Income (loss) before provision for income taxes.. $ 63,798 $ 12,258 $ 2,593 $ (4,275) $ 74,374 =========== ============= ============ =========== ============= Total assets..................................... $ 9,768,851 $ 1,285,719 $ 89,291 $ 339,415 $ 110,583 $ 11,593,859 =========== =========== ============= ============ =========== =============
AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Note 9 - Segment Information (Continued) Geographic Areas ----------------
Three months ended June 30, 2000 ---------------------------------------------------------------------------------- Other United United Australia/ Foreign States Kingdom New Zealand Canada Operations Consolidated ----------- ----------- ------------ ------------ ----------- ------------- Revenue.......................................... $ 956,857 $ 64,540 $ 25,486 $ 39,933 $ 9,652 $ 1,096,468 =========== =========== ============= ============ =========== ============= EBITDA........................................... $ 100,806 $ 17,218 $ 4,482 $ 5,763 $ 989 $ 129,258 =========== =========== ============= ============ =========== ============= Income before provision for income taxes......... $ 45,518 $ 12,207 $ 4,183 $ 5,358 $ 792 $ 68,058 =========== =========== ============= ============ =========== ============= Total assets..................................... $10,051,081 $ 424,005 $ 84,406 $ 434,442 $ 64,665 $11,058,599 =========== =========== ============= ============ =========== =============
Geographic Areas ----------------
Three months ended June 30, 1999 ---------------------------------------------------------------------------------- Other United United Australia/ Foreign States Kingdom New Zealand Canada Operations Consolidated ----------- ----------- ------------- ------------ ----------- ------------- Revenue.......................................... $ 578,604 $ 27,399 $ 23,893 $ 7,561 $ 637,457 =========== ============== ============ =========== ============= EBITDA........................................... $ 51,507 $ 4,878 $ 2,666 $ (1,761) $ 57,290 =========== ============== ============ =========== ============= Income (loss) before provision for income taxes.. $ 42,593 $ 4,515 $ 2,422 $ (1,986) $ 47,544 =========== ============== ============ =========== ============= Total assets..................................... $ 9,768,851 $ 1,285,719 $ 89,291 $ 339,415 $ 110,583 $11,593,859 =========== =========== ============== ============ =========== =============
Note 10 - Retirement Benefits Effective January 1, 1999, the Company curtailed its defined benefit plans to its eligible salaried and hourly employees as of June 30, 1985. The Company recognized a non-recurring $7.5 million pre-tax gain as a result of the curtailment which was recorded in January 1999 and is included in Direct Operating Expenses on the accompanying Statement of Operations for the three months and six months ended June 30, 1999. Note 11 - Subsequent Event On July 20, 2000, one of the Company's vehicle financing subsidiaries issued $200 million of Series 2000-3 Floating Rate Rental Car Asset-Backed Notes. The Notes are secured by the Company's vehicles. Anticipated principal repayment on the Notes commence May 2003 through October 2003 . The interest rate with respect to the Series 2000-3 Notes will be equal to Libor plus 19 basis points. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) General Overview The following discussion and analysis of results of operations includes the vehicle rental operations and the vehicle leasing and other fee based services operations ("Vehicle Management Services or VMS") of the Company. 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. Vehicle rental 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. VMS conducts operations principally in the United States, Canada, the United Kingdom and Germany. VMS' business includes providing vehicles on lease and other vehicle related services, such as vehicle acquisition, title and registration, vehicle remarketing and fleet management consultation. VMS' principal feebased products are fuel, vehicle maintenance and accident management services. Management believes that a more meaningful comparison is made when the historical results of operations for the six months and three months ended June 30, 2000 are compared to the pro-forma results of operations for the six months and three months ended June 30, 1999, which give effect to the VMS acquisition, as if it had occurred on January 1, 1999. EBITDA is presented since it is a widely accepted indicator of funds available to service debt, although it is not a measure of liquidity or of financial performance under generally accepted accounting principles ("GAAP"). The Company believes that EBITDA, while providing useful information, should not be considered in isolation or as an alternative to net income or cash flows as determined under GAAP. Revenue Vehicle Rental Revenue: Revenue is recognized over the period the vehicle is rented. Vehicle Leasing Revenue: The Company primarily leases vehicles under three standard arrangements: open-end operating leases, closed-end operating leases or open-end finance leases (direct financing leases). These leases are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for leases". Each lease is either classified as an operating lease or direct financing lease and are included in Vehicles, net-leasing and Finance Lease Receivables, respectively, on the accompanying Statement of Financial Position. Lease terms range from 12 months to 50 months. Amounts charged to the leases for interest on the unrecovered investment are credited to income on a level yield method, which approximates the contractual terms. Other Fee Based Revenue: Revenue from fleet management services other than leasing are recognized over the period in which services are provided and the related expenses are incurred. Costs and Expenses Vehicle rental expenses include: o Direct operating expenses (primarily field operations' wages and related benefits, concessions and commissions paid to airport authorities, vehicle insurance premiums and other costs relating to the operation of rental locations and the rental fleet). o Depreciation and lease charges relating to the rental fleet (including net gains or losses upon disposition of vehicles). o Selling, general and administrative expenses (including payments to Cendant under the Master License Agreement, reservation costs, advertising and marketing costs, and commissions paid to airlines and travel agencies). o Interest expense (primarily relating to the financing of the rental fleet) VMS' vehicle leasing and other fee based services expenses include: o Depreciation and lease charges relating to the fleet (including net gains or losses upon disposition of vehicles). o Selling, general and administrative expenses (including wages and related benefits, information processing and information services costs). o Interest expense (relating primarily to VMS' leased fleet). MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Unaudited) Net income Vehicle rental profitability is primarily a function of the number of rental transactions, pricing of rental transactions and utilization of the rental fleet. VMS' profitability is primarily a function of the number of fee-based transactions, leased vehicle volume and pricing. Corporate Expenses associated with the VMS acquisition, which are primarily interest expense, amortization of cost in excess of net assets acquired and amortization of deferred financing costs are shown separately in a column entitled "Corporate". The following discussion and analysis provides information that management believes to be relevant to understanding the Company's financial position and results of operations: RESULTS OF OPERATIONS Historical Results of Operations for the Six Months Ended June 30, 2000 Compared to Pro-forma Results of Operations for the Six Months Ended June 30, 1999 The following table sets forth for the periods indicated, certain items in the Company's condensed consolidated statement of operations (in thousands):
Historical Pro-forma Six Months ended June 30, 2000 Six Months ended June 30, 1999 --------------------------------------------------- ------------------------------------------------- Vehicle Vehicle Leasing Total Leasing Total and Other Avis Group and Other Avis Group Vehicle Fee Based Holdings, Vehicle Fee Based Holdings, Rental Services Corporate Inc. Rental Services Corporate Inc. ----------- ----------- --------- ------------- ----------- ------------ ---------- ----------- Revenue: Vehicle Rental......... $ 1,255,473 $ 1,255,473 $1,204,374 $ 1,204,374 Vehicle Leasing........ $ 707,158 707,158 $ 687,931 687,931 Other fee based........ 146,870 146,870 124,012 124,012 ----------- ----------- ------------- ----------- ------------ ----------- Total Revenue: 1,255,473 854,028 2,109,501 1,204,374 811,943 2,016,317 ----------- ----------- ------------- ----------- ------------ ----------- Costs and expenses: Direct operating....... 456,008 456,008 461,720 461,720 Vehicle depreciation and lease charges,net...... 319,328 508,174 827,502 318,471 514,837 833,308 Selling, general and administrative....... 235,598 130,880 $ (203) 366,275 231,182 128,519 359,701 Interest, net............ 112,581 121,582 234,163 99,925 94,450 $ 1,000 195,375 ----------- ----------- --------- ------------- ------------ ------------ ---------- ----------- 1,123,515 760,636 (203) 1,883,948 1,111,298 737,806 1,000 1,850,104 ----------- ----------- --------- ------------- ------------ ------------ ---------- ----------- EBITDA................... 131,958 93,392 203 225,553 93,076 74,137 (1,000) 166,213 Interest - acquisition debt................. 71,831 71,831 68,758 68,758 Amortization of cost in excess of net assets acquired... 6,281 3,509 13,804 23,594 6,351 3,997 13,246 23,594 Non-vehicle depreciation and amortization......... 14,937 10,035 1,487 26,459 12,351 11,038 629 24,018 ----------- ----------- --------- ------------- ------------ ------------ ---------- ----------- Income before provision for income taxes.......... $110,740 $ 79,848 $(86,919) 103,669 $ 74,374 $ 59,102 $ (83,633) 49,843 =========== =========== ========= =========== =========== ========== Provision for income taxes 46,651 26,804 ------------- ----------- Net $ 57,018 $ 23,039 income................... ============= ===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Unaudited) VEHICLE RENTAL Revenue Revenue increased 4.2%, from $1,204.4 million to $1,255.5 million, compared to the same period in 1999. The increase reflects an increase in the overall market demand (2.5%) and the impact of two acquisitions completed in 1999: Rent-A-Car Company, Inc. on March 19, 1999 and Motorent, Inc. on June 30, 1999 (1.7% combined). The revenue increase reflects a 3.6% increase in the number of rental transactions and a 0.6% increase in revenue per rental transaction. Total Costs and Expenses Total costs and expenses (including amortization of cost in excess of net assets acquired and non-vehicle depreciation and amortization) increased 1.3%, from $1,130.0 million to $1,144.7 million, compared to the same period in 1999. Direct operating expenses decreased 1.2%, from $461.7 million to $456.0 million, compared to the same period in 1999. As a percentage of revenue, direct operating expenses declined to 36.3 %, from 38.3% for the corresponding period in 1999. The reduction was due primarily to lower maintenance and damage costs (0.5% of revenue), lower airport commissions (1.9% of revenue), lower vehicle insurance costs (0.2% of revenue), and other operating cost savings (0.7%), partially offset by higher compensation costs (0.7% of revenue). 1999 results included a one-time $7.5 million gain (0.6% of revenue), resulting from the curtailment of the Company's Defined Benefit Plans. Vehicle depreciation and lease charges increased 0.3%, from $318.5 million to $319.3 million, compared to the same period in 1999. As a percentage of revenue, vehicle depreciation and lease charges were 25.4% of revenue, as compared to 26.4% of revenue for the corresponding period in 1999. The change reflected a 1.8% increase in the average rental fleet combined with a lower cost per vehicle. Selling, general and administrative expenses increased 1.9%, from $231.2 million to $235.6 million, compared to the same period in 1999. The increase was due to higher royalty fees ($3.3 million), higher marketing expenses ($2.0 million), and higher travel agency commissions expenses ($2.9 million), partially offset by lower general and administrative expenses ($3.5 million). Fleet related interest expense increased 12.7%, from $99.9 million to $112.6 million, compared to the same period in 1999, due to higher borrowings required to finance the growth of the rental fleet and higher average interest rates. Income before provision for income taxes increased 48.9%, from $74.4 million to $110.7 million, compared to the same period in 1999. The increase reflects higher revenue and lower costs and expenses as a percentage of revenue. VEHICLE LEASING AND OTHER FEE BASED SERVICES Revenue VMS' revenue increased 5.2%, from $811.9 million to $854.0 million, compared to the same period in 1999. The increase consists of a 2.8% or $19.2 million increase in vehicle leasing revenue and a 18.4% or $22.9 million increase in other fee based revenue, compared to the same period in 1999. The increase in vehicle leasing revenue reflects a 2.1% increase in leased units and an increase in interest charges billed back to customers due to higher interest rates. The increase in other fee based revenue reflects solid growth in the three major fee based product lines: fuel, maintenance and accident management. Fuel revenue increased 32.1% reflecting an increase in outstanding fuel cards and higher fuel prices. Accident Management continued its strong growth as total revenue increased 17.8%. Total Costs and Expenses Total costs and expenses (including amortization of cost in excess of net assets acquired and non-vehicle depreciation and amortization) increased 2.8%, from $752.8 million to $774.2 million, compared to the same period in 1999. The increase was mainly due to $27.1 million of higher interest expense, resulting from higher interest rates, which for the most part, was billed back to customers. Income before provision for income taxes increased 35.1%, from $59.1 million to $79.8 million, compared to the same period in 1999. The increase reflects higher revenue and lower costs and expenses as a percentage of revenue. CORPORATE Corporate expenses primarily include interest expense and amortization of deferred financing costs related to the Company's Senior Subordinated Notes and Term loans which provided financing for the VMS acquisition (see Acquisition Financing contained in Note 7 of the notes to the condensed consolidated financial statements). Corporate expenses increased 3.9%, from $83.6 million to $86.9 million, compared to the same period in 1999, mainly due to $3.1 million increase in interest expense caused by higher interest rates. TOTAL AVIS GROUP HOLDINGS, INC. Provision for Income Taxes The Company's consolidated provision for income increased 74.0%, from $26.8 million to $46.7 million, compared to the same period in 1999. The effective income tax rate for the period ended June 30, 2000 was 45.0%, down from 53.8% for the corresponding period in 1999. The decrease in the effective income tax rate was due primarily to an increase in income before provision for income taxes. 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 Consolidated net income increased 147.5 %, from $23.0 million to $57.0 million, compared to the same period in 1999. The increase reflects higher revenue, decreased costs and expenses as a percentage of revenue and a lower effective income tax rate. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Unaudited) RESULTS OF OPERATIONS Historical Results of Operations for the Three Months Ended June 30, 2000 Compared to Pro-forma Results of Operations for the Three Months Ended June 30, 1999 The following table sets forth for the periods indicated, certain items in the Company's condensed consolidated statement of operations (dollars in thousands):
Historical Pro-forma Three Months ended June 30, 2000 Three Months ended June 30, 1999 ------------------------------------------------- -------------------------------------------------- Vehicle Vehicle Leasing Total Leasing Total and Other Avis Group and Other Avis Group Vehicle Fee Based Holdings, Vehicle Fee Based Holdings, Rental Services Corporate Inc. Rental Services Corporate Inc. --------- ------------ ---------- ------------- ---------- ------------- ---------- ------------ Revenue: Vehicle Rental............. $ 666,597 $ 666,597 $ 637,457 $ 637,457 Vehicle Leasing............ $ 356,050 356,050 $ 346,411 346,411 Other fee based............ 73,821 73,821 63,626 63,626 --------- ------------ ------------- ---------- ------------- ------------ Total Revenue: 666,597 429,871 1,096,468 637,457 410,037 1,047,494 --------- ------------ ------------- ---------- ------------- ------------ Costs and expenses: Direct operating........... 229,314 229,314 242,886 242,886 Vehicle depreciation and lease charges, net....... 172,096 254,409 426,505 165,417 259,441 424,858 Selling, general and administrative........... 120,203 65,989 186,192 120,381 64,948 185,329 Interest, net.............. 62,469 62,730 125,199 51,483 47,354 $ 500 99,337 --------- ------------ ---------- ------------- ---------- ------------- ---------- ------------ 584,082 383,128 967,210 580,167 371,743 500 952,410 --------- ------------- ---------- ------------- ---------- ------------- ---------- ------------ EBITDA....................... 82,515 46,743 129,258 57,290 38,294 (500) 95,084 Interest - acquisition debt.. $ 35,998 35,998 34,297 34,297 Amortization of cost in excess of net assets acquired....... 3,122 1,727 6,913 11,762 3,177 1,971 6,614 11,762 Non-vehicle depreciation and amortization............... 7,579 5,117 744 13,440 6,569 5,397 314 12,280 ---------- ------------ ---------- ------------- ---------- ------------- ---------- ------------ Income before provision for income taxes.............. $ 71,814 $ 39,899 $ (43,655) $ 68,058 $ 47,544 $ 30,926 $(41,725) 36,745 ========== ============ ========== ========== ============= ========== Provision for income taxes... 30,626 18,296 ------------- ------------ Netincome.................... $ 37,432 $ 18,449 ============= ============
VEHICLE RENTAL Revenue Revenue increased 4.6%, from $637.5 million to $666.6 million, compared to the same period in 1999. The increase reflects overall market demand (3.0%) and the impact of two acquisitions completed in 1999: Rent-A-Car Company, Inc. on March 19, 1999 and Motorent, Inc. on June 30, 1999 (1.6% combined). The revenue increase reflects a 4.4% increase in the number of rental transactions and a 0.1% increase in revenue per rental transaction. Total Costs and Expenses Total costs and expenses (including amortization of cost in excess of net assets acquired and non-vehicle depreciation and amortization) increased 0.8%, from $589.9 million to $594.8 million, compared to the same period in 1999. Direct operating expenses decreased 5.6%, from $242.9 million to $229.3 million, compared to the same period in 1999. As a percentage of revenue, direct operating expenses declined to 34.4%, from 38.1% for the corresponding period in 1999. The reduction was due primarily from lower maintenance and damage costs (0.7% of revenue), lower airport commissions (1.9% of revenue), lower facility expense (0.4%) and other operating cost savings (0.7%). MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Unaudited) Vehicle depreciation and lease charges increased 4.0%, from $165.4 million to $172.1 million, compared to the same period in 1999. As a percentage of revenue, vehicle depreciation and lease charges were 25.8% of revenue, as compared to 25.9% of revenue for the corresponding period in 1999. The change reflected a 3.5% increase in the average rental fleet combined with a higher cost per vehicle. Selling, general and administrative expenses decreased 0.1%, from $120.4 million to $120.2 million, compared to the same period in 1999. The decrease was due to lower general and administrative expenses ($2.8 million) and lower reservation fees ($1.0 million), partially offset by higher royalty fees ($1.8 million) and higher travel agency commissions ($2.0 million). Fleet related interest expense increased 21.3%, from $51.5 million to $62.5 million, compared to the same period in 1999, due to higher borrowings required to finance the growth of the rental fleet and higher average interest rates. Income before provision for income taxes increased 51.0%, from $47.5 million to $71.8 million, compared to the same period in 1999. The increase reflects higher revenue and lower costs and expenses as a percentage of revenue. VEHICLE LEASING AND OTHER FEE BASED SERVICES Revenue VMS' revenues increased 4.8%, from $410.0 million to $429.9 million, compared to the same period in 1999. The increase consists of a $9.6 million increase in vehicle leasing revenue and a 16% or $10.2 million increase in other fee based revenue. The increase in vehicle leasing revenue reflects a 1.8 % increase in leased units and an increase in interest charges billed back to customers due to higher interest rates. The increase in other fee based revenue reflects solid growth in the three major fee based product lines: fuel, maintenance and accident management. Fuel revenue increased 29.9% reflecting an increase in outstanding fuel cards and higher fuel prices. Accident Management continued its strong growth as total revenue increased 26.2 %. Total Cost and Expenses Total costs and expenses (including amortization of cost in excess of net assets acquired and non-vehicle depreciation and amortization) increased 2.9%, from $379.1 million to $390.0 million, compared to the same period in 1999. The increase was mainly due to $15.4 million of higher interest expense, resulting from higher interest rates, which for the most part, was billed back to customers. Income before provision for income taxes increased 29.0%, from $30.9 million to $39.9 million, compared to the same period in 1999. The increase reflects higher revenue and lower costs and expenses as a percentage of revenue. CORPORATE Corporate expenses primarily include interest expense and amortization of deferred financing costs related to the Company's Senior Subordinated Notes and Term loans which provided financing for the VMS acquisition (see Note 7 of the notes to the condensed consolidated financial statements). Corporate expenses increased 4.6%, from $41.7 million to $43.7 million, compared to the same period in 1999, mainly due to $1.7 million increase in interest expense caused by higher interest rates. TOTAL AVIS GROUP HOLDINGS, INC. Provision for Income Taxes The Company's consolidated provision for income taxes increased 67.4%, from $18.3 million to $30.6 million, compared to the same period in 1999. The effective income tax rate was 45.0%, down from 49.8% for the corresponding period in 1999. The decrease in the effective income tax rate was due primarily to an increase in income before provision for income taxes. 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 Consolidated net income increased 102.9%, from $18.4 million to $37.4 million, compared to the same period in 1999. 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 expected to be 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 will be for the acquisition of new vehicles and the repayment of the VMS acquisition indebtedness. For the six months ended June 30, 2000, the Company's expenditures for new vehicles were approximately $4.0 billion and proceeds from the disposition of used vehicles were approximately $2.4 billion. For 2000, management expects the Company's expenditures for new vehicles (net of proceeds from the disposition of used vehicles) to be higher than in 1999. Since the late 1980's, the Company has acquired vehicles related to its vehicle rental operations primarily pursuant to manufacturer repurchase programs. Repurchase prices under the repurchase programs are based on either (1) a specified percentage of original vehicle cost determined by the month the vehicle is returned to the manufacturer or (2) the original capitalization cost less a set daily depreciation amount (the "Repurchase Programs"). Repurchase Programs limit residual risk with respect to vehicles purchased under the programs. This enables management to better estimate depreciation expense in advance. VMS has historically not participated in Repurchase Programs and the Company does not expect it to do so in the future. Generally, customers with open-end leases, which make up approximately 85% of VMS' lease portfolio, bear the residual risk with respect to their vehicles. For closed-end leases, which make up approximately 15% of VMS' lease portfolio, VMS bears the residual risk. The Company has established methods for disposition of used vehicles that are not covered by Repurchase Programs. Historically, the Company's financing requirements for rental vehicles have typically reached an annual peak during the second and third calendar quarters, as fleet levels build in response to increased rental demand during that period. The typical low point for cash requirements occurs during the end of the fourth quarter and the beginning of the first quarter, coinciding with lower levels of vehicle and rental demand. Management expects that this pattern will continue with the addition of VMS, whose cash requirements have historically been relatively consistent over the course of a given year. Management expects that cash flows from operations and funds from available credit facilities will be sufficient to meet the Company's anticipated cash requirements for operating purposes for the next twelve months. Trade receivables, from vehicle rental operations, also provide liquidity with approximately 11 days of daily sales outstanding. The Company made capital investments for property improvements totaling $28.8 million for the six months ended June 30, 2000. The Company has an interest rate management policy, including a target mix for average fixed rate and floating rate indebtedness on a consolidated basis. However, an increase in interest rates may have a material adverse impact on the Company's profitability. Vehicle Rental ABS Facility To support vehicle rental operations, the Company has a domestic integrated financing program that as of June 30, 2000 provides for up to $4.0 billion in financing for vehicles covered by Repurchase Programs, with up to 25% of the asset-backed securities ("ABS") Facility available for vehicles not covered by Repurchase Programs. The ABS Facility provides for the issuance of up to $1.5 billion of asset backed variable funding notes (the "Variable Funding Notes") and $2.5 billion of asset-backed medium term notes are outstanding under the ABS Facility (the "Medium Term Notes"). The Variable Funding Notes and the Medium Term Notes are indirectly secured by, among other things, a first priority security interest in the Company's rental fleet. The Variable Funding Notes support the issuance by a special purpose company of commercial paper notes that are rated A-1 by Standard & Poor's Ratings Services ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's"). The Medium Term Notes are guaranteed under a surety bond issued by MBIA and AMBAC Assurance and as a result are rated AAA by S&P and Aaa by Moody's. At June 30, 2000, the Company had approximately $3.8 billion of debt outstanding under the ABS Facility and had approximately $175 million of additional credit available for rental vehicle purchases. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Unaudited) Based on current market conditions and the Company's current banking relationships, management expects to fund maturities of the Medium Term Notes either by the issuance of new medium term notes or an increase in the outstanding principal amount of the Variable Funding Notes depending on market conditions at the time the Medium Term Notes mature. However, management cannot be sure that this will occur. On May 1, 2000, one of the Company's vehicle rental financing subsidiaries issued $250 million of Series 2000-1 Floating Rate Rental Car Asset-Backed Notes (Series 2000-1 Notes). The notes are secured by the Company's vehicles. Anticipated principal repayment on the Notes commence on February 2003 through July 2003. The interest rate with respect to the Series 2000-1 Notes will be equal to LIBOR plus 19 basis points per annum. The Series 2000-1 Notes are guaranteed under a Suerty Bond issued by AMBAC and are rated AAA by Standards and Poor and Aaa by Moody's. The Series 2000-1 Notes rank pari pasu with the Variable Funding Note and the Medium Term Notes described above. On May 22, 2000, one of the Company's vehicle rental financing subsidiaries issued $300 million of Series 2000-2 Floating Rate Rental Car Asset Backed Notes (Series 2000-2 Notes). These notes were issued as a paired series with the Series 1997-1A Asset-Backed Medium Term Notes, with the proceeds from this series used to fund the scheduled amortization of the Series 1997-1A notes. The notes are secured by the Company's vehicles. Anticipated principal repayment on the Notes commence on March 2007 through August 2007. The interest rate with respect to the Series 2000-2 Notes will be equal to LIBOR plus 34 basis points per annum. The Series 2000-2 Notes are guaranteed under a Suerty Bond issued by AMBAC and are rated AAA by Standards and Poor and Aaa by Moody's. The Series 2000-2 Notes rank pari pasu with the Variable Funding Note and the Medium Term Notes described above. Vehicle Leasing ABS Facilities VMS-U.S currently has a $3.0 billion lease financing program (the "Vehicle Leasing ABS Facility") supported by the leases and vehicles owned by VMS-U.S. The Vehicle Leasing ABS facility consists of two classes of floating rate asset-backed notes; Class A-1 notes, which total $550 million and Class A-2, which total $450 million. Both classes of notes have an interest rate, which is reset monthly at LIBOR plus 32 basis points for the Class A-1 notes and 35 basis points for the Class A-2 notes. The Class A-1 notes have an average expected life of 2 years and commence amortizing on March 2001 with a final stated maturity of October 2006. The Class A-2 notes have an average expected life of 3 years and commence amortizing when the Class A-2 are repaid in full. The Class A-2 notes have a final stated maturity of October 2011. Both classes of notes are rated AAA by S&P and Aaa by Moody's. In addition to the floating rate asset-backed notes, the Company may issue up to $1.75 billion Variable Funding Investor Notes to a group of multi-seller commercial paper conduits. At June 30, 2000, the Company had two series of Preferred Membership Interest outstanding, which total $99.3 million. Preferred Membership Interest are financial instruments issued by the Company to third parties in connection with the VMS vehicle financing. VMS-U.K. currently has a $838 million asset-backed facility (the "U.K. ABS Facility") which is supported by the leases, vehicles and fuel card receivables of the various VMS-U.K. entities. The U.K. ABS Facility is funded through a group of multi-seller commercial paper conduits. As of June 30, 2000 there was $795 million outstanding under this facility, which is included in Assets Held for Sale, net on the accompanying Statement of Financial Position (see Note 5). Borrowings for the Company's other 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. The Company guarantees only the borrowings of its subsidiary in Argentina, which had outstanding debt of $2.8 million at June 30, 2000. At June 30, 2000, the total debt for the Company's other international operations is approximately $270 million. The impact on the Company's liquidity and financial condition due to the exchange rate fluctuations of the Company's foreign operations is not expected to be material. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Unaudited) Acquisition Financing The Company is party to a credit agreement (the " Credit Facility") which provides for up to $1.35 billion of borrowings in the form of (1) A Revolving Credit Facility in the amount of up to $350.0 million, (2) a $250.0 million Term A Loan, (3) a $375.0 million Term B Loan and (4) a $375.0 million Term C Loan. Upon consummation of the VMS Acquisition, Avis borrowed as of June 30, 1999, the full $1.0 billion under the Term A Loan, Term B Loan and Term C Loan and $73.0 million under the Revolving Credit Facility. As of June 30, 2000, there is $60.0 million outstanding under the Revolving Credit Facility, $242.5 million under Term Loan A and $374.5 million outstanding under each of Term Loans B and C. The loans under the Credit Facility bear interest at variable rates at fixed margin, above either Chase Manhattan Bank's alternative base rate or the Eurodollar rate. The Credit Facility is guaranteed by each U.S subsidiary of Avis Group Holdings, Inc., but excluding any insurance subsidiaries, banking subsidiaries, and securitization or other vehicle financing subsidiaries. All borrowings by the Company under the Credit Facility are secured by a first-priority perfected lien on substantially all of the tangible and intangible assets of the Company and each guarantor under the Credit Facility excluding assets that secure the ABS Facilities, and by a pledge of all the capital stock of each of Avis Group Holdings, Inc.'s U.S. subsidiaries and 65% of the capital stock of its first tier non-U.S. subsidiaries. In addition, in connection with the VMS acquisition, the Company issued Senior Subordinated Notes (the "Notes") which mature in 2009. Avis Group Holdings, Inc.'s obligation under the Notes are subordinate and junior in right of payment in all existing and future senior indebtedness of the Company, including all indebtedness under the New Credit Facility. The obligations of the Company under the Notes and the Indenture are guaranteed on a senior subordinated basis by each of the Company's U.S. subsidiaries, other than its banking subsidiaries, insurance subsidiaries and securitization and other vehicle financing subsidiaries which have not guaranteed senior indebtedness of the Company. The Credit Facility and the Indenture contain numerous financing and operating covenants that limit the discretion of the Company's management with respect to certain business matters. Under terms of the credit agreement with the Company's lenders, approximately $800 million of the net proceeds from the sale of PHH Europe will be used to reduce the Company's acquisition financing (see Note 5). These covenants place significant restrictions on, among other things, the ability of the Company and certain of its subsidiaries to incur additional indebtedness, pay dividends and other distributions, prepay subordinated indebtedness, create liens or other encumbrances, make capital expenditures, make certain investments or acquisitions, engage in certain transactions with affiliates, sell or otherwise dispose of assets and merge with other entities and otherwise restrict corporate activities. The Credit Facility and the Indenture contain customary events of default. As of June 30, 2000, the Company was in compliance with all such covenants. Seasonality The Company's vehicle rental business is seasonal, 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. Since VMS' business is generally not seasonal, these patterns of seasonality are expected to continue. 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. Inflation The increased acquisition cost of vehicles is the primary inflationary factor affecting the Company's operations. Many of the Company's other operating expenses are inflation sensitive, with increases in inflation generally resulting in increased costs of operations. The effect of inflation-driven cost increases on the Company's overall operating costs is not expected to be greater for the Company than for its competitors. Recent Accounting Standards A recent pronouncement of the Financial Accounting Standards Board which is not required to be adopted at this date, is Statement of Financial Accounting Standards ("SFAS") No. 133 - "Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133") which is effective for the Company's consolidated financial statements for the year ending December 31, 2001. 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. The adoption of SFAS 133 is not expected to have a material effect on the Company's 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; 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, 1999. Actual results may differ materially from those projected. These forward-looking statements represent the Company's judgement as of the date of this report. ITEM 3: QUANTITATIVE AND QUALITATIVE FINANCIAL DISCLOSURES ABOUT MARKET RISKS Quantitative and Qualitative Financial Disclosures About Market Risk The Company has derivative financial instruments at June 30, 2000 that are sensitive to changes on its debt obligations and on its interest rate swap agreements. The following derivative instruments' agreements have been entered into by the Company: (a) In order to reduce its risk from interest rate fluctuations under its asset backed debt, the Company has entered into domestic interest rate cap and interest rate floor agreements with duration of 10 years, respectively. The domestic interest rate cap and interest rate floor agreements have notional values of $526.9 million and $366.6 million, respectively. The agreements established the domestic and foreign interest rate ceiling and floor on asset-backed vehicle financing of 6.13% and 5.0%, respectively. (b) The Company has also entered in U.S and Foreign Interest Rate Swap Agreements, which effectively convert floating to fixed rates of interest. At June 30, 2000, these swap agreements have an aggregate notional value of $1,410.5 million and terminate through May 2005. (c) Depending on market fundamentals of the price of gasoline and other conditions, the Company may purchase put options to reduce or eliminate the risk of gasoline price declines. Put options purchased by the Company effectively establish a minimum sales transaction fee for the volume of gasoline purchased on the Company's programs. An increase in the value of the options is highly correlated to decreases in the average price of gasoline purchased by the Company's cardholders. Put options permit the Company to participate in price increases above the option price. The cost of an option is amortized in the month the option expires. Gains from the sale or exercise of options are recognized when the underlying option is sold. At June 30, 2000, the total contract amount of such options was 25.7 million gallons of gasoline and the unamortized cost of options was $277 thousand and is included in other assets in the Company's consolidated statement of financial position. 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 Group Holdings, Inc. -------------------------- (Registrant) Dated: August 9, 2000 By: /s/ Kevin M. Sheehan ----------------------------- President-Corporate and Business Affairs and Chief Financial Officer (principal financial officer) Dated: August 9, 2000 By: /s/ Timothy M. Shanley ----------------------------- Vice President and Controller (principal accounting officer) Part II. Other Information ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of the Company's stockholder's was held on May 16, 2000. The following matters were submitted to a vote of the stockholders as was described in the Company's Proxy Statement, which was filed together with the Company's Annual Report on Form 10-K dated April 14, 2000: 1) To elect eleven directors for a one-year term and until their successors are duly elected and qualified; 2) To ratify the appointment of Deloitte & Touche LLP as the auditors of the Company's financial statements for the year ending December 31, 2000; 3) To approve the amendment to the Company's Amended and Restated Certificate of Incorporation to (I) reclassify the Company's 100,000,000 shares of authorized Common Stock as a Class A Common Stock and (ii) authorize 15,000,000 shares of non-voting Class B Common Stock which may be converted into Class A Common Stock under certain circumstances; 4) To approve the Company's 2000 Incentive Compensation Plan ITEM: 6(a) EXHIBITS SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Exhibits filed with Form 10-Q for the quarter ended June 30, 2000 under the Securities Exchange Act of 1934. AVIS GROUP HOLDINGS, INC. Commission file number 1-13315 EXHIBIT INDEX Exhibit No. Description Page No -------- ---------------------------------------- -------- 27 Financial Data Schedule for 28 the Six months ended June 30, 2000 ITEM: 6(b) CURRENT REPORT ON FORM 8-K On July 14, 2000, the Company filed a Form 8-K that with the approval of it's Board of Director's and it's stockholders, giving notification that it had reclassified its existing Common Stock as Class A Common Stock.