-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WDSFP91OqeNq84FaF/WGllaVJod5NvGzfdquTrPlV8yr9DXCtH+rnLZ6Q8dzTaVz mrGE74rB41BHZs/Ibvz0PA== 0000891104-96-000030.txt : 19961206 0000891104-96-000030.hdr.sgml : 19961206 ACCESSION NUMBER: 0000891104-96-000030 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961205 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19961205 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HFS INC CENTRAL INDEX KEY: 0000891104 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 223059335 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11402 FILM NUMBER: 96676367 BUSINESS ADDRESS: STREET 1: 339 JEFFERSON RD CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 2014289700 MAIL ADDRESS: STREET 2: 339 JEFFERSON RD CITY: PARSIPPANY STATE: NJ ZIP: 07054 FORMER COMPANY: FORMER CONFORMED NAME: HOSPITALITY FRANCHISE SYSTEMS INC DATE OF NAME CHANGE: 19940202 8-K/A 1 FORM 8-K/A DATED DECEMBER 5, 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________ Form 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ____________ December 5, 1996 (August 29, 1996) (Date of Report (date of earliest event reported)) HFS Incorporated (Exact name of Registrant as specified in its charter) Delaware 1-11402 22-3059335 (State or other jurisdiction (Commission File No.) (I.R.S. Employer of incorporation or organization) Identification No.) 6 Sylvan Way Parsippany, New Jersey 07054 (Address of principal executive office) (Zip Code) (201) 428-9700 (Registrant's telephone number, including area code) This Current Report on Form 8-K/A amends the Current Report on Form 8-K of HFS Incorporated (the "Company" or "Registrant") dated August 29, 1996. Item 7. Exhibits Exhibit No. Description 23.1 Consent of Price Waterhouse LLP 99.1 The audited consolidated statements of financial position of Avis, Inc. and its subsidiaries at February 29, 1996 and February 28,1995, and the related consolidated statements of operations, of changes in stockholders' equity, of changes in redeemable preferred stock, and of cash flows for each of the three years in the period ended February 29, 1996. 99.2 The unaudited consolidated financial statements of Avis, Inc. and its subsidiaries at May 31, 1996 and for the three months ended May 31, 1996 and 1995. 99.3 The unaudited consolidated financial statements of Avis, Inc. and its subsidiaries at August 31, 1996 and for the six months ended August 31, 1996 and 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HFS INCORPORATED By: /s/ Michael P. Monaco Michael P. Monaco Vice Chairman and Chief Financial Officer Date: December 5, 1996 HFS INCORPORATED CURRENT REPORT ON FORM 8-K Report Dated December 5, 1996 (August 29, 1996) EXHIBIT INDEX Exhibit No. Description 23.1 Consent of Price Waterhouse, LLP 99.1 The audited consolidated statements of financial position of Avis, Inc. and its subsidiaries at February 29, 1996 and February 28,1995, and the related consolidated statements of operations, of changes in stockholders' equity, of changes in redeemable preferred stock, and of cash flows for each of the three years in the period ended February 29, 1996. 99.2 The unaudited consolidated financial statements of Avis, Inc. and its subsidiaries at May 31, 1996 and for the three months ended May 31, 1996 and 1995. 99.3 The unaudited consolidated financial statements of Avis, Inc. and its subsidiaries at August 31, 1996 and for the six months ended August 31, 1996 and 1995. EX-23 2 EX. 23.1 - CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 333-11029 and 333-11031), and Form S-8 (Nos. 33-56354, 33-70632, 33-72752, 33-83956, 333-06733, 33-94756, 333-03532 and 333-06939) of HFS, Inc. of our report dated April 25, 1996 relating to the consolidated financial statements of Avis, Inc., which appears in the Current Report on Form 8-K/A of HFS, Inc. dated August 29, 1996. Price Waterhouse LLP New York, New York December 4, 1996 EX-99.1 3 EX. 99.1 - AVIS STATEMENTS EXHIBIT 99. 1 Report of Independent Accountants To the Board of Directors and Stockholders of Avis, Inc. In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of changes in stockholders' equity, of changes in redeemable preferred stock, and of cash flows present fairly, in all material respects, the financial position of Avis, Inc. and its subsidiaries at February 29, 1996 and February 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 29, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP New York, New York April 25, 1996 AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 (In thousands) ASSETS 1996 1995 ----------- ----------- Cash and cash equivalents .......................... $ 49,326 $ 36,643 Accounts receivable, net ........................... 144,842 109,408 Due from affiliated company ........................ 75,635 71,570 Prepaid expenses ................................... 40,227 32,612 Vehicles, net ...................................... 2,064,943 1,767,050 Property and equipment, net ........................ 146,429 125,019 Other assets ....................................... 176,368 153,908 Cost in excess of fair value of net assets acquired 506,683 503,051 ----------- ----------- Total assets .................................. $ 3,204,453 $ 2,799,261 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ................................... $ 181,920 $ 182,103 Accrued liabilities ................................ 200,870 166,542 Current and deferred income taxes .................. 36,339 30,191 Public liability and property damage ............... 205,698 198,180 Debt ............................................... 2,043,143 1,570,482 Due to affiliated company .......................... 122,111 273,298 Redeemable preferred stock ......................... 72,409 77,274 Redeemable portion of common stock ................. 295,482 213,523 Unearned compensation .............................. (263,024) (277,787) Participating convertible preferred stock (par value $.01 per share, 15,000,000 shares authorized, 9,788,623 shares outstanding in 1996 and 1995) ... 132,000 132,000 Common stock (par value $.01 per share, 100,000,000 shares authorized; 23,619,703 shares and 23,619,828 shares outstanding in 1996 and 1995, respectively) .................. 290 290 Additional paid in capital ......................... 215,644 275,071 Treasury stock ..................................... (102,252) (102,251) Retained earnings .................................. 62,095 59,818 Foreign currency equity adjustment ................. 1,728 527 ----------- --------- Commitments and contingencies Total liabilities and stockholders' equity .... $ 3,204,453 $ 2,799,261 =========== =========== See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND FEBRUARY 28, 1994 (In thousands)
Years Ended ----------------------------------------- February 29, February 28, February 28, 1996 1995 1994 ----------- ------------ ----------- Revenues ...................................... $ 1,716,677 $ 1,455,588 $ 1,371,324 ----------- ----------- ----------- Cost and expenses: Direct operating ............................ 749,406 688,287 643,272 Vehicle depreciation ........................ 379,501 313,778 254,346 Vehicle lease charges ....................... 125,483 81,568 78,670 Selling, general and administrative ......... 244,999 211,040 186,294 Interest .................................... 149,534 135,607 125,505 Unrealized foreign exchange (gain) loss ....... 410 (777) (360) Amortization of unearned compensation - Employee Stock Ownership Plan ............... 15,875 15,804 15,804 Amortization of cost in excess of fair value of net assets acquired and other intangibles ... 16,420 16,219 15,983 ----------- ----------- ----------- Income (loss) before income taxes and preferred stock dividends ................... 35,049 (5,938) 51,810 Provision for income taxes .................... 23,977 13,160 28,322 ----------- ----------- ----------- Net income (loss) ............................. 11,072 (19,098) 23,488 Preferred stock dividends ..................... (8,769) (8,769) (7,015) ----------- ----------- ----------- Income (loss) available for common shares ..... $ 2,303 $ (27,867) $ 16,473 =========== =========== ===========
See accompanying notes to the consolidated financial statements. AVIS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED FEBRUARY 29, 1996 (In thousands)
Participating Convertible Common Stock Preferred Stock -------------------- ----------------- Foreign Additional Additional Treasury currency Par paid-in Par paid-in stock Retained equity value capital value capital (at cost) earnings adjustment ------- ---------- ----- --------- --------- --------- ---------- Balance March 1, 1995 ......................... $ 290 $ 275,071 $ 98 $ 131,902 $(102,251) $ 59,818 $ 527 Amortization of unearned compensation expense for the year ended February 29, 1996 ....... 20 Net income for the year ended February 29, 1996 .......................... 11,072 Tax benefit of ESOP income tax deductions for the year ended February 29, 1996 ........ 22,885 Increase in pension liability over unrecognized prior service cost .......................... (373) Foreign currency equity adjustment for the year ended February 29, 1996 ................ 1,201 Payment of common and preferred stock dividends (8,781) Change in redeemable portion of common stock .. (81,959) Purchase of treasury stock (125 shares) ....... (1) Appropriation for amortization of discount from redemption value of preferred stock .... (14) ------- --------- ----- --------- --------- --------- --------- Balance February 29, 1996 ..................... $ 290 $ 215,644 $ 98 $ 131,902 $(102,252) $ 62,095 $ 1,728 ======= ========= ===== ========= ========= ========= =========
See accompanying notes to the financial statements. AVIS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED FEBRUARY 28, 1995 (In thousands)
Participating Convertible Common Stock Preferred Stock ----------------- ------------------ Foreign Additional Additional Treasury currency Par paid-in Par paid-in stock Retained equity value capital value capital (at cost) earnings adjustment ------ ---------- ------ --------- --------- -------- ---------- Balance March 1, 1994 .......................... $ 290 $ 56,038 $ 98 $ 131,902 $(100,712) $ 87,698 $ (837) Net loss for the year ended February 28, 1995 ........................... (19,098) Tax benefit of ESOP income tax deductions for the year ended February 28, 1995 ......... 6,627 Reduction of pension liability over unrecognized prior service cost ........................... 178 Foreign currency equity adjustment for the year ended February 28, 1995 ................. 1,364 Payment of preferred stock dividends ........... (8,769) Change in redeemable portion of common stock ... 212,228 Appropriation for amortization of discount from redemption value of preferred stock ..... (13) Purchase of treasury stock (85,696 shares) ..... (1,539) ------ ------- ------ --------- --------- --------- ------- Balance February 28, 1995 ...................... $ 290 $275,071 $ 98 $ 131,902 $(102,251) $ 59,818 $ 527 ====== ======== ===== ========= ========= ======== =======
See accompanying notes to the consolidated financial statements. AVIS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED FEBRUARY 28, 1994 (In thousands)
Participating Convertible Common Stock Preferred Stock Foreign ------------------ ---------------- Common Currency Additional Additional Treasury stock equity Par paid-in Par paid-in stock purchase Retained Adjust- value capital value capital (at cost) warrants earnings ment ------ ---------- ----- ---------- --------- -------- -------- -------- Balance March 1, 1993 .............................. $ 284 $(118,916) $ 98 $ 131,902 $ (25,089) $ 155 $71,242 $ 282 Net income for the year ended February 28, 1994 .... 23,488 Cumulative effect of change in accounting for income taxes (SFAS No. 109) ...................... 68,100 Tax benefit derived from change in statutory income tax rates under the Revenue Reconciliation Act of 1993 ....................... 2,000 Tax benefit of ESOP income tax deductions for the year ended February 28, 1994 ............. 16,855 Excess of additional pension liability over unrecognized prior service cost .................. (258) Foreign currency equity adjustment for the year ended February 28, 1994 ..................... (1,119) Payment of common and preferred stock dividends .... (7,019) Change in redeemable portion of common stock ....... 86,600 Appropriation for amortization of discount from redemption value of preferred stock ......... (13) Exchange of common stock for Series C preferred stock (2,889,057 shares) ......................... (53,968) Purchase of treasury stock (1,147,890 shares) ...... (21,655) Common stock issued under stock option plan (77,462) 1 403 Common stock purchase warrants exercised (599,452 shares @ $2.37; redeemed 19,045 shares @ $16.56) . 5 1,254 (155) ----- -------- ----- --------- --------- ------ ------- ------- Balance February 28, 1994 .......................... $ 290 $ 56,038 $ 98 $ 131,902 $(100,712) $ $87,698 $ (837) ====== ======== ===== ========= ========== ====== ======= =======
See accompanying notes to the financial statements. AVIS, INC. CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE PREFERRED STOCK FOR THE YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND FEBRUARY 28, 1994 (In thousands)
Series A Series B Series C preferred preferred preferred Additional Discount on Total stock stock stock paid-in preferred preferred par value par value par value capital stock stock --------- --------- --------- ---------- ---------- --------- Balance March 1, 1993 ............ $ 2 $ 2 - $ 23,369 $ (93) $ 23,280 Accretion in preferred stock for amortization of discount from redemption value ................. 13 13 Issuance of Series C preferred stock $ 29 53,939 53,968 ------ ------ ------- -------- ------ -------- Balance February 28, 1994 .......... 2 2 29 77,308 (80) 77,261 ------ ------ ------- -------- ------ -------- Accretion in preferred stock for amortization of discount from redemption value ................. 13 13 ------ ------ ------- -------- ------ ------- Balance February 28, 1995 .......... 2 2 29 77,308 (67) 77,274 ------ ------ ------- -------- ------ ------- Accretion in preferred stock for amortization of discount from redemption value ................. 14 14 Redemption of preferred stock ...... (4,879) (4,879) ------ ------ ------- -------- ------ -------- Balance February 29, 1996 .......... $ 2 $ 2 $ 29 $ 72,429 $ (53) $ 72,409 ====== ====== ======= ======== ====== ========
See accompanying notes to the consolidated financial statements. AVIS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND FEBRUARY 28, 1994 (In thousands) Increase (decrease) in cash and cash equivalents
Years Ended ------------------------------------------- February 29, February 28, February 28, 1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss) ....................................... $ 11,072 $ (19,098) $ 23,488 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ........................... 444,498 388,066 326,200 Deferred income tax provision ........................... 15,404 2,018 20,673 Provision for losses on accounts receivable ............. 1,803 85 1,815 Gain on sale of the Canadian Car Lease Division ......... (2,629) Change in operating assets and liabilities: Finance lease receivable .............................. 2,321 3,117 Accounts receivable and due from affiliated company ... (31,965) 5,255 10,400 Prepaid expenses ...................................... (7,362) (4,425) 2,321 Other assets .......................................... (3,373) (3,888) (11,085) Accounts payable ...................................... (6,183) 20,844 39,768 Accrued liabilities ................................... 38,247 25,538 846 Public liability and property damage .................. 7,455 15,417 5,883 ----------- ----------- ----------- Net cash provided by operating activities ............. 469,596 432,133 420,797 ----------- ----------- ----------- Cash flows from investing activities: Payments for vehicle additions .......................... (2,557,368) (3,105,223) (2,745,150) Proceeds received from vehicle sales ................... 1,867,111 2,699,944 2,613,457 Payments for additions to property and equipment, net ... (37,177) (26,434) (15,076) Purchase of Agency Rent A Car ........................... (20,524) Proceeds from the sale of the Canadian Car Lease Division 87,192 Investment in associated companies ...................... (7,525) (100) (4,495) ----------- ----------- ----------- Net cash used in investing activities ................. (755,483) (431,813) (64,072) ----------- ----------- ----------- Cash flows from financing activities: Increase (decrease) in debt and due to affiliated company ............................................... 316,302 (100,911) (20,484) Increase in deferred debt issuance costs ................ (3,028) (1,200) (7,151) Principal payments on ESOP acquisition debt ............. (73,250) (61,750) Payment of common and preferred stock dividends ......... (8,781) (8,769) (7,019) Purchase of treasury stock .............................. (1) (1,539) (21,655) Increase in unearned compensation ....................... (1,092) Decrease in debt due to the sale of the Canadian Car Lease Division .................................... (77,842) Redemption of preferred stock ........................... (4,879) Other financing activities, net ......................... 1,508 ----------- ----------- ----------- Net cash provided by (used in) financing activities ......... 298,521 (185,669) (194,393) ----------- ----------- ----------- Effect of exchange rate changes on cash ..................... 49 (272) 381 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ........ 12,683 (185,621) 162,713 Cash and cash equivalents at beginning of period ............ 36,643 222,264 59,551 ----------- ----------- ----------- Cash and cash equivalents at end of period .................. $ 49,326 $ 36,643 $ 222,264 =========== =========== =========== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest .............................................. $ 147,960 $ 137,351 $ 128,572 Income taxes .......................................... 7,747 9,307 4,299
Disclosure of accounting policy: For purposes of reporting cash flows, the Company considers deposits and short-term investments with an initial maturity of three months or less to be cash equivalents. The effect of unrealized foreign currency revaluations on the assets and liabilities of foreign subsidiaries has been eliminated. Changes in vehicles and vehicle related accounts are included in the cash flows from investing activities. See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND FEBRUARY 28, 1994 Note 1 - ESOP Transaction In 1987, the trust for the Employee Stock Ownership Plan (ESOP) of Avis, Inc. (the "Company") acquired all the outstanding common stock of Avis, Inc. This transaction has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. Accordingly, the purchase price has been allocated based on the estimated fair value of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of the Company's net assets is included in "Cost in excess of fair value of net assets acquired" on the consolidated balance sheet. Note 2 - Summary of Significant Accounting Policies Principles of Consolidation The Company's primary business is the rental of automobiles. The consolidated financial statements include the accounts of all majority-owned subsidiaries of Avis, Inc. combined with related accounts of the ESOP and Prime Vehicles Trust. Intercompany accounts and transactions among Avis, Inc., its subsidiaries, the ESOP and Prime Vehicles Trust (Vehicle Trust) have been eliminated. During the year ended February 29, 1996, the Company acquired the rights to the name and certain assets of Agency Rent A Car, Inc., a company primarily engaged in the insurance replacement car rental business. Investments in associated companies in which the Company has a 20 percent or greater interest are accounted for under the equity method of accounting. Generally accepted accounting principles require the use of estimates, which are subject to change, in the preparation of financial statements. Certain amounts of the prior period have been reclassified for comparability. Revenue Recognition Revenue derived from the rental of automobiles is recognized when earned and expenses are recorded when incurred. Vehicles Vehicles are stated at cost net of accumulated depreciation. When vehicles are sold, gains or losses are reflected as an adjustment to depreciation. Vehicles are generally depreciated at a rate of 10% to 25% per annum. Property and Equipment Property and equipment is stated at cost net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful life of the assets. Estimated useful lives range from thirty years for buildings to five to ten years for furniture and office equipment. Leasehold improvements are amortized over the shorter of twenty years or the remaining life of the lease. Maintenance and repairs are expensed; renewals and improvements are capitalized. When depreciable assets are retired or sold, the cost and related accumulated depreciation are removed from the accounts with any resulting gain or loss reflected in income. Cost in Excess of Net Assets Acquired and Other Intangibles Cost in excess of net assets acquired is amortized over a 40 year period and is shown net of accumulated amortization of approximately $126 million and $110 million at February 29, 1996 and February 28, 1995, respectively. Impairment Accounting In 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Company reviews the recoverability of its long-lived assets, including goodwill and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recoverable. The measurement of possible impairment is based on the Company's ability to recover the asset from the expected future pre-tax undiscounted cash flows of the related asset. The measurement of impairment requires management to use estimates of expected future cash flows related to long-lived assets. It is at least reasonably possible that future events or circumstances could cause these estimates to change. The Company's policy on impairment in prior years was not materially different. Public Liability and Property Damage Provision for public liability and property damage on claims for which the Company is self-insured is made by a charge to expense based upon evaluations of estimated ultimate liabilities on reported and unreported claims. The Company is self-insured up to $1 million per claim. The liability for public liability and property damage is calculated using an accepted actuarial method and is not discounted or calculated on a present-value basis. Income Taxes Effective March 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). The provision for income taxes includes current and deferred income taxes. Deferred income taxes arise from temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The Company derives income tax benefits for contributions, distributions and dividends remitted to the ESOP (see note 15). The Company reflects the tax benefit of ESOP income tax deductions as an increase to stockholders' equity. The Company does not provide for federal income taxes on the undistributed portion of the Company's earnings of foreign subsidiaries and affiliates that is anticipated to be permanently reinvested for growth and expansion. Pensions Costs of the defined benefit plans are actuarially determined under the projected unit credit cost method and include amounts for current service and interest on projected benefit obligations and plan assets. The Company's policy is to fund at least the minimum contribution amount required by the Employee Retirement Income Security Act of 1974. Foreign Currency Translation The balance sheets of foreign operations are translated at rates of exchange at the balance sheet date and income statements are translated at average exchange rates for the periods presented. Translation gains and losses are included as a component of stockholders' equity. Advertising Advertising costs are expensed as incurred. There are no deferred costs for advertising at February 29, 1996, February 28, 1995 and February 28, 1994. Environmental Costs The Company's operations include the storage and dispensing of gasoline. Expenses in connection with the remediation of accidental fuel discharges at various locations are provided for when it is probable that obligations have been incurred and amounts can be reasonably estimated. Recoveries from insurance companies and other reimbursements are generally immaterial. The Company provided $6,894,000, $2,850,000 and $2,822,000 for remediation costs during the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Note 3 - Accounts Receivable and Due from Affiliated Company Accounts receivable is comprised of the following (in thousands): February February 29, 1996 28, 1995 --------- --------- Vehicle rentals .................................. $103,731 $ 73,963 Damage claims .................................... 7,134 7,997 Due from licensees ............................... 3,336 2,271 Due from vehicle manufacturers ................... 87,977 78,792 Other ............................................ 22,765 21,224 -------- -------- 224,943 184,247 Less allowance for doubtful accounts ............. 4,466 3,269 -------- -------- $220,477 $180,978 ======== ======== The provision for losses on accounts receivable was $1,803,000, $85,000 and $1,815,000 for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Note 4 - Vehicles Vehicles are stated at cost, net of accumulated depreciation as follows (in thousands): February February 29, 1996 28, 1995 ----------- ----------- Vehicles ............................... $ 2,358,936 $ 1,927,995 Accumulated depreciation ............... (293,993) (160,945) ----------- ----------- $ 2,064,943 $ 1,767,050 =========== =========== Included in vehicles are vehicles acquired under short and long-term capital leases, as described in Note 9, of $30,098,000 and $47,291,000 (net of accumulated depreciation of $54,834,000 and $37,641,000) at February 29, 1996 and February 28, 1995, respectively. Also included in vehicles are $34,924,000 and $29,441,000 of buses and other support vehicles used in the operation of the Company's business at February 29, 1996 and February 28, 1995, respectively. Vehicles also include vehicles held for sale as follows (in thousands): February February 29, 1996 28, 1995 -------- -------- Vehicles held for sale ..................... $ 27,041 $ 6,733 Accumulated depreciation ................... (4,092) (1,051) -------- -------- $ 22,949 $ 5,682 ======== ======== Depreciation expense recorded for vehicles was $392,946,000, $337,038,000 and $277,230,000, net of a gain on the disposal of vehicles of $13,445,000, $23,260,000 and $22,884,000 for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Costs and expenses are offset by certain incentives and allowances from various vehicle manufacturers, the most significant of which was received from the General Motors Corporation. Approximately $99 million, $103 million and $104 million was recognized from these incentives and allowances in the Consolidated Statement of Operations for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. In November 1988 and April 1990, the Company entered into seven year operating leases under which a combined original amount of $324.3 million of vehicles were leased. The leases are cancelable at the Company's option; however, additional costs may be incurred upon termination based upon the fair value of the vehicles at the time the option is exercised. At the termination of the leases, the Company may purchase the vehicles at an agreed-upon fair market value or return them to the lessor. In December 1994, the Company entered into a financing arrangement whereby it may lease up to $500 million of vehicles. Under this arrangement at February 29, 1996, there were $357.7 million of vehicles acquired under operating leases. The vehicles leased under this arrangement may be leased for periods of up to 18 months. The lease cost charged to the Company varies with the number of vehicles leased and the repurchase agreement offered by the vehicle manufacturer to the lessor and includes all expenses including the interest costs of the financing company. The rental payments due in each of the succeeding years for these leases, as described above, are as follows (in thousands): February 28, 1997 ....................................... $96,276 February 28, 1998 ....................................... 5,729 Rental expense for those vehicles acquired under operating leases as described above was $106,024,000, $65,241,000 and $57,055,000 for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Note 5 - Property and Equipment Property and equipment is comprised of the following (in thousands): February February 29, 1996 28, 1995 -------- -------- Land ........................................... $ 19,652 $ 19,975 Buildings ...................................... 14,767 12,643 Leasehold improvements ......................... 144,488 134,833 Furniture, fixtures and equipment .............. 31,669 28,743 Construction in progress ....................... 15,670 6,254 -------- -------- 226,246 202,448 Less accumulated depreciation and amortization ............................. 79,817 77,429 -------- -------- $146,429 $125,019 ======== ======== Depreciation and amortization expense was $16,404,000, $14,572,000 and $14,665,000 for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Note 6 - Investments in Associated Companies Investments in associated companies, included in other assets, consist of the following (in thousands): February February 29, 1996 28, 1995 -------- -------- Avis Europe Limited and Subsidiaries ............. $59,614 $52,499 Other ............................................ 2,325 1,945 ------- ------- $61,939 $54,444 ======= ======= At February 28, 1995 the Company owned 7.4% of the common stock of Cilva Holdings, Plc (Cilva). During 1996, the Company also acquired additional common stock in Cilva for $7.5 million, resulting in total holdings of 8.7% at February 29, 1996. On February 28, 1996 Cilva recapitalized its shareholder debt instruments whereby the Company exchanged its holdings in debt securities for newly issued common stock in a successor company, Avis Europe Limited. The Company accounts for its investment on the cost method of accounting. The Company may redeem a portion of its investment in Avis Europe Limited between March 1, 2000 and July 15, 2000. The Company also has an investment of approximately $1 million in the preferred shares of Avis Europe, Plc, a subsidiary of Avis Europe Limited. In 1992, the Company discontinued accruing interest income and recorded a provision for possible loss on its investments in Cilva, including interest income accrued but yet unpaid. The Company recorded and fully reserved $6,631,000, $5,931,000 and $5,370,000 of interest income for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. The equity in earnings of other associated companies was $366,000, $334,000 and $460,000 for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Note 7 - Accrued Liabilities Accrued liabilities is comprised of the following (in thousands): February February 29, 1996 28, 1995 -------- -------- Payroll and related costs .................... $ 60,986 $ 41,249 Taxes, other than income taxes ............... 10,206 6,335 Interest ..................................... 20,073 15,782 Sales and marketing .......................... 20,697 23,257 Remediation of fuel discharges ............... 9,726 5,747 Other various ................................ 79,182 74,172 -------- -------- $200,870 $166,542 ======== ======== Note 8 - Debt and Due to Affiliated Company Debt outstanding is comprised of the following (in thousands): February February 29, 1996 28, 1995 --------- ---------- Commercial paper - vehicle trust financing ....... $ 29,550 $ 1,000 Short-term capital lease obligation .............. 142 Short-term notes - foreign ....................... 46,635 38,356 Current portion of long-term debt - vehicle trust financing ....................... 46,000 10,000 Current portion of long-term debt - other ........ 32,337 21,742 --------- ---------- Total current debt .......................... 154,664 71,098 --------- ---------- Vehicle trust financing: Guaranteed ESOP notes ......................... 1,000,000 1,000,000 Revolving credit facility ...................... 412,500 195,700 Manufacturer's financing due June 1996 ......... 132,000 Floating rate notes due September 1998 ......... 115,000 Insurance company notes due from December 1995 to December 1999 at 6.50% - 8.23% .......................... 112,000 112,000 Insurance company notes due from June 1996 to June 2003 at 5.78% - 7.92% .......... 150,500 196,500 --------- --------- Vehicle trust financing - long term ...... 1,790,000 1,636,200 Floating rate notes due September 1996 ........... 15,000 7.50% capital lease terminating November 1997..... 40,615 59,984 Floating rate notes due November 1998 ............ 62,000 Insurance company notes due from June 1998 to June 2000 at 9.98% - 10.30% ............ 52,500 Other domestic ................................... 3,820 5,394 Debt of foreign subsidiaries: Floating rate notes due April 1997 ............. 46,000 27,643 Floating rate notes due July 1997 .............. 10,557 15,689 7.00% notes due February 1998 .................. 5,098 Other foreign .................................. 12,772 ---------- ---------- Total long-term debt ......................... 2,010,590 1,772,682 ---------- ---------- $2,165,254 $1,843,780 ========== ========== At February 29, 1996, February 28, 1995 and February 28, 1994, the weighted average interest rate on commercial paper was 5.9%, 6.6% and 3.9%, respectively. The weighted average interest rate of the short-term notes payable - foreign as of February 29, 1996, February 28, 1995 and February 28, 1994 was 7.2%, 8.6% and 5.9%, respectively. The primary source of financing for domestic vehicles is provided by a vehicle trust. Amounts drawn against this facility may be used to purchase vehicles and pay certain expenses of the vehicle trust. The security for the vehicle trust financing facility consists of a lien on the vehicles acquired under the facility, together with security interests in certain other assets of the trust. Additionally, the vehicle trust and security agreement require that there be outstanding at all times subordinated debt in a specified percentage range (10% - 25%) of the net book value of the vehicles owned by the trust. Pursuant to the agreement, the subordinated debt is to be provided by the vehicle manufacturer finance companies and by Avis, Inc. The $1 billion ESOP related tax advantaged vehicle trust financing consists of loans under various agreements with banks, insurance companies and vehicle manufacturer finance companies. The tax advantaged notes were issued in September 1987 with a final maturity of 25 years and mandatory annual principal reductions commencing in 1998. These notes are issued by the Company and are guaranteed by the vehicle trust. As of February 29, 1996, February 28, 1995 and February 28, 1994, the weighted average interest rate under these loans was 6.1%, 6.3% and 5.0%, respectively. The vehicle trust financing consists of bank notes, commercial paper and loans from insurance companies. The notes are issued by a group of banks under a $850 million three year revolving credit facility, which expires on September 30, 1997. As of February 29, 1996, February 28, 1995 and February 28, 1994, the weighted average interest rate of borrowings under this facility was 6.0%, 6.6% and 4.2%, respectively. As of February 29, 1996, $95,601,000 of vehicle manufacturer finance companies subordinated debt is included in vehicle financing. At February 29, 1996, the Company has a $67 million line of credit from a non-affiliated vehicle manufacturer finance company which may be used for either ESOP or vehicle trust financing. Of this facility, $60 million is available for subordinated debt. As of February 29, 1996, the Company utilized $67 million of this facility, of which $15,933,500 was subordinated. This facility requires a fee of 1/4 of 1% on the unused portion. In November 1992, the Company entered into a five year capital lease under which $96.7 million of vehicles were leased. The lease is cancelable at the Company's option; however, additional costs may be incurred upon termination based upon the fair value of the vehicles at the time the option is exercised. At the termination of the lease, the Company may purchase the vehicles at an agreed-upon fair market value or return them to the lessor. The future minimum lease payments due under the Company's short and long-term capital lease obligations in each of the succeeding years ending February 28, together with the present value of minimum lease payments, are as follows (in thousands): 1997.................................................. $22,192 1998.................................................. 41,500 ------- Total minimum lease payments ......................... 63,692 Less: interest .................................... 3,566 short-term capital lease obligation ......... 142 current portion of long-term capital lease obligation ............................ 19,369 ------- Capital lease obligation - long term ................. $40,615 ======= Under the terms of the Company's loan agreements, the Company must maintain a minimum net worth, minimum earnings and cash flow ratios. The most restrictive covenant of certain of these agreements has a limitation on the total debt of the Company. Mandatory maturities of long-term obligations for each of the succeeding years is as follows (in thousands): February 28, 1997 ...................................... $ 78,337 February 28, 1998 ...................................... 528,842 February 28, 1999 ...................................... 366,806 February 29, 2000 ...................................... 130,096 February 28, 2001 ...................................... 123,377 Thereafter ............................................. 861,469 Other Credit Facilities The Company has letters of credit/working capital agreements totaling $102,549,000, which may be renewed biannually at its option and the banks' discretion. The collateral for certain of these agreements consists of a lien on property and equipment and certain receivables. At February 29, 1996 and February 28, 1995, the Company has outstanding letters of credit amounting to $53,627,000 and $34,303,000, respectively. There were no working capital loans outstanding at February 29, 1996. At February 28, 1995, there were $15 million of working capital loans outstanding. A facility fee of 1/4 of 1% on the unused portion is required by the 1995 agreement. In addition, for certain of its international operations, the Company has available at February 29, 1996 and February 28, 1995, unused lines of credit of $186,718,000 and $161,537,000, respectively. The unused lines of credit agreements require a quarterly fee of 0.1% to 1.0% of the unused line. Note 9 - Income Taxes The provision (benefit) for income taxes is comprised of the following (in thousands): Years Ended --------------------------------- February February February 29, 1996 28, 1995 28, 1994 -------- -------- -------- Current: State ................................. $ 2,477 $ 912 $ 504 Federal ............................... 98 22,545 Foreign ............................... 6,096 10,132 6,645 -------- -------- -------- 8,573 11,142 29,694 -------- -------- -------- Deferred: Federal ............................... 9,730 (1,299) (5,190) Foreign ............................... 5,674 3,317 3,818 -------- -------- -------- 15,404 2,018 (1,372) -------- -------- -------- Provision for income taxes ................. 23,977 13,160 28,322 Less: Federal tax benefit of ESOP income tax deductions credited to stock- holders' equity under SFAS No. 109 (22,885) (6,627) (16,855) -------- ------- -------- $ 1,092 $ 6,533 $ 11,467 ======== ======== ======== The Company derives an income tax deduction for dividend distributions to the ESOP. The ESOP repays the same amount to the Company to reduce the ESOP debt due to the Company (see note 2). The effective income tax rate varies from the federal statutory income tax rate due to the following:
Years Ended --------------------------------------------------------------- February 29, 1996 February 28, 1995 February 28, 1994 ------------------ --------------------- ------------------- Statutory U.S. federal income tax rate $ 12,267 35.0% $ (2,078) (35.0)% $ 18,133 35.0% Tax effect of foreign operations ...... 3,546 10.1 2,760 46.4 4,207 8.1 Alternative minimum tax provision ..... 98 1.7 500 1.0 Amortization of cost in excess of net assets acquired and other intangibles 4,094 11.7 4,410 74.2 4,331 8.4 Foreign dividends and withholding tax . 2,589 7.4 7,460 125.6 1,034 2.0 State income taxes, net of federal tax benefit ......................... 1,610 4.6 593 10.0 328 0.6 Other ................................. (129) (0.4) (83) (1.3) (211) (0.4) ------- ---- ------ ----- ------- ----- Provision for income taxes ........ 23,977 68.4 13,160 221.6 28,322 54.7 ------- ---- ------ ----- ------ ---- Tax benefit of ESOP income tax deductions credited to stockholders' equity under SFAS No. 109 .......... (22,885) (65.3) (6,627) (111.6) (16,855) (32.6) ------- ----- ------ ------ ------- ----- Effective income tax rate ............. $ 1,092 3.1% $ 6,533 110.0% $ 11,467 22.1% ======== === ======== ===== ======== ====
In accordance with SFAS 109, the deferred tax asset includes the following (in thousands): February February 29, 1996 28, 1995 -------- -------- Gross Deferred Tax Asset: Public liability and property damage book expense in excess of tax expense $ 66,151 $ 64,947 Other accrued expenses in excess of tax expense ........................ 41,563 38,812 Net operating loss carryforward ........ 124,176 98,318 Alternative minimum income tax credit carryover .................... 3,025 3,025 -------- -------- 234,915 205,102 -------- -------- Gross Deferred Tax Liabilities: Tax depreciation in excess of book depreciation ......................... (133,579) (112,830) Prepaids and other ..................... (10,497) (9,166) --------- -------- (144,076) (121,996) --------- -------- Valuation allowance .................... (30,395) (29,412) --------- -------- Net deferred tax asset ................. $ 60,444 $ 53,694 ========= ========= The Company has net operating loss carryforwards of $354,789,000, $280,909,000 and $249,601,000 at February 29, 1996, February 28, 1995 and February 28, 1994, respectively. The Company has alternative minimum tax net operating loss carryforwards of $162,729,000, $85,422,000 and $37,879,000 at February 29, 1996, February 28, 1995 and February 28, 1994, respectively. These carryforwards expire in various years commencing February 28, 2003 through February 28, 2011. The Company also has available unused investment tax credits of approximately $5,834,000 which expire on February 28, 2002. The valuation allowance is management's best estimate of the potential net operating loss carryforwards which may expire before utilization. Deferred income taxes were not provided on accumulated undistributed earnings of certain foreign subsidiaries of $30,308,000, $25,534,000 and $21,842,000 at February 29, 1996, February 28, 1995 and February 28, 1994, respectively, because such accumulated undistributed earnings are considered to be permanently reinvested. If these amounts were not considered permanently reinvested, additional deferred income taxes of approximately $13,246,000, $11,138,000 and $9,524,000 would have been provided at February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Note 10 - Redeemable Preferred Stock The Company has authorized 2,500,000 shares each of Series A and Series B $.01 par value cumulative, redeemable preferred stock at February 29, 1996 and February 28, 1995. There are 186,986.8 shares, 233,733.5 shares and 233,733.5 shares of each series issued and outstanding at February 29, 1996, February 28, 1995 and February 28, 1994, respectively. The preferred series A and B are subject to redemption at the option of the Company, providing certain financial tests are met. The redemption price will decline each succeeding September 25 by $.75 per share until September 25, 1997 when the redemption price will be fixed at $50 per share plus accrued dividends. At February 29, 1996, the Company may redeem the preferred stock for $51.50 per share plus accrued dividends. In addition, upon the occurrence of certain events, including the sale of all or substantially all the common stock by the Company, or the payment in full of its acquisition indebtedness (originally $395 million), the Company is required to redeem 20% of the outstanding preferred stock on the anniversary of such an event and an equal amount in each of the ensuing four years at a price of $50 per share plus accrued but unpaid dividends. Since the acquisition indebtedness was paid in full in February 1995, the Company is required to redeem 20% of the preferred stock by February 28, 1996 and annually thereafter to the year 2000 at a redemption price of $50 per share plus accrued but unpaid dividends. During the year ended February 29, 1996, the Company redeemed 46,746.7 shares of each series of preferred stock. All the preferred shares must be redeemed at $50 per share if there is a change in control of the Company upon a sale of all or substantially all of the assets of the Company or upon merger or other business combination. Dividends are cumulative and are payable quarterly at an annual rate of 15% of the liquidation preference amount. The Series B Preferred Stock is junior to the Series A Preferred Stock as to the payment of dividends and liquidation preferences. In November 1992, the Board of Directors of the Company authorized the issuance of up to 5,000,000 shares of Series C, $.01 par value, cumulative redeemable preferred stock with a liquidation preference value of $18.68 per share. At February 29, 1996, February 28, 1995 and February 28, 1994, there are 2,878,112, 2,889,057 and 2,889,057 shares of Series C preferred stock issued and outstanding, respectively. The Company may, at its option, redeem the Series C Preferred Stock after June 1, 2001 and is required to redeem all the Series C Preferred Stock outstanding on May 30, 2004 in three equal annual installments commencing June 30, 2004 at a price equal to the liquidation preference value of $18.68 per share plus accrued but unpaid dividends. In addition, the Company may, at its option, redeem the Series C Preferred Stock upon the consummation of a primary public offering and is required to redeem all the Series C Preferred Stock in the event of the occurrence of certain major corporate transactions involving a change in control, at a price equal to the lower of the liquidation preference value or the fair market value of the common stock (as adjusted for any recapitalization) plus, in either case, accrued but unpaid dividends. Dividends on the Series C Preferred Stock are cumulative and are payable quarterly in cash at an annual rate of 9.75% of the liquidation preference value. The Series C Preferred Stock ranks junior to the Series A and Series B Preferred Stock and senior to the participating convertible preferred stock and common stock, with respect to dividends and liquidation preference. Note 11 - Participating Convertible Preferred Stock The Company has authorized 15,000,000 shares of $.01 par value participating convertible preferred stock. At February 29, 1996, February 28, 1995 and February 28, 1994, the Company has issued and outstanding 9,788,623 shares. Each share is convertible into one share of common stock of the Company at the option of the holder. The stock is held by the General Motors Corporation (described herein as an affiliated company or a vehicle manufacturer). Note 12 - Common Stock The Company has authorized 100,000,000 shares of $.01 par value common stock. There are 29,042,916 shares issued at February 29, 1996, February 28, 1995 and February 28, 1994, of which 23,619,703, 23,619,828 and 23,705,524 are outstanding and held by the ESOP trustee and former employees at February 29, 1996, February 28, 1995 and February 28, 1994, respectively. ESOP shares are allocated for the account of employees, pro rata, as the ESOP acquisition debt is repaid. At February 29, 1996, February 28, 1995 and February 28, 1994, 5,423,213, 5,423,088 and 5,337,392 shares are held as treasury stock, respectively. The Company is obligated under certain conditions to repurchase common stock issued to employees and former employees to the extent legally required and as permitted under the Company's loan agreements. Under the Company's loan agreements, the payment of cash dividends on its common stock is restricted except where such dividends are used to retire ESOP debt. The unearned compensation represents the unamortized amount of deferred compensation to be received by employees in the form of shares of the Company's common stock, which they will receive from the ESOP. The initial amount of unearned compensation ($395 million) generally represents cash proceeds of the acquisition debt less amounts used to refinance existing debt. In 1993, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 93-6, "Employers' Accounting for Employee Stock Ownership Plans." The SOP gives accounting guidance for shares acquired by the ESOP after December 31, 1992 (new ESOP shares). The Company may continue to use the earlier accounting rules to measure compensation expense for shares acquired by the ESOP prior to December 31, 1992 (old ESOP shares). Accordingly, as old ESOP shares are allocated to employees, compensation expense is charged based on the amortization of the original unearned compensation amount on a straight line basis over 25 years. As new ESOP shares are allocated to employees, compensation expense is charged based on the fair value of those shares. Unearned compensation is released based on the cost of the shares acquired. Any difference between the cost and fair value of the shares allocated is charged or credited to additional paid-in capital. Shares are generally allocated annually in January for the prior calendar year. The shares held by the ESOP and former employees are as follows: February February February 29, 1996 28, 1995 28, 1994 ---------- ---------- ---------- Shares held by the ESOP: Unallocated shares: Old ESOP shares ........... 14,465,131 15,333,722 16,175,629 New ESOP shares ........... 115,170 Allocated shares: Old ESOP shares ........... 9,026,899 8,281,603 7,525,683 New ESOP shares ........... 5,680 Shares held by former employees .. 6,823 4,503 4,212 ---------- ---------- ---------- Total outstanding ................ 23,619,703 23,619,828 23,705,524 ========== ========== ========== The Company's common stock is redeemable at the option of the holders, subject to certain significant vesting and other financial restrictions on the Company. If however, all outstanding shares of the Company were fully vested, the Company's maximum cash obligation related to these shares based upon the annual valuation of the Company's common stock would have been approximately $295,482,000, $213,523,000 and $425,751,000 at February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Redeemable Appraised Redeemable Shares Value Portion of Outstanding Per Share Common Stock ----------- --------- ------------ Balance March 1, 1993 ......... 27,065,557 $ 18.93 $512,350,994 ============ Warrants exercised for common stock ............... 599,452 Options exercised for common stock ............... 77,462 Exchange of common shares for Series C Preferred Stock (2,889,057) Purchase of treasury shares ... (1,147,890) ------------ Balance February 28, 1994 ..... 23,705,524 $ 17.96 $425,751,211 ============ Purchase of treasury shares ... (85,696) ------------ Balance February 28, 1995 ..... 23,619,828 $ 9.04 $213,523,245 ============ Purchase of treasury shares ... (125) ------------ Balance February 29, 1996 ..... 23,619,703 $ 12.51 $295,482,485 =========== ============ Note 13 - Long-Term Compensation Plan In April 1993, the Company adopted a long-term compensation plan which took the form of a unit appreciation rights plan. Under this plan, a total of 5 million units were eligible for distribution, with full vesting over a four year period. At February 29, 1996, February 28, 1995 and February 28, 1994, there were approximately 70,000, 4,000,000 and 4,000,000 appreciation units outstanding, respectively, with no appreciation in value. In 1995, the Board of Directors adopted a long-term compensation plan for key management employees in the form of a stock appreciation rights plan which substantially replaced the April, 1993 plan. A total of 5 million units are eligible for distribution. The units granted to each participating employee under a single grant shall vest in three equally proportioned allotments (aggregating approximately 1.4 million each) to start on the third anniversary of the date of grant, with all units to be fully vested on the fifth anniversary of the grant or the occurrence of certain events including a change in control. The value of each grant's units are measured by the fair market value of one share of the Company's common stock on the date of grant ($9.04), such measurement value being subject to a readjustment for the second and third allotments based upon the fair market value of one share of common stock on the first anniversary of the grant ($12.51 at January 1, 1996) and the second anniversary of the grant (to be determined at January 1, 1997), respectively. Under the Plan, the holder of each vested unit is entitled to receive in cash the appreciation in the fair market value of one share of the Company's common stock at the date of exercise over the measurement value. The exercise periods expire in varying years through 2007. Compensation expense is recorded as the fair market value of one share of the Company's common stock appreciates over the grant price for each allotment. Approximately 4.3 million units are outstanding at February 29, 1996 with none eligible for exercise. During the year ended February 29, 1996, approximately $4.9 million was charged to expense under this plan. In addition, in 1995, the Company issued a "Management Long-Term Incentive Plan" for certain key employees. The Plan is in the form of a performance unit award. Income is charged and payment is determined by the performance ratio, which is measured as a percentage of the increase in a share of the Company's common stock, over the performance period (three fiscal years). At the conclusion of the performance period, one-third of the payment will be made to participants with the remaining two equal installments made on the first and second anniversaries thereof. Generally, participants must be employees of the Company at the time each installment is made. There are approximately 720,000 units outstanding at February 29, 1996, with a base value of $9.04 (the value of one share of the Company's stock on March 1, 1995). The amount charged to expense under this plan for the year ended February 29, 1996 was immaterial. Note 14 - Fair Value of Financial Instruments The carrying value of the Company's financial instruments approximates fair value except for debt and redeemable preferred stock and certain other financial instruments which are not material. At February 29, 1996 and February 28, 1995, the carrying value of debt and redeemable preferred stock is $2,237,663,000 and $1,921,054,000 with fair values of approximately $2,255,250,000 and $1,914,000,000, respectively. The fair value is estimated by reference to various market data, including borrowing rates currently available to the Company with similar terms and maturities. Note 15 - Retirement Benefits The Company sponsors non-contributory defined benefit plans covering employees who are members of certain collective bargaining units and non-union full-time employees hired prior to December 31, 1983 who were age 25 or above on January 1, 1985. It also contributes to union sponsored pension plans. The Company sponsors a Voluntary Investment Savings Plan under a "qualified cash or deferred arrangement" under Section 401(k) of the Internal Revenue Code. For the years ended February 29, 1996, February 28, 1995 and February 28, 1994, the cost of this plan was approximately $1,718,000, $1,625,000 and $1,477,000, respectively. Included in the Investment Savings Plan, the Company sponsors a defined contribution plan for substantially all non-union full-time employees not otherwise covered. Employer contributions and costs for this plan are determined as 2% of each covered employee's compensation. The cost of the plan for the years ended February 29, 1996, February 28, 1995 and February 28, 1994 amounted to $1,798,000, $1,718,000 and $1,550,000, respectively. In addition, the Company sponsors an Employee Stock Ownership Plan (ESOP). The ESOP is a defined contribution retirement plan sponsored by Avis, Inc. and its domestic subsidiaries. The Avis ESOP Committee is appointed by the Company's Board of Directors to administer the ESOP. In September 1987, the ESOP, through the use of funds borrowed from the Company, purchased all of the then outstanding common stock of the Company. The Company remits funds for payment of the ESOP debt principal and interest to the ESOP in the form of contributions, distributions and dividends. The ESOP repays principal and interest to the Company for the borrowed funds. As the ESOP repays the amount borrowed plus interest, redeemable common stock is released and allocated to the accounts of participants in the ESOP up to the deductible amount permitted by the Internal Revenue Code. The common stock is held by the ESOP trustee as collateral for the amount borrowed by the ESOP. Most domestic non-union and certain union employees of the Company are eligible to participate in the ESOP. Participants do not contribute to the ESOP. A similar, nonqualified plan exists for certain employees ineligible to participate in the ESOP. Units are allocated in a manner consistent with the stock allocation for participants in the ESOP. Benefits are paid in cash to terminated participants in a manner similar to distributions from the ESOP. The measurement value of each unit is equivalent to one share of the Company's common stock at the date of payment. There are approximately 532,000, 495,000 and 446,000 vested units outstanding at February 29, 1996, February 28, 1995 and February 28, 1994, respectively. The amount charged to expense for the nonqualified plan was immaterial for the years ended February 29, 1996, February 28, 1995 and February 28, 1994. The defined benefit plans provide benefits based upon years of credited service, highest average compensation and social security benefits. Annual retirement benefits, at age 65, are equal to 1 1/2% of the participating employee's final average compensation (average compensation during the highest five consecutive years of employment in the ten years prior to retirement) less 1 3/7% of the Social Security benefits for each year of service up to a maximum of 35 years. In addition, the plan provides for reduced benefits after age 55 and for a joint and survivor annuity option. The status of the U.S. defined benefit plans at February 29, 1996, February 28, 1995 and February 28, 1994 is as follows (in thousands):
1996 1995 1994 ------------------------ ------------------------ ---------------------- Salaried & Salaried & Salaried & Hourly Hourly Hourly Employees Employees Employees as of June as of June as of June 30, 1985 Bargaining 30, 1985 Bargaining 30, 1995 Bargaining ----------- ---------- ----------- ----------- ----------- ---------- Actuarial present value of benefit obligations: Vested benefit obligation ...... $ 37,864 $ 5,400 $ 27,871 $ 4,244 $ 26,800 $ 4,093 ======== ======== ======== ======== ======== ======== Accumulated benefit obligation.. $ 42,182 $ 5,606 $ 30,682 $ 4,428 $ 29,800 $ 4,308 ======== ======== ======== ======== ======== ======== Projected benefit obligation ... $ 58,695 $ 5,606 $ 44,550 $ 4,428 $ 46,500 $ 4,308 Plan assets at fair value .......... 52,294 4,572 44,408 3,653 40,230 3,505 -------- -------- -------- -------- -------- -------- Projected benefit obligation (in excess of) plan assets ........... (6,401) (1,034) (142) (775) (6,270) (803) Unrecognized net actuarial loss .... 4,635 453 939 80 4,642 258 Unrecognized prior service cost .... (2,749) 985 (3,047) 981 (3,387) 837 Additional minimum liability ....... (1,438) (1,061) (1,095) -------- -------- -------- -------- ------- -------- Accrued pension cost ............... $ (4,515) $ (1,034) $ (2,250) $ (775) $ (5,015) $ (803) ======== ======== ======== ======== ======== ========
At February 29, 1996, February 28, 1995 and February 28, 1994, the measurement of the projected benefit obligation was based on a 7.5%, 8.5% and 7.5% assumed discount rate, respectively. Compensation increases were assumed at a rate of 5.0%, at February 29, 1996, February 28, 1995 and February 28, 1994. The assumed long-term rate of return on plan assets was 8.75% at February 29, 1996 and February 28, 1995 and 9.0% at February 28, 1994. The plan assets are invested in corporate bonds, U.S. government securities and common stock mutual funds. Net pension cost for the defined benefit plans includes the following components (in thousands): Years Ended ------------------------------------ February February February 29, 1996 28, 1995 28, 1994 -------- -------- -------- Service cost ................... $ 2,508 $ 3,077 $ 2,538 Interest cost .................. 4,128 4,078 3,200 Actual return on plan assets ... (9,939) 7 (3,727) Net amortization of actuarial gains and prior service cost.. 5,288 (4,564) 404 Union contributions ............ 2,104 1,978 1,928 Foreign plans .................. 140 116 110 ------- ------- ------- Net pension cost ............... $ 4,229 $ 4,692 $ 4,453 ======= ======= ======= The Company also sponsors several foreign pension plans. The most significant of these is the Canadian pension plan. The status of the Canadian defined benefit plans at February 29, 1996, February 28, 1995 and February 28, 1994 is as follows (in thousands): 1996 1995 1994 Canadian Canadian Canadian Plan Plan Plan -------- -------- -------- Actuarial present value of benefit obligations: Vested benefit obligation ............... $ 2,884 $ 2,872 $ 2,477 ======= ======= ======= Accumulated benefit obligation .......... $ 2,884 $ 2,872 $ 2,477 ======= ======= ======= Projected benefit obligation ............ $ 3,150 $ 3,138 $ 2,706 Plan assets at fair value ............... 7,275 6,250 6,264 ------- ------- ------- Plan assets in excess of projected benefit obligation .................... 4,125 3,112 3,558 Unrecognized net actuarial loss (gain)... (125) 597 65 Unrecognized net transition asset ....... (2,922) (2,993) (3,237) ------- ------- ------- Prepaid pension cost .................... $ 1,078 $ 716 $ 386 ======= ======= ======= At February 29, 1996, February 28, 1995 and February 28, 1994 the measurement of the projected benefit obligation was based on a 9.5% assumed discount rate. Compensation increases were assumed at a rate of 5.0%, at February 29, 1996, February 28, 1995 and February 28, 1994. The assumed long-term rate of return on plan assets was 9.50% at February 29, 1996, February 28, 1995 and at February 28, 1994. The plan assets are held in mutual funds which are invested in Canadian stocks, bonds, real estate and money market funds. Net prepaid pension cost for the Canadian defined benefit plan includes the following components (in thousands): Years Ended ----------------------------------- February February February 29, 1996 28, 1995 28, 1994 -------- -------- -------- Service cost ......................... $ 72 $ 97 $ 56 Interest cost ........................ 301 271 252 Expected return on plan assets........ (587) (586) (570) Amortization of unrecognized net asset at transition ............ (133) (133) (141) ------- ------ ------ Net prepaid pension cost ............. $(347) $(351) $(403) ======= ====== ====== Note 16 - Leases, Airport Concession Fees and Commitments The Company is committed to make rental payments under noncancelable operating leases relating principally to vehicle rental facilities and equipment. Under certain leases, the Company is obligated to pay certain additional costs, such as property taxes, insurance and maintenance. Airport concession agreements usually require a guaranteed minimum amount plus contingent fees which are generally based on a percentage of revenues. Operating lease payments and airport concession fees charged to income amount to (in thousands): Years Ended ------------------------------------- February February February 29, 1996 28, 1995 28, 1994 -------- -------- -------- Minimum fees .................. $117,766 $108,479 $103,360 Contingent fees ............... 59,687 46,390 43,720 -------- -------- -------- 177,453 154,869 147,080 Less sublease rentals ......... 4,536 4,119 3,584 -------- -------- -------- $172,917 $150,750 $143,496 ======== ======== ======== Future minimum rental commitments under noncancelable operating leases amounted to approximately $392,867,000 at February 29, 1996. The minimum rental payments due in each of the succeeding five years are as follows (in thousands): February 28, 1997 ........................... $ 95,175 February 28, 1998 ........................... 78,197 February 28, 1999 ........................... 50,066 February 29, 2000 .......................... 34,158 February 28, 2001 ........................... 25,930 Thereafter .................................. 109,341 At February 29, 1996, the Company has guaranteed up to $149,000 of an affiliated company's credit facility obligation. In addition to the Company's lease commitments, the Company has outstanding purchase commitments of approximately $772 million and $588 million at February 29, 1996 and February 28, 1995, of which approximately $760 million and $561 million relate to vehicle purchases, respectively. Note 17 - Related Party Transactions Vehicle manufacturers offer vehicle repurchase programs on an ongoing basis to assist in the acquisition and disposition of vehicles. These programs generally allow the Company, at its option, subject to certain provisions, to sell the vehicles back to the manufacturers at pre-determined prices. Amounts included under these programs are reflected in "Due from affiliated company." Under the terms of certain financing agreements with the General Motors Corporation (General Motors), the Company is required to purchase a significant percentage (70%) of its fleet from General Motors subject to market conditions. In addition, the Company participates in an arrangement whereby General Motors provides payments for purchasing and promoting a specified number and mix of vehicles. At February 29, 1996, the Company has a $450 million line of credit from General Motors which may be used for either ESOP or vehicle trust financing. Of this facility, $300 million is available for subordinated debt. As of February 29, 1996, the Company utilized $118 million of this facility, of which $79,667,500 was subordinated. This facility requires a fee of 1/4 of 1% on the unused portion. The Company and Avis Europe, Plc cooperate jointly in marketing and promotion activities, the exchange of reservations, the honoring of charge cards and vouchers and the transfer of the related billings. In addition, the Company provides certain data processing services to Avis Europe, Plc for which it charged approximately $9.9 million, $9.2 million and $7.3 million for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Two members of the Company's board of directors serve on the board of Avis Europe Limited (formerly Cilva) (the parent company of Avis Europe, Plc) and one member of the Avis Europe Limited board serves as a director of the Company. Note 18 - Segment Information The Company operates in the United States and in foreign countries. The operations within major geographic areas are summarized as follows (in thousands): February February February 29, 1996 28, 1995 28, 1994 ----------- ----------- ----------- Revenues United States .............. $ 1,504,484 $ 1,275,132 $ 1,195,556 Australia .................. 95,968 79,222 64,440 Canada ..................... 69,319 60,092 72,778 Other foreign operations ... 46,906 41,142 38,550 ----------- ----------- ----------- Total ................ $ 1,716,677 $ 1,455,588 $ 1,371,324 =========== =========== =========== Income (loss) before income taxes United States .............. $ 2,015 $ (40,027) $ 16,726 Australia .................. 15,920 13,638 10,296 Canada ..................... 4,944 7,171 13,026 Other foreign operations ... 12,170 13,280 11,762 ----------- ----------- ----------- Total ................ $ 35,049 $ (5,938) $ 51,810 =========== =========== =========== Total assets at end of year United States .............. $ 2,805,438 $ 2,466,962 $ 2,623,337 Australia .................. 113,093 90,732 58,212 Canada ..................... 115,849 90,226 108,152 Other foreign operations ... 170,073 151,341 135,002 ----------- ----------- ----------- Total ................ $ 3,204,453 $ 2,799,261 $ 2,924,703 =========== =========== =========== Note 19 - Purchase of Agency Rent A Car On October 2, 1995, the Company acquired the rights to the name and certain assets of Agency Rent A Car, Inc. (Agency), a company primarily engaged in the insurance replacement rent a car business, for a total purchase price of $20.5 million. The acquisition has been accounted for as a purchase, and the results of Agency have been included in the accompanying consolidated financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired. This allocation resulted in goodwill of approximately $18 million, which is being amortized over 40 years. The unaudited consolidated results of operations on a pro forma basis as though Agency had been acquired as of the beginning of 1996 and 1995 are as follows (in thousands): Unaudited -------------------------------------- February 29, 1996 February 28, 1995 ----------------- ----------------- Net sales ................ 1,760,179 1,587,699 Income before income taxes 29,739 12,781 Net loss ................. (1,506) (15,700) The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Agency acquisition been consummated as of the above dates, nor are they necessarily indicative of the future operating results. The pro forma results above reflect the operations of Agency during a period in which significant downsizing was in effect. By the time of the acquisition of Agency by the Company, Agency's operations were significantly reduced compared with the periods presented above. Note 20 - Litigation There are various matters of litigation involving the Company and its subsidiaries which have arisen during the normal course of operations. As litigation is subject to many uncertainties, the outcome of any individual matter is not predictable with any degree of certainty, and it is reasonably possible that one or more of these matters could be decided unfavorably against the Company or its subsidiaries. In the opinion of management, the ultimate liability, if any, resulting from these matters will not have a material adverse effect on the Company's consolidated financial statements. Note 21 - Subsequent Event - (unaudited) A. Acquisition of Avis, Inc. - On October 17, 1996, HFS Incorporated ("HFS") completed the acquisition of all of the outstanding capital stock of the Company, including payments under certain employee stock plans of the Company and the redemption of certain series of preferred stock of the Company for an aggregate $806.5 million. The purchase price was comprised of approximately $367.2 million in cash, $100.9 million in indebtedness and $338.4 million (approximately 4.6 million shares) in HFS common stock. B. Litigation - On May 22, 1996 a complaint was filed in the United States District Court for Eastern District of North Carolina against Avis Rent A Car System, Inc. ("ARACS") and one of its licensees, New Hanover Rent-A-Car, Inc. ("New Hanover") alleging discrimination by New Hanover in the rental of automobiles based on race. Plaintiff seeks an unspecified amount of compensatory and punitive damages and a permanent injunction barring ARACS and New Hanover from continuing to engage in illegally discriminatory conduct. ARACS has asserted claims for indemnification against New Hanover and intends to vigorously defend the complaint. ARACS believes that it has meritorious defenses against the complaint. In the opinion of management, the ultimate liability, if any, resulting from this matter will not have a material adverse effect on the Company's consolidated financial position. EX-99.2 4 EX. 99.2 AVIS FIN'L. STMTS. EXHIBIT 2 AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION MAY 31, 1996 AND FEBRUARY 29, 1996 (In thousands) (Unaudited) May 31, February 29, 1996 1996 --------------------------- ASSETS Cash and cash equivalents ........................ $ 75,122 $ 49,326 Accounts receivable, net ......................... 152,224 144,842 Due from affiliated company ...................... 44,098 75,635 Prepaid expenses ................................. 45,755 40,227 Vehicles, net .................................... 2,330,630 2,064,943 Property and equipment, net ...................... 150,538 146,429 Other assets ..................................... 165,881 176,368 Cost in excess of fair value of net assets acquired .............. 503,037 506,883 ----------- ----------- Total assets ................................ $ 3,467,285 $ 3,204,453 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ................................. $ 205,443 $ 181,920 Accrued liabilities .............................. 195,371 200,870 Current and deferred income taxes ................ 36,959 36,339 Public liability and property damage ............. 208,692 205,698 Debt ............................................. 2,262,223 2,043,143 Due to affiliated company ........................ 122,002 122,111 Redeemable preferred stock ....................... 72,412 72,409 Redeemable portion of common stock ............... 295,465 295,482 Unearned compensation ............................ (261,702) (263,024) Participating convertible preferred stock ........ 132,000 132,000 Common stock ..................................... 290 290 Additional paid in capital ....................... 217,445 215,644 Treasury stock ................................... (102,269) (102,252) Retained earnings ................................ 79,120 62,095 Foreign currency equity adjustment ............... 3,834 1,728 ----------- ----------- Commitments and contingencies Total liabilities and stockholders' equity .. $ 3,467,285 $ 3,204,453 =========== =========== See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995 (In thousands) (Unaudited) Three Months Ended ------------------------- May 31, May 31, 1996 1995 --------- ---------- Revenues ......................................... $ 496,994 $ 394,258 --------- --------- Cost and expenses: Direct operating ............................... 210,611 167,225 Vehicle depreciation ........................... 90,746 84,208 Vehicle lease charges .......................... 36,924 34,446 Selling, general and administrative ............ 79,288 49,393 Interest ....................................... 37,971 34,456 Unrealized foreign exchange loss ................. 62 Amortization of unearned compensation - Employee Stock Ownership Plan .................. 3,951 3,951 Amortization of cost in excess of fair value of net assets acquired and other intangibles ............ 4,178 4,056 --------- --------- Income before income taxes and preferred stock dividends ................................ 33,325 16,461 Provision for income taxes ....................... 14,280 10,706 --------- --------- Net income ....................................... 19,045 5,755 Preferred stock dividends ........................ (2,017) (2,192) --------- --------- Income available for common shares ............... $ 17,028 $ 3,563 ========= ========= See accompanying notes to the consolidated financial statements. AVIS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MAY 31, 1996 (In thousands) (Unaudited)
Participating Convertible Common Stock Preferred Stock ----------------- ----------------- Foreign Additional Additional Treasury currency Par paid-in Par paid-in stock Retained equity value capital value capital (at cost) earnings adjustment ----- --------- ----- ---------- ---------- --------- ---------- Balance March 1, 1996 ......................... $ 290 $ 215,644 $ 98 $ 131,902 $(102,252) $ 62,095 $ 1,728 Net income for the three months ended May 31, 1996 ............................... 19,045 Tax benefit of ESOP income tax deductions for the three months ended May 31, 1996 ..... 1,784 Foreign currency equity adjustment for the three months ended May 31, 1996 ............. 2,106 Payment of common and preferred stock dividends (2,017) Change in redeemable portion of common stock .. 17 Purchase of treasury stock (1,381 shares) ..... (17) Appropriation for amortization of discount from redemption value of preferred stock .... (3) ------ --------- ------ --------- --------- --------- --------- Balance May 31, 1996 .......................... $ 290 $ 217,445 $ 98 $ 131,902 $(102,269) $ 79,120 $ 3,834 ====== ========= ====== ========= ========= ========= ========= See accompanying notes to the consolidated financial statements.
AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995 (In thousands) Increase (decrease) in cash and cash equivalents (Unaudited)
Three Months Ended ---------------------- May 31, May 31, 1996 1995 ---------- --------- Net cash provided by operating activities ............... $ 149,485 $ 104,437 Cash flows from investing activities: Payments for vehicle additions ...................... (734,439) (454,963) Proceeds received from vehicle sales ............... 408,981 351,445 Payments for additions to property and equipment, net (8,276) (8,749) --------- --------- Net cash used in investing activities ................... (333,734) (112,267) Cash flows from financing activities: Increase in debt and due to affiliated company ...... 214,518 25,281 Increase in deferred debt issuance costs ............ (56) (391) Payment of preferred stock dividends ................ (2,017) (2,192) Purchase of treasury stock .......................... (17) (977) Increase in unearned compensation ................... (2,629) --------- --------- Net cash provided by financing activities ............... 209,799 21,721 Effect of exchange rate changes on cash ................. 246 (72) --------- --------- Net increase in cash and cash equivalents ............... 25,796 13,819 Cash and cash equivalents at beginning of period ........ 49,326 36,643 --------- --------- Cash and cash equivalents at end of period .............. $ 75,122 $ 50,462 ========= ========= Supplemental disclosure of cash flows information: Cash paid during the period for: Interest .......................................... $ 29,997 $ 26,224 Income taxes ...................................... 3,539 2,157
Disclosure of accounting policy: For purposes of reporting cash flows, the Company considers deposits and short-term investments with an initial maturity of three months or less to be cash equivalents. The effect of unrealized foreign currency revaluations on the assets and liabilities of foreign foreign subsidiaries has been eliminated. Changes in vehicles and vehicle related accounts are included in the cash flows from investing activities. See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996 AND MAY 31, 1995 (Unaudited) Note 1 - Organization and Significant Accounting Policies In 1987, the trust for the Employee Stock Ownership Plan (ESOP) of Avis, Inc. (the Company) acquired all the outstanding common stock of Avis, Inc. This transaction has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. Accordingly, the purchase price has been allocated based on the estimated fair value of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of the Company's net assets is included in "Cost in excess of fair value of net assets acquired" on the consolidated balance sheet. The Company's primary business is the rental of automobiles. The consolidated financial statements include the accounts of all majority-owned subsidiaries of Avis, Inc. combined with related accounts of the ESOP and Prime Vehicles Trust. Intercompany accounts and transactions among Avis, Inc., its subsidiaries, the ESOP and Prime Vehicles Trust (Vehicle Trust) have been eliminated. During the year ended February 29, 1996, the Company acquired the rights to the name and certain assets of Agency Rent A Car, Inc., a company primarily engaged in the insurance replacement car rental business. Investments in associated companies in which the Company has a 20 percent or greater interest are accounted for under the equity method of accounting. Generally accepted accounting principles require the use of estimates, which are subject to change, in the preparation of financial statements. Certain amounts of the prior period have been reclassified for comparability. The unaudited interim financial statements at May 31, 1996 and for the three months ended May 31, 1996 and 1995 have been prepared in accordance with generally accepted accounting principles, and in the opinion of the Company include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim period. Note 2 - Gain on Sale of Leasehold Right In April, 1996 the Company sold a leasehold right and recognized a pre-tax gain of approximately $4.4 million. Note 3 - Vehicles Vehicles are stated at cost, net of accumulated depreciation as follows (in thousands): May May 31, 1996 31, 1995 ---------- ----------- Vehicles ............................... $ 2,663,301 $ 2,056,855 Accumulated depreciation ............... (332,671) (214,332) ----------- ----------- $ 2,330,630 $ 1,842,523 =========== =========== Included in vehicles are vehicles acquired under long-term capital leases of $25,795,000 and $42,992,000 (net of accumulated depreciation of $59,138,000 and $41,941,000) at May 31, 1996 and May 31, 1995, respectively. Vehicles also include vehicles held for sale as follows (in thousands): May May 31, 1996 31, 1995 -------- --------- Vehicles held for sale ..................... $ 31,423 $ 17,884 Accumulated depreciation ................... (4,827) (2,219) -------- -------- $ 26,596 $ 15,665 ======== ======== Depreciation expense recorded for vehicles was $104,986,000 and $89,384,000, net of a gain on disposal of vehicles of $14,240,000 and $5,176,000 for the three months ended May 31, 1996 and May 31, 1995, respectively. Note 4 - Income Taxes The provision (benefit) for income taxes is comprised of the following (in thousands): Three Months Ended ------------------------ May 31, May 31, 1996 1995 --------- --------- Current: State ......................................... $ 546 $ 252 Foreign ....................................... 1,568 2,112 -------- -------- 2,114 2,364 -------- -------- Deferred: Federal ....................................... 11,282 6,956 Foreign ....................................... 884 1,386 -------- -------- 12,166 8,342 -------- -------- Provision for income taxes ....................... 14,280 10,706 Less: Federal tax benefit of ESOP income tax deductions credited to stockholders' equity under SFAS No. 109 .............. (1,784) (1,912) -------- -------- $ 12,496 $ 8,794 ======== ======== The Company derives an income tax deduction for dividend distributions to the ESOP. The ESOP repays the same amount to the Company to reduce the ESOP debt due to the Company. The effective income tax rate varies from the federal statutory income tax rate due to the following: Three Months Ended ------------------------ May 31, May 31, 1996 1995 --------- -------- Statutory U.S. federal income tax rate ............... 35.0% 35.0% Tax effect of foreign operations .................... 1.9 1.5 Amortization of cost in excess of net assets acquired and other intangibles .............. 3.5 5.9 Foreign dividends and withholding tax ................ 0.6 21.3 State income taxes, net of federal tax benefit ........................................ 0.9 0.9 Other ................................................ 1.0 0.4 ----- ------ Provision for income taxes ....................... 42.9 65.0 ----- ------ Tax benefit of ESOP income tax deductions credited to stockholders' equity under SFAS No. 109 (5.4) (11.6) ------ ------- Effective income tax rate ....... .................... 37.5% 53.4% ====== ======= Note 5 - Subsequent Event On October 17, 1996, HFS Incorporated ("HFS") completed the acquisition of all of the outstanding capital stock of the Company, including payments under certain employee stock plans of the Company and the redemption of certain series of preferred stock of the Company for an aggregate $806.5 million. The purchase price was comprised of approximately $367.2 million in cash, $100.9 million in indebtedness and $338.4 million (approximately 4.6 million shares) in HFS common stock. Note 6 - Litigation On May 22, 1996 a complaint was filed in the United States District Court for Eastern District of North Carolina against Avis Rent A Car System, Inc. (ARACS) and one of its licensees, New Hanover Rent-A-Car, Inc. (New Hanover) alleging discrimination by New Hanover in the rental of automobiles based on race. Plaintiff seeks an unspecified amount of compensatory and punitive damages and a permanent injunction barring ARACS and New Hanover from continuing to engage in illegally discriminatory conduct. ARACS has asserted claims for indemnification against New Hanover and intends to vigorously defend the complaint. ARACS believes that it has meritorious defenses against the complaint. In the opinion of management, the ultimate liability, if any, resulting from this matter will not have a material adverse effect on the Company's consolidated financial position. EX-99.3 5 EX. 99.3 AVIS FIN'L. STMTS. EXHIBIT 99.3 AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AUGUST 31, 1996 AND FEBRUARY 29, 1996 (In thousands) (Unaudited) August 31, February 29, 1996 1996 --------------------------- ASSETS Cash and cash equivalents ........................ $ 75,683 $ 49,326 Accounts receivable, net ......................... 174,047 144,842 Due from affiliated company ...................... 114,976 75,635 Prepaid expenses ................................. 45,296 40,227 Vehicles, net .................................... 2,567,517 2,064,943 Property and equipment, net ...................... 151,854 146,429 Other assets ..................................... 154,035 176,368 Cost in excess of fair value of net assets acquired .............. 499,143 506,683 ----------- ----------- Total assets ................................ $ 3,782,551 $ 3,204,453 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ................................. $ 231,159 $ 181,920 Accrued liabilities .............................. 208,669 200,870 Current and deferred income taxes ................ 39,609 36,339 Public liability and property damage ............. 215,135 205,698 Debt ............................................. 2,488,651 2,043,143 Due to affiliated company ........................ 132,563 122,111 Redeemable preferred stock ....................... 72,416 72,409 Redeemable portion of common stock ............... 295,465 295,482 Unearned compensation ............................ (257,751) (263,024) Participating convertible preferred stock ........ 132,000 132,000 Common stock ..................................... 290 290 Additional paid in capital ....................... 220,401 215,644 Treasury stock ................................... (102,269) (102,252) Retained earnings ................................ 103,339 62,095 Foreign currency equity adjustment ............... 2,874 1,728 ----------- ----------- Commitments and contingencies Total liabilities and stockholders' equity .. $ 3,782,551 $ 3,204,453 =========== =========== See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND AUGUST 31, 1995 (In thousands) (Unaudited) Six Months Ended ------------------------- August 31, August 31, 1996 1995 --------- ---------- Revenues ......................................... $1,069,005 $ 851,724 --------- --------- Cost and expenses: Direct operating ............................... 454,302 353,413 Vehicle depreciation ........................... 199,927 186,257 Vehicle lease charges .......................... 74,080 67,358 Selling, general and administrative ............ 163,559 109,460 Interest ....................................... 80,938 72,365 Unrealized foreign exchange loss ................. - 471 Amortization of unearned compensation - Employee Stock Ownership Plan .................. 7,902 7,902 Amortization of cost in excess of fair value of net assets acquired and other intangibles ............ 8,355 8,112 --------- --------- Income before income taxes and preferred stock dividends ................................ 79,942 46,386 Provision for income taxes ....................... 35,363 24,948 --------- --------- Net income ....................................... 44,579 21,438 Preferred stock dividends ........................ (3,328) (4,384) --------- --------- Income available for common shares ............... $ 41,251 $ 17,054 ========= ========= See accompanying notes to the consolidated financial statements. AVIS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED AUGUST 31, 1996 (In thousands) (Unaudited)
Participating Convertible Common Stock Preferred Stock ----------------- ----------------- Foreign Additional Additional Treasury currency Par paid-in Par paid-in stock Retained equity value capital value capital (at cost) earnings adjustment ----- --------- ----- ---------- ---------- --------- ---------- Balance March 1, 1996 ......................... $ 290 $ 215,644 $ 98 $ 131,902 $(102,252) $ 62,095 $ 1,728 Net income for the six months ended August 31, 1996 ............................... 44,579 Tax benefit of ESOP income tax deductions for the six months ended August 31, 1996 ..... 4,740 Foreign currency equity adjustment for the six months ended August 31, 1996 ............. 1,146 Payment of common and preferred stock dividends (3,328) Change in redeemable portion of common stock .. 17 Purchase of treasury stock (1,381 shares) ..... (17) Appropriation for amortization of discount from redemption value of preferred stock .... (7) ------ --------- ------ --------- --------- --------- --------- Balance August 31, 1996 ....................... $ 290 $ 220,401 $ 98 $ 131,902 $(102,269) $ 103,339 $ 2,874 ====== ========= ====== ========= ========= ========= ========= See accompanying notes to the consolidated financial statements.
AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND AUGUST 31, 1995 (In thousands) Increase (decrease) in cash and cash equivalents (Unaudited)
Six Months Ended -------------------------- August 31, August 31, 1996 1995 ------------ ---------- Net cash provided by operating activities ............... $ 362,655 $ 232,207 Cash flows from investing activities: Payments for vehicle additions ...................... (1,518,932) (1,066,329) Proceeds received from vehicle sales ............... 750,245 549,648 Payments for additions to property and equipment, net (14,379) (14,962) ---------- ----------- Net cash used in investing activities ................... (783,066) (531,643) Cash flows from financing activities: Increase in debt and due to affiliated company ...... 452,714 318,387 Increase in deferred debt issuance costs ............ (98) (1,530) Payment of preferred stock dividends ................ (3,328) (4,384) Purchase of treasury stock .......................... (17) - Increase in unearned compensation ................... (2,629) (1,092) -------- --------- Net cash provided by financing activities ............... 446,642 311,381 Effect of exchange rate changes on cash ................. 126 (34) --------- --------- Net increase in cash and cash equivalents ............... 26,357 11,911 Cash and cash equivalents at beginning of period ........ 49,326 36,643 --------- --------- Cash and cash equivalents at end of period .............. $ 75,683 $ 48,554 ========= ========= Supplemental disclosure of cash flows information: Cash paid during the period for: Interest .......................................... $ 78,717 $ 69,621 Income taxes ...................................... 5,355 3,204
Disclosure of accounting policy: For purposes of reporting cash flows, the Company considers deposits and short-term investments with an initial maturity of three months or less to be cash equivalents. The effect of unrealized foreign currency revaluations on the assets and liabilities of foreign subsidiaries has been eliminated. Changes in vehicles and vehicle related accounts are included in the cash flows from investing activities. See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Organization and Significant Accounting Policies In 1987, the trust for the Employee Stock Ownership Plan (ESOP) of Avis, Inc. (the Company) acquired all the outstanding common stock of Avis, Inc. This transaction has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. Accordingly, the purchase price has been allocated based on the estimated fair value of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of the Company's net assets is included in "Cost in excess of fair value of net assets acquired" on the consolidated balance sheet. The Company's primary business is the rental of automobiles. The consolidated financial statements include the accounts of all majority-owned subsidiaries of Avis, Inc. combined with related accounts of the ESOP and Prime Vehicles Trust. Intercompany accounts and transactions among Avis, Inc., its subsidiaries, the ESOP and Prime Vehicles Trust (Vehicle Trust) have been eliminated. During the year ended February 29, 1996, the Company acquired the rights to the name and certain assets of Agency Rent A Car, Inc., a company primarily engaged in the insurance replacement car rental business. Investments in associated companies in which the Company has a 20 percent or greater interest are accounted for under the equity method of accounting. Generally accepted accounting principles require the use of estimates, which are subject to change, in the preparation of financial statements. Certain amounts of the prior period have been reclassified for comparability. The unaudited interim financial statements at August 31, 1996 and for the six months ended August 31, 1996 and 1995 have been prepared in accordance with generally accepted accounting principles, and in the opinion of the Company include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim period. Note 2 - Gain on Sale of Leasehold Right In April, 1996 the Company sold a leasehold right and recognized a pre-tax gain of approximately $4.4 million. Note 3 - Vehicles Vehicles are stated at cost, net of accumulated depreciation as follows (in thousands): August August 31, 1996 31, 1995 ---------- ----------- Vehicles ............................... $ 2,946,820 $ 2,435,234 Accumulated depreciation ............... (379,303) (307,896) ----------- ----------- $ 2,567,517 $ 2,127,338 =========== =========== Included in vehicles are vehicles acquired under long-term capital leases of $21,496,000 and $38,693,000 (net of accumulated depreciation of $63,437,000 and $46,240,000) at August 31, 1996 and August 31, 1995, respectively. Vehicles also include vehicles held for sale as follows (in thousands): August August 31, 1996 31, 1995 -------- --------- Vehicles held for sale ..................... $ 26,572 $ 23,873 Accumulated depreciation ................... (4,145) (3,693) -------- -------- $ 22,427 $ 20,180 ======== ======== Depreciation expense recorded for vehicles was $199,927,000 and $186,257,000, net of a gain on disposal of vehicles of $31,109,000 and $9,461,000 for the six months ended August 31, 1996 and August 31, 1995, respectively. Note 4 - Income Taxes The provision (benefit) for income taxes is comprised of the following (in thousands): Six Months Ended ------------------------ August 31, August 31, 1996 1995 --------- --------- Current: State ......................................... $ 1,092 $ 704 Foreign ....................................... 2,852 3,789 -------- -------- 3,944 4,493 -------- -------- Deferred: Federal ....................................... 27,255 17,106 Foreign ....................................... 4,164 3,349 -------- -------- 31,419 20,455 -------- -------- Provision for income taxes ....................... 35,363 24,948 Less: Federal tax benefit of ESOP income tax deductions credited to stockholders' equity under SFAS No. 109 .............. (4,740) (6,482) -------- -------- $ 30,623 $ 18,466 ======== ======== The Company derives an income tax deduction for dividend distributions to the ESOP. The ESOP repays the same amount to the Company to reduce the ESOP debt due to the Company. The effective income tax rate varies from the federal statutory income tax rate due to the following: Six Months Ended ------------------------ August 31 August 31 1996 1995 --------- -------- Statutory U.S. federal income tax rate ............... 35.0% 35.0% Tax effect of foreign operations .................... 4.9 5.6 Amortization of cost in excess of net assets acquired and other intangibles .............. 2.7 4.8 Foreign dividends and withholding tax ................ 0.5 7.0 State income taxes, net of federal tax benefit ........................................ 0.9 1.0 Other ................................................ 0.2 0.4 ----- ------ Provision for income taxes ....................... 44.2 53.8 ----- ------ Tax benefit of ESOP income tax deductions credited to stockholders' equity under SFAS No. 109 (5.9) (14.0) ------ ------- Effective income tax rate ....... .................... 38.3% 39.8% ====== ======= Note 5 - Subsequent Event On October 17, 1996, HFS Incorporated ("HFS") completed the acquisition of all of the outstanding capital stock of the Company, including payments under certain employee stock plans of the Company and the redemption of certain series of preferred stock of the Company for an aggregate $806.5 million. The purchase price was comprised of approximately $367.2 million in cash, $100.9 million in indebtedness and $338.4 million (approximately 4.6 million shares) in HFS common stock. Note 6 - Litigation On May 22, 1996 a complaint was filed in the United States District Court for Eastern District of North Carolina against Avis Rent A Car System, Inc. (ARACS) and one of its licensees, New Hanover Rent-A-Car, Inc. (New Hanover) alleging discrimination by New Hanover in the rental of automobiles based on race. Plaintiff seeks an unspecified amount of compensatory and punitive damages and a permanent injunction barring ARACS and New Hanover from continuing to engage in illegally discriminatory conduct. ARACS has asserted claims for indemnification against New Hanover and intends to vigorously defend the complaint. ARACS believes that it has meritorious defenses against the complaint. In the opinion of management, the ultimate liability, if any, resulting from this matter will not have a material adverse effect on the Company's consolidated financial position. -----END PRIVACY-ENHANCED MESSAGE-----